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on Central Banking |
| By: | Glenn D. Rudebusch; John C. Williams |
| Abstract: | The modern view of monetary policy stresses its role in shaping the entire yield curve of interest rates in order to achieve various macroeconomic objectives. A crucial element of this process involves guiding financial market expectations of future central bank actions. Recently, a few central banks have started to explicitly signal their future policy intentions to the public, and two of these banks have even begun publishing their internal interest rate projections. We examine the macroeconomic effects of direct revelation of a central bank's expectations about the future path of the policy rate. We show that, in an economy where private agents have imperfect information about the determination of monetary policy, central bank communication of interest rate projections can help shape financial market expectations and may improve macroeconomic performance. |
| JEL: | E43 E52 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12638&r=cba |
| By: | N. Gregory Mankiw; Ricardo Reis |
| Abstract: | This paper develops and analyzes a general-equilibrium model with sticky information. The only rigidity in goods, labor, and financial markets is that agents are inattentive, sporadically updating their information sets, when setting prices, wages, and consumption. After presenting the ingredients of such a model, the paper develops an algorithm to solve this class of models and uses it to study the model’s dynamic properties. It then estimates the parameters of the model using U.S. data on five key macroeconomic time series. It finds that information stickiness is present in all markets, and is especially pronounced for consumers and workers. Variance decompositions show that monetary policy and aggregate demand shocks account for most of the variance of inflation, output, and hours. |
| JEL: | E10 E30 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12605&r=cba |
| By: | Thomas Sargent; Noah Williams; Tao Zha |
| Abstract: | We infer determinants of Latin American hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden Markov model that potentially assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals. Our maximum likelihood estimates allow us to interpret observed inflation rates in terms of variations in the deficits, sequences of shocks that trigger temporary episodes of expectations driven hyperinflations, and occasional superficial reforms that cut inflation without reforming deficits. Our estimates also allow us to infer the deficit adjustments that seem to have permanently stabilized inflation processes. |
| JEL: | D83 E31 E52 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12606&r=cba |
| By: | Eijffinger, Sylvester C W; Schaling, Eric; Tesfaselassie, Mewael F. |
| Abstract: | In this paper we incorporate the term structure of interest rates in a standard inflation forecast targeting framework. We find that under flexible inflation targeting and uncertainty in the degree of persistence in the economy, allowing for active learning possibilities has effects on the optimal interest rate rule followed by the central bank. For a wide range of possible initial beliefs about the unknown parameter, the dynamically optimal rule is in general more activist, in the sense of responding aggressively to the state of the economy, than the myopic rule for small to moderate deviations of the state variable from its target. On the other hand, for large deviations, the optimal policy is less activist than the myopic and the certainty equivalence policies. |
| Keywords: | learning; rational expectations; separation principle; term structure of interest rates |
| JEL: | C53 E43 E52 F33 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5896&r=cba |
| By: | Canova, Fabio; Gambetti, Luca; Pappa, Evi |
| Abstract: | We examine the dynamics of output growth and inflation in the US, Euro area and UK using a structural time varying coefficient VAR. There are important similarities in structural inflation dynamics across countries; output growth dynamics differ. Swings in the magnitude of inflation and output growth volatilities and persistences are accounted for by a combination of three structural shocks. Changes over time in the structure of the economy are limited and permanent variations largely absent. Changes in the volatilities of structural shocks matter. |
| Keywords: | persistence; structural time varying VARs; transmission; variability |
| JEL: | C11 E12 E32 E62 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5878&r=cba |
| By: | Krogstrup, Signe; Wyplosz, Charles |
| Abstract: | The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Along with Piguvian taxes, a number of policy measures are examined and welfare-ranked: deficit ceilings, golden rules and delegation. In general, the combination of delegation and an optimally-set deficit ceiling deliver the social optimum, even if the deficit ceiling is not credible. |
| Keywords: | common pool; deficit bias; fiscal institutions; fiscal restraints; fiscal rules; stability pact |
| JEL: | E61 E62 H6 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5866&r=cba |
| By: | Huw Dixon (Economics Department, University of York, YO10 5DD, UK.) |
| Abstract: | This paper shows how any steady state distribution of ages and related hazard rates can be represented as a distribution across firms of completed contract lengths. The distribution is consistent with a Generalised Taylor Economy or a Generalised Calvo model with duration dependent reset probabilities. Equivalent distributions have different degrees of forward lookingness and imply different behaviour in response to monetary shocks. We also interpret data on the proportions of firms changing price in a period, and the resultant range of average contract lengths. JEL Classification: E50. |
