|
on Central Banking |
| By: | Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain |
| 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 labour 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. |
| Keywords: | international transmission mechanism; long-run restrictions; net exports; real exchange rates; terms of trade; US current account; VAR |
| JEL: | F32 F41 F42 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5853&r=cba |
| By: | Rose, Andrew K |
| Abstract: | A stable international monetary system has emerged since the early 1990s. A large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks. These countries place few restrictions on capital mobility and allow their exchange rates to float. The domestic focus of monetary policy in these countries does not have any obvious international cost. Inflation targeters have lower exchange rate volatility and less frequent “sudden stops” of capital flows than similar countries that do not target inflation. Inflation targeting countries also do not have current accounts or international reserves that look different from other countries. This system was not planned and does not rely on international coordination. There is no role for a center country, the IMF, or gold. It is durable; in contrast to other monetary regimes, no country has yet abandoned an inflation-targeting regime in crisis. Succinctly, it is the diametric opposite of the post-war system; Bretton Woods, reversed. |
| Keywords: | capital; controls; durable; exchange; finance; fixed; inflation; rate; regime |
| JEL: | F02 F10 F34 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5854&r=cba |
| By: | Artis, Michael J |
| Abstract: | The paper presents the text of a lecture given at the Bank of England in December 2005 as the first in a series of lectures in memory of John Flemming. It provides a personal view of what the profession has learnt about currency unions as a result of the establishment and operation of the European Monetary Union. It argues that the salience of business cycle concurrence as a criterion for participation is probably less than used to be understood and for some countries borders on irrelevance. In any case the effects of union upon business cycle concurrence are themselves not obvious. It also appears that, after a period in which very large estimates of the trade effect of currency unions were widespread, more modest estimates are in order. The most unlooked-for effect is probably that which has occurred in the financial markets; country premia within the EMU are very small, offering a means for insurance against asymmetric shocks. Finally, the lessons of another, local, experiment in currency union is examined. But the useful lessons from this experiment (Ecco L’Euro) are found to be limited. |
| Keywords: | currency union; EMU; optimal currency area theory |
| JEL: | E0 E4 F1 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5677&r=cba |
| By: | Obstfeld, Maurice |
| Abstract: | In the face of huge balance of payments surpluses and internal inflationary pressures, China has been in a classic conflict between internal and external balance under its dollar currency peg. Over the longer term, China’s large, modernizing, and diverse economy will need exchange rate flexibility and, eventually, convertibility with open capital markets. A feasible and attractive exit strategy from the essentially fixed RMB exchange rate would be a two-stage approach, consistent with the steps already taken since July 2005, but going beyond them. First, establish a limited trading band for the RMB relative to a basket of major trading partner currencies. Set the band so that it allows some initial revaluation of the RMB against the dollar, manage the basket rate within the band if necessary, and widen the band over time as domestic foreign exchange markets develop. Second, put on hold ad hoc measures of financial account liberalization. They will be less helpful for relieving exchange rate pressures once the RMB/basket rate is allowed to move flexibly within a band, and they are best postponed until domestic foreign exchange markets develop further, the exchange rate is fully flexible, and the domestic financial system has been strengthened and placed on a market-oriented basis. |
| Keywords: | China balance of payments; China currency; fixed exchange rate exit strategy; renminbi |
| JEL: | F32 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5771&r=cba |
| By: | Gosselin, Pierre; Gosselin-Lotz, Aileen; Wyplosz, Charles |
| Abstract: | Morris and Shin (2002) have shown that a central bank may be too transparent if the private sector pays too much attention to its possible imprecise signals simply because they are common knowledge. In their model, the central bank faces a binary choice: to reveal or not to reveal its information. This paper extends their model to the more realistic case where the central bank must anyway convey some information by setting the interest rate. This situation radically changes the conclusions. In many cases, full transparency is socially optimal. In other instances the central bank can distill information to either manipulate private sector expectations in a way that reduces the common knowledge effect or to reduce the unavoidable information content of the interest rate. In no circumstance is the option of only setting the interest rate socially optimal. |
| Keywords: | central bank transparency |
| JEL: | E42 E52 E58 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5666&r=cba |
| By: | Gürkaynak, Refet S.; Levin, Andrew; Swanson, Eric T |
