|
on Central Banking |
| By: | Charles Engel; John H. Rogers |
| Abstract: | We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which the current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries -- more modest than the growth over the past 20 years -- the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. A test of current account sustainability suggests that the U.S. is not keeping on a long-run sustainable path. A direct test of our model finds that the dynamics of the U.S. current account -- the increasing deficits over the past decade -- are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender -- though not the only legitimate contender -- for explaining the U.S. current account deficit. |
| Keywords: | Budget deficits ; Equilibrium (Economics) ; Econometric models |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:856&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. |
| Keywords: | Monetary policy ; Uncertainty ; Economic forecasting |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-8&r=cba |
| By: | Kevin J. Lansing |
| Abstract: | This paper introduces a form of boundedly-rational expectations into an otherwise standard New-Keynesian Phillips curve. The representative agent's forecast rule is optimal (in the sense of minimizing mean squared forecast errors), conditional on a perceived law of motion for inflation and observed moments of the inflation time series. The perceived law of motion allows for both temporary and permanent shocks to inflation, the latter intended to capture the possibility of evolving shifts in the central bank's inflation target. In this case, the agent's optimal forecast rule defined by the Kalman filter coincides with adaptive expectations, as shown originally by Muth (1960). I show that the perceived optimal value of the gain parameter assigned to the last observed inflation rate is given by the fixed point of a nonlinear map that relates the gain parameter to the autocorrelation of inflation changes. The model allows for either a constant gain or variable gain, depending on the length of the sample period used by the agent to compute the autocorrelation of inflation changes. In the variable-gain setup, the equilibrium law of motion for inflation is nonlinear and can generate time-varying inflation dynamics similar to those observed in long-run U.S. data. The model's inflation dynamics are driven solely by white-noise fundamental shocks propagated via the expectations feedback mechanism; all monetary policy-dependent parameters are held constant. |
| Keywords: | Inflation (Finance) ; Phillips curve ; Econometric models |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-15&r=cba |
| By: | Glenn D. Rudebusch; Eric T. Swanson; Tao Wu |
| Abstract: | In 2004 and 2005, long-term interest rates remained remarkably low despite improving economic conditions and rising short-term interest rates, a situation that former Fed Chairman Alan Greenspan dubbed a "conundrum." We document the extent and timing of this conundrum using two empirical no-arbitrage macro-finance models of the term structure of interest rates. These models confirm that the recent behavior of long-term yields has been unusual--that is, it cannot be explained within the framework of the models. Therefore, we consider other macroeconomic factors omitted from the models and find that some of these variables, particularly declines in long-term bond volatility, may explain a portion of the conundrum. Foreign official purchases of U.S Treasuries appear to have played little or no role. |
| Keywords: | Monetary policy - United States ; Federal funds rate ; Treasury bonds |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-16&r=cba |
| By: | Philip Lane; Gian Maria Milesi-Ferretti |
| Abstract: | This paper addresses the implications of financial globalization for exchange rate behavior. We highlight two dimensions: first, a wider dispersion in net foreign asset positions implies stronger long-term trends in real exchange rates; second, the impact of currency movements on net external wealth is an increasing function of the scale of international balance sheets. |
| Keywords: | Financial integration, exchange rates |
| JEL: | F31 F32 |
| Date: | 2006–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp129&r=cba |
| By: | Philip Lane; Sébastien Wälti |
| Abstract: | We provide a quantitative analysis of the impact of the euro on European financial integration. We consider both volume- and price-based indicators. In general, we find evidence that common membership of the euro area strengthens bilateral financial linkages. However, we emphasize that EMU has only been one innovation driving European financial integration in recent years, with global factors also increasingly important. |
| Date: | 2006–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp139&r=cba |