| Keywords: | Contract length, steady state, hazard rate, Calvo, Taylor. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060676&r=cba |
| By: | John Fender; Neil Rankin |
| Abstract: | A dynamic general equilibrium model of an open economy with staggered wages is constructed. We analyse disinflation through pegging the exchange rate. In accordance with the stylised facts, an initial boom in output can result, depending on the exact level of the peg. The reason is an element of preannouncement in the policy. Disinflation through reducing monetary growth is shown to be equivalent to disinflation through pegging the exchange rate, if the latter includes an initial currency revaluation. This helps explain why such disinflation causes a short-run slump. The model can also help explain inflation persistence. |
| Keywords: | Exchange-rate-based disinflation, money-based disinflation, staggered wages, preannouncement effects. |
| JEL: | F52 E41 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0610&r=cba |
| By: | Lothian, James R. (Fordham University); Taylor, Mark P. (University of Warwick and Centre for Economic Policy Research, London) |
| Abstract: | Using data since 1820 for the US, the UK and France, we test for the presence of real effects on the equilibrium real exchange rate (the Harrod-Balassa-Samuelson, HBS effect) in an explicitly nonlinear framework and allowing for shifts in real exchange rate volatility across nominal regimes. A statistically signifcant HBS effect for sterling-dollar captures its longrun trend and explains a proportion of variation in changes in the real rate that is proportional to the time horizon of the change. There is signifcant evidence of nonlinear reversion towards long-run equilibrium and downwards shifts in volatility during &xed nominal exchange rate regimes. |
| Keywords: | purchasing power parity ; real exchange rate ; nonlinear dynamics ; Harrod-Balassa-Samuelson effect ; productivity differentials |
| JEL: | F31 F41 C1 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:768&r=cba |
| By: | Bernd Schnatz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper tests for nonlinearities in the adjustment of the euro exchange rate towards purchasing power parity (PPP). It presents new survey based evidence consistent with non-linear patterns in euro exchange rate dynamics. Moreover, based on an exponential smooth transition autoregressive (ESTAR-) model, it finds strong evidence that the speed of mean reversion in euro exchange rates increases non-linearly with the magnitude of the PPP deviation. Accordingly, while the euro real exchange rate can be well approximated by a random walk if PPP deviations are small, in periods of significant deviations, gravitational forces are set to take root and bring the exchange rate back towards its long-term trend. Consistent with higher euro-dollar volatility, deviations from the PPP equilibrium for this pair need to be stronger in order to reach the same adjustment intensity as for other currencies. JEL Classification: F31. |
| Keywords: | Purchasing power parity, real exchange rate, non-linearities, STAR models. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060682&r=cba |
| By: | Burnside, A Craig; Eichenbaum, Martin; Kleshchelski, Isaac; Rebelo, Sérgio |
| Abstract: | Currencies that are at a forward premium tend to depreciate. This ‘forward-premium puzzle’ represents an egregious deviation from uncovered interest parity. We document the properties of returns to currency speculation strategies that exploit this anomaly. The first strategy, known as the carry trade, is widely used by practitioners. This strategy involves selling currencies forward that are at a forward premium and buying currencies forward that are at a forward discount. The second strategy relies on a particular regression to forecast the payoff to selling currencies forward. We show that these strategies yield high Sharpe ratios which are not a compensation for risk. However, these Sharpe ratios do not represent unexploited profit opportunities. In the presence of microstructure frictions, spot and forward exchange rates move against traders as they increase their positions. The resulting ‘price pressure’ drives a wedge between average and marginal Sharpe ratios. We argue that marginal Sharpe ratios are zero even though average Sharpe ratios are positive. |
| Keywords: | carry trade; exchange rates; uncovered interest parity |
| JEL: | F31 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5883&r=cba |
| By: | Jaimovich, Nir; Rebelo, Sérgio |
| Abstract: | We propose a model that generates an economic expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that exhibit a weak short-run wealth effect on the labour supply. These preferences nest the two classes of utility functions most widely used in the business cycle literature as special cases. Our model can generate recessions that resemble those of the post-war U.S. economy without relying on negative productivity shocks. The recessions are caused not by contemporaneous negative shocks but rather by lackluster news about future TFP or investment-specific technical change. |
| Keywords: | business cycles; expectations; news |
| JEL: | E3 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5877&r=cba |
| By: | Menkhoff, Lukas (University of Hannover); Taylor, Mark P. (University of Warwick and Centre for Economic Policy Research) |
