nep-cba New Economics Papers
on Central Banking
Issue of 2006‒09‒16
thirty-two papers chosen by
Alexander Mihailov
University of Essex

  1. Monetary policy with model uncertainty: distribution forecast targeting By Svensson, Lars E.O.; Williams, Noah
  2. Productivity, External Balance and Exchange Rates: Evidence on the Transmission Mechanism Among G7 Countries By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  3. U.S. wage and price dynamics: a limited information approach By Argia M. Sbordone
  4. Changes in the Federal Reserve's Inflation Target: Causes and Consequences By Peter N. Ireland
  5. The International Role of the Dollar and Trade Balance Adjustment By Linda S. Goldberg; Cédric Tille
  6. Futures prices as risk-adjusted forecasts of monetary policy By Monika Piazzesi; Eric T. Swanson
  7. A Worldwide System of Reference Rates By John Williamson
  8. The adaptive markets hypothesis: evidence from the foreign exchange market By Christopher J. Neely; Paul A. Weller; Joshua M. Ulrich
  9. The Returns to Currency Speculation By Craig Burnside; Martin Eichenbaum; Isaac Kleshchelski; Sergio Rebelo
  10. Modelling the Duration of Interest Rate Spells Under Inflation Targeting in Canada By Ruby Shih; David E. A. Giles
  11. Are Monetary Rules and Reforms Complements or Substitutes? A Panel Analysis for the World versus OECD Countries By Ansgar Belke; Bernhard Herz; Lukas Vogel
  12. Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective By Marika Karanassou; Hector Sala; Dennis J. Snower
  13. Assessing Different Drivers of the GreatModeration in the U.S. By Efrem Castelnuovo
  14. The long-run Fisher effect: can it be tested? By Mark J. Jensen
  15. Slow Money Dissemination By Zeno Enders
  16. International Financial Instability in a World of Currencies Hierarchy By Andrea Terzi
  17. Periodically Collapsing Rational Bubbles in Exchange Rates: A Markov-Switching Analysis for a Sample of Industrialised Markets By Jose Eduardo de A. Ferreira
  18. Dynamic Variational Preferences By Fabio Maccheroni; Massimo Marinacci; Aldo Rustichini
  19. Nonlinear Time Series Analysis By Bruce Mizrach
  20. Unemployment Fluctuations With Staggered Nash Wage Bargaining By Mark Gertler; Antonella Trigari
  21. How Far Ahead Do People Plan? By John Hey; Julia Knoll
  22. A Companion to "The Origin and Diffusion of Shocks to Regional Interest Rates in the United States, 1880-2002." By Hugh Rockoff; John Landon-Lane
  23. Swiss Exchange Rate Policy in the 1930s. Was the Delay in Devaluation Too High a Price to Pay for Conservatism? By Michael Bordo; Thomas Helbling; Harold James
  24. The production function approach to the Belgian output gap, Estimation of a Multivariate Structural Time Series Model By Philippe Moës
  25. Epistemic Foundations for Backward Induction: An Overview By Perea Andrés
  26. Geometry of Financial Markets - Towards Information Theory Model of Markets By Edward W. Piotrowski; Jan Sladkowski
  27. Fast estimation methods for time series models in state-space form. By Alfredo Gª Hiernaux; Miguel Jerez; José Casals
  28. The Distribution of Total Work in the EU and US By Michael C. Burda; Daniel S. Hamermesh; Philippe Weil
  29. Seemingly Irrelevant Events Affect Economic Perceptions and Expectations: The FIFA World Cup 2006 as a Natural Experiment By Thomas Dohmen; Armin Falk; David Huffman; Uwe Sunde
  30. Is there a bank lending channel in Hungary? Evidence from bank panel data By Csilla Horváth; Judit Krekó; Anna Naszódi
  31. Turkish Experience With Implicit Inflation Targeting By Ali Hakan Kara
  32. The Credibility of Cabo Verde’s Currency Peg By Macedo, Jorge Braga de; Pereira, Luis Brites

  1. By: Svensson, Lars E.O.; Williams, Noah
    Abstract: We examine optimal and other monetary policies in a linear-quadratic setup with a relatively general form of model uncertainty, so-called Markov jump-linear-quadratic systems extended to include forward-looking variables. The form of model uncertainty our framework encompasses includes : simple i.i.d. model deviations; serially correlated model deviations; estimable regimeswitching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying central-bank judgment about the state of model uncertainty; and so forth. We provide an algorithm for finding the optimal policy as well as solutions for arbitrary policy functions. This allows us to compute and plot consistent distribution forecasts–fan charts–of target variables and instruments. Our methods hence extend certainty equivalence and “mean forecast targeting” to more general certainty non-equivalence and “distribution forecast targeting.”
    Keywords: Optimal policy, multiplicative uncertainty
    JEL: E42 E52 E58
    Date: 2005
  2. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    Abstract: This paper investigates the international transmission of productivity shocks in a sample of five G7 countries. For each country, using long-run restrictions, we identify shocks that increase permanently domestic labor productivity in manufacturing (our measure of tradables) relative to an aggregate of other industrial countries including the rest of the G7. We find that, consistent with standard theory, these shocks raise relative consumption, deteriorate net exports, and raise the relative price of nontradables --- in full accord with the Harrod-Balassa-Samuelson hypothesis. Moreover, the deterioration of the external account is fairly persistent, especially for the US. The response of the real exchange rate and (our proxy for) the terms of trade differs across countries: while both relative prices depreciate in Italy and the UK (smaller and more open economies), they appreciate in the US and Japan (the largest and least open economies in our sample); results are however inconclusive for Germany. These findings question a common view in the literature, that a country's terms of trade fall when its output grows, thus providing a mechanism to contain differences in national wealth when productivity levels do not converge. They enhance our understanding of important episodes such as the strong real appreciation of the dollar as the US productivity growth accelerated in the second half of the 1990s. They also provide an empirical contribution to the current debate on the adjustment of the US current account position. Contrary to widespread presumptions, productivity growth in the US tradable sector does not necessarily improve the US trade deficit, nor deteriorate the US terms of trade, at least in the short and medium run.
    JEL: F32 F41 F42
    Date: 2006–08
  3. By: Argia M. Sbordone
    Abstract: This paper analyzes the dynamics of prices and wages using a limited information approach to estimation. I estimate a two-equation model for the determination of prices and wages derived from an optimization-based dynamic model in which both goods and labor markets are monopolistically competitive; prices and wages can be reoptimized only at random intervals; and, when prices and wages are not reoptimized, they can be partially adjusted to previous-period aggregate inflation. The estimation procedure is a two-step minimum distance estimation that exploits the restrictions imposed by the model on a time-series representation of the data. In the first step, I estimate an unrestricted autoregressive representation of the variables of interest. In the second, I express the model solution as a constrained autoregressive representation of the data and define the distance between unconstrained and constrained representations as a function of the structural parameters that characterize the joint dynamics of inflation and labor share. This function summarizes the cross-equation restrictions between the model and the time-series representations of the data. I then estimate the parameters of interest by minimizing a quadratic function of that distance. I find that the estimated dynamics of prices and wages track actual dynamics quite well and that the estimated parameters are consistent with the observed length of nominal contracts.
    Keywords: Prices ; Wages ; Estimation theory ; Inflation (Finance)
    Date: 2006
  4. By: Peter N. Ireland
    Abstract: This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve's unobserved inflation target. The results indicate that the target rose from 1 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2 1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target.
    JEL: E31 E32 E52
    Date: 2006–08
  5. By: Linda S. Goldberg; Cédric Tille
    Abstract: The pattern of international trade adjustment is affected by the continuing international role of the dollar and related evidence on exchange rate pass-through into prices. This paper argues that a depreciation of the dollar would have asymmetric effects on flows between the United States and its trading partners. With low exchange rate pass-through to U.S. import prices and high exchange rate pass-through to the local prices of countries consuming U.S. exports, the effect of dollar depreciation on real trade flows is dominated by an adjustment in U.S. export quantities, which increase as U.S. goods become cheaper in the rest of the world. Real U.S. imports are affected less because U.S. prices are more insulated from exchange rate movements — pass-through is low and dollar invoicing is high. In relation to prices, the effects on the U.S. terms of trade are limited: U.S. exporters earn the same amount of dollars for each unit shipped abroad, and U.S. consumers do not encounter more expensive imports. Movements in dollar exchange rates also affect the international trade transactions of countries invoicing some of their trade in dollars, even when these countries are not transacting directly with the United States.
