nep-cba New Economics Papers
on Central Banking
Issue of 2006‒04‒22
57 papers chosen by
Roberto Santillan

  1. The Relationship Between Exchange Rates and Inflation Targeting Revisited By Sebastian Edwards
  2. Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through By Takatoshi Ito; Kiyotaka Sato
  3. Optimal Inflation Targeting under Alternative Fiscal Regimes By Pierpaolo Benigno; Michael Woodford
  4. Back to Wicksell? In search of the foundations of practical monetary policy By Roberto Tamborini
  5. Openness and the Case for Flexible Exchange Rates By Corsetti, Giancarlo
  6. The Real Effects of EMU By Philip R. Lane;
  7. Central Bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy By Andreas Schabert
  8. Calvo Contracts - Optimal Indexation in General Equilibrium By Le, Vo Phuong Mai; Minford, Patrick
  9. The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime By Jay C. Shambaugh; Julian di Giovanni
  10. Does Neoclassical Theory Account for the Effects of Big Fiscal Shocks? Evidence From World War II By Ellen R. McGrattan; Lee E. Ohanian
  11. The U.S. Current Account Deficit: Gradual Correction or Abrupt Adjustment? By Sebastian Edwards
  12. The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities,1970–2004 By Philip R. Lane; Gian Maria Milesi-Ferretti
  13. Learning Under Ambiguity By Larry Epstein; Martin Schneider
  14. A Portfolio Theory of International Capital Flows By Michael B. Devereux; Makoto Saito
  15. Rational Inattention: A Solution to the Forward Discount Puzzle By Philippe Bacchetta; Eric van Wincoop
  16. Dissent and Disagreement on the Fed's FOMC: Understanding Regional Affiliations and limits to Transparency By Ellen Meade
  17. Money Rules By Cees Ullersma; Jan Marc Berk; Bryan Chapple
  18. Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers By Campbell Leith and Leopold von Thadden
  19. Optimal Monetary Policy When Agents Are Learning By Krisztina Molnár; Sergio Santoro
  20. Pareto Improving Monetary Policy in Incomplete Markets By Sergio Turner; Norovsambuu Tumennasan
  21. External Shocks, U.S. Monetary Policy and Macroeconomic Fluctuations in Emerging Markets By Bartosz Mackowiak
  22. Monetary policy regime shifts: new evidence from time-varying interest rate rules By Carmine Trecroci; Matilde Vassalli
  23. Joining the European Monetary Union - Comparing First and Second Generation Open Economy Models By Le, Vo Phuong Mai; Minford, Patrick
  24. Macroeconomic Regime Switches and Speculative Attacks By Bartosz Mackowiak
  25. Currency Areas and Monetary Coordination By Qing Liu; Shouyong Shi
  26. "Banking in General Equilibrium with an Application to Japan." By R. Anton Braun; Max Gillman
  27. On Determinants of the Yen Weight in the Implicit Basket System in East Asia By Takatoshi Ito; Keisuke Orii
  28. Macroeconomic policy and the distribution of growth rates By Vatcharin Sirimaneetham; Jonathan Temple
  29. How Far Are We From The Slippery Slope? The Laffer Curve Revisited By Mathias Trabandt; Harald Uhlig
  30. Effects of Exchange Rate Volatility on the Volume and Volatility of Bilateral Exports By Christopher F. Baum; Mustafa Caglayan
  31. The Forward Exchange Rate Bias Puzzle: Evidence from New Cointegration Tests By Raj Aggarwal; Brian M. Lucey; Sunil K. Mohanty
  32. Further evidence on the statistical properties of Real GNP By Laura Mayoral
  33. Output fluctuations persistence: Do cyclical shocks matter? By Silvestro Di Sanzo
  34. Macroeconomic Policies and Institutions By Jean-Paul Fitoussi
  36. Impulse Responses Confidence Intervals for Persistent Data: What Have We Learned? By Elena Pesavento; Barbara Rossi
  37. GMM Estimation and Inference in Dynamic Panel Data Models with Persistent Data By Hugo Kruiniger
  38. A Pressure-Augmented Taylor Rule for Italy By Chiara Dalle Nogare; Matilde Vassalli
  40. Brüssel, Frankfurt oder Basel - Wo muss das Problem steigender Staatsschulden in der Europäischen Währungsunion gelöst werden? By Philipp Paulus
  41. The Persistence of Inflation in OECDCountries: a Fractionally Integrated Approach By Laura Mayoral
  42. A Dynamic Perspective for the Reform of the Stability and Growth Pact By Christian Deubner
  43. The substitution bias of the consumer price index By Petter Frenger
  44. - La concurrence euro-dollar dans la perspective de l'élargissement de l'Union européenne By Michel Lelart
  45. Economic Shocks, Progressiveness of Taxation, and Indexation of Taxes and Public Expenditure in EMU By Markku Kotilainen
  46. Indicator and boundaries of financial stability By Jan Willem van den End
  47. The indicators of international financial integration: A set of convergent measures (In French) By Bertrand BLANCHETON (CMHE-IFReDE-GRES); Samuel MAVEYRAUD-TRICOIRE (Université Bordeaux IV)
  48. Flight to Quality and Collective Risk Management By Ricardo J. Caballero; Arvind Krishnamurthy
  49. Real Exchange Rate Adjustment In European Transition Countries By Maican, Florin G.; Sweeney, Richard J.
  50. House Prices and Monetary Policy in Colombia By Martha Misas A.
  51. Following the yellow brick road? The Euro, the Czech Republic, Hungary and Poland. By Jesús Rodríguez López; José Luis Torres Chacón
  52. The Chinese Yuan after the Chinese Exchange Rate System Reform By Eiji Ogawa; Michiru Sakane
  54. Evaluación de pronósticos del tipo de cambio utilizando By Munir A. Jalil. B; Martha Misas
  56. The Time-Varying Long-Run Unemployment Rate: The Case Colombian By Luis Eduardo Arango; Carlos Esteban Posada
  57. Managing Exchange Rate Volatility: A Comparative Counterfactual Analysis of Singapore 1994 to 2003 By Peter Wilson; Henry Ng Shang Ren

  1. By: Sebastian Edwards
    Abstract: This paper deals with the relationship between inflation targeting and exchange rates. I address three specific issues: first, I analyze the effectiveness of nominal exchange rates as shock absorbers in countries with inflation targeting. This issue is closely related to the magnitude of the "pass-through" coefficient. Second, I investigate whether exchange rate volatility is different in countries with an inflation targeting regime than in countries with alternative monetary policy arrangements. And third, I discuss whether the exchange rate should play a role in determining the monetary policy stance under inflation targeting. An alternative way of posing this question is whether the exchange rate should have an independent role in an open economy Taylor rule.