| Abstract: | We investigate the extent to which inflation targeting helps anchor long-run inflation expectations by comparing the behaviour of daily bond yield data in the United Kingdom and Sweden—both inflation targeters—to that in the United States, a non-inflation-targeter. Using the difference between far-ahead forward rates on nominal and inflation-indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons, we examine how much, if at all, far-ahead forward inflation compensation moves in response to macroeconomic data releases and monetary policy announcements. In the U.S., we find that forward inflation compensation exhibits highly significant responses to economic news. In the U.K., we find a level of sensitivity similar to that in the U.S. prior to the Bank of England gaining independence in 1997, but a striking absence of such sensitivity since the central bank became independent. In Sweden, we find that inflation compensation has been insensitive to economic news over the whole period for which we have data. We show that these observations are also matched by the relative means and volatilities of the time series of far-ahead forward inflation compensation in these three countries. Our findings support the view that a well-known and credible inflation target helps anchor the private sector’s views regarding the distribution of long-run inflation outcomes. |
| Keywords: | inflation targeting |
| JEL: | E31 E52 E58 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5808&r=cba |
| 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: | consumer expenditure survey; Euler equation; inflation expectations; Michigan survey of consumers; survey of professional forecasters |
| JEL: | D12 D84 E31 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5790&r=cba |
| By: | Orphanides, Athanasios; Williams, John C |
| Abstract: | A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic landscape within which the public forms expectations and policymakers must formulate and implement monetary policy. Using an estimated model of the U.S. economy, we show that monetary policy rules that would perform well under the assumption of rational expectations can perform very poorly when we introduce imperfect knowledge. We then examine the performance of an easily implemented policy rule that incorporates three key characteristics of inflation targeting: transparency, commitment to maintaining price stability, and close monitoring of inflation expectations, and find that all three play an important role in assuring its success. Our analysis suggests that simple difference rules in the spirit of Knut Wicksell excel at tethering inflation expectations to the central bank’s goal and in so doing achieve superior stabilization of inflation and economic activity in an environment of imperfect knowledge. |
| Keywords: | bond prices; learning; monetary policy rules; natural rate of interest; natural rate of unemployment; rational expectations; uncertainty |
| JEL: | D83 D84 E52 E58 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5664&r=cba |
| By: | Kose, Ayhan; Prasad, Eswar; Rogoff, Kenneth; Wei, Shang-Jin |
| Abstract: | The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. We attempt to provide a unified conceptual framework for organizing this vast and growing literature. This framework allows us to provide a fresh synthetic perspective on the macroeconomic effects of financial globalization, both in terms of growth and volatility. Overall, our critical reading of the recent empirical literature is that it lends some qualified support to the view that developing countries can benefit from financial globalization, but with many nuances. On the other hand, there is little systematic evidence to support widely-cited claims that financial globalization by itself leads to deeper and more costly developing country growth crises. |
| Keywords: | capital account liberalization; developing countries; financial crises; financial integration; growth and volatility |
| JEL: | F02 F21 F36 F4 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5842&r=cba |
| By: | Devereux, Michael B; Engel, Charles M |
| Abstract: | Both empirical evidence and theoretical discussion have long emphasized the impact of `news' on exchange rates. In most exchange rate models, the exchange rate acts as an asset price, and as such responds to news about future returns on assets. But the exchange rate also plays a role in determining the relative price of non-durable goods when nominal goods prices are sticky. In this paper we argue that these two roles may conflict with one another. If news about future asset returns causes movements in current exchange rates, then when nominal prices are slow to adjust, this may cause changes in current relative goods prices that have no efficiency rationale. In this sense, anticipations of future shocks to fundamentals can cause current exchange rate misalignments. Friedman's (1953) case for unfettered flexible exchange rates is overturned when exchange rates are asset prices. We outline a series of models in which an optimal policy eliminates the effects of news on exchange rates. |
| Keywords: | exchange rate; expectations; monetary policy |
| JEL: | F3 F31 F33 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5743&r=cba |
| By: | Devereux, Michael B; Saito, Makoto |
| Abstract: | Recent global imbalances and large gross external financial movements have raised interest in modeling the relationship between international financial market structure and capital flows. This paper constructs a model in which the composition of national portfolios is an essential element in facilitating international capital flows. Each country chooses an optimal portfolio in face of real and nominal risk. Current account deficits are financed by net capital flows which reflect differential movements in the holdings of gross external assets and liabilities. A country experiencing a current account deficit will be accumulating both gross external liabilities and gross external assets. Net capital flows generate movements in risk premiums such that the rate of return on a debtor country's gross liabilities is lower than the return on its gross assets. This ensures stability of the world wealth distribution. An attractive feature of the model is that portfolio shares, returns, and the wealth distribution can be characterized analytically. A calibrated version of the model can match quite well the observed measures of gross and net external assets and liabilities for the US economy. |
