nep-cba New Economics Papers
on Central Banking
Issue of 2006‒09‒23
thirty-one papers chosen by
Alexander Mihailov
University of Reading

  1. Monetary Policy Strategy: How Did We Get Here? By Frederic S. Mishkin
  2. A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best? By Ray C. Fair
  3. Endogenous Monetary Policy Regime Change By Troy Davig; Eric M. Leeper
  4. Generalizing the Taylor Principle By Troy Davig; Eric M. Leeper
  5. A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical" Sources of Persistence Become Superfluous? By Fabio Milani
  6. The Evolution of the Fed's Inflation Target in an Estimated Model under RE and Learning By Fabio Milani
  7. Estimating the Inflation-Output Variability Frontier with Inflation Targeting: A VAR Approach By W. Douglas McMillin; James S. Fackler
  9. Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating' By Reginaldo P. Nogueira Jnr
  10. The optimal degree of exchange rate flexibility: A target zone approach By Jesús Rodríguez López; Hugo Rodríguez Mendizábal
  11. Trade Volume Effects of the Euro: Aggregate and Sector Estimates By Flam, Harry; Nordström, Håkan
  12. Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective By Marika Karanassou; Hector Sala; Dennis J. Snower
  13. The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy By Thorvardur Tjörvi Ólafsson
  14. Forecasting using Bayesian and Information Theoretic Model Averaging: An Application to UK Inflation By George Kapetanios; Vincent Labhard; Simon Price
  15. Forecasting Using Predictive Likelihood Model Averaging By George Kapetanios; Vincent Labhard; Simon Price
  16. Uncover Latent PPP by Dynamic Factor Error Correction Model (DF-ECM) Approach: Evidence from Five OECD Countries By Duo Qin
  17. Are twin currency and debt crises special? By Bauer, Christian; Herz, Bernhard; Karb, Volker
  18. Banks’ regulatory buffers, liquidity networks and monetary policy transmission By Merkl, Christian; Stolz, Stéphanie
  19. Inflation, Variability, and the Evolution of Human Capital in a Model with Transactions Costs By Dimitrios Varvarigos
  20. Generic Determinacy and Money Non-Neutrality of International Monetary Equilibria By Dimitrios P. Tsomocos
  21. Do actions speak louder than words? Household expectations of inflation based on micro consumption data By Inoue, Atsushi; Kilian, Lutz; Kiraz, Fatma Burcu
  22. Can a time-varying equilibrium real interest rate explain the excess sensitivity puzzle? By Alexius, Annika; Welz, Peter
  23. Dynamic models with non clearing markets By Jean-Pascal Bénassy
  24. A note on price-taking and price-making behaviours in general equilibrium oligopoly models By Ludovic Julien; Fabrice Tricou
  25. Expansionary fiscal consolidations in Europe - new evidence By António Afonso
  26. Forecasting with panel data By Baltagi, Badi H.
  28. Customer order flow, information and liquidity on the Hungarian foreign exchange market By Áron Gereben; György Gyomai; Norbert Kiss M.
  29. Simple efficient policy rules and inflation control in Iceland By Ben Hunt
  30. International Lessons for the Property Price Boom in South Africa By Funke, Norbert; Kißmer, Friedrich; Wagner, Helmut
  31. Macroeconomic Effects of Fiscal Policies: Empirical Evidence from Bangladesh, China, Indonesia and the Philippines By Geoffrey Ducanes; Marie Anne Cagas; Duo Qin; Pilipinas Quising; Mohammad Abdur Razzaque

  1. By: Frederic S. Mishkin
    Abstract: This paper, which is the introductory chapter in my book, Monetary Policy Strategy, forthcoming from MIT Press, outlines how thinking in academia and central banks about monetary policy strategy has evolved over time. It shows that six ideas that are now accepted by monetary authorities and governments in almost all countries of the world have led to improved monetary performance: 1) there is no long-run tradeoff between output (employment) and inflation; 2) expectations are critical to monetary policy outcomes; 3) inflation has high costs; 4) monetary policy is subject to the time-inconsistency problem; 5) central bank independence helps improve the efficacy of monetary policy; and 6) a strong nominal anchor is the key to producing good monetary policy outcomes.
    JEL: E52 E58
    Date: 2006–09
  2. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper examines the performances of the past five Federal Reserve chairmen using optimal control techniques and a macroeconometric model. Each chairman is judged by the actual performance of the economy under his term relative to what the performance would have been had he behaved optimally. Comparing chairmen only on the basis of the actual performance of the economy is not appropriate because it does not control for different exogenous-variable values and shocks that the Fed has no control over. The results suggest that Greenspan was indeed the best, but followed closely by Martin. Volcker also does well, but probably not quite as well as Greenspan and Martin. However, Volcker does much better than one would conclude he did by just looking at the actual state of the economy during his term. Miller and Burns do poorly; they should have been considerably tighter than they were.
    Keywords: Fed chairmen, Optimal control, Economic performance
    JEL: E52
    Date: 2006–09
  3. By: Troy Davig (Federal Reserve Bank of Kansas City); Eric M. Leeper (Indiana University Bloomington)
    Abstract: This paper makes changes in monetary policy rules (or regimes) endogenous. Changes are triggered when certain endogenous variables cross specified thresholds. Rational expectations equilibria are examined in three models of threshold switching to illustrate that (i) expectations formation effects generated by the possibility of regime change can be quantitatively important; (ii) symmetric shocks can have asymmetric effects; (iii) endogenous switching is a natural way to formally model preemptive policy actions. In a conventional calibrated model, preemptive policy shifts agents’ expectations, enhancing the ability of policy to offset demand shocks; this yields a quantitatively significant “preemption dividend.”
    Keywords: Markov switching, Taylor rule, expectations formation
    JEL: E31 E32 E52 E58
    Date: 2006–08
  4. By: Troy Davig (Federal Reserve Bank of Kansas City); Eric M. Leeper (Indiana University Bloomington)
    Abstract: The paper generalizes the Taylor principle—the proposition that central banks can stabilize the macroeconomy by raising their interest rate instrument more than one-for-one in response to higher inflation—to an environment in which reaction coefficients in the monetary policy rule evolve according to a Markov process. We derive a long-run Taylor principle that delivers unique bounded equilibria in two standard models. Policy can satisfy the Taylor principle in the long run, even while deviating from it substantially for brief periods or modestly for prolonged periods. Macroeconomic volatility can be higher in periods when the Taylor principle is not satisfied, not because of indeterminacy, but because monetary policy amplifies the impacts of fundamental shocks. Regime change alters the qualitative and quantitative predictions of a conventional new Keynesian model, yielding fresh interpretations of existing empirical work.
    Keywords: regime change, indeterminacy, monetary policy
    JEL: E31 E52 C62
    Date: 2006–08
  5. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper estimates a monetary DSGE model with learning introduced from the primitive assumptions. The model nests infinite-horizon learning and features, such as habit formation in consumption and inflation indexation, that are essential for the model fit under rational expectations. I estimate the DSGE model by Bayesian methods, obtaining estimates of the main learning parameter, the constant gain, jointly with the deep parameters of the economy. The results show that relaxing the assumption of rational expectations in favor of learning may render mechanical sources of persistence superfluous. In particular, learning appears a crucial determinant of inflation inertia.
    Keywords: Infinite-horizon learning; DSGE model; Bayesian estimation; Non-rational expectations; Inflation persistence; Habit formation
    JEL: C11 D84 E30 E50 E52
    Date: 2005–12
  6. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper aims to infer the evolving Fed's inflation target by estimating a monetary model under the assumptions of RE and learning. The results emphasize how different assumptions about expectations may have important effects on the inferred target movements.
    Keywords: Time-varying inflation target; Learning, Expectations, Bayesian estimation
    JEL: E50 E52 E58
    Date: 2006–09
  7. By: W. Douglas McMillin; James S. Fackler
    Abstract: This paper (i) illustrates how a VAR model can be used to evaluate inflation targeting, (ii) derives the policy frontier available to the central bank using counterfactual experiments with real time data, and (iii) estimates how this frontier has changed over time in terms of the position and slope of the available tradeoff between output gap variability and inflation variability under inflation targeting. Various inflation targets are considered as are tolerance bands of varying width around these targets. The results indicate that over time (i) a given reduction in inflation variability is associated with a smaller rise in output variability and that (ii) a given inflation variability is achieved with smaller interest rate volatility. Consistent with the data, our results require federal funds rate persistence, though no instrument instability was observed. One interpretation of these results is that they reflect the growing credibility of the Federal Reserve.
