|
on Central Banking |
| By: | Markku Lanne; Helmut Lütkepohl |
| Abstract: | A central issue of monetary policy analysis is the specification of monetary policy shocks. In a structural vector autoregressive setting there has been some controversy about which restrictions to use for identifying the shocks because standard theories do not provide enough information to fully identify monetary policy shocks. In fact, to compare different theories it would even be desirable to have over-identifying restrictions which would make statistical tests of different theories possible. It is pointed out that some progress towards overidentifying monetary policy shocks can be made by using specific data properties. In particular, it is shown that changes in the volatility of the shocks can be used for identification. Based on monthly US data from 1965-1996 different theories are tested and it is found that associating monetary policy shocks with shocks to nonborrowed reserves leads to a particularly strong rejection of the model whereas assuming that the Fed accommodates demand shocks to total reserves cannot be rejected. |
| Keywords: | monetary policy, structural vector autoregressive analysis, vector autoregressive process, impulse responses |
| JEL: | C32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1744&r=cba |
| By: | Christoffel, Kai Philipp; Küster, Keith; Linzert, Tobias |
| Abstract: | We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy. |
| Keywords: | Labor market, wage rigidity, bargaining, Bayesian estimation |
| JEL: | C11 E32 E52 J64 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4356&r=cba |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | The paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models and applies it to a New Keynesian DSGE model along the lines of Christiano, Eichenbaum, and Evans (JPE2005) and Smets and Wouters (JEEA2003). We first quantify the degree of model misspecification and then illustrate its implications for the performance of different interest-rate feedback rules. We find that many of the prescriptions derived from the DSGE model are robust to model misspecification. |
| Keywords: | Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-4&r=cba |
| By: | Clausen, Volker; Wohltmann, Hans-Werner |
| Abstract: | This paper analyzes the dynamic effects of anticipated monetary and fis- cal policies in a large monetary union, which is characterized by asym- metric interest rate transmission. We explicitly solve the asymmetric three-country model using the decomposition methods of Aoki (1981) and Fukuda (1993). Anticipated monetary and fiscal expansions lead to negative international spillovers and to intertemporal reversals in the re- lative effectiveness of policy on member country outputs. Intertemporal international coordination of monetary policies between Euroland and the US is able to stabilize the output adjustment processes induced by an anticipated unilateral fiscal expansion. |
| Keywords: | Monetary Union, Fiscal Policy, Monetary Policy, Policy Coordination |
| JEL: | E58 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:3835&r=cba |
| By: | Eric Parrado; Turgut Kisinbay; Rodolfo Maino; Jorge Iván Canales Kriljenko |
| Abstract: | How should a central bank organize itself to produce the best possible inflation forecast? This paper discusses elements for building a comprehensive platform for an inflation forecasting framework. It describes the exercise of forecasting inflation as a production process, which induces a strict discipline concerning data management, information gathering, the use of a suitable statistical apparatus, and the exercise of sound communication strategies to reinforce reputation and credibility. It becomes critical how a central bank organizes itself to produce relevant macroeconomic forecasts, with special consideration to product design, the essential requirements needed in the forecasting process, and key related organizational issues. In addition, the paper proposes to factor into the process the authorities' policy responses to previous inflation forecasts in order to be consistent with the spirit of the inflation targeting framework. |
| Keywords: | Inflation , Central bank organization , Inflation targeting , Monetary policy , Central bank policy , Data collection , Data analysis , Forecasting models , |
| Date: | 2006–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/122&r=cba |
| By: | Philippe D Karam; Douglas Laxton; Andrew Berg |
| Abstract: | This paper motivates and describes an approach to forecasting and monetary policy analysis based on the use of a simple structural macroeconomic model, along the lines of those in use in a number of central banks. It contrasts this approach with financial programming and its emphasis on monetary aggregates, as well as with more econometrically driven analyses. It presents illustrative results from an application to Canada. A companion paper provides a more detailed how-to guide and introduces a set of tools designed to facilitate this approach. |
| Keywords: | Monetary policy , Canada , United States , Monetary aggregates , Forecasting models , Economic models , |
| Date: | 2006–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/80&r=cba |
| By: | Philippe D Karam; Douglas Laxton; Andrew Berg |
| Abstract: | This paper provides a how-to guide to model-based forecasting and monetary policy analysis. It describes a simple structural model, along the lines of those in use in a number of central banks. This workhorse model consists of an aggregate demand (or IS) curve, a price-setting (or Phillips) curve, a version of the uncovered interest parity condition, and a monetary policy reaction function. The paper discusses how to parameterize the model and use it for forecasting and policy analysis, illustrating with an application to Canada. It also introduces a set of useful software tools for conducting a model-consistent forecast. |