| Keywords: | current account; international capital flows; portfolio |
| JEL: | F32 F34 F41 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5746&r=cba |
| By: | Buiter, Willem H |
| Abstract: | Flexible inflation targeting cannot be rationalised using conventional welfare economic criteria, except in a single, practically uninteresting special case. New-Keynesian DSGE models imply that optimal monetary policy implements the Bailey-Friedman Optimal Quantity of Money rule and that actual inflation fully validates or accommodates core inflation. Flexible inflation targeting is also inconsistent with the mandates of leading inflation targeters like the Bank of England and the ECB. These mandates are lexicographic in price stability and therefore does not permit a trade-off between inflation volatility and output gap volatility in the monetary policy maker's objective function. Operational independence of the central bank is limited by the central bank's intertemporal budget constraint. Price stability, or an externally imposed inflation target, may not be independently financeable by the central bank. In that case, active budgetary support from the Treasury is necessary to make the inflation target financeable. Independent monetary policy is fully compatible with coordinated and cooperative monetary and fiscal policy. Central bank operational independence precludes substantive accountability; it is compatible only with a weak form of formal accountability: reporting obligations. Central bank independence will only survive if it is viewed as legitimate by the polity and its citizens. A necessary condition for this is that the central bank restricts its activities and public discourse to its natural core mandate: price stability and the capacity and willingness to act as lender of last resort. The Protocol on the Statute of the ESCB and the ECB has given the ECB a mandate that goes beyond this natural core mandate. Such behaviour represents a threat to its continued independence. |
| Keywords: | accountability; central bank intertemporal budget constraint; flexible inflation targeting |
| JEL: | D6 E3 E4 E5 H0 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5772&r=cba |
| By: | Buti, Marco; Sapir, André |
| Abstract: | During the ‘Golden Age’ that lasted until the mid-1970s, Europe witnessed a "public finance" phase, when the three sides of Musgrave’s triangle - allocative efficiency, redistribution and cyclical stabilisation - seemed to reinforce one another. EMU's fiscal rules - embodied in the Maastricht Treaty and the Stability and Growth Pact - can be regarded as the attempt by European governments to overcome the subsequent "public choice" phase à la Buchanan which was characterised by increasing budget deficits and trade offs between allocative efficiency and redistribution. The original Stability Pact delivered only partly. A rigorous enforcement of the reformed Pact will depend on two conditions: the renewed ownership of the rules by key players and the relative weight of the perceived negative externalities of fiscal misbehaviour versus the political costs of attempting to limit the partner countries’ room for manoeuvre. |
| Keywords: | EMU; fiscal policy; Stability Pact |
| JEL: | E6 H3 H6 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5830&r=cba |
| By: | Adam, Klaus; Billi, Roberto M |
| Abstract: | Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment robustly generates too much inflation. A conservative monetary authority thus remains desirable. Exclusive focus on inflation by the central bank recoups large part - in some cases all - of the steady state welfare losses associated with lack of monetary and fiscal commitment. An inflation conservative central bank tends to improve also the conduct of stabilization policy. |
| Keywords: | conservative monetary policy; discretionary policy; sequential non-cooperative policy games; time consistent policy |
| JEL: | E52 E62 E63 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5740&r=cba |
| By: | Kirill Sosunov (Higher School of Economics); Oleg Zamulin (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 the results to Russian and Chinese economies in recent years. Both countries appear to pursue reserve accumulation policies. We find a clear trade-o 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 F4 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0082&r=cba |
| By: | Adao, Bernardino; Correia, Maria Isabel Horta; Teles, Pedro |
| Abstract: | This paper assesses the relevance of the exchange rate regime for stabilization policy. This regime question cannot be dealt with independently of other institutions, in particular how fiscal policy is designed. We show that once fiscal policy is taken into account, the exchange rate regime is irrelevant. This is the case independently of the severity of price rigidities, independently of asymmetries across countries in shocks and transmission mechanisms and regardless of the incompleteness of international financial markets. The only relevant condition is labour mobility. The immobility of labour across countries is a necessary condition for our results. |
| Keywords: | fiscal and monetary policy; fixed exchange rates; labour mobility; monetary union; nominal rigidities; stabilization policy |
| JEL: | E31 E63 F20 F33 F41 F42 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5797&r=cba |
| By: | Assenmacher-Wesche, Katrin; Gerlach, Stefan |
