|
on Central Banking |
| By: | Jerome L. Stein |
| Abstract: | The "Pessimists" and the "Optimists" disagree whether the US external deficits and the associated buildup of US net foreign liabilities are problems that require urgent attention. A warning signal should be that the debt ratio deviates significantly from the optimal ratio. The optimal debt ratio or debt burden should take into account the vulnerability of consumption to shocks from the productivity of capital, the interest rate and exchange rate. The optimal debt ratio is derived from inter-temporal optimization using Dynamic Programming, because the shocks are unpredictable, and it is essential to have a feedback control mechanism. The optimal ratio depends upon the risk adjusted net return and risk aversion both at home and abroad. On the basis of alternative estimates, we conclude that the Pessimists' fears are justified on the basis of trends. The trend of the actual debt ratio is higher than that of the optimal ratio. The Optimists are correct that the current debt ratio is not a menace, because the current level of the debt ratio is not above the corresponding level of the optimum ratio. |
| Keywords: | U.S. current account deficits, external debt, stochastic optimal control, dynamic programming, inter-temporal optimization |
| JEL: | C61 F32 F34 F37 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1805&r=cba |
| By: | John Creedy |
| Abstract: | This paper is concerned with the use of social welfare functions in evaluating changes. In particular, it considers suggestions that welfare weights to be used in comparing the gains and losses of different individuals (or other appropriate units of analysis), and a social time preference rate for use in cost benefit evaluation, can be estimated either from consumers’ behaviour or from the judgements implicit in tax policy. It is suggested that results are highly sensitive to the context and model specification assumed. More importantly, the argument that an estimated elasticity of marginal utility or time preference rate should be used in policy evaluations fails to recognise that fundamental value judgements are involved. Various estimates may be of interest, but they cannot be used by economists to impose value judgements. The main contribution economists can make is to examine the implications of adopting a range of alternative value judgements. |
| Keywords: | Evaluating Policy;Welfare Weights |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:971&r=cba |
| By: | Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Gunnar Bårdsen (Norwegian University of Science and Technology and Norges Bank); Kjersti-Gro Lindquist (Norges Bank (Central Bank of Norway)) |
| Abstract: | We evaluate two main views on pursuing financial stability within a flexible inflation targeting regime. It appears that potential gains from an activist or precautionary approach to promoting financial stability are highly shock dependent. We find support for the conventional view that concern for financial stability generally warrants a longer target horizon for inflation. The preferred target horizon depends on the financial stability indicator and the shock. An extension of the target horizon favoring financial stability may contribute to relatively higher variation in inflation and output. |
| Keywords: | Monetary policy, financial stability |
| JEL: | C51 C52 C53 E47 E52 |
| Date: | 2006–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_08&r=cba |
| By: | Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin)) |
| Abstract: | We estimate the sticky information Phillips curve model ofMankiw 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: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:0406&r=cba |
| By: | Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin)) |
| Abstract: | We investigate the relevance of the Carroll’s sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year. |
| Keywords: | Inflation expectations, sticky information, inflation persistence |
| JEL: | D84 E31 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:0306&r=cba |
| By: | Wouter Botzen, W.J. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Marey, Philip S. |
| Abstract: | The role of asset prices in monetary policy has been widely debated. This paper examines the role that stock prices play in the monetary policy of the ECB. For this purpose, standard and augmented forward-looking Taylor rules are estimated for the ECB using monthly data between 1999 and 2005. Of special interest is the impact of adding stock prices to the standard Taylor rule of the ECB. The GMM estimations of a standard Taylor rule and augmented Taylor rules for the Euro area indicate that the ECB considered stock price developments in setting interest rates. Monetary policy of the ECB stabilized asset prices by raising interest rates when the stock market index was above average and lowering rates when the index was below average. Stock prices are not only relevant as instruments but also as arguments in the ECB policy rule. The empirical plausibility of the Taylor rule improves when it allows for a reaction to the stock market. These results challenge previous studies. |
| Keywords: | Taylor rules; Asset prices; ECB monetary policy |
| JEL: | E4 E5 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:vuarem:2006-17&r=cba |
| By: | David-Jan Jansen; Jakob de Haan |
