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on Central Banking |
| By: | Lars O. Svensson; Robert J. Tetlow |
| Abstract: | We outline a method to provide advice on optimal monetary policy while taking policymakers' judgment into account. The method constructs Optimal Policy Projections (OPPs) by extracting the judgment terms that allow a model, such as the Federal Reserve Board's FRB/US model, to reproduce a forecast, such as the Greenbook forecast. Given an intertemporal loss function that represents monetary policy objectives, OPPs are the projections - of target variables, instruments, and other variables of interest -that minimize that loss function for given judgment terms. The method is illustrated by revisiting the Greenbook forecasts of February 1997 and November 1999, in each case using the vintage of the FRB/US model that was in place at that time. These two particular forecasts were chosen, in part, because they were at the beginning and the peak, respectively, of the late 1990s boom period. As such, they differ markedly in their implied judgments of the state of the world, and our OPPs illustrate this difference. For a conventional loss function, our OPPs provide significantly better performance than Taylor-rule simulations. |
| JEL: | E52 E58 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11392&r=cba |
| By: | Tim Robinson (Reserve Bank of Australia); Andrew Stone (Reserve Bank of Australia) |
| Abstract: | We use a simple model of a closed economy to study the recommendations of monetary policy-makers attempting to respond optimally to an asset-price bubble whose stochastic properties they understand. We focus on the impact which the zero lower bound (ZLB) on nominal interest rates has on the recommendations of such policy-makers. For a given target inflation rate, we identify several different forms of ‘insurance’ which policy-makers could potentially take out against encountering the ZLB due to the future bursting of a bubble. Even with perfect knowledge of the bubble process, however, which of these will be optimal varies from one type of bubble to another and, for certain bubbles, from one period to the next. It is therefore difficult to draw general conclusions as to whether the ZLB should cause policy-makers to operate policy more tightly or loosely than otherwise, while a bubble is growing – even after abstracting from the informational difficulties they face in practice. We also examine the implications of the ZLB for policy-makers’ preferences as to their inflation target. Policy-makers who wish to avoid concerns about the ZLB should take care not to set too low a target, especially if the neutral real interest rate is low. Such policy-makers should also set a higher target inflation rate if the economy’s natural propensity to rebound from a shock to output is weak, or if output is relatively unresponsive to real interest rate settings. |
| Keywords: | monetary policy; asset-price bubbles; zero lower bound |
| JEL: | E32 E52 E60 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2005-04&r=cba |
| By: | Giuseppe DIANA; Blandine ZIMMER |
| Abstract: | This paper analyses the case of a monetary union between identical countries characterised by oligopolistic competition in their labour market. It suggests that the switch to a common currency may improve their macroeconomic performances depending on labour market features. |
| Keywords: | Monetary Union, Employment, Inflation. |
| JEL: | E24 F33 J51 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2005-06&r=cba |
| By: | Martin Melecky (School of Economics, University of New South Wales) |
| Abstract: | This paper investigates effects of third-currency monetary policy shocks on exchange rates. For this purpose we setup a structural VAR model containing the exchange rates of the three major currencies – the U.S. dollar, the euro and the Japanese yen – and short-term interest rates on the three currencies. In addition, we include the medium-term interest rates and price levels as control variables. Long-run restrictions in accord with tested hypotheses and the existing literature are used to identify the structural VAR. The impulse response analysis of the co- integrated VAR reveals that third-currency monetary policy shocks not only significantly impact on the considered exchange rates but their impacts are comparable to those of MP shocks associated with the quoted currencies in terms of their magnitude. |
| Keywords: | Exchange Rates, Currency Substitution, Third-Currency Effects, SVAR |
| JEL: | F02 F31 F36 F42 |
| Date: | 2005–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505016&r=cba |
| By: | Arnab Bhattacharjee; Sean Holly |