| Abstract: | Technical analysis involves the prediction of future exchange rate (or other assetprice) movements from an inductive analysis of past movements. A reading of the large literature on this topic allows us to establish a set of stylised facts, including the facts that technical analysis is an important and widely used method of analysis in the foreign exchange market and that applying certain technical trading rules over a sustained period may lead to significant positive excess returns. We then analyze four arguments that have been put forward to explain the continuing widespread use of technical analysis and its apparent profitability: that the foreign exchange market may be characterised by not-fully-rational behaviour; that technical analysis may exploit the influence of central bank interventions; that technical analysis may be an efficient form of information processing ; and finally that it may provide information on nonfundamental influences on foreign exchange movements. Although all of these positions may be relevant to some degree, neither non-rationality nor official interventions seem to be widespread and persistent enough to explain the obstinate passion of foreign exchange professionals for technical analysis. |
| Keywords: | foreign exchange market ; technical analysis ; market microstructure |
| JEL: | F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:769&r=cba |
| By: | Dudley Cooke |
| Abstract: | A general equilibrium model of a small open economy is developed to analyze the optimal rate of inflation under discretion. Once agents' welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship. A greater degree of openness may lead the policy maker to want to exploit the short-run Phillips curve more aggressively, even if involves a smaller short-run benefit, because changes in export demand affect the terms of trade. Inflation can then be higher in a more open economy. |
| Date: | 2006–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:621&r=cba |
| By: | Bayoumi, Tamim; Jayanthi, Sarma; Lee, Jaewoo |
| Abstract: | This paper describes the result and the methodology of updating the IMF's nominal and real effective exchange rate weights on the basis of trade data over 1999-2001. The underlying framework is an updated version of the IMF's current effective exchange rate calculation, which uses weights largely based on 1989-91 data. Since then, substantial changes have occurred in international trade relations, warranting a recalculation of effective exchange rate indices on the basis of new trade patterns. Updated weights show that the United States and developing countries (most notably China) have grown in their importance in global trade, while Japan and the European Union have declined, with substantial implications for the path of the dollar and exchange rate effects of emerging market crises since 1995. |
| Keywords: | effective exchange rate; weight |
| JEL: | F10 F30 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5860&r=cba |
| By: | Manfred Gärtner |
| Abstract: | This paper provides a concise overview of the state of the art on monetary policy and central banking from a public choice perspective. It starts with a brief look at the roots of today’s view of monetary policy conduct and the design of pertinent institutions in early work on political business cycles, and then proceeds to a discussion of the inflationstabilization dilemma along with proposed solutions in the form of central bank independence and conservativeness, incentive contracts, and inflation policy targets. The last section addresses current developments. These include the proper choice of monetary policy targets, the role of New Keynesian and sticky-information aggregate-supply curves and the quest for simple and efficient rules for monetary policy that has been triggered by the proposal and widespread polularity of the Taylor rule. |
| Keywords: | Monetary policy, central banking, rules, discretion, stabilization, inflation, bias, public choice |
| JEL: | E31 E32 E52 E58 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2006:2006-25&r=cba |
| By: | Helge Berger (Free University Berlin, Department of Economics, Boltzmannstr. 20, 14195 Berlin, Germany & CESifo.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Media coverage of monetary policy actions is a central channel of a central bank’s communication with the wider public, and thus an important factor for its credibility and policy effectiveness. This paper analyses the coverage which ECB monetary policy decisions receive in the print media, and the determinants of its extent and of its favorableness. We find that that the press critically discusses the ECB’s policy decisions in the context of prior market expectations and of the inflation environment, and that the media’s coverage of decisions is generally highly responsive to ECB communication – in particular its Press Conference on meeting days. However, the paper also finds clear limitations in this regard, thus underlining the critical monitoring role assumed by the media. JEL Classification: E52, E58. |
| Keywords: | Monetary policy, ECB, communication, media, press, coverage, transparency, accountability. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060679&r=cba |
| By: | Günter W. Beck (Goethe University Frankfurt and CFS. Contact: Faculty of Economics and Business Administration, Goethe University Frankfurt, Mertonstrasse 17, 60325 Frankfurt, Germany.); Kirstin Hubrich (Corresponding author: Research Department, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimiliano Marcellino (IEP-Bocconi University, IGIER and CEPR. Contact: Bocconi University, IGIER, Via Salasco, 5, Milano 20136, Italy.) |
