nep-cba New Economics Papers
on Central Banking
Issue of 2006‒04‒01
37 papers chosen by
Roberto Santillan

  1. Time-varying risk, interest rates, and exchange rates in general equilibrium By Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe
  2. Monetary and fiscal theories of the price level: the irreconcilable differences By Bennett T. McCallum; Edward Nelson
  3. Inflation: do expectations trump the gap? By Jeremy M. Piger; Robert H. Rasche
  4. Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden By Refet S. Gürkaynak; Andrew T. Levin; Eric T. Swanson
  5. Exchange-rate pass-through in the G-7 countries By Jane E. Ihrig; Mario Marazzi; Alexander D. Rothenberg
  6. Methods for Robust Control By Richard Dennis, Kai Leitemo, and Ulf Soderstrom
  7. Central Bank Independence and the `Free Lunch Puzzle': A New Perspective By Ali al-Nowaihi; Paul Levine; Alex Mandilaras
  8. On Optimal Monetary and Fiscal Policy Interactions in Open Economies By Chiara Forlati
  9. Reaction Functions of Bank of England MPC Members: Insiders versus Outsiders By Christopher Spencer
  10. The Dissent Voting Behaviour of Bank of England MPC Members By Christopher Spencer
  11. Inflation Forecast-Based-Rules and Indeterminacy: A Puzzle and a Resolution By Paul Levine; Peter McAdam; Joseph Pearlman
  13. Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macromodel for the U.S. Economy By Pu Chen; Carl Chiarella; Peter Flaschel; Willi Semmler
  14. Do Banks Reduce Lending Preemptively in Response to Capital Losses? By Shinichi Nishiyama; Tae Okada; Wako Watanabe
  15. Imperfect Common Knowledge in First Generation Models of Currency Crises By Gara Minguez-Afonso
  16. A Roadmap for the Asian Exchange Rate Mechanism By Gongpil Choi; Deok Ryong Yoon
  17. Openness and inflation volatility: Cross-country evidence By Christopher Bowdler; Adeel Malik
  18. Openness, exchange rate regimes and the Phillips curve By Christopher Bowdler
  19. Interest Rate Rules and Macroeconomic Stabilization By Mark Weder
  20. Sticky Borders By Gita Gopinath; Roberto Rigobon
  21. Sequencing of Capital Account Liberalization - Japan's experiences and their implications to China By Kenji Aramaki
  22. Paper or plastic? the effect of time on the use of check and debit cards at grocery stores By Elizabeth Klee
  23. Risks in U.S. bank international exposures By Nicola Cetorelli; Linda Goldberg
  24. On the efficiency-legitimacy trade-off in EMU By Francisco Torres
  25. Ireland and Switzerland: the jagged edges of the Great Inflation By Edward Nelson
  26. Keynesian Disequilibrium Dynamics: Convergence, Roads to Instability and the Emergence of Complex Business Fluctuations By Pu Chen; Carl Chiarella; Peter Flaschel; Hing Hung
  27. Public Debt Maturity and Currency Crises By Paul Levine; Alexandros Mandilaras; Jun Wang
  28. Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises By Guillermo A. Calvo; Alejandro Izquierdo; Ernesto Talvi
  29. Australia's Deflation in the 1890s By Colin McKenzie
  30. The Role of Search Frictions and Bargaining for Inflation Dynamics By George Kapetanios and Massimiliano Marcellino
  31. Exchane-Rate-Based Stabilization, Durables Consumption, and the Stylized Facts By Edward F. Buffie; Manoj Atolia
  32. Shake Hands or Shake Apart? Pre-war Global Trade and Currency Blocs--the role of the Japanese Empire By Toshihiro Okubo
  33. Exchange Rates, Shocks and Inter-Dependency in East Asia - Lessons from a Multinational Model By Sophie Saglio; Yonghyup Oh; Jacques Mazier
  34. The transition to electronic trading in the secondary treasury market By Bruce Mizrach; Christopher J. Neely
  35. Illiquidity in the interbank payment system following wide-scale disruptions By Morten L. Bech; Rod Garratt
  36. A Convergência Monetária: Portugal e a União Europeia By Francisco Torres
  37. Optimal control in nonlinear models: a generalised Gauss-Newton algorithm with analytic derivatives By Richard Pierse

  1. By: Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe
    Abstract: Under mild assumptions, the data indicate that time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. A general equilibrium monetary model with an endogenous source of risk variation—a variable degree of asset market segmentation—can produce key features of actual interest rates and exchange rates. In this model, the endogenous segmentation arises from a fixed cost for agents to exchange money for assets. As inflation varies, so does the benefit of asset market participation, and that changes the fraction of agents participating. These effects lead the risk premium to vary systematically with the level of inflation. This model produces variation in the risk premium even though the fundamental shocks have constant conditional variances.