| Keywords: | Monetary policy , Canada , United States , Monetary aggregates , Forecasting models , Economic models , |
| Date: | 2006–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/81&r=cba |
| By: | Wohltmann, Hans-Werner; Winkler, Roland |
| Abstract: | The paper analyzes the impacts of anticipated and unanticipated monetary policies on two large open economies that are dependent upon raw materials imports from a small third country. The analysis is based on asymmetric behavior on the supply side of both economies and an endogenous commod- ity pricing equation of Phillips' curve type. It is shown that an increase in the growth rate of domestic money supply is not neutral in the long run but induces contractionary output effects in both economies. The paper also dis- cusses the impacts of monetary policy rules that either reduce the in°ationary or contractionary output effects of commodity price shocks. |
| Keywords: | Monetary Policy, Oil Price Shocks, International Policy Coordination |
| JEL: | E63 F42 Q43 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:3834&r=cba |
| By: | Christopher J. Neely |
| Abstract: | This paper presents the results of a survey of monetary authorities with respect to their beliefs about foreign exchange intervention. The survey provides evidence on new intervention issues that would be difficult to investigate otherwise, such as conditional response times, non-foreign exchange factors in intervention and beliefs about profitability. At the same time, the survey provides new evidence on issues that have been investigated with other methods, such as channels of effectiveness, effect on currency components, profitability, and motivations for secrecy. Respondents disagreed with the predominant views on intervention*s effect on volatility and common arguments against intervention. The exchange rate regime of a central bank explains its beliefs about several important aspects of intervention, including factors in a successful intervention and the potential profitability of intervention. |
| Keywords: | Foreign exchange ; Banks and banking, Central |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-045&r=cba |
| By: | Leith, Campbell; von Thadden, Leopold |
| Abstract: | This paper develops a small New Keynesian model with capital accumulation and government debt dynamics. The paper discusses the design of simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of Ricardian equivalence. Under this assumption, government debt turns into a relevant state variable which needs to be accounted for in the analysis of equilibrium dynamics. The key analytical finding is that without explicit reference to the level of government debt it is not possible to infer how strongly the monetary and fiscal instruments should be used to ensure determinate equilibrium dynamics. Specifically, we identify in our model discontinuities associated with threshold values of steady-state debt, leading to qualitative changes in the local determinacy requirements. These features extend the logic of Leeper (1991) to an environment in which fiscal policy is non-neutral. Naturally, this non-neutrality increases the importance of fiscal aspects for the design of policy rules consistent with determinate dynamics. |
| Keywords: | Monetary policy, Fiscal regimes |
| JEL: | E52 E63 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4472&r=cba |
| By: | Döpke, Jörg; Dovern, Jonas; Fritsche, Ulrich; Slacalek, Jirka |
| Abstract: | This paper investigates the relevance of the sticky information model of Mankiw and Reis (2002) and Carroll (2003) for four major European economies (France, Germany, Italy and the United Kingdom). As opposed to the benchmark rational expectation models, households in the sticky information environment update their expectations sporadically rather than instantaneously owing to the costs of acquiring and processing information. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Using survey data on households’ and experts’ inflation expectations, we find that the model adequately captures the dynamics of household inflation expectations. Both parametrizations imply comparable speeds of information updating for the European households as was previously found in the US, on average roughly once a year. |
| Keywords: | Inflation, expectations, sticky information, inflation persistence |
| JEL: | E31 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4231&r=cba |
| By: | Ravi Balakrishnan; Sam Ouliaris |
| Abstract: | This paper aims to improve the understanding of U.S. inflation dynamics by separating out structural from cyclical effects using frequency domain techniques. Most empirical studies of inflation dynamics do not distinguish between secular and cyclical movements, and we show that such a distinction is critical. In particular, we study traditional Phillips curve (TPC) and new Keynesian Phillips curve (NKPC) models of inflation, and conclude that the long-run secular decline in inflation cannot be explained in terms of changes in external trade and global factor markets. These variables tend to impact inflation primarily over the business cycle. We infer that the secular decline in inflation may well reflect improved monetary policy credibility and, thus, maintaining low inflation in the long run is closely linked to anchored inflation expectations. |