| Abstract: | Transparency and openness of the monetary policymaking process at the Bank of England has provided very detailed information on both the decisions of individual members of the Monetary Policy Committee and the information on which they are based. We consider this decision making process in the context of a model in which inflation forecast targeting is used but there is heterogeneity among the members of the committee. We find that internally generated forecasts of output and market generated expectations of medium term inflation provide the best description of discrete changes in interest rates. We find a role for asset prices through the equity market, foreign exchange market and housing prices. There are identifiable forms of heterogeneity among members of the committee that improves the predictability of interest rate changes. This can be thought of as supporting the argument that full transparency of monetary policy decision making can be welfare enhancing. |
| Keywords: | Monetary policy, interest rates, Monetary Policy Committee, Committee decision making |
| JEL: | E42 E43 E50 E58 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0530&r=cba |
| By: | Reza Anglingkusumo (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, and Bank Indonesia, Jakarta) |
| Abstract: | The stability of the demand for real Ml in Indonesia is empirically examined using quarterly data between 1981 and 2002. A cointegrated VAR methodology that isolates the period of structural breaks in the data generating process of the variables, caused by the Asian crisis, is used. The results show that the nominal Ml demand function is long run homogenous in the price level and the price level itself is endogenous in the equation for nominal Ml. Therefore, a reparameterization towards the real Ml demand function is necessary. In the pre and post Asian crisis era, the demand function for real Ml in Indonesia is empirically stable and consists of a small number of variables. In the long run, the real private household consumption spending forms the permanent part of the demand for real Ml balances. Meanwhile, in the short run, the opportunity cost of holding real Ml balances, measured by the l-month nominal interest rate of time deposits in commercial banks, and agents' seasonal preference for real money balances, are key determinants of the demand for real Ml balances. In addition, there is evidence of a co-breaking relationship between the real Ml balances and the real private household consumption spending in Indonesia during the Asian crisis. |
| Keywords: | money demand; cointegrated V AR; structural breaks; co-breaking; Asian crisis; Indonesia |
| JEL: | E41 C12 |
| Date: | 2005–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20050051&r=cba |
| By: | Reza Anglingkusumo (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, and Bank-Indonesia, Jakarta) |
| Abstract: | In this paper the effect of excess narrow money (MI) on C PI intlation in Indonesia before, during, and after the Asian crisis is empirically examined. The standard model for the monetary analysis of inflation, i.e. the P-Star model by Hallman-Porter-Small (1991), is applied and tested empirically using quarterly Indonesian data between 1981 and 2002. The empirical model is a Markov switching error correction model. The results show that the two regime P-star model, in terms of excess MI, tracks the long run dynamics of CPI inflation in Indonesia remarkably weIl. Hence, there is an empirical support for the assertion that long run CPI intlation in Indonesia is a monetary phenomenon. In addition, there is evidence of a co-breaking relationship between excess MI and consumer prices in Indonesia during the Asian crisis. |
| Keywords: | inflation; monetary model; structural break; regime switching error correction model; co-breaking; Asian crisis; Indonesia |
| JEL: | E31 C12 |
| Date: | 2005–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20050054&r=cba |
| By: | Basant K. Kapur |
| Abstract: | Singapore%u2019s experience with international capital flows over the past two decades or so has been a rather %u2013 although not completely %u2013 benign one, owing to strong fundamentals and generally well-conceived macro-economic policies. We begin by briefly discussing the experience in 1998 of Hong Kong, another city-state with a well-developed banking system and equities market, and operating on a Currency Board (CB) system (although with some differences from Singapore%u2019s CB system). The discussion serves to identify some %u2018areas of vulnerability%u2019 in the Hong Kong set-up at that time. We next discuss Singapore%u2019s policy background and early experience, and in the light of Hong Kong%u2019s experience are better able to appreciate how Singapore%u2019s policy framework served to circumvent or minimize important vulnerabilities. Particular attention is paid to Singapore%u2019s exchange-rate policy and its policy of non-internationalization of the Singapore dollar. Equity- and currency- market interactions are also considered. We next show how Singapore emerged relatively unscathed from the 1997 Asian Crisis. Lastly, we discuss Singapore%u2019s debt markets, and show how under the imperative of promoting the development of its bond markets the non-internationalization policy has been progressively relaxed, while retaining key safeguards. |
| JEL: | F4 F3 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11369&r=cba |