| Abstract: | We examine the usefulness of communication by the European Central Bank for predicting its interest rate decisions. We use ordered probit models based on the Taylor rule which we estimate using statements by ECB officials as well as macroeconomic variables. Statements by ECB officials on the main refinancing rate and future inflation are significantly related to ECB decisions. However, an out-of-sample evaluation shows that communication-based models do not outperform models based on macroeconomic data in predicting decisions. Both sets of models only accurately predict decisions to leave interest rates unchanged. |
| Keywords: | ECB communication, interest rate decision, Taylor rule, ordered probit models |
| JEL: | E43 E52 E58 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1804&r=cba |
| By: | Adam Posen; Daniel Popov Gould |
| Abstract: | We find in cross-sectional investigations that wage restraint is either unchanged or increased following EMU in the vast majority of countries. This contradicts the predictions of a widely-cited family of models of labor market bargaining. In those, Germany would have been expected to display the greatest decline in wage restraint post-EMU, and we find no indication of such a decline. The time-series evidence on Italy shows a significant increase in wage restraint after eurozone entry. This pattern is consistent with the models that emphasise the gains from monetary credibility. The eurozone increase in wage restraint is matched by the increase seen in the UK and Sweden after adopting inflation targeting, another means to credibility. |
| Keywords: | EMU, wage bargaining, monetary credibility, productivity |
| JEL: | E25 E58 J58 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1783&r=cba |
| By: | Robert Amano; Steve Ambler; Nooman Rebei |
| Abstract: | The authors study the macroeconomic effects of non-zero trend inflation in a simple dynamic stochastic general-equilibrium model with sticky prices. They show that trend inflation leads to a substantial reduction in the stochastic means of output, consumption, and employment. It also leads to an increase in the variability and persistence of most aggregates. Price dispersion across firms unambiguously increases the welfare costs of inflation. The effects hold qualitatively no matter how sticky prices are modelled, but they are quantitatively much stronger under Calvo pricing. |
| Keywords: | Business fluctuations and cycles; Economic models; Inflation and prices; Inflation targets |
| JEL: | E24 E32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-34&r=cba |
| By: | Sosunov, Kirill (Higher School of Economics, Moscow); Zamulin, Oleg (New Economic School) |
| Abstract: | The paper investigates the ability of monetary authorities to keep the real exchange rate undervalued over the long run by implementing a policy of accumulating foreign exchange reserves. We consider a model of a three-sector, small, open economy, where the central bank continuously purchases foreign currency reserves and compare them to Russian and Chinese economies in recent years. Both countries appear to pursue reserve accumulation policies. We find a clear trade-off between the steady state levels of the real exchange rate and inflation. After calibration, the model predicts an 8.5% real undervaluation of the Russian currency and a 13.7% undervaluation of the Chinese currency. Predicted inflation is found to match observed levels. |
| Keywords: | real exchange rate targeting; foreign exchange reserves; Dutch disease |
| JEL: | E52 F41 |
| Date: | 2006–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2006_011&r=cba |
| By: | Stefan Krause; Felix Rioja |
| Abstract: | We study how financial development is related to short run stabilization. Specifically, our objective is to derive monetary policy efficiency measures (PEMs) for 37 industrialized and developing countries, and analyze the impact that the size and depth of the banking sector and the capital sector have on policy performance. It is our contention that a more developed financial sector increases the scope of action of policy, resulting in improved policy performance. In our empirical analysis we use three financial development measures: private credit, liquid liabilities, and a financial aggregate index that comprises banking and stock market measures. Our findings suggest that more developed financial markets, controlling for central bank independence, inflation targeting and membership to the Economic and European Monetary Union, significantly contribute to explaining a more efficient monetary policy implementation. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:0613&r=cba |
| By: | Marzo, Massimiliano (University of Bolonga and Johns Hopkins University); Strid, Ingvar (Stockholm School of Economics); Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | The present paper compares the performance in terms of second order accurate welfare of opportunistic non-linear Taylor rules and with respect to traditional linear Taylor rules. The macroeconomic model representing the benchmark for the analysis includes capital accumulation (with quadratic costs of adjustment), price rigidities (quadratic approach), along the standard New-Keynesian approach. The model is solved up to second order approximation and welfare is evaluated according to several criteria (conditional to the non-stochastic steady state, unconditional, and according to a linear ad hoc function). The results show that: (i) the opportunistic rule is a Pareto improvement with respect to other monetary policy rules traditionally considered in the literature; (ii) the computation of welfare costs reveals that the burden of adjustment is almost entirely on labor supply fluctuations; (iii) increasing the degree of price rigidities and the degree of competition in the final goods markets, makes the opportunistic rule even more preferable with respect to the alternatives. Business Cycle statistics for the model with opportunistic rule show a large volatility in labor supply, with a limited volatility for the nominal interest rate. |