| Date: | 2006–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/159&r=cba |
| By: | Reitz, Stefan; Taylor, Mark P. |
| Abstract: | The coordination channel has been proposed as a means by which foreign exchange market intervention may be effective, in addition to the traditional portfolio balance and signaling channels. If strong and persistent misalignments of the exchange rate are caused by non-fundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then central bank intervention may act as a coordinating signal, encouraging stabilizing speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness. |
| Keywords: | foreign exchange intervention, coordination channel, market microstructure, nonli mean reversion |
| JEL: | C10 F31 F41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4245&r=cba |
| By: | Paustian, Matthias |
| Abstract: | What is the role of contracting schemes for the welfare costs of nominal rigidities over the business cycle? We examine 4 different modeling schemes of nominal rigidities that all have the same average duration of contracts. We find that Calvo (1983) wage and price contracts may deliver welfare costs that are 3-4 times higher than Taylor (1980) contracts. However, that result is sensitive to the monetary policy rule. We discuss the implications of modeling capital mobility and of adopting the Mankiw and Reis (2002) sticky information scheme for the welfare costs of nominal rigidities. |
| Keywords: | welfare, Calvo, Taylor, sticky information, costs of nominal rigidities |
| JEL: | E32 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4216&r=cba |
| By: | Tillmann, Peter |
| Abstract: | The canonical New Keynesian model specifies inflation as the present-value of future real marginal cost. This paper tests this New Keynesian Phillips Curve and exploits projections of future real marginal cost generated by VAR models to assess the model’s ability to match the behavior of actual inflation. In accordance to the literature, the model fits Euro data well at first sight. However, analyses of this kind disregard the considerable degree of uncertainty surrounding VAR forecasts. A set of bias-corrected bootstrapped confidence bands reveals that this result is consistent with both a well fitting and a completely failing model. Allowing for inflation inertia through backward-looking indexation narrows confidence bands around measures of the model’s fit but, still, cannot generate sufficiently precise estimates. Hence, we cannot say whether the model fits or fails. |
| Keywords: | New Keynesian Phillips Curve, present-value model, marginal cost, VAR, bootstrap |
| JEL: | E31 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:2938&r=cba |
| By: | Álvarez, Luís; Dhyne, Emmanuel; Hoeberichts, Marco; Kwapil, Claudia; Le Bihan, Hervé; Lünnemann, Patrick; Martins, Fernando; Sabbatini, Roberto; Stahl, Harald; Vermeulen, Philip; Vilmunen, Juoko |
| Abstract: | This paper presents original evidence on price setting in the euro area at the individual level. We use micro data on consumer (CPI) and producer (PPI) prices, as well as survey information. Our main findings are: (i) prices in the euro area are sticky and more so than in the US; (ii) there is evidence of heterogeneity and of asymmetries in price setting behaviour; (iii) downward price rigidity is only slightly more marked than upward price rigidity and (iv) implicit or explicit contracts and coordination failure theories are important, whereas menu or information costs are judged much less relevant by firms. |
| Keywords: | Price setting, Price stickiness, Consumer prices, Producer prices, survey data |
| JEL: | C25 D40 E31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4239&r=cba |
| By: | Stephen Morris; Hyun Song Shin |
| Date: | 2006–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:321307000000000236&r=cba |
| By: | Ellen R. McGrattan |
| Abstract: | A central debate in applied macroeconomics is whether statistical tools that use minimal identifying assumptions are useful for isolating promising models within a broad class. In this paper, I compare three statistical models—a vector autoregressive moving average (VARMA) model, an unrestricted state space model, and a restricted state space model—that are all consistent with the same prototype business cycle model. The business cycle model is a prototype in the sense that many models, with various frictions and shocks, are observationally equivalent to it. The statistical models I consider differ in the amount of a priori theory that is imposed, with VARMAs imposing minimal assumptions and restricted state space models imposing the maximal. The objective is to determine if it is possible to successfully uncover statistics of interest for business cycle theorists with sample sizes used in practice and only minimal identifying assumptions imposed. I find that the identifying assumptions of VARMAs and unrestricted state space models are too minimal: The range of estimates are so large as to be uninformative for most statistics that business cycle researchers need to distinguish alternative theories. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:643&r=cba |
| By: | Peter Isard |
| Abstract: | This paper provides an overview of the uncovered interest parity assumption. It traces the history of the interest parity concept, summarizes evidence on the empirical validity of uncovered interest parity, and discusses different interpretations of the evidence and the implications for macroeconomic analysis. The uncovered interest parity assumption has been an important building block in multiperiod models of open economies, and although its validity is strongly challenged by the empirical evidence, at least at short time horizons, its retention in macroeconomic models is supported on pragmatic grounds by the lack of much empirical support for existing models of the exchange risk premium. |