  8. By: Jan Libich
    Abstract: This paper shows an avenue through which a numerical inflation target ensures low inflation and high credibility: one that is independent of the usual Walsh incentive contract. Our novel game theoretic framework - a generalization of alternating move games - formalizes the fact that since the target is explicit/legislated, it cannot be frequently reconsidered. The "explicitness" therefore serves as a commitment device. There are two key results. First, it is shown that if the inflation target is sufficiently rigid (explicit) relative to the public's wages, low inflation is time consistent and hence credible even if the policymaker's output target is above potential. Second, it is found that the central banker's optimal explicitness level is decreasing in the degree of her patience/independence (due to their substitutability in achieving credibility). Our analysis therefore offers an explanation for the "inflation and credibility convergence" over the past two decades as well as the fact that inflation targets were legislated primarily by countries that had lacked central bank independence like New Zealand, Canada and the UK rather than the US, Germany, or Switzerland. We show that there exists fair empirical support for all the predictions of our analysis.
    JEL: E42 E61 C70 C72
    Date: 2006–09
  9. By: Reginaldo P. Nogueira Jnr
    Abstract: The paper presents evidence on exchange rate pass-through and the "Fear of Floating" hypothesis before and after Inflation Targeting for a set of developed and emerging market economies. We use a structural VAR model to estimate the effect of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. We then use several different methodologies to examine the existence of "Fear of Floating" practices. We observe a drastic reduction in direct foreign exchange market intervention after the adoption of Inflation Targeting. As the exchange rate pass-through still matters for the attainment of the inflation targets, "Fear of Floating" seems to play only a minor role for most economies in our sample.
    Keywords: Inflation Targeting; Exchange Rate Pass-Through, 'Fear of Floating'
    JEL: E31 E52 F31 F41
    Date: 2006–09
  10. By: Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); Hugo Rodríguez Mendizábal (Department of Economics, Universidad Autónoma de Barcelona)
    Abstract: This paper presents a benchmark model that rationalizes the choice of the degree of exchange rate flexibility. We show that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. Furthermore, the model is consistent with some known stylized facts in the empirical literature on target zones that previous models were not able to generate jointly, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchage rate to fundamentals and the shape of the exchange rate stochastic distribution.
    Keywords: Target zones, exchange rate agreements, monetary policy, time consistency.
    JEL: E52 F31 F33
    Date: 2006–09
  11. By: Flam, Harry (Institute for International Economic Studies, Stockholm University); Nordström, Håkan (Kommerskollegium)
    Abstract: The gravity model is used to estimate the trade volume effects of the creation of the European currency union. The euro is estimated to have raised the level of aggregate trade between euro countries in 1998-2002 compared to 1989-1997 by 15 per cent and the level of trade with outside countries by 8 per cent. The effect is clearly increasing over time. Estimates for one-digit SITC sectors yield a concentration of effects to highly processed manufactures, indicating that the spillover is caused by increasing vertical specialization across countries.
    Keywords: -
    JEL: F10
    Date: 2006–06–01
  12. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA); Dennis J. Snower (Institute for World Economics, CEPR and IZA)
    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: 2006–09
  13. By: Thorvardur Tjörvi Ólafsson
    Abstract: This paper provides a survey on the recent literature on the new Keynesian Phillips curve: the controversies surrounding its microfoundation and estimation, the approaches that have been tried to improve its empirical fit and the challenges it faces adapting to the open-economy framework. The new Keynesian Phillips curve has been severely criticized for poor empirical dynamics. Suggested improvements involve making some adjustments to the standard sticky price framework, e.g. introducing backwardness and real rigidities, or abandoning the sticky price model and relying on models of inattentiveness, learning or state-dependant pricing. The introduction of openeconomy factors into the new Keynesian Phillips curve complicate matters further as it must capture the nexus between price setting, inflation and the exchange rate. This is nevertheless a crucial feature for any model to be used for inflation forecasting in a small open economy like Iceland.
    Date: 2006–09
  14. By: George Kapetanios (Queen Mary, University of London); Vincent Labhard (Bank of England); Simon Price (Bank of England)
    Abstract: In recent years there has been increasing interest in forecasting methods that utilise large datasets, driven partly by the recognition that policymaking institutions need to process large quantities of information. Factor analysis is one popular way of doing this. Forecast combination is another, and it is on this that we concentrate. Bayesian model averaging methods have been widely advocated in this area, but a neglected frequentist approach is to use information theoretic based weights. We consider the use of model averaging in forecasting UK inflation with a large dataset from this perspective. We find that an information theoretic model averaging scheme can be a powerful alternative both to the more widely used Bayesian model averaging scheme and to factor models.