| Keywords: | disinflation; monetary policy rules; nonlinear rules; Taylor rules |
| JEL: | E31 E61 |
| Date: | 2006–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2006_0008&r=cba |
| By: | David Amirault; Carolyn Kwan; Gordon Wilkinson |
| Abstract: | In many mainstream macroeconomic models, sticky prices play an important role in explaining the effects of monetary policy on the economy. Various theories have been set forth to explain why prices are sticky. This study takes a firm-level survey approach, in a spirit similar to Blinder et al. (1998), to shed some light on the question of why prices are sticky. In particular, the Bank of Canada's regional offices surveyed 170 Canadian firms for their views on price dynamics. The authors find that the most important motivators of price changes are price changes by competitors, changes in domestic input costs, and changes in demand. Surprisingly, but consistent with the results reported in Bils and Klenow (2002), the survey evidence suggests that more than 50 per cent of firms change their prices more than four times a year. Moreover, the survey indicates that prices change more frequently than they did ten years ago, because of more intense competition and advances in information technology. |
| Keywords: | Inflation and prices; Transmission of monetary policy |
| JEL: | D40 E30 L11 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-35&r=cba |
| By: | Gillman, Max (Cardiff Business School); Otto, Glen |
| Abstract: | The paper presents and tests a theory of the demand for money that is derived from a general equilibrium, endogenous growth economy, which in effect combines a special case of the shopping time exchange economy with the cash-in-advance framework. The model predicts that both higher inflation and financial innovation - that reduces the cost of credit - induce agents to substitute away from money towards exchange credit. The implied interest elasticity of money demand rises with the inflation rate and financial innovation rather than being constant as is typical in shopping time specifications. Using quarterly data for the US and Australia, we find evidence of cointegration for the money demand model. This money demand stability results because of the extra series that capture financial innovation; included are robustness checks and comparison to a standard money demand specification. |
| JEL: | C23 E41 O42 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2006/24&r=cba |
| By: | Minoas Koukouritakis (Department of Economics, University of Crete); Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada) |
| Abstract: | This paper uses cointegration and common trends techniques to investigate empirically the expectations hypothesis of the term structure of interest rates among the original 15 EU countries. By decomposing each term structure into its transitory and permanent components, we also examine whether the short or the long rate is weakly exogenous and thus determine the long run behavior of each term structure. The empirical results support the expectations theory of the term structure of interest rates for all the EU-15 countries. They also indicate that the long term interest rates are weakly exogenous for almost all the countries in our sample. Further, we investigate if the expectation theory of the term structure of interest rates is affected by other exogenous variables such as nominal and real exchange rates, inflation rates, inflation variance, money growth and its variance. Our evidence suggests that the inclusion of the other exogenous variables does not affect the expectations hypothesis for most of the EU-15 countries. |
| Keywords: | Term Structure, European Union, Cointegration, Common Trends, Weak Exogeneity |
| JEL: | E43 F15 F42 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0611&r=cba |
| By: | Arghyrou, Michael G (Cardiff Business School); Chortareas, Georgios |
| Abstract: | Global current account imbalances have been one of the focal points of interest for policymakers during the last few years. Less attention has been paid, however, to the diverging current account balances of the individual euro area countries. In this paper we consider the dynamics of current account adjustment and the role of real exchange rates in current account determination in the EMU. After controlling for the effects of income growth, we find the relationship between real exchange rates and the current account to be substantial in size and subject to non-linear effects. Overall, we argue that real exchange rates can offer further insights, beyond the effects of the income catch-up process, relevant to current account determination in the EMU. |
| Keywords: | current account; real exchange rate; EMU; nonlinearities |
| JEL: | C51 C52 F31 F32 F41 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2006/23&r=cba |
| By: | Sebastian Dullien (Financial Times Deutschland); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin) |