| By: | Holmberg, Karolina (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | In recent years, it has become increasingly common to estimate New Keynesian Phillips curves with a measure of firms' real marginal cost as the real driving variable. It has been argued that this measure is both theoretically and empirically superior to the traditional output gap. In this paper, a marginal-cost based New Keynesian Phillips curve is estimated on Swedish data by means of GMM and Full Information Maximum Likelihood. The results show that with real marginal cost in the structural equation the point estimates generally have the exptected positive sign, which is less frequently the case using the output gap in the Phillips curve equation. This suggests that real marginal cost might be a more adequate real explanatory variable for Swedish inflation than the output gap. However, standard errors in the estimations are large and it is in fact difficult to pin down a statistically significant relationship between either real marginal cost or the output gap and inflation. |
| Keywords: | Inflation; New Keynesian Phillips curve; Real marginal cost; Small Open Economy; GMM; Full Information Maximum Likelihood |
| JEL: | C22 E31 E32 |
| Date: | 2006–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0197&r=cba |
| By: | Andrew Ang; Geert Bekaert; Min Wei |
| Abstract: | Surveys do! We examine the forecasting power of four alternative methods of forecasting U.S. inflation out-of-sample: time series ARIMA models; regressions using real activity measures motivated from the Phillips curve; term structure models that include linear, non-linear, and arbitrage-free specifications; and survey-based measures. We also investigate several methods of combining forecasts. Our results show that surveys outperform the other forecasting methods and that the term structure specifications perform relatively poorly. We find little evidence that combining forecasts produces superior forecasts to survey information alone. When combining forecasts, the data consistently places the highest weights on survey information. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-15&r=cba |
| By: | Christopher Allsopp; Amit Kara; Edward Nelson |
| Abstract: | The United Kingdom*s monetary policy strategy is one of floating exchange rates and inflation forecast targeting, with the targeted measure referring to consumer prices. We consider whether it is welfare-reducing to target inflation in the CPI rather than in a narrower index; and the role of the exchange rate in the transmission of monetary policy actions to CPI inflation. We argue that it is appropriate to model imports as intermediate goods rather than as goods consumed directly by households. This leads to a simpler transmission mechanism of monetary policy, while also offering a sustainable explanation fore the weakness of the exchange rate/inflation relationship and making consumer price inflation an appropriate monetary policy target. |
| Keywords: | Inflation (Finance) - Great Britain ; Foreign exchange rates - Great Britain |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-030&r=cba |
| By: | Patrick Villieu (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Nelly Gregoriadis (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Florina Semenescu (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]) |
| Abstract: | It is widely recognized that the Euro area is an asymmetric monetary union which assembles countries with heterogeneous structures on financial, goods and labour markets stricken by asymmetric shocks. However, the main objective of the European Central Bank (ECB) is to preserve price stability for the euro area as a whole, and the ECB pays most of its attention to union-wide output and (principally) inflation, neglecting, at least on the level of principles, inflation and output divergences in union. In this paper, we wonder, at a theoretical level, about the social loss associated with such an objective based on aggregate magnitudes, and we search for solutions, namely an “optimal” contract for a common central bank. We show in particular that it is not necessarily a good thing that a common central bank worries about inflation divergences without being concerned about output divergences in union. |
| Keywords: | Monetary Policy ; Monetary Union ; Heterogeneity, Optimal Contract ; Inflation Divergences |
| Date: | 2006–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00071195_v1&r=cba |
| By: | Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet MarburgAuthor-Name: Boris Hofmann); Boris Hofmann (Zentrum für Europäische Integrationsforschung, University of Bonn, Walter-Flex-Str. 3, D-53113 Bonn, Germany) |
