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on Central Banking |
| By: | Athanasios Orphanides |
| Abstract: | Nearly a quarter-century after Paul Volcker's declaration of war on inflation on October 6, 1979, Alan Greenspan declared that the goal had been achieved. Drawing on the extensive historical record, I examine the views of Chairmen Volcker and Greenspan on some aspects of the evolving monetary policy debate and explore some of the distinguishing characteristics of the disinflation. |
| Keywords: | Anti-inflationary policies ; Monetary policy ; Greenspan, Alan ; Volcker, Paul A. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-05&r=cba |
| By: | Athanasios Orphanides; John C. Williams |
| Abstract: | A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic landscape within which the public forms expectations and policymakers must formulate and implement monetary policy. Using an estimated model of the U.S. economy, we show that monetary policy rules that would perform well under the assumption of rational expectations can perform very poorly when we introduce imperfect knowledge. We then examine the performance of an easily implemented policy rule that incorporates three key characteristics of inflation targeting: transparency, commitment to maintaining price stability, and close monitoring of inflation expectations, and find that all three play an important role in assuring its success. Our analysis suggests that simple difference rules in the spirit of Knut Wicksell excel at tethering inflation expectations to the central bank's goal and in so doing achieve superior stabilization of inflation and economic activity in an environment of imperfect knowledge. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-14&r=cba |
| By: | Pierre Gosselin; Aileen Lotz; Charles Wyplosz (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | Morris and Shin (2002) have shown that a central bank may be too transparent if the private sector pays too much attention to its possible imprecise signals simply because they are common knowledge. In their model, the central bank faces a binary choice: to reveal or not to reveal its information. This paper extends their model to the more realistic case where the central bank must anyway convey some information by setting the interest rate. This situation radically changes the conclusions. In many cases, full transparency is socially optimal. In other instances the central bank can distill information to either manipulate private sector expectations in a way that reduces the common knowledge effect or to reduce the unavoidable information content of the interest rate. In no circumstance is the option of only setting the interest rate socially optimal. |
| Keywords: | Central Bank Transparency |
| Date: | 2006–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp08-2006&r=cba |
| By: | L. Bottazzi; P. Manasse |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:444&r=cba |
| By: | Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Dale Henderson (Federal Reserve Board) |
| Abstract: | We consider standard monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There are also below-target equilibria (BTE) with inflation always below target and constant asymptotically approaching or eventually reaching a below-target value. Liquidity traps are neither necessary or sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary-policy rules that preclude BTE, some which are monotonic in inflation but all of which are non-differentiable at a point. For standard monetary-policy rules, there are plausible fiscal policies that insure uniqueness by precluding BTE; those policies exclude perpetual surpluses and, possibly, perpetual balanced budgets. |
| Keywords: | Zero bound, liquidity trap, inflation targeting, determinancy |
| JEL: | E31 E41 E52 E62 |
| Date: | 2006–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_03&r=cba |
| By: | L. Lambertini; R. Rovelli |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:460&r=cba |
| By: | L. Lambertini; R. Rovelli |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:464&r=cba |
| By: | Robert J. Tetlow; Brian Ironside |
| Abstract: | We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model's inception in July 1996 until November 2003. The period of study was one of important changes in the U.S. economy with a productivity boom, a stock market boom and bust, a recession, the Asia crisis, the Russian debt default, and an abrupt change in fiscal policy. We document the surprisingly large and consequential changes in model properties that occurred during this period and compute optimal Taylor-type rules for each vintage. We compare these optimal rules against plausible alternatives. Model uncertainty is shown to be a substantial problem; the efficacy of purportedly optimal policy rules should not be taken on faith. We also find that previous findings that simple rules are robust to model uncertainty may be an overly sanguine conclusion. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-08&r=cba |
| By: | Jörg Döpke; Jonas Dovern; Ulrich Fritsche; Jirka Slacalek |
| Abstract: | We investigate the relevance of the Carroll's sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year. |
| Keywords: | Inflation expectations, sticky information, inflation persistence |
| JEL: | D84 E31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp571&r=cba |
| By: | Peter J. Klenow; Jonathan L. Willis |
| Abstract: | A large literature seeks to provide microfoundations of price setting for macro models. A challenge has been to develop a model in which monetary policy shocks have the highly persistent effects on real variables estimated by many studies. Nominal price stickiness has proved helpful but not sufficient without some form of "real rigidity" or "strategic complementarity." We embed a model with a real rigidity a la Kimball (1995), wherein consumers flee from relatively expensive products but do not flock to inexpensive ones. We estimate key model parameters using micro data from the U.S. CPI, which exhibit sizable movements in relative prices of substitute products. When we impose a significant degree of real rigidity, fitting the micro price facts requires very large idiosyncratic shocks and implies large movements in micro quantities. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-03&r=cba |
| By: | M. Marzo |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:411&r=cba |
| By: | Jose Manuel Campa; Linda S. Goldberg |
| Abstract: | Border prices of traded goods are highly sensitive to exchange rates; however, the consumer price index (CPI) and the retail prices of goods that make up the CPI are more stable. This paper decomposes the sources of this price stability for twenty-one OECD (Organisation for Economic Co-operation and Development) countries, focusing on the important role of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported inputs used in different categories of consumption goods, and weights in the consumption of nontradables, home tradables, and imported goods. While distribution margins damp the sensitivity of consumption prices of tradable goods to exchange rates, they also lead to enhanced pass-through when the prices of nontraded goods are sensitive to exchange rates. Such price sensitivity arises because imported inputs are used in the production of home nontradables. Calibration exercises show that, of all countries examined, the United States has the lowest expected CPI sensitivity to exchange rates-at less than 5 percent. On average, the calibrated exchange rate pass-through into CPI is expected to be closer to 15 percent. |
| Keywords: | Consumer price indexes ; Foreign exchange rates ; Organisation for Economic Co-operation and Development ; Prices |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:247&r=cba |
| By: | Robert J. Tetlow (Federal Reserve Board, 20th and C Streets, NW, Washington, D.C. 20551, USA.); Peter von zur Muehlen (von zur Muehlen & Associates, Vienna, VA 22181, USA.) |
| Abstract: | In recent years, the learnability of rational expectations equilibria (REE) and determinacy of economic structures have rightfully joined the usual performance criteria among the sought-after goals of policy design. Some contributions to the literature, including Bullard and Mitra (2001) and Evans and Honkapohja (2002), have made significant headway in establishing certain features of monetary policy rules that facilitate learning. However a treatment of policy design for learnability in worlds where agents have potentially misspecified their learning models has yet to surface. This paper provides such a treatment. We begin with the notion that because the profession has yet to settle on a consensus model of the economy, it is unreasonable to expect private agents to have collective rational expectations. We assume that agents have only an approximate understanding of the workings of the economy and that their learning the reduced forms of the economy is subject to potentially destabilizing perturbations. The issue is then whether a central bank can design policy to account for perturbations and still assure the learnability of the model. Our test case is the standard New Keynesian business cycle model. For different parameterizations of a given policy rule, we use structured singular value analysis (from robust control theory) to find the largest ranges of misspecifications that can be tolerated in a learning model without compromising convergence to an REE. In addition, we study the cost, in terms of performance in the steady state of a central bank that acts to robustify learnability on the transition path to REE. |
| Keywords: | monetary policy; learning; E-stability; learnability; robust control. |
| JEL: | C6 E5 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060594&r=cba |
| By: | Aghion, Philippe; Bacchetta, Philippe; Rancière, Romain; Rogoff, Kenneth |
| Abstract: | This paper offers empirical evidence that real exchange rate volatility can have a significant impact on long-term rate of productivity growth, but the effect depends critically on a country's level of financial development. For countries with relatively low levels of financial development, exchange rate volatility generally reduces growth, whereas for financially advanced countries, there is no significant effect. Our empirical analysis is based on an 83 country data set spanning the years 1960-2000; our results appear robust to time window, alternative measures of financial development and exchange rate volatility, and outliers. We also offer a simple monetary growth model in which real exchange rate uncertainty exacerbates the negative investment effects of domestic credit market constraints. Our approach delivers results that are in striking contrast to the vast existing empirical exchange rate literature, which largely finds the effects of exchange rate volatility on real activity to be relatively small and insignificant. |
| Keywords: | exchange rate regime; financial development; growth |
| JEL: | E44 F33 F43 O42 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5629&r=cba |
| By: | Martin Feldstein |
| Abstract: | This paper is an analytic comment on two chapters of the Economic Report of the President for 2006. Chapter One deals with the economy in 2005 and the outlook for the future. The chapter provides a detailed analysis of the expansion in 2005 but not an explanation of why the expansion occurred despite the sharp rise in oil prices. I discuss the role of easy money in stimulating mortgage borrowing which generated negative savings in 2005. Looking ahead, I comment on the risk to inflation implied by the rising unit labor costs over the past four years. Chapter six deals with the international position of the United States. It provides a useful analysis of capital flows to the United States and the reasons why other countries have current account surpluses. It does not deal with the role of the dollar or the nature of the adjustment that might occur to reduce the US current account deficit. I present some comments on those issues. |
| JEL: | E0 F3 F4 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12168&r=cba |
| By: | Andrew Bauer; Robert A. Eisenbeis; Daniel F. Waggoner; Tao Zha |
| Abstract: | In 1994, the Federal Open Market Committee (FOMC) began to release statements after each meeting. This paper investigates whether the public’s views about the current path of the economy and of future policy have been affected by changes in the Federal Reserve’s communications policy as reflected in private sector’s forecasts of future economic conditions and policy moves. In particular, has the ability of private agents to predict where the economy is going improved since 1994? If so, on which dimensions has the ability to forecast improved? We find evidence that the individuals’ forecasts have been more synchronized since 1994, implying the possible effects of the FOMC’s transparency. On the other hand, we find little evidence that the common forecast errors, which are the driving force of overall forecast errors, have become smaller since 1994. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-03&r=cba |
| By: | Domenico Giannone (European Centre for Advanced Research in Economics and Statistics (ECARES) Université Libre de Bruxelles, CP 114, Av. F.D. Roosevelt, 50. B-1050 Brussels, Belgium); Lucrezia Reichlin (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.) |
| Abstract: | Not so much and we should not, at least not yet. |
| Keywords: | International Business Cycles, Euro Area, Risk Sharing, European Integration, Income Insurance. |
| JEL: | E32 C33 C53 F2 F43 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060595&r=cba |
| By: | Narayana R. Kocherlakota; Luigi Pistaferri |
| Abstract: | Typical incomplete markets models in international economics make two assumptions. First, households are not able to fully insure themselves against country-specific shocks. Second, there is a representative household within each country, so that households are fully insured against idiosyncratic shocks. We assume instead that cross-household risk-sharing is limited within countries, but cross-country risk-sharing is complete. We consider two types of limited risk-sharing: domestically incomplete markets (DI) and private information-Pareto optimal (PIPO) risk-sharing. We show that the models imply distinct restrictions between the cross-sectional distributions of consumption and real exchange rates. We evaluate these restrictions using household-level consumption data from the United States and the United Kingdom. We show that the PIPO restriction fits the data well when households have a coefficient of relative risk aversion of around 5. The analogous restrictions implied by the representative agent model and the DI model are rejected at conventional levels of significance. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:372&r=cba |
| By: | Assenmacher-Wesche, Katrin; Gerlach, Stefan |
| Abstract: | Several authors have recently interpreted the ECB's two-pillar framework as separate approaches to forecast and analyse inflation at different time horizons or frequency bands. The ECB has publicly supported this understanding of the framework. This paper presents further evidence on the behaviour of euro area inflation using band spectrum regressions, which allow for a natural definition of the short and long run in terms of specific frequency bands, and causality tests in the frequency domain. The main finding is that variations in inflation are well explained by low-frequency movements of money and real income growth and high-frequency fluctuations of the output gap. |
| Keywords: | frequency domain; inflation; money growth; quantity theory; spectral regression |
| JEL: | C22 E3 E5 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5632&r=cba |
| By: | Alessia Campolmi |
| Abstract: | In a closed economy context there is common agreement on price inflation stabilization being one of the objects of monetary policy. Moving to an open economy context gives rise to the coexistence of two measures of inflation: domestic inflation (DI) and consumer price inflation (CPI). Which one of the two measures should be the target variable? This is the question addressed in this paper. In particular, I use a small open economy model to show that once sticky wages indexed to past CPI inflation are introduced, a complete inward looking monetary policy is no more optimal. I first, derive a loss function from a second order approximation of the utility function and then, I compute the fully optimal monetary policy under commitment. Then, I use the optimal monetary policy as a benchmark to compare the performance of different monetary policy rules. The main result is that once a positive degree of indexation is introduced in the model the rule performing better (among the Taylor type rules considered) is the one targeting wage inflation and CPI inflation. Moreover this rule delivers results very close to the one obtained under the fully optimal monetary policy with commitment. |
| Keywords: | Inflation, open economy, sticky wages, indexation |
| JEL: | E12 E52 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:961&r=cba |
| By: | R. Cellini; L. Lambertini |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:463&r=cba |
| By: | Gauti B. Eggertsson |
| Abstract: | This paper addresses the effectiveness of fiscal policy at zero nominal interest rates. I analyze a stochastic general equilibrium model with sticky prices and rational expectations and assume that the government cannot commit to future policy. Real government spending increases demand by increasing public consumption. Deficit spending increases demand by generating inflation expectations. I derive fiscal spending multipliers that calculate how much output increases for each dollar of government spending (real or deficit). Under monetary and fiscal policy coordination, the real spending multiplier is 3.4 and the deficit spending multiplier is 3.8. However, when there is no policy coordination, that is, when the central bank is "goal independent," the real spending multiplier is unchanged but the deficit spending multiplier is zero. Coordination failure may explain why fiscal policy in Japan has been relatively less effective in recent years than during the Great Depression. |
| Keywords: | Fiscal policy ; Government spending policy ; Deficit financing ; Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:241&r=cba |
| By: | M. Marzo |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:409&r=cba |
| By: | M. Marzo |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:410&r=cba |
| By: | Mariano Kulish (Reserve Bank of Australia) |
| Abstract: | This paper studies two types of interest rate rules that involve long-term nominal interest rates in the context of a New Keynesian model. The first type considers the possibility of adding longer-term rates to the list of variables the central bank reacts to in setting its short-term rate. The second type considers Taylor-type rules that are expressed in terms of interest rates of different maturities, which are operationally equivalent to more complex rules expressed in terms of the short-term rate. It is shown that both types of rules can give rise to a unique rational expectations equilibrium in large regions of the policy-parameter space. The normative evaluation shows that under certain preferences of the monetary authority, policy rules of the second type produce better results than the standard Taylor-type rule. |
| Keywords: | term structure of interest rates; monetary policy rules |
| JEL: | E43 E52 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2006-02&r=cba |
| By: | David R. Skeie |
| Abstract: | In the literature, bank runs take the form of withdrawals of real demand deposits that deplete a fixed reserve of goods in the banking system. However, in a modern banking system, large withdrawals take the form of electronic payments that shift balances among banks within a clearinghouse system, with no analog of a depletion of a scarce reserve. In a model of nominal demand deposits repayable in money within a clearinghouse, I show that interbank lending and monetary prices imply that traditional bank runs do not occur. This finding suggests that deposit insurance may not be needed to prevent bank runs in a modern economy. |
| Keywords: | Financial crises ; Clearinghouses (Banking) ; Bank deposits ; Bank reserves |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:242&r=cba |
| By: | R. Golinelli; R. Rovelli |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:429&r=cba |
| By: | Butter, Frank A.G. den (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics) |
| Abstract: | In the institutional set-up of (economic) policy preparation in the Netherlands there is ample interaction between scientific insights and policy proposals. This Dutch polder model lays much emphasis on the social dialogue to come to an agreement on, and have public support for policy proposals. It was very much the idea of Jan Tinbergen winner of the first Nobel price in economics to have a clear separation in policy preparation between (i) trying to reach consensus on the working of the economy, as formalised in econometric models; (ii) come to a compromise on policy goals between the various minority parties of the government; and (iii) rely on independent and undisputed data collection by an autonomous Central Bureau of Statistics (CBS). The aim of this separation of responsibilities is to guarantee, as much as possible, the scientific quality of policy preparation and at the same time to gain public support for policy measures so that implementation costs are kept low. This paper discusses the working of this institutional set-up, its historical background and the mechanisms of quality control and reputation which are essential for the interaction between scientific knowledge and policy preparation to remain fruitful. |
| Keywords: | Economic policy; Polder model; Social dialogue; Interaction between science and policy |
| JEL: | E61 E66 H11 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:vuarem:2006-7&r=cba |
| By: | Oscar Bernal (DULBEA, Université libre de Bruxelles, Brussels) |
| Abstract: | In the United States, Japan and the Euro Zone, FX interventions are institutionally decided by specific political authorities and implemented by central banks on their behalf. Bearing in mind that these specific political authorities and central banks might not necessarily pursue the same exchange rates objectives, the model proposed in this paper takes account explicitly of this institutional organisation to examine its effects on FX intervention activity. The empirical relevance of our theoretical model is assessed by developing a friction model on the Japanese experience between 1991 and 2004 which reveals how the magnitude of that country’s FX interventions is the outcome of the Japanese Ministry of Finance’s trade-off between attaining its own exchange rate target and one of the Bank of Japan’s. |
| Keywords: | Central banks; Foreign exchange interventions; Interactions; Friction models. |
| JEL: | E58 E61 F31 G15 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:dul:wpaper:06-03rs&r=cba |
| By: | Ariño, Miguel A. (IESE Business School); Canela, Miguel A. (Universitat de Barcelona) |
| Abstract: | En este informe se describen los rasgos principales de la evolución de la tasa de cambio dólar-euro, usando datos diarios, desde la adopción efectiva del euro a principios de 1999 hasta finales de 2005. Se muestra cómo la trayectoria de esta tasa de cambio se puede caracterizar de distinta forma según la escala temporal adoptada. En primer lugar, al examinar las variaciones en períodos superiores a seis meses, la trayectoria de la tasa dólar-euro se puede caracterizar mediante una sucesión de tendencias lineales. Sobre esta tendencia poligonal se superponen unos ciclos de entre uno y tres meses de duración. Por último, a escala diaria, muestra un comportamiento prácticamente impredictible, muy cercano a lo que en econometría se denomina ruido blanco. Estas pautas no son exclusivas de la tasa dólar-euro, sino compartidas, en general, por las tasas de cambio contra el dólar de las monedas de flotación libre. Tomando el valor de cambio del dólar contra una cesta de monedas utilizada por la Reserva Federal, se muestra que las pautas observadas pueden ser atribuidas a las variaciones en el valor "intrínseco" del dólar. |
| Keywords: | Tasa cambio; volatilidad; indice cesta monedas; |
| Date: | 2006–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0620&r=cba |
| By: | Romain Duval (OECD Economics Department, 2 rue Andre Pascal, 75775 Paris Cedex 16, France.); Jørgen Elmeskov (OECD Economics Department, 2 rue Andre Pascal, 75775 Paris Cedex 16, France.) |
| Abstract: | Will EMU accelerate or retard structural reform in labour and product markets? The theoretical literature is ambiguous. New descriptive evidence provided in this paper suggests that euro-area countries have made relatively good progress in structural reform. However, it is much less clear whether progress can be ascribed to EMU membership. To explore further the influence of monetary regime, the paper undertakes an econometric examination of the likelihood that countries undertake reform in five specific areas of labour and product market policies. Based on pooled cross-country/time series Probit regressions covering 21 countries and the period 1985-2003, it is found that structural reform is strengthened by high unemployment, crisis, healthy public finances, reforms in other policy fields and small country size. Further, countries that pursue fixed exchange-rate regimes or participate in monetary union, and therefore have little or no monetary autonomy, appear to undertake less reform – with the effect possibly being concentrated on large countries. |
| Keywords: | political economy; EMU; euro; reforms; labour market; product market. |
| JEL: | D7 O52 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060596&r=cba |
| By: | Etsuro Shioji |
| Abstract: | China has recently announced its intention to fundamentally reform its currency regime in the future. This paper studies how the country's choice of its exchange rate regime interacts with the rest of East Asia's choice. For that purpose, I build a four country new open economy macroeconomic model that consists of East Asia, China, Japan and the US. It is assumed that both East Asia and China peg their respective currencies to certain weighted averages of the Japanese yen and the US dollar. Each side takes the other's choice as given and chooses its own basket weight. The game is characterized by strategic complementarity. It is shown that the currency in which the traded goods prices are quoted plays an important role. The paper considers two alternative cases, the standard producer currency pricing (PCP) case and the vehicle currency pricing (VCP) case in which all the prices of traded goods are preset in the units of US dollars. In the PCP case, trade volume is the important determinant of the equilibrium basket weights, and the balances of trade are inconsequential. However, in the VCP case, trade balances between the four economies are shown to play an important role. Under VCP, and starting from realistic initial trade balances, the equilibrium basket weights far exceed what are implied by Japan's presence in international trade. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:06024&r=cba |
| By: | Eric Ghysels; Jonathan H. Wright |
| Abstract: | Surveys of forecasters, containing respondents' predictions of future values of growth, inflation and other key macroeconomic variables, receive a lot of attention in the financial press, from investors, and from policy makers. They are apparently widely perceived to provide useful information about agents' expectations. Nonetheless, these survey forecasts suffer from the crucial disadvantage that they are often quite stale, as they are released only infrequently, such as on a quarterly basis. In this paper, we propose methods for using asset price data to construct daily forecasts of upcoming survey releases, which we can then evaluate. Our methods allow us to estimate what professional forecasters would predict if they were asked to make a forecast each day, making it possible to measure the effects of events and news announcements on expectations. We apply these methods to forecasts for several macroeconomic variables from both the Survey of Professional Forecasters and Consensus Forecasts. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-10&r=cba |
| By: | Marco Castellani; Emanuel Santos |
| Abstract: | This paper evaluates several artificial intelligence and classical algorithms on their ability of forecasting the monthly yield of the US 10-year Treasury bonds from a set of four economic indicators. Due to the complexity of the prediction problem, the task represents a challenging test for the algorithms under evaluation. At the same time, the study is of particular significance for the important and paradigmatic role played by the US market in the world economy. Four data-driven artificial intelligence approaches are considered, namely, a manually built fuzzy logic model, a machine learned fuzzy logic model, a self-organising map model and a multi-layer perceptron model. Their performance is compared with the performance of two classical approaches, namely, a statistical ARIMA model and an econometric error correction model. The algorithms are evaluated on a complete series of end-month US 10-year Treasury bonds yields and economic indicators from 1986:1 to 2004:12. In terms of prediction accuracy and reliability of the modelling procedure, the best results are obtained by the three parametric regression algorithms, namely the econometric, the statistical and the multi-layer perceptron model. Due to the sparseness of the learning data samples, the manual and the automatic fuzzy logic approaches fail to follow with adequate precision the range of variations of the US 10-year Treasury bonds. For similar reasons, the self-organising map model gives an unsatisfactory performance. Analysis of the results indicates that the econometric model has a slight edge over the statistical and the multi-layer perceptron models. This suggests that pure data-driven induction may not fully capture the complicated mechanisms ruling the changes in interest rates. Overall, the prediction accuracy of the best models is only marginally better than the prediction accuracy of a basic one-step lag predictor. This result highlights the difficulty of the modelling task and, in general, the difficulty of building reliable predictors for financial markets. |
| Keywords: | interest rates; forecasting; neural networks; fuzzy logic. |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp42006&r=cba |
| By: | Van Horen, Neeltje; Schmukler, Sergio L.; Levy Yeyati, Eduardo |
| Abstract: | The authors argue that the cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of international financial integration, reflecting accurately the factors that segment markets and inhibit price arbitrage. Applying to equity markets recent methodological developments in the purchasing power parity literature, they show that nonlinear Threshold Autoregressive (TAR) models properly capture the behavior of the cross market premium. The estimates reveal the presence of narrow non-arbitrage bands and indicate that price differences outside these bands are rapidly arbitraged away, much faster than what has been documented for good markets. Moreover, the authors find that financial integration increases with market liquidity. Capital controls, when binding, contribute to segment financial markets by widening the non-arbitrage bands and making price disparities more persistent. Cr isis episodes are associated with higher volatility, rather than by more persistent deviations from the law of one price. |
| Keywords: | Markets and Market Access,Economic Theory & Research,Access to Markets,Macroeconomic Management,Fiscal & Monetary Policy |
| Date: | 2006–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3897&r=cba |
| By: | Daniel L. Thornton |
| Abstract: | Motivated, on the one hand, by the belief that the Fed controls the short-term rate through open market operations, and on the other, by "the lack of convincing proof that this is what happens," Hamilton (1997) suggested that more convincing evidence of the liquidity effect could be obtained with the use of high-frequency (daily) data. Thornton*s (2001a) detailed analysis of Hamilton*s results and evidence using both Hamilton*s and an alternative methodology indicates a quantitatively unimportant daily liquidity effect. Recently, Carpenter and Demiralp (2006) report "clear evidence" of a daily liquidity effect using a more comprehensive reserve-supply-shock measure than that used by Hamilton. This paper investigates the daily liquidity effect using Carpenter and Demiralp*s new measure. |
| Keywords: | Interest rates ; Open market operations ; Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-020&r=cba |
| By: | Katsumi Shimotsu (Queen's University) |
| Abstract: | This paper analyzes the semiparametric estimation of multivariate long-range dependent processes. The class of spectral densities considered is motivated by and includes those of multivariate fractionally integrated processes. The paper establishes the consistency of the multivariate Gaussian semiparametric estimator (GSE), which has not been shown in other work, and the asymptotic normality of the GSE estimator. The proposed GSE estimator is shown to have a smaller limiting variance than the two-step GSE estimator studied by Lobato (1999). Gaussianity is not assumed in the asymptotic theory. Some simulations confirm the relevance of the asymptotic results in samples of the size used in practical work. |
| Keywords: | fractional integration, long memory, semiparametric estimation |
| JEL: | C22 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1062&r=cba |
| By: | Franklin Allen; Elena Carletti; Robert Marquez |
| Abstract: | Market discipline for financial institutions can be imposed not only from the liability side, as has often been stressed in the literature on the use of subordinated debt, but also from the asset side. This will be particularly true if good lending opportunities are in short supply, so that banks have to compete for projects. In such a setting, borrowers may demand that banks commit to monitoring by requiring that they use some of their own capital in lending, thus creating an asset market-based incentive for banks to hold capital. Borrowers can also provide banks with incentives to monitor by allowing them to reap some of the benefits from the loans, which accrue only if the loans are in fact paid off. Since borrowers do not fully internalize the cost of raising capital to the banks, the level of capital demanded by market participants may be above the one chosen by a regulator, even when capital is a relatively costly source of funds. This implies that the capital requirement may not be binding, as recent evidence seems to indicate. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-11&r=cba |
| By: | Jonathan H. Wright |
| Abstract: | The slope of the Treasury yield curve has often been cited as a leading economic indicator, with inversion of the curve being thought of as a harbinger of a recession. In this paper, I consider a number of probit models using the yield curve to forecast recessions. Models that use both the level of the federal funds rate and the term spread give better in-sample fit, and better out-of-sample predictive performance, than models with the term spread alone. There is some evidence that controlling for a term premium proxy as well may also help. I discuss the implications of the current shape of the yield curve in the light of these results, and report results of some tests for structural stability and an evaluation of out-of-sample predictive performance. |
| Keywords: | Economic indicators ; Economic forecasting ; Interest rates |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-07&r=cba |
| By: | Erik Feijen; Enrico Perotti |
| Abstract: | While financial liberalization has in general favorable effects, reforms in countries with poor regulation is often followed by financial crises. We explain this variation as the outcome of lobbying interests capturing the reform process. Even after liberalization, market investors must rely on enforcement of investor protection, which may be structured so as to block funding for new entrants, or limit their access to refinance after a shock. This forces inefficient default and exit by more leveraged entrepreneurs, protecting more established producers. As a result, lobbying may deliberately worsen financial fragility. After large external shocks, borrowers from the political elite in very corrupt countries may successfully lobby for weak enforcement, and retain control of collateral. We provide evidence that industry exit rates and profit margins after banking crises are higher in the most corrupt countries. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d05-160&r=cba |
| By: | Todd Keister |
| Abstract: | This paper presents a model in which currency crises can spread across countries as a result of the self-fulfilling beliefs of market participants. An incomplete-information approach is used to overcome many undesirable features of existing multiple-equilibrium explanations of contagion. If speculators expect contagion across markets to occur, they have an incentive to trade in both currency markets to take advantage of this correlation. These actions, in turn, link the two markets in such a way that a sharp devaluation of one currency will be propagated to the other market, fulfilling the original expectations. Even though this contagion is driven solely by expectations, the model places restrictions on observable variables that are broadly consistent with existing empirical evidence. |
| Keywords: | Financial crises ; Foreign exchange market ; Devaluation of currency |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:249&r=cba |
| By: | Joel F. Houston; Kevin J. Stiroh |
| Abstract: | This paper examines the evolution of risk in the U.S. financial sector using firm-level equity market data from 1975 to 2005. Over this period, financial sector volatility has steadily increased, reaching extraordinary levels from 1998 to 2002. Much of this recent turbulence can be attributed to a series of major financial shocks, and we find evidence of an upward trend in volatility only for the common component that affects the entire financial sector. While idiosyncratic volatility remains dominant, a combination of common shocks, deregulation, and diversification has reduced its relative importance since the early 1990s. Within the financial sector, commercial banks show the largest rise in volatility, which also reflects industry shocks and not the idiosyncratic component. Despite these changes, we find that the links between the financial sector and economic activity have declined in recent years. These results have implications for investors, bank regulators, and other policymakers concerned with the origins of financial sector risk and with the links between the financial markets and real activity. |
| Keywords: | Risk ; Financial markets ; Banks and banking |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:248&r=cba |
| By: | Dennis, Richard; Leitemo, Kai; Söderström, Ulf |
| 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 Söderlind, 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 state-space form. Interestingly, because state-space forms and structural forms are not unique the two approaches do not necessarily return the same equilibria for 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 the conditional means of the shock processes. |
| Keywords: | misspecification; optimal policy; robust control |
| JEL: | C61 E52 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5638&r=cba |
| By: | M. Hashem Pesaran; Ron P. Smith; Takashi Yamagata; Liudmyla Hvozdyk |
| Abstract: | In this paper we adopt a new approach to testing for purchasing power parity, PPP, that is robust to base country effects, cross-section dependence, and aggregation. We test for PPP applying a pairwise approach to the disaggregated data set recently analysed by Imbs, Mumtaz, Ravan and Rey (2005, QJE). We consider a variety of tests applied to all 66 possible pairs of real exchange rate among the 12 countries and estimate the proportion of the pairs that are stationary, for the aggregates and each of the 19 commodity groups. To deal with small sample problems, we use a factor augmented sieve bootstrap approach and present bootstrap pairwise estimates of the proportions that are stationary. The bootstrapped rejection frequencies at 26%-49% based on unit root tests suggest some evidence in favour of the PPP in the case of the disaggregate data as compared to 6%-14% based on aggregate price series. |
| Keywords: | Purchasing Power Parity, Panel Data, Pairwise Approach, Cross Section Dependence. |
| JEL: | C23 F31 F41 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0634&r=cba |
| By: | Csóka Péter; Herings P. Jean-Jacques; Kóczy László Á. (METEOR) |
| Abstract: | Coherent measures of risk defined by the axioms of monotonicity, subadditivity, positive homogeneity, and translation invariance are recent tools in risk management to assess the amount of risk agents are exposed to. If they also satisfy law invariance and comonotonic additivity, then we get a subclass of them: spectral measures of risk. Expected shortfall is a well-known spectral measure of risk is. We investigate the above mentioned six axioms using tools from general equilibrium (GE) theory. Coherent and spectral measures of risk are compared to the natural measure of risk derived from an exchange economy model, that we call GE measure of risk. We prove that GE measures of risk are coherent measures of risk.We also show that spectral measures of risk can be represented by GE measures of risk only under stringent conditions, since spectral measures of risk do not take the regulated entity’s relation to the market portfolio into account. To give more insights, we characterize the set of GE measures of risk. |
| Keywords: | microeconomics ; |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2006015&r=cba |
| By: | Høg, Espen P. (Department of Accounting, Aarhus School of Business); Frederiksen, Per H. (Jyske Bank) |
| Abstract: | The paper revisits dynamic term structure models (DTSMs) and proposes a new way in dealing with the limitation of the classical affine models. In particular, this paper expands the flexibility of the DTSMs by applying a fractional Brownian motion as the governing force of the state variable <p> instead of the standard Brownian motion. This is a new direction in pricing non defaultable bonds with offspring in the arbitrage free pricing of weather derivatives based on fractional Brownian motions. By applying fractional Itˆo calculus and a fractional version of the Girsanov transform, <p> a no arbitrage price of the bond is recovered by solving a fractional version of the fundamental bond pricing equation. Besides this theoretical contribution, the paper proposes an estimation methodology based on the Kalman filter approach, which is applied to the US term structure of <p> interest rates. |
| Keywords: | Fractional bond pricing equation; fractional Brownian motion; fractional Ornstein-Uhlenbeck process; long memory; Kalman filter |
| Date: | 2006–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:aaracc:06-001&r=cba |
| By: | Hsiao Chink Tang |
| Abstract: | This study empirically examines whether a group of 12 Asian countries is suitable to form an Asian Monetary Union (AMU). The criteria of suitability are based on the Optimum Currency Area (OCA) literature whereby countries experiencing symmetrical shocks, have smaller size of shock and faster speed of adjustment are considered as potentially good partners in a monetary union. The Blanchard and Quah (BQ) structural vector autoregression (SVAR) methodology is used to identify the demand and supply shocks. The overall finding provides no support for the formation of a full-fledged AMU. Instead, what appears more feasible initially is the formation of smaller sub-groupings within the region. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-13&r=cba |
| By: | Juan de Dios Tena; Edoardo Otranto |
| Abstract: | This paper is an empirical analysis of the manner in which official interest rates are determined by the Bank of England. We use a nonlinear framework that allow for the separate study of factors affecting the magnitude of positive and negative interest rate changes as well as their probabilities. Using this approach, new kinds of monetary shocks are defined and used to evaluate their impact on the UK economy. Among them, unanticipated negative interest rate changes are especially important. The model generalizes previous approaches in the literature and provides a rich methodology to understand central banks’ decisions and their consequences. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws062006&r=cba |
| By: | Carolyn Sissoko (Department of Economics, Occidental College) |
| Abstract: | This paper develops a monetary model based on a standard infinite horizon general equilibrium endowment economy by relaxing the general equilibrium assumption that every agent buys and sells simultaneously. The paper finds that fiat money can implement a Pareto optimum only if taxes are type-specific. We then consider intermediated money by assuming that financial intermediaries whose liabilities circulate as money have an important identifying characteristic: they are widely viewed as default-free. The paper demonstrates that default-free intermediaries who issue credit cards to consumers can resolve the monetary problem without type-specific policy. We argue that our idealized financial environment is a starting point for studying the monetary use of credit. |
| JEL: | E5 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:occ:wpaper:6&r=cba |
| By: | Tommy Sveen (Norges Bank (Central Bank of Norway)); Lutz Weinke (Duke University) |
| Abstract: | What are the consequences for monetary policy design implied by the fact that price setting and investment takes typically place simultaneously at the firm level? To address this question we analyze simple (constrained) optimal interest rate rules in the context of a dynamic New Keynesian model featuring firm-speci.c capital accumulation as well as sticky prices and wages à la Calvo. We make the case for Taylor type rules. They are remarkably robust in the sense that their welfare implications do not appear to hinge neither on the speci.c assumptions regarding capital accumulation that are used in their derivation nor on the particular definition of natural output that is used to construct the output gap. On the other hand we find that rules prescribing that the central bank does not react to any measure of real economic activity are not robust in that sense. |
| Keywords: | Monetary policy, Sticky prices, Aggregate investment |
| JEL: | E22 E31 E52 |
| Date: | 2006–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_04&r=cba |
| By: | Carolyn Sissoko (Department of Economics, Occidental College) |
| Abstract: | This paper develops a mechanism that links the combined monetary and financial role of intermediaries to the division of labor and endogenous growth. The mechanism is based on an analysis of the late 18th century British environment. At this time the money supply was composed mainly of circulating private debt, which was liquid because of the intermediation of bankers. The model builds on an augmented Ramsey Cass Koopmans (RCK) model of optimal growth. First, by relaxing the assumption that each agent buys and sells at the same time an endogenous cash-in-advance constraint is created. The cash constraint is not binding for agents who borrow from intermediaries at the start of a period and repay the debt at the end of the period. Thus intermediated short-term credit is a solution to the monetary friction. Second to address the division of labor the symmetric n-good n-type structure of Kiyotaki and Wright’s search model of money is nested into each period of the model. Because each type of agent is more productive when his production is specialized, relaxing the cash constraint leads to a division of labor. Finally the exogenous growth of the RCK model is reinterpreted as endogenous growth due to a process of learning-by-doing. We find that financial intermediaries by relaxing the cash constraint promote the division of labor which generates a process of endogenous growth. Because the growth rate of the economy is increasing in the quantity of credit in the economy, the model provides a theoretic explanation for the empirical findings of Levine, Loayza and Beck and Rousseau and Wachtel. |
| JEL: | E5 O3 O4 |
| Date: | 2002–08 |
| URL: | http://d.repec.org/n?u=RePEc:occ:wpaper:8&r=cba |
| By: | Javier Guillermo Gómez |
| Abstract: | Capital flows often confront central banks with a dilemma: to contain the exchange rate or to allow it to float. To tackle this problem, an equilibrium model of capital flows is proposed. The model captures sudden stops with shocks to the country risk premium. This enables the model to deal with capital outflows as well as capital inflows. From the equilibrium conditions of the model, I derive an expression for the accounting of net foreign assets, which helps study the evolution of foreign debt under different policy experiments. The policy experiments point to three main conclusions. First, interest rate defenses of the exchange rate can deliver recessions during capital outflows even in financially resilient economies. Second, during unanticipated reversals in capital inflows, the behavior of foreign debt is not necessarily improved by containing the exchange rate. Third, an economy can gain resilience not by simply shifting the currency denomination of debt, but by both, shifting the denomination and floating the currency. |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002470&r=cba |
| By: | Masami Imai (Economics and East Asian Studies, Wesleyan University) |
| Abstract: | On April 1, 2002, the Japanese government lifted a blanket guarantee of all deposits and began limiting the coverage of time deposits. This paper uses this deposit insurance reform as a natural experiment to investigate the relationship between deposit insurance coverage and market discipline. I find that the reform raised the sensitivity of interest rates on deposits, and that of deposit quantity to default risk. In addition, the interest rate differentials between partially insured large time deposits and fully insured ordinary deposits increased for risky banks. These results suggest that the deposit insurance reform enhanced market discipline in Japan. I also find that too-big-to-fail (TBTF) policy became a more important determinant of interest rates and deposit allocation after the reform, thereby partially offsetting the positive effects of the deposit insurance reform on overall market discipline. |
| Keywords: | Deposit Insurance, Market Discipline, Japanese Banks |
| JEL: | G2 G28 O53 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2006-007&r=cba |
| By: | Carolyn Sissoko (Department of Economics, Occidental College) |
| Abstract: | This note observes that in a simple infinite horizon economy with heterogeneous endowments and a cash-in-advance constraint the Friedman Rule holds, but can be implemented only with type-specific taxation. By contrast, if credit contracts are enforceable, the same allocation can be reached in equilibrium without type specific policy. The Friedman Rule is reinterpreted as a statement that fiat money is inferior to credit as a form of money. |
| JEL: | E4 E5 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:occ:wpaper:7&r=cba |
| By: | Antonio Montañés; Marcos Sanso-Navarro |
| Abstract: | Long-horizon uncovered interest parity during the post-Bretton Woods era in the G7 countries is analyzed in this paper. The main di¤erence with previous studies relies in the use of cointegration methods due to the non-stationary behavior of the variables involved. Moreover, the consideration of structural breaks becomes a key element for this relationship to hold. These shifts are identi.ed as sharp changes in the time-varying risk premium as a consequence of turning points in monetary policy and exchange rates regimes. Finally, the robustness of the obtained results to recent developments in the Eurozone is checked. |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaeee:221&r=cba |
| By: | Norberto Rodríguez N; José Luis Torres; Andrés Velasco M. |
| Abstract: | Una estimación adecuada de la brecha del producto es un requisito indispensable para la conducción de la política monetaria bajo el régimen de inflación objetivo. Por esta razón, en la literatura y al interior del Banco de la República, se trabaja con una gran variedad de mediciones a partir de técnicas alternativas. Desafortunadamente, como la brecha del producto es una variable no observable, siempre hay gran incertidumbre sobre cualquier estimación. Para sobreponerse a este problema, en el Departamento de Inflación se siguen regularmente una amplia gama de indicadores, en especial encuestas de opinión empresarial y datos de actividad, para mejorar la comprensión de la situación de la economía en el ciclo y para identificar posibles presiones de demanda. Aunque en principio parece razonable y adecuado contar con gran cantidad de medidas y monitorear diversas fuentes de información complementarias, en la práctica resulta problemático poder resumir de manera eficiente la información disponible en una sola medida que pueda ser utilizada para producir pronósticos de inflación y recomendaciones de política. Hasta hace poco, la reducción de la información se hacía a partir del juicio de los expertos sobre los pesos relativos que se asignaban para cada medición y para la información proveniente de encuestas. Lo cual potencialmente podía conducir a un problema de variables omitidas y a sesgar cualquier estimación. Para resolver este problema en este trabajo se estima un indicador de brecha del producto como el factor no observado entre los datos disponibles. Dicho factor se estima utilizando componentes principales estáticos, el cual debe resumir la información contenida en los datos mientras que excluye cualquier error presente en las medidas originales. La calidad del indicador se evalúa posteriormente a partir de su capacidad predictiva de la inflación básica de bienes no transables en Colombia, mediante una Curva de Phillips híbrida. Los resultados sugieren, como se esperaba, que el indicador de brecha del producto es superior a cualquiera de las medidas individuales para señalar presiones de demanda, puesto que combina de manera eficiente la información de varias fuentes. Adicionalmente se encuentra, que los pronósticos fuera de muestra se pueden mejorar si se excluyen para la estimación del indicador aquellas medidas que provienen de filtros estadísticos. Lo cual reafirma la importancia de seguir fuentes alternativas de información, en especial de encuestas de opinión industrial, a pesar de que la industria tan sólo pesa un 15% del PIB en Colombia. |
| Date: | 2006–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002467&r=cba |
| By: | Patrick Eugster (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich) |
| Abstract: | This contribution starts out by noting a conflict of interest between consumers and insurers. Consumers face positive correlation in their assets (health, wealth, wisdom, i.e. skills), causing them to demand a great deal of insurance coverage. Insurers on the other hand eschew positively correlated risks. It can be shown that insurance contributes to a reduction of their asset volatility only if unexpected deviations of payments from expected value correlate negatively across lines of insurance. Analyzing deviations from trend in aggregate insurance payments, one finds the following for the United States and Switzerland. Private U.S. but not Swiss insurance has a hedging effect for consumers, while both social insurance schemes expose consumers to excess asset volatility. In the insurance systems of both countries, the private component fails to offset deviations in the social component (and vice versa). As to the supply of insurance, cointegration analysis indicates the absence of common trends. Therefore, insurance companies could offer combined policies to the benefit of consumers, hedging their underwriting risks both domestically and internationally. |
| Keywords: | Insurance, Portfolio Theory, International Diversification, Combined Contracts |
| JEL: | G22 G15 G11 D14 C22 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0604&r=cba |
| By: | Robert A. Eisenbeis; W. Scott Frame; Larry D. Wall |
| Abstract: | Fannie Mae and Freddie Mac are government-sponsored enterprises that are central players in U.S. secondary mortgage markets. Over the past decade, these institutions have amassed enormous mortgage- and non-mortgage-oriented investment portfolios that pose significant interest-rate risks to the companies and a systemic risk to the financial system. This paper describes the nature of these risks and systemic concerns and then evaluates several policy options for reducing the institutions’ investment portfolios. We conclude that limits on portfolio size (assets or liabilities) would be the most desirable approach to mitigating the systemic risk posed by Fannie Mae and Freddie Mac. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-02&r=cba |
| By: | Adam B. Ashcraft |
| Abstract: | Although bank capital regulation permits a bank to choose freely between equity and subordinated debt to meet capital requirements, lenders and investors view debt and equity as imperfect substitutes. It follows that the mix of debt in regulatory capital should isolate the role that the market plays in disciplining banks. I document that since the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) reduced the ability of the FDIC to absorb losses of subordinated debt investors, the mix of debt has had a positive effect on the future outcomes of distressed banks, as if the presence of debt investors has worked to limit moral hazard. To mitigate concerns about selection, I use the variation across banks in the mix of debt in capital generated by cross-state variation in state corporate income tax rates. Interestingly, instrumental variables (IV) estimates document that selection problems are indeed important, but suggest that the benefits of subordinated debt are even larger. I conclude that the market may play a useful direct role in regulating banks. |
| Keywords: | Bank capital ; Federal Deposit Insurance Corporation Improvement Act of 1991 ; Debt ; Bank supervision |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:244&r=cba |
| By: | Mark Furletti; Christopher Ody |
| Abstract: | This paper describes the Federal Reserve System’s monthly estimate of revolving consumer credit as published in the G.19 statistical release. It analyzes the source data, sampling methods, and calculations on which this estimate currently relies. In addition, it proposes a framework for analyzing the revolving credit statistic and suggests modifications to how the estimate is calculated and presented. The paper concludes that the revolving credit estimate is highly accurate and proposes that the System consider five modifications that would improve its usefulness to researchers. |
| Keywords: | Consumer credit ; Credit cards ; Debt |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpdp:06-03&r=cba |
| By: | Kimmo Soramaki; Morten L. Bech; Jeffrey Arnold; Robert J. Glass; Walter Beyeler |
| Abstract: | We explore the network topology of the interbank payments transferred between commercial banks over the Fedwirer Funds Service. We find that the network is compact despite low connectivity. The network includes a tightly connected core of money-center banks to which all other banks connect. The degree distribution is scale-free over a substantial range. We find that the properties of the network changed considerably in the immediate aftermath of the attacks of September 11, 2001. |
| Keywords: | Fedwire ; Payment systems ; Electronic funds transfers ; Banking structure |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:243&r=cba |
| By: | John Stachurski (Department of Economics, University of Melbourne) |
| Abstract: | This paper studies a Monte Carlo algorithm for computing distributions of state variables when the underlying model is a Markov process. It is shown that the L1 error of the estimator always converges to zero with probability one, and often at a parametric rate. A related technique for computing stationary distributions is also investigated. |
| Keywords: | Distributions, Markov processes, simulation. |
| JEL: | C15 C22 C63 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:615&r=cba |
| By: | Rodolfo Apreda |
| Abstract: | State-owned enterprises set a clear example of a mixed governance, in which the public and private realms blend together to bring about a complex structure we are going to define as dual governance. This paper puts forth a new design of governance for state-owned banks. Firstly, the whole subject is framed within the transaction costs approach to financial intermediation. Next, we move on to the formal governance of state-owned banks. Afterwards, we focus on dual governance and expand on agency problems that arise from the fiduciary role, accountability, transparency, rent-seeking and soft-budget constraints. The paper's proposal hinges upon the subsidiarity portfolio, to which the state-owned bank should manage as a trustee only, so that dual governance could be enhanced. We conclude bringing forth a minimal set of dual governance principles. |
| Keywords: | governance, public governance, dual governance, state-owned banks, subsidiarity. |
| JEL: | G34 G21 D23 D73 H20 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:319&r=cba |
| By: | Paul Willen; Felix Kubler |
| Abstract: | We examine the effects of collateralized borrowing in a realistically parameterized life-cycle portfolio choice problem. We provide basic intuition in a two-period model and then solve a multi-period model computationally. Our analysis provides insights into life-cycle portfolio choice relevant for researchers in macroeconomics and finance. In particular, we show that standard models with unlimited borrowing at the riskless rate dramatically overstate the gains to holding equity when compared with collateral-constrained models. Our results do not depend on the specification of the collateralized borrowing regime: The gains to trading equity remain relatively small even with the unrealistic assumption of unlimited leverage. We argue that our results strengthen the role of borrowing constraints in explaining the portfolio participation puzzle, that is, why most investors do not own stock. |
| Keywords: | Margin accounts ; Investments ; Securities |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:06-4&r=cba |
| By: | Stacey L. Schreft |
| Abstract: | This essay provides an overview of the literature on consumer payment behavior. It considers the state of our understanding of how and why consumers choose their payment methods and what is needed to make more headway in understanding consumer payment decisions. It closes by discussing the policy issues that require that we make progress with payments research. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-04&r=cba |
| By: | Chan, Kalok (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Menkveld, Albert J,; Yang, Zhishu |
| Abstract: | This paper uses the perfect market segmentation setting in China's stock market to examine whether foreign investors are at informational disadvantage relative to domestic investors. We analyze the price discovery roles of the A- (domestic investors) and B-share (foreign investors) markets in China using a new database of transactions data. Before Feb 19, 2001, the A-share market leads the B-share market in price discovery - the signed volume and quote revision of the A-share market have strong predictive ability for B-share quote returns, but not vice versa. After Feb 19, 2001, because some domestic investors are allowed to invest on the B-share market, we also find evidence for a reverse causality from the B-share to the A-share market. Nevertheless, the Hasbrouck (1995) information share analysis reveals that A-shares continue to dominate price discovery. |
| Keywords: | Market microstructure; Informational role; Segmented markets; Chinese stock markets |
| JEL: | F21 D82 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:vuarem:2006-4&r=cba |
| By: | Levchenko, Andrei A.; Do, Quy-Toan |
| Abstract: | The differences in the levels of financial development between industrial and developing countries are large and persistent. Theoretical and empirical literature has argued that these differences are the source of comparative advantage and could therefore shape trade patterns. This paper points out the reverse link: financial development is influenced by comparative advantage. The authors illustrate this idea using a model in which a country ' s financial development is an equilibrium outcome of the economy ' s productive structure: financial systems are more developed in countries with large financially intensive sectors. After trade opening demand for external finance, and therefore financial development, are higher in a country that specializes in financially intensive goods. By contrast, financial development is lower in countries that primarily export goods which do not rely on external finance. The authors demonstrate this effect empirically using data on financial development and export patterns in a panel of 96 countries over the period 1970-99. Using trade data, they construct a summary measure of a country ' s external finance need of exports and relate it to the level of financial development. In order to overcome the simultaneity problem, they adopt a strategy in the spirit of Frankel and Romer (1999). The authors exploit sector-level bilateral trade data to construct, for each country and time period, a predicted value of external finance need of exports based on the estimated effect of geography variables on trade volumes across sectors. Their results indicate that financial development is an equilibrium outcome that depends strongly on a country ' s trade pattern. |
| Keywords: | Economic Theory & Research,Free Trade,Trade Policy,Investment and Investment Climate,Trade Law |
| Date: | 2006–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3889&r=cba |
| By: | Kalemli-Ozcan, Sebnem; Reshef, Ariell; Sorensen, Bent E; Yosha, Oved |
| Abstract: | We study the determinants of net capital income flows within the United States. We analyze a simple multi-state neoclassical model in which total factor productivity varies across states and over time and capital flows freely across state borders. The model predicts that capital will flow to states with relatively high output growth. Since relative growth patterns are persistent such states are also high output states, which implies that high output will be associated with inflows of capital and net outflows of capital income. Our empirical findings correspond well to the predictions of the model and indicate persistent net capital income flows and net cross-state investment positions between states which are an order of magnitude larger than observed capital income flows between countries. Thus, our results imply that frictions associated with national borders are likely to be the main explanation for 'low' international capital flows. |
| Keywords: | capital flows; historical income; net factor income; ownership |
| JEL: | F21 F41 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5635&r=cba |
| By: | Zekeriya Eser; Joe Peek |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d05-157&r=cba |
| By: | Fernald, John |
| Abstract: | Structural vector-autoregressions with long-run restrictions are extraordinarily sensitive to low-frequency correlations. This paper explores this sensitivity analytically and via simulations, focusing on the contentious issue of whether hours worked rise or fall when technology improves. Recent literature finds that when hours per person enter the VAR in levels, hours rise; when they enter in differences, hours fall. However, once we allow for (statistically and economically plausible) trend breaks in productivity, the treatment of hours is relatively unimportant: Hours fall sharply on impact following a technology improvement. The issue is the common high-low-high pattern of hours per capita and productivity growth since World-War II. Such low-frequency correlation almost inevitably implies a positive estimated impulse response. The trend breaks control for this correlation. In addition, the specification with breaks can easily 'explain' (or encompass) the positive estimated response when the breaks are omitted; in contrast, the no-breaks specification has more difficulty explaining the negative response when breaks are included. More generally, this example suggests a need for care in applying the long-run-restrictions approach. |
| Keywords: | business cycles; structural change; technology |
| JEL: | E24 E32 O47 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5631&r=cba |
| By: | Javier Guillermo Gómez |
| Abstract: | El artículo hace una narración de la política monetaria en Colombia. Por ser una narración de la política monetaria en una economía abierta, el artículo hace énfasis en los conceptos de trilema de la política monetaria, ancla nominal y regimenes monetarios. Además, la narración incluye el período actual de régimen de inflación objetivo, presenta los antecedentes académicos y la definición del régimen de inflación objetivo, y presenta las características actuales de este régimen en Colombia. La principal implicación de política es que el requisito más importante para mantener la estabilidad de precios es que el Banco de la República procure mantener la meta de inflación firme, y dirija las tasas de interés en consecuencia, ante aumentos de la inflación producidos por presiones de demanda, devaluaciones y aumentos en la inflación de alimentos |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002469&r=cba |
| By: | Dairo Estrada; Esteban Gómez; Inés Orozco |
| Abstract: | This paper analyzes the determinants of interest margins in the Colombian Financial System. Based on the model by Ho and Saunders (1981), interest margins are modelled as a function of the pure spread and bank-specific institutional imperfections using quarterly data for the period 1994:IV-2005:III. Additionally, the pure spread is estimated as a function of market power and interest rate volatility. Results indicate that interest margins are mainly affected by credit institutions' inefficiency and to a lesser extent by credit risk exposure and market power. This implies that public policies should be oriented towards creating the necessary market conditions for banks to enhance their efficiency. |
| Date: | 2006–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002468&r=cba |
| By: | Eduardo A. Lora (Research Department, Inter-American Development Bank); Mauricio Cardenas (Fedesarrollo) |
| Abstract: | Fiscal deficits on average only 1.4% of GDP; debt coefficients on the decline; early debt repayments to the International Monetary Fund and massive repurchases of Brady bonds that 15 years ago were the last salvation for overly endebted governments. This doesn't look like Latin America, the region with the strongest tradition of macroeconomic instability in the world and the longest history of noncompliance with its public debt commitments. However, these are some of the fiscal events that have been occurring since the beginning of 2006, a particularly favorable time for the region (Available only in Spanish). |
| Keywords: | Fiscal institutions; budget institutions; decentralization; tax policy; Latin America. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:2003&r=cba |
| By: | Frömmel, Michael |
| Abstract: | We investigate the exchange rate volatility of six Central and Eastern European countries (CEEC) between 1994 and 2004. The analysis merges two approaches, the GARCH-model (Bollerslev 1986) and the Markov Switching Model (Hamilton 1989). We discover switches between high and low volatility regimes which are consistent with policy settings for Hungary, Poland and, less pronounced, the Czech Republic, whereas Romania and Slovakia do not show a clear picture. Slovenia, finally, shows some kind of anticipation of the wide fluctuation margins in ERM2. |
| Keywords: | CEEC, exchange rate volatility, regime switching GARCH, Markov switching model, transition economies |
| JEL: | E42 F31 F36 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-333&r=cba |
| By: | Xiaoqiang Cheng; Hans Degryse |
| Abstract: | This paper shows that banking development spurs growth, even in a country with a high growth rate such as China. Employing data of 27 Chinese provinces over the period 1995-2003, we study whether the financial development of two different types of institutions – banks and non-bank financial institutions – have a (significantly different) impact on local economic growth. Our findings show that banks outperform non-bank financial institutions. Only banking development exerts a statistically and economically significant positive impact on local economic growth. This effect becomes more pronounced when the financial sector is less concentrated. |
| Keywords: | growth, financial development, Chinese provinces, banks |
| JEL: | E44 G21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:lic:licosd:17106&r=cba |
| By: | Iván Major (Institute of Economics, Hungarian Academy of Sciences) |