| Abstract: | We investigate co-movements and heterogeneity in inflation dynamics of different regions within and across euro area countries using a novel disaggregate dataset to improve the understanding of inflation differentials in the European Monetary Union. We employ a model where regional inflation dynamics are explained by common euro area and country specific factors as well as an idiosyncratic regional component. Our findings indicate a substantial common area wide component, that can be related to the common monetary policy in the euro area and to external developments, in particular exchange rate movements and changes in oil prices. The effects of the area wide factors differ across regions, however. We relate these differences to structural economic characteristics of the various regions. We also find a substantial national component. Our findings do not differ substantially before and after the formal introduction of the euro in 1999, suggesting that convergence has largely taken place before the mid 90s. Analysing US regional inflation developments yields similar results regarding the relevance of common US factors. Finally, we find that disaggregate regional inflation information, as summarised by the area wide factors, is important in explaining aggregate euro area and US inflation rates, even after conditioning on macroeconomic variables. Therefore, monitoring regional inflation rates within euro area countries can enhance the monetary policy maker’s understanding of aggregate area wide inflation dynamics. JEL Classification: E31, E52, E58, C33. |
| Keywords: | Regional inflation dynamics, euro area and US, common factor models. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060681&r=cba |
| By: | Assenmacher-Wesche, Katrin; Gerlach, Stefan |
| Abstract: | Many central banks have abandoned monetary targeting because the link between money growth and inflation seemed to disappear in the 1980s. Using spectral regression techniques, we show that for the euro area, Japan, the UK and the US there is a unit relationship between money growth and inflation at low frequencies when the impact of interest rate changes on money demand is accounted for. We estimate Phillips-curve equations in which the low-frequency information from money growth is combined with high-frequency information from the output gap to explain movements in inflation. |
| Keywords: | frequency domain; Phillips curve; Quantity theory; spectral regression |
| JEL: | C22 E3 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5868&r=cba |
| By: | Maria Demertzis |
| Abstract: | Recent literature on monetary policy has emphasised the role of expectations and the merits of tying them down through credible commitment. However, although always in favour of reaping the benefits of having committed, Central Banks worry about the fact that in real time, it is not always easy to assume that they are in such a position. Decisions need to be taken then, under the assumption of predetermined expectations. We argue that in these circumstances, the provision of clear inflation objectives helps agents understand Central Bank objectives better and is thus beneficial to all. |
| Keywords: | expectations; information games; inflation targets |
| JEL: | C70 C78 E58 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:118&r=cba |
| By: | Cesar Carrera (University of California, Santa Cruz and Central Bank of Peru); Mahir Binici (University of California, Santa Cruz and Central Bank of Turkey) |
| Abstract: | We provide an empirical analysis about the relationship between exchange rate and different price indexes for each OECD country. We were focused on how different inflation environments could explain a decreasing degree of the exchange rate pass-through over prices in each country. In a second stage, we estimate the relationship between pass-through and prices using individual-country pass-through. We find evidence in favor of the hypothesis that the exchange rate pass-through is lower when it is taken into account environments in which it is observed lower and stables rates of inflation, result which would be associated with a more effective monetary policy in terms of transparency and inflation control. |
| Keywords: | Pass-through, Exchange rate, Inflation, Monetary Policy |
| JEL: | E31 E52 F3 F4 C22 C31 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2006-009&r=cba |
| By: | Canova, Fabio; Gambetti, Luca; Pappa, Evi |
| Abstract: | We examine the dynamics of US output and inflation using a structural time varying coefficient VAR. We show that there are changes in the volatility of both variables and in the persistence of inflation. Technology shocks explain changes in output volatility, while a combination of technology, demand and monetary shocks explain variations in the persistence and volatility of inflation. We detect changes over time in the transmission of technology shocks and in the variance of technology and of monetary policy shocks. Hours and labour productivity always increase in response to technology shocks. |
| Keywords: | persistence; structural time varying VARs; transmission; variability |
| JEL: | C11 E12 E32 E62 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5879&r=cba |
| By: | Giuseppe Diana; Moise Sidiropoulos |