    Date: 2006
  2. By: Bennett T. McCallum; Edward Nelson
    Abstract: The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability - and therefore plausibility - of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.
    Keywords: Monetary policy ; Fiscal policy
    Date: 2006
  3. By: Jeremy M. Piger; Robert H. Rasche
    Abstract: We measure the relative contribution of the deviation of real activity from its equilibrium (the gap), *supply shock* variables, and long-horizon inflation expectations for explaining the U.S. inflation rate in the post-war period. For alternative specifications for the inflation driving process and measures of inflation and the gap we reach a similar conclusion: the contribution of changes in long-horizon inflation expectations dominates that for the gap and supply shock variables. Put another way, variation in long-horizon inflation expectations explains the bulk of the movement in realized inflation. We also use our preferred specification for the inflation driving process to compute a history of model-based forecasts of the inflation rate. For both short and long horizons these forecasts are close to those observed from surveys.
    Keywords: Government securities ; Inflation (Finance)
    Date: 2006
  4. By: Refet S. Gürkaynak; Andrew T. Levin; Eric T. Swanson
    Abstract: We investigate the extent to which inflation targeting helps anchor long-run inflation expectations by comparing the behavior of daily bond yield data in the United Kingdom and Sweden--both inflation targeters--to that in the United States, a non-inflation-targeter. Using the difference between far-ahead forward rates on nominal and inflation-indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons, we examine how much, if at all, far-ahead forward inflation compensation moves in response to macroeconomic data releases and monetary policy announcements. In the U.S., we find that forward inflation compensation exhibits highly significant responses to economic news. In the U.K., we find a level of sensitivity similar to that in the U.S. prior to the Bank of England gaining independence in 1997, but a striking absence of such sensitivity since the central bank became independent. In Sweden, we find that forward inflation compensation has been insensitive to economic news over the whole period for which we have data. Our findings support the view that a well-known and credible inflation target helps to anchor the private sector's perceptions of the distribution of long-run inflation outcomes.
    Keywords: Inflation (Finance) ; Prices ; Monetary policy
    Date: 2006
  5. By: Jane E. Ihrig; Mario Marazzi; Alexander D. Rothenberg
    Abstract: This paper examines the current thinking on exchange-rate pass-through to both import prices and consumer prices and estimates the extent to which they have fallen in the G-7 countries since the late 1970s and 1980s. For import-price pass-through we find that all countries experience a numerical decline in the responsiveness of import prices to exchange-rate movements; for nearly half of these countries the decline between 1975-1989 and 1990-2004 is statistically significant. We estimate that while a 10 percent depreciation in the local currency would have increased import prices by nearly 7 percent on average across these countries in the late 1970s and 1980s, it would have only increased import prices by 4 percent in the last 15 years. The responsiveness of consumer prices to exchange-rate movements declines for nearly every country, with the decline being statistically significant for two countries. Specifically, while a 10 percent depreciation in the local currency would have increased consumer prices by almost 2 percent on average in the late 1970s and 1980s, it would have had a neutral effect on consumer prices in the last 15 years.
    Keywords: Foreign exchange rates ; Pricing ; Group of Seven countries
    Date: 2006
  6. By: Richard Dennis, Kai Leitemo, and Ulf Soderstrom
    Abstract: Robust control allows policymakers to formulate policies that guard against model misspecification. The principal tools used to solve robust control problems are state-space methods (see Hansen and Sargent, 2006, and Giordani and Soderlind, 2004). In this paper we show that the structural-form methods developed by Dennis (2006) to solve control problems with rational expectations can also be applied to robust control problems, with the advantage that they bypass the task, often onerous, of having to express the reference model in statespace form. Interestingly, because state-space forms and structural forms are not unique the two approaches do not necessarily return the same equilibriafor robust control problems. We apply both state-space and structural solution methods to an empirical New Keynesian business cycle model and find that the differences between the methods are both qualitatively and quantitatively important. In particular, with the structural-form solution methods the specification errors generally involve changes to the conditional variances in addition to theconditional means of the shock processes.
