nep-cba New Economics Papers
on Central Banking
Issue of 2006‒06‒24
forty-one papers chosen by
Alexander Mihailov
University of Essex

  1. The Mystique of Central Bank Speak By Petra Geraats
  2. Optimal Time Consistent Monetary Policy By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  3. Bubbles, Collateral and Monetary Equilibrium By Aloisio Pessoa de Araújo; Mario R. Páscoa; Juan Pablo Torres-Martínez
  4. Proposal for a Common Currency among Rich Democracies (Paper 1); One World Money, Then and Now (Paper 2) By Richard N. Cooper (Paper 1); Michael Bordo (Paper 2); Harold James (Paper 2)
  5. Exchange-Rate Arrangements and Financial Integration in East Asia: On a Collision Course? By Hans Genberg
  6. "Why Central Banks (and Money) ÒRule the RoostÓ" By C. Sardoni
  7. Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice By Christopher M. Meissner; Nienke Oomes
  8. Firm-specific production factors in a DSGE model with Taylor price setting By Gregory de Walque; Frank Smets; Raf Wouters
  9. Optimal monetary policy in Markov-switching models with rational expectations agents By Andrew P Blake; Fabrizio Zampolli
  10. Monetary Policy in an Estimated DSGE Model with a Financial Accelerator By Ian Christensen; Ali Dib
  11. Broad money vs. narrow money: A discussion following the Federal Reserve’s decision to discontinue publication of M3 data By Tim Congdon
  12. The Boskin Commission Report: A Retrospective One Decade Later By Robert J. Gordon
  13. Europe’s Hard Fix: The Euro Area By Otmar Issing
  14. The Federal Reserve's Dual Mandate: A Time-Varying Monetary Policy Priority Index for the United States By René Lalonde; Nicolas Parent
  15. The Welfare Implications of Inflation versus Price-Level Targeting in a Two-Sector, Small Open Economy By Eva Ortega; Nooman Rebei
  16. Implementing Optimal Monetary Policy in New-Keynesian Models with Inertia By George W. Evans; Bruce McGough
  17. Monetary Union, External Shocks and Economic Performance: A Latin American Perspective By Sebastian Edwards
  18. Optimal monetary policy in a regime-switching economy: the response to abrupt shifts in exchange rate dynamics By Fabrizio Zampolli
  19. Optimal discretionary policy in rational expectations models with regime switching By Richhild Moessner
  20. "GibsonÕs Paradox II" By Greg Hannsgen
  21. LVTS, the Overnight Market, and Monetary Policy By Nadja Kamhi
  22. Money and Credit Factors By Paul D. Gilbert; Erik Meijer
  23. Are Currency Crises Low-State Equilibria? An Empirical, Three-Interest-Rate Model By Christopher M. Cornell; Raphael H. Solomon
  24. "CAN BASEL II ENHANCE FINANCIAL STABILITY?: A Pessimistic View" By L. Randall Wray
  25. Does the Yield Spread Predict the Output Gap in the U.S.? By Zagaglia, Paolo
  26. Integrated Macroeconomic Accounts for the United States: Draft SNA-USA By Albert M. Teplin; Charles Ian Mead; Brent R. Moulton; Rochelle Antoniewicz; Susan Hume McIntosh; Michael G. Palumbo; Genevieve Solomon
  27. Measurement of Business Cycles By Don Harding; Adrian Pagan
  28. The Open Economy Consequences of U.S. Monetary Policy By John Bluedorn; Christopher Bowdler
  29. Responses to Monetary Policy Shocks in the East and the West of Europe: A Comparison By Marek Jarocinski
  30. An Evaluation of Core Inflation Measures By Jamie Armour
  31. Reexamining the linkages between inflation and output growth: A bivariate ARFIMA-FIGARCH approach By Mustafa Caglayan and Feng Jiang
  32. L'articulation des monnaies : questions sur la fongibilité et la convertibilité By Jérôme Blanc
  33. "Time and Money: Substitutes in Real Terms and Complements in Satisfactions" By J. Bonke; M. Deding; M. Lausten
  34. Sterling implications of a US current account reversal By Morten Spange; Pawel Zabczyk
  35. Working Time over the 20th Century By Alexander Ueberfeldt
  36. Financial Innovations and Macroeconomic Volatility By Urban Jermann; Vincenzo Quadrini
  37. Regime Shifts in the Indicator Properties of Narrow Money in Canada By Tracy Chan; Ramdane Djoudad; Jackson Loi
  38. Estimación de la tasa natural de interés para la economía peruana By Paul Castillo; Carlos Montoro; Vicente Tuesta
  39. Structural Change in Covariance and Exchange Rate Pass-Through: The Case of Canada By Lynda Khalaf; Maral Kichian
  40. MUSE: The Bank of Canada's New Projection Model of the U.S. Economy By Marc-André Gosselin; René Lalonde
  41. Un siglo de la curva de Phillips en México By Guerrero, Carlos; Osorio, Paulina; Tiol, Arianna

  1. By: Petra Geraats (Faculty of Economics, University of Cambridge, Cambridge)
    Abstract: Despite the recent trend towards greater transparency of monetary policy, in many respects mystique still prevails in central bank speak. This paper shows that the resulting perception of ambiguity could be desirable. Under the plausible assumption of imperfect common knowledge about the degree of central bank transparency, economic outcomes are affected by both the actual and perceived degree of transparency. It is shown that actual transparency is beneficial while it may be useful to create the perception of opacity. The optimal communication strategy for the central bank is to provide clarity about the inflation target and to communicate information about the output target and supply shocks with perceived ambiguity. In this respect, the central bank benefits from sustaining transparency misperceptions, which helps to explain the mystique of central bank speak.