    JEL: F1 F3 F4
    Date: 2006–08
  6. By: Monika Piazzesi; Eric T. Swanson
    Abstract: Many researchers have used federal funds futures rates as measures of financial markets' expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment. In this paper, we document that excess returns on federal funds futures have been positive on average and strongly countercyclical. In particular, excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business-cycle indicators such as Treasury yield spreads and corporate bond spreads. Excess returns on eurodollar futures display similar patterns. We document that simply ignoring these risk premia significantly biases forecasts of the future path of monetary policy. We also show that risk premia matter for some futures-based measures of monetary policy shocks used in the literature.
    Keywords: Federal funds rate ; Federal funds market (United States) ; Monetary policy
    Date: 2006
  7. By: John Williamson (Institute for International Economics)
    Date: 2006–06–31
  8. By: Christopher J. Neely; Paul A. Weller; Joshua M. Ulrich
    Abstract: We analyze the intertemporal stability of returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously published rules. The excess returns of the 1970s and 1980s were genuine and not just the result of data mining. But these profit opportunities had disappeared by the mid-1990s for filter and moving average (MA) rules. Returns to less-studied rules, such as channel, ARIMA, genetic programming and Markov rules, also have declined, but have probably not completely disappeared. The volatility of returns makes it difficult to estimate mean returns precisely. The most likely time for a structural break in the MA and filter rule returns is the early 1990s. These regularities are consistent with the Adaptive Markets Hypothesis (Lo, 2004), but not with the Efficient Markets Hypothesis.
    Keywords: Foreign exchange market ; Foreign exchange
    Date: 2006
  9. By: Craig Burnside; Martin Eichenbaum; Isaac Kleshchelski; Sergio Rebelo
    Abstract: Currencies that are at a forward premium tend to depreciate. This `forward-premium puzzle' represents an egregious deviation from uncovered interest parity. We document the properties of returns to currency speculation strategies that exploit this anomaly. The first strategy, known as the carry trade, is widely used by practitioners. This strategy involves selling currencies forward that are at a forward premium and buying currencies forward that are at a forward discount. The second strategy relies on a particular regression to forecast the payoff to selling currencies forward. We show that these strategies yield high Sharpe ratios which are not a compensation for risk. However, these Sharpe ratios do not represent unexploited profit opportunities. In the presence of microstructure frictions, spot and forward exchange rates move against traders as they increase their positions. The resulting `price pressure' drives a wedge between average and marginal Sharpe ratios. We argue that marginal Sharpe ratios are zero even though average Sharpe ratios are positive.
    JEL: E24 F31 G15
    Date: 2006–08
  10. By: Ruby Shih (Department of Economics, University of Victoria); David E. A. Giles (Department of Economics, University of Victoria)
    Abstract: We use survival models to analyze the duration of the spells associated with the interest rate used by the Bank of Canada as its monetary policy instrument. Both non-parametric and parametric models are estimated, allowing for right-censoring of the data, and time-varying covariates. We find that the data are explained well by an accelerated failure time Weibull model, with the annual rate of inflation and the quarterly rate of growth in GDP as covariates. The model indicates that there is positive duration dependence in the interest rate spells, and that unemployment and exchange rate effects are insignificant.
    Keywords: Inflation target, survival analysis, monetary policy
    JEL: C14 C42 E43
    Date: 2006–09–08
  11. By: Ansgar Belke (University of Hohenheim); Bernhard Herz (University of Bayreuth); Lukas Vogel (University of Bayreuth)
    Abstract: This paper investigates the relationship between the exchange rate regime and the degree of structural reforms using panel data techniques. We look at a broad sample of countries (the “world sample”) and also an OECD sample. Our main findings suggest that adopting a fixed exchange rate rule is positively correlated with the degree of overall structural reforms and the trade component. The paper also highlights the fact that considering a heterogeneous panel of countries as opposed to a limited does not matter for this results.
    Date: 2006–06–07
  12. By: Marika Karanassou (Queen Mary, University of London and IZA Bonn); Hector Sala (Universitat Autònoma de Barcelona and IZA Bonn); Dennis J. Snower (Kiel Institute for World Economics, University of Kiel, CEPR and IZA Bonn)
    Abstract: The conventional wisdom that inflation and unemployment are unrelated in the long-run implies that these phenomena can be analysed by separate branches of economics. The macro literature tries to explain inflation dynamics and estimates the NAIRU. The labour macro literature tries to explain unemployment dynamics and determine the real economic factors that drive the natural rate of unemployment. We show that the orthodox view that the New Keynesian Phillips curve is vertical in the long-run and that it cannot generate substantial inflation persistence relies on the implausible assumption of a zero interest rate. In the light of these results, we argue that a holistic framework is needed to jointly explain the evolution of inflation and unemployment.