  7. By: Ali al-Nowaihi (University of Leicester); Paul Levine (University of Surrey); Alex Mandilaras (University of Surrey)
    Abstract: A new perspective is provided on a puzzle that has emerged from the empirical lit- erature suggesting that government-independent central banks provide a `free lunch': lower in°ation is apparently achieved at no cost in terms of greater output variance. We assess the various explanations provided by the theoretical literature. After revis- iting the free lunch puzzle and con¯rming the empirical importance of open-economy effects, we develop a Rogoff-style delegation model that combines the latter with po- litical monetary cycle e®ects. We show that if all countries delegate monetary policy to government independent banks, as economies become more integrated then a low inflation, higher output variance trade-off re-emerges.
    Keywords: central bank independence, open economy, political uncertainty
    JEL: C72 E61
    Date: 2006–03
  8. By: Chiara Forlati
    Abstract: This paper studies monetary and fiscal policy interactions in a two country model, where taxes on firms’ sales are optimally chosen and the monetary policy is set cooperatively. It turns out that in a two country setting non-cooperative fiscal policy makers have an incentive to change taxes on sales depending on shocks realizations in order to reduce output production. Therefore whether the fiscal policy is set cooperatively or not matters for optimal monetary policy decisions. Indeed, as already shown in the literature, the cooperative monetary policy maker implements the flexible price allocation only when special conditions on the value of the distortions underlying the economy are met. However, if non-cooperative fiscal policy makers set the taxes on firms’ sales depending on shocks realizations, these conditions cannot be satisfied; conversely, when fiscal policy is cooperative, these conditions are fulfilled. We conclude that whether implementing the flexible price allocation is optimal or not depends on the fiscal policy regime.
    Keywords: Monetary and Fiscal Policy, Policy Coordination
    JEL: E52 E58 E62 F42
    Date: 2004–07
  9. By: Christopher Spencer (University of Surrey)
    Abstract: In 1997, the Bank of England was granted operational responsibility for setting interest rates to meet a Government inflation target of RPIX 2.5 percent. As part of the shift towards independence, operational decisions on monetary policy were delegated to a Monetary Policy Committee. Using voting data obtained from Minutes of Monetary Policy Committee Meetings, I show that as a group, internally appointed MPC members (insiders) on average prefer higher interest rates than external appointees (outsiders). Further, ordered logit analysis demonstrates that insiders and outsiders are motivated by different concerns when setting interest rates, with the interest rate setting behaviour of outsiders being less easy to predict than those of insiders.
    Keywords: Monetary Policy Committee, insiders, outsiders, voting
    Date: 2006–03
  10. By: Christopher Spencer (University of Surrey)
    Abstract: I examine the propensity of Bank of England Monetary Policy Committee (BoEMPC) members to cast dissenting votes. In particular, I compare the type and frequency of dissenting votes cast by socalled insiders (members of the committee chosen from within the ranks of bank staff) and outsiders (committee members chosen from outside the ranks of bank staff). Significant differences in the dissent voting behaviour associated with these groups is evidenced. Outsiders are significantly more likely to dissent than insiders; however, whereas outsiders tend to dissent on the side of monetary ease, insiders do so on the side of monetary tightness. I also seek to rationalise why such differences might arise, and in particular, why BoEMPC members might be incentivised to dissent. Amongst other factors, the impact of career backgrounds on dissent voting is examined. Estimates from logit analysis suggest that the effect of career backgrounds is negligible.
    Keywords: Monetary Policy Committee, insiders, outsiders, dissent voting, career backgrounds, appointment procedures
    Date: 2006–03
  11. By: Paul Levine (University of Surrey); Peter McAdam (European Central Bank); Joseph Pearlman (London Metropolitan University)
    Abstract: We examine an interesting puzzle in monetary economics between what monetary authorities claim (namely to be forward-looking and pre-emptive) and the poor stabilization properties routinely reported for forecast-based rules. Our resolution is that central banks should be viewed as following ‘Calvo-type’ inflation-forecast-based (IFB) interest rate rules which depend on a discounted sum of current and future rates of inflation. Such rules might be regarded as both within the legal frameworks, and potentially mimicking central bankers’ practice. We find that Calvo-type IFB interest rate rules are first: less prone to indeterminacy than standard rules with a finite forward horizon. Second, for such rules in difference form the indeterminacy problem disappears altogether. Third, optimized forms have good stabilization properties as they become more forward-looking, a property that sharply contrasts that of standard IFB rules. Fourth, they appear potentially data coherent when incorporated into a well-known estimated DSGE model of the Euro-area.