    Keywords: Transparency, monetary policy, communication
    JEL: E52 E58 D82
    Date: 2006–05–15
  2. By: Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
    Abstract: We develop a simple and intuitive procedure to derive analytically the unconditionally optimal (UO) policy in a general linear-quadratic setup, a perspective stressed by Taylor (1979) and Whiteman (1986). We compare the UO perspective on optimal monetary policy with the timeless perspective and policy based on minimizing conditional discounted losses. We use our approach in simple backward and forward-looking models and conclude that the UO perspective is worthy of renewed interest.
    Keywords: Time consistency, unconditional expectation, timeless perspective, optimal policy.
    JEL: E20 E32 F32 F41
    Date: 2006–06
  3. By: Aloisio Pessoa de Araújo (EPGE/FGV); Mario R. Páscoa; Juan Pablo Torres-Martínez
    Date: 2006–04
  4. By: Richard N. Cooper (Paper 1) (Harvard University); Michael Bordo (Paper 2) (Economics Department, Rutgers University and Harvard University); Harold James (Paper 2) (History Department and Woodrow Wilson School, Princeton University)
    Abstract: Paper 1: This paper suggests that some time in the not-too-distant future the governments of the industrialized democracies – concretely, the United States, the European Union, and Japan – should consider establishing a common currency for their collective use. A common currency would credibly eliminate exchange rate uncertainty and exchange rate movements among major currencies, both of which are significant sources of disturbance to important economies. One currency would of course entail one monetary policy for the currency area, and a political mechanism to assure accountability. This proposal is not realistic today, but is set as a vision for the second or third decade into the 21st century. Europeans, in creating EMU, have taken a major step in the direction indicated. Their idea could be taken further. Paper 2: In this paper, we look at the major arguments for monetary simplification and unification before explaining why the nineteenth century utopia is an idea whose time has gone, not come.
    Date: 2006–09–06
  5. By: Hans Genberg (Executive Director (Research), Hong Kong Monetary Authority)
    Abstract: Financial integration in Ease Asia is actively being pursued and will in due course lead to substantial mobility of capital between economies in the region. Plans for monetary cooperation as a prelude to monetary integration and ultimately monetary unification are also proposed. These plans often suggest that central banks should adopt some form of common exchange rate policy in the transition period towards full monetary union. This paper argues that this is a dangerous path in the context of highly integrated financial markets. An alternative approach is proposed where independent central banks coordinate their monetary policies through the adoption of common objectives and by building an appropriate institutional framework. When this coordination process has progressed to the point where interest rate developments are similar across the region, and if in the meantime the required institutional infrastructure has been build, the next step towards monetary unification can be taken among those central banks that so desire. The claim is that this transition path is likely to be robust and will limit the risk of currency crises.
    Date: 2006–05–05
  6. By: C. Sardoni
    Abstract: Some have argued that a significant decrease in the demand for money, due to financial innovations, could imply that central banks are unable to implement effective monetary policies. This paper argues that central banks are always able to influence the economyÕs interest rates, because their liability is the economyÕs unit of account. In this sense, central banks Òrule the roost.Ó In the 1930s, starting from KeynesÕs ideas and referring to money in general, Kaldor had followed a similar line of analysis. In principle, a new unit of account could displace conventional money and, hence, central banks. But this process meets relevant obstacles, which essentially derive from the externalities and network effects that characterize money. Money is a Òsocial relation.Ó Money and central banks are the outcome of complex social and economic processes. Their displacement will occur through equally complex processes, rather than through mere innovation.
