nep-cba New Economics Papers
on Central Banking
Issue of 2006‒07‒21
fifteen papers chosen by
Alexander Mihailov
University of Essex

  1. The Impact of Uncertainty on Monetary Policy Rules in the UK By Christopher Martin; Costas Milas
  2. Forecasting inflation with an uncertain output gap By Bjørnland, Hilde C.; Brubakk, Leif; Jore, Anne Sofie
  3. International Liquidity Swaps : Is the Chiang Mai Initiative Pooling Reserves Efficiently ? By Kohlscheen, Emanuel; Taylor, Mark P
  4. Structural Breaks in the Real Exchange Rate Adjustment Mechanism By Copeland, Laurence; Heravi, Saeed
  5. Monetary Policy Rules in Central and Eastern Europe By Frömmel, Michael; Schobert, Franziska
  6. Monetary Policy, the Bond Market, and Changes in FOMC Communication Policy By Troy Davig; Jeffrey R. Gerlach
  7. Expectations, Learning and Macroeconomic Persistence By Fabio Milani
  8. Adaptive Learning and Inflation Persistence By Fabio Milani
  9. U.S. natural rate dynamics reconsidered By Bårdsen, Gunnar; Nymoen, Ragnar
  10. Euro or “Teuro”?: The Euro-induced Perceived Inflation in Germany By Hans Wolfgang Brachinger
  11. Is Discrete Time a Good Representation of Continuous Time? By Luis A. Puch; Omar Licandro
  12. Are Average Growth Rate and Volatility Related? By Partha Chatterjee; Malik Shukayev
  13. Análisis Desagregado de la Inflación: Una Aplicación Regional By María Ángeles Caraballo; Carlos Usabiaga
  14. The Effects of Budget Deficit Reduction on Exchange Rate: Evidence from Turkey By Yaprak Gulcan; Mustafa Erhan Bilman
  15. La crise monétaire turque de 2000/2001 : analyse de l'échec du plan de stabilisation par le change du FMI By Jérôme Héricourt; Julien Reynaud

  1. By: Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: Although policymakers and commentators have repeatedly stressed the impact of uncertainty about the true state of the economy on the setting of interest rates, the academic literature has largely ignored this issue. This paper provides a theoretical analysis of how uncertainty about the true state of the economy affects optimal monetary policy rules and presents empirical evidence 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 smaller when inflation is more uncertain and larger when the output gap is more uncertain; we also find that the impact of the output gap is smaller when the output gap is more uncertain. We also find that uncertainty has reduced the volatility but has not affected the average value of interest rates.
    Keywords: Monetary policy, Uncertainty.
    JEL: C51 C52 E52 E58
    Date: 2006–06
  2. By: Bjørnland, Hilde C. (Dept. of Economics, University of Oslo); Brubakk, Leif (Norges Bank); Jore, Anne Sofie (Norges Bank)
    Abstract: The output gap (measuring the deviation of output from its potential) is a crucial concept in the monetary policy framework, indicating demand pressure that generates inflation. The output gap is also an important variable in itself, as a measure of economic fluctuations. However, its definition and estimation raise a number of theoretical and empirical questions. This paper evaluates a series of univariate and multivariate methods for extracting the output gap, and compares their value added in predicting inflation. The multivariate measures of the output gap have by far the best predictive power. This is in particular interesting, as they use information from data that are not revised in real time. We therefore compare the predictive power of alternative indicators that are less revised in real time, such as the unemployment rate and other business cycle indicators. Some of the alternative indicators do as well, or better, than the multivariate output gaps in predicting inflation. As uncertainties are particularly pronounced at the end of the calculation periods, assessment of pressures in the economy based on the uncertain output gap could benefit from being supplemented with alternative indicators that are less evised in real time.
    Keywords: Output gap; real time indicators; forecasting; Phillips curve
    JEL: C32 E31 E32 E37
    Date: 2006–05–04
  3. By: Kohlscheen, Emanuel (Department of Economics, University of Warwick); Taylor, Mark P (Department of Economics, University of Warwick)
    Abstract: We analyze the network of bilateral liquidity swaps (BSAs) among the ASEAN+3 countries. We find that the network has taken the correlation of capital flows in the region into account, in the sense that countries with lower correlation of reserve growth have engaged in larger BSAs. All else equal, a decimal point increase in the correlation of international reserve growth decreases the size of a bilateral swap agreement between 18 and 27%. Moreover, we find that the approximatedly $ 60bn of BSAs have had a limited impact, if any, on government bond spreads so far. Finally, we identify potential gains from inter-regional BSAs.
    Keywords: insurance ; international reserves ; liquidity ; sovereign risk ; swaps
    JEL: F30 F34
    Date: 2006
  4. By: Copeland, Laurence (Cardiff Business School); Heravi, Saeed (Cardiff Business School)
    Abstract: We show that the behaviour of the real exchange rates of the UK, Germany, France and Japan has been characterised by structural breaks which changed the adjustment mechanism. In the context of a Time-Varying Smooth Transition AutoRegressive of the kind introduced by Lundbergh et al (2003), we show that the real exchange rate process shifted in the aftermath of Black Wednesday in the case of the Pound, in 1984-5 in the case of the Franc and, more tentatively, during the Asian crisis of 1997-8 in the case of the Yen.
    Date: 2006–07
  5. By: Frömmel, Michael; Schobert, Franziska
    Abstract: We estimate monetary policy rules for six central and eastern European countries (CEEC) by taking changes in the policy settings explicitly into account. Distinguishing rather fixed and more flexible exchange rate arrangements we find that for most countries exchange rates played an important role in monetary policy during the fixed exchange rate regime, whereas their influence disappears after the introduction of floating exchange rate regimes. This indicates that most countries followed their officially announced policy settings. For Slovenia and to some extent for Romania, however, we find evidence for exchange rate targeting, although they officially announced a managed float.
    Keywords: monetary policy, Taylor rule, transition economies, CEEC, inflation targeting, interest rate policy
    JEL: E52 E58 P20
    Date: 2006–07
  6. By: Troy Davig (Federal Reserve Bank of Kansas City); Jeffrey R. Gerlach (Department of Economics, College of William and Mary)
    Abstract: Using high-frequency data in a Markov-switching framework, we identify states that imply different responses of the yield curve to unexpected changes in the federal funds target. Empirical estimates reveal a low-volatility state where long-term bonds respond significantly, and in a predictable manner, to unexpected changes in the federal funds target. An alternative state exists with higher volatility, where unexpected changes in the federal funds target raise the short-end of the yield curve, but have no significant effect on the long-end. The low-volatility state for long-term bonds occurs from September 1995 to May 1999 and again from March 2000 to January 2002. The timing of the switches between the two states for long-term bonds coincides with changes in FOMC communication policy - though not all changes in communications policy induce a switch.
    Keywords: Monetary Policy, Bond Market, Markov-Switching, Central Bank Communications
    JEL: E43 E58 G12
    Date: 2006–07–11
  7. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper presents an estimated model with learning and provides evidence that learning can improve the fit of popular monetary DSGE models and endogenously generate realistic levels of persistence. The paper starts with an agnostic view, developing a model that nests learning and some of the structural sources of persistence, such as habit formation in consumption and inflation indexation, that are typically needed in monetary models with rational expectations to match the persistence of macroeconomic variables. I estimate the model by likelihood-based Bayesian methods, which allow the estimation of the learning gain coefficient jointly with the "deep" parameters of the economy. The empirical results show that when learning replaces rational expectations, the estimated degrees of habits and indexation drop near zero. This …nding suggests that persistence arises in the model economy mainly from expectations and learning. The posterior model probabilities show that the specification with learning fits significantly better than does the specification with rational expectations. Finally, if learning rather than mechanical sources of persistence provides a more appropriate representation of the economy, the implied optimal policy will be different. The policymaker will also incur substantial costs from misspecifying private expectations formation.
    Keywords: Persistence, Constant-gain learning, Expectations, Habit formation in consumption, Inflation inertia; Phillips curve; Bayesian econometrics; New-Keynesian model.
    JEL: C11 D84 E30 E50 E52
    Date: 2005–08
  8. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: What generates persistence in inflation? Is inflation persistence structural? This paper investigates learning as a potential source of persistence in inflation. The paper focuses on the price-setting problem of firms and presents a model that nests structural sources of persistence (indexation) and learning. Indexation is typically necessary under rational expectations to match the inertia in the data and to improve the fit of estimated New Keynesian Phillips curves. The empirical results show that when learning replaces the assumption of fully rational expectations, structural sources of persistence in ination, such as indexation, become unsupported by the data. The results suggest learning behavior as the main source of persistence in inflation. This finding has implications for the optimal monetary policy. The paper also shows how one's results can heavily depend on the assumed learning speed. The estimated persistence and the model fit, in fact, vary across the whole range of constant gain values. The paper derives the best-fitting constant gains in the sample and shows that the learning speed has substantially changed over time.
    Keywords: Adaptive learning; Inflation persistence; Sticky prices; Best-fitting constant gain; Learning speed; Expectations
    JEL: D84 E30 E50
    Date: 2005–06
  9. By: Bårdsen, Gunnar (The Norwegian University of Science and Technology (NTNU)); Nymoen, Ragnar (Dept. of Economics, University of Oslo)
    Abstract: Several features of the U.S. natural rate of unemployment are reconsidered through specification and testing of econometric models. Traditionally, the choice has been between a wage Phillips curve model, PCM, or an equilibrium correction wage curve model, WECM. The models proposed in this paper feature extended equilibrium correction which reduces the consequences for natural rate dynamics of choosing between wage models. In order for the difference between PCM and WECM to become important, the extended equilibrium correction mechanism must be ‘switched off’ by restrictions. These restrictions are rejected when tested. The analysis supports the original view that natural rates depend on the macroeconomic system, rather than just the wage Phillips curve. The analysis indicates a reduction of the natural rate in the course of the 1990s, due to low worker bargaining power and other structural changes. The estimated reduction is approximately 0.5 0.8 percentage points, which is less than existing results based on Phillips curve estimation.
    Keywords: US unemployment; natural rate; NAIRU; equilibrium correction; Phillips curve
    JEL: C52 E24 E31 E37 J31
    Date: 2006–05–09
  10. By: Hans Wolfgang Brachinger (Department of Quantitative Economics)
    Abstract: After the introduction of the euro notes and coins in January 2002, throughout the Economic and Monetary Union member countries there was a widespread feeling that the euro had brought about a significant hike in consumer prices. A substantial discrepancy was evident between inflation as measured by the official consumer price indices (CPI) and the one perceived by the general public. In this paper the German case is treated. First, a short overview is given on the public discussions and the many studies published by the German Federal Statistical Office. Then a newly developed theory of inflation perception is outlined and a corresponding index of perceived inflation (IPI) is developed. This index has been calculated for Germany. In the main part of the paper, the results are presented. The IPI time series for Germany from 1996 through 2006 clearly show a special inflation around the introduction of the Euro notes and coins. During that period, the average perceived inflation was approximately 4 times higher than the official inflation rate.
    Keywords: perceived inflation; price index; prospect theory; euro cash changeover
    JEL: C43 E31 D81
    Date: 2006–07–17
  11. By: Luis A. Puch; Omar Licandro
    Abstract: Economists model time as continuous or discrete. The recent literature on continuous time models with delays should help to bridge the gap between these two families of models. In this note, we propose a simple time--to--build model in continuous time, and show that a discrete time version is a true representation of the continuous time problem under some sufficient conditions.
  12. By: Partha Chatterjee; Malik Shukayev
    Abstract: The empirical relationship between the average growth rate and the volatility of growth rates, both over time and across countries, has important policy implications, which depend critically on the sign of the relationship. Following Ramey and Ramey (1995), a wide consensus has been building that, in the post-World War II data, the correlation is negative. The authors replicate Ramey and Ramey's result and find that it is not robust to either the definition of growth rate or the composition of the sample. They show that the use of log difference as growth rates, as in Ramey and Ramey, creates a strong bias towards finding a negative relationship. Further, they exhaustively investigate this relationship, for various growth rates, across time, countries, within groups of countries, and within states of the United States. The authors use different methods and control variables for this inquiry. Their analysis suggests that there is no significant relationship between the two variables in question.
    Keywords: Business fluctuations and cycles
    JEL: E32
    Date: 2006
  13. By: María Ángeles Caraballo (Universidad de Sevilla); Carlos Usabiaga (Universidad Pablo de Olavide)
    Abstract: Este trabajo pretende contribuir a un mejor conocimiento de la inflación andaluza y española. Los datos empleados provienen del IPC (1993-2001). Hemos trabajado con datos del agregado, de las regiones, de las provincias y de las capitales de provincia españolas. Desde otra perspectiva, también hemos trabajado a nivel sectorial (33 y 57). La amplia estadística descriptiva presentada en la primera parte de nuestro trabajo apunta hacia una notable homogeneidad de la estructura de la inflación entre los distintos entornos geográficos considerados. Sin embargo, en la comparación entre los sectores se aprecia una importante heterogeneidad. En la segunda parte de nuestro trabajo empleamos la metodología de Ball y Mankiw (1995) para detectar si existen rigideces nominales en la determinación de los precios, encontrando una evidencia muy robusta en este sentido tanto para Andalucía como para España.
    Keywords: Inflación, rigideces nominales, Andalucía
    JEL: E31
    Date: 2006
  14. By: Yaprak Gulcan (Department of Economics, Faculty of Business, Dokuz Eylül University); Mustafa Erhan Bilman (Department of Economics, Faculty of Business, Dokuz Eylül University)
    Abstract: This study investigates the effect of budget deficit reduction on exchange rate between US dollar and Turkish lira (TL). Our article aims to illustrate that the evidence on the relationship between budget deficits and exchange rates is not clear-cut and to explain why the theoretical approaches that underlie the relationship are ambiguous while there is general agreement that cutting budget deficits and debt will lower interest rates. The relationship between deficit reduction and exchange rates has caused a debate among the most famous monetary policy makers and researchers. [Melvin (1989), Mishkin (1992), Greenspan (1995), Thiessen (1995), Krugman (1995), Feldstein (1995)] In addition, budget deficit can be counted as one of the most common and major problem that influences the macroeconomic stability in developing economies. In this sense, cointegration method and causality tests were used in order to find out the possible effects of budget deficit reduction on exchange rates during the period of 1960-2003 in Turkey.
    Keywords: Budget deficits, exchange rates, cointegration analysis
    JEL: H62 F31
    Date: 2005–12–12
  15. By: Jérôme Héricourt (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Julien Reynaud (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: Cet article propose un examen empirique de l'échec du Plan de Stabilisation par le Change mis en place sous l'impulsion du FMI en Turquie à partir de janvier 2000. Nous estimons un modèle vectoriel à correction d'erreur dans lequel les chocs de court terme sont modélisés à l'aide d'une parité de taux d'intérêt non couverte. L'emploi de données en fréquence quotidienne, inhabituelle dans ce type d'étude, nous permet de rendre compte de la contrainte liée à la fixité du taux de change, pesant au jour le jour sur l'autorité monétaire. Nos résultats soulignent que l'apparente flexibilité laissée à la banque centrale turque au travers des ajustements de la base monétaire était en réalite largement tributaire des facteurs externes, laissant la banque centrale pieds et poings liés au bon vouloir du marché.
    Keywords: Crise de change, politique monétaire, Plan de Stabilisation par le Change, Turquie, VECM.
    Date: 2006–07–10

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