nep-cba New Economics Papers
on Central Banking
Issue of 2006‒06‒10
thirty-two papers chosen by
Alexander Mihailov
University of Essex

  1. The Brave New World of Central Banking: The Policy Challenges Posed by Asset Price Booms and Busts By Stephen G. Cecchetti
  2. Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects By Rasmus Fatum; Michael M. Hutchison
  3. Capital Flows and Monetary Policy By Javier Gómez Pineda
  4. Putting the New Keynesian Model to a Test By G. PEERSMAN; R. STRAUB
  5. Testing the New Keynesian Phillips Curve Without Assuming Identification By Sophocles Mavroeidis
  6. Real Exchange Rate Misalignment: Prelude to Crisis? By David M. Kemme; Saktinil Roy;
  7. An Economy in Transition and DSGE: What the Czech National Bank’s New Projection Model Needs By Jaromir Benes; Tibor Hledik; Michael Kumhof; David Vavra
  8. Core inflation at the Bank of Canada A critique By Kevin Clinton
  9. Reasons for Real Appreciation in Central Europe By Michael Brandmeier
  10. Bond Yield Compression in the Countries Converging to the Euro By Lucjan T. Orlowski; Kirsten Lommatzsch;
  11. Foreign Exchange Interventions and Interest Rate Policy in the Czech Republic: Hand in Glove? By Balazs Egert; Lubos Komarek
  12. Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues By Balázs Égert,; László Halpern; Ronald MacDonald
  13. Current Account Reversals and Growth: The Direct Effect Central and Eastern Europe 1923-2000 By Komarek, Lubos; Komarkova, Zlatuse; Melecky, Martin
  14. Evidence of Bank Lending Channel for Argentina and Colombia By José Gómez González; Fernando Grosz
  15. Bankruptcy, Counterparty Risk, and Contagion By Holger Kraft; Mogens Steffensen
  16. Failure process and causes of company bankruptcy: a typology By H. OOGHE; S. DE PRIJCKER
  17. Re-examining the Structural and the Persistence Approach to Unemployment By T. BERGER; G. EVERAERT
  18. Assessing the Impact of Market Microstructure Noise and Random Jumps on the Relative Forecasting Performance of Option-Implied and Returns-Based Volatility By Gael M. Martin; Andrew Reidy; Jill Wright
  19. The Monetary Transmission Mechanism in the Czech Republic (evidence from VAR analysis) By Katerina Arnostova; Jaromir Hurnik
  20. Optimal Forward-Looking Policy Rules in the Quarterly Projection Model of the Czech National Bank By Jan Strasky
  21. Plant-Level Nonconvexities and the Monetary Transmission Mechanism By Roman Sustek
  22. Exchange Rate Variability, Pressures and Optimum Currency Area Criteria: Lessons for the Central and Eastern European Countries By Roman Horvath
  23. La Política Monetaria en Colombia By Javier Gómez Pineda
  24. Determinants of Interest Margins in Colombia By Dairo Estrada; Esteban Gómez; Inés Orozco
  25. The Application of Structured Feedforward Neural Networks to the Modelling of Daily Series of Currency in Circulation By Marek Hlavacek; Michael Konak; Josef Cada
  26. The Behavioural Equilibrium Exchange Rate of the Czech Koruna By Lubos Komarek; Martin Melecky
  27. Currency Crises, Current Account Reversals and Growth : The Compounded Effect for Emerging Markets By Komarek, Lubos; Melecky, Martin
  28. Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind? By Balázs Égert; ;
  29. La estimación de un indicador de brecha del producto a partir de encuestas y datos reales By Norberto Rodríguez N.; José Luis Torres T.; Andrés Velasco M.
  30. Panel Data Analysis - Advantages and Challenges By Cheng Hsiao
  31. A Century of Work and Leisure By Valerie A. Ramey; Neville Francis
  32. The Brain as a Hierarchical Organization By Isabelle Brocas; Juan D. Carillo

  1. By: Stephen G. Cecchetti
    Abstract: At the dawn of the 21st century, property and equity ownership are spread more broadly across the population than they once were. One consequence of this is that asset price booms and crashes now have a direct impact on general welfare. The fact that bubbles distort nearly all economic decisions gives policymakers a stronger interest in asset price stability. In this essay I examine the theoretical and empirical case for the existence of equity and property bubbles, and then summarize the economic distortions that they create. The evidence suggests increasing our attention on property prices. I go on to discuss the possible policy responses, including examining the consequences of changing the way in which housing is included in standard aggregate price measures.