    Date: 2006–06
  7. By: Christopher M. Meissner; Nienke Oomes
    Abstract: Conditional on choosing a pegged exchange rate regime, what determines the currency to which countries peg or “anchor” their exchange rate? This paper aims to answer this question using a panel multinomial logit framework, covering more than 100 countries for the period 1980-1998. We find that trade network externalities are a key determinant of anchor currency choice, implying that there are multiple steady states for the distribution of anchor currencies in the international monetary system. Other factors found to be related to anchor currency choice include the symmetry of output co-movement, the currency denomination of debt, and legal or colonial origins.
    Keywords: exchange rate regime; anchor; network externalities; optimal currency area; international currency; de facto
    JEL: E42 F02 F33
    Date: 2006–06
  8. By: Gregory de Walque (National Bank of Belgium, Research Department); Frank Smets (ECB, CEPR and University of Ghent); Raf Wouters (National Bank of Belgium, Research Department)
    Abstract: This paper compares the Calvo model with a Taylor contracting model in the context of the Smets-Wouters (2003) Dynamic Stochastic General Equilibrium (DSGE) model. In the Taylor price setting model, we introduce firm-specific production factors and discuss how this assumption can help to reduce the estimated nominal price stickiness. Furthermore, we show that a Taylor contracting model with firm-specific capital and sticky wage and with a relatively short price contract length of four quarters is able to outperform, in terms of empirical fit, the standard Calvo model with homogeneous production factors and high nominal price stickiness. In order to obtain this result, we need very large real rigidities either in the form of a huge (constant) elasticity of substitution between goods or in the form of an elasticity of substitution that is endogenous and very sensitive to the relative price.
    Keywords: Inflation persistence, DSGE models
    JEL: E1 E3
    Date: 2006–06
  9. By: Andrew P Blake; Fabrizio Zampolli
    Abstract: In this paper we consider the optimal control problem of models with Markov regime shifts and forward-looking agents. These models are very general and flexible tools for modelling model uncertainty. An algorithm is devised to compute the solution of a linear rational expectations model with random parameters or regime shifts. This algorithm can also be applied in the optimisation of any arbitrary instrument rule. A second algorithm computes the time-consistent policy and the resulting Nash-Stackelberg equilibrium. Similar methods can be easily employed to compute the optimal policy under commitment. Furthermore, the algorithms can also handle the case in which the policymaker and the private sector hold different beliefs. We apply these methods to compute the optimal (non-linear) monetary policy in a small open economy subject to random structural breaks in some of its key parameters.
  10. By: Ian Christensen; Ali Dib
    Abstract: The authors estimate a sticky-price dynamic stochastic general-equilibrium model with a financial accelerator, à la Bernanke, Gertler, and Gilchrist (1999), to assess the importance of financial frictions in the amplification and propagation of the effects of transitory shocks. Structural parameters of two models, one with and one without a financial accelerator, are estimated using a maximum-likelihood procedure and post-1979 U.S. data. The estimation and simulation results provide some quantitative evidence in favour of the financial-accelerator model. The financial accelerator appears to play an important role in investment fluctuations, but its importance for output depends on the nature of the initial shock.
    Keywords: Business fluctuations and cycles; Economic models; Econometric and statistical methods
    JEL: E32 E37 E44
    Date: 2006
  11. By: Tim Congdon
    Date: 2006–05
  12. By: Robert J. Gordon
    Abstract: This paper provides a retrospective on the 1996 Boskin Commission Report, Toward a More Accurate Measure of the Cost of Living, and its famous estimate that the CPI in 1995-96 was upward biased by 1.1 percent per year. The paper summarizes the report's methods, findings, and recommendations, and then reviews the criticisms that appeared soon after the Report was issued. Post-Boskin changes in the CPI are summarized and assessed, as is recent research on related issues. The paper sharply distinguishes two questions. First, with what we know now, what should the Commission have concluded about CPI bias in 1995-96? Second, what is the bias now after the many improvements introduced into the CPI since the Commission's Report? About the first question, my own recent research on apparel and rental housing indicates a substantial downward bias in the CPI over much of the twentieth century, diminishing in size after 1985. Incorporating these findings into the Boskin matrix would reduce its 0.6 percent annual upward bias due to quality change and new products to a smaller 0.4 percent bias. However, this is more than offset by the stunning discrepancy over 2000-06 in the chain-weighted C-CPI-U compared to the traditional CPI-U, indicating that the Commission greatly understated the magnitude of upper-level substitution bias. This retrospective evaluation suggests that the Boskin bias estimate for 1995-96 should have been 1.2 to 1.3 percent, not 1.1 percent. Current upward bias in the CPI is estimated to have declined from the revised 1.2-1.3 percent in the Boskin era to about 0.8 percent today. Yet the Boskin report, like most contemporary studies of quality change, failed to place sufficient value on the value of new products and on increased longevity. Allowing for these, today's bias is at least 1.0 percent per year or perhaps even higher.