    Keywords: Inflation-forecast-based interest rate rules, Calvo-type interest rate rules, indeterminacy
    JEL: E52 E37 E58
    Date: 2006–02
  12. By: Martin Fukac; Adrian Pagan
    Date: 2006–03
  13. By: Pu Chen (Faculty of Economics, University of Bielefeld); Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Peter Flaschel (Faculty of Economics, University of Bielefeld); Willi Semmler (Bernhard Schwartz Center for Economic Policy Analysis, New School University and Center for Empirical Macroeconomics, University of Bielefeld, Bielefeld,)
    Abstract: In this paper we formulate a baseline disequilibrium AS-AD model and empirically estimate it with time series data for the US-economy. The version of the model used here exhibits a Phillips-curve, a dynamic IS curve and a Taylor interest rate rule. It is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates. A version of Okun's law is used to link capacity utilization to employment. Our proposed nonlinear 5D model of real market dynamics overcomes anomalies of the old Neoclassical synthesis and also the rational expectations methodology of the new Neoclassical Synthesis. It resembles New Keynesian macroeconomics but permits nonclearing of markets. It exhibits typical Keynesian feedback structures with asymptotic stability of its steady state for low adjustment speeds and with loss of stability { generally by way of Hopf bifurcations { when certain adjustment speeds are made sufficiently large. We provide system estimates of our model, for quarterly time series data of the U.S. economy 1965.1-2001.1, and study the stability features of the U.S. economy with respect to its various feedback channels from an empirical perspective. Based on these estimates, which in particular imply that goods market dynamics are profit led, we find that the dynamics are strongly convergent around the steady state, if monetary policy is sufficiently active, but will lose this feature if the inflationary climate variable or the price inflation rate itself adjusts sufficiently fast. We also study to what extent more active interest rate feedback rules or downward wage rigidity can stabilize the dynamics in the large when the steady state is locally repelling. We study the economy's behavior due to faster adjustments. We find that monetary policy should allow for sufficient steady state inflation in order to avoid stability problems in areas of the phase space where wages are not flexible in a downward direction.
    Keywords: AS-AD disequilibrium; wage and price Phillips curves; Okun's law; (in-)stability; persistent fluctuations; monetary policy
    JEL: E24 E31 E32
    Date: 2006–03–01
  14. By: Shinichi Nishiyama; Tae Okada; Wako Watanabe
    Abstract: We empirically examined whether declining bank loans in Japan in the late 1990s are the result of banks' downward adjustments of lending supply (a "credit crunch") in response to capital losses (a "capital crunch"). Estimating the new lending supply function as a non-linear function of the capital to asset ratio, we found that the (new lending supply) function is not only increasing in bank capital but also concave in bank capital, which supports the view that a "credit crunch" occurs since forward-looking banks have an incentive to avoid failing to meet regulatory requirements in the future.
    Date: 2006–03
  15. By: Gara Minguez-Afonso
    Abstract: First generation models assume that the level of reserves of a Central Bank in a fixed exchange rate regime is common knowledge among consummers, and therefore the timing of the attack on the currency, in an economy with persistent deficit, can be correctly anticipated. In these models, the collapse of the peg leads to no discrete change in the exchange rate. We relax the assumption of perfect information and introduce uncertainty about the willingness of a Central Bank to defend the peg. In this new setting, there is a unique equilibrium at which the fixed exchange is abandoned. In our model, the lack of common knowledge will lead to a discrete devaluation of the local currency once the peg finally collapses.
    Date: 2006–02
  16. By: Gongpil Choi (Korea Institute of Finance); Deok Ryong Yoon (Korea Institute for Internation Economic Policy)
    Abstract: Given the increasing importance of capital market development for financial stability and multilateral cooperation for sustained growth, a country's choice of exchange rate regime is hardly trivial. Instead of relying on a series of individually managed floats, it would be better for each country to target its currency against a basket of other currencies. A still much better alternative would be to form a regional block, which would tie Asian currencies together and create a regional currency while allowing them to float against major currencies. Whether the type is an individual peg to a tailored basket or a multilateral peg to a common basket remains to be determined. Under any plausible scenario, some type of regional currency needs to be developed to promote an environment suitable for financial and monetary cooperation that is, in turn, conducive to capital market development. Since conditions in the region are increasingly favourable for an OCA (Optimal Currency Area), such cooperation would be mutually beneficial as well as globally desirable.