    JEL: F02 F43
    Date: 2006–04
  2. By: Takatoshi Ito; Kiyotaka Sato
    Abstract: The pass-through effects of exchange rate changes on the domestic prices in the East Asian countries are examined using a VAR analysis including several price indices and domestic macroeconomic variables as well as the exchange rate. Results from the VAR analysis show that (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit countries; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large and statistically significant. Thus, Indonesia's accommodative monetary policy as well as the high degree of the CPI responsiveness to exchange rate changes was important factors that resulted in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period.
    Date: 2006–04
  3. By: Pierpaolo Benigno; Michael Woodford
    Abstract: Standard discussions of flexible inflation targeting as an optimal monetary policy abstract completely from the consequences of monetary policy for the government budget. But at least some of the countries now adopting inflation targeting have substantial difficulty in controlling fiscal imbalances, so that the additional strains resulting from strict control of inflation are of substantial concern, and some (notably Sims 2005) have argued that inflation targeting can even be counterproductive under some fiscal regimes. Here, therefore, we analyze welfare-maximizing monetary policy taking explicit account of the consequences of monetary policy for the government budget, and under a variety of assumptions about the nature of the fiscal regime. The paper contrasts the optimal monetary policies under three alternative assumptions about fiscal policy: (i) the case in which little distortion is required to raise additional government revenue, and the fiscal authority can be relied upon to ensure intertemporal government solvency [the implicit assumption in standard analyses]; (ii) the case in which only distorting sources of revenue exist, but distorting taxes are adjusted optimally; and (iii) the case in which tax rates cannot be expected to change in response to a change in monetary policy [the problematic case emphasized by Sims]. In both of cases (ii) and (iii), it is optimal for monetary policy to allow the inflation rate to respond to fiscal developments (and the optimal responses to other shocks are somewhat different than in the classic analysis, which assumes case (I)). Nonetheless, optimal monetary policy can still be implemented through a form of flexible inflation targeting, and it remains critical, even in the most pessimistic case (case (iii)), that inflation expectations (beyond some very short horizon) not be allowed to vary in response to shocks.
    JEL: E52 E63
    Date: 2006–04
  4. By: Roberto Tamborini
    Abstract: It is now widely held that the New Neoclassical Synthesis (NSS) offers central banks a "user friendly", though rigorous, theoretical framework consistent with current practice of systematic stabilization policy based on interest rate rules (e.g. Woodford (2003)). Particular interest and curiosity have been aroused by Woodford's argument that the NNS theory of monetary policy is in its essence a modern restatement and refinement of Wicksell's interest-rate theory of prices (1898). This paper deals with two main issues prompted by Woodford's Neo-Wicksellian revival. The first questions the consistency between the NNS and Wicksell. The second concerns the value added for monetary policy of Wicksellian ideas in their own right. Section 2 clarifies some basic theoretical issues underlying the NNS and its inconsistency with a proper Wicksellian approach, which should be based on saving-investment imbalances that are precluded by the NNS theoretical framework. Section 3 presents a proper Neo-Wicksellian dynamic model whereby it is possible to assess, and hopefully clarify, some basic issues concerning the macroeconomics of saving-investment imbalances. Section 4 examines implications for monetary policy, in particular for Taylor rules, and section 5 concludes.
    Date: 2006
  5. By: Corsetti, Giancarlo
    Abstract: Models of stabilization in open economy traditionally emphasize the role of exchange rates as a substitute for nominal price flexibility in fostering relative price adjustment. This view has been recently criticized on the ground that, to the extent that prices are sticky in local currency, the exchange rate does not play the stabilizing role envisioned by the received wisdom. An important question is whether, for this very reason, stabilization policies should limit exchange rate movements, or even eliminate them altogether. In this paper, I re-assess this issue by extending the Corsetti and Pesenti (2001) model to allow for home bias in consumption | so that I can exploit the advantages of closed-form solutions. While this extension leaves most properties of the model unaffected, home bias implies that the real exchange rate in an efficient equilibrium is not constant, but fluctuates with the terms of trade. The weight that monetary authorities optimally place on stabilizing domestic marginal costs is increasing in Home bias: with asymmetric shocks, fixed exchange rates are incompatible with efficient monetary rules. Yet, the adverse welfare consequences of exchange rate movements constrain the optimal intensity of monetary responses to domestic shocks. Openness matters: in our specification each country produces an equal share of the world value added; the lower the import content of consumption, the higher the exchange rate volatility implied by optimal stabilization rules. In relatively closed economy, optimal monetary rules tend to converge, regardless of the nature of nominal rigidities in the exports market.
    Keywords: exchange rate pass-through; exchange rate regimes; international policy cooperation; nominal rigidities; optimal monetary policy
    JEL: E31 E52 F42
    Date: 2006–04
  6. By: Philip R. Lane;
    Abstract: We explore the impact of European monetary union (EMU) on the economies of the member countries. While the annual dispersion in inflation rates have not been much different to the variation across US regions, inflation differentials in the euro area have been much more persistent, such that cumulative intra-EMU real exchange rate movements have been quite substantial. EMU has indeed contributed to greater economic integration - however, economic linkages with the rest of the world have also been growing strongly, such that the relative importance of intra-EMU trade has not dramatically increased. In terms of future risks, a severe economic downturn or financial crisis in a member country will be the proving ground for the political viability of EMU.
    Date: 2006–04–05
  7. By: Andreas Schabert (Universiteit van Amsterdam)
    Abstract: This paper examines the role of the monetary instrument choice for local equilibrium determinacy under sticky prices and different fiscal policy regimes. Corresponding to Benhabib et al.'s (2001) results for interest rate feedback rules, the money growth rate should not rise by more than one for one with inflation when the primary surplus is raised with public debt. Under an exogenous primary surplus, money supply should be accommodating -- such that real balances grow with inflation -- to ensure local equilibrium determinacy. When the central bank links the supply of money to government bonds by controlling the bond-to-money ratio, an inflation stabilizing policy can be implemented for both fiscal policy regimes. Local determinacy is then ensured when the bond-to-money ratio is not extremely sensitive to inflation, or when interest payments on public debt are entirely tax financed, i.e., the budget is balanced.
    Keywords: Fiscal-Monetary Policy Interaction; Money Growth; Bond-to-Money Ratio; Local Equilibrium Determinancy
    JEL: E52 E63 E32
    Date: 2006–03–08
  8. By: Le, Vo Phuong Mai; Minford, Patrick
    Abstract: Calvo contracts, which are the basis of the current generation of New Keynesian models, widely include indexation to general inflation. We argue that the indexing formula should be expected inflation rather than lagged inflation. This optimises the welfare of the representative agent in a general equilibrium model of the New Keynesian type. This is shown analytically for a simplified model and by numerical simulation for a full model with price and wage contracts as well as capital. The consequence of such indexation is that monetary policy no longer has any effect on welfare.
    Keywords: Calvo contracts; indexing; New Keynesian
    JEL: E0
    Date: 2006–04
  9. By: Jay C. Shambaugh; Julian di Giovanni
    Abstract: It is often argued that small economies are affected by conditions in large countries. This paper explores the connection between interest rates in major industrial countries and annual real output growth in other countries. The results show that high large-country interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates. The paper then examines the potential channels through which large-country interest rates affect small economies. The direct monetary policy channel is the most likely channel when compared with other possibilities, such as a general capital market effect or a trade effect.
    JEL: F3 F4
    Date: 2006–04–05
  10. By: Ellen R. McGrattan; Lee E. Ohanian
    Abstract: There is much debate about the usefulness of the neoclassical growth model for assessing the macro- economic impact of fiscal shocks. We test the theory using data from World War II, which is by far the largest fiscal shock in the history of the United States. We take observed changes in fiscal policy during the war as inputs into a parameterized, dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data. Our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock.
    JEL: E0 E6
    Date: 2006–04
  11. By: Sebastian Edwards
    Abstract: In this paper I use a large multi-country data set to analyze the determinants of abrupt and large “current account reversals.” The results from a variance-component probit model indicate that the probability of experiencing a major current account reversal is positively affected by larger current account deficits, lower prices of exports relative to imports, and expansive monetary policies. On the other hand, this probability is lower for more advanced countries, and for countries with flexible exchange rates. An analysis of the marginal effects of current account deficits and of the predicted probability of reversal indicates that both have increased significantly for the U.S. since 1999. However, the level of this probability is still on the low side. I estimate that the predicted probability of a current account reversal in the U.S. has increased from 1.7% in 1999, to 14.9% in 2006.
    JEL: F02 F43 O11
    Date: 2006–04
  12. By: Philip R. Lane; Gian Maria Milesi-Ferretti
    Abstract: We construct estimates of external assets and liabilities for over 140 countries over the period 1970-2004. We describe our estimation methods and present some key features of the data, both at the country and at the global level. We focus in particular on trends in net and gross external positions, as well as on the composition of international portfolios, distinguishing between foreign direct investment, portfolio equity investment, foreign exchange reserves, and external debt. We also document the existence of a “world net foreign asset discrepancy” (the stock counterpart to the world current account discrepancy) and identify the asset categories that account for this discrepancy.
    Keywords: International financial integration; net foreign assets
    JEL: F32
    Date: 2006–04–05
  13. By: Larry Epstein (University of Rochester); Martin Schneider (New York University)
    Abstract: This paper considers learning when the distinction between risk and ambiguity matters. It first describes thought experiments, dynamic variants of those provided by Ellsberg, that highlight a sense in which the Bayesian learning model is extreme - it models agents who are implausibly ambitious about what they can learn in complicated environments. The paper then provides a generalization of the Bayesian model that accommodates the intuitive choices in the thought experiments. In particular, the model allows decision-makers’ confidence about the environment to change — along with beliefs — as they learn. A calibrated portfolio choice application shows how this property induces a trend towards more stock market participation and investment.
    Keywords: ambiguity, learning, noisy signals, ambiguous signals, quality information, portfolio choice, portfolio diversification, Ellsberg Paradox
    JEL: D81 D83 D9 G11 G12
    Date: 2006–04
  14. By: Michael B. Devereux; Makoto Saito
    Abstract: This paper constructs a model in which the currency composition of national portfolios is an essential element in facilitating capital ‡ows between countries. In a two country environment, each country chooses optimal nominal bond portfolios in face of real and nominal risk.Current account deficits are financed by increases in domestic currency debt, but balanced by increases in foreign currency credit. This is combined with an evolution of risk-premiums such that the rate of return on the debtor country’s gross liabilities is lower than the return on its gross assets. This ensures stability of the world wealth distribution.
    Date: 2006–04–05
  15. By: Philippe Bacchetta (University of Lausanne, Studienzentrum Gerzensee and CEPR); Eric van Wincoop (University of Virginia)
    Abstract: The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate dierential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international nance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benet from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks.
    Date: 2005–09
  16. By: Ellen Meade
    Abstract: This paper addresses two important, but distinct, issues in monetary policy. The first issue concerns regional influences on voting within a monetary policy committee. In a committee that includes representatives from different regions or countries, is there a regional element to the monetary policy decision or to the votes cast by monetary policymakers? The second issue concerns possible limits to transparency. In an independent central bank that strives to be accountable and to communicate its policy effectively, are there circumstances under which increasing transparency could be harmful? The answer to both of these questions with respect to the Federal Reserve is "maybe".
    Keywords: central banking; Federal Reserve; FOMC; voting
    JEL: E58 F33 E42 E65
    Date: 2006–03
  17. By: Cees Ullersma; Jan Marc Berk; Bryan Chapple
    Abstract: We assess a New Keynesian macro-economic model that is supplemented with a micro-founded role for money in determining aggregate demand and supply in order to better describe monetary policy transmission. In this model welfare is higher if the monetary authority takes money growth explicitly into account when setting interest rates.
    Keywords: money; monetary policy; monetary transmission
    JEL: E52 E58
    Date: 2006–04
  18. By: Campbell Leith and Leopold von Thadden
    Abstract: This paper develops a small New Keynesian model with capital accumulation and government debt dynamics. The paper discusses the design of simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of Ricardian equivalence. Under this assumption, government debt turns into a relevant state variable which needs to be accounted for in the analysis of equilibrium dynamics. The key analytical finding is that without explicit reference to the level of government debt it is not possible to infer how strongly the monetary and fiscal instruments should be used to ensure determinate equilibrium dynamics. Specifically, we identify in our model discontinuities associated with threshold values of steady-state debt, leading to qualitative changes in the local determinacy requirements. These features extend the logic of Leeper (1991) to an environment in which fiscal policy is non-neutral and requires us to pay equal attention to to monetary and fiscal policy in designing policy rules consistent with determinate dynamics.
    JEL: E52 E63
  19. By: Krisztina Molnár; Sergio Santoro
    Abstract: Most studies of optimal monetary policy under learning rely on optimality conditions derived for the case when agents have rational expectations. In this paper, we derive optimal monetary policy in an economy where the Central Bank knows, and makes active use of, the learning algorithm agents follow in forming their expectations. In this setup, monetary policy can influence future expectations through its e ect on learning dynamics, introducing an additional tradeo between inflation and output gap stabilization. Specifically, the optimal interest rate rule reacts more aggressively to out-of-equilibrium inflation expectations and noisy cost-push shocks than would be optimal under rational expectations: the Central Bank exploits its ability to "drive" future expectations closer to equilibrium. This optimal policy closely resembles optimal policy when the Central Bank can commit and agents have rational expectations. Monetary policy should be more aggressive in containing inflationary expectations when private agents pay more attention to recent data. In particular, when beliefs are updated according to recursive least squares, the optimal policy is time-varying: after a structural break the Central Bank should be more aggressive and relax the degree of aggressiveness in subsequent periods. The policy recommendation is robust: under our policy the welfare loss if the private sector actually has rational expectations is much smaller than if the Central Bank mistakenly assumes rational expectations whereas in fact agents are learning.
    Keywords: Optimal Monetary Policy, Learning, Rational Expectations
    JEL: C62 D83 D84 E0 E5
    Date: 2006–03–15
  20. By: Sergio Turner; Norovsambuu Tumennasan
    Date: 2006
  21. By: Bartosz Mackowiak
    Abstract: Using structural VARs, I find that external shocks are an important source of macroeconomic fluctuations in emerging markets. Furthermore, U.S. monetary policy shocks affect quickly and strongly interest rates and the exchange rate in a typical emerging market. The price level and real output in a typical emerging market respond to U.S. monetary policy shocks by more than the price level and real output in the U.S. itself. These findings are consistent with the idea that “when the U.S. sneezes, emerging markets catch a cold.” At the same time, U.S. monetary policy shocks are not important for emerging markets relative to other kinds of external shocks.
    Keywords: Structural vector autoregression, monetary policy shocks, international spillover effects of monetary policy, external shocks, emerging markets
    JEL: F41 E3 O11
    Date: 2006–04
  22. By: Carmine Trecroci; Matilde Vassalli
    Abstract: We estimate forward-looking interest-rate rules, for major advanced countries, allowing for time variation in their parameters. Traditional constant-parameter reaction functions likely blur the impact of i) model uncertainty, ii) conflicting objectives, iii) shifting preferences and iv) nonlinearities of policymakers choices. We find that monetary policies followed by the US, the UK, Germany, France and Italy, often described in terms of standard Taylor rules, are best summarized by feedback rules that allow for time variation in their parameters. Estimated rules point to sizeable differences in the actual conduct of monetary policies, even in the countries now belonging to the EMU. Also, our TVP specification outperforms the conventional Taylor rule in tracking the actual Fed funds rate.
  23. By: Le, Vo Phuong Mai; Minford, Patrick
    Abstract: We log-linearise the Dellas and Tavlas (DT) model of monetary union and solve it analytically. We find that the intuition of optimal currency analysis of DT's second generation open economy model is essentially the same as that of first generation models. Monetary union results in no welfare loss if its member states are symmetric. However, asymmetry causes loss in welfare both due to the failure of the union policy to deal suitably with a country's asymmetric shocks and due to an active monetary policy by union in pursuit of its distinct objectives. The asymmetry in DT is largely due to the differing wage rigidities across countries.
    Keywords: asymmetry; monetary union; multi-country model; representative agent model; wage rigidity
    JEL: E42 F41 F42
    Date: 2006–04
  24. By: Bartosz Mackowiak
    Abstract: This paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated. The paper develops a model of an open economy in which monetary policy starts active, fiscal policy starts passive and, in a particular state of nature, monetary policy switches to passive and fiscal policy switches to active. The probability of the regime switch is endogenous and changes over time together with the state of the economy. The regime switch is preceded by a sharp increase in interest rates and causes a jump in the exchange rate. The model predicts that currency composition of public debt affects dynamics of macroeconomic variables. Furthermore, the model is consistent with evidence from recent currency crises, in particular small seigniorage revenues.
    Keywords: Coordination of monetary policy and fiscal policy, policy regime switch, currency crisis, speculative attack, fiscal theory of the price level
    JEL: E52 E61 F33
    Date: 2006–04
  25. By: Qing Liu; Shouyong Shi
    Abstract: In this paper we integrate the recent development in monetary theory with international finance, in order to examine the coordination between two currency areas in setting long-run inflation. The model determines the value of each currency and the size of each currency area without requiring buyers to use a particular currency to buy a country's goods. We show that the two countries inflate above the Friedman rule in a non-cooperative game. Coordination between the two areas reduces inflation to the Friedman rule, increases consumption, and improves welfare of both countries. This gain from coordination increases as the two areas become more integrated in trade. These results arise from the new features of the model, such as the deviations from the law of one price and the extensive margin of trade. To illustrate these new features, we show that introducing a direct tax on foreign holdings of a currency does not eliminate a country's incentive to inflate, while it does in traditional models.
    Keywords: Exchange rates; Currency areas; Coordination
    JEL: F41 E40
  26. By: R. Anton Braun (Faculty of Economics, University of Tokyo); Max Gillman (Department of Economics, Boston University)
    Abstract: Japan has now experienced over a decade of slow growth and deflation. This period has also been associated with protracted problems in the banking sector. A wide range of measures have been tried in to restore health in the banking sector including recapitalization, the extension of 100% guarantees to all deposits, and central bank purchases of shares held by banks. It has also argued that ending deflation is an important ingredient in restoring banking sector health. This paper develops a general equilibrium of the banking sector. In our model the banking sector produces an intermediate good that is used to produce investment goods and a variable fraction of consumption goods. We then assess the implications of alternative policies designed to assist the banking sector in terms of their implications for welfare and the size and profitability of the banking sector.
    Date: 2006–04
  27. By: Takatoshi Ito; Keisuke Orii
    Abstract: After the Asian currency crisis, most Asian economies have adopted managed float regimes, with notable exception of China, Hong Kong, and Malaysia. Various studies have examined the weights of the dollar, the yen, and the euro, regarding floating is loosely managed with reference to the basket currency system. However, results are mixed, in that in some periods, the yen weight seems to be higher in some countries, and in some other periods, the Asian currencies seem to have gone back to the dollar peg. This paper seeks the determinants of the yen weight in Asian currencies. It is found that the yen weight tends to increase when the yen depreciates and when the domestic interest rates rise. The yen weight tends to decrease when the US interest rate rises. Asymmetry is observed among coefficients of variables between the lower and higher yen periods. In addition, the yen weight is less susceptible to the overall position of the US dollar vis-a-vis major currencies. It should also be noted that the peculiarity among countries seems large in handling the currency weights in the basket.
    Date: 2006–04
  28. By: Vatcharin Sirimaneetham; Jonathan Temple
    Abstract: We examine the view that high-quality macroeconomic policy is a necessary, but not sufficient, condition for economic growth. We first construct a new index of the quality of macroeconomic policy. We then directly compare growth rate distributions across countries with good and bad policies; use Bayesian methods to examine the partial correlation between policy and growth; and outline how growth and steady-state income levels might have differed, had all countries achieved good policy outcomes. One finding is that bad macroeconomic policies can be offset by other factors, but the fastest-growing countries in our sample all shared high-quality macroeconomic management.
    Keywords: macroeconomic policy, economic growth, Washington Consensus, Bayesian Model Averaging, counterfactuals
    JEL: O23 O40
    Date: 2006–03
  29. By: Mathias Trabandt; Harald Uhlig
    Abstract: The goal of this paper is to examine the shape of the Laffer curve quantitatively in a simple neoclassical growth model calibrated to the US as well as to the EU-15 economy. We show that the US and the EU-15 area are located on the left side of their labor and capital tax Laffer curves, but the EU-15 economy being much closer to the slippery slopes than the US. Our results indicate that since 1975 the EU-15 area has moved considerably closer to the peaks of their Laffer curves. We find that the slope of the Laffer curve in the EU-15 economy is much flatter than in the US which documents a much higher degree of distortions in the EU-15 area. A dynamic scoring analysis shows that more than one half of a labor tax cut and more than four fifth of a capital tax cut are self-financing in the EU-15 economy.
    Keywords: Laffer curve, US and EU-15 economy
    JEL: E0 E60 H0
    Date: 2006–04
  30. By: Christopher F. Baum (Boston College); Mustafa Caglayan (University of Glasgow)
    Abstract: We present an empirical investigation of a recently suggested but untested proposition that exchange rate volatility can have an impact on both the volume and variability of trade flows, considering a broad set of countries' bilateral real trade flows over the period 1980-1998. We generate proxies for the volatility of real trade flows and real exchange rates after carefully scrutinizing these variables' time series properties. Similar to the findings of earlier theoretical and empirical research, our first set of results show that the impact of exchange rate uncertainty on trade flows is indeterminate. Our second set of results provide new and novel findings that exchange rate volatility has a consistent positive and significant effect on the volatility of bilateral trade flows.
    Keywords: exchange rates, volatility, fractional integration, trade flows
    JEL: F17 F31 C22
    Date: 2006–04–16
  31. By: Raj Aggarwal; Brian M. Lucey; Sunil K. Mohanty
    Abstract: An important puzzle in international finance is the failure of the forward exchange rate to be a rational forecast of the future spot rate. It has often been suggested that this puzzle may be resolved by using better statistical procedures that correct for both non-stationarity and nonnormality in the data. We document that even after accounting for non-stationarity, nonnormality, and heteroscedasticity using parametric and non-parametric tests on data for over a quarter century, US dollar forward rates for horizons ranging from one to twelve months for the major currencies, the British pound, Japanese yen, Swiss franc, and the German mark, are generally not rational forecasts of future spot rates. These findings of non-rationality in forward exchange rates for the major currencies continue to be puzzling especially as these foreign exchange markets are some of the most liquid asset markets with very low trading costs.
    Keywords: flight-to-quality, contagion, multivariate GARCH
    JEL: F31 G14 F47 G15
    Date: 2006–04–05
  32. By: Laura Mayoral
    Abstract: The well-known lack of power of unit root tests has often been attributed to the short length of macroeconomic variables and also to DGP’s that depart from the I(1)-I(0) alternatives. This paper shows that by using long spans of annual real GNP and GNP per capita (133 years) high power can be achieved, leading to the rejection of both the unit root and the trend-stationary hypothesis. This suggests that possibly neither model provides a good characterization of these data. Next, more flexible representations are considered, namely, processes containing structural breaks (SB) and fractional orders of integration (FI). Economic justification for the presence of these features in GNP is provided. It is shown that the latter models (FI and SB) are in general preferred to the ARIMA (I(1) or I(0)) ones. As a novelty in this literature, new techniques are applied to discriminate between FI and SB models. It turns out that the FI specification is preferred, implying that GNP and GNP per capita are non-stationary, highly persistent but mean-reverting series. Finally, it is shown that the results are robust when breaks in the deterministic component are allowed for in the FI model. Some macroeconomic implications of these findings are also discussed.
    Keywords: GNP, unit roots, fractional integration, structural change, long memory, exogenous growth models
    Date: 2005–05
  33. By: Silvestro Di Sanzo (Departamento de Fundamentos del Analisis Economico, Universidad de Alicante)
    Abstract: The aim of this paper is to identify the different sources of persistence of output fluctuations. We propose an unobserved components model that allows us to decompose GDP series into a trend component and a cyclical component. We let the drift of the trend component to switch between different regimes according to a first-order Markov process. To calculate an appropriate p-value for a test of linearity we propose a bootstrap procedure, which allows for general forms of heteroskedasticity. The performance of the bootstrap is checked by means of a Monte Carlo simulation. Our study concerns the U.S. As suggested by the Endogenous Growth theory, cyclical shocks appear to play an important role on the observed persistence of output. We argue that the traditional explanation of persistence, which is related to Real Business Cycle models with exogenous productivity, is not consistent with our data. We also find that the majority of business cycle fluctuations in the U.S. are due to real shocks.
    Keywords: Business cycle; Persistence; Unobserved Components model; First-order Markov process; Wild bootstrap; Monte Carlo
    JEL: C12 C13 C15 C32 E32
    Date: 2006
  34. By: Jean-Paul Fitoussi (Observatoire Français des Conjonctures Économiques)
    Date: 2006
  35. By: Alejandro Justiniano; Bruce Preston
    Abstract: This paper evaluates whether an estimated, structural, small open economy model of the Canadian economy can account for the substantial influence of foreign-sourced disturbances indentified in numerous reduced-form studies. The analysis shows that the benchmark model - and a number of variants which include a range of market imperfections - imply cross-equation restrictions and therefore capture certain properties of the data - for instance, the volatility and persistence of the real exchange rate - and yield plausible parameter estimates, this success is qualified by the model's inability to account for the transmission of foreign disturbances to the domestic economy: less than one percent of the variance of output is explained by foreign shocks.
    Date: 2006–04
  36. By: Elena Pesavento; Barbara Rossi
    Abstract: This paper is a comprehensive comparison of existing methods for constructing confidence bands for univariate impulse response functions in the presence of high persistence. Monte Carlo results show that Kilian (1998a), Wright (2000), Gospodinov (2004) and Pesavento and Rossi (2005) have favorable coverage properties, although they differ in terms of robustness at various horizons, median unbiasedness, and reliability in the possible presence of a unit or mildly explosive root. On the other hand, methods like Runkle's (1987) bootstrap, Andrews and Chen (1994), and regressions in levels or first differences (even when based on pre-tests) may not have accurate coverage properties. The paper makes recommendations as to the appropriateness of each method in empirical work.
    Date: 2006–03
  37. By: Hugo Kruiniger (Queen Mary, University of London)
    Abstract: In this paper we consider GMM based estimation and inference for the panel AR(1) model when the data are persistent and the time dimension of the panel is fixed. We find that the nature of the weak instruments problem of the Arellano-Bond estimator depends on the distributional properties of the initial observations. Subsequently, we derive local asymptotic approximations to the finite sample distributions of the Arellano-Bond estimator and the System estimator, respectively, under a variety of distributional assumptions about the initial observations and discuss the implications of the results we obtain for doing inference. We also propose two LM type panel unit root tests.
    Keywords: Dynamic panel data, GMM, Weak instruments, Weak identification, Local asymptotics, Multi-index asymptotics, Diagonal path asymptotics, LM test, Panel unit root test
    JEL: C12 C13 C23
    Date: 2006–04
  38. By: Chiara Dalle Nogare; Matilde Vassalli
    Abstract: Following Havrilesky seminal work (1995) and its extension by Maier, Sturm and de Haan (2002) we construct a monthly index of external influences on Bank of Italy’s conduct for the period 1984-1998. This paper describes the index of overall pressure on Italian monetary policy and the five sub-indexes of which it is composed. We evaluate whether Bank of Italy responded to pressure by estimating Taylor rules augmented with the pressure indexes. We conclude that in most cases external pressures did affect Bank of Italy’s action.
  39. By: Martha López
    Abstract: Uno de los hechos estilizados más recientes alrededor del mundo es que, después de varias décadas, se está convergiendo a una inflación baja y estable. Algunos países ya llegaron a su estado estacionario en este sentido y otros aún están en proceso de desinflación. Dado que la inflación inflinge costos en el bienestar de los agentes y frena el crecimiento económico de largo plazo, este es uno de los logros más importantes de las autoridades monetarias. No obstante, en el corto plazo el proceso desinflacionario puede tener impacto negativo sobre el producto y el empleo. Este trabajo presenta algunos criterios que son relevantes en la determinación del nivel de inflación de largo plazo y cómo el régimen de política monetaria de Inflación-objetivo permite disminuir los costos asociados al proceso desinflacionario en la medida que la política monetaria gana credibilidad.
    Date: 2006–03–01
  40. By: Philipp Paulus
    Abstract: This paper shows that in addition to fiscal rules in the European Monetary Union (EMU), some support can be found from financial markets to keep rising public debt in check. EMU likely has an overall positive impact on the ability of both markets and market participants for EMU government bonds to price such securities correctly, which would in turn discipline profligate EMU governments. However, apart from fiscal rules like the Stability and Growth Pact, some regulatory issues will still have to be addressed to ascertain the functioning of markets for EMU government bonds. It is concluded that regulatory efforts should concentrate on competition policy by the EU Commission in Brussels for EMU financial markets and banks, as well as on an EMU-wide authority for the ECB in Frankfurt to monitor and combat systemic risk. However, the Basel accords on capital requirements for banks should not be made legally binding, since leaving risk-taking and risk measurement to banks individually likely helps overcome competitive distortions in a larger EMU capital market.
    Keywords: monetary union, fiscal stability, banking system, banking regulation
    JEL: F33 G28 H63
    Date: 2006–03
  41. By: Laura Mayoral
    Abstract: The statistical properties of inflation and, in particular, its degree of persistence and stability over time is a subject of intense debate and no consensus has been achieved yet. The goal of this paper is to analyze this controversy using a general approach, with the aim of providing a plausible explanation for the existing contradictory results. We consider the inflation rates of 21 OECD countries which are modelled as fractionally integrated (FI) processes. First, we show analytically that FI can appear in inflation rates after aggregating individual prices from firms that face different costs of adjusting their prices. Then, we provide robust empirical evidence supporting the FI hypothesis using both classical and Bayesian techniques. Next, we estimate impulse response functions and other scalar measures of persistence, achieving an accurate picture of this property and its variation across countries. It is shown that the application of some popular tools for measuring persistence, such as the sum of the AR coefficients, could lead to erroneous conclusions if fractional integration is present. Finally, we explore the existence of changes in inflation inertia using a novel approach. We conclude that the persistence of inflation is very high (although non-permanent) in most post-industrial countries and that it has remained basically unchanged over the last four decades.
    Keywords: Inflation persistence, persistence stability, ARFIMA models, long memory, structural breaks, bayesian estimations
    JEL: C22 E31
    Date: 2005–02
  42. By: Christian Deubner
    Abstract: This paper explores the functioning of the EMU Stability and Growth Pact from 1999 to 2005, year of its first explicit reform. The causes and the principal axes of that reform are analysed, as well as the main arguments for defending or critizising it. As to the Pact’s prior functioning, for almost all small and medium Euro area states this is a success story and the reform appears apt to facilitate the Pact’s future implementation. As to the larger Member States, the Pact experience has been a history of non-observance which the Pact’s reform appears only to condone and abet. This contradictory experience leads to a negative judgement on the functioning of the SGP as a whole. But recognising the success of the compliers’ group, and not only the failure of the non-compliers, justifies the Pact’s basic logic, as against certain commonly heard indictments. It permits to sharpen the analysis. These points will be explored later in this paper.
    Keywords: Economic and monetary union; EMU; stability and growth pact; single european currency; reform of the stability and growth pact; surveillance and co-ordination of economic and budgetary policies in EMU
    JEL: E61 E62
    Date: 2006–03
  43. By: Petter Frenger (Statistics Norway)
    Abstract: The paper uses elementary consumer theory to propose an inflation independent ratio definition of the substitution bias of the Laspeyres consumer price index, and derives an approximate substitution bias which depends on the size of the price change as measured by a norm in the Laspeyres plane and on the elasticity of substitution in the direction of the price change. This norm or distance measure can be interpreted as a price substitution index which yields useful information about the movements of relative prices. Norwegian CPI data are used to quantify these relationships.
    Keywords: consumer price index (CPI); substitution bias; elasticity of substitution.
    JEL: C43 D12
    Date: 2006–03
  44. By: Michel Lelart (LEO - Laboratoire d'économie d'Orleans - - [CNRS : UMR6221] - [Université d'Orléans] - [])
    Abstract: La session a été consacrée cette année-là aux Etats-Unis et l'Europe élargie dans le système international de sécurité. L'élargissement ne sera pas sans conséquences sur la concurrence entre les deux grandes monnaies internationales que sont le dollar, principalement, mais aussi l'euro.
    Keywords: Euro ; dollar ; élargissement ; union européenne
    Date: 2006–03–30
  45. By: Markku Kotilainen
    Keywords: Economic and monetary union, EMU, taxation, public expenditure, progressiveness of taxation, indexation
    JEL: E32 E62 E63 E64 F33 F41 F42
    Date: 2006–04–03
  46. By: Jan Willem van den End
    Abstract: This paper presents an information variable for financial stability consisting of a composite index and its related critical boundaries. It is an extension of a Financial Conditions Index with information on financial institutions. The indicator is bounded, on one side, by the instability boundary which depends on the solvency buffers of the institutions and the stress level on financial markets. On the other side, the imbalances boundary signals when extreme imbalances accumulate. This concept is applied to the Netherlands and six OECD countries which experienced a financial crisis.
    Keywords: financial stability; indicator; crisis
    JEL: E44 G10 G12 G20
    Date: 2006–04
  47. By: Bertrand BLANCHETON (CMHE-IFReDE-GRES); Samuel MAVEYRAUD-TRICOIRE (Université Bordeaux IV)
    Abstract: In this article, we propose to evaluate the robustness of the main indicators of international financial integration by indicating their principal results as well as their limits. Empirical studies, whatever the indicator of integration which is chosen, conclude that the recent period is characterized by a very deep integration of capital markets, without any historical equivalence.
    Keywords: Integration, capital market, financial history
    JEL: F02 F21
    Date: 2006
  48. By: Ricardo J. Caballero; Arvind Krishnamurthy
    Abstract: We present a model of flight to quality episodes that emphasizes systemic risk and the Knightian uncertainty surrounding these episodes. Agents make risk management decisions with incomplete knowledge. They understand their own shocks, but are uncertain of how correlated their shocks are with systemwide shocks. Aversion to this uncertainty leads them to question whether their private risk management decisions are robust to aggregate events, generating conservatism and excessive demand for safety. We show that agents’ actions lock-up the capital of the financial system in a manner that is wasteful in the aggregate and can trigger and amplify a financial accelerator. The scenario that the collective of conservative agents are guarding against is impossible, and known to be so even given agents’ incomplete knowledge. A lender of last resort, even if less knowledgeable than private agents about individual shocks, does not suffer from this collective bias and finds that pledging intervention in extreme events is valuable. The benefit of such intervention exceeds its direct value because it unlocks private capital markets.
    JEL: E30 E44 E5 F34 G
    Date: 2006–04
  49. By: Maican, Florin G. (Department of Economics, School of Business, Economics and Law, Göteborg University); Sweeney, Richard J. (McDonough School of Business, Georgetown University)
    Abstract: This paper presents unit-root test results for real exchange rates in ten Central and Eastern European transition countries during 1993:01-2003:12. Because of the shift from controlled to market economies and the accompanying crises, failed policy regimes and changes in exchange rate regimes, appropriate tests in transition countries require allowing for both structural changes and outliers. In both single-equation tests and panel tests with SUR techniques, the data reject the unit-root null for the CEE countries. Accounting for structural breaks and outliers gives much faster mean-reversion speeds than otherwise. <p>
    Keywords: Purchasing power parity; real exchange rate; Monte Carlo; unit root; transition countries; panel data
    JEL: C15 C22 C32 C33 E31 F31
    Date: 2006–02–14
  50. By: Martha Misas A.
    Abstract: This paper investigates the possible responses of an inflation-targeting monetary policy in the face of asset price deviations from fundamental values. Focusing on the housing sector of the Colombian economy, we consider a general equilibrium model with frictions in credit market and bubbles in housing prices. We show that monetary policy is less efficient when it responds directly to asset price of housing than a policy that reacts only to deviations of expected inflation (CPI) from target. Some prudential regulation may provide a better outcome in terms of output and inflation variability.
    Date: 2006–03–01
  51. By: Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); José Luis Torres Chacón (Departamento de Teoría e Historia Económica, Universidad de Málaga)
    Abstract: This paper uses a combination of VAR and bootstrapping techniques to analyze whether the exchange rates of some New Member States of the EU have been used as output stabilizers (those of the Czech Republic, Hungary and Poland), during 1993-2004. This question is important because it provides a prior evaluation on the costs and benefits involved in entering the European Monetary Union (EMU). Joining the EMU is not optional for these countries but mandatory, although there is no definite deadline. Therefore, if the exchange rate works as a shock absorber, monetary independence could be retained for a longer period. Our main finding is that the exchange rate could be a stabilizing tool in Poland and the Czech Republic, although in Hungary it appears to act as a propagator of shocks. In addition, in these three countries, demand and monetary shocks account for most of the variability in both nominal and real exchange rates.
    Keywords: EMU, exchange rate, Structural VAR, stationary bootstraps.
    JEL: C31 F31 F33
    Date: 2006–04
  52. By: Eiji Ogawa; Michiru Sakane
    Abstract: In this paper, we investigate the actual exchange rate policy conducted by the Chinese government after the Chinese exchange rate system reform on July 21 2005. Also, we investigate long-run effect (Balassa-Samuelson effect) on the Chinese yuan. We found that the Chinese government had a statistically significant but small change in exchange rate policy during our sample period to January 25, 2006. It is not identified that the Chinese monetary authority is adopting the currency basket system because the change is too small in the economic sense. On one hand, higher growth rate of productivity will appreciate the Chinese yuan in terms of the US dollar and the Japanese yen while higher growth rates of productivity in Chinese tradable good sector tend to give the Balassa-Samuleson effect, that is undervaluation bias, to the Chinese yuan.
    Date: 2006–04
  53. By: Julián Pérez Amaya
    Abstract: Empleando un modelo de equilibrio general dinámico y estocástico para una economía pequeña y abierta con imperfecciones y rigideces en el sector no transable calibrado para Colombia, se estudia la conveniencia de que la autoridad monetaria fije como medida de inflación objetivo en su función de reacción la inflación total, la inflación doméstica o la inflación externa, en un contexto en el cual la fuente de las fluctuaciones proviene del sector externo y de choques en la productividad en cada uno de los sectores. Dada la existencia de una curva de Phillips aumentada por expectativas en el sector no transable, la política monetaria implica un trade-off entre la incertidumbre sobre la inflación y la variabilidad del producto. Se encuentra que este trade-off varía de acuerdo a la medida de inflación incluida en la función de reacción de la autoridad monetaria. Además, se encuentran los siguientes resultados: Una regla de tasa de interés que responde a la inflación no transable, es la más efectiva en reducir la variabilidad del producto, al costo de tener una inflación total más volátil que en los otros dos regímenes estudiados. En el caso de tener un régimen que responde a la inflación transable se genera más volatilidad en el producto con un nivel de volatilidad medio en la inflación. La política más efectiva para reducir la variabilidad de la inflación total, es aquella en que el banco central responde a la inflación total. Dado que este régimen genera una volatilidad media en el producto, puede ser considerado como el mejor régimen en términos de minimización de la variabilidad del producto y de la inflación total.
    Date: 2006–03–01
  54. By: Munir A. Jalil. B; Martha Misas
    Abstract: El presente trabajo compara especificaciones lineales y no lineales (expresadas en redes neuronales artificiales) ajustadas a la variación porcentual diaria del tipo de cambio utilizando para ello funciones de costo tradicionales (simétricas) a la vez que se introduce el análisis asimétrico. Los resultados muestran que las redes neuronales permiten obtener mejores pronósticos con ambos tipos de funciones de costos. Sin embargo, es de anotar que cuando se evalúan los pronósticos con funciones asimétricas, el modelo no lineal supera ampliamente a su contraparte lineal.
    Date: 2006–02–28
  55. By: Hernando Vargas H.; Dpto de Estabilidad Financiera
    Abstract: El presente trabajo ilustra cómo los altos niveles de deuda pública, a través de los riesgos de mercado, pueden convertirse en una restricción para la ejecución de la política monetaria. Dependiendo de donde se financie el sector público, un nivel grande de deuda pública se refleja en una importante exposición de éste al riesgo cambiario y/o en una exposición sustancial del sistema financiero a los riesgos de mercado. Ante esta situación, un choque a la cuenta de capitales que genere una fuerte depreciación de la moneda y una caída en los precios de los títulos de deuda pública podría restringir las acciones de la autoridad monetaria. Una política restrictiva encaminada a cumplir las metas inflacionarias podría generar pérdidas importantes por valoración en el portafolio de las instituciones financieras, afectando de esta manera la estabilidad del sistema. El documento discute por qué los riesgos de mercado de la deuda pública son un problema latente en Colombia a la vez que se discute cómo podría responder el banco central ante una salida de capitales.
    Date: 2006–03–01
  56. By: Luis Eduardo Arango; Carlos Esteban Posada
    Abstract: The long-run component of the Colombian unemployment rate is estimated for the last twenty years. According to the results, the main determinants of the permanent component of the unemployment rate are the real hourly wage, the non-wage labor costs and the rate of capital accumulation. Given the statistical properties of the variables, a cointegration approach was adopted.
    Date: 2006–03–30
  57. By: Peter Wilson (Department of Economics, National University of Singapore 1 Arts Link, Singapore); Henry Ng Shang Ren
    Abstract: The objective of this paper is see how well Singapore’s exchange rate regime has coped with exchange rate volatility before and after the Asian financial crisis by comparing the performance of Singapore’s actual regime in minimising the volatility of the nominal effective exchange rate (NEER) and the bilateral rate against the US$ against some counterfactual regimes and the corresponding performance of eight other East Asian countries. In contrast to previous counterfactual exercises, such as Williamson (1998a) and Ohno (1999) which compute the weights for effective exchange rates on the basis of simple bloc aggregates, we apply a more disaggregated methodology using a larger number of trade partners. We also utilize ARCH/GARCH techniques to obtain estimates of heteroskedastic variances to better capture the time-varying characteristics of volatility for the actual and simulated exchange rate regimes. Our findings confirm that Singapore’s managed floating exchange rate system has delivered relatively low currency volatility. Although there are gains in volatility reduction for all countries in the sample from the adoption of either a unilateral or common basket peg, particularly post-crisis, these gains are relatively low for Singapore, largely because low actual volatility. Finally, there are additional gains for nondollar peggers from stabilizing intra-EA exchange rates against the dollar if they were to adopt a basket peg, especially post-crisis, but the gains for Singapore are again relatively modest.
    Keywords: East Asia, exchange rates, counterfactuals.
    JEL: F31 F33 F36

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