nep-cba New Economics Papers
on Central Banking
Issue of 2005‒01‒23
eight papers chosen by
Roberto Santillan

  1. Changes in the Federal Reserve’s Inflation Target: Causes and Consequences By Peter N. Ireland
  2. Large Hoardings of International Reserves: Are They Worth It? By Pablo García; Claudio Soto
  3. Persistence and the Role of Exchange Rate and Interest Rate Inertia in Monetary Policy By 300
  4. Modelling UK Inflation: Persistence, Seasonality and Monetary Policy By D R Osborn; M Sensier
  5. How Do Monetary and Fiscal Policy Interact in the European Monetary Union? By Matthew B. Canzoneri; Robert E. Cumby; Behzad T. Diba
  6. THE INFLATION IN EUROPEAN UNION By Giovanis Elephtherios
  7. Price Indeterminacy Reinvented: Pegging Interest Rates While Targeting Prices, Inflation, or Nominal Income By David Eagle
  8. Pricing behavior and the introduction of the euro: evidence from a panel of restaurants By Eugenio Gaiotti; Francesco Lippi

  1. By: Peter N. Ireland (Boston College)
    Abstract: This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve’s unobserved inflation target. The results indicate that the target rose from 1 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2 1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target.
    Keywords: inflation target, new Keynesian model, supply shocks, inflation
    JEL: E31 E32 E52
    Date: 2005–01–14
  2. By: Pablo García; Claudio Soto
    Abstract: We empirically assess the contribution of international reserves vis- à -vis institutional variables in reducing the risk of a currency crisis. We find that the ratio of reserves to short-term debt is robust in explaining international crisis, even after controlling for financial development and political variables. Based on our estimates on crisis probabilities we compute the optimal level of reserves for a set of East Asian economies and for Chile. The results of this exercise turn out to be very sensitive to the data utilized and to the assumptions regarding the cost of a crisis. For our benchmark estimate we conclude that the current stocks of reserves for most of the cases are consistent with an optimal selfinsurance policy under reasonable assumptions regarding the cost of a crisis.
    Date: 2004–12
  3. By: 300
    Abstract: In a general equilibrium model, this paper investigates the importance of the exchange rate and the interpretation of the observed inertia in the policy interest rate. We derive an optimizing macroeconomic model that features habit formation in the consumer's utility function and uses a hybrid New Keynesian Phillips curve with inflation inertia. As a consequence, aggregate demand and supply shocks will have a persistent effect on output and inflation. In this framework, we assess the performance of simple, and perhaps non-optimal, interest rate rules under different degrees of habit formation and inflation persistence. We conclude that a policy rule that responds to expected inflation, as well as to output and the exchange rate, is able to reduce output and inflation volatility in the face of aggregate demand and foreign inflation shocks. This result must be interpreted with caution, because, as is found in other studies, i) the reduction in volatility is marginal and ii) the Taylor-type policy rule assessed here may be a restrictive one and, as mentioned before, non-optimal. On the other hand, the gains from adopting an inertial interest rate rule are directly related to the degree of inflation persistence in the model. In particular, when the degree of inflation persistence is high, an inertial policy rule attenuates the impacts that supply shocks have on inflation and the interest rate.
    Date: 2004–12
  4. By: D R Osborn; M Sensier
    Abstract: This paper studies monthly RPIX inflation in the UK in the context of the change to inflation targeting in 1992. Our empirical models take account of the strong and changing seasonal pattern of inflation, while also focusing on inflation persistence and Phillips curve explanations. In both univariate and Phillips curve models, we find strong evidence of a change in parameters around the end of 1992, at the time of the introduction of inflation targeting. All models point to a substantial decline in inflation persistence after this date.
    Date: 2004
  5. By: Matthew B. Canzoneri; Robert E. Cumby; Behzad T. Diba