| Abstract: | This paper compares the ECB’s conduct of monetary policy with that of the Bundesbank. Estimated monetary policy reaction functions for the Bundesbank (1979:4-1998:12) and the European Central Bank (1999:1-2004:5) show that, while the ECB and the Bundesbank react similarly to expected inflation, the ECB reacts significantly stronger to the output gap. Theoretical considerations suggest that this stronger response to the output gap may rather be due to a higher interest rate sensitivity of the German output gap than to a higher weight given to output stabilisation by the ECB. Counterfactual simulations based on the estimated interest rate reaction functions suggest that German interest rates would not have been lower under a hypothetical Bundesbank regime after 1999. However, this conclusion crucially depends on the assumption of an unchanged long-run real interest rate for the EMU period. Adjusting the Bundesbank reaction function for the lower long-run real interest rate estimated for the ECB regime reverses this conclusion. |
| Keywords: | Taylor rule, monetary policy, ECB, Bundesbank |
| JEL: | E5 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mar:volksw:200502&r=cba |
| By: | Peter Bofinger; Eric Mayer |
| Abstract: | This note shows that the Svensson versus McCallum and Nelson controversy battled in the Federal Reserve Bank of St. Loius Review (September/ October 2005) can be mapped into a static version of a New Keynesian macro model that consists of an IS-equation, a Phillips curve and an inflation targeting central bank (e.g., Bofinger, Mayer, Wollmershäuser, (2006); Walsh (2002)). As a contribution to literature we supplement the controversy by a forceful graphical analysis. The general debate centers on the question by which notion monetary policy should be implemented. The two sides have fundamentally opposite views on this issue. Svensson argues for targeting rules as a notion of optimal monetary policy, whereas McCallum and Nelson promote simple instrument rules. In this note we systematically analyze these two categories of monetary policy rules. In particular we show that the rule discussed by McCallum and Nelson (2005) imposes different degrees of variability on the economy compared to a targeting rule when monetary policy falls prey to measurement error. To our opinion the hybrid Taylor rule developed by McCallum and Nelson contradicts the original idea of simple rules as a heuristic for monetary policy making and should be rebutted for practical reasons |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp585&r=cba |
| By: | Ricardo Lagos |
| Abstract: | A distinction is drawn between outside money—money that is either of a fiat nature or backed by some asset that is not in zero net supply within the private sector—and inside money, which is an asset backed by any form of private credit that circulates as a medium of exchange. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:374&r=cba |
| By: | Massimo Caruso (Bank of Italy) |
| Abstract: | This paper examines the impact of stock market fluctuations on money demand in Italy taking a long-run perspective. The empirical findings suggest that stock market fluctuations contribute to explain temporary movements in the liquidity preference, rather than its secular patterns. Overall, a positive association emerges between an index of stock market prices that includes dividends and real money balances; however, the estimated long-run relationship is unstable. In a dynamic, short-term specification of money demand the estimated coefficient on deflated stock prices is positive, thus compatible with a wealth effect, in the years 1913-1980, while in the last two decades a substitution effect prevailed and the correlation between money and share prices has been negative. This is likely to reflect a change in financial structure and the increasing role of opportunity costs defined over a wider range of assets. These results are confirmed by data on stock market capitalisation. Moreover, in the recent period stock market turnover and money growth are positively correlated. |
| Keywords: | long-run money demand function, asset prices volatility |
| JEL: | E41 E44 N14 N24 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_576_06&r=cba |
| By: | Christopher J. Neely; Paul A. Weller |
| Abstract: | Shleifer and Vishny (1997) pointed out some of the practical and theoretical problems associated with assuming that rational speculation would quickly drive asset prices back to long-run equilibrium. In particular, they showed that the possibility that asset price disequilibrium would worsen, before being corrected, tends to limit rational speculators. Uniquely, Shleifer and Vishny (1997) showed that “performance-based asset management” would tend to reduce speculation when it is needed most, when asset prices are furthest from equilibrium. We analyze a generalized Shleifer and Vishny (1997) model for central bank intervention. We show that increasing availability of arbitrage capital has a pronounced effect on the dynamic intervention strategy of the central bank. Intervention is reduced during periods of moderate misalignment and amplified at times of extreme misalignment. This pattern is consistent with empirical observation. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-033&r=cba |