| Abstract: | This paper compares relative unit labour cost developments in the countries of the euro-area since the beginning of the European Monetary Union (EMU) both with historical developments and with intra-regional unit labour cost developments in the United States of America and Germany. To this end, unit labour cost indices for the US states and census regions from 1977 to 1997 as well as for the German Länder from 1970 to 2004 have been constructed. Against this benchmark, it is found that unit labour cost increases since 1999 in Portugal and to a lesser extent in Spain and Greece can be judged as excessive, pointing at labour market rigidities which might impair smooth working of EMU in the future. |
| Keywords: | Unit labor costs, divergence, convergence, Euro-zone, inflation |
| JEL: | F2 F4 N2 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:0506&r=cba |
| By: | Richard S. Grossman (Department of Economics, Wesleyan University) |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2006-021&r=cba |
| By: | Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jan Gottschalk (International Monetary Fund) |
| Abstract: | New-Keynesian macroeconomic models typically assume that any long-run trade-off between inflation and unemployment is ruled out. While this appears to be a reasonable characterization of the US economy, it is less clear that the natural rate hypothesis necessarily holds in a European country like Germany where hysteretic effects may invalidate it. Inspired by the framework developed by Farmer (2000) and Beyer and Farmer (2002), we investigate the long-run relationships between the interest rate, unemployment and inflation in West Germany from the early 1960s up to 2004 using a multivariate co-integration analysis technique. The results point to a structural break in the late 1970s. In the later time period we find for west Germany data a strong negative correlation between the trend components of inflation and unemployment. We show that this finding contradicts the natural rate hypothesis, introduce a version of the New Keynesian model which allows for some hysteresis and compare the effectiveness of monetary policy in these two models. In general, a policy rule with an aggressive response to a rise in unemployment performs better in a model with hysteretic characteristics than in a model without. |
| Keywords: | Cointegration, Vector error Correction Model, Unemployment, Phillips Curve, Hysteresis |
| JEL: | B22 C32 E24 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:0106&r=cba |
| By: | Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II]) |
| Abstract: | Although today's main organisation principle of monetary spaces is the nation-state's one, everyone can see it is not totally the case because of the existence and the development of local and social currencies and other sorts of parallel currencies. European history gives very useful lessons on this matter. One can distinguish, indeed, three historical periods : firstly, an “old regime” with a great diversity of money, including forms of local currencies ; secondly, the building of nation states and, consequently, what Benjamin Cohen (1998) calls a “westphalian model of geography of money”, centred on the principle of one nation, one money, excluding local currencies different from national currencies ; thirdly, the contesting of such a regime of monetary sovereignty. European history gives, then, evidences that the contemporary dynamics of local currencies is not a new one, but that it is undoubtedly the most important of the third period. <br />European history leads however to make significant differences between forms of monetary localisms. Those differences are analyzed within the following framework. First, we have to make a distinction between the nature of issuers : public authorities, groups of citizens, businesses and banks. Monetary localisms before the Westphalian era were mainly organized by public authorities (lords) and religious orders, whereas today's monetary localisms mainly come from citizens and businesses (except from emergency issues and secessions logics). Second, we have to make a distinction between the rationales for monetary localisms : sovereignty, seignoriage and financing needs, protecting spaces, revitalizing spaces, transforming the nature of exchanges and money. Monetary localisms before the Westphalian era were mainly organized in order to capture money and dynamize spaces, whereas one can find the four rationales in today's monetary localisms. <br />The paper, after presenting the analytical framework, concentrates on three sorts of local currencies : local currencies as a result of necessities, local currencies issued by banks and local currencies aiming to change money. It concludes on the differences between local currencies in European history and contemporary local currencies. |
| Keywords: | Local currencies;monetary history;Europe;Owen;Gesell;Banks of issue |
| Date: | 2006–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00102974_v1&r=cba |
| By: | William Barnett (Department of Economics, The University of Kansas) |
| Abstract: | This short paper is the encyclopedia entry on Divisia Monetary Indexes to appear in the second edition of the International Encyclopedia of the Social Sciences. The encyclopedia is edited by William A. Darity and forthcoming from Macmillan Reference USA (Thomson Gale). |
| Keywords: | monetary aggregation, index number theory, Divisia index, encyclopedia entry, aggregation theory. |
| JEL: | E4 E5 C43 G12 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:200606&r=cba |