| Abstract: | This paper adapts in a simple static context the Rogoff's (1985) analysis of monetary policy delegation to a conservative central banker to the robust control framework. In this framework, uncertainty means that policymakers are unsure about their model, in the sense that there is a group of approximate models that they also consider as possibly true, and their objective is to choose a rule that will work under a range of di¤erent model specifications. We find that robustness reveals the emergence of a precautionary behaviour in the case of unstructured model uncertainty, reducing thus government's willingness to delegate monetary policy to a conservative central banker. |
| Keywords: | Robust control, Monetary policy delegation, Central bank conservativeness. |
| JEL: | E52 E58 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2006-26&r=cba |
| By: | Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Using bilateral data on international equity and bond flows, we find that the prediction of the International Capital Asset Pricing Model is partially met and that global equity markets might be more integrated than global bond markets. Moreover, over the turbulent 1998-2001 period characterised by an equity bubble and the subsequent burst, we find evidence that investors preferred portfolio assets of countries where the central bank gave relative importance to money. As for EMU, once controlling for diversification benefits and the elimination of the exchange rate risk, we show that cross-border portfolio flows among euro area countries have increased due to the catalyst effect of EMU. Country's shares in the world market portfolio, home bias, initial degree of misallocation across countries, past returns, diversification benefits and EMU can explain 35-40% of the total variation in equity and bond asset flows. JEL Classification: C13, C21, F37, G11. |
| Keywords: | Capital flows, Home bias, Risk diversification, EMU, Monetary policy. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060678&r=cba |
| By: | Thomas A. Eife |
| Abstract: | This paper documents that the impact of the euro changeover in January 2002 on prices was not uniform across the 12 participating countries. There are countries where prices increased significantly, but there are also countries where price-setting behaviour during the changeover does not appear to be very different from other points in time. This paper argues that the above difference can be explained by looking at the way countries regulated price setting during the changeover, and that any impact of the changeover could have been avoided with appropriate regulations. The gap between the actual and the perceived impact is addressed and policy recommendations for future changeovers are provided |
| Keywords: | currency changeover, euro, economic policy, prices, perceived inflation |
| JEL: | E31 E60 L11 |
| Date: | 2006–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2006-06&r=cba |
| By: | Michael W. Elsby |
| Abstract: | This paper formalizes and assesses empirically the implications of widely observed evidence for downward nominal wage rigidity (DNWR). It shows how a model of DNWR informed by diverse evidence for worker resistance to nominal wage cuts is nevertheless consistent with weak macroeconomic effects. This occurs because firms have an incentive to compress wage increases as well as wage cuts when DNWR binds. By neglecting potential compression of wage increases, the previous literature may have overstated the costs of DNWR to firms. Using a broad range of micro--data from the US and Great Britain I find that firms do indeed compress wage increases as well as wage cuts at times when DNWR binds. Accounting for this reduces the estimated increase in aggregate wage growth due to DNWR to be much closer to zero, consistent with the predictions of the model. These results suggest that DNWR may not provide a strong argument against the targeting of low inflation rates, as practiced by many monetary authorities. Importantly, though, this result is nevertheless consistent with evidence that suggests workers are averse to nominal wage cuts. |
| JEL: | E24 E31 J30 J41 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12611&r=cba |
| By: | Jan Lemmen |
| Abstract: | The possible undervaluation of the renminbi is evaluated. A survey of the literature concludes toward a renminbi undervaluation of about 25% in real effective terms. This undervaluation is not expected to disappear any time soon. |
| Keywords: | China; exchange rates; outlook |
| JEL: | F31 O24 O53 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:memodm:166&r=cba |
| By: | Veldkamp, Laura; Wolfers, Justin |
| Abstract: | When similar patterns of expansion and contraction are observed across sectors, we call this a business cycle. Yet explaining the similarity and synchronization of these cycles across industries remains a puzzle. Whereas output growth across industries is highly correlated, identifiable shocks, like shocks to productivity, are far less correlated. While previous work has examined complementarities in production, we propose that sectors make similar input decisions because of complementarities in information acquisition. Because information about driving forces has a high fixed cost of production and a low marginal cost of replication, it can be more efficient for firms to share the cost of discovering common shocks than to invest in uncovering detailed sectoral information. Firms basing their decisions on this common information make highly correlated production choices. This mechanism amplifies the effects of common shocks, relative to sectoral shocks. |
| Keywords: | business cycles; comovement puzzle; costly information; information markets |
| JEL: | D82 E32 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5898&r=cba |
