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on Central Banking |
| By: | Pierpaolo Benigno; Michael Woodford |
| Abstract: | We consider a general class of nonlinear optimal policy problems involving forward-looking constraints (such as the Euler equations that are typically present as structural equations in DSGE models), and show that it is possible, under regularity conditions that are straightforward to check, to derive a problem with linear constraints and a quadratic objective that approximates the exact problem. The LQ approximate problem is computationally simple to solve, even in the case of moderately large state spaces and flexibly parameterized disturbance processes, and its solution represents a local linear approximation to the optimal policy for the exact model in the case that stochastic disturbances are small enough. We derive the second-order conditions that must be satisfied in order for the LQ problem to have a solution, and show that these are stronger, in general, than those required for LQ problems without forward-looking constraints. We also show how the same linear approximations to the model structural equations and quadratic approximation to the exact welfare measure can be used to correctly rank alternative simple policy rules, again in the case of small enough shocks. |
| JEL: | C61 C63 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12672&r=cba |
| By: | Hans Genberg (Hong Kong Monetary Authority) |
| Abstract: | Financial integration in Ease Asia is actively being pursued and will in due course lead to substantial mobility of capital between economies in the region. Plans for monetary cooperation as a prelude to monetary integration and ultimately monetary unification are also proposed. These plans often suggest that central banks should adopt some form of common exchange rate policy in the transition period towards full monetary union. This paper argues that this is a dangerous path in the context of highly integrated financial markets. An alternative approach is proposed where independent central banks coordinate their monetary policies through the adoption of common objectives and by building an appropriate institutional framework. When this coordination process has progressed to the point where interest rate developments are similar across the region, and if in the meantime the required institutional infrastructure has been build, the next step towards monetary unification can be taken among those central banks that so desire. The claim is that this transition path is likely to be robust and will limit the risk of currency crises. |
| Keywords: | Regional and International Currency Arrangements |
| JEL: | F41 F15 F33 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:41&r=cba |
| By: | Sebastian Edwards (University of California, Los Angeles and National Bureau of Economic Research) |
| Abstract: | During the last few years there has been a renewed analysis in currency unions as a form of monetary arrangement. This new interest has been largely triggered by the Euro experience. Scholars and policy makers have asked about the optimal number of currencies in the world economy. They have analyzed whether different countries satisfy the traditional “optimal currency area” criteria. These include: (a) the synchronization of the business cycle; (b) the degree of factor mobility; and (c) the extent of trade and financial integration. In this paper I analyze the desirability of a monetary union from a Latin American perspective. First, I review the existing literature on the subject. Second, I use a large data set to analyze the evidence on economic performance in currency union countries. I investigate these countries’ performance on four dimensions: (a) whether countries without a national currency have a lower occurrence of “sudden stop” episodes; (b) whether they have a lower occurrence of “current account reversal” episodes; (c) what is their ability to absorb international terms of trade shocks; and (d) what is their ability to absorb “sudden stops” and “current account reversals” shocks. I find that belonging to a currency union does not lower the probability of facing a sudden stop or a current account reversal. I also find that external shocks are amplified in currency union countries. The degree of amplification is particularly large when compared to flexible exchange rate countries. |
| Keywords: | Regional and International Currency Arrangements |
| JEL: | F41 F15 F33 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:43&r=cba |
| By: | Josef Christl (Oesterreichische Nationalbank) |
| Abstract: | This paper focuses on the requirements and features of a successful monetary union on the basis of the optimum currency area theory, the “logical roadmap” for integration as proposed by Balassa as well as the economic and institutional framework of the European Economic and Monetary Union (EMU). The analysis suggests that monetary union is contingent upon high economic integration and strong political commitment. However, political union is not an ex-ante requirement. Outside factors such as systemic shocks and globalization seem to speed up the pooling of sovereignty in the economic domain. A firm commitment to stability-oriented monetary and fiscal policies is a precondition for gaining credibility and trust within and outside a monetary union. Last, but not least, convergence criteria, fiscal rules and strong institutions are necessary to help ensure and monitor the participants’ compliance. However, the European experience is not a blueprint for regional integration that can be directly and entirely applied to other regions. |
| Keywords: | Economic and Monetary Integration; International Monetary Arrangements and Institutions; Monetary Policy and Central Banking; Macroeconomic Policy Formation |
| JEL: | E50 E61 F02 F33 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:42&r=cba |
| By: | John Duffy; Michele Berardi |