| Abstract: | Credit bureaus administering information sharing among lenders about customers reduce information asymmetry and should be key to modern credit markets. In contrast to former studies, we show that willingness to share information depends more on institutions and market concentration than on demand or other market characteristics such as, regional diversity or local monopolies. We show using infinite period models with strategic behavior that lenders' interest to share information depends on market concentration and the type of information sharing arrangement. Sharing bad information only is the dominant strategy if banks think long-term. If banks are myopic no information sharing may occur. |
| Keywords: | Organisational Behaviour, Transaction Costs, Criteria for Decision-Making under Risk and Uncertainty, Asymmetric and Private Information, Intertemporal Firm Choice and Growth, Investment, or Financing, Banks; Other Depository Institutions; Mortgages |
| JEL: | D23 D81 D82 D92 G21 |
| Date: | 2006–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:0603&r=cba |
| By: | Zsolt Darvas; Gábor Rappai; Zoltán Schepp |
| Abstract: | Results and models of this paper are based on a strikingly new empirical observation: long maturity forward rates between bilateral currency pairs of the US, Germany, UK, and Switzerland are stationary. Based on this result, we suggest a new explanation for the UIP-puzzle maintaining rational expectations and risk neutrality. The model builds on the interaction of foreign exchange and fixed income markets. Ex ante short run and long run UIP and the EHTS is assumed. We show that ex post shocks to the term structure could explain the behavior of the nominal exchange rate including its volatility and the failure of ex post short UIP regressions. We present evidence on ex post validity of long run UIP and strikingly new evidence on the stationarity of the long forward exchange rates of major currencies. We set up, calibrate and simulate a stylized model that well captures the observed properties of spot exchange rates and UIP regressions of major currencies. We define the notion of yield parity and test its empirical performance for monthly series of major currencies with favorable results. |
| Keywords: | EHTS; forward discount bias; stationarity of long maturity forward rates; UIP; yield parity |
| JEL: | E43 F31 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:098&r=cba |
| By: | Menkveld, Albert J. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Cheung, Yiu C.; Jong, Frank de |
| Abstract: | We study sovereign yield dynamics and order flow in the largest euro-area treasury markets. We exploit unique transaction data to explain daily yield changes in the tenðyear government bands of Italy, France, Belgium, and Germany. We use a state space model to decompose these changes into (i) a benchmark yield innovation, (ii) a yield spread common factor innovation, (iii) country-specific innovations, and (iv) (transitory) microstructure effects. We relate changes in each of these factors to national order imbalance and find that Italian order imbalance impacts the common factor innovation, French and Belgian order imbalance impact country-specific innovations, and German order imbalance only changes yields temporarily. Order imbalance, however, does not have explanatory power for the most important factor: benchmark yield innovations. |
| Keywords: | Government bond; Order imbalance; Euro |
| JEL: | G10 G15 G18 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:vuarem:2006-6&r=cba |
| By: | Giang Ho; Anthony Pennington-Cross |
| Abstract: | After a mortgage is originated the borrower promises to make scheduled payments to repay the loan. These payments are sent to the loan servicer, who may be the original lender or some other firm. This firm collects the promised payments and distributes the cash flow (payments) to the appropriate investor/lender. A large data set (loan-level) of securitized subprime mortgages is used to examine if individual servicers are associated with systematic differences in mortgage performance (termination). While accounting for unobserved heterogeneity in a competing risk (default and prepay) proportional hazard framework, individual servicers are associated with substantial and economically meaningful impacts on loan termination. |
| Keywords: | Mortgages ; Banking law ; Home equity loans |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-024&r=cba |
| By: | Grose, Claire; Friedman, Felice B. |
| Abstract: | This paper examines legal and regulatory measures that can be taken to promote access to the primary market in emerging market economies. While capital market development depends on many factors including, primarily, a favorable macroeconomic environment, an appropriately designed and effective legal and regulatory framework can help to encourage market growth and to increase access to finance for all companies, including small- and medium-sized enterprises. In this paper we identify the basic necessities that underpin a regulatory regime that is cost effective and strikes an appropriate balance between, on the one hand, laws and regulations that may be too restrictive to achieve a supply of capital and, on the other, those that may be so relaxed that investors feel that there is an unacceptable level of risk and d o not care to venture into the market. We explore the legal foundations for the successful operation of a primary market for securities and identify disclosure and effective monitoring and enforcement as essential elements of legal protection. We then examine different legal and regulatory approaches for improving access to finance. We discuss measures that can be used by traditional stock exchanges to attract smaller enterprises to their lists as well as recent initiatives to create second boards or divide the main board into different market segments. We also discuss different mechanisms for companies to raise funds outside of a formal stock market listing, including private placements and private equity. Finally, we propose some recommendations for a simple legal and regulatory framework that will help promote access to primary equity markets, via both the traditional exchange as well as other alternatives. |
| Keywords: | Markets and Market Access,Economic Theory & Research,Financial Intermediation,Corporate Law,Investment and Investment Climate |
| Date: | 2006–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3892&r=cba |
| By: | J. Christina Wang; Susanto Basu |
| Abstract: | What is the output of financial institutions? And how can we measure their nominal and, more importantly, real value, especially since many financial services are provided without explicit charges? This paper summarizes the theoretical result that, to correctly impute the nominal value of implicit financial service output, the “user cost of money” framework needs to be extended to take account of the systematic risk in financial instruments. This extension is easy to implement in principle: One can continue using the current imputation procedure, and the only change needed is to adjust the reference rates of interest for risk. ; The paper clarifies why the risk-related income is not part of the output—or equivalently, why risk bearing is not a service—of financial institutions. The paper next argues that, to measure real output, one must first explicitly specify and define the economic services produced by financial firms, a step that is absent from the “user cost of money” theory. Once it is established that only financial services, and not instruments, should be counted as the value added of financial firms, it follows that the quantity of services provided by these institutions is not necessarily in fixed proportion to the volume of instruments. The corollary is that the implicit price of financial services bears no definitive relationship with any reference rate. Instead, price deflators for financial services should be constructed using methods similar to those used for other services. |
| Keywords: | Financial services industry |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:06-3&r=cba |
| By: | Edward J. Kane |
| Abstract: | Considered as a social contract, a financial safety net imposes duties and confers rights on different sectors of the economy. Within a nation, elements of incompleteness inherent in this contract generate principal-agent conflicts that are mitigated by formal agreements, norms, laws, and the principle of democratic accountability. Across nations, additional layers of incompleteness emerge that are hard to moderate. This paper shows that nationalistic biases and leeway in principles used to measure value-at-risk and bank capital make it unlikely that the crisis-prevention and crisis-resolution schemes incorporated in Basel II and EU Directives could allocate losses imbedded in troubled institutions efficiently or fairly across member nations. |
| JEL: | G21 G28 P51 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12170&r=cba |
| By: | Dániel Holló; Márton Nagy (Magyar Nemzeti Bank) |
| Abstract: | This paper aims to estimate bank efficiency differences across member states of the European Union and tries to explain their causes. We show on an empirical basis that the level and spread of bank efficiency in the EU and their changes are significantly determined by characteristics of operational environment and the “conscious” behaviour of management.In the long term, through the integration of financial markets and institutions, as well as the establishment of the Single European Banking Market, the impact of advantages and disadvantages underlying the operational environment is reduced or eliminated; therefore only managerial ability is of any relevance. Our findings suggest that there is a costefficiency gap and convergence between the old and new member states, irrespective of the specifications of the model. With respect to profit efficiency, however, differences in efficiency between the two regions are only established after controlling for some major characteristics of the varying operational environments. Our study also investigates the relevance of and the correlation between accounting-based and statistics-based efficiency indicators. We conclude that the accounting based efficiency indicators are inadequate for managing heterogeneity arising from institutional and operational environments. Hence such indicators only allow limited cross-sectional comparison through time. |
| Keywords: | parametric approach, X- and alternative profit-efficiency, Fourier-flexible functional form, banking system. |
| JEL: | F36 G15 G21 G34 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2006/3&r=cba |