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on Central Banking |
| By: | Marc Hofstetter |
| Abstract: | Why is that the achievements of some disinflations from low and moderate peaks are longlived, whereas in others the gains in the inflationary front dissipate quickly? Based on an index of the sustainability of disinflations proposed in the paper, various competing explanations of what determines sustainability are tested. Three factors, potentially at the top of the list of many researchers, are shown to be insignificant: oil shocks, fiscal policy and inflation targeting. Nevertheless, other important features such as the exchange rate regime, achieving a low inflation rate during the disinflation and food price shocks are shown to be important variables driving the sustainability records. |
| Date: | 2005–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:col:001049:002385&r=cba |
| By: | Bjørnland, Hilde C. (Dept. of Economics, University of Oslo) |
| Abstract: | This paper analyses the transmission mechanisms of monetary policy in a small open economy like Norway through structural VARs, paying particular attention to the interdependence between the monetary policy stance and exchange rate movements in the inflation-targeting period. Previous studies of the effects of monetary policy in open economies have typically found small or puzzling effects on the exchange rate; puzzles that may arise due to the recursive restrictions imposed on the contemporaneous interaction between monetary policy and the exchange rate. By instead imposing a long-run neutrality restriction on the real exchange rate, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, the interdependence increases considerably. In particular, following a contractionary monetary policy shock, the real exchange rate appreciates immediately and thereafter depreciates back to baseline. Furthermore, output and consumer price inflation fall gradually as expected; thereby also ruling out any price puzzle that has commonly been found in the literature. Results are compared and found to be consistent with among other the findings from an “event study” that focuses on immediate responses in asset prices following a surprise monetary policy decision. |
| Keywords: | VAR; monetary policy; open economy; identification; event study. |
| JEL: | C32 E52 F31 F41 |
| Date: | 2005–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_031&r=cba |
| By: | Adam S. Posen (Institute for International Economics) |
| Abstract: | Central banks should not be in the business of trying to prick asset price bubbles. Bubbles generally arise out of some combination of irrational exuberance, technological jumps, and financial deregulation (with more of the second in equity price bubbles and more of the third in real estate booms). Accordingly, the connection between monetary conditions and the rise of bubbles is rather tenuous, and anything short of inducing a recession by tightening credit conditions prohibitively is unlikely to stem their rise. Even if a central bank were willing to take that one-in-three or less shot at cutting off a bubble, the cost-benefit analysis hardly justifies such preemptive action. The macroeconomic harm from a bubble bursting is generally a function of the financial system’s structure and stability—in modern economies with satisfactory bank supervision, the transmission of a negative shock from an asset price bust is relatively limited, as was seen in the United States in 2002. However, where financial fragility does exist, as in Japan in the 1990s, the costs of inducing a recession go up significantly, so the relative disadvantages of monetary preemption over letting the bubble run its course mount. In the end, there is no monetary substitute for financial stability, and no market substitute for monetary ease during severe credit crunch. These two realities imply that the central bank should not take asset prices directly into account in monetary policymaking but should be anything but laissez-faire in responding to sharp movements in inflation and output, even if asset price swings are their source. |
| Keywords: | bubbles, asset prices, monetary policy, central banks |
| JEL: | E44 G18 E52 E58 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp06-1&r=cba |
| By: | Oleg Korenok (Department of Economics, VCU School of Business) |
| Abstract: | Mankiw and Reis (2002) have revived imperfect information explanations for the short run real effects of monetary policy. This paper contrasts their sticky information model with the standard sticky price model. First, I utilize a theoretical relation between aggregate prices and unit labor cost that allows me to leave unspecified household preferences, wage setting and money demand. Second, I introduce a modeling approach that allows me to nest the sticky price and the sticky information models within a single empirical framework. Third, I propose a single-step estimation method that provides consistent estimates of adjustment speeds and reliable confidence bands that enable me to reject flexible prices. Finally, I use the approach to carry out an empirical specification analysis of multiple structural models. An empirical comparison favors the sticky price explanation over the Mankiw-Reis model. |
| Keywords: | sticky price, sticky information, model selection |
| JEL: | E12 E3 C32 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:vcu:wpaper:0501&r=cba |
| By: | James Foreman-Peck (Cardiff Business School) |
| Abstract: | This paper examines whether the states brought together in the Italian monetary union of the nineteenth century constituted an optimum monetary area, either before or after unification. Interest rate shocks indicate close relations between states in northern Italy but negative correlations between the North and the South before unification, suggesting some advantages of continued Southern monetary independence. The proportion of Southern Italian trade with the North was small, in contrast to intra- Northern trade, and therefore monetary independence imposed a light burden. Changes in the wheat market indicate that the South and North after unification (though not probably because of it) increasingly specialised according to their comparative advantages. Coupled with differences in economic behaviour of the Southern economy, this meant that monetary policies appropriate for the North were less so for the South. In the face of agricultural shocks originating in the New World and in France, the South would have gained from depreciating its exchange rate against the North or against the non-Italian world. As it was, nineteenth century Italian monetary union did not create the conditions for its own success, contrary to the findings of Frankel and Rose (1998) for the later twentieth century. |