    Keywords: natural rate of unemployment, NAIRU, New Keynesian Phillips Curve, inflation-unemployment tradeoff, inflation dynamics, unemployment dynamics
    JEL: E24 E31
    Date: 2006–08
  13. By: Efrem Castelnuovo (University of Padua)
    Abstract: This paper employs a calibrated new-Keynesian DSGE model to assess the relative importance of two different, potentially important drivers of the Great Moderation in the U.S., namely 'good policy' vs. 'good luck'. The calibrated model is capable to replicate the actual standard deviations of inflation and output. Factual and counterfactual simulations are run in order to gauge the relative importance of the systematic monetary policy vs. the stochastic shocks hitting the economic system in shaping some macroeconomic volatilities. Importantly, under the bad policy scenario sunspots may influence the equilibrium values of the macroeconomic variables of interest, and distortions in the transmission mechanism going from the structural shocks to the variables of interest are allowed for. Our findings support the relevance of both drivers in causing inflation volatility. By contrast, output volatility can hardly be explained by a monetary policy switch like the one occurred in the U.S. at the end of the '70s.
    JEL: E30 E52
    Date: 2006–08
  14. By: Mark J. Jensen
    Abstract: Empirical support for the long-run Fisher effect, a hypothesis that a permanent change in inflation leads to an equal change in the nominal interest rate, has been hard to come by. This paper provides a plausible explanation of why past studies have been unable to find support for the long-run Fisher effect. This paper argues that the necessary permanent change to the inflation rate following a monetary shock has not occurred in the industrialized countries of Australia, Austria, Belgium, Canada, Denmark, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States. Instead, this paper shows that inflation in these countries follows a mean-reverting, fractionally integrated, long-memory process, not the nonstationary inflation process that is integrated of order one or larger found in previous studies of the Fisher effect. Applying a bivariate maximum likelihood estimator to a fractionally integrated model of inflation and the nominal interest rate, the inflation rate in all seventeen countries is found to be a highly persistent, fractionally integrated process with a positive differencing parameter significantly less than one. Hence, in the long run, inflation in these countries will be unaffected by a monetary shock, and a test of the long-run Fisher effect will be invalid and uninformative as to the truthfulness of the long-run Fisher effect hypothesis.
    Date: 2006
  15. By: Zeno Enders
    Abstract: A model of limited participation in the asset market is developed, in which varieties of consumption bundles are purchased sequentially. By this, heterogeneity in money holdings and in the effective elasticity of substitution of consumers arises, which affects optimal markups chosen by oligopolistic firms. The model generates a short-term inflation-output trade off, although all firms can set their optimal price each period and no informational problems exist. The responses are persistent even after a one-time monetary shock due to an internal propagation mechanism that stems from the slow dissemination of newly injected money. Furthermore, a liquidity effect, countercyclical markups, procyclical profits and marginal costs after monetary shocks are obtained. The model is simple and tractable, such that analytical results for the linearized model can be derived.
    Keywords: Limited Participation, Countercyclical Markups, Liquidity Effect Phillips Curve, Oligopolistic Competition
    JEL: E31 E32 E51
    Date: 2006
  16. By: Andrea Terzi
    Abstract: The 1990s witnessed an increase in international financial turbulence. In fact, financial crises have become a global policy issue, due to their frequency, size, geographic extension, and social costs, while an array of policy actions have been advocated to prevent crises from happening again. One significant, yet controversial question is whether efforts should be directed towards national reforms in emerging markets or, rather, towards a new international design of international payments. After a critical review of the standing proposals, this paper contends that this debate has not yet fully explored one of the problems of international instability, that is to say, the problem raised by international payments in a world where currencies are of diverse quality. As Keynes firmly contended, the monetary side of the (global) economy is not a neutral factor. In fact, it may be that some of the fundamental factors behind any model of international financial instability, are the problems posed by the different degrees of “international moneyness” that make currencies unequal. Viewed in this light, a major re-design of international payments systems is warranted, and options seem limited to either world dollarization or the ‘bancor’ solution. Recent reformulations of Keynes’s original ‘bancor’ proposal seem to be a more viable alternative to either the status quo or world dollarization.
