nep-cba New Economics Papers
on Central Banking
Issue of 2006‒09‒11
24 papers chosen by
Alexander Mihailov
University of Essex

  1. Identifying Monetary Policy Shocks via Changes in Volatility By Markku Lanne, Helmut Luetkepohl
  2. Understanding inflation persistence - a comparison of different models By Huw Dixon; Engin Kara
  3. Optimal monetary policy in the generalized Taylor economy By Engin Kara
  4. Price Rigidity and Flexibility: New Empirical Evidence By Daniel Levy
  5. Flexible inflation targeting and financial stability: Is it enough to stabilise inflation and output? By Q. Farooq Akram; Øyvind Eitrheim
  6. The Long-Run Phillips Curve and Non-Stationary Inflation By Bill Russell, Anindya Banerjee
  7. Sticky Information Phillips Curves : European Evidence By Jörg Döpke; Jonas Dovern; Ulrich Fritsche; Jirka Slacalek
  8. Quantifying Inflation Pressure and Monetary Policy Response in the United States By Diana N. Weymark; Mototsugu Shintani
  9. Mean Variance Optimization of Non-Linear Systems and Worst-case Analysis By Elena Carletti; Philipp Hartmann; Giancarlo Spagnolo
  10. The Target Rate and Term Structure of Interest Rates By Marco Realdon
  11. The Economic Importance of Fiscal Rules By Michael J. Artis, Luca Onorante
  12. Has EMU Had Any Impact on the Degree of Wage Restraint? By Adam S. Posen; Daniel Popov Gould
  13. Regular adjustment - theory and practice. By Jerzy (Jurek) D. Konieczny; Fabio Rumler
  14. Persistence in Law-of-One-Price Deviations: Evidence from Micro-data By Mario J. Crucini; Mototsugu Shintani
  15. A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications By Fischer, Christoph; Porath, Daniel
  16. Financial predictors of real activity and the propagation of aggregate shocks By Johann Burgstaller
  17. A New Explanatory Model for Policy Analysis and Evaluation By Marije Schouwstra; Michael Ellman
  18. Business cycle synchronisation in East Asia By Fabio Moneta; Rasmus Rüffer
  19. A Theory of Liquidity and Regulation of Financial Intermediation By Emmanuel Farhi; Mikhail Golosov; Aleh Tsyvinski
  20. The Effect of a Transaction Tax on Exchange Rate Volatility By Markku Lanne; Timo Vesalay
  21. The Boom-Bust Cycle in Finland and Sweden 1984-1995 in an International Perspective By Lars Jonung; Ludger Schuknecht; Mika Tujula
  22. The Origins of Meso Economics - Schumpeter's Legacy By Kurt Dopfer
  23. ¿Por qué ha crecido tanto la cantidad de dinero?: teoría y evidencia internacional (1975-2002)§ By Mauricio A. Hernández; Munir Jalil Barney; Carlos Esteban Posada
  24. Estimación de la estructura a plazos de las tasas de interés en Colombia por medio del método de funciones B-spline cúbicas By VÁSQUEZ, Diego Mauricio; MELO, Luis Fernando

  1. By: Markku Lanne, Helmut Luetkepohl
    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 over-identifying 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 total reserves cannot be rejected.
    Keywords: Monetary policy, structural vector autoregressive analysis, vector autoregressive process, impulse responses
    JEL: C32
    Date: 2006
  2. By: Huw Dixon (Economics Department, University of York, Heslington, York, YO10 5DD, United Kingdom.); Engin Kara (University of York, Heslington, York, YO10 5DD, United Kingdom.)
    Abstract: This paper adopts the Impulse-Response methodology to understand inflation persistence. It has often been argued that existing models of pricing fail to explain the persistence that we observe. We adopt a common general framework which allows for an explicit modelling of the distribution of contract lengths and for different types of price setting. In particular, we find that allowing for a distribution of contract lengths can yield a more plausible explanation of inflation persistence than indexation. JEL Classification: E17, E3.
    Keywords: DGE models, inflation, persistence, price-setting.