| Abstract: | Announced in the autumn of 1998, the monetary policy strategy of the European Central Bank (ECB) quickly became controversial, arguably because the ECB provided neither an explicit representation of the inflation process nor an explanation for why it necessitated the adoption of a two-pillar framework. Several reduced-form empirical models that seek to do so have subsequently been presented in the literature. The hallmark of these models is the hypothesis that inflation can be decomposed into a 'trend', which is explained by a smoothed measure of past money growth, and a deviation from that trend, which is accounted for by the output gap. In this paper we survey this literature, discuss how it relates to the monetary transmission mechanism and extend the inflation equations by introducing cost-push shocks. We find that changes in import prices, oil prices and exchange rates are statistically significant in euro-area inflation equations but that they leave intact the earlier findings that money growth and the output gap matter. |
| Keywords: | frequency domain; Philipps curve; quantity theory; spatial regression |
| JEL: | C22 E3 E5 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5683&r=cba |
| By: | Artis, Michael J; Onorante, Luca |
| Abstract: | The paper provides an assessment of the effect of the recent revision of the Stability and Growth Pact (SGP) on the European economies. A set of structural VARs, one for each Eurozone country, is estimated. The estimated models are then used to assess the possible effect of alternative sets of fiscal rules, with particular attention to the SGP in its old and reformed versions. The results suggest that fiscal policy has had in the past a limited smoothing effect on the cycle and therefore the cost of the old rules in the “corrective” arm of the Pact was also limited. As for the reform of the Pact the analysis is overall supportive of the new country-specific Medium term Objectives. The modified rules of the excessive deficit procedure are likely to give governments only a limited extra leeway to reduce the variability of the cycle. |
| Keywords: | European Monetary Union; fiscal-monetary interactions; Stability and Growth Pact |
| JEL: | E61 E62 E63 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5684&r=cba |
| By: | Ellingsen, Tore; Friberg, Richard; Hassler, John |
| Abstract: | We study optimal price setting by a monopolist in an infinite horizon model with stochastic costs, moderate inflation, and costly price adjustment. For realistic parameters, chosen to replicate observed frequencies of price changes, the model fits numerically several empirical regularities. In particular, price reductions are larger but less frequent than price increases, and prices respond considerably faster to cost increases than to cost decreases. The associated kink in the steady state short-run Phillips curve implies that the output loss associated with a small negative inflation surprise is about twice as large as the output gain associated with a small positive inflation surprise. |
| Keywords: | asymmetric price adjustment; downward rigidity; menu costs; Phillips curve |
| JEL: | D42 E31 E32 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5749&r=cba |
| By: | Bindseil, Ulrich (European Central Bank); Nyborg, Kjell G. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Strebulaev, Ilya A. (Graduate School of Business, Stanford University) |
| Abstract: | Repo auctions are used to inject central bank funds against collateral into the banking sector. The ECB uses standard discriminatory auctions and hundreds of banks participate. The amount auctioned over the monthly reserve maintenance period is in principle exactly what banks collectively need to fulfill reserve requirements. We study bidder-level data and find: (i) Bidder behavior is different from what is documented for treasury auctions. Private information and the winner’s curse seem to be relatively unimportant. (ii) Underpricing is positively related to the difference between the interbank rate and the auction minimum bid rate, with the latter appearing to be a binding constraint. (iii) Bidders are more aggressive when the imbalance of awards in the previous auction is larger. (iv) Large bidders do better than small bidders. Some of our findings suggests that bidders are concerned with the loser’s nightmare and have limited amounts of the cheapest eligible collateral. |
| Keywords: | Repo auctions; multiunit auctions; reserve requirements; loser’s nightmare; money markets; central bank; collateral; open market operations |
| JEL: | D44 E43 E50 G12 G21 |
| Date: | 2005–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2005_013&r=cba |
| By: | Alexei Deviatov (New Economic School); Neil Wallace (Pennsylvania State University) |
| Abstract: | Long times series on production of gold and the value of gold, taken from Jastram’s book The Golden Constant, are used to estimate a Cagan-type demand function that relates the real total value of gold to its expected rate of return. The model assumes that gold production and a latent scale variable (income or consumption) are jointly exogenous and that the data are measured with error. The data reject the model: the estimates imply that the real value of gold varies a great deal relative to the expected return and depends negatively, rather than positively, on the expected return. |
| Keywords: | gold, Cagan demand function, estimation |
| JEL: | E41 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0080&r=cba |
| By: | Alexei Deviatov (New Economic School); Igor Dodonov (New Economic School) |
| Abstract: | Empirical analysis of exchange rates has produced puzzles that conventional models of exchange rates cannot explain. Here we deal with four puzzles regarding both real and nominal exchange rates, which are robust and inconsistent with standard theory. These puzzles are that both real and nominal exchange rates: i) are disconnected from fundamentals, ii) are much more volatile than fundamentals, iii) show little di?erence in behavior, and iv) fail to satisfy conservation of volatility. We develop a two-country, two-currency version of the random matching model to study exchange rates. We show that search and legal restrictions can produce exchange-rate dynamics consistent with these four puzzles. |
