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on Central Banking |
| By: | Stephen G. Cecchetti; Alfonso Flores-Lagunes; Stefan Krause |
| Abstract: | Over the past twenty years, macroeconomic performance has improved in industrialized and developing countries alike. In a broad cross-section of countries inflation volatility has fallen markedly while output variability has either fallen or risen only slightly. This increased stability can be attributed to either: 1) more efficient policy-making by the monetary authority, 2) a reduction in the variability of the aggregate supply shocks, or 3) changes in the structure of the economy. In this paper we develop a method for measuring changes in performance, and allocate the source of performance changes to these two factors. Our technique involves estimating movements toward an inflation and output variability efficiency frontier, and shifts in the frontier itself. We study the change from the 1980s to the 1990s in the macroeconomic performance of 24 countries and find that, for most of the analyzed countries, more efficient policy has been the driving force behind improved macroeconomic performance. |
| JEL: | E52 E58 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:10973&r=cba |
| By: | Eugenio Gaiotti (Bank of Italy); Alessandro Secchi (Bank of Italy) |
| Abstract: | The paper exploits a unique panel, covering some 2,000 Italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt, to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production. It has been argued that this mechanism may explain the dimension of the real effects of monetary policy, give a rationale for the positive short-run response of prices to rate increases(the “price puzzle”) and call for a more gradual monetary policy response to shocks. We find robust evidence in favour of the presence of a cost channel of monetary policy transmission, proportional to the amount of working capital held by each firm. The channel is large enough to have non-trivial monetary policy implications. |
| Keywords: | monetary transmission, cost channel, working capital |
| JEL: | E52 E31 |
| Date: | 2004–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0412010&r=cba |
| By: | José De Gregorio; Andrea Tokman R. |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchep:11&r=cba |
| By: | Charles Engel; Kenneth D. West |
| Abstract: | We explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate. The interest rate rule, in conjunction with some standard assumptions, implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials. The weights are functions of the parameters of the interest rate rule. An initial look at German data yields some support for the model. |
| JEL: | F41 E52 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:10995&r=cba |
| By: | Giuseppe Ferrero (Bank of Italy, Economic Research Department) |
| Abstract: | Under the assumption of bounded rationality, economic agents learn from their past mistaken predictions by combining new and old information to form new beliefs. The purpose of this paper is to examine how the policy-maker, by affecting private agents' learning process, determines the speed at which the economy converges to the rational expectation equilibrium. I find that by reacting strongly to private agents' expected inflation, a central bank would increase the speed of convergence. I assess the relevance of the transition period when looking at a criterion for evaluating monetary policy decisions and suggest that a fast convergence is not always suitable. |
| Keywords: | Interest Rate Setting, Adaptive Learning, Rational Expectations, Speed of Convergence |
| JEL: | E52 C62 D83 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_499_04&r=cba |
| By: | William A. Barnett (University of Kansas) |
| Abstract: | We derive fundamental new theory for measuring monetary service flows aggregated over countries within a multicountry economic union. We develop three increasingly restrictive approaches: (1) the heterogeneous agents approach, (2) the multilateral representative agent approach, and (3) the unilateral representative agent approach. Our heterogeneous agents approach contains our multilateral representative agent approach as a special case. These results are being used by the European Central Bank in the construction of its Divisia monetary aggregates database, with convergence from the most general to the more restrictive approaches expected as economic convergence within the euro area proceeds. Our theory is equally as relevant to other economic unions, with or without a common currency. We use a stochastic approach to aggregation across countries over heterogeneous representative agents. Our theory permits monitoring the effects of policy at the aggregate level over a multicountry economic union, while also monitoring the distribution effects of policy among the countries of the multicountry area. The resulting index number theory assures internal consistency of the data construction methodology with the theory used in applications of the data in modeling and policy. |
| Keywords: | multilateral aggregation, Divisia monetary aggregates, ECB, EMU, Euro area, aggregation over countries, heterogeneous agents, distribution effects |
| JEL: | E41 G12 C43 C22 |
| Date: | 2004–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0412009&r=cba |
| By: | Ruy Lama; Juan Pablo Medina |
| Abstract: | This paper studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We solve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a version of the model calibrated to the Chilean economy. The contributions of the paper are twofold. First, under the optimal policy the volatility of nontradable inflation is near zero. Second, stabilizing non-tradable inflation is optimal regardless of the financial structure of the small open economy. Even for a moderate degree of price stickiness, implementing a monetary policy that mitigates asset market segmentation is highly distortionary. This last result suggests that policymakers should resort to other instruments in order to correct financial imperfections. |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:286&r=cba |
| By: | Gregory H. Bauer; Clara Vega |
| Abstract: | Existing studies using low-frequency data show that macroeconomic shocks contribute little to international stock market covariation. Those studies, however, do not account for the presence of asymmetric information, where sophisticated investors generate private information about the fundamentals that drive returns in many countries. In this paper, the authors use a new microstructure data set to better identify the effects of private and public information shocks about U.S. interest rates and equity returns. High-frequency private and public information shocks help forecast domestic money and equity returns over daily and weekly intervals. In addition, these shocks are components of factors that are priced in a model of the cross-section of international returns. Linking private information to U.S. macroeconomic factors is useful for many domestic and international asset-pricing tests. |
| Keywords: | Financial markets; International topics; Market structure and pricing |
| JEL: | F30 G12 G14 G15 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:04-47&r=cba |