| By: | Michel Beine; Jérôme Lahaye; Sébastien Laurent; Christopher J. Neely; Franz C. Palm |
| Abstract: | We analyze the relationship between interventions and volatility at daily and intra-daily frequencies for the two major exchange rate markets. Using recent econometric methods to estimate realized volatility, we decompose exchange rate volatility into two major components: a continuously varying component and jumps. Some coordinated interventions affect the temporary (jump) part of the volatility process. Most coordinated operations are associated with an increase in the persistent (continuous) part of exchange rate volatility. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-031&r=cba |
| By: | Antonio Scalia (Banca d’Italia) |
| Abstract: | I estimate a two-equation system on the euro-Czech koruna exchange rate and order flow at hourly frequency within the framework of Evans-Lyons (JME 2002). I use transac-tions data from the Reuters Spot Matching market in the second half of 2002, during which the Czech National Bank conducted discreet interventions to stem the appreciation of the domestic currency. I find a significant impact of order flow on the exchange rate, equal on average to 7.6 basis points per €10 million, of which 80 percent persists through the day. The news of intervention increases the price impact of order flow by 3.9 basis points per €10 million, consistently with the notion of intervention efficacy. The order flow equation yields in-conclusive results. |
| Keywords: | Foreign exchange, central bank intervention, Czech koruna, ERM II, empirical microstructure |
| JEL: | E65 F31 G15 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_579_06&r=cba |
| By: | Ron Borzekowski; Elizabeth K. Kiser |
| Abstract: | Dramatic changes have occurred in the U.S. payment system over the past two decades, most notably an explosion in electronic card-based payments. Not surprisingly, this shift has been accompanied by a series of policy debates, all of which hinge critically on understanding consumer behavior at the point of sale. Using a new nationally representative survey, we transform consumers' responses to open-ended questions on reasons for using debit cards to estimate a characteristics-based discrete-choice demand model that includes debit cards, cash, checks, and credit cards. Market shares computed using this model line up well with aggregate shares from other sources. The estimates are used to conduct several counterfactual experiments that predict consumer responses to alternative payment choices. We find that consumers respond strongly to elapsed time at the checkout counter and to whether the payment instrument draws from debt or liquidity. In addition, substitution patterns vary substantially with demographics. New "contactless" payment methods designed to replace debit cards are predicted to draw market share from cash, checks, and credit, in that order. Finally, although we find an effect of cohort on payment technology adoption, this effect is unlikely to diminish substantially over a 10-year horizon. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-17&r=cba |
| By: | Maximilian J B Hall (Dept of Economics, Loughborough University) |
| Abstract: | Should be added soon |
| Keywords: | Banking, Japan |
| JEL: | L11 L13 L93 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2004_13&r=cba |
| By: | Evelyn Korn (Faculty of Business Administration and Economics, Philipps Universitaet Marburg) |
| Abstract: | The information quality of mandatory financial reporting depends on two factors: (1) Are standards appropriate to produce financial statements that provide investors with sufficient information? (2) Is compliance to standards enforced by appropriate institutions? This paper addresses the question if firms should be able to create hidden reserves as an example for the effect of standards on information quality. The analysis shows that rational investors are able to correctly decipher financial statements – independent of the standards in use. The question of sufficient enforcement proves to have a deeper impact on the quality of information. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mar:volksw:200601&r=cba |
| By: | Ron Borzekowski; Elizabeth K. Kiser; Shaista Ahmed |
| Abstract: | Debit card use at the point of sale has grown dramatically in recent years in the U.S., and now exceeds the number of credit card transactions. However, many questions remain regarding patterns of debit card use, consumer preferences when using debit, and how consumers might respond to explicit pricing of card transactions. Using a new nationally representative consumer survey, this paper describes the current use of debit cards by U.S. consumers, including how demographics affect use. In addition, consumers' stated reasons for using debit cards are used to analyze how consumers substitute between debit and other payment instruments. We also examine the relationship between household financial conditions and payment choice. Finally, we use a key variable on bank-imposed transaction fees to analyze price sensitivity of card use, and find a 12 percent decline in overall use in reaction to a mean 1.8 percent fee charged on certain debit card transactions; we believe this represents the first microeconomic evidence in the United States on price sensitivity for a card payment at the point of sale. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-16&r=cba |