| Date: | 2006–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/96&r=cba |
| By: | Gian Maria Milesi-Ferretti; Philip R. Lane |
| Abstract: | We construct estimates of external assets and liabilities for 145 countries for the period 1970-2004. We describe our estimation methods and present key features of the data at the country and the global level. We focus on trends in net and gross external positions, and the composition of international portfolios, distinguishing between foreign direct investment, portfolio equity investment, official reserves, and external debt. We document the increasing importance of equity financing and the improvement in the external position for emerging markets, and the differing pace of financial integration between advanced and developing economies. We also show the existence of a global discrepancy between estimated foreign assets and liabilities, and identify the asset categories that account for this discrepancy. |
| Keywords: | Financial assets , Foreign investment , External debt , Reserves , |
| Date: | 2006–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/69&r=cba |
| By: | Sims, Christopher A. |
| Abstract: | The literature applying information-theoretic ideas to economics has so far considered only Gaussian uncertainty. Ex post Gaussian uncertainty can be justified as optimal when the associated optimization problem is linear-quadratic, but the literature has often assumed Gaussian uncertainty even where it cannot be justified as optimal. This paper considers a simple two-period optimal saving problem with a Shannon capacity constraint and non-quadratic utility. It derives an optimal ex post probability density for wealth in two leading cases (log and linear utility) and lays out a general approach for handling other cases numerically. It displays and discusses numerical solutions for other utility functions, and considers the feasibility of extending this paper’s approaches to general non-LQ dynamic programming problems. The introduction of the paper discusses approaches that have been taken in the existing literature to applying Shannon capacity to economic modeling, making criticisms and suggesting promising directions for further progress. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4228&r=cba |
| By: | Nautz, Dieter; Ruth, Karsten |
| Abstract: | Although stable money demand functions are crucial for the monetary model of the exchange rate, empirical research on exchange rates and money demand is more or less disconnected. This paper tries to fill the gap for the Euro/Dollar exchange rate. We investigate whether monetary disequilibria provided by the empirical literature on U.S. and European money demand functions contain useful information about exchange rate movements. Our results suggest that the empirical performance of the monetary exchange rate model improves when insights from the money demand literature are explicitly taken into account. |
| Keywords: | Euro/Dollar Exchange Rate, Monetary Model, Money Demand Functions |
| JEL: | E41 F31 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:3377&r=cba |
| By: | Eric Parrado; Rodolfo Maino; Leonardo Leiderman |
| Abstract: | The shift to inflation targeting has contributed to the relatively low inflation observed in some emerging market economies although, as noted by many economists, the preconditions required for a successful implementation were not in place. The existence of managed exchange rate regimes, a narrow base of domestic nominal financial assets, the lack of market instruments to hedge exchange rate risks, together with fear of floating and dollarization, have been stressed as factors that might weaken the efficacy of monetary policy. By examining various aspects of monetary transmission and policy formulation in two highly dollarized economies (Peru and Bolivia) vis-à-vis two economies with low levels of dollarization (Chile and Colombia), we found that, while dollarization imposes differences in both the transmission capacity of monetary policy and its impact on real and financial sectors, it does not preclude the use of inflation targeting as a policy regime. |
| Date: | 2006–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/157&r=cba |
| By: | Hofmann, Boris |
| Abstract: | This paper assesses the performance of monetary indicators in predicting euro area HICP inflation out-of-sample over the period since the start of EMU considering a wide range of forecasting models, including standard bivariate forecasting models, factor models, simple combination forecasts as well as trivariate two-pillar Phillips Curve type forecasting models. The results suggest that monetary indicators are still useful indicators for inflation in the euro area, but that a thorough and broad based monetary analysis is needed to extract the information content of monetary developments for future inflation. |
| Keywords: | euro area, inflation, leading indicators, money |
| JEL: | C32 E31 E40 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4469&r=cba |
| By: | Aleksander Berentsen and Cyril Monet |