    Keywords: ACU, Asian Exchange rate,
    JEL: F33 F36
    Date: 2005–12
  17. By: Christopher Bowdler (Nuffield College, Oxford University); Adeel Malik (Centre for the Study of African Economies, University of Oxford)
    Abstract: Recent decades have seen a considerable expansion of global trade and a simultaneous decline in inflation volatility. This paper investigates whether greater openness to trade helps achieve inflation stability. Using panel data for a sample of developing and industrial countries over the period 1961-2000, we document a negative and statistically significant effect of openness on inflation volatility. This relationship is estimated after controlling for the potential endogeneity of openness, and the average rate of inflation. We conduct a battery of robustness tests, showing in particular the robustness of our conclusions to controlling for the choice of exchange rate regime. A sub-sample analysis suggests that the relationship between openness and inflation volatility is more pronounced in developing and emerging market economies than in OECD countries. We also identify potential channels underpinning this relationship. In particular, we provide evidence that openness may promote inflation stability through dampening monetary and terms of trade shocks.
    Keywords: Openness, inflation, globalization, volatility, panel data.
    JEL: E31 F41 O57
    Date: 2005–03–15
  18. By: Christopher Bowdler (Nuffield College, Oxford University)
    Abstract: A number of theoretical models predict that the slope of the Phillips curve increases with trade openness, but cross-country studies provide little evidence for such a correlation. We highlight two reasons for this finding. Firstly, the strength of the relationship may depend on the extent of exchange rate adjustment, which is a potential determinant of output and inflation dynamics in open economies, but previous studies have not made a distinction between fixed and floating exchange rate regimes. Secondly, existing estimates of the Phillips curve slope are based on data from the 1950s through the 1980s, and are therefore likely affected by price and wage controls, inflationary oil price hikes and the role played by fiscal policy in driving output and inflation (the underlying theory requires that monetary shocks dominate). We calculate new measures of the Phillips curve slope using data from 1981-98, a period during which these factors were arguably less important. Regressions based on the new measures indicate that the Phillips curve slope increases with trade openness amongst countries maintaining flexible and semi-flexible exchange rate regimes, but is unrelated to openness amongst countries maintaining fixed exchange rate regimes.
    Keywords: Openness, inflation, Phillips curve, sacrifice ratio, exchange rate regime.
    JEL: E31 E32 F41
    Date: 2005–10–01
  19. By: Mark Weder (School of Economics, University of Adelaide)
    Abstract: High degrees of relative risk aversion induce indeterminacy in cash- in-advance economies. This paper finds that Taylor-style policies can pre-empt such sunspot equilibria. Specific policy recommendations depend on the fundamentals of the economy, i.e. the empirically true value of coecient of relative risk aversion.
    Keywords: Cash-in-Advance Economies, Taylor Rules, Sunspot Equilibria.
    JEL: E32 E52
    Date: 2006–01
  20. By: Gita Gopinath; Roberto Rigobon
    Abstract: The stickiness of traded goods prices and the currency in which prices are sticky play a central role in international macroeconomics. Despite the existence of a rich theoretical literature, there is very little empirical evidence that directly measures the extent of price stickiness in traded goods prices. To address these questions, we use unpublished micro data on import and export prices at-the-dock for the United States for the period 1994-2005. We present three main results: First, the trade weighted average price duration in dollars is 12.26 months for imports and 13.77 months for exports. This level of stickiness is about twice as high as recent evidence on retail goods prices. The fact that both imports and exports are sticky in dollars suggests that contrary to standard modeling assumptions there is producer currency pricing in U.S. exports and local currency pricing in U.S. imports. Second, there is tremendous heterogeneity in price duration across goods, with differentiated goods adjusting prices far less frequently than homogenous goods. Further, the degree of stickiness does not change dramatically with exchange rate volatility. Third, we document that the degree of stickiness in import prices has been increasing throughout the last 10 years, with very little of this increase explained by a compositional shift from homogenous to differentiated goods.
    JEL: F30
    Date: 2006–03
  21. By: Kenji Aramaki (University of Tokyo)
    Abstract: This paper reviews Japan's experiences with the liberalization of capital accounts, and tries to identify their implications to China. Liberalization of capital accounts proceeded very gradually in Japan from the adoption of a system of general prohibition of foreign exchange and capital transactions in 1949 through the shift to a generally liberalized system in 1979. Meantime, Japan was exposed to the turbulent international financial markets due to the move from a peg to a float system of its currency and two oil crises. In response to the massive short-term capital flow in and out of the country caused by these shocks, Japan, which was generally headed for the liberalization of the capital accounts, was frequently forced to resort to foreign exchange and capital control measures to stabilize the market. These experiences by Japan seems to give valuable implications to China, for which significant enhancement of the flexibility of its exchange rate movement under the recently revised formal exchange rate regime and the liberalization of capital accounts continue to be important policy agenda in the years to come.