    Keywords: . Central bank policy, equity price bubbles, housing price bubbles.
    JEL: E5 G0
    Date: 2005–12
  2. By: Rasmus Fatum (School of Business, University of Alberta); Michael M. Hutchison (Department of Economics, University of California Santa Cruz)
    Abstract: Studies of central bank intervention are complicated by the fact that we typically observe intervention only during periods of turbulent exchange markets. Furthermore, entering the market during these particular periods is a conscious “self-selection” choice made by the intervening central bank. We estimate the “counterfactual” exchange rate movements that allow us to determine what would have occurred in the absence of intervention and we introduce the method of propensity score matching to the intervention literature in order to estimate the “average treatment effect” (ATE) of intervention. Specifically, we estimate the ATE for daily Bank of Japan intervention over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period, ineffective during 2003 and counterproductive during the first quarter of 2004.
    Keywords: foreign exchange intervention; Bank of Japan; self-selection, matching methods
    JEL: E58 F31 G15
    Date: 2006–05
  3. By: Javier Gómez Pineda
    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 di¤erent 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.
    Keywords: Sudden stops; Credit booms; Country risk; Fear of floating; Debt sustainability
    JEL: F41 F32 G15 H62 H63
    Abstract: In recent years, New Keynesian dynamic stochastic general equilibrium (NK DSGE) models have become increasingly popular in the academic literature and in policy analysis. However, it is still disputed how successful these models are in reproducing the dynamic behavior of an economy following structural shocks. This paper is an attempt to shed some light on this issue. We use a VAR with sign restrictions that are robust to model and parameter uncertainty to estimate the effects of monetary policy, preference, government spending, investment, price markup, technology and labor supply shocks on macroeconomic variables in the United States and the euro area. In contrast to the NK DSGE models, the empirical results indicate that technology shocks have a positive effect on hours worked, and investment and preference shocks have a positive impact on consumption and investment, respectively. While the former is in line with the predictions of Real Business Cycle (RBC) models, the latter indicates the relevance of accelerator effects, as described in the earlier Keynesian literature. Furthermore, we show that NK DSGE models might overemphasize the role of cost-push shocks in business cycle fluctuations, while in the same time underestimating the importance of other shocks such as changes in technology and investment adjustment costs.
    Keywords: DSGE models; vector autoregressions; sign restrictions
    JEL: C32 C51 E32 E52
    Date: 2006–03
  5. By: Sophocles Mavroeidis
    Abstract: We re-examine the evidence on the new Phillips curve model of Gali and Gertler (Journal of Monetary Economics 1999) using the conditional score test of Kleibergen (Econometrica 2005), which is robust to weak identification. In contrast to earlier studies, we find that US postwar data are consistent both with the view that inflation dynamics are forward-looking, and with the opposite view that they are predominantly backward-looking. Moreover, the labor share does not appear to be a relevant determinant of inflation. We show that this is an important factor contributing to the weak identification of the Phillips curve.
    Date: 2006
  6. By: David M. Kemme; Saktinil Roy;
    Abstract: A model of the long run equilibrium real exchange rate based upon macroeconomic fundamentals is employed to calculate real exchange rate misalignments for Poland and Russia during the 1990s using the Beveridge and Nelson (1981) decomposition of macrofundamentals into transitory and permanent components. Short run movements of the real exchange rate are estimated with ARIMA and GARCH error correction specifications. The different nominal exchange rate regimes of the two countries generate different levels of misalignment and different responses to exogenous shocks. The average misalignment in Russia is substantially greater than that in Poland, indicating incipient pressures to devalue the ruble immediately preceding the August 1998 crisis. The half life of an exogenous shock is found to be much shorter for Poland than for Russia in the pre-crisis period. Dynamic forecasts indicate that the movements of the real exchange rate in the post-crisis period are significantly different from those in the pre-crisis period. Thus, the currency crisis in Russia could not be anticipated with the movements of the real exchange rate estimated with the macroeconomic fundamentals.