    JEL: I1 I11
    Date: 2006–06
  13. By: Otmar Issing (European Central Bank)
    Date: 2006–04–26
  14. By: René Lalonde; Nicolas Parent
    Abstract: In the United States, the Federal Reserve has a dual mandate of promoting stable inflation and maximum employment. Since the Fed directly controls only one instrument-the federal funds rate-the authors argue that the Fed's priorities continuously alternate between inflation and economic activity. In this paper, the authors assume that the effective weights put by the Fed on different indicators vary over time. To test this assumption, they estimate a monetary policy priority index by adding non-linear endogenous weights to a conventional Taylor-type rule.
    Keywords: Monetary policy framework; Monetary policy implementation; Econometric and statistical methods
    JEL: C22 C52 E52
    Date: 2006
  15. By: Eva Ortega; Nooman Rebei
    Abstract: The authors analyze the welfare implications of simple monetary policy rules in the context of an estimated model of a small open economy for Canada with traded and non-traded goods, and with sticky prices and wages. They find statistically significant heterogeneity in the degree of price rigidity across sectors. They also find welfare gains in targeting only the non-traded-goods inflation, since prices are found to be more sticky in this production sector, but those gains come at the cost of substantially increased aggregate volatility. The authors look for the welfare-maximizing specification of an interest rate reaction function that allows for a specific price-level target. They find, however, that, overall, the higher welfare is achieved, given the estimated model for the Canadian economy, with a strict inflation-targeting rule where the central bank reacts to the next period's expected deviation from the inflation target and does not target the output gap.
    Keywords: Economic models; Exchange rates; Inflation targets
    JEL: E31 E32 E52
    Date: 2006
  16. By: George W. Evans (University of Oregon Economics Department); Bruce McGough (Oregon State University)
    Abstract: We consider optimal monetary policy in New Keynesian models with inertia. First order conditions, which we call the MJB-alternative, are found to improve upon the timeless perspective. The MJB-alternative is shown to be the best possible in the sense that it minimizes policymakers' unconditional expected loss, and further, it is numerically found to offer significant improvement over the timeless perspective. Implementation of the MJB-alternative is considered via construction of interest-rate rules that are consistent with its associated unique equilibrium. Following Evans and Honkapohja (2004), an expectations based rule is derived that always yields a determinate model and an E-stable equilibrium. Further, the "policy manifold" of all interest-rate rules consistent with the MJB-alternative is classified, and open regions of this manifold are shown to correspond to indeterminate models and unstable equilibria.
    Keywords: Monetary Policy, Taylor Rules, Indeterminacy, E-stability
    JEL: E52 E32 D83 D84
    Date: 2006–06–03
  17. By: Sebastian Edwards (University of California, Los Angeles and National Bureau of Economic Research)
    Abstract: During the last few years there has been a renewed analysis in currency unions as a form of monetary arrangement. This new interest has been largely triggered by the Euro experience. Scholars and policy makers have asked about the optimal number of currencies in the world economy. They have analyzed whether different countries satisfy the traditional “optimal currency area” criteria. These include: (a) the synchronization of the business cycle; (b) the degree of factor mobility; and (c) the extent of trade and financial integration. In this paper I analyze the desirability of a monetary union from a Latin American perspective. First, I review the existing literature on the subject. Second, I use a large data set to analyze the evidence on economic performance in currency union countries. I investigate these countries’ performance on four dimensions: (a) whether countries without a national currency have a lower occurrence of “sudden stop” episodes; (b) whether they have a lower occurrence of “current account reversal” episodes; (c) what is their ability to absorb international terms of trade shocks; and (d) what is their ability to absorb “sudden stops” and “current account reversals” shocks. I find that belonging to a currency union does not lower the probability of facing a sudden stop or a current account reversal. I also find that external shocks are amplified in currency union countries. The degree of amplification is particularly large when compared to flexible exchange rate countries.
    Date: 2006–05–06
  18. By: Fabrizio Zampolli
    Abstract: This paper examines the trade-offs that a central bank faces when the exchange rate can experience sustained deviations from fundamentals and occasionally collapse. The economy is modelled as switching randomly between different regimes according to time-invariant transition probabilities. We compute both the optimal regime-switching control rule for this economy and optimised linear Taylor rules, in the two cases where the transition probabilities are known with certainty and where they are uncertain. The simple algorithms used in the computation are also of independent interest as tools for the study of monetary policy under general forms of (asymmetric) additive and multiplicative uncertainty. An interesting finding is that policies based on robust (minmax) values of the transition probabilities are usually more conservative.