    Keywords: trade liberialiazation, China, Japan, capital accounts, China, peg system, float system, foreign exchange,
    JEL: F13 F14 F31
    Date: 2006–12
  22. By: Elizabeth Klee
    Abstract: Time is a significant cost of conducting transactions, and theoretical models predict that transactions costs significantly affect the type of media of exchange buyers use. However, there is little empirical work documenting the magnitude of this effect. This paper uses grocery store scanner data to examine how time affects consumer choices of checks and debit cards. On average, check transactions take thirty percent longer than debit card transactions. This time difference is a significant factor in the choice to use a debit card over a check and offers empirical evidence for transactions costs affecting the use of media of exchange.
    Keywords: Consumer behavior ; Checks
    Date: 2006
  23. By: Nicola Cetorelli; Linda Goldberg
    Abstract: U.S. banks have substantial exposure to foreign markets such as Europe and Latin America. In this paper, we show how the amounts and forms of these exposures have evolved over time and note the changes in embodied risks taken through banks' cross-border activity, local claims, and derivative positions. Our findings vary with the type of U.S. bank. Compared with other banks, money-center banks tend to have a greater share of their assets in foreign exposures. Some of money-center banks' exposure to riskier countries, particularly Latin American countries, is achieved through the activities of local branches and subsidiaries that take on liabilities as well as assets, a strategy that reduces their bank transfer risk accordingly. As a share of total international exposures, the transfer risk assumed by money-center banks tends to be significantly lower than that of other banks.
    Keywords: Banks and banking, International ; International finance ; Bank investments ; Branch banks
    Date: 2006
  24. By: Francisco Torres (Universidade de Aveiro)
    Abstract: This paper addresses the question whether the process of European monetary integration implies efficiency-legitimacy trade-off. The paper considers that the process of monetary policy delegation to the European Central Bank (ECB), ratified by all European Union (EU) parliaments, was a non-zero-sum game, increasing both the efficiency and the legitimacy of monetary policy in the eurozone. There was however a change in the nature of delegation: the initial principal (EU national governments and/or parliaments) delegated to the agent (the ECB) control over its behaviour in regard to monetary policy. The paper distinguishes two types of constraints for monetary policy: credibility constraints and political constraints. The change in the nature of delegation of monetary policy (tying the hands of the principal) was a means of dealing with credibility constraints. The paper goes on investigating whether, and if so to what extent, the European Parliament (EP) is fit to function as a principal of the ECB as a means of dealing with political constraints. Thus, the paper analyses the European Parliament’s increased involvement in overseeing the Central Bank’s activities, aiming at understanding whether and how that new and special role (an informal institution of dialogue) could affect the trade-off between efficiency and legitimacy in the conduct of monetary policy in the eurozone.
    Keywords: Economic and Monetary Union; monetary policy delegation: efficiency and legitimacy; accountability; responsiveness; principal-agent relations; governance
    JEL: E58 E61 E65
    Date: 2006–03
  25. By: Edward Nelson
    Abstract: Ireland and Switzerland both had rising inflation during the early 1970s, but their experiences diverged thereafter, so that they form a rare example of two countries whose inflation rates are poorly correlated with one another over the Great Inflation period. In addition, each of the two countries' records is anomalous in important respects relative to other economies' 1970s inflations. This paper proposes that the monetary policy neglect hypothesis can account for the anomalies, providing a consistent explanation for the Great Inflation across countries. Extensive archival evidence is considered from each country regarding the doctrines that guided 1970s policymaking. This evidence establishes that Switzerland*s better record is accounted for by the competition between monetary and nonmonetary views of inflation being resolved earlier and more decisively in favor of the monetary view. In Ireland, by contrast, nonmonetary views of inflation dominated policymaking throughout the 1970s.
    Keywords: Inflation (Finance) ; Ireland ; Switzerland
    Date: 2006
  26. By: Pu Chen (Faculty of Economics, University of Bielefeld); Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Peter Flaschel (Faculty of Economics, University of Bielefeld); Hing Hung (School of Finance and Economics, University of Technology, Sydney)
    Abstract: We reformulate the traditional AS-AD growth model of the Neoclassical Synthesis (stage I) with a Taylor policy rule replacing the conventional LM-curve, with gradually adjusting wages as well as prices, and with perfect foresight on current inflation rates and an adaptively revised notion of an inflationary climate in which the economy is operating. We compare this approach with the New Keynesian approach, the Neoclassical Synthesis, stage II, with staggered price and wage setting and find various common components, yet with radically different dynamic implications due to our treatment of the forward-looking part of our wage-price spiral. We show for a system estimate of our model that it implies qualitatively local asymptotic stability and when its estimated form is simulated in response to isolated shocks strongly damped business fluctuations, due to a stable interaction of goods market dynamics with the interest rate policy of the central bank and due to a normal working of a real-wage feedback chain. These results are however endangered ? leading in fact to economic breakdown ? when there is a global floor to money wage inflation rates. In this case, the return of some money wage flexibility in deep depressions is of help in restoring viability of the model, thereby even avoiding explosive dynamics and the collapse of the economy. This situation leads to viable, but complex business fluctuations.
    Keywords: DAS-DAD dynamics; wage and price Phillips curves; real interest effects; real wage effects; (in)stability; persistent business cycles; complex dynamics
    JEL: E24 E31 E32
    Date: 2006–03–01
  27. By: Paul Levine (University of Surrey); Alexandros Mandilaras (University of Surrey); Jun Wang (University of Surrey)
    Abstract: This paper provides a theoretical and empirical examination of the e®ect of debt structure on the probability of a currency crisis and the slope of the yield curve. We employ an open-economy version of the Barro-Gordon model with public debt, as in Benigno and Missale (2004) and generalize the analysis to allow for the case where the monetary authority can fully commit itself to an escape clause monetary rule. Comparing the latter with the discretionary outcomes motivates the asymmetric information game where the signalling e®ect of defending the parity competes with the fundamentals of the debt burden. Two key predictions of the model are tested with positive results.
    Keywords: Currency crisis, debt management
    JEL: F31
    Date: 2006–03
  28. By: Guillermo A. Calvo; Alejandro Izquierdo; Ernesto Talvi
    Abstract: Using a sample of emerging markets that are integrated into global bond markets, we analyze the collapse and recovery phase of output collapses that coincide with systemic sudden stops, defined as periods of skyrocketing aggregate bond spreads and large capital flow reversals. Our findings indicate the presence of a very similar pattern across different episodes: output recovers with virtually no recovery in either domestic or foreign credit, a phenomenon that we call Phoenix Miracle, where output “rises from its ashes”, suggesting that firms go through a process of financial engineering to restore liquidity outside the formal credit markets. Moreover, we show that the US Great Depression could be catalogued as a Phoenix Miracle. However, in contrast to the US Great Depression, EM output collapses occur in a context of accelerating price inflation and falling real wages, casting doubts on price deflation and nominal wage rigidity as key elements in explaining output collapse, and suggesting that financial factors are prominent for understanding these collapses.
    JEL: F31 F32 F34 F41
    Date: 2006–03
  29. By: Colin McKenzie
    Abstract: The purpose of this paper is to examine two factors, gold production and export prices, that have been suggested as having aided Australia's escape from the deflation it faced in the early 1890s. In order to examine the factors influencing Australian domestic prices in the second half of the nineteenth century, annual data over the period 1861-1900 are used to estimate a structural vector autoregression. Causality tests in a reduced form vector autoregression suggest that two factors Granger cause the movements in Australian domestic prices, namely export prices and net exports. In contrast, movements in gold production in Australia do not significantly directly cause Australian domestic prices, but have some indirect effect through the interest rate and net exports. Impulse response functions computed from the structural vector autoregression suggest that shocks in export prices lead to a rise in domestic prices, but shocks in gold production do not. Perhaps surprisingly, an export price shock leads to a fall in net exports in the medium term. Changes in capital flows would appear to be an important adjustment channel.
    Date: 2006–03
  30. By: George Kapetanios and Massimiliano Marcellino
    Abstract: The estimation of dynamic factor models for large sets of variables has attracted considerable attention recently, due to the increased availability of large datasets. In this paper we propose a new parametric methodology for estimating factors from large datasets based on state space models and discuss its theoretical properties. In particular, we show that it is possible to estimate consistently the factor space. We alsodevelop a consistent information criterion for the determination of the number of factors to be included in the model. Finally, we conduct a set of simulation experiments that show that our approach compares well with existing alternatives.
  31. By: Edward F. Buffie (Department of Economics, Indiana University); Manoj Atolia (Department of Economics, Florida State University)
    Abstract: In this paper we show that a model featuring durables consumption, weak credibility, and sticky prices can explain many of the stylized facts associated with exchange-rate-based stabilization, including the quantitative variation exhibited by key macroeconomic variables. In standard models, the boom phase of ERBS is nothing more than a tepid expansion – changes in spending, real output, and the real exchange rate are unexceptional. But when durables are part of the choice set, the boom is truly a boom: following a temporary reduction in the crawl, total consumption spending rises 12-20%, the real exchange rate appreciates 40-55%, and the current account deficit swells to 5-7% of GDP. None of these results requires easy intertemporal substitution in consumption.