| By: | Michael Bordo; Anna J. Schwartz |
| Abstract: | David Laidler has been a major player in the development of the monetarist tradition. As the monetarist approach lost influence on policy makers he kept defending the importance of many of its principles. In this paper we survey and assess the impact on monetary economics of Laidler's work on the demand for money and the quantity theory of money; the transmission mechanism on the link between money and nominal income; the Phillips Curve; the monetary approach to the balance of payments; and monetary policy. |
| JEL: | E00 E50 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12593&r=cba |
| By: | Jean-Marie Dufour; David Tessier |
| Abstract: | The authors examine simultaneously the causal links connecting monetary policy variables, real activity, and stock returns. Their interest lies in the fact that the dynamics of asset prices can provide key insights--in terms of information--for the conduct of monetary policy, since asset prices constitute a class of potentially leading indicators of either economic activity or inflation. This is of particular interest in the context of an inflation-targeting regime, where the monetary policy stance is set according to inflation forecasts. While most empirical studies on causality have examined this issue using Granger's (1969) original definition, the authors examine the causality relations through the generalization proposed in Dufour and Renault (1998). For the United States, the authors find no support for stock returns as a leading indicator of the macroeconomic variables considered, or for stock returns being influenced by those macroeconomic variables, except for one case: fluctuations in M1 tend to anticipate fluctuations in stock returns. Furthermore, the authors' empirical methodology allows them to infer that monetary aggregates may have significant predictive power for income and prices at longer horizons. It is therefore incorrect to dismiss the importance of monetary aggregates based on the usual Granger causality criteria. The causality pattern inferred by the authors' procedure is consistent with the Phillips curve (for the inflation dynamics) and with the Taylor rule in the case of the interest rate. For Canada, the results are much different. The authors show that there is a potential role for asset prices as a predictor of some important macroeconomic variables, namely interest rates, inflation, and output at policy-relevant horizons. Furthermore, some measures of monetary aggregates tend to dominate the interest rate as robust causal variables for output growth and inflation. However, the authors do not find strong evidence in favour of the Phillips curve and the Taylor rule. Finally, for both Canada and the United States, the authors show that seasonal adjustments can highly distort the inferred causality structure. |
| Keywords: | Monetary and financial indicators |
| JEL: | C1 C12 C15 C32 C51 C53 E52 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-39&r=cba |
| By: | Moïse Sidiropoulos; Eleftherios Spyromitros |
| Abstract: | This paper examines the welfare and stabilisation implications of alterna- tive fiscal decision rules in a monetary union with a common monetary policy, such as the European Monetary Union (EMU). We develop a two-country model under monetary union in presnece of asymmetries. Fiscal policies are assumed alternatively non-cooperative (decentralised) and cooperative (centralised) and labour markets are characterised by decentralised and centralised wage setting. The central issue of the paper is the design of the appropriate fiscal policy rule by comparing and evaluating the performance of alternative arrangements to distribute the power over fiscal authorities between the centre of the union and the individual members of the union. The main result of this paper reveals that a decentralized fiscal policy rule, where the member states conduct independent fiscal policies, with centralised wage setting in labour markets of monetary union members is the appropriate institutional design. This institutional arrangement would improve the social welfare and stabilize better than others the idiosyncratic shocks hitting the economies of the monetary union members. |
| Keywords: | Policy-mix, EMU, labor market institutions. |
| JEL: | E58 E52 E63 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2006-25&r=cba |
| By: | García-Fronti, Javier; Miller, Marcus; Zhang, Lei |
| Abstract: | The stylised facts of currency crises in emerging markets include output contraction coming hard on the heels of devaluation, with a prominent role for the adverse balance-sheet effects of liability dollarisation. In the light of the South East Asian experience, we propose an eclectic blend of the supply-side account of Aghion, Bacchetta and Banerjee (2000) with a demand recession triggered by balance sheet effects (Krugman, 1999). This sharpens the dilemma facing the monetary authorities - how to defend the currency without depressing the economy. But, with credible commitment or complementary policy actions, excessive output losses can, in principle, be avoided. |
| Keywords: | contractionary devaluation; financial crises; Keynesian recession; supply and demand shocks |
| JEL: | E12 E4 E51 F34 G18 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5905&r=cba |
| By: | Broner, Fernando A |
| Abstract: | The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, which relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information delays the attack on the currency past the point at which the shadow exchange rate equals the peg, giving rise to unpredictable and discrete devaluations. |