    Keywords: Russia, Poland, equilibrium real exchange rates, misalignment, cointegration, exogenous shocks, macroeconomic crises
    JEL: F31 F36 P17
    Date: 2005–10–01
  7. By: Jaromir Benes; Tibor Hledik; Michael Kumhof; David Vavra
    Abstract: Since the introduction of the inflation targeting regime in 1998 the Czech National Bank has made considerable progress in developing formal tools for supporting its Forecasting and Policy Analysis System. This paper documents the advances in the ongoing research aimed at developing a DSGE small open economy model designed to capture some of the most important features of the Czech economy—both the business-cycle regularities and the recent developments associated with the economy’s transition and its convergence towards the industrialized European countries. The model in its current form is able to capture trends in relative prices, allow for medium-convergence in expenditure shares, and deal with the undercapitalization and investment inflow issues. Besides the model exhibits real and nominal rigidities that are in line with the recent New Open Economy Macroeconomics literature built fully on first principles. The innovative features of our model include the international currency pricing scheme permitting flexible calibration of import and export price elasticities along with the disconnect of the nominal exchange rate, the policy reaction function with a parameterized forecast horizon, and a generalized capital accumulation equation with imperfect intertemporal substitution of investment.
    Keywords: .
    JEL: C32 E32
    Date: 2005–12
  8. By: Kevin Clinton (Queen's University)
    Abstract: Core inflation is a useful concept for the theory and practice of monetary policy. The Bank of Canada maintains, in addition, that core inflation should be, and has in fact been, a useful predictor of headline inflation. Under the bank’s policy of inflation targeting, however, this is incorrect: over horizons of a year or more the best forecast should be the 2 percent target; and core inflation should have no predictive content. Post- 1995 evidence confirms this argument.
    Keywords: TBA
    Date: 2006–05
  9. By: Michael Brandmeier
    Abstract: The real economic effects of the considerably high appreciation in Central European Economies (CEE) are controversially disputed in the eve of the European Monetary Union (EMU) entry of several CEE economies. The Balassa-Samuelson-effect was made responsible for the expectation of higher inflation rates in CEE than in the EMU in the next years. Higher inflation rates will deteriorate the price competitiveness of the export sectors in the CEE countries because of real appreciation. This paper focuses on the effects of labour productivity differences in several industrial and service sectors on the consumer prices. Labour productivity changes are affected by the technology impact on labour demand and by the relative wage increases following from tensions of regional labour markets because of rising prices and skilled labour shortage. Real appreciation is determined by labour productivity differences and by capital good imports. We conclude that the negative coherence between real appreciation and the endangered price competitiveness of the export sectors in CEE has to be taken into account, unless the negative experience of loss of competitiveness because of sudden real appreciation in Eastern Germany will take place on a large scale in the eastern part of the enlarged euro area.
    Keywords: European Monetary Union, inflation differences, Balassa-Samuelson-effect, Central and Eastern Europe
    JEL: E31 F33 F41
    Date: 2006–06–02
  10. By: Lucjan T. Orlowski; Kirsten Lommatzsch;
    Abstract: We demonstrate that bond yield compression is under way in the countries converging to the euro and that German yields are significant drivers of local currency yields. Based on the evidence from Poland, Hungary and the Czech Republic, we conclude that these new Member States of the European Union are ready to adopt the euro without risking a disruptive shock to their financial stability. This message transpires from investigating the daily volatility dynamics of local bond yields as a function of German yields, conditional on changes in local term spreads, exchange rates and adjustments to central bank reference rates. Similar results of high sensitivity of local currency bond yields to changes in German yields are obtained from testing monthly series of macroeconomic fundamentals. These findings provide evidence of the potential usefulness of term spreads as indicators of monetary convergence.
    Keywords: term spread, term premium, yield compression, monetary convergence, new Member States, EMU, conditional volatility, asymmetric GARCH models
    JEL: E43 E44 F36
    Date: 2005–10–01
  11. By: Balazs Egert; Lubos Komarek
    Abstract: This paper studies the impact of daily official foreign exchange interventions on the Czech koruna's exchange rate vis-a-vis the euro (the German mark prior to 1999) from 1997 to 2002. Both the event study methodology, extended with official interest rate moves, and a variety of GARCH models reveal that central bank interventions, especially koruna purchases, seem to have been relatively ineffective from 1997 to mid-1998 compared to the size of the interventions. From mid-1998 to 2002, however, koruna sales turn out to be effective in smoothing the path of the exchange rate up to 60 days. Nevertheless, the event study approach indicates that the success of FX interventions may be intimately related to the coordination of intervention and interest rate policies.
    Keywords: Central bank intervention, Czech Republic, event study, foreign exchange intervention, GARCH, interest rate policy, transition economies.
    JEL: F31
    Date: 2005–12
  12. By: Balázs Égert,; László Halpern; Ronald MacDonald
    Abstract: In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size.
    Keywords: equilibrium exchange rate, Purchasing Power Parity, trend appreciation, Balassa-Samuelson effect, productivity, inflation differential, tradable prices, regulated prices, Fundamental Equilibrium Exchange Rate, Behavioural Equilibrium Exchange Rate, Permanent Equilibrium Exchange Rate, NATREX, CHEER, transitional economies, euro.
    JEL: C15 E31 F31 O11 P17
    Date: 2005–10–01
  13. By: Komarek, Lubos (Czech National Bank); Komarkova, Zlatuse (Prague School of Economics); Melecky, Martin (University of New South Wales)
    Abstract: According to economic theory, the capital inflows reversal – so-called sudden stop – has a significant negative effect on economic growth. This paper investigates the direct impact of current account reversals on growth in Central and Eastern European countries. Two steps to conduct the analysis are applied. In the first step we estimate the standard growth equation augmented by an effect of the current account reversal. We find that after a current account reversal the growth rate declines by 1.10 percentage points in the current year. The subsequent analysis of the adjustment dynamics builds upon the notion of convergence. We find the unconditional and conditional convergence coefficients to be - 0.47 and -0.52, respectively. This implies that the consequences of the reversal are likely eliminated after 3.3 years when the actual growth rate is back at its equilibrium level, ceteris paribus. Finally, the cumulative loss associated with a sudden stop in capital flows is about 2.3 percentage points. We infer that Central and Eastern European countries are relatively flexible in terms of adjustment and reallocation of resources given the findings in similar literature examining either a more general sample or concentrating on rather different regions.
    Keywords: Current Account Reversals ; Economic Growth ; Emerging Market Economies ; Adjustment Dynamics ; Panel Data Analysis
    JEL: F32 C23 O40 O52
    Date: 2005
  14. By: José Gómez González; Fernando Grosz
    Abstract: In this paper we find empirical evidence of bank lending channel for Colombia and Argentina. As for Argentina, we do not find evidence that changes in the interbank interest rate affect the growth rate of total loans directly. However, it does indirectly through interactions: the interbank interest rate affects the loan supply through its interactions with capitalization and liquidity. As for Colombia, there is direct bank lending channel, which is reinforced through interactions with capitalization and liquidity. Also, using a panel data of more than 3300 firms, we provide additional support to the existence of a bank lending channel for Colombia.
    Date: 2006–06–01
  15. By: Holger Kraft (Fachbereich Mathematik, Universität Kaiserslautern); Mogens Steffensen (Department of Applied Mathematics and Statistics, University of Copenhagen)
    Abstract: This paper provides a unifying framework for the modeling of various types of credit risks such as contagion effects. We argue that Markov chains can efficiently be used to tackle these problems. However, our approach is not limited to pricing problems with contagion. Other applications include the modeling of a more sophisticated default process of a firm. On the theoretical side, we derive pricing formulas for three building blocks that are generalizations of contingent claims studied in Lando (1998). These claims can be thought of as atoms forming the basis for all credit risky payments. Furthermore, we demonstrate that, in general, all contingent claims exposed to credit risk satisfy a system of partial differential equations. This is the key result to calculate prices of credit risky claims explicitly and efficiently.
    Keywords: default risk; financial distress; default correlation; contagion; Markov chains
    JEL: G13
    Date: 2006–05
    Abstract: This paper describes a typology of failure processes within companies. Based on case studies and considering companies’ ages and management characteristics, we discovered four types of failure processes. The first failure process describes the deterioration of unsuccessful start-up companies leaded by a management with a serious deficiency in managerial and industry- related experience. The second process reveals the collapse after a failing growth of ambitious early- stage companies. Those companies have, after a failed investment, insufficient financial means to adjust their way of doing business to the changes in the environment in order to prevent bankruptcy. Third, we describe the failure process of dazzled established companies, leaded by an overconfident management without a realistic view on the company’s financial situation. Lastly, the bankruptcy of apathetic companies, describes the gradual deterioration of an apathetic established company where management had lost touch with the changing environment. This typology gives new insight into the evolution of financial performance ratios during the years preceding bankruptcy. Furthermore, we found that there is a great difference in the presence and importance of specific causes of bankruptcy between the distinctive failure processes. Errors made by management, errors in corporate policy and changes in the gradual and immediate environments differ considerably between each of the four failure processes.