    Keywords: Currency hierarchy, Currency crises, Banking crises, Capital flows, International monetary arrangements and institutions
    JEL: F02 F33 F34 G15
    Date: 2005–10
  17. By: Jose Eduardo de A. Ferreira
    Abstract: This paper investigates the presence of periodically collapsing rational bubbles in exchange rates for a sample of industrialised countries. A periodically collapsing rational bubble is defined as an explosive deviation from economic fundamentals with distinct expansion and contraction phases in finite time. By using Markov-switching regime models we were not able to find robust evidence of a bubble driving the exchange rate away from fundamentals. Moreover, the results also revealed significant non-linearities and different regimes. The importance of these findings suggests that linear monetary models may not be appropriate to examine exchange rate movements.
    Keywords: Foreign Exchange; Bubbles; Fundamentals; Markov-Switching; Assets
    JEL: F31 F37 F41
    Date: 2006–09
  18. By: Fabio Maccheroni; Massimo Marinacci; Aldo Rustichini
    Abstract: We introduce and axiomatize dynamic variational preferences, the dynamic version of the variational preferences we axiomatized in [21], which generalize the multiple priors preferences of Gilboa and Schmeidler [9], and include the Multiplier Preferences inspired by robust control and first used in macroeconomics by Hansen and Sargent (see [11]), as well as the classic Mean Variance Preferences of Markovitz and Tobin. We provide a condition that makes dynamic variational preferences time consistent, and their representation recursive. This gives them the analytical tractability needed in macroeconomic and financial applications. A corollary of our results is that Multiplier Preferences are time consistent, but Mean Variance Preferences are not.
    Keywords: Ambiguity Aversion; Model Uncertainty; Recursive Utility; Robust Control; Time Consistency
    JEL: C61 D81
    Date: 2006
  19. By: Bruce Mizrach (Rutgers University)
    Abstract: This entry for the New Palgrave covers developments in nonlinear time series analysis over the last 25 years.
    Keywords: nonlinear, time series, analysis
    JEL: C22 C14 C45
    Date: 2006–02–25
  20. By: Mark Gertler; Antonella Trigari
    Abstract: A number of authors have recently emphasized that the conventional model of unemployment dynamics due to Mortensen and Pissarides has difficulty accounting for the relatively volatile behavior of labor market activity over the business cycle. We address this issue by modifying the MP framework to allow for staggered multiperiod wage contracting. What emerges is a tractable relation for wage dynamics that is a natural generalization of the period-by-period Nash bargaining outcome in the conventional formulation. An interesting side-product is the emergence of spillover effects of average wages on the bargaining process. We then show that a reasonable calibration of the model can account well for the cyclical behavior of wages and labor market activity observed in the data. The spillover effects turn out to be important in this respect.
    JEL: E24 E32 J23 J3
    Date: 2006–08
  21. By: John Hey; Julia Knoll
    Abstract: We report on a simple experiment which enables us to infer how far people plan ahead when taking decisions in a dynamic risky context. Usually economic theory assumes that people plan right to the end of the planning horizon. We find that this is true for a little over half of the subjects in the experiment, while a little under one half seem not to plan ahead at all.
    Keywords: Planning, dominance, myopia, naivety, sophistication
    JEL: D80 C80
    Date: 2006–08
  22. By: Hugh Rockoff (Rutgers); John Landon-Lane (Rutgers)
    Abstract: This paper contains all of the statistical results underlying our paper "The Origin and Diffusion of Shocks to Regional Interest Rates in the United States, 1880-2002." It also contains a table of the underlying data, and a discussion of how the data was constructed.