    Date: 2006–09
  3. By: Engin Kara (University of York, Heslington, York, YO10 5DD, United Kingdom.)
    Abstract: In this paper we use the Generalized Taylor Economy (GTE) framework in which there are many sectors with overlapping contracts of different lengths to analyze the design of monetary policy. We derive a utility based objective function of a central bank for this economy and use it to evaluate the performance of alternative simple rules. We find that a simple rule that targets an index that gives more weight to the sectors which have longer contracts and are more important in the aggregate index yields a welfare outcome nearly identical to the optimal policy. However, we find that potential gains in targeting sector specific inflation rates rather than the aggregate inflation rate is very sensitive to the shape of the distribution. We show that except for the cases where prices/wages are reoptimized very frequently, the performance of the sectoral rule can be closely approximated by a simple rule that targets aggregate inflation. JEL Classification: E32, E52, E58.
    Keywords: Inflation targeting, Optimal Monetary Policy.
    Date: 2006–09
  4. By: Daniel Levy
    Abstract: The marketplace, along with its price system, is the single most important institution in a western-style free enterprise economy. The ability of prices to adjust to changes in supply and demand conditions enables the market to function efficiently and lies behind the magical invisible hand mechanism. To the behaviour of prices and in particular to the ability of prices to adjust to changes in market conditions, therefore, have fundamental implications for many key issues in many areas of both microeconomics as well as macroeconomics. It is, therefore, critical to study and understand whether there are barriers to price adjustments, what are the nature of these barriers, how the barriers lead to price rigidity, what are possible implications of these rigidities, etc. This introductory essay briefly summarizes the fourteen empirical studies of price rigidity that are included in this special issue.
    Date: 2006–09
  5. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Øyvind Eitrheim (Norges Bank (Central Bank of Norway))
    Abstract: We investigate empirically whether a central bank can promote financial stability by stabilising inflation and output, and whether additional stabilisation of asset prices and credit growth would enhance financial stability, in particular. We employ an econometric model of the Norwegian economy to investigate the performance of simple interest rate rules that allow a response to asset prices and credit growth, in addition to inflation and output. We find that output stability also promotes financial stability, while inflation stability is achieved at the expense of both output and financial stability. A stabilisation of house prices, equity prices and/or credit growth enhances stability in both inflation and output, but not financial stability. By contrast, stabilisation of the nominal exchange rate induces excess volatility in general.
    Keywords: Monetary policy, financial stability, asset prices, interest rate rules.
    JEL: C51 C52 C53 E47 E52
    Date: 2006–08–31
  6. By: Bill Russell, Anindya Banerjee
    Abstract: Modern theories of inflation incorporate a vertical long-run Phillips curve and are usually estimated using techniques that ignore the non-stationary behaviour of inflation. Consequently, the estimates obtained are imprecise and are unable to distinguish between competing models of inflation and test the veracity of a vertical long-run Phillips curve. We estimate a Phillips curve model taking into account the non-stationary properties in inflation and identify a small but significant positive relationship between inflation and unemployment. The results provide some evidence that the trade-off between inflation and the unemployment rate in the short-run worsens as the mean rate of inflation increases.
    Keywords: Inflation, unemployment, long-run Phillips curve, business cycle, GMM
    JEL: C22 C32 C52 D40 E31 E32
    Date: 2006
  7. By: Jörg Döpke; Jonas Dovern; Ulrich Fritsche; Jirka Slacalek
    Abstract: We estimate the sticky information Phillips curve model of Mankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months.
    Keywords: Inflation expectations, sticky information, Phillips curve, inflation persistence
    JEL: D84 E31
    Date: 2006
  8. By: Diana N. Weymark; Mototsugu Shintani
    Date: 2006–09–02
  9. By: Elena Carletti (Center for Financial Studies, Frankfurt, and Wharton Financial Institution Center); Philipp Hartmann (European Central Bank, Frankfurt); Giancarlo Spagnolo (Stockholm School of Economics, Consip Research Unit, and CEPR)
    Abstract: We model the impact of bank mergers on loan competition, reserve holdings and aggregate liquidity. A merger changes the distribution of liquidity shocks and creates an internal money market, leading to financial cost efficiencies and more precise estimates of liquidity needs. The merged banks may increase their reserve holdings through an internalization effect or decrease them because of a diversification effect. The merger also affects loan market competition, which in turn modifies the distribution of bank sizes and aggregate liquidity needs. Mergers among large banks tend to increase aggregate liquidity needs and thus the public provision of liquidity through monetary operations of the central bank.
    Keywords: Credit Market Competition, Bank Reserves, Internal Money Market, Banking System Liquidity, Monetary Operations
    JEL: D43 G21 G28 L13
    Date: 2006–03–06
  10. By: Marco Realdon
    Abstract: This paper presents a tractable bond valuation model, which further develops the approach proposed by Piazzesi (2005). The short term inter-bank interest rate is equal to the target rate set by the central bank plus a spread. Bond yields are driven by the intensities that determine the probabilities that the central bank may raise or cut the target interest rate. Unlike in Piazzesi (2005), negative intensities have a convenient interpretation and do not complicate estimation, and two accurate approximations to the bond pricing equation provide new closed form solutions for discount bond prices that require no numerical integration. Unlike in Piazzesi the target interest rate can be constrained to be non-negative. Yields, especially long term ones, decrease when the central bank is expected to decide more frequent and/or larger average future changes in the target interest rate. The model lends itself to easy calibration and estimation.
    Keywords: Bond valuation, target interest rate, closed form solution, yield curve, central banker's meeting
    JEL: G13
    Date: 2006–08
  11. By: Michael J. Artis, Luca Onorante
    Abstract: The present paper provides an assessment of the effect of the recent revision of the Stability and Growth Pact (SGP) on the European economies. A set of structural VARs, one for each eurozone country, is estimated. The estimated models are then used to assess the possible effect of alternative sets of fiscal rules, with particular attention to the Stability and Growth Pact in its old and reformed versions. The investigation suggests that fiscal policy has had in the past a limited smoothing effect on the cycle, and therefore the cost of the old rules in the corrective arm of the Pact was also limited. As for the reform of the Pact, the analysis is overall supportive of the new country-specific Medium Term Objectives. The modified rules of the Excessive deficit procedure are likely to give the governments only a limited extra leeway to reduce the variability of the cycle.
    Keywords: European Monetary Union, Stability and Growth Pact, fiscal-monetary interactions
    JEL: E61 E62 E62
    Date: 2006
  12. By: Adam S. Posen (Institute for International Economics); Daniel Popov Gould (Institute for International Economics)
    Abstract: This working paper investigates the European Monetary Unification’s (EMU) effect on wage restraint—the degree to which wage increases do or do not exceed productivity growth. We find in cross-sectional investigations that wage restraint either is unchanged or has increased following EMU in the vast majority of countries. This finding contradicts the predictions of a widely cited family of models of coordination of labor market bargaining. In particular, one would have expected Germany to display the greatest decline in wage restraint post-EMU under these models, but in our time-series analysis we find no indication of such a decline. The overall shift toward greater wage restraint is consistent with the models that emphasize the gains from monetary credibility. The time-series evidence on Italy, which shows a significant increase in wage restraint after eurozone entry, also supports this view. That said, the increase in wage restraint in the eurozone is matched by that associated with the increase in credibility seen in the United Kingdom and Sweden after their adoption of inflation targeting post-1992.
    Keywords: EMU, wage bargaining, monetary credibility, productivity
    JEL: E58 E25 J58
    Date: 2006–08
  13. By: Jerzy (Jurek) D. Konieczny (Department of Economics, Wilfrid Laurier University, Waterloo, Ontario, Canada, N2L 3C5.); Fabio Rumler (Oesterreichische Nationalbank, Otto Wagner Platz 3, A-1090 Vienna, Austria.)