    Date: 2006–05
    Abstract: This paper examines the relative importance of the structural and the persistence approach to unemployment. We set out a standard imperfect competition model that decomposes observed unemployment into a structural and a persistent cyclical component. The natural rate of unemployment is treated as an unobserved variable that has observable effects on the measured unemployment rate, output and prices. The multivariate unobserved component model is estimated for the US and the euro area using Bayesian techniques and the Kalman filter. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is somewhat lower in the US but demand shocks seem to be more important in explaining variation of unemployment.
    Keywords: natural rate of unemployment, persistence, unobserved components, Kalman filter, Bayesian analysis
    JEL: C11 C32 E24 E31 E32
    Date: 2006–05
  18. By: Gael M. Martin; Andrew Reidy; Jill Wright
    Abstract: This paper presents a comprehensive empirical evaluation of option-implied and returns-based forecasts of volatility, in which new developments related to the impact on measured volatility of market microstructure noise and random jumps are explicitly taken into account. The option-based component of the analysis also accommodates the concept of model-free implied volatility, such that the forecasting performance of the options market is separated from the issue of misspecification of the option pricing model. The forecasting assessment is conducted using an extensive set of observations on equity and option trades for News Corporation for the 1992 to 2001 period, yielding certain clear results. According to several different criteria, the model-free implied volatility is the best performing forecast, overall, of future volatility, with this result being robust to the way in which alternative measures of future volatility accommodate microstructure noise and jumps. Of the volatility measures considered, the one which is, in turn, best forecast by the option-implied volatility is that measure which adjusts for microstructure noise, but which retains some information about random jumps.
    Keywords: Volatility Forecasts; Quadratic Variation; Intraday Volatility Measures; Model-free Implied Volatility.
    JEL: C10 C53 G12
    Date: 2006
  19. By: Katerina Arnostova; Jaromir Hurnik
    Abstract: Due to significant lags between a monetary policy action and the subsequent responses in the economy, understanding the transmission mechanism is of primary importance for conducting monetary policy. This paper analyses the monetary policy transmission mechanism using VAR models - the most widely used empirical methodology for analyzing the transmission mechanism in the Czech economy. Using the VAR methodology, the paper tries to evaluate the effects of an exogenous shock to monetary policy. The results show that an unexpected monetary policy tightening leads to a fall in output, whereas prices remain persistent for a certain time. The exchange rate reaction then heavily depends on the data sample used. Although it is clear that due to the rather short time span of the data, the results should be taken with caution, they at least show that the basic framework of how monetary policy affects the economy does not differ significantly either from what would be predicted by the theory or from the results obtained for more developed economies.
    Keywords: Impulse response, monetary policy, transmission mechanism, vector autoregressions.
    JEL: E37 E52
    Date: 2005–12
  20. By: Jan Strasky
    Abstract: This paper analyses the performance of the inflation forecast-based (IFB) monetary policy rules in the quarterly projection model of the Czech National Bank. The paper begins by reviewing the model and its parametrization, including the variance-covariance matrix of disturbances employed in simulations. The main part of the paper presents the results of an extensive grid search over various targeting horizons and coefficient values for a simple IFB rule with optimized coefficients, and suggests three possibilities for improvement: a shorter targeting horizon, a higher relative weight placed on inflation gap stabilization, and a lower coefficient on partial interest rate adjustment. These results are supported by an analysis of the impact of individual shocks on the optimal coefficients of the IFB rule. The last section of the paper argues for inclusion of the real exchange rate stabilization objective in the policy maker’s loss function and repeats the grid search for an optimal rule allowing for the real exchange rate feedback term. The previous results are not dramatically altered and we conclude that the stabilization properties of the extended rules are comparable with the those of the original optimized IFB rules.
    Keywords: Exchange rates, inflation targeting, monetary policy rules, open economy.