    Keywords: interest rates, monetary unions
    JEL: N22
    Date: 2006–07–31
  23. By: Michael Bordo; Thomas Helbling; Harold James
    Abstract: In this paper we examine the experience of Switzerland’s devaluation in 1936. The Swiss case is of interest because Switzerland was a key member of the gold bloc, and much of the modern academic literature on the Great Depression tries to explain why Switzerland and the other gold bloc countries, France, and the Netherlands, remained on the gold standard until the bitter end. We ask the following questions: what were the issues at stake in the political debate? What was the cost to Switzerland of the delay in the franc devaluation? What would have been the costs and benefits of an earlier exchange rate policy? More specifically, what would have happened if Switzerland had either joined the British and devalued in September 1931, or followed the United States in April 1933? To answer these questions we construct a simple open economy macro model of the interwar Swiss economy. On the basis of this model we then posit counterfactual scenarios of alternative exchange rate pegs in 1931 and 1933. Our simulations clearly show a significant and large increase in real economic activity. If Switzerland had devalued with Britain in 1931, the output level in 1935 would have been some 18 per cent higher than it actually was in that year. If Switzerland had waited until 1933 to devalue, the improvement would have been about 15 per cent higher. The reasons Switzerland did not devalue earlier reflected in part a conservatism in policy making as a result of the difficulty of making exchange rate policy in a democratic setting and in part the consequence of a political economy which favored the fractionalization of different interest groups.
    JEL: N1 N13
    Date: 2006–08
  24. By: Philippe Moës (National Bank of Belgium, Research Department)
    Abstract: A multivariate structural time series model is applied to the factor inputs of a production function (or components thereof) to estimate the Belgian output gap. The usefulness of capacity utilization is also investigated but the variable is not given a prominent status. The number of independent cycles - there may be more than one - and the frequencies retained in the cycles are not restricted a priori. To allow for leads and lags between variables, phase shifts à la Rünstler are introduced at a later stage. Additivity of leads and lags is not imposed. Over 1983-2004, a 3.5 years periodicity is found in the cycles. At that periodicity, the cycles in the participation and unemployment rates are negligible. Two independent cycles hide behind the cycles of the other variables: hours, TFP and capacity utilization. A common cycle restriction is rejected, even allowing for idiosyncratic cycles. The cycles present in the whole data set cannot be subsumed in a single measure such as capacity utilization. Phase shifts are significant, with hours leading by as much as 3 quarters and capacity utilization lagging but additivity of leads and lags is rejected. The resulting output gap has much in common with the NBB business survey indicator.
    Keywords: Business cycle, output gap, phase shifts, structural time series models
    JEL: C32 E32
    Date: 2006–09
  25. By: Perea Andrés (METEOR)
    Abstract: In this survey we analyze, and compare, various sufficient epistemic conditions for backward induction that have been proposed in the literature. To this purpose we present a simple epistemic base model for games with perfect information, and translate the different models into the language of this base model. As such, we formulate the various sufficient conditions for backward induction in a uniform language, which enables us to explictly analyze their differences and similarities.
    Keywords: mathematical economics;
    Date: 2006
  26. By: Edward W. Piotrowski; Jan Sladkowski
    Abstract: Most of parameters used to describe states and dynamics of financial market depend on proportions of the appropriate variables rather than on their actual values. Therefore, projective geometry seems to be the correct language to describe the theater of financial activities. We suppose that the object of interest of agents, called here baskets, form a vector space over the reals. A portfolio is defined as an equivalence class of baskets containing assets in the same proportions. Therefore portfolios form a projective space. Cross ratios, being invariants of projective maps, form key structures in the proposed model. Quotation with respect to an asset X (i.e. in units of X) are given by linear maps. Among various types of metrics that have financial interpretation, the min-max metrics on the space of quotations can be introduced. This metrics has an interesting interpretation in terms of rates of return. It can be generalized so that to incorporate a new numerical parameter (called temperature) that describes agent's lack of knowledge about the state of the market. In a dual way, a metrics on the space of market quotation is defined. In addition, one can define an interesting metric structure on the space of portfolios/quotation that is invariant with respect to hyperbolic (Lorentz) symmetries of the space of portfolios. The introduced formalism opens new interesting and possibly fruitful fields of research.
  27. By: Alfredo Gª Hiernaux (Universidad Complutense de Madrid. Facultad de CC. Económicas y Empresariales. Dpto. Fundamentos del An´alisis Económico II.); Miguel Jerez (Universidad Complutense de Madrid. Facultad de CC. Económicas y Empresariales. Dpto. Fundamentos del An´alisis Económico II.); José Casals (Universidad Complutense de Madrid. Facultad de CC. Económicas y Empresariales. Dpto. Fundamentos del An´alisis Económico II)
    Abstract: We propose two fast, stable and consistent methods to estimate time series models expressed in their equivalent state-space form. They are useful both, to obtain adequate initial conditions for a maximum-likelihood iteration, or to provide final estimates when maximum-likelihood is considered inadequate or costly. The state-space foundation of these procedures implies that they can estimate any linear fixed-coefficients model, such as ARIMA, VARMAX or structural time series models. The computational and finitesample performance of both methods is very good, as a simulation exercise shows.