  19. By: Richhild Moessner
    Abstract: The existence of and uncertainty about structural change in the economy are important features facing policymakers. This paper considers the implications for policy design of uncertainty about structural change, modelling the time variation in parameters of forward-looking models as Markov processes. We extend an algorithm of Backus and Driffill for optimal discretionary policy in rational expectations models to the case with Markov switching in model parameters. As an illustration, we apply our method to determine the optimal monetary policy solution in the presence of structural changes in intrinsic output persistence, within a hybrid New Keynesian model estimated for the euro area. We find that the coefficients of the optimal policy rule are state-dependent, and depend non-linearly on the transition probabilities between states with different values of intrinsic output persistence.
  20. By: Greg Hannsgen
    Abstract: The Gibson paradox, long observed by economists and named by John Maynard Keynes (1936), is a positive relationship between the interest rate and the price level. This paper explains the relationship by means of interest-rate, cost-push inflation. In the model, spending is driven in part by changes in the rate of interest, and the central bank sets the interest rate using a policy rule based on the levels of output and inflation. The model shows that the cost-push effect of inflation, long known as GibsonÕs paradox, intensifies destabilizing forces and can be involved in the generation of cycles.
    Date: 2006–05
  21. By: Nadja Kamhi
    Abstract: Operational events in the Large Value Transfer System (LVTS) almost always result in a disturbance of the regular flow of payments. The author explores the link between payment flows and the overnight interest rate. She also explores the way that payments system frictions affect the overnight interest rate. Payments system frictions arise because LVTS participants lack full information on their own payment flows and those of others. This uncertainty diminishes as the final end-of-day settlement nears. By borrowing earlier in the day in the overnight market, however, participants can insure against being short at the final end-of-day settlement. The author first develops a general framework describing the role that payment flows and payments system frictions have on the overnight rate and then empirically tests the implications of this model. She finds that LVTS payment flows are an important determinant of pressure on the overnight interest rate.
    Keywords: Payment, clearing, and settlement systems; Monetary policy implementation
    JEL: E5
    Date: 2006
  22. By: Paul D. Gilbert; Erik Meijer
    Abstract: The authors introduce new measures of important underlying macroeconomic phenomena that affect the financial side of the economy. These measures are calculated using the time-series factor analysis (TSFA) methodology introduced in Gilbert and Meijer (2005). The measures appear to be both more interesting and more robust to the effects of financial innovations than traditional aggregates. The general ideas set out in Gilbert and Pichette (2003) are pursued, but the improved estimation methods of TSFA are used. Furthermore, four credit aggregates are added to the components of the monetary aggregates, resulting in the possibility of extracting more common factors.
    Keywords: Credit and credit aggregates; Monetary aggregates; Econometric and statistical methods
    JEL: E51 C43 C82
    Date: 2006
  23. By: Christopher M. Cornell; Raphael H. Solomon
    Abstract: Suppose that the dynamics of the macroeconomy were given by (partly) random fluctuations between two equilibria: "good" and "bad." One would interpret currency crises (or recessions) as a shift from the good equilibrium to the bad. In this paper, the authors specify a dynamic investment-savings-aggregate-supply (IS-AS) model, determine its closed-form solution, and examine numerically its comparative statics. The authors estimate the model via maximum likelihood, using data for Argentina, Canada, and Turkey. Since the data show no support for the multiple-equilibrium explanation of fluctuations, the authors cast doubt on the third-generation models of currency crisis.
    Keywords: Uncertainty and monetary policy
    JEL: C62 E59 F41
    Date: 2006
  24. By: L. Randall Wray
    Abstract: Even as the United States enjoys an economic expansion, there is an undercurrent of concern among economic analysts who follow financial markets. Some feel that the expansion of the credit derivatives markets poses the threat of a crisis similar to the Long-Term Capital Management debacle of 1998. Credit derivatives allow banks to share risks with holders of the derivatives, which are often mutual funds and other nonbank financial institutions. The Basel II accord, now being implemented in many countries, is hailed as a good form of protection against the risk of a series of bank failures of the type that might cause problems in the derivatives markets. Basel II represents a more sophisticated and complex version of the original Basel Accord of 1992, which set minimum capital ratios for various types of bank assets.
    Date: 2006–05
  25. By: Zagaglia, Paolo (Dept. of Economics, Stockholm University)
    Abstract: Yes, but only at short horizons from 1 to 3 quarters over the full post-World War II sample. The predictive relation between the yield spread and the output gap is characterized by parameter instability. Differently from the predictive models of the yield spread for output growth, structural instability is not due to a loss of predictive ability after 1985. Rather, the predictive relation estimated on post-1985 data holds for a range of horizons larger than for pre-1985 data. I also show that the information on current monetary policy is statistically irrelevant for the prediction of the output gap over the post-1985 subsample.