    Abstract: We ask why, in many circumstances and many environments, decision-makers choose to act on a time-regular basis (e.g. adjust every six weeks) or on a state regular basis (e.g. set prices ending in a 9), even though such an approach appears suboptimal. The paper attributes regular behaviour to adjustment cost heterogeneity. We show that, given the cost heterogeneity, the likelihood of adopting regular policies depends on the shape of the benefit function - the flatter it is, the more likely, ceteris paribus, is regular adjustment. We provide sufficient conditions under which, when policy makers differ with respect to the shape of the benefit function (as in Konieczny and Skrzypacz, 2006), the frequency of adjustments across markets is negatively correlated with the incidence of regular adjustments. On the other hand, if policy makers differences are due to the level of adjustment costs (as in Dotsey, King and Wolman, 1999), then the correlation is positive. To test the model we apply it to optimal pricing policies. We use a large Austrian data set, which consists of the direct price information collected by the statistical office and covers 80% of the CPI over eight years. We run cross-sectional tests, regressing the proportion of attractive prices and, separately, the excess proportion of price changes at the beginning of a year and at the beginning of a quarter, on various conditional frequencies of adjustment, inflation and its variability, dummies for good types, and other relevant variables. We find that the lower is, in a given market, the conditional frequency of price changes, the higher is the incidence of time- and state-regular adjustment. JEL Classification: E31, L11, E52, D01.
    Keywords: Optimal pricing, attractive prices, menu costs.
    Date: 2006–08
  14. By: Mario J. Crucini; Mototsugu Shintani
    Date: 2006–09–02
  15. By: Fischer, Christoph; Porath, Daniel
    Abstract: Panel unit root tests of real exchange rates – as opposed to univariate tests – usually reject non-stationarity. These tests, however, could be biased if the real exchange rate contained MA roots. Indeed, two independent arguments claim that the real exchange rate, being a sum of a stationary and a non-stationary component, is possibly an ARIMA (1, 1, 1) process. Monte Carlo simulations show, how systematic changes in the parameters of the components, of the test equation and of the correlation matrix affect the size of first and second generation panel unit root tests. Two components of the real exchange rate, the real exchange rate of a single good and a weighted sum of relative prices, are constructed from the data for a panel of countries. Computation of the relevant parameters reveals that panel unit root tests of the real exchange rate are severely oversized, usually much more so than simple ADF tests. Thus, the evidence for PPP from panel unit root tests may be merely due to extreme size biases.
    Keywords: panel unit root test, purchasing power parity, real exchange rate, Monte Carlo simulation
    JEL: C33 F31
    Date: 2006
  16. By: Johann Burgstaller (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: Bond yield and retail interest rate spreads are presumed to lead real activity on the basis of financial accelerator mechanisms, markup cyclicality or simply because they are forward-looking. Empirical results for Austria show that retail rate spreads outperform many other indicators in this respect. Nevertheless, there is no evidence for a financial accelerator being behind this finding.
    Keywords: Leading indicator; business cycle; shock propagation; financial accelerator; bank markup
    JEL: E32 E44 G12 G21
    Date: 2006–09
  17. By: Marije Schouwstra (Faculty of Economics and Econometrics, Universiteit van Amsterdam); Michael Ellman (Faculty of Economics and Econometrics, Universiteit van Amsterdam)
    Abstract: This model of policy evaluation has been developed to identify factors that cause policy outcomes to diverge from the intended results. In this model the explanatory factors may be inherent to the conceptual and institutional framework to which policy makers adhere, or they may be ‘real world’ factors such as badly-defined performance indicators or cyclical economic problems. This model can be used by scholars for analyzing and evaluating government policies and the policies of international organizations and by policy makers to improve their policies. The model can also be used for cross-country comparisons to establish why a certain policy works in one country or situation and why it does not work in another country or situation.
    Keywords: model of policy analysis model of policy evaluation public policy international financial institutions evaluation international organizations cross country comparison policy analysis conceptual framework institutional framework normative formal
    JEL: E61 F35 F37 F53 G38 H43 H83 O19 O21 O22
    Date: 2006–07–13
  18. By: Fabio Moneta (Finance Department, Carroll School of Management, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467-3808, USA.); Rasmus Rüffer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Against the background of the rapid inter- and intraregional integration of East Asia, we examine the extent and nature of synchronisation of business cycles in the region. We estimate various specifications of a dynamic common factor model for output growth of ten East Asian countries. A significant common factor is shared by all Asian countries considered, except China and Japan. The degree of synchronisation has fluctuated over time, with an upward trend particularly evident for the newly industrialised countries. Synchronisation appears to mainly reflect strong export synchronisation, rather than common consumption or investment dynamics. Cross-country spill-over effects explain only a small part of the comovement in the region. More importantly, a number of exogenous factors, such as the price of oil and the JPY-USD exchange rate, play an important role in synchronising activity. In addition, economic linkages with Europe and North America may also have contributed to the observed synchronisation. JEL Classification: E30, F00.