| By: | William Barnett (Department of Economics, The University of Kansas) |
| Abstract: | This short paper is the encyclopedia entry on Supply of Money to appear in the second edition of the International Encyclopedia of the Social Sciences. The encyclopedia is edited by William A. Darity and forthcoming from Macmillan Reference USA (Thomson Gale). |
| Keywords: | monetary aggregation, index number theory, Divisia index, encyclopedia entry, aggregation theory, supply of money. |
| JEL: | E4 E5 C43 G12 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:200607&r=cba |
| By: | Carlos Estaban Posada; Andrés Felipe García |
| Abstract: | La literatura referente a los modelos de inflación y política monetaria anti-inflacionaria del tipo denominado “Inflation Targeting” (IT) ha reforzado una opinión popular: que la inflación tiene poca o ninguna relación con el aumento de la cantidad de dinero. Esta opinión es contraria a una de las más viejas teorías económicas: la teoría cuantitativa del dinero (TCD). En las siguientes páginas se establece la relación entre un modelo básico de IT y la TCD, y se aclaran un caso de irrelevancia de la cantidad de dinero: el de la “trampa de liquidez” o caso “keynesiano-radical”. Este caso se contrapone a los otros casos, que sí son compatibles con la TCD. Por último, se reporta evidencia favorable a la hipótesis de pertinencia de la TCD para el caso colombiano reciente (1986: I – 2005:III) |
| Date: | 2006–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002668&r=cba |
| By: | Dorbec, Anna (University of Paris X Nanterre) |
| Abstract: | The analysis of external economic relations of Russia reveals a paradox: while Europe is the main trade and direct investment partner of Russia, this is far from being the case concerning its currency’s role in Russia's financial activities. The dollar is much preferred by economic agents for financial operations. This paper proposes a disaggregated approach to this issue by separating the ‘means of exchange’ and ‘store of value’ components of the use of substitution currencies. The influence of three main factors (inertial component, real trade relations and exchange rate fluctuations) on the relative demand for the euro by Russian economic agents is tested for the period 1999-2004. Finally we suggest a theoretical interpretation of the results based on the conventions theory approach. |
| Keywords: | dollarisation; euroisation; transition; Russia; currency substitution; asset substitution; network externalities; hysteresis; conventions |
| JEL: | E41 E52 F31 F41 G20 |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_015&r=cba |
| By: | Funke, Michael (Hamburg University) |
| Abstract: | The New Keynesian Phillips curve (NKPC) posits the dynamics of inflation as forward looking and related to marginal costs. In this paper we examine the empirical relevance of the NKPC for mainland China. The empirical results indicate that an augmented (hybrid) NKPC gives results that are consistent with the data generating process. It is in this respect that the NKPC provides useful insights into the nature of inflation dynamics in mainland China as well as useful insights for the conduct of monetary policy. |
| Keywords: | China; inflation; New Keynesian Phillips curve |
| JEL: | C22 E31 |
| Date: | 2005–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_006&r=cba |
| By: | Mehrotra , Aaron (BOFIT) |
| Abstract: | We examine money demand in the Chinese economy during a period characterized by significant disinflation and outright deflation, coupled with strong output growth. Our study establishes a stable money demand system for broad money M2. Inflation affects the adjustment of the system towards equilibrium, and shocks to broad money are found to lead to higher inflation in the context of an impulse response analysis. No evidence of non-linearity in money demand is found for the disinflationary period. The results provide support for the PBoC’s policy of specifying intermediate targets for money growth. Importantly, our results suggest that movements in the nominal effective exchange rate should be taken into account in a successful implementation of such a policy. |
| Keywords: | money demand; disinflation; deflation; China |
| JEL: | E31 E41 |
| Date: | 2006–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2006_010&r=cba |
| By: | Mehrotra, Aaron (BOFIT) |
| Abstract: | We examine the role of the exchange and interest rate channels during recent deflation episodes in Japan, Hong Kong and China. We estimate open-economy structural vector autoregressive (SVAR) models for the three economies with different monetary regimes and varying degrees of openness. In both Japan and Hong Kong, shocks to the nominal effective exchange rate have a statistically significant impact on prices, with a notably stronger effect in Hong Kong. Our results provide evidence about the role of external influences in the deflation episodes of these economies, and could also be seen to weakly support suggestions to depreciate the currency in order to escape from a liquidity trap. The importance of the interest rate channel is also found to be high in Japan and Hong Kong. In China, where interest rates have not been an important monetary policy tool, neither exchange nor interest rate shocks significantly influence price developments. |
| Keywords: | deflation; zero lower bound; SVAR |
| JEL: | E31 F41 |
| Date: | 2005–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_017&r=cba |