| Abstract: | This paper studies the theoretical properties of a channel system of interestrate control in a dynamic general equilibrium model. Agents are subject to liquidity shocks which can be partially insured in a secured money market, or at a standing facility operated by the central bank. We show that it is optimal to have a strictly positive interest rate corridor and that a shift of the corridor affects the money market rate one for one. Moreover, the central bank can tighten its policy without changing its policy rate by simply increasing the corridor symmetrically around the policy rate. |
| Keywords: | Monetary Policy, Interest Rates, Search |
| JEL: | E40 E50 D83 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:295&r=cba |
| By: | Mark Crosby; Tim Kam; Kirdan Lees (Reserve Bank of New Zealand) |
| Abstract: | This paper quantifies the costs of mitigating exchange rate volatility within the context of a flexible inflation targeting central bank. Within a standard linearquadratic formulation of inflation targeting, we append a term that penalises deviations in the exchange rate to the central bank’s loss function. For a simple forward-looking New Keynesian model, we show that the central bank can reduce volatility in the exchange rate relatively costlessly by aggressively responding to the real exchange rate. However, when we append correlated shocks – to better match summary statistics of the Australian data – we find that the costs associated with reducing exchange rate volatility are larger: output volatility increases substantially. Finally, we apply our method to a variant of a small backward-looking New Keynesian model of the Australian economy. Under this model, large increases in inflation and output volatility accrue if the central bank attempts to mitigate exchange rate volatility. |
| JEL: | C51 E52 F41 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/07&r=cba |
| By: | Christoffel, Kai; Linzert, Tobias |
| Abstract: | In this paper we incorporate a labor market with matching frictions and wage rigidities into the New Keynesian business cycle model. In particular, we analyze the effect of a monetary policy shock and investigate how labor market frictions affect the transmission process of monetary policy. The model allows real wage rigidities to interact with adjustments in employment and hours affecting inflation dynamics via marginal costs. We find that the response of unemployment and inflation to an interest rate innovation depends on the degree of wage rigidity. Generally, more rigid wages translate into more persistent movements of aggregate inflation. Moreover, the impact of a monetary policy shock on unemployment and inflation depends also on labor market fundamentals such as bargaining power and the flows in and out of employment. |
| Keywords: | Monetary Policy, Matching Models, Labor Market Search, Inflation Persistence, Real Wage Rigidity |
| JEL: | E31 E32 E52 J64 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4248&r=cba |
| By: | Agnes Benassy-Quere |
| Abstract: | In this paper, a simple, two-country, static model is developed in order to analyze short-run fiscal spillovers in a monetary union, depending on (i) the way fiscal policy is implemented (expenditures versus net taxes), (ii) the strength of the supply-side channel of tax policies compared to the demand-side channel, and (iii) the extent of central bank accommodation. It is shown that both a spending expansion and a tax cut produce positive spillovers on foreign output provided the central bank accommodates the shock, except if tax cuts have large supply-side effects. If the central bank does not accommodate the shock, the spillovers of a fiscal expansion are generally negative. However fiscal spillovers can be positive in the case of a tax cut because induced disinflation reduces or even reverses the reaction of the central bank. Due to financial liberalization, it is possible that demand-side channels of fiscal policy have become less powerful compared to supply-side channels. To the extent that interest-rate variations are smooth, this could reduce the positive spillover of a spending expansion while turning the spillover of a tax cut into the negative territory. |
| Keywords: | Fiscal policy; theoretical model; spillovers; monetary union; short run; tax and budget policy; models; monetary block |
| JEL: | E61 E62 F41 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2006-13&r=cba |
| By: | Edda Claus; Mardi Dungey; Renee Fry |
| Abstract: | Two impediments to effective monetary policy operation include illiquidity in bond markets and the move towards the zero bound of interest rates. Either or both of these scenarios have been evident in many countries in the last decade, raising the suggestion that alternative means of enacting monetary policy may be required. This paper empirically explores policy options implemented through equity and currency markets that will generate similar inflation responses at a short (2 year) and a long (10 year) time frame as those obtained under current arrangements. The results show that current monetary policy arrangements are least costly in terms of the output loss from achieving lower inflation outcomes. However, if this option ceases to be available the next best alternative is to use the equity market option provided a longer run focus is maintained. Focus on short horizons increases the longer term output costs of the policy in all cases. |
| JEL: | E52 C51 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-17&r=cba |
| By: | Wolfram Berger; Helmut Wagner |