| By: | Lindblad, Hans (Sveriges Riksdag); Sellin, Peter (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | In this paper we simultaneously estimate the real exchange rates between the Swedish Krona, the US Dollar and the Euro. A prime candidate for explaining the exchange rate movements is relative potential output. Since this variable is unobservable, cyclical and potential output are estimated in an unobserved components framework together with a Phillips curve. Our empirical exchange rate results are in line with theory. Increases in relative potential output and the terms of trade strengthen the exchange rate, while a relative increase of the fraction of middle-aged people in the population and budget deficits depreciate the exchange rate. The estimates suggest that the recent deterioration of the relative budget situation for the US versus Europe is a prime candidate for explaining the USD/EUR exchange rate change lately. |
| Keywords: | Equilibrium real exchange rate; expectations augmented Phillips curve; unobserved-components model |
| JEL: | C32 E31 F31 F41 |
| Date: | 2006–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0193&r=cba |
| By: | Laeven, Luc; Beck, Thorsten |
| Abstract: | There is a wide cross-country variation in the institutional structure of bank failure resolution, including the role of the deposit insurer. The authors use quantitative analysis for 57 countries and discuss specific country cases to illustrate this variation. Using data for over 1,700 banks across 57 countries, they show that banks in countries where the deposit insurer has the responsibility of intervening failed banks and the power to revoke membership in the deposit insurance scheme are more stable and less likely to become insolvent. Involvement of the deposit insurer in bank failure resolution thus dampens the negative effect that deposit insurance has on banks ' risk taking. |
| Keywords: | Banks & Banking Reform,Financial Crisis Management & Restructuring,Financial Intermediation,Corporate Law,Insurance & Risk Mitigation |
| Date: | 2006–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3920&r=cba |
| By: | Carlsson, Mikael (Research Department, Central Bank of Sweden); Smedsaas, Jon (Department of Economics) |
| Abstract: | We study the relationship between technology shocks and labor input on Swedish firm-level data using a production function approach to identify technology shocks. Taking standard steps yields a contractionary contemporaneous labor-input response in line with previous studies. This finding may, however, be driven by measurement errors in the labor-input variable. Relying on a unique feature of our data set, which contains two independently measured firm-specific labor input measures, we can evaluate the potential bias. We do not find any evidence supporting that this bias would conceal any true positive contemporaneous effect. The results thus point away from standard flexible-price models and towards models emphasizing firm-level rigidities. |
| Keywords: | Technology Shocks; Labor Input; Business Fluctuations; Micro Data |
| JEL: | C33 D24 E32 |
| Date: | 2006–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0198&r=cba |
| By: | Christopher Martin (Brunel University); Costas Milas (Keele University, Department of Economics) |
| Abstract: | This paper analyses the impact of uncertainty on monetary policy rules in the US since the early 1980s. Extending the Taylor rule to allow the response of interest rates to inflation and the output gap to depend on uncertainty, we find evidence that the predictions of the theoretical literature on responses to uncertainty are reflected in the behaviour of policymakers, suggesting that policymakers are adhering to prescriptions for optimal policy. |
| Keywords: | Monetary policy, Uncertainty. |
| JEL: | C51 C52 E52 E58 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2005/10&r=cba |
| By: | Christopher Martin (Brunel University); Costas Milas (Keele University, Department of Economics) |
| Abstract: | This paper provides empirical evidence on the response of monetary policymakers to uncertainty. Using data for the UK since the introduction of inflation targets in October 1992, we find that the impact of inflation on interest rates is lower when inflation is more uncertain and is larger when the output gap is more uncertain. These findings are consistent with the predictions of the theoretical literature. We also find that uncertainty has reduced the volatility but has not affected the average value of interest rates and argue that monetary policy would have been less passive in the absence of uncertainty. |