| By: | Coricelli, Fabrizio (University of Siena, University of Ljubljana and CEPR); Égert , Balázs (Oesterreichische Nationalbank); MacDonald, Ronald (University of Glasgow and CESIfo) |
| Abstract: | This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe. In particular, while laying out the functioning of the separate channels in the MTM, it explores possible interrelations between different channels and their impact on prices and the real economy. The empirical findings for Central and Eastern Europe are then briefly compared with results for industrialized countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance, and potential development, of the different channels, emphasizing the relevant asymmetries between Central and Eastern European countries and the euro area. |
| Keywords: | monetary transmission; transition; Central and Eastern Europe; credit channel; interest rate channel; interest-rate pass-through; exchange rate channel; exchange rate pass-through; asset price channel |
| JEL: | E31 E51 E58 F31 O11 P20 |
| Date: | 2006–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2006_008&r=cba |
| By: | Fidrmuc , Jarko (Oesterreichische Nationalbank); Korhonen, Iikka (BOFIT) |
| Abstract: | We review the literature on business-cycle correlation between the euro area and Central and Eastern European countries (CEECs), a topic that has gained attention in recent years as new EU entrants prepare for participation in the monetary union. Our meta-analysis suggests several CEECs already have comparably high correlation with the euro area business cycle. We also find that estimation methodologies can have a significant effect on correlation coefficients. While central bankers are more conservative in their estimates, we find no evidence of a geographical bias in the studies. |
| Keywords: | monetary union; optimum currency area; business cycles; meta-analysis |
| JEL: | C42 E32 F15 F31 |
| Date: | 2004–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2004_020&r=cba |
| By: | Égert , Balázs (Oesterreichische Nationalbank); Morales-Zumaquero, Amalia (University of Málaga and Centro de Estudios Andaluces) |
| Abstract: | This paper attempts to analyze the direct impact of exchange rate volatility on the export performance of ten Central and Eastern European transition economies as well as its indirect impact via changes in exchange rate regimes. Not only aggregate but also bilateral and sectoral export flows are studied. To this end, we first analyze shifts in exchange rate volatility linked to changes in the exchange rate regimes and second, use these changes to construct dummy variables we include in our export function. The results suggest that the size and the direction of the impact of forex volatility and of regime changes on exports vary considerably across sectors and countries and that they may be related to specific periods. |
| Keywords: | exchange rate volatility; export; trade; transition; structural breaks |
| JEL: | F31 |
| Date: | 2005–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_008&r=cba |
| By: | Mª Ángeles Caraballo Pou (Universidad de Sevilla); Carlos Dabús (CONICET y Universidad Nacional del Sur); Diego Caramuta (Universidad Nacional del Sur) |
| Abstract: | This paper presents evidence on a non-linear "inflation-relative prices variability" relationship in three Latin American countries with very high inflation experiences: Argentina, Brazil and Peru. More precisely, and in contrast to results found in previous literature for similar countries, we find a non-concave relation at higher inflation regimes, i.e. when inflation rate surpasses certain threshold. This non-concavity is mainly explained by the unexpected component of inflation, which suggests that the uncertainty associated to very high inflation periods can be quite relevant to understand the non neutrality of inflation in extreme price instability. |
| Keywords: | Non-linearities, inflation regimes, relative prices variability, unexpected inflation. |
| JEL: | E0 E3 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:cea:doctra:e2006_09&r=cba |
| By: | María Ángeles Caraballo (Universidad de Sevilla); Carlos Usabiaga (Universidad de Pablo de Olavide) |
| Abstract: | This paper analyses the effects of supply shocks on the Spanish inflation rate. The methodology applied is based on Ball and Mankiw (1995). These authors assume that a good proxy for supply shocks is the third moment of the distribution of price changes, and show that nominal rigidities imply a positive relation between inflation and skewness, that is magnified by the variance of the distribution. The main data used are the monthly consumer price indexes of each region, disaggregated in 57 categories, for the 1993-2005 period. We estimate the relation between mean inflation and the higher moments of the distribution, including several control variables. The analysis has been carried out in two ways: firstly, each region is analysed separately and, secondly, we have used panel data techniques in order to test the homogeneity across regions. Our results point out that Spanish regions show a common pattern with regard to the nominal rigidities detected, and that the Spanish economy is vulnerable to supply shocks. |
| Keywords: | Inflation, nominal rigidities, skewness, supply shocks, Spanish regions |
| JEL: | E31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:cea:doctra:e2006_17&r=cba |
| By: | Korhonen, Iikka (BOFIT); Wachtel, Paul (Stern School of Business, New York University) |