| Keywords: | exchange-rate puzzles, exchange-rate volatility, bargaining, search |
| JEL: | F31 C78 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0079&r=cba |
| By: | Vitale, Paolo |
| Abstract: | We offer a critical review of recent developments in the study of foreign exchange intervention. In particular, we discuss some unresolved issues, such as the secrecy puzzle, the relevance of the signalling and portfolio-balance effect hypotheses, the identification of the impact of foreign exchange intervention on currency values. We suggest that: i) the unresolved nature of these issues is partly due to the absence of a market microstructure perspective in most of the existing analysis of foreign exchange intervention; and ii) that recent promising advances in this strand of research have not fully exploited the potential of such perspective. |
| Keywords: | exchange rate dynamics; foreign exchange micro structure; official intervention |
| JEL: | D82 G14 G15 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5729&r=cba |
| By: | Lane, Philip R.; Schmukler, Sergio |
| Abstract: | Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities (with the exception of China’s FDI liabilities), these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are “short equity, long debt.” Third, China and India have improved their net external positions over the last decade although, based on their income level, neoclassical models would predict them to be net borrowers. Domestic financial developments and policies seem essential in understanding these patterns of integration. These include financial liberalization and exchange rate policies; domestic financial sector policies; and the impact of financial reform on savings and investment rates. Changes in these factors will affect the international financial integration of China and India (through shifts in capital flows and asset/liability holdings) and, consequently, the international financial system. |
| Keywords: | capital flows; China; financial integration; India; world economy |
| JEL: | F02 F30 F31 F32 F33 F36 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5852&r=cba |
| By: | Alexandre B. Cunha (IBMEC Business School - Rio de Janeiro) |
| Abstract: | In this paper we extend the Modigliani-Miller Theorem to the composition of the public debt. We show that in a deterministic model the structure of a government's assets and liabilities is undetermined. Hence, a floating exchange rate regime can implement any attainable competitive equilibrium. Concerning stochastic economies, if the government issues nominal bonds of several maturities, then the same result may hold. Thus, a conceivable link between the choice of an exchange rate regime and economic outcomes may be due to factors often not considered in standard macroeconomic models. |
| Keywords: | Modigliani-Miller Theorem, exchange rate regime, indeterminacy |
| JEL: | E42 E58 F31 F41 G32 |
| Date: | 2006–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:ibr:dpaper:2006-03&r=cba |
| By: | Broner, Fernando A; Ventura, Jaume |
| Abstract: | This paper presents a theoretical study of the effects of globalization on risk sharing and welfare. We model globalization as a gradual and exogenous increase in the fraction of goods that are tradable. In the absence of frictions, globalization opens new goods markets and raises welfare. We assume, however, that countries cannot commit to pay their debts. Unlike the previous literature, and motivated by changes in the institutional setup of emerging-market borrowing, we also assume that countries cannot discriminate between domestic and foreign creditors when paying their debts. Although globalization still opens new goods markets, we find that it can also open or close some asset markets. The net effect on risk sharing and welfare of this process of creation and destruction of markets might be either positive or negative depending on a variety of factors that the theory highlights. |
| Keywords: | domestic markets; globalization; international markets; risk sharing; sovereign risk |
| JEL: | F34 F36 G15 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5820&r=cba |
| By: | Ramon Gomez-Salvador (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alberto Musso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marc Stocker (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper provides a description and a discussion of some important aspects relating to recent productivity developments in the euro area. Following decades of stronger gains in the euro area than in the US, labour productivity growth has fallen behind that in the US in recent years. This reflects a decline in average labour productivity growth observed in the euro area since the mid-1990s, which stands in sharp contrast with opposite developments in the US. The decline in labour productivity growth experienced in the euro area since the mid-1990s resulted from both lower capital deepening and lower total factor productivity growth. From a sectoral perspective, industries not producing or using intensively information and communication technology (ICT) would appear mostly responsible for the decline in average labour productivity growth since the mid-1990s. These developments were broadly experienced by most euro area countries. A comparison with developments in the US suggests that the euro area economy seems to have benefited much less from increased production and use of ICT technologies, in particular in the services sector. Diverging trends in labour productivity growth between the euro area and the US in recent years mainly reflect developments in a number of specific ICT-using services such as retail, wholesale and some financial services where strong gains were registered in the US. The evidence presented in this paper suggests that, in order to support economic growth in the euro area, emphasis should be given to both policy measures that directly address the determinants of productivity and, given the interactions among the various factors of growth, to policies that raise labour utilisation. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20060053&r=cba |