| Abstract: | This paper studies the optimal design of monetary policy in an optimizing two-country sticky price model. We suppose that the production sequence of final consumption goods stretches across both countries and is associated with vertical trade. Prices of final consumption goods are sticky in the consumer's currency. Pursuing an inward-looking policy, as suggested in recent work, is not optimal in this set-up. We also ask which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy. The results hinge critically on the degree of price flexibility and the relative importance of cost-push and productivity shocks. In many cases, a strict targeting of price indices like producer or consumer price indices is dominated by rules that allow for some fluctuations in prices such as nominal income or monetary targeting. |
| Date: | 2006–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/164&r=cba |
| By: | Michael Lamla (Department of Management, Technology and Economics, ETH Zurich (Swiss Federal Institute of Technology), Switzerland); Sarah M. Rupprecht (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH)) |
| Abstract: | This paper analyzes European financial markets’ comprehension and interpretation of ECB communication signals. By applying a novel indicator developed by Berger et al. (2006), that quantifies the contents of the ECB’s introductory statements, we find that communication affects the term structure of interest rates in the medium run over a horizon between five months to one year. Our results suggest that financial market agents expect the ECB to prepare them for a change in interest rates well in advance. However, judging upon the dynamics of the response, the exact timing of a decision is less foreseeable. Disentangling the effects of ECB statements on prices, the real and the monetary sector, we provide evidence that especially the ECB’s interpretation and forecasts of price developments represent important news to financial market agents. |
| Keywords: | Central Bank Communication, Expectations, Term Structure of Interest Rates, Yield Curve, ECB. |
| JEL: | E43 E44 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:06-135&r=cba |
| By: | Michael T. Gapen; Ralph Chami; Thomas F. Cosimano |
| Abstract: | This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption, and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments. |
| Date: | 2006–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/61&r=cba |
| By: | Mick Silver |
| Abstract: | This paper provides an overview of statistical measurement issues relating to alternative measures of core inflation, and the criteria for choosing among them. The approaches to measurement considered include exclusion-based methods, imputation methods, limited influence estimators, reweighting, and economic modeling. Criteria for judging which approach to use include credibility, control, deviations from a smoothed reference series, volatility, predictive ability, causality and cointegration tests, and correlation with money supply. Country practice can differ in how the approaches are implemented and how their appropriateness is assessed. There is little consistency in the results of country studies to readily suggest guidelines on accepted methods. |
| Keywords: | Inflation , Consumer price indexes , Inflation targeting , Economic models , |
| Date: | 2006–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/97&r=cba |
| By: | Tommaso Proietti (Università degli Studi di Udine - Dipartimento di Scienze Statistiche) |
| Abstract: | The measurement of core inflation can be carried out by optimal signal extraction techniques based on the multivariate local level model, by imposing suitable restrictions on its parameters. The various restrictions correspond to several specialisations of the model:the core inflation measure becomes the optimal estimate of the common trend in a multivariate time series of inflation rates for a variety of goods and services, or it becomes a minimum variance linear combination of the inflation rates, or it represents the component generated by the common disturbances in a dynamic error component formulation of the multivariate local level model. Particular attention is given to the characterisation of the optimal weighting functions and to the design of signal extraction filters that can be viewed as two sided exponentially weighted moving averages applied to a cross-sectional average of individual inflation rates. An empirical application relative to U.S. monthly inflation rates for 8 expenditure categories is proposed. |
| Keywords: | common trends, dynamic factor analysis, homogeneity, exponential smoothing |
| Date: | 2006–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:83&r=cba |
| By: | Roland Straub; Gert Peersman |
| 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, the success of these models in reproducing the dynamic behavior of an economy following structural shocks is still disputed. This paper attempts to shed 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 models, the latter indicates the relevance of accelerator effects, as described by earlier Keynesian models. We also show that NK DSGE models might overemphasize the contribution of cost-push shocks to business cycle fluctuations while, at the same time, underestimating the importance of other shocks such as changes to technology and investment adjustment costs. |
| Date: | 2006–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/135&r=cba |
| By: | Robert Rich; Joseph Tracy |
| Abstract: | This paper examines matched point and density forecasts of inflation from the Survey of Professional Forecasters to analyze the relationship between expected inflation, disagreement, and uncertainty. We extend previous studies through our data construction and estimation methodology. Specifically, we derive measures of disagreement and uncertainty by using a decomposition proposed in earlier research by Wallis and by applying the concept of entropy from information theory. We also undertake the empirical analysis within a seemingly unrelated regression framework. Our results offer mixed support for the propositions that disagreement is a useful proxy for uncertainty and that increases in expected inflation are accompanied by heightened inflation uncertainty. However, we document a robust, quantitatively and statistically significant positive association between disagreement and expected inflation. |
| Keywords: | Inflation (Finance) ; Economic forecasting ; Information theory ; Uncertainty |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:253&r=cba |
| By: | Eduardo Levy Yeyati |
| Abstract: | The cost of holding international reserves to self insure against foreign currency liquidity runs is typically estimated as the sovereign spread on the risk-free return on reserves paid on the debt issued to purchase them. However, to the extent that reserves lower the probability of a run-induced default, they reduce the spread paid on the stock of sovereign debt, adding to the marginal benefits of reserve accumulation. This paper illustrates this aspect numerically, showing that the costs of reserves, as typically measured, may have been considerably overstated. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpbsdt:2006-10&r=cba |
| By: | Martin Cihák |
| Abstract: | To showcase their increasing focus on financial stability, many central banks and other institutions have started publishing regular reports on financial stability. The paper presents a survey of the available financial stability reports, and proposes a framework for assessing such documents. It illustrates how the framework can be implemented, and uses the findings to identify prevalent practices, recent trends, and areas for improvement. |
| Date: | 2006–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/163&r=cba |
| By: | Marvin Goodfriend; Eswar Prasad |
| Abstract: | As China's economy becomes more market based and continues its rapid integration into the global economy, having an independent and effective monetary policy regime oriented to domestic objectives will become increasingly important. Employing modern principles of monetary policy in light of the current state of China's financial institutions, we motivate and present a package of proposals to guide the operation of a new monetary policy regime. Specifically, we recommend an explicit low long-run inflation objective, operational independence for the People's Bank of China (PBC) with formal strategic guidance from the government, and a minimal set of financial sector reforms (to make the Chinese banking system robust against interest rate fluctuations). We argue that anchoring monetary policy with an explicit inflation objective would be the most reliable way for the PBC to tie down inflation expectations, and thereby enable monetary policy to make the best contribution to macroeconomic and financial stability, as well as economic growth. The management and monitoring of money (and credit) growth by the PBC would continue to play a useful role in the stabilization of inflation, but a money target would not constitute a good stand-alone nominal anchor. |
| Keywords: | Monetary policy , China , Flexible exchange rates , Inflation targeting , Financial sector , Bank reforms , Central bank policy , Central bank role , Money supply , Financial systems , Transition economies , |
| Date: | 2006–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/111&r=cba |
| By: | Nautz, Dieter; Scharff, Juliane |
| Abstract: | In recent macroeconomic theory, relative price variability (RPV) generates the central distortions of inflation. This paper provides first evidence on the empirical relation between inflation and RPV in the euro area focusing on threshold effects of inflation. We find that expected inflation significantly increases RPV if inflation is either very low (below -1.38% p.a.) or very high (above 5.94% p.a.). In the intermediate regime, however, expected inflation has no distorting effects which supports price stability as an outcome of optimal monetary policy. |
| Keywords: | Inflation, Relative Price Variability, Panel Threshold Models |
| JEL: | C23 E31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4250&r=cba |
| By: | Ettore Kovarich; Russell C. Krueger |
| Abstract: | Looking ahead to the creation of a Gulf Cooperation Council (GCC) Currency Union in 2010, the paper covers some implications for the statistical programs of the GCC countries. Despite uncertainty over the structure of the proposed union, the paper envisions several types of mutually reinforcing statistics-convergence criteria, statistics on the core policy variables and instruments, additional macroeconomic data, specialized statistics related to the economic and institutional conditions within the union, and public information. Major changes to national statistical programs are needed that should begin soon. |
| Keywords: | Statistics , Monetary unions , Cooperation Council for the Arab States of the Gulf , |
| Date: | 2006–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/141&r=cba |
| By: | Ewe-Ghee Lim |
| Abstract: | This paper examines opposing views on the euro's challenge to the dollar as an international currency. One view emphasizes Europe's large economy and diversification effects as undergirding a vigorous challenge. The other emphasizes "network externalities," particularly undergirding continued dollar dominance. The data to date support the second view but also show the euro has significantly overtaken the legacy currencies as a reserve currency. Generally, large economic size alone is insufficient to challenge the network externalities supporting vehicle currencies, but scope exists for the euro to advance as an international store of value. The paper discusses the euro's medium-term prospects. |
| Date: | 2006–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/153&r=cba |
| By: | Balázs Égert; Ronald MacDonald |
| Abstract: | This paper surveys recent advances in the monetary transmission mechanism (MTM). In particular, while laying out the functioning of the separate channels in the MTM, special attention is paid to exploring possible interrelations between different channels through which they may amplify or attenuate each others’ impact on prices and the real economy. We take stock of the empirical findings especially as they relate to countries in Central and Eastern Europe, and compare them to results reported for industrialised countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance and potential development of the different channels. |
| Keywords: | monetary transmission, transition, Central and Eastern Europe, credit channel, interest rate channel, interest-rate pass-through, exchange rate channel, exchange rate pass-through, asset price channel |
| JEL: | E31 E51 E58 F31 O11 P20 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1739&r=cba |
| By: | Herrmann, Sabine; Jochem, Axel |
| Abstract: | The current accounts of most EU member states in central and eastern Europe have been showing growing deficits in recent years. According to panel estimates the deficits can be attributed primarily to factors characteristic for the stage of development, ie the relative income level and high capital building. The positive impact of a closing income gap, however, is largely compensated by real appreciation. The net effect of government budget deficits is rather small, since they are mostly financed by private saving. Further integration of the financial sector is likely to improve the current accounts. Although the current account positions do not require fundamental policy reversals, there are clear risks of exchange rate adjustments that should be reduced before entering the euro area. |
| Keywords: | current account, new EU member countries, catching-up process |
| JEL: | F15 F32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4226&r=cba |
| By: | Mohsin S. Khan; Axel Schimmelpfennig |
| Abstract: | This paper examines the relative importance of monetary factors and structuralist supply-side factors for inflation in Pakistan. A stylized inflation model is specified that includes standard monetary variables (money supply, credit to the private sector), the exchange rate, as well as the wheat support price as a supply-side factor that has received considerable attention in Pakistan. The model is estimated for the period January 1998 to June 2005 on a monthly basis. The results indicate that monetary factors have played a dominant role in recent inflation, affecting inflation with a lag of about one year. Changes in the wheat support price influence inflation in the short run, but not in the long run. Furthermore, the wheat support price matters only over the medium term if accommodated by monetary policy. |
| Date: | 2006–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/60&r=cba |
| By: | Magnus Saxegaard |
| Abstract: | This paper examines the pattern of excess liquidity in sub-Saharan Africa and its consequences for the effectiveness of monetary policy. The paper argues that understanding the consequences of excess liquidity requires quantifying the extent to which commercial bank holdings of excess liquidity exceed levels required for precautionary purposes. It proposes a methodology for measuring this quantity and uses it to estimate a nonlinear structural VAR model for the CEMAC region, Nigeria and Uganda. The study suggests that excess liquidity weakens the monetary policy transmission mechanism and thus the ability of monetary authorities to influence demand conditions in the economy. |
| Keywords: | Excess liquidity , Sub-Saharan Africa , Central African Economic and Monetary Community , Nigeria , Uganda , Monetary policy , Money supply , Credit , Economic models , |
| Date: | 2006–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/115&r=cba |
| By: | Charalambos G. Tsangarides; Mahvash Saeed Qureshi |
| Abstract: | Applying techniques of clustering analysis to a set of variables suggested by the convergence criteria and the theory of optimal currency areas, this paper looks for country homogeneities to assess membership in the existing and proposed monetary unions of the broader west African region. Our analysis reveals considerable dissimilarities in the economic characteristics of the countries in west and central Africa. In particular, the West African Monetary Zone (WAMZ) countries do not form a cluster with the West Africa Economic and Monetary Union (WAEMU) countries; and, within the WAMZ, there is a significant lack of homogeneity. Furthermore, when west and central African countries are considered together, we find significant heterogeneities within the CFA franc zone, and some interesting similarities between the Economic and Monetary Community of Central Africa (CEMAC) and WAMZ countries. Overall, our findings raise some questions about the geographical boundaries of several existing and proposed monetary unions. |
| Keywords: | Monetary unions , Africa , West African Economic and Monetary Union , Central African Economic and Monetary Community , Data analysis , |
| Date: | 2006–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/90&r=cba |