| Keywords: | Monetary policy, uncertainty |
| JEL: | C51 C52 E52 E58 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2005/11&r=cba |
| By: | Andrea Vaona; Dennis Snower |
| Abstract: | A growing body of empirical evidence shows that there exists a long-run positive tradeoff between inflation and real macroeconomic activity. Within a New Keynesian framewok, we examine how increasing returns generate a positive long-run relation between inflation and output. |
| Keywords: | Phillips curve, Inflation, Increasing returns, nominal inertia, monetary policy |
| JEL: | E3 E20 E40 E50 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1277&r=cba |
| By: | Tommaso Mancini Griffoli (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | This paper builds a monetary model where firm entry is endogenous, thereby exposing a new channel for the transmission of monetary policy. Individuals have a choice between consuming or investing in new firms by financing a sunk entry cost. Monetary policy shocks affect the cost-benefit analysis of creating new firms, and generate persistent as well as hump-shaped responses of consumption, investment, output and new firm entry, as observed in the data. These results lie on an endogenous source of inertia and are obtained despite minimal nominal rigidities, as only entry costs are assumed to be sticky. |
| Keywords: | Monetary policy, firm entry, sunk entry costs, investment, sticky prices, New Keynesian models. |
| JEL: | E37 E40 E52 L16 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp09-2006&r=cba |
| By: | Fabio Busetti (Bank of Italy); Silvia Fabiani (Bank of Italy); Andrew Harvey (Cambridge University) |
| Abstract: | We consider how unit root and stationarity tests can be used to study the convergence properties of prices and rates of inflation. Special attention is paid to the issue of whether a mean should be extracted in carrying out unit root and stationarity tests and whether there is an advantage to adopting a new (Dickey-Fuller) unit root test based on deviations from the last observation. The asymptotic distribution of the new test statistic is given and Monte Carlo simulation experiments show that the test yields considerable power gains for highly persistent autoregressive processes with relatively large initial conditions, the case of primary interest for analysing convergence. We argue that the joint use of unit root and stationarity tests in levels and first differences allows the researcher to distinguish between series that are converging and series that have already converged, and we set out a strategy to establish whether convergence occurs in relative prices or just in rates of inflation. The tests are applied to the monthly series of the Consumer Price Index in the Italian regional capitals over the period 1970-2003. It is found that all pairwise contrasts of inflation rates have converged or are in the process of converging. Only 24% of price level contrasts appear to be converging, but a multivariate test provides strong evidence of overall convergence. |
| Keywords: | Dickey-Fuller test, initial condition, law of one price, stationarity test |
| JEL: | C22 C32 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_575_06&r=cba |
| By: | Annalisa Castelli; Gerald P. Dwyer, Jr.; Iftekhar Hasan |
| Abstract: | We examine the relationship between the number of bank relationships and firms’ performance, evaluating possible differential effects related to firms’ size. Our sample of firms from Italy includes many small firms, 99 percent of which are not listed and for which bank debt is a major source of financing. In the sample, 4 percent of the firms have a single bank relationship, and 66 percent of them have five or fewer relationships. We find that return on equity and return on assets decrease as the number of bank relationships increases, with a stronger relationship for small firms than for large firms. We also find that interest expense over assets increases as the number of relationships increases. Particularly for small firms, our results are consistent with analyses indicating that fewer bank relationships reduce information asymmetries and agency problems, which outweigh negative effects connected to holdup problems. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-05&r=cba |
| By: | Tommaso Mancini Griffoli (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | If the Euro has boosted intra Euro-Area trade, what exactly in the new currency is responsible for such an effect? Most explanations focus on a decrease in exchange rate volatility or in transaction costs, receiving mixed empirical support. After briefly surveying the relevant literature, this paper points to a novel channel of transmission: the sharp decrease in real interest rates that accompanied the Euro. The argument is that lower interest rates spurred investment spending and manufacturing value added, as in Flam and Helpman (1987), and induced a greater number for firms to enter the export market, ultimately boosting trade. This phenomenon is captured in a simple model with fixed costs, where the number of firms or varieties supported in a market is endogenous. The model is used to augment the traditional trade gravity equation. In the end, empirical results are presented in support of the interest rate's role at explaining the "Rose effect". |
| Keywords: | Gravity equation, International Trade, Common Currency, Instability tests in Panel data, Euro Area. |
| JEL: | F1 F4 C23 C52 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp10-2006&r=cba |
| By: | Ben Craig; Joseph G. Haubrich |
| Abstract: | Changes in net lending hide the much larger and more variable gross lending flows. We present a series of stylized facts about gross loan flows and how they vary over time, bank size, and the business cycle. We look at both the intensive (increases and decreases) and extensive (entry and exits) margins. We compare these results with the output from a simple stochastic search model. |
| Keywords: | Bank loans ; Business cycles |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0604&r=cba |
| By: | Edward S. Knotek II |
| Abstract: | This paper examines whether monetary shocks can consistently generate stagflation in a dynamic, stochastic setting. I assume that the monetary authority can induce transitory shocks and longer-lasting monetary regime changes in its operating instrument. Firms cannot distinguish between these shocks and must learn about them using a signal extraction problem. The possibility of changes in the monetary regime greatly improves the ability of money to generate stagflation. This is true whether the regime actually changes or not. If the monetary regime changes on average once every ten years, stagflation occurs in 76% of model simulations. The intuition for this result is simple: increased output volatility due to learning coupled with inflation inertia produce conditions conducive to the emergence of stagflation. The incidence of stagflation can be reduced by a stable, transparent central bank. |
| Keywords: | Inflation (Finance) ; Recessions ; Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-05&r=cba |
| By: | Ivo J.M. Arnold (Nyenrode Business Universiteit) |
| Abstract: | This paper uses a simple model of optimal monetary policy to consider whether the influence of national output and inflation rates on ECB interest rate setting should equal a country’s weight in the eurozone economy. The findings depend on assumptions regarding interest rate elasticities, exchange rate elasticities, and openness vis-à-vis non-eurozone countries. The major conclusion is that the ECB should respond less to inflation shocks in EMU countries that have strong trading ties with non-eurozone countries. Intuitively, these countries can take care of some of the monetary tightening themselves, through a real appreciation vis-à-vis their non-eurozone trading partners. |
| Keywords: | EMU, Taylor rule; Optimal monetary poli |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:nijrep:2005-01&r=cba |
| By: | Anatoliy Belaygorod; Michael J. Dueker |
| Abstract: | We extend Lubik and Schorfheide's (2004) likelihood-based estimation of dynamic stochastic general equilibrium (DSGE) models under indeterminacy to encompass a sample period including both determinacy and indeterminacy by implementing the change-point methodology (Chib, 1998). This feature is useful because DSGE models generally are estimated with data sets that include the Great Inflation of the 1970s and the surrounding low inflation periods. Timing the transitions between determinate and indeterminate equilibria is one of the key contributions of this paper. Moreover, by letting the data provide estimates of the state transition dates and allowing the estimated structural parameters to be the same across determinacy states, we obtain more precise estimates of the differences in characteristics, such as the impulse responses, across the states. In particular, we find that positive interest rate shocks were inflationary under indeterminacy. While the change-point treatment of indeterminacy is applicable to all estimated linear DSGE models, we demonstrate our methodology by estimating the canonical Woodford model with a time-varying inflation target. Implementation of the change-point methodology coupled with Tailored Metropolis-Hastings provides a highly efficient Bayesian MCMC algorithm. Our prior-posterior updates indicate substantially lower sensitivity to hyperparameters of the prior relative to other estimated DSGE models. |
| Keywords: | Equilibrium (Economics) - Mathematical models ; Econometric models - Evaluation |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-025&r=cba |