| By: | Cees Ullersma; Gerben Hieminga |
| Abstract: | Although some authors have suggested that monetary expansion is still possible when the monetary policy interest rate cannot be reduced further, central banks tend to avoid interest rates close to the zero lower bound. Taking into account central banks.aversion to very low interest rates, we investigate optimal monetary policy in a New-Keynesian macro-economic model. Our analysis shows that appointing a central banker with a high aversion to low interest rate levels can mitigate the zero bound risk at the cost of persistent in.ation deviations from target. If fear of the zero lower bound is unfounded, it is better to appoint a central banker with no aversion to the zero lower bound, who will not shy away from unorthodox policies when the policy interest rate cannot be reduced further. |
| Keywords: | zero lower bound; inflation bias. |
| JEL: | E58 E52 E31 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:117&r=cba |
| By: | Papaioannou, Elias; Portes, Richard; Siourounis, Gregorios |
| Abstract: | Foreign exchange reserve accumulation has risen dramatically in recent years. The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away from the US dollar. A major portfolio shift would significantly affect exchange rates and the status of the dollar as the dominant international currency. We develop a dynamic mean-variance optimization framework with portfolio rebalancing costs to estimate optimal portfolio weights among the main international currencies. Making various assumptions on expected currency returns and the variance-covariance structure, we assess how the euro has changed this allocation. We then perform simulations for the optimal currency allocations of four large emerging market countries (Brazil, Russia, India and China), adding constraints that reflect a central bank’s desire to hold a sizable portion of its portfolio in the currencies of its peg, its foreign debt and its international trade. Our main results are: (i) The optimizer can match the large share of the US dollar in reserves, when the dollar is the reference (risk-free) currency. (ii) The optimum portfolios show a much lower weight for the euro than is observed. This suggests that the euro may already enjoy an enhanced role as an international reserve currency ('punching above its weight'). (iii) Growth in issuance of euro-denominated securities, a rise in euro zone trade with key emerging markets, and increased use of the euro as a currency peg, would all work towards raising the optimal euro shares, with the last factor being quantitatively the most important. |
| Keywords: | currency optimizer; euro; foreign reserves; international currencies |
| JEL: | F02 F30 G11 G15 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5734&r=cba |
| By: | Olivei, Giovanni; Tenreyro, Silvana |
| Abstract: | A vast empirical literature has documented delayed and persistent effects of monetary policy shocks on output. We show that this finding results from the aggregation of output impulse responses that differ sharply depending on the timing of the shock: When the monetary policy shock takes place in the first two quarters of the year, the response of output is quick, sizable, and dies out at a relatively fast pace. In contrast, output responds very little when the shock takes place in the third or fourth quarter. We propose a potential explanation for the differential responses based on uneven staggering of wage contracts across quarters. Using a stylized dynamic general equilibrium model, we show that a very modest amount of uneven staggering can generate differences in output responses similar to those found in the data. |
| Keywords: | business cycles; impulse-response function; monetary policy; nominal rigidity |
| JEL: | E1 E31 E32 E52 E58 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5716&r=cba |
| By: | Merkl, Christian; Snower, Dennis J. |
| Abstract: | This paper explores the influence of wage and price staggering on monetary persistence. We show that, for plausible parameter values, wage and price staggering are highly complementary in generating monetary persistence. We do so by proposing the new measure "quantitative persistence," after discussing weaknesses of the "contract multiplier," which is generally used to compare persistence. The existence of complementarities means that beyond understanding how wage and price staggering work in isolation, it is important to explore their interactions. Furthermore, our analysis indicates that the degree of monetary persistence generated by wage vis-à-vis price staggering depends on the relative competitiveness of the labour and product markets. We show that the conventional wisdom that wage staggering can generate more persistence than price staggering does not necessarily hold. |
| Keywords: | monetary persistence; monetary policy; price staggering; wage staggering |
| JEL: | E40 E50 E52 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5658&r=cba |
| By: | Conconi, Paola; Perroni, Carlo |
| Abstract: | We examine the relationship between international policy coordination and domestic policy reputation when both are self-sustaining. We show that domestic policy commitment does not necessarily facilitate international cooperation; rather, efficient polices may be most easily sustained when countries are unable to pre-commit to policy domestically. Moreover, lack of domestic commitment is more likely to facilitate international cooperation the larger are the international spillovers of domestic policies. |
| Keywords: | domestic policy commitment; international agreements |