    JEL: E52 E58 F41
    Date: 2005–12
  21. By: Roman Sustek
    Abstract: Micro-level empirical evidence suggests that plant managers adjust production by utilizing capital along nonconvex margins. Existing models of the monetary transmission mechanism (MTM), however, assume that production units adjust output smoothly. The objective of this paper is to determine whether such plant-level nonconvexities affect the MTM in a quantitatively significant way. To this end we replace the smooth production function in a prototypical model of the MTM with heterogeneous plants that adjust output along three nonconvex margins: intermittent production, shiftwork, and weekend work. We calibrate the model such that steady-state utilization of these margins is in line with U.S. data. We find that the nonconvexities dampen the responses of aggregate economic activity and prices to monetary policy shocks by about 50 percent relative to the standard model, thereby significantly reducing the effectiveness of the MTM. Due to heterogeneity and discrete choices at the plant level, monetary policy affects the output decisions of only “marginal†plants – those close to being indifferent between alternative production plans. In equilibrium the measure of such plants is rather small. In addition, contrary to popular belief, the quantitative effects of monetary policy shocks on aggregate output do not significantly change with the degree of capacity utilization over the business cycle. The effects on inflation, however, do change substantially over the business cycle when monetary policy shocks are persistent.
    Keywords: Asymmetries, heterogenous plants, monetary transmission mechanism, nonconvexities, nonlinear approximation.
    JEL: E22 E23 E32 E52
    Date: 2005–12
  22. By: Roman Horvath
    Abstract: This paper estimates the medium-term determinants of the bilateral exchange rate variability and exchange rate pressures for 20 developed countries in the 1990s. The results suggest that the optimum currency area criteria explain the dynamics of bilateral exchange rate variability and pressures to a large extent. Next, we predict exchange rate volatility and pressures for the Central and Eastern European Countries (CEECs). We find that the CEECs encounter exchange rate pressures at approximately the same level as the euro area countries did before they adopted the euro.
    Keywords: Euro Adoption, Exchange Rates, GMM, Optimum Currency Area.
    JEL: F15 F31 E58
    Date: 2005–12
  23. By: Javier Gómez Pineda
    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.
    Keywords: Política monetaria; Trilema; Ancla nominal; Régimen monetario; Inflación objetivo.
    JEL: E52 E58 F32 F41
  24. 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 Saun- ders (1981), interest margins are modelled as a function of the pure spread and bank-speci¯c 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 a®ected by credit institutions' ine±ciency and to a lesser extent by credit risk exposure and market power. This implies that public policies should be ori- ented towards creating the necessary market conditions for banks to enhance their e±ciency.
    Keywords: Interest Margins, Competition, Credit Risk, Interest Rate Risk.
    JEL: L11 L41 L89 G21 G28
  25. By: Marek Hlavacek; Michael Konak; Josef Cada
    Abstract: One of the most significant factors influencing the liquidity of the financial market is the amount of currency in circulation. Although the central bank is responsible for the distribution of the currency it cannot assess the demand for the currency, as that demand is influenced by the non-banking sector. Therefore, the amount of currency in circulation has to be forecasted. This paper introduces a feedforward structured neural network model and discusses its applicability to the forecasting of currency in circulation. The forecasting performance of the new neural network model is compared with an ARIMA model. The results indicate that the performance of the neural network model is better and that both models might be applied at least as supportive tools for liquidity forecasting.
    Keywords: Neural network, seasonal time series, currency in circulation.
    JEL: C45 C53
    Date: 2005–12
  26. By: Lubos Komarek; Martin Melecky
    Abstract: The behavioural equilibrium exchange rate (BEER) model of the Czech koruna is derived in this paper and estimated by three methods suitable for non-stationary time series. The potential determinants of the real equilibrium exchange rate considered are the productivity differential, the interest rate differential, the terms of trade, net foreign direct investment, net foreign assets, government consumption and the degree of openness. We find that the Czech koruna was on average undervalued over the period 1994 to 2004 by about 7 percent with respect to the estimated BEER. The significant determinants of the equilibrium exchange rate of the Czech koruna appear to be the productivity differential, the real interest rate differential, the terms of trade and net foreign direct investment.
    Keywords: Czech Republic, equilibrium exchange rate modelling, ERM II, exchange rate misalignments, time-series analysis.