| Abstract: | We assess the extent and speed of exchange rate pass-through in the countries of the Commonwealth of Independent States (CIS). We do this in the framework of vector autoregressive regressions, utilising impulse functions and variance decompositions with monthly data that starts in 1999 in order to avoid periods of very high inflation and the Russian crisis. We find that exchange rate movements have a clear impact on price developments in the CIS countries. The speed of the pass-through is also fairly high: in most cases the full effect is transmitted into domestic prices in less than 12 months. Unlike in many other emerging market economies, an additional effect from US prices on to domestic prices is not significant. The extent of the exchange rate pass-through is usually much higher than in our benchmark group of emerging market countries. Variance decomposition shows that the relative share of exchange rates in explaining changes in domestic prices is higher in the CIS countries than in the benchmark group. Our results indicate that policy-makers in the CIS countries need to pay more attention to exchange rate movements than in many other emerging market countries. |
| Keywords: | exchange rate pass-through; inflation; exchange rate regime; transition countries |
| JEL: | E31 E42 F31 F42 |
| Date: | 2005–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_002&r=cba |
| By: | Égert , Balázs (Oesterreichische Nationalbank); Halpern , László (Oesterreichische Nationalbank) |
| Abstract: | This paper analyses the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. The results indicate that the real misalignments reported in the literature are systematically influenced, inter alia, by the underlying theoretical concepts (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and by the econometric estimation methods. The important implication of these findings is that a systematic analysis is needed in terms of both alternative economic and econometric specifications to assess equilibrium exchange rates. |
| Keywords: | equilibrium exchange rate; Balassa-Samuelson effect; meta-analysis |
| JEL: | C15 E31 F31 O11 P17 |
| Date: | 2005–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_004&r=cba |
| By: | Égert, Balázs (Oesterreichische Nationalbank) |
| Abstract: | This paper investigates the equilibrium exchange rates of three Southeastern European countries (Bulgaria, Croatia and Romania), of two CIS economies (Russia and Ukraine) and of Turkey. A systematic approach in terms of different time horizons at which the equilibrium exchange rate is assessed is conducted, combined with a careful analysis of country-specific factors. For Russia, a first look is taken at the Dutch Disease phenomenon as a possible driving force behind equilibrium exchange rates. A unified framework including productivity and net foreign assets completed with a set control variables such as openness, public debt and public expenditures is used to compute total real misalignment bands. |
| Keywords: | Balassa-Samuelson; Dutch Disease; Bulgaria; Croatia; Romania; Russia; Ukraine; Turkey |
| JEL: | E31 O11 P17 |
| Date: | 2005–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_003&r=cba |
| By: | Juan Manuel Julio Román |
| Abstract: | We distinguish two types of monetary policy rules: those depen- dent on particular models and loss functions and those robust to them. While dependent rules are useful for monetary policy implementation, robust rules are powerful tools to characterize the behavior of the monetary authority over a time span. Robust rules are estimated directly from observable data usually under the assumption that the targets, the nominal interest rate and the in°a- tion rate are stationary. During the transition from a moderately high level of in°ation to a stable, internationally accepted level ¼, the commitment with this goal imply that the in°ation rate, targets, nominal interest rates and nominal equilibrium interest rates are non-stationary. Acknowledging this later fact has important implications for the dynamic behavior of transmission mechanisms models during the transition. In this note we set up a robust monetary policy rule useful to characterize the behavior of a central bank during the transition to a stable in°ation level. As in previous research, estimation may be carried out by GMM on a nonlinear equation. We illustrate these results by charac- terizing the behavior of the Colombian central bank during the period of full in°ation targeting, that is after 2000. Our results agree with the prevailing policy in the sample span: A gentle in°ation stabilization program, a stronger one on the output gap, and a high degree of interest rate smoothing. Combin- ing these evidence with that of previous works our results suggests that the policy rule is time varying, a useful fact for policy implementation. |
| Date: | 2006–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002669&r=cba |
| By: | Claeys, Sophie (BOFIT) |
| Abstract: | The Central Bank of Russia (CBR) assumes a wide range of functions not raditional to a central bank. In addition to the daily conduct of monetary policy, it acts as a regulator and supervisor of the banking sector. It is currently overssing the implementation of a deposit insurance scheme and is the main owner of Russia's largest commercial bank, Sberbank. As this additional functions may conflict with the CBR policy objectives, I review how the current design of the CBR deviates from the optimal allocation of regulatory powers within a central bank prescribed in the literature. I then empirically investigate the need for a supervisory body within the CBR. Using a simple Taylor rule framework I find that the CBR does not use its "hands-on" supervisory information to maintain financial stability, but rather to accomodate state-owned banks' balances. |
