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on Central Banking |
| By: | Marvin Goodfriend (Federal Reserve Bank of Richmond); Robert G. King (Department of Economics, Boston University) |
| Abstract: | The reduction in inflation that occurred in the early 1980s, when the Federal Reserve was headed by Paul Volcker, is arguably the most widely discussed and visible macroeconomic event of the last 50 years of U.S. history. Inflation had been dramatically rising, but under Volcker, the Fed first contained and then reversed this process. Using a simple modern macroeconomic model, we argue that the real effects of the Volcker disinflation were mainly due to its imperfect credibility. In our view, the observed upward volatility and subsequent stubborn elevation of long-term interest rates during the disinflation are key indicators of its imperfect credibility. Studying transcripts of the Federal Open Market Committee recently released to the public, we find — to our surprise — that Volcker and other FOMC members likewise regarded the long-term interest rates as indicative of inflation expectations and of the credibility of their disinflationary policy. Drawing from the transcripts and other contemporary sources, we consider the interplay of monetary targets, operating procedures, and credibility during the Volcker disinflation. |
| Keywords: | credibility, disinflation, monetary policy, Volcker |
| JEL: | E3 E4 E5 N1 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bos:macppr:wp2005-007&r=cba |
| By: | Albert Lee Chun (Stanford University) |
| Abstract: | Through explicitly incorporating analysts' forecasts as observable factors in a dynamic arbitrage- free model of the yield curve, this paper proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities. An empirical examination reveals that survey expectations about in°ation, output growth and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields. Although perceptions about in°ation are largely responsible for movements in long-term interest rates, an explicit slope factor is necessary to adequately capture the dynamics of the yield curve. Macroeconomic forecasts play an important role in explaining time-variation in the market prices of risk, with forecasted GDP growth playing a dominant role. The estimated coe±cients from a forward-looking monetary policy rule support the assertion that the central bank preemptively reacts to in°ationary expectations while suggesting patience in accommodating real output growth expectations. Models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations due to the arrival of news or central bank statements and announcements. |
| Keywords: | term structure, interest rates, affine model, forward-looking policy rule, macro-finance, no-arbitrage, blue-chip forecasts, survey data |
| JEL: | E40 E43 E44 G12 D84 E52 E58 |
| Date: | 2005–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512006&r=cba |
| By: | Stanley C. W. Salvary |
| Abstract: | Historically, informedness of economic agents via price stability has been the rationale for the money supply rule derived from the Quantity Theory of Money. The monetarists place the emphasis on the level of the money supply in the determination of price level changes and a money supply rule is adopted as the means of informing agents of expected price level changes. This paper advances an alternative, to the monetarist explanation of the determination of the price level, which does not rely on changes in the supply of money but on changes in the composition of aggregate demand and supply. In the absence of monetary dislocation or revaluation, change in the general price level is attributed to the net effect of the realignment of relative prices. Further, it is argued that economic agents are better informed under the relativist approach than under the monetarist approach. |
| Keywords: | price instability, monetary policy, monetary authority, price signalling, fiscal policy, the endogeneity of money, the money supply, the rate of inflation, nominal interest rates, the velocity of money, repudiation of paper money, the supply of credit, 'fully informed agents'. |
| JEL: | E |
| Date: | 2005–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512005&r=cba |
| By: | Petra M. Geraats |
| Abstract: | Central bank independence and transparency have become best practice in monetary policy. This paper cautions that transparency about economic information may not be beneficial in the absence of central bank independence. The reason is that it reduces monetary uncertainty, which could make the government less inhibited to interfere with monetary policy. In fact, a central bank could use monetary mystique to obtain greater insulation from political pressures, even if the government faces no direct cost of overriding. As a result, economic secrecy could be beneficial and provide the central bank greater political independence. |
| Keywords: | Transparency, monetary policy, political pressures |
| JEL: | E58 E52 D82 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0557&r=cba |
| By: | Guglielmo Maria Caporale; Alaa M. Soliman |
| Abstract: | This paper examines the monetary transmission mechanism in eight EU member states. It provides useful empirical evidence for assessing the impact of a common monetary policy in the early stages of EMU, and enables us to form a view on how the regime change represented by EMU is likely to be translated into changes in policy multipliers in the various EU countries. The empirical analysis applies techniques recently developed by Wickens and Motto (2001) for identifying shocks by estimating a VECM for the endogenous variables, and a stationary VAR in first differences for the exogenous variables. Our findings suggest that there are significant differences between EU countries in the transmission mechanism of monetary policy. |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:bru:bruedp:05-20&r=cba |
| By: | Gillman, Max (Cardiff Business School); Cziráky, Dario |
| Abstract: | The paper estimates the money demand in Croatia using monthly data from 1994 to 2002. A failure of the Fisher equation is found and adjustment to the standard money demand function is made to include the inflation rate as well as the nominal interest rate. In a two-equation cointegrated system, a stable money demand shows rapid convergence back to equilibrium after shocks. This function performs better than an alternative using the exchange rate instead of the inflation rate, as in the "pass-through" literature on exchange rates. The results provide a basis for inflaton rate forecasting and suggest the ability to use inflation targeting goals in transition countries during the EU accession process. Finding a stable money demand also limits the scope for central bank "inflation bias". |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2005/7&r=cba |
| By: | Paul Castillo (Central Bank of Peru & London School of Economics); Carlos Montoro (Central Bank of Peru & London School of Economics); Vicente Tuesta (Central Bank of Peru) |