    Keywords: output gap; yield spread; predictability
    JEL: E27 E43
    Date: 2006–05–08
  26. By: Albert M. Teplin; Charles Ian Mead; Brent R. Moulton; Rochelle Antoniewicz; Susan Hume McIntosh; Michael G. Palumbo; Genevieve Solomon (Bureau of Economic Analysis)
    Abstract: This paper presents integrated macroeconomic accounts for the United States for the period 1985 to 2002 and discusses issues related to their construction and use. Specifically, it focuses on tying together the national income and product accounts (NIPAs) and international transaction accounts (ITA) published by the Bureau of Economic Analysis and the flow of funds accounts (FFA) published by the Federal Reserve Board. The paper provides integrated accounts for seven sectors: households and nonprofit organizations serving households, nonfinancial non-corporate businesses, nonfinancial corporate businesses, financial businesses, federal government, state and local governments, and the rest of the world. Each sector table has a full complement of accounts: current accounts (production and income accounts), accumulation accounts (capital account, financial account, and other changes in volume account), revaluation account, and balance sheet account. As a result, the sector statements trace the factors leading to changes in sector net worth. Relative to current publications of the two agencies, the tables go quite a bit further toward providing for the United States the sequence of accounts suggested in the System of National Accounts 1993 (SNA93), the recognized international standard. The tables use official data as of June 10, 2004; however, a few series have been created by the authors, and they are unofficial preliminary estimates at this time.
    JEL: E60
    Date: 2005–07
  27. By: Don Harding; Adrian Pagan
    Abstract: We describe different ways of measuring the business cycle. Insti- tutions such as the NBER, OECD and IMF do this through locating the turning points in series taken to represent the aggregate level of economic activity. The turning points are determined according to rules that either come from a parametric model or are non-parametric. Once located information can be extracted on cycle characteristics. We also distinguish cases where a single or multiple series are used to represent the level of activity.
    JEL: E32
    Date: 2006
  28. By: John Bluedorn; Christopher Bowdler
    Abstract: We characterize the channels by which a failure to distinguish intended/unintended and anticipated/unanticipated monetary policy may lead to attenuation bias in monetary policy`s open economy effects. Using a U.S. monetary policy measure which isolates the intended and unanticipated component of federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables, finding it to be substantial. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices.
    Keywords: Open economy monetary policy identification, Exchange rate adjustment, Interest rate pass-through
    JEL: E52 F31 F41
    Date: 2006
  29. By: Marek Jarocinski (Universitat Pompeu Fabra, Barcelona and CASE - Center for Social and Economic Research, Warsaw)
    Abstract: This paper compares responses to monetary shocks in the EMU countries (in the pre-EMU sample) and in the New Member States (NMS) from Central Europe. The small-sample problem, especially acute for the NMS, is mitigated by using a Bayesian estimation procedure which combines information across countries. A novel identification scheme for small open economies is used. The estimated responses are quite similar across regions, but there is some evidence of more lagged, but ultimately stronger price responses in the NMS economies. This contradicts the common belief that monetary policy is less effective in post-transition economies, because of their lower financial development. NMS also have a probably lower sacrifice ratio, which is consistent with the predictions of both the imperfect information model of Lucas (1973) and the New-Keynesian model of Ball et al. (1988).
    Keywords: monetary policy transmission, Structural VAR, Bayesian estimation, exchangeable prior
    JEL: C11 C15 C33 E40 E52
    Date: 2006–05–17
  30. By: Jamie Armour
    Abstract: The author provides a statistical evaluation of various measures of core inflation for Canada. The criteria used to evaluate the measures are lack of bias, low variability relative to total CPI inflation, and ability to forecast actual and trend total CPI inflation. The author uses the same methodology as Hogan, Johnson, and Laflèche (2001) and thus provides updated empirical results. The findings are that most traditional measures of core inflation are unbiased and all continue to be less volatile than total inflation. They nevertheless display some volatility and have limited predictive ability. Overall, CPIW seems to have a slight advantage over the other measures, but the differences across measures are not large. (CPIW uses all components of total CPI but adjusts the weight of each component by a factor that is inversely proportional to the component's variability.) Compared with the results of Hogan, Johnson, and Laflèche, CPIW's relative performance has improved. The distribution of price changes for 54 CPI subcomponents is also examined, and substantial increases in both the skewness and kurtosis of this distribution since 1998 are found.