| JEL: | F02 F10 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5762&r=cba |
| By: | Guse , Eran (Department of Applied Economics, University of Cambridge) |
| Abstract: | I introduce Expectational Business Cycles where aggregate activity fluctuates due to learning, heterogeneous updating rules and random changes in the social norm predictor. Agents use one of two updating rules to learn the equilibrium values while heterogeneity is dictated via an evolutionary process. Uncertainty of a new equilibrium, due to a shock to the structure of the economy, results in a sudden decrease in output. As agents learn the equilibrium, output slowly increases to its equilibrium value. These business cycles arrive faster, are longer and more severe as agents possess less rationality. |
| Keywords: | adaptive learning; aggregate fluctuations; heterogeneous expectations; multiple equilibria; rational expectations |
| JEL: | C62 D84 E37 |
| Date: | 2005–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2004_019&r=cba |
| By: | Joseph P. Byrne, Julia Darby and Ronald MacDonald |
| Abstract: | In this paper we consider the impact of exchange rate volatility on the volume of bilateral US trade (both exports and imports) using sectoral data. Amongst the novelties in our approach are the use of sectoral industrial price indices, rather than an aggregate price index, and the construction of the sectoral groupings, which is based on economic and econometric criteria. We find that separating trade into differentiated goods and homogeneous goods results in the most appropriate sectoral division, and we also report evidence to suggest that exchange rate volatility has a robust and significantly negative effect across sectors, although it is strongest for exports of differentiated goods. |
| JEL: | F3 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2006_9&r=cba |
| By: | Alexei Deviatov (New Economic School) |
| Abstract: | I study money creation in versions of the Trejos-Wright (1995) and Shi (1995) models with indivisible money and individual holdings bounded at two units. I work with the same class of policies as in Deviatov and Wallace (2001), who study money creation in that model. However, I consider an alternative notion of implementability–the ex ante pairwise core. I compute a set of numerical examples to determine whether money creation is beneficial. I find beneficial e?ects of money creation if individuals are su?ciently risk averse (obtain su?ciently high utility gains from trade) and impatient. |
| Keywords: | inflation; Friedman rule; optimal monetary policy |
| JEL: | E31 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0081&r=cba |
| By: | Ian Babetskii |
| Abstract: | A fixed exchange rate regime eliminates one degree of freedom in absorbing macroeconomic shocks. Therefore, there is a call for higher labor market flexibility in countries which are members of the monetary union or those which intend to join the monetary union. Focusing on the cross-country analysis of labor markets in the enlarged European Union, this paper aims to assess empirically the role of aggregate wages as a correction mechanism for dealing with economic disturbances. A comparable quarterly data-set is constructed covering 1995–2004 for four central European states (CE-4), four new EU members already participating in the Exchange Rate Mechanism-II (ERM-II participants), and three peripheral members of the euro area (EMU- 3). We apply classical time series/panel, Bayesian, and cointegration techniques to determine the extent to which aggregate wages can accommodate shocks in the economy. The macroeconomic data does not seem to support the argument that real wages are flexible in the CE-4, the ERM-II participants, and the EMU-3. |
| Keywords: | . ERM-II, euro adoption, labor market, wage flexibility. |
| JEL: | E24 E52 C22 C33 P20 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2006/1&r=cba |
| By: | Christos Ioannidis and Alexandros Kontonikas |
| Abstract: | This paper investigates the impact of monetary policy on stock returns in thirteen OECD countries over the period 1972-2002. Our results indicate that monetary policy shifts significantly affect stock returns, thereby supporting the notion of monetary policy transmission via the stock market. Our contribution with respect to previous work is threefold. First, we show that our findings are robust to various alternative measures of stock returns. Second, our inferences are adjusted for the non-normality exhibited by the stock returns data. Finally, we take into account the increasing co-movement among international stock markets. The sensitivity analysis indicates that the results remain largely unchanged. |
| JEL: | E44 E52 E60 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2006_12&r=cba |
| By: | Paz Rico Belda (Universitat de València) |
| Abstract: | This paper investigates whether threshold effects exist in the relationship between dollar-euro real exchange rate and real interest differential, over the period January 1984 to December 2004. We specify a three-regime threshold model and the results provide evidence that there is no threshold effect in the short term, but the nonlinear behaviour of real exchange rate implies threshold effect in the long term. On the other hand, the nonlinearity into the behaviour of real exchange rates can be modelled by a Band-TAR which implies a symmetric response to the real interest differential outside the bank. Finally, into the threshold band the behaviour of real exchange rate is near to follow a random walk, so monetary shocks are more persistence than outside this region. En este trabajo se analiza si existe efecto umbral en la relación entre el tipo de cambio real dólar-euro y el diferencial de intereses reales, durante el periodo comprendido entre enero de 1984 y diciembre de 2004. Para ello se específica un modelo threshold de tres regímenes y los resultado evidencian que no existe efecto umbral corto plazo pero si a largo plazo. El comportamiento no lineal del tipo de cambio real conlleva en el largo plazo una respuesta al diferencial de intereses reales que es diferente fuera que dentro de la banda umbral. Asimismo, el comportamiento del tipo de cambio real sigue un proceso Band-TAR, de tal forma que reacciona igual por arriba que por debajo de la banda al diferencial de intereses reales. Finalmente, dentro de la banda umbral el tipo de cambio real muestra un comportamiento cercano a presentar raíz unitaria, por lo que los shocks monetarios generan desviaciones de su nivel de equilibrio más persistentes que fuera de la banda. |