    Date: 2005
  28. By: Michael C. Burda (Humboldt University of Berlin, CEPR and IZA Bonn); Daniel S. Hamermesh (University of Texas at Austin, NBER and IZA Bonn); Philippe Weil (Université Libre de Bruxelles (ECARES), Institut d’Études Politiques de Paris, CEPR and NBER)
    Abstract: Using two time-diary data sets each for Germany, Italy the Netherlands and the U.S. from 1985-2003, we demonstrate that Americans work more than Europeans: 1) in the market; 2) in total (market and home production)-- there is no one-for-one tradeoff across countries in total work; 3) at unusual times of the day and on weekends. In addition, gender differences in total work within a given country are significantly smaller than variation across countries and time. We conclude that some of the transatlantic differences could reflect inferior equilibria that are generated by social norms and externalities. While an important outlet for total work, home production by females appears very sensitive to tax rates in the G-7 countries. We adapt the theory of home production to account for fixed costs of market work and adduce evidence that they, in contrast to other relative costs, vary significantly across countries.
    Keywords: time use, gender inequality, household production, hours of work
    JEL: J22 E24 D13
    Date: 2006–08
  29. By: Thomas Dohmen (IZA Bonn); Armin Falk (IZA Bonn and University of Bonn); David Huffman (IZA Bonn); Uwe Sunde (IZA Bonn and University of Bonn)
    Abstract: Prominent economic theories have emphasized the role of commonly held perceptions and expectations for determining macroeconomic outcomes. A key empirical question is how such collectively held beliefs are formed. We use the FIFA World Cup 2006 as a natural experiment. We provide direct evidence that seemingly irrelevant events (the outcomes of soccer matches) can systematically affect individual perceptions about economic prospects, both on a personal and economy-wide level.
    Keywords: expectation formation, sunspots, soccer world cup, macroeconomic outcomes, psychology
    JEL: D8 D0 E0
    Date: 2006–08
  30. By: Csilla Horváth; Judit Krekó (Magyar Nemzeti Bank); Anna Naszódi (Magyar Nemzeti Bank)
    Abstract: In this paper we analyze the bank lending channel in Hungary. We provide a brief overview of the theory and the empirical approaches used to investigate the existence of bank lending channel. From the possible methods we use the generally applied approach suggested by Kahsyap and Stein (1995) which relies on discovering asymmetries in changes in the amount of loans to monetary actions in order to isolate supply and demand effects. We estimate an ARDL model where the asymmetric effects are captured by interaction-terms. We find significant asymmetric adjustment of loan quantities along certain bank characteristics. The existence of bank lending channel, and therefore loan supply decisions of banks, can explain these asymmetries. In addition, we do not find any sign for asymmetric loan demand adjustment along these variables. According to these findings, we cannot rule out the existence of the bank lending channel in Hungary.
    Keywords: monetary transmission, credit channel, bank lending channel, ARDL model.
    JEL: C23 E44 E52 G21
    Date: 2006
  31. By: Ali Hakan Kara
    Date: 2006
  32. By: Macedo, Jorge Braga de; Pereira, Luis Brites
    Abstract: This paper studies the credibility of the currency peg of Cape Verde (CV) by assessing the impact of economic fundamentals, our explanatory variables, on the stochastic properties of Exchange Market Pressure (EMP), the dependent variable, using EGARCH-M models. Our EMP descriptive analysis finds a substantial reduction in the number of crisis episodes and of (unconditional) volatility after the peg’s adoption. Moreover, our estimation results suggest that mean EMP is driven by fundamentals and that conditional variability is more sensitive to negative shocks. We also find evidence that the expected return from holding CV’s assets is lower under the currency peg for the same increase in monthly volatility. The reason is that the return’s composition is “more virtuous”, as it results from the strengthening of CV’s foreign reserve position and is not due to either a larger risk premium or favourable exchange rate movements. We take this to be a sign of the credibility of the peg, which apparently reflects the intertemporal credibility of CV’s economic policy and so has successfully withstood international markets’ scrutiny.
    Date: 2006

This nep-cba issue is ©2006 by Alexander Mihailov. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.