| Keywords: | Central Bank; Prudential Regulation and Supervision; Monetary Policy Rules; Russia |
| JEL: | G21 G28 |
| Date: | 2005–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_007&r=cba |
| By: | Charemza , Wojciech W. (National Bank of Poland and University of Leicester, UK); Makarov, Svetlana (European University at St. Petersburg, Russia and National Bank of Poland) |
| Abstract: | The paper proposes a new indicator of expected real effects of a policy aimed at controlling inflation. The indicator, called real effect of inflation targeting (REIT), involves the comparison of expected and output-neutral inflation. It is shown that it can be derived from a simple two-dimensional vector autoregressive model of inflation and output gap. The microdynamics of such model are explained in terms of the foundations of Taylor-type staggered wage contracts. It is assumed that the monetary authority has some discretion regarding the timing of monetary actions. Here REIT can be used to set the optimal times for such actions, if the control of output is regarded as a secondary policy target. A simulation experiment illustrates the rationale of such a device for timing monetary measures. The REIT has been used by the Polish Monetary Policy Council since 2001 in it's inflation targeting and is thought to have contributed to a substantial decline in Polish inflation in 2003 and to an increase in output growth in 2004. A similar indicator computed for Russia as a means of monitoring monetary policy rather than as an active tool confirms that active expansionary policy in 2002 and 2003 might have contributed to Russian economic growth in 2004 and 2005, whereas similar policy measures for 2004 are likely to prove ineffective. |
| Date: | 2005–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_020&r=cba |
| By: | Pami Dua (Delhi School of Economics); Partha Sen (Delhi School of Economics) |
| Abstract: | This paper examines the relationship between the real exchange rate, level of capital flows, volatility of the flows, fiscal and monetary policy indicators and the current account surplus for the Indian economy for the period 1993Q2 to 2004Q1. The estimations indicate that the variables are cointegrated and each granger causes the real exchange rate. The generalized variance decompositions show that determinants of the real exchange rate, in descending order of importance include net capital inflows and their volatility (jointly), government expenditure, current account surplus and the money supply. A preliminary analysis suggests that a similar analysis can be performed for the foreign exchange reserves held by the RBI. |
| Keywords: | real exchange rate, capital flows, foreign exchange reserves, cointegration, |
| JEL: | C32 F31 F41 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:144&r=cba |
| By: | Pablo Gonzalez (ILADES-Georgetown University, Universidad Alberto Hurtado); Mauricio Tejada (Cámara Chilena de la Construcción. División Estudios) |
| Abstract: | Gran parte de la literatura relacionada con las funciones de reacción del Banco Central ha estimado funciones de reacción lineales, asumiendo preferencias cuadráticas para el Banco Central y ecuaciones de oferta y demanda agregadas lineales. Sin embargo, en la práctica estos supuestos pueden ser ampliamente discutidos. Por esta razón, la literatura más moderna en el estudio de las funciones de reacción se ha centrado en el uso de preferencias asimétricas para el Banco Central y/o curvas de Phillips no lineales, asumiendo formas paramétricas particulares para modelar dichas funciones. Esto podría llevar a inferencias erróneas si dichas especificaciones son incorrectas. El estudio de las funciones de reacción no lineales para el caso de Chile aún no ha recibido mucha atención, por lo que este artículo ha tratado de contribuir buscando evidencia que sustente preferencias no lineales. Para ello, se usó el enfoque flexible de inferencia no lineal propuesto por Hamilton (2001). Se encontró que, si bien la respuesta del Banco Central es lineal en relación a los desvíos de la inflación respecto a la meta, existe evidencia de no linealidad respecto al ciclo económico. |
| Keywords: | metas de inflación, funciones de reacción, modelos no-lineales |
| JEL: | E52 E58 C13 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv173&r=cba |
| By: | Claeys, Sophie (CERISE); Lanine , Gleb (CERISE); Schoors, Koen (CERISE) |
| Abstract: | We focus on the conflict between two central bank objectives – individual bank stability and systemic stability. We study the licensing policy of the Central Bank of Russia (CBR) during 1999-2002. Banks in poorly banked regions, banks that are too big to be disciplined adequately, and banks that are active on the interbank market enjoy protection from license withdrawal, which suggests a tacit concern for systemic stability. The CBR is also found reluctant to with-draw licenses from banks that violate the individual's deposits-to-capital ratio as this conflicts with the tacit CBR objective to secure depositor confidence and systemic stability. |
| Keywords: | bank supervision; bank crisis; Russia |
| JEL: | E50 G20 N20 |
| Date: | 2005–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2005_010&r=cba |