| By: | James Peery Cover (Department of Economics, Finance & Legal Studies, University of Alabama); C. James Hueng (Department of Economics, Western Michigan University) |
| Abstract: | It is generally agreed that the price-output correlation in the United States was positive prior to the Second World War, but became negative during the postwar period (at least by 1972). This paper offers evidence that the price-output correlation changed signs because of a decrease in the variability of aggregate demand. A structural VAR with bivariate GARCH (1,1) errors is used to estimate a times series of price-output correlations as well as of the conditional variances of the structural shocks to AD and AS. It is found that during the postwar period the price-output correlation is negative and significantly different from zero only when the standard deviation of the AD shock is less than that of the AS shock. |
| Keywords: | Price-Output Correlation, Structural VAR, Supply and Demand Shocks, Blanchard-Quah Decomposition |
| JEL: | E3 C32 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:bsu:wpaper:200602&r=cba |
| By: | Dimitrios Malliaropulos; Ekaterini Panopoulou; Nikitas Pittis; Theologos Pantelidis |
| Abstract: | This paper employs a new methodology for measuring the contribution of growth and interest rate differentials to the half-life of deviations from Purchasing Power Parity (PPP). Our method is based on directly comparing the impulse response function of a VAR model, where the real exchange rate is Granger caused by these variables with the impulse response function of a univatiate ARMA model for the real exchange rate. We show that the impulse response function of the VAR model is not, in general, the same with the impulse response function obtained from the equivalent ARMA representation, if the real exchange rate is Granger caused by other variables in the system. The difference between the two functions captures the effects of the Granger-causing variables on the half-life of deviations from PPP. Our empirical results for a set of four currencies suggest that real and nominal long term interest rate differentials and real GDP growth differentials account for 22% to 50% of the half-life of deviations from PPP. |
| Keywords: | real exchange rate; persistence measures; VAR; impulse response function; PPP. |
| Date: | 2006–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp135&r=cba |
| By: | Ivo J.M. Arnold; Ronald MacDonald; Casper G. de Vries (Nyenrode Business Universiteit) |
| Abstract: | A widely held notion holds that freely floating exchange rates are excessively volatile when judged against fundamentals and when moving from fixed to floating exchange rates. We re-examine the data and conclude that the disparity between the fundamentals and exchange rate volatility is more apparent than real, especially when the Deutsche Mark, rather than the dollar is chosen as the numeraire currency. We also argue, and indeed demonstrate, that in cross-regime comparisons one has to account for certain ‘missing variables’ which compensate for the fundamental variables’ volatility under fixed rates. |
| Keywords: | Exchange rates; Exchange rate regimes; Excess volatility. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:nijrep:2006-04&r=cba |
| By: | Robert Dixon (Department of Economics, The University of Melbourne); John Freebairn (Department of Economics and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); G. C. Lim (Department of Economics and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne) |
| Abstract: | In this paper we explore a new approach to understanding the evolution of the unemployment rate in Australia. Specifically, we use gross worker flows data to explore the consequences of assuming that there is no unique equilibrium rate of unemployment but rather a continuum of stochastic equilibrium rates which reflect the movement of the entry and exit rates over time. It is shown that the stochastic equilibrium unemployment rate and the observed unemployment rate are very closely related and we explore the reasons why this is so. We examine the short-run dynamics of the entry and exit rates (specifically, the impulse response functions) and the impact on the unemployment rate of shocks to the entry and exit rates and find that shocks to the entry rate have been more important than shocks to the exit rate in bringing about variations in the unemployment rate over our sample period. We then present a new way to disentangle the effects on the (equilibrium) unemployment rate of the business cycle and structural shifts. It would appear that there was a once and for all downward shift in the equilibrium rate(s) of unemployment in Australia in the early 1990s, which likely reflects the introduction of a more generous system of disability pension benefits. |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2006n11&r=cba |