| Keywords: | banda umbral, tipo de cambio real, diferencial de intereses reales, paridad de poder adquisitivo, no linealidad Threshold, real exchange rates, real interest differentials, purchasing power parity, nonlinearity. |
| JEL: | F30 F47 C53 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasec:2006-13&r=cba |
| By: | Marc Hofstetter |
| Abstract: | This paper challenges the conventional view according to which disinflations in Latin America —even from low and moderate peaks— have been carried out at no cost to output. After suggesting a new methodology that overcomes some of the shortcomings of the traditional methods used to measure the costs of disinflations, large sacrifice ratios are obtained for the 1970s and 80s. While the disinflation costs for the 90s remain negative, it is shown that an unusual combination of circumstances —i.e., factors related to capital inflows, structural reforms, and the peculiar recent inflation history— can explain this fortunate result. |
| Date: | 2006–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:col:001049:002679&r=cba |
| By: | Makoto Watanabe |
| Abstract: | This paper studies an (S, s) pricing model from the perspective of inflation and price competition in search markets. I present a model in which consumers'search technologies can influence firms' price setting, price dispersion, and the market structure. The result shows that although price competition among firms is more intensified in markets where consumers' search technologies are more efficient, price inflation is counter-intuitively, more likely to increase monopoly power of firms and to stimulate entry in these markets. The model also provides new empirical implications for firms' price setting behaviors. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we065623&r=cba |
| By: | Taylor, Alan M; Wilson, Janine |
| Abstract: | Do international trade and finance flow together? In theory, trade and finance can be substitutes or complements, so the matter must be resolved empirically. We study trade and financial flows from the United Kingdom from 1870 to 1913 and the United States in the interwar years. Trade and finance are robustly correlated, even after allowing for simultaneity. Evidence from the British Empire casts doubt on the idea that trade is a punishment device in the event of default. |
| Keywords: | complementarities; international investment; international trade |
| JEL: | F10 F30 F40 N10 N20 N70 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5846&r=cba |
| By: | Aron, Janine; Muellbauer, John |
| Abstract: | This paper examines the evolution of monetary policy in South Africa in 1994-2004 in terms of design, the operational framework, the South African Reserve Bank’s (SARB) understanding of monetary policy transmission and the transparency, credibility and predictability of monetary policy. Quantitative indexes of transparency in 1994 and 2004 are compared and expectations data and forward interest rate data used to assess the credibility and predictability of policy under inflation targeting. The forecasting performance of the SARB is evaluated, and monetary policy decisions taken in response to external and domestic shocks assessed. The impact of monetary policy on the level of real interest rates and the role for complementary policies are examined. |
| Keywords: | inflation targeting; monetary policy; South Africa |
| JEL: | E52 E58 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5831&r=cba |
| By: | Assenmacher-Wesche, Katrin; Gerlach, Stefan |
| Abstract: | While monetary targeting has become increasingly rare, many central banks attach weight to money growth in setting interest rates. This raises the issue of how money can be combined with other variables, in particular the output gap, when analysing inflation. The Swiss National Bank emphasises that the indicators it uses to do so vary across forecasting horizons. While real indicators are employed for short-run forecasts, money growth is more important at longer horizons. Using band spectral regressions and causality tests in the frequency domain, we show that this interpretation of the inflation process fits the data well. |
| Keywords: | frequency domain; Phillips curve; quantity theory; spectral regression |
| JEL: | C22 E3 E5 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5723&r=cba |
| By: | Rocío Betancourt; Hernando Vargas; Norberto Rodríguez Niño |
| Abstract: | Banks and other credit institutions are key players in the transmission of monetary policy, especially in emerging market economies, where the responses of deposit and loan interest rates to shifts in policy rates are among the most important channels. This pass-through depends on the conditions prevailing in the loan and deposit markets, which are, in turn, affected by macroeconomic factors. Hence, when setting their policy, monetary authorities must take into account those conditions and the behavior of banks. This paper illustrates this point by means of a theoretical micro-banking model and shows empirical evidence for Colombia suggesting that some aspects of the model might be relevant features of the transmission mechanism. |
| Date: | 2006–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002676&r=cba |