    Keywords: Business cycles synchronisation, East Asia, dynamic factor model.
    Date: 2006–08
  19. By: Emmanuel Farhi; Mikhail Golosov; Aleh Tsyvinski
    Date: 2006–09–02
  20. By: Markku Lanne; Timo Vesalay
    Abstract: We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange markets. Our argument stems from the decentralized trading practice and the presumable discrepancy between 'informed' and 'uninformed' traders' valuations. Since informed 'traders' valuations are likely to be less dispersed, a transaction tax penalizes informed trades disproportionately, leading to increased volatility. Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transaction costs is found to have a significant positive effect on volatility.
    Keywords: Transaction tax; exchange rates; volatility
    JEL: F31 F42 G15 G28
    Date: 2005
  21. By: Lars Jonung (European Commission); Ludger Schuknecht (European Central Bank and Center for Financial Studies); Mika Tujula (European Central Bank)
    Abstract: This paper compares the boom-bust cycle in Finland and Sweden 1984-1995 with the average boom-bust pattern in industrialized countries as calculated from an international sample for the period 1970-2002. Two clear conclusions emerge. First, the Finnish-Swedish experience is much more volatile than the average boom-bust pattern. This holds for virtually every time series examined. Second, the bust and the recovery in the two Nordic countries differ markedly more from the international pattern than the boom phase does. The bust is considerably deeper and the recovery comes earlier and is more rapid. We explain the highly volatile character of the Finnish and Swedish boom-bust episode by the design of economic policies in the 1980s and 1990s. The boom-bust cycle in Finland and Sweden 1984-1995 was driven by financial liberalization and a hard currency policy, causing large pro-cyclical swings in the real rate of interest transmitted via the financial sector into the real sector and then into the public finances.
    Keywords: Boom, Bust, Asset Price Cycles, Real Interest Rates, Financial Crisis, Finland, Sweden
    JEL: E32 E62 E63
    Date: 2006–05–22
  22. By: Kurt Dopfer
    Abstract: Length 44 pages
    Date: 2006–09
  23. By: Mauricio A. Hernández; Munir Jalil Barney; Carlos Esteban Posada
    Abstract: os rasgos característicos de muchas economías desarrolladas y en desarrollo de los últimos dos decenios han sido la gran expansión de sus agregados monetarios, por encima del aumento de su ingreso nominal, y la reducción de sus tasas de inflación. Suponiendo que la conjunción de ambos rasgos indica aumentos significativos de la demanda de saldos reales de dinero, en este documento se reporta un intento de estimación de la demanda de saldos reales de moneda doméstica mediante un ejercicio realizado bajo el método denominado mínimos cuadrados ordinarios dinámicos en panel para una muestra de 63 países a lo largo del período 1975- 2002. De acuerdo con los resultados, los aumentos del gasto en consumo privado, la caída de los diferenciales de inflación con respecto a Estados Unidos y la reducción de la tasa de interés en Estados Unidos (tasa a tres meses sobre Treasure bills) contribuyeron a aumentar la demanda de dinero doméstico en el período mencionado.
    Keywords: demanda de dinero; consumo; tasa de interés; inflación, panel; cointegración; mínimos cuadrados ordinarios dinámicos.
    JEL: C23 E41
  24. By: VÁSQUEZ, Diego Mauricio; MELO, Luis Fernando
    Abstract: En este documento se presenta la descripción y los resultados de la estimación de la estructura a plazos de las tasas de interés en Colombia utilizando el método de funciones B-spline cúbicas. Adicionalmente, se llevan a cabo comparaciones entre los resultados obtenidos a través de esta metodología y los presentados por Arango, Melo y Vásquez (2002) respecto a los métodos de Nelson y Siegel, y de la Bolsa de Valores de Colombia. Se observa que el desempeño del método de estimación de funciones Bspline cúbicas es similar al de Nelson y Siegel, y estos dos métodos superan al de la Bolsa de Valores de Colombia.
    Date: 2004–10–01

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