    Abstract: Formation of the Euro area raises new questions about the coordination of monetary and fiscal policy. Using a New Neoclassical Synthesis (NNS) model, we show that a common monetary policy, responding to area-wide aggregates, has asymmetric effects on countries within the union, depending on whether they are large or small, or whether they have high or low debts. We analyze the implications of these asymmetries for the various countries welfare and for their fiscal policies. We also study rules for setting national tax and spending rates, rules that constrain movements in the deficit to GDP ratio. We ask whether these rules are necessary for the common monetary policy to be able to harmonize national inflation rates, and we analyze their effects on national welfare. We also discuss some potential failings of our model (and perhaps NNS models generally); in particular, our model%u2019s variance decompositions suggest that productivity shocks may play an inordinately large role, while fiscal shocks (or demand shocks generally) may play too small a role (even when 'rule of thumb' spenders are added).
    JEL: E63 F33
    Date: 2005–01
  6. By: Giovanis Elephtherios (University of Thessaly)
    Abstract: The significance of stability of P.C.I. (Price consumer index) is reported in the situation of economy in which the price consumer index does not present tendencies of important change so much to inflation,- as down,- deflation. This is also the aim of E.E. (European Union), to maintain in a constant level the price consumer index. In this article we will present a model of forecast of inflation of E.E. in the 15 states, with result the possibility that is given to us to be able forecast with a great precision the inflation of separately states which it helps us to forecast also the inflation of E.E. of the 15 and to take in a short time the essential measures of economic policy, those who from them are feasible and to deter undesirable situations.
    Keywords: basic ecocometrics forecasting
    JEL: C
    Date: 2005–01–16
  7. By: David Eagle (Eastern Washington University)
    Abstract: Contrary to Sargent and Wallace (1975), a central bank’s use of an interest-rate instrument does determine prices when the central bank pursues either a short-term or long-term price target. However, in order for a central bank’s pursuit of a long-term price target to be credible, the public still needs something like a Taylor or McCallum-Woodford rule. The use of an interest-rate instrument also determines prices when the central bank targets nominal income in either the short-term or long-term. However, if the central bank targets interest rates in the short term with a long-term inflation target, then prices are indeterminate.
    Keywords: price indeterminancy, pegging interest rates, inflation targeting, nominal-income targeting, nominal-aggregate-demand targeting, price-level targeting
    JEL: E
    Date: 2005–01–20
  8. By: Eugenio Gaiotti (Banca d'Italia); Francesco Lippi (Banca d'Italia)
    Abstract: This paper assembles an original panel of data from 2,500 restaurants in Italy over the 1998-2004 period. The main objective is to study whether the euro cash changeover had an impact on individual pricing behavior, as it seems to be perceived by consumers. Although the sample is not representative of the whole sector, our interest stems from the possibility of gaining deeper insights from individual data, as well as from the fact that restaurant prices were at the center of the public discussion. First, the paper analyzes the distribution of price changes in several years, to identify what features may contribute to explain the widespread perception of a large effect of the introduction of the euro on prices. Second, the paper discusses the economic mechanisms which may help explaining the impact of the cash changeover on prices. The data show that restaurant prices recorded sizeable increases in both 2001 and 2002 (around 10 and 9 per cent, respectively). The cumulated increase in the price of a meal between 1998 and 2003 is substantial (the index rises by 40 per cent). The changeover might have focussed the public attention over this medium-run trend, prompting the attribution of the whole increase to the introduction of the euro. The analysis suggests that such increases reflect in part unfavorable developments on the costs side (strong increases in unit labor costs and fresh food inputs in both years) and strong increases in demand (especially in 2001). Part of the restaurant price increase recorded in 2002, however, does seem ascribable to the effect of the changeover. We find evidence consistent with a “menu-cost” hypothesis for pricing behavior: the rise in the average meal price is mainly due to a greater fraction of agents who revise their price, rather than to greater individual price revisions. Moreover, more market power (as proxied by a local concentration index) is associated with greater than average price increases during the changeover. A simple interpretation is proposed for this finding, which may also explain why the effects of the cash changeover may have been especially pronounced in this industry as opposed to more competitive ones.
    Keywords: euro cash changeover; menu cost
    JEL: E
    Date: 2005–01–20

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