    Keywords: Forecasting, Inflation, Bayesian model averaging, Akaike criteria, Forecast combining
    JEL: C11 C15 C53
    Date: 2006–09
  15. By: George Kapetanios (Queen Mary, University of London); Vincent Labhard (Bank of England); Simon Price (Bank of England and City University)
    Abstract: Recently, there has been increasing interest in forecasting methods that utilise large datasets. We explore the possibility of forecasting with model averaging using the out-of-sample forecasting performance of various models in a frequentist setting, using the predictive likelihood. We apply our method to forecasting UK inflation and find that the new method performs well; in some respects it outperforms other averaging methods.
    Keywords: Forecasting, Inflation, Bayesian model averaging, Akaike criterion, Forecast combining
    JEL: C11 C15 C53
    Date: 2006–09
  16. By: Duo Qin (Queen Mary, University of London)
    Abstract: This study measures purchasing power parity (PPP) by means of the dynamic-factor errorcorrection model (DF-ECM) approach. Under this new approach, PPP is embedded in latent disequilibrium factors, which are extracted from a large variable set of bilateral price disparities; the factors are then used as error-correction leading indicators to explain exchange rate and inflation. Modelling experiments on five OECD countries using monthly data show promising results, which reverse the common belief that PPP is at best a very long-run relationship at the macro level.
    Keywords: Purchasing power parity, Law of one price, Dynamic factor, Error correction
    JEL: F31 C22 C33
    Date: 2006–09
  17. By: Bauer, Christian; Herz, Bernhard; Karb, Volker
    Abstract: We show theoretically and empirically that twin currency and debt crises should be treated as a particular crisis type. Twin currency and debt crises differ from both pure currency and pure debt crises in their determinants, the course of the crises, and their economic consequences. We find that each crises type has a unique set of macroeconomic causes. We also uncover internal contagion and selection bias effects which may lead to biased results if twin crises are not treated separately. Such a separation considerably improve the efficiency of early warning systems especially on debt and twin crises.
    Date: 2006
  18. By: Merkl, Christian; Stolz, Stéphanie
    Abstract: Based on a quarterly regulatory dataset for German banks from 1999 to 2004, this paper analyzes the effects of banks’ regulatory capital on the transmission of monetary policy in a system of liquidity networks. The dynamic panel regression results provide evidence in favor of the bank capital channel theory. Banks holding less regulatory capital and less interbank liquidity react more restrictively to a monetary tightening than their peers.
    Keywords: monetary policy transmission, bank lending channel, bank capital channel, liquidity networks
    JEL: C23 E52 G21 G28
    Date: 2006
  19. By: Dimitrios Varvarigos (Dept of Economics, Loughborough University)
    Abstract: In a monetary growth model, I show that average inflation inhibits growth while inflation volatility enhances it. The effect of nominal volatility on human capital accumulation depends on the response of money demand and the corresponding extent of transactions costs rather than from a direct, precautionary motive.
    Keywords: money; growth; volatility.
    JEL: E32 E60 O42
    Date: 2006–07
  20. By: Dimitrios P. Tsomocos
    Abstract: I address the issue of the 'number' of International Monetary Equilibria that the international finance model of Geanakoplos and Tsomocos (2002) possesses. The mainstream competitive model has locally unique equilibria with respect to the real side of the economy; however, it manifests nominal indeterminacy. Kareken and Wallace (1981) extend the O.L.G. indeterminacy result to a monetary model of the international economy. However, the role of monetary sector together with the market and agent heterogeneity remove real and nominal indeterminacy in the Geanakoplos and Tsomocos model. In particular, nominal indeterminacy abruptly disappears when private liquid wealth is non-zero. Finally, monetary policy becomes non-neutral since monetary changes affect nominal variables which in turn determine different real allocations. Lucas did not find these non-neutral effects in his model of international finance because he postulated a 'sell-all model' in which every agent sells everything he owns in every period. Thus, the number of transactions remain unaffected by definition regardless of any policy changes. Instead, when transactions emerge endogenously in equilibrium monetary policy has non-neutral effects provided that there exist potential gains to trade at the initial allocation of goods.