    Keywords: Inflation and prices
    JEL: E31
    Date: 2006
  31. By: Mustafa Caglayan and Feng Jiang
    Abstract: In this paper, given recent theoretical developments that inflation can exhibit long memory properties due to the output growth process, we propose a new class of bivariate processes to simultaneously investigate the dual long memory properties in the mean and the conditional variance of inflation and output growth series. We estimate the model using monthly UK data and document the presence of dual long memory properties in both series. Then, using the conditional variances generated from our bivariate model, we employ Granger causality tests to scrutinize the linkages between the means and the volatilities of inflation and output growth.
    JEL: C32 E31
  32. By: Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II])
    Abstract: Identifier comme normale la coexistence de formes monétaires distinctes dans les sociétés modernes conduit à interroger un postulat économiste fondateur, qui consiste à concevoir la monnaie comme parfaitement fongible (autrement dit, les avoirs monétaires sont indifférenciés et interchangeables), et d'où il résulte que les relations entre monnaies sont analysées au travers du critère de concurrence. Ce texte vise à revenir sur ces deux points, fongibilité et concurrence. La thèse développée est que la façon dont les monnaies sont articulées ne relève pas nécessairement de la concurrence. Une explication majeure est l'imparfaite fongibilité des monnaies. <br />Ce texte propose ainsi une analyse systématique des cloisonnements monétaires et une étude de ses conséquences, en déconstruisant le concept de fongibilité au moyen d'une grille de lecture théorique rendant compte de la diversité des pratiques monétaires et des formes de la monnaie dans les sociétés modernes.
    Keywords: Monnaie;pratiques monétaires;fongibilité;concurrence;convertibilité
    Date: 2006–06–16
  33. By: J. Bonke; M. Deding; M. Lausten
    Abstract: Time and money are basic commodities in the utility function and are substitutes in real terms. To a certain extent, having time and money is a matter of either/or, depending on individual preferences and budget constraints. However, satisfaction with time and satisfaction with money are typically complements, i.e., individuals tend to be equally satisfied with both domains. In this paper, we provide an explanation for this apparent paradox through the analysis of the simultaneous determination of economic satisfaction and leisure satisfaction. We test some hypotheses, including the hypothesis that leisure satisfaction depends on both the quantity and quality of leisure-where quality is proxied by good intensiveness and social intensiveness. Our results show that both the quantity and the quality of leisure are important determinants of leisure satisfaction, and, since having money contributes to the quality of leisure, this explains the empirical findings of the satisfactions being complementary at the same time as the domains are substitutes. Interestingly, gender matters. Intra-household effects and especially individual characteristics are more pronounced for women than for men for both domain satisfactions. Additionally, good intensiveness is more important for men (e.g., housing conditions), whereas social intensiveness is more important for women (e.g., the presence of children and participation in leisure-time activities).
    Date: 2006–05
  34. By: Morten Spange; Pawel Zabczyk
    Abstract: This paper investigates the potential implications for sterling of the US current account returning to balance. The analysis is conducted using a three-country model comprising the United Kingdom, the United States and a block that is meant to represent the rest of the world. The main conclusion from our analysis is that the potential implications for sterling of a US current account reversal are highly uncertain - one can derive a wide range of estimates for the potential changes. Estimates of the sterling adjustments are smaller than the implied movements in the dollar and depend heavily on (a) the cause of the US current account adjustment; (b) the assumptions one makes about the associated adjustment of the UK current account deficit; and (c) assumptions about key model parameters.
  35. By: Alexander Ueberfeldt
    Abstract: From 1870 to 2000, the workweek length of employed persons decreased by 41 per cent in industrialized countries. The employment rate, employment per working age person, displays large movements but no clear secular pattern. This motivated the question: What accounts for the large decrease in the workweek length and developments in the employment rate over the past 130 years? The answer is given in a dynamic general-equilibrium model with supervisory and production workers. Over time, both types of workers become more productive. In a calibrated version of the model, productivity gains of supervisors account for a large fraction of the decline in the workweek length in Japan, the United Kingdom, and the United States. The model, augmented to include taxes, government spending, and technological progress, captures the movement in the employment rates of the three countries.
    Keywords: Economic models; Labour markets; Productivity
    JEL: E13 E24 O11
    Date: 2006
  36. By: Urban Jermann; Vincenzo Quadrini
    Abstract: The volatility of US business cycle has declined during the last two decades. During the same period the financial structure of firms has become more volatile. In this paper we develop a model in which financial factors play a key role in generating economic fluctuations. Innovations in financial markets allow for greater financial flexibility and generate a lower volatility of output together with a higher volatile in the financial structure of firms.