    Keywords: Reverse Shooting, Global Nonlinear Saddlepath Solution
    JEL: C63 C61
    Date: 2005–12
  32. By: Toshihiro Okubo (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: Despite world-wide bloc economies after the Depression, Japan had a tight relationship with the British Commonwealth and created tight connections with the Sterling and the Gold blocs in the late 1930s. The world-wide bloc economies did not isolate Japan.
    Keywords: International Economics; Exchange Rates; Trade; Whatever Related
    Date: 2006–03–22
  33. By: Sophie Saglio (University of Paris 13); Yonghyup Oh (Department of International Economics and Finance of Korea Institute for International Economic Policy); Jacques Mazier (University of Paris 13)
    Abstract: This paper presents a simple macroeconomic model of international interdependency describing Korea, Japan, China, and the rest of East Asia in their relations with the United States and the rest of the world. The model includes both a foreign trade block and an internal demand block analysing demand formation and the price-wage-employment adjustment process. Exchange rates are fixed, but can be manipulated exogenously. The main features of the East Asian trade structure are integrated into the model, and foreign trade price elasticises are higher for Korea and China and smaller for Japan.
    Keywords: Multinational model, East Asian interdependency, exchange rates, asymmetric shocks
    JEL: C52 F15 F17 F42
    Date: 2005–12
  34. By: Bruce Mizrach; Christopher J. Neely
    Abstract: This article reviews the history of the recent shift to electronic trading in equity, foreign exchange and fixed-income markets. We analyze a new data set: the eSpeed (Cantor Fitzgerald) electronic Treasury network. We contrast the market microstructure of eSpeed with the traditional voice assisted networks that report through GovPX. The electronic market (eSpeed) has greater volume, smaller spreads and a lower estimated impact of a trade than the voice market (GovPX).
    Keywords: Government securities ; Electronic trading of securities
    Date: 2006
  35. By: Morten L. Bech; Rod Garratt
    Abstract: We show how the interbank payment system can become illiquid following wide-scale disruptions. Two forces are at play in such disruptions-operational problems and changes in participants' behavior. We model the interbank payment system as an n-player game and utilize the concept of a potential function to describe the process by which one of multiple equilibria emerges after a wide-scale disruption. If the disruption is large enough, hits a key geographic area, or hits a "too-big-to-fail" participant, then the coordination of payment processing can break down, and central bank intervention might be required to reestablish the socially efficient equilibrium. We also explore how the network topology of the underlying payment flow among banks affects the resiliency of coordination. The paper provides a theoretical framework to analyze the effects of events such as the September 11 attacks.
    Keywords: Payment systems ; Banks and banking ; Game theory ; Banks and banking, Central
    Date: 2006
  36. By: Francisco Torres (Universidade de Aveiro)
    Abstract: In Portugal, as in most other European Union (EU) countries, the challenge of Economic and Monetary Union (EMU) has worked as a mechanism for economic stabilisation. However, the political consensus on the participation in EMU did not develop with respect to the need for implementing structural reforms and abolishing many of the policy distortions affecting the economy and to other goals of European integration, such as environmental quality, consumer protection or internal social cohesion, all of them pre-conditions for long-term development. Moreover, the objectives of EMU price stability and sound public finances were also not internalised in that consensus, although they were behind some crucial policy decisions, such as to join the EMS in 1992. During the entire macroeconomic convergence phase European monetary reform was regarded as an unavoidable external constraint that went together with an exogenous political objective. It was only due to the political consensus on not being left out of the EU core that the necessary consensus could be maintained to pursue a policy compatible with the objective of EMU participation throughout the heights of the European recession in Portugal (1993/94), the electoral year of 1995 and the two first years of a new legislature (1996/97) with a minority Government of a different political colour. This lack of internal objectives and economic and political strategy of integration surfaced and the political and social consensus broke once Portugal had joined EMU upon its inception, leading to the current economic crisis.
    Keywords: Portugal; European Union; macroeconomic stabilisation; monetary and fiscal policy; economic reform
    JEL: E63 E65 O52 F02
    Date: 2006–03
  37. By: Richard Pierse (University of Surrey)
    Abstract: In this paper we propose an algorithm for the solution of optimal control problems with nonlinear models based on a generalised Gauss- Newton algorithm but making use of analytic model derivatives. The method is implemented in WinSolve, a general nonlinear model solu- tion program.
    Date: 2006–03

This nep-cba issue is ©2006 by Roberto Santillan. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.