    Keywords: Determinacy, exchange rates, liquid wealth, non-neutrality, monetary policy
    JEL: D5 E5 E6 F1 F2 F3
    Date: 2006
  21. By: Inoue, Atsushi; Kilian, Lutz; Kiraz, Fatma Burcu
    Abstract: Survey data on household expectations of inflation are routinely used in economic analysis, yet it is not clear to what extent households are able to articulate their expectations in survey interviews. We propose an alternative approach to recovering households’ implicit expectations of inflation from their consumption expenditures. We show that these implicit expectations have predictive power for CPI inflation. They are better predictors of CPI inflation than survey responses, except for highly educated consumers. Moreover, households’ implicit inflation expectations respond to inflation news, consistent with recent work on the transmission of information across consumers. The response of consumers’ expectations to inflation news tends to increase with their level of education. Our evidence strengthens the case for macroeconomic models with sticky information.
    Keywords: Inflation Expectations, Consumer Expenditure Survey, Michigan Survey of Consumers, Survey of Professional Forecasters, Euler Equation
    JEL: D12 D84 E31
    Date: 2006
  22. By: Alexius, Annika (Department of Economics); Welz, Peter (Riksbanken)
    Abstract: The strong response of long-term interest rates to macroeconomic shocks has typically been explained in terms of informational asymmetries between the central bank and private agents. The standard models assume that the equilibrium real interest rate is constant over time and independent of structural shocks. We incorporate time-variation in the equilibrium real interest rate as function of structural shocks to e.g. productivity and demand. This extended model implies that forward interest rates at long horizons move about 40 basis points as the short-term interest rate increases one percentage point. In terms of regressions of changes in long-term interest rates on changes in the short-term interest rate, including a time-varying equilibrium real interest rate explains about half of the puzzle.
    Keywords: Term structure; equilibrium real interest rate; unobserved components model
    JEL: C51 E43 E52
    Date: 2006–09–11
  23. By: Jean-Pascal Bénassy
    Abstract: This article studies a new class of models which synthesize the two traditions of general equilibrium with nonclearing markets and imperfect competition on the one hand, and dynamic stochastic general equilibrium (DSGE) models on the other hand. This line of models has become a central paradigm of modern macroeconomics for at least three reasons: (a) it displays solid microeconomic foundations, (b) it is a highly synthetic theory, which combines in a unified framework general equilibrium, nonclearing markets, imperfect competition, growth theory and rational expectations, (c) it is also an empirical success, leading to substantial progress towards matching real world statistics.
    Date: 2006
  24. By: Ludovic Julien (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Fabrice Tricou (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: This paper explores the rationale of price-taking and price-making behaviours in the context of Walrasian and Cournotian pure exchange economies. Beside the influence of the number of agents, we underline the role of the structure of preferences. Through three equilibrium variations of the same basic economy, we obtain several results about price manipulation, about asymptotic identifications for large economies and for degenerate preferences, and about welfare comparisons. Perfect competition does not only correspond to the case of large economies, but may also concern economies where market powers are more or less equivalent.
    Keywords: Cournot-Walras equilibria, market power, perfect competition
    Date: 2006–09–08
  25. By: António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In order to assess the existence of expansionary fiscal consolidations in Europe, panel data models for private consumption are estimated for the EU15 countries, using annual data over the period 1970–2005. Three alternative approaches to determine fiscal episodes are used, and the level of government indebtedness is also taken into account. The results show some evidence in favour of the existence of expansionary fiscal consolidations, for a few budgetary spending items (general government final consumption, social transfers, and taxes), depending on the specification and on the time span used. On the other hand, the possibility of asymmetric effects of fiscal episodes does not seem to be corroborated by the results. JEL Classification: C23, E21, E62.
    Keywords: fiscal policy, expansionary fiscal consolidations, non-Keynesian effects, panel data models, European Union.
    Date: 2006–09
  26. By: Baltagi, Badi H.
    Abstract: This paper gives a brief survey of forecasting with panel data. Starting with a simple error component regression and surveying best linear unbiased prediction under various assumptions of the disturbance term. This includes various ARMA models as well as spatial autoregressive models. The paper also surveys how these forecasts have been used in panal data applications, running horse races between heterogeneous and homogeneous panel data models using out of sample forecasts.
    Keywords: Forecasting, BLUP, Panel Data, Spatial Dependence, Serial Correlation
    JEL: C33
    Date: 2006
  27. By: Jim Engle-Warnick; Nurlan Turdaliev
    Abstract: We experimentally test whether a class of monetary policy decision rules describes decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation. We find that Taylor-type rules fit the choice data well, and are instrumental in characterizing heterogeneity in decision making. Our experiment is the first to begin to organize data experimentally with an eye on monetary policy rules for this, one of the most widely watched and analyzed decisions in economics.