| Date: | 2006–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:113&r=cba |
| By: | Flandreau, Marc |
| Abstract: | This paper examines the historical record of the Austro-Hungarian monetary union, focusing on its bargaining dimension. As a result of the 1867 Compromise, Austria and Hungary shared a common currency, although they were fiscally sovereign and independent entities. By using repeated threats to quit, Hungary succeeded in obtaining more than proportional control and forcing the common central bank into a policy that was very favourable to it. Using insights from public economics, this paper explains the reasons for this outcome. Because Hungary would have been able to secure quite good conditions for itself had it broken apart, Austria had to provide its counterpart with incentives to stay on board. I conclude that the eventual split of Hungary after WWI was therefore not written on the wall in 1914, since the Austro-Hungarian monetary union was quite profitable to Hungarians. |
| Keywords: | free riding; market integration; monetary union; secession |
| JEL: | F31 N32 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5397&r=cba |
| By: | Gianni Amisano; Marco Tronzano |
| Abstract: | This paper extends Svensson (1994) ?simplest test?of in?ation target credibility inside a Bayesian econometric framework. We apply this approach to the initial years of the Eurosystem and obtain various estimates of ECB?s monetary policy credibility. Overall, our empirical evidence is robust to alternative prior assumptions, and suggests that the strategy followed by the ECB was successful in building a satisfactory degree of reputation. However, we ?nd some signi?cant credibility reversals concerning both anti-in?ationary and anti-de?ationary credibility. These reversals, in turn, are closely related to the evolution of the cyclical macroeconomic conditions in the Euro area. |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0512&r=cba |
| By: | Florin Ovidiu Bilbiie (Nuffield College, New Road, OX1 1NF, Oxford, United Kingdom.); André Meier (International Monetary Fund, 700 19th Street NW, Washington, DC 20431, USA.); Gernot J. Müller (Goethe University Frankfurt, Department of Economics, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany) |
| Abstract: | Using vector autoregressions on U.S. time series for 1957-1979 and 1983-2004, we find government spending shocks to have stronger e¤ects on output, consumption, and wages in the earlier sample. We try to account for this observation within a DSGE model featuring price rigidities and limited asset market participation. Speci?cally, we estimate the structural parameters of the model for both samples by matching impulse responses. Model-based counterfactual experiments suggest that increased asset market participation accounts for some of the changes in fiscal transmission. However, the key quantitative factor appears to be the more active monetary policy of the Volcker-Greenspan period. |
| Keywords: | Government Spending; Asset Market Participation; Fiscal Policy; Monetary Policy; DSGE; Vector Autoregression; Minimum Distance Estimation |
| JEL: | E21 E62 E63 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060582&r=cba |
| By: | Júlia Lendvai (University of Namur, Economics Department.) |
| Abstract: | This paper estimates traditional and New Phillips curves for Hungary over the sample period 1995Q1 to 2004Q1. It presents the first structural Phillips curve estimations for a New EU Member State economy. We find that Hungarian inflation dynamics can be reasonably well described by a standard New Hybrid Phillips curve and by its open economy extension specifying imported goods as intermediate production goods. Our estimation results indicate that Hungarian inflation is significantly more inertial than Euro area inflation. Hungarian inflation inertia appears to be the result of pervasive backward looking price setting behaviour, while prices seem to be reset more frequently than in the Euro area. At the same time, Hungarian inflation dynamics is comparable to that of countries characterized by a relatively high average inflation rate. |
| Keywords: | New Keynesian Phillips curve, Inflation dynamics, Open economy. |
| JEL: | E31 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2005/46&r=cba |
| By: | Michele Fratianni (Indiana University, Kelley School of Business, Department of Business Economics and Public Policy); Franco Spinelli (Università degli Studi di Brescia, Dipartimento di economia.) |
| Abstract: | Did the city-states of Genoa and Venice kick a financial revolution all the way back in the Quattrocento, much sooner than the financial revolutions of the Netherlands, England and America? To answer this question we analyze the classic revolutions in terms of three key criteria: credibility of debtor’s promises, the role of national banks in facilitating the development of financial markets, and the extent and depth of financial and monetary innovations. We then compare the record of Genoa and Venice with the benchmark from the three classic financial revolutions. The upshot is that the two maritime city-states had developed many of the features that were to be found later on in the Netherlands, England and the United States. The importance of Genoa and Venice as financial innovators has been eclipsed by the fact that these two city-states did not survive politically. Instead, the innovations were absorbed in the long chain of financial evolution and, in the process, lost the identity of their creators. |
| Date: | 2006–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:112&r=cba |