| Keywords: | currency crises; discrete devaluations; first generation models; multiple equilibria; private information |
| JEL: | D8 E58 F31 F32 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5876&r=cba |
| By: | Andres Vesilind |
| Abstract: | This paper focuses on two actively studied inefficiencies in financial markets: the forward premium bias in foreign exchange markets (see, for example, Hansen and Hodrick 1980, Fama 1984, Bansal and Dahlquist 2000, etc.) and the empirical finding that the time expectations theory performs relatively poorly in describing the average shape of yield curves (for a list of papers see, for example, Backus et al. 1998, p 1). The goal of the article is to test whether these two inefficiencies can still offer the possibilities of earning positive and stable excess return for investors. For that purpose, first two very simple trading strategies are tested based on the abovementioned inefficiencies: buying the currencies of the countries with higher short-term interest rates against the currencies of the countries with lower short-term interest rates (i.e. simple FX carry-strategy) and holding long-only positions in longerterm interest rate futures. The results show that the two studied risk premiums are still present in the markets and enable investors to earn excess returns even with simple strategies. Additional tests show that the performance of these simple strategies can be further improved by the inclusion of a risk factor in the foreign exchange carry-strategy and by the addition of monetary policy direction and yield curve steepness filters in the long-only strategy in interest rate futures. |
| Keywords: | trading rules, forward premium bias, time expectations theory |
| JEL: | E44 E47 E58 F37 G11 G15 |
| Date: | 2006–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2006-04&r=cba |
| By: | Hens, Thorsten (Institute for Empirical Research in Economics, University of Zurich); Pilgrim, Beate (Reuters AG, Frankfurt, Germany) |
| Abstract: | We show that for international economies with two countries, in which agents have additively separable utility functions, the existence of sunspot equilibria is equivalent to the occurrence of the transfer paradox. This equivalence enables us to provide some new insights on the relation of the existence of sunspot equilibria and the multiplicity of spot market equilibria. |
| Keywords: | Sunspot Equilibria; Transfer Paradox |
| JEL: | C62 D52 F20 F30 O12 |
| Date: | 2004–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2004_014&r=cba |
| By: | Agostino Consolo |
| Abstract: | The aim of this paper is to forecast some of the most important measures of inflation of the Estonian economy by making use of linear and non-linear models. Results from comparing classes of optimal models are similar to those in the forecasting literature. In particular, there are gains from using more sophisticated methods such as factor analysis and time-varying parameters methods. Model discrimination is based on evaluation criteria which are computed by a real-time dynamic estimation procedure. Moreover, forecasts uncertainty is appropriately taken into account: Fan Charts can exhaustively describe the final output for what concerns out-of-sample forecasting. |
| Keywords: | Estonian Economy, forecasting, inflation modelling |
| JEL: | C22 C32 C53 E31 |
| Date: | 2006–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2006-03&r=cba |
| By: | Eliana González; Miguel I. Gómez; Luis F. Melo; José Luis Torres |
| Abstract: | Many developing countries are adopting inflation targeting regimes to guide monetary policy decisions. In such countries the share of food in the consumption basket is high and policy makers often employ total inflation (as opposed to core inflation) to set inflationary targets. Therefore, central banks need to develop reliable models to forecast food inflation. Our literature review suggests that little has been done in the construction of models to forecast short-run food inflation in developing countries. We develop a model to improve short-run food inflation forecasts in Colombia. The model disaggregates food items according to economic theory and employs Flexible Least Squares given the presence of structural changes in the inflation series. We compare the performance of this new model to current models employed by the central bank. Next, we apply econometric methods to combine forecasts from alternative models and test whether such combination outperforms individual models. Our results indicate that forecasts can be improved by classifying food basket items according to unprocessed, processed and food away from home and by employing forecast combination techniques. |
| Date: | 2006–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002681&r=cba |
| By: | Han Kim, E; Morse, Adair; Zingales, Luigi |
| Abstract: | We compile the list of articles published in major refereed economics journals during the last 35 years that have received more than 500 citations. We document major shifts in the mode of contribution and in the importance of different sub-fields: Theory loses out to empirical work, and micro and macro give way to growth and development in the 1990s. While we do not witness any decline in the primacy of production in the United States over the period, the concentration of institutions within the U.S. hosting and training authors of the highly-cited articles has declined substantially. |
| Keywords: | citations; innovations in economics |
| JEL: | A11 B20 O33 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5873&r=cba |