    JEL: C91 E42
    Date: 2006–09
  28. By: Áron Gereben (Magyar Nemzeti Bank); György Gyomai (Magyar Nemzeti Bank (at the time of writing)); Norbert Kiss M. (Magyar Nemzeti Bank)
    Abstract: Customer order flow – signed transaction volume between market makers and their customers – is a key concept in the microstructure approach to exchange rates. We attempt to explore what the data tells us about the role of customer order flow in the market for Hungarian forint, using the standard analytical framework of the FX microstructure literature. Our results confirm that customer order flow helps to explain exchange rate fluctuations, which suggests that customer order flow is a key source of information for the market makers. We also find that domestic and foreign customers play significantly different roles on the euro/Hungarian forint market: foreign players' order flow seems to provide the information that drives exchange rate fluctuations, whereas domestic customers are the source of market liquidity. We present evidence suggesting that current order flow from customers is able to provide a significantly better ‘forecast’ for the the exchange rate than the random walk benchmark in a simple Meese-Rogoff-type framework. However, we were unable to improve upon the random walk in a more realistic forecasting exercise. Finally, we highlight some features of our data that suggest that beyond microstructure, the traditional portfolio-balance channel of exchange rate determination is also in place.
    Keywords: customer order flow, microstructure, exchange rate.
    JEL: F31 G15
    Date: 2006
  29. By: Ben Hunt
    Abstract: In March 2001 Iceland introduced inflation targeting. In the three years that followed, inflation was quickly stabilized at the target rate and fluctuated well within the Central Bank's tolerance band. However, since February 2005 inflation has often been above the upper tolerance limit. This raises the question of how tightly is it feasible to control inflation in a very small open economy like Iceland. This paper attempts to provide some empirical answers to this question using small estimated macroeconomic models of Iceland, New Zealand, Canada, the United Kingdom and the United States. These models are used to derive efficient monetary policy frontiers that trace of the locus of the lowest combinations of inflation and output variability that are achievable under a range of alternative rules for operating monetary policy. These efficient policy frontiers illustrate that inflation stabilization is a considerably more daunting challenge in Iceland than in other industrial countries, even other very small industrial countries like New Zealand. The key reason for this result is the relative magnitudes of the shocks to which the economy is subjected. If inflation outside the target band undermines the credibility of monetary policy, thereby increasing the real cost of maintaining price stability, these results suggest that the inflation targeting framework will need to continue to evolve to reduce the probability that targeted inflation will breach the tolerance range. Further, other macroeconomic policy changes, such more systematic coordination between monetary and fiscal policy, should be considered to help further reduce inflation and output variability in Iceland.
    Date: 2006–08
  30. By: Funke, Norbert; Kißmer, Friedrich; Wagner, Helmut
    Abstract: South Africa appears to share some of the characteristics (property price boom, easing of monetary policy, strong domestic demand growth) of asset price booms in industrial countries that were often followed by a period of weak growth. The international experience suggests that a number of practical obstacles need to be overcome before a more proactive role of monetary policy is warranted. However, a larger variety of available mortgage contracts, including longer-term fixed-rate contracts, should allow for a more efficient allocation of interest rate risks. Also, a more systematic nationwide collection of property price data, including data on commercial property price developments, would provide a more representative basis for analysis.
    Keywords: Asset Prices, property prices, monetary policy, economic development
    JEL: E44 E52 E58
    Date: 2006
  31. By: Geoffrey Ducanes (University of the Philippines); Marie Anne Cagas (Asian Development Bank and University of the Philippines); Duo Qin (Queen Mary, University of London and Asian Development Bank); Pilipinas Quising (Asian Development Bank); Mohammad Abdur Razzaque (University of Dhaka, Bangladesh)
    Abstract: This paper studies macroeconomic effects of fiscal policies in four Asian countries – Bangladesh, China, Indonesia, and the Philippines – by means of structural macroeconometric model simulations. It is found that short-term fiscal multipliers from an untargeted increase in government expenditure are positive but much less than those from an increased expenditure targeted to capital spending. The multiplier effects from fiscal expansion via a tax rate reduction are found to be typically much less than through higher spending. The effectiveness of automatic stabilizers in general, and more specifically whether expenditure or tax-side stabilizer is more effective, differs across countries.
    Keywords: Fiscal policy, Growth, Public finance, Deficit
    JEL: E62 E17 C53 P52
    Date: 2006–09

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