    JEL: E3 G1 G3
    Date: 2006–06
  37. By: Tracy Chan; Ramdane Djoudad; Jackson Loi
    Abstract: Financial innovations and the removal of the reserve requirements in the early 1990s have made the distinction between demand and notice deposits arbitrary. This classification issue has affected those narrow monetary aggregates (gross and net M1) that rely on a proper distinction for their definition, and may have eroded their value as indicators. The authors examine whether the indicator properties of various narrow aggregates for the growth of real output have changed over time. They find evidence of a regime shift in the relationship between real and narrow monetary aggregates and the growth of real output, which seems to have occurred in 1992. More specifically, their results show that real M1+, the definition of which is not based on the distinction between demand and notice deposits, has become a more useful indicator in predicting the growth of real output over the more recent period.
    Keywords: Monetary aggregates
    JEL: E40 E42 E50
    Date: 2006
  38. By: Paul Castillo (Central bank of Peru); Carlos Montoro (Central bank of Peru); Vicente Tuesta (Central bank of Peru)
    Abstract: Con la adopción del esquema de Metas Explicitas de Inflación por un gran grupo de bancos centrales, la estimación de una métrica de la posición de la política monetaria se ha convertido en un tema de interés permanente para académicos, analistas económicos y para los propios bancos centrales. Al respecto, la brecha entre la tasa de interés de corto plazo, que sirve de instrumento de política monetaria y la Tasa Natural de Interés estimada (TNI) -definida esta última como aquella tasa de interés real consistente con la estabilidad de precios en ausencia de fricciones nominales-, se utiliza como indicador de la posición de la política monetaria. En este documento se estima la TNI para la economía peruana. Para ello se implementa la metodología basada en la aplicación del Filtro de Kalman a un modelo semi-estructural de economía abierta y pequeña con data para el Perú correspondiente al periodo 1994-2005. Los resultados muestran una reducción persistente de la TNI en el Perú a partir de 1999, asociada a una mejora de los términos de intercambio y a una reducción de las tasas de interés internacional. Asimismo, la estimación muestra que el impulso monetario habría sido positivo entre 1994 y 1997, negativo entre 1998 y el 2001, y ligeramente positivo para el periodo 2002-2005. Finalmente, el ejercicio de descomposición de varianza de la fluctuación del indicador de la posición de la política monetaria indica que el 24 por ciento de las fluctuaciones en ésta, se explicarían por variaciones en la TNI. Así, de no considerarse una TNI cambiante en el tiempo, la medición de la posición de política monetaria sería menos precisa.
    Keywords: Tasa Natural de Interés, Filtro de Kalman, Política Monetaria, Perú.
    JEL: E43 E47 E52 F41
    Date: 2006–06
  39. By: Lynda Khalaf; Maral Kichian
    Abstract: The authors address empirically the implications of structural breaks in the variance-covariance matrix of inflation and import prices for changes in pass-through. They define pass-through within a correlated vector autoregression (VAR) framework as the response of domestic inflation to an impulse in import price inflation. This approach allows them to examine changes in both the amount and the duration of pass-through.
    Keywords: Econometric and statistical methods
    JEL: F40 F31 C52 E31
    Date: 2006
  40. By: Marc-André Gosselin; René Lalonde
    Abstract: The analysis and forecasting of developments in the U.S. economy have always played a critical role in the formulation of Canadian economic and financial policy. Thus, the Bank places considerable importance on generating internal forecasts of U.S. economic activity as an input to the Canadian projection. Over the past year, Bank staff have been using a new macroeconometric model, MUSE (Model of the U.S. Economy). The model is a system of estimated equations that describe, in a stock-flow framework, the interactions among the principal macroeconomic variables, such as gross domestic product (GDP), inflation, interest rates, and the exchange rate. The stock-flow equilibrium is fully described in MUSE. In steady state, the model defines specific values for all stocks, including capital stock, government debt, financial wealth, and net foreign assets. In MUSE, most behavioural equations are governed by a polynomial adjustment cost (PAC) structure. This approach is widely used in the U.S. Federal Reserve Board's FRB/US model. By allowing for lags in the dynamic equations in the context of forward-looking rational expectations, the PAC approach strikes a balance between theoretical structure and forecasting accuracy. MUSE, therefore, makes an explicit distinction between dynamic movements caused by changes in expectations and those caused by adjustment costs. Moreover, GDP is decomposed into household expenditures, business investment, government spending, exports, and imports. Hence, MUSE can be used to predict the consequences of a wide variety of shocks to the U.S. economy.
    Keywords: Economic models; Business fluctuations and cycles
    JEL: E37 C53 E17 E27 F17
    Date: 2005
  41. By: Guerrero, Carlos (Tecnológico de Monterrey, Campus Ciudad de México); Osorio, Paulina; Tiol, Arianna
    Keywords: Phillips curve, Mexico, curva de Phillips
    JEL: C2 E24 E12
    Date: 2006–01

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