| Abstract: | In this paper we establish a link between the volatility of oil price shocks and a positive expected value of inflation in equilibrium (inflation premium). In doing so, we implement the perturbation method to solve up to second order a benchmark New Keynesian model with oil price shocks. In contrast with log linear approximations, the second order solution relaxes certainty equivalence providing a link between the volatility of shocks and inflation premium. First, we obtain analytical results for the determinants of the level of inflation premium. Thus, we find that the degree of convexity of both the marginal cost and the phillips curve is a key element in accounting for the existence of a positive inflation premium. We further show that the level of inflation premium might be potentially large even when a central bank implements an active monetary policy. Second, we evaluate numerically the second order solution of the model to explain the episode of high and persistent inflation observed in the US during the 70's. We find, in contrast with Clarida, Gali and Gertler (QJE, 2000), that even when there is no difference in the monetary policy rules between the pre-Volcker and post-Volcker periods, oil price shocks can generate high inflation levels during the 70's through a positive high level of inflation premium. As by product, our analysis shows that oil price shocks along with a distorted steady state can generate a time- varying endogenous trade-off between inflation and deviations of output from its efficient level. The previous trade-off, once uncertainty is taking into account, implies that a positive level of inflation premium is an optimal response to oil price shocks. |
| Keywords: | Phillips Curve, Second Order Solution, Oil Price shocks, Endogenous Trade off |
| JEL: | E52 E42 E12 C63 |
| Date: | 2005–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512004&r=cba |
| By: | Pierre St-Amant; Greg Tkacz; Annie Guérard-Langlois; Louis Morel |
| Abstract: | The authors document the research output of 34 central banks from 1990 to 2003, and use proxies of research inputs to measure the research productivity of central banks over this period. Results are obtained with and without controlling for quality and for policy relevance. The authors find that, overall, central banks have been hiring more researchers and publishing more research since 1990, with the United States accounting for more than half of all published central bank research output, although the European Central Bank is rapidly establishing itself as an important research centre. When controlling for research quality and relevance, the authors generally find that there is no clear relationship between the size of an institution and its productivity. They also find preliminary evidence of positive correlations between the policy relevance and the scientific quality of central bank research. There is only very weak evidence of a positive correlation between the quantity of external partnerships and the productivity of researchers in central banks. |
| Keywords: | Central bank research |
| JEL: | E59 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-37&r=cba |
| By: | James Rossiter |
| Abstract: | The consumer price index (CPI) is the most commonly used measure of inflation in Canada. As an indicator of changes in the cost of living, however, the CPI is subject to various types of measurement bias. The author updates previous Bank of Canada estimates of the bias in the Canadian CPI by examining four different sources of potential bias. He finds that the total measurement bias has increased only slightly in recent years to 0.6 percentage points per year, and is low when compared with other countries. |
| Keywords: | Inflation et prix; Cibles en matière d'inflation |
| JEL: | E31 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-39&r=cba |
| By: | José de Luna Martínez (The World Bank) |
| Abstract: | This paper presents the findings of a survey conducted by the World Bank of central banks in 40 developing countries across different regions in the world. The survey focused on the following topics: (1) coverage of national statistics on remittances, (2) cost of transferring and delivering remittances, (3) regulatory regime for remittance transactions, and (4) efforts of developing countries to channel remittance flows through formal financial institutions. The study finds that in most countries existing data do not reflect the full amount of remittance inflows that they receive every year. Coverage of instruments and financial institutions through which remittances take place is limited. Moreover, only a few countries measure remittances that take place through informal channels. It also finds that the scope of financial authorities in developing countries to reduce remittance fees is limited because a large part of the fees charged to customers are set by financial institutions located in the countries where transactions originate. Cooperation between sending and recipient countries is needed to reduce remittance costs. The survey finds that in several countries money transfer companies are not properly supervised. Given the increasing international concerns with money laundering and terrorism financing issues, it is important that basic registration and reporting requirements are introduced for money transfer companies. Registration and reporting requirements should be designed in such a way that they do not deter the further development of this type of financial institution. Finally, the survey finds that most countries need to establish better mechanisms that would allow them to maximize the developmental effect of remittance inflows. By establishing new savings and investment instruments for remittance recipient households, a larger part of remittance flows might be channeled to finance productive investments, thus fostering economic growth. |
| Keywords: | Domestic finance, Poverty, Labor and employment |
| Date: | 2005–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3638&r=cba |
| By: | Marc-André Gosselin; Nicolas Parent |
| Abstract: | Over the past few years, the ability of the United States to finance its current account deficit has been facilitated by massive purchases of U.S. Treasury bonds and agency securities by Asian central banks. In this process, Asian central banks have accumulated large stockpiles of U.S.-dollar foreign exchange reserves. How far is the current level of reserves from that predicted by the standard macroeconomic determinants? The authors answer this question by using Pedroni's (1999) panel cointegration tests as the basis for the estimation of a long-run reserve-demand function in a panel of eight Asian emerging-market economies. This is a key innovation relative to the existing research on international reserves modelling: although the data are typically I(1), the literature ignores this fact and makes statistical inference based on unadjusted standard errors. While the authors find evidence of a positive structural break in the demand for international reserves by Asian central banks in the aftermath of the financial crisis of 1997-98, their results indicate that the actual level of reserves accumulated in 2003-04 was still in excess relative to that predicted by the model. Therefore, as long as historical relationships hold, a slowdown in the rate of accumulation of reserves is likely. This poses negative risks for the U.S. dollar. However, both the substantial capital losses that Asian central banks would incur if they were to drastically change their holding policy and the evidence that the currency composition of reserves evolves only gradually mitigate the risks of a rapid depreciation of the U.S. dollar triggered by Asian central banks. |
| Keywords: | Econometric and statistical methods; International topics; Financial stability |
| JEL: | C23 F31 G15 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-38&r=cba |