    JEL: C52 C53 E58 E61 F31
    Date: 2005–12
  27. By: Komarek, Lubos (Czech National Bank); Melecky, Martin (University of New South Wales)
    Abstract: This paper investigates the possible negative effect of external crises, sudden stops in capital flows and currency crises in emerging market economies. We find that a current account reversal has an important effect, both direct and indirect, on economic growth, and depresses GDP by about 1 percentage point in the current year, when using a broad group of emerging markets. On the other hand, currency crises themselves, identified as a sharp depreciation, do not appear to have a significant direct impact on growth. Their overall effect on growth is positive, though rather insignificant from an economic point of view. The joint occurrence of the currency crisis and the current account reversal appears to be the most damaging event for economic growth. Both the direct and compounded effects are about 5 times larger than those of the reversal in the current year. The estimated cumulative losses for current account reversals and the joint crisis are 2 and 21 percentage points, respectively. The time necessary for the adjustment of actual growth back to its equilibrium rate is roughly 2.5 years after the current account reversal and 6.5 years after the joint occurrence of the currency crisis and the reversal.
    Keywords: External Crises ; Economic Growth ; Open Transition Economy ; Panel Data
    JEL: F32 C23 O40 O52
    Date: 2005
  28. By: Balázs Égert; ;
    Abstract: This paper investigates the importance of the Balassa-Samuelson effect for two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey) and two CIS countries (Russia and Ukraine). The paper first studies the basic assumptions of the Balassa-Samuelson effect using yearly data, and then undertakes an econometric analysis of the assumptions on the basis of monthly data. The results suggest that for most of the countries, there is either amplification or attenuation, implying that any increase in the open sector’s productivity feeds onto changes in the relative price of non-tradables either imperfectly or in an over-proportionate manner. With these results as a background, the size of the Balassa-Samuelson effect is derived. For this purpose, a number of different sectoral classification schemes are used to group sectors into open and closed sectors, which makes a difference for some of the countries. The Balassa-Samuelson effect is found to play only a limited role for inflation and real exchange rate determination, and it seems to be roughly in line with earlier findings for the eight new EU member states of Central and Eastern Europe.
    Keywords: Balassa-Samuelson effect, productivity, inflation, real exchange rate, transition, South Eastern Europe, CIS, Turkey
    JEL: E31 O11 P17
    Date: 2005–11–01
  29. By: Norberto Rodríguez N.; José Luis Torres T.; 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.
    Keywords: Brecha del producto, componentes principales, Curva de Phillips, Colombia.
    JEL: C32 C43 E31 E37 E52
  30. By: Cheng Hsiao
    Abstract: We explain the proliferation of panel data studies in terms of (i) data availability, (ii) the more heightened capacity for modeling the complexity of human behavior than a single cross-section or time series data can possibly allow, and (iii) challenging methodology. Advantages and issues of panel data modeling are also discussed.
    Keywords: Panel data, Longitudinal data, Unobserved heterogeneity, Random effects, Fixed effects
    Date: 2006–05
  31. By: Valerie A. Ramey; Neville Francis
    Abstract: Has leisure increased over the last century? Standard measures of hours worked suggest that it has. In this paper, we develop a comprehensive measure of non-leisure hours that includes market work, home production, commuting and schooling for the last 105 years. We also present empirical and theoretical arguments for a definition of “per capita” that encompasses the entire population. The new measures reveal a number of interesting 20th Century trends. First, 70 percent of the decline in hours worked has been offset by an increase in hours spent in school. Second, contrary to conventional wisdom, average hours spent in home production are actually slightly higher now than they were in the early part of the 20th Century. Finally, leisure per capita is approximately the same now as it was in 1900.
    JEL: E2 N1 N3
    Date: 2006–05
  32. By: Isabelle Brocas; Juan D. Carillo
    Abstract: We model the brain as a multi-agent organization. Based on recent neuroscience evidence, we assume that different systems of the brain have different time-horizons and different access to information. Introducing asymmetric information as a restriction on optimal choices generates endogenous constraints in decision-making. In this game played between brain systems, we show the optimality of a self-disciplining rule of the type “work more today if you want to consume more today” and discuss its behavioral implications for the distribution of consumption over the life-cycle. We also argue that our dual-system theory provides “micro-microfoundations” for discounting and offer testable implications that depart from traditional models with no conflict and exogenous discounting. Last, we analyze a variant in which the agent has salient incentives or biased motivations. The previous rule is then replaced by a simple, non-intrusive precept of the type “consume what you want, just don’t abuse”.
    Date: 2006–04

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