| Abstract: | We examine the role of central bank transparency when the private sector is modeled as adaptive learners. In our model, transparent policies enable the private sector to adopt correctly specified models of inflation and output while intransparent policies do not. In the former case, the private sector learns the rational expectations equilibrium while in the latter case it learns a restricted perceptions equilibrium. These possibilities arise regardless of whether the central bank operates under commitment or discretion. We provide conditions under which the policy loss from transparency is lower (higher) than under intransparency, allowing us to assess the value of transparency when agents are learning. |
| JEL: | D83 E52 E58 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:283&r=cba |
| By: | John Duffy; Wei Xiao |
| Abstract: | We examine the expectational stability (E--stability) of rational expectations equilibrium in the ``New Keynesian`` model where monetary policy is optimally derived and interest rate stabilization is added to the central bank`s traditional objectives of inflation and output stabilization. We consider both the case where the central bank lacks a commitment technology and the case of full commitment. We show that for both cases, optimal policy rules yield rational expectations equilibria that are E-stable for a wide range of empirically plausible parameter values. These findings stand in contrast to Evans and Honkapohja`s (2003ab, 2006) findings for optimal monetary policy rules in environments where interest rate stabilization is not a central bank objective. |
| JEL: | D83 E43 E52 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:284&r=cba |
| By: | Paul Söderlind |
| Abstract: | The effect of monetary policy on financial risk premia is analysed in a simple general equilibrium model with sticky wages and an optimising central bank. Analytical results show that equity risk premia and term premia are higher under inflation targeting than under output targeting, and that inflation risk premia are higher for policies that strike a balance between output and inflation stability (and achieve a social optimum) than for policies that target only one of them. |
| Keywords: | Inflation risk premium, equity risk premium, term premium |
| JEL: | E52 E44 G12 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2006:2006-26&r=cba |
| By: | Richard N. Cooper (Harvard University); Michael Bordo (Economics Department, Rutgers University and Harvard University); Harold James (History Department and Woodrow Wilson School, Princeton University) |
| Keywords: | Regional and International Currency Arrangements |
| JEL: | F41 F15 F33 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:44&r=cba |
| By: | Otmar Issing ((European Central Bank)) |
| Keywords: | Regional and International Currency Arrangements |
| JEL: | F41 F15 F33 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:39&r=cba |
| By: | John Williamson (Institute for International Economics) |
| Keywords: | Regional and International Currency Arrangements |
| JEL: | F41 F15 F33 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:45&r=cba |
| By: | Clements, Michael P (Department of Economics, University of Warwick) |
| Abstract: | We ask whether the different types of forecasts made by individual survey respondents are mutually consistent, using the SPF survey data. We compare the point forecasts and central tendencies of probability distributions matched by individual respondent, and compare the forecast probabilities of declines in output with the probabilities implied by the probability distributions. When the expected associations between these different types of forecasts do not hold for some idividuals, we consider whether the discrepancies we observe are consistent with rational behaviour by agents with asymmetric loss functions. |
| Keywords: | Rationality ; probability forecasts ; probability distributions |
| JEL: | C53 E32 E37 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:772&r=cba |
| By: | Paul De Grauwe; Pablo Rovira Kaltwasser |
| Abstract: | This paper presents a behavioral finance model of the exchange rate. Agents forecast the exchange rate by means of very simple rules. They can choose between three groups of forecasting rules: fundamentalist, extrapolative and momentum rules. Agents using a fundamentalist rule are not able to observe the true value of the fundamental exchange and therefore have to rely on an estimate of this variable to make a forecast. Based on simulation analysis we find that two types of equilibria exist, a fundamental and a non-fundamental one. Both the probability of finding a particular type of equilibrium and the probability of switching between different types of equilibria depend on the number of rules available to agents. Furthermore, we find that the exchange rate dynamics is sensitive to initial conditions and to the risk perception about the underlying fundamental. Both results are dependent on the number of forecasting rules. |
| JEL: | C53 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1849&r=cba |
| By: | Stefano Gnocchi (Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas, 25, 08005 Barcelona, Spain.) |
| Abstract: | The purpose of the paper is to design optimal monetary policy rules in a New-Keynesian model featuring the presence of non-atomistic unions. It is shown that concentrated labor markets call for more aggressive inflation stabilization. This is because the central bank is able to induce wage restraint and to push output towards Pareto efficiency by implementing tougher stabilization policies. Moreover, the welfare cost of deviation from the optimal policy is increasing in wage setting centralization. The analysis is performed in the context of a linearquadratic approach where the welfare measure is derived resorting to a second order approximation to households’ lifetime utility. JEL Classification: E24, E52. |
| Keywords: | Monetary Policy, Unions, Inflation. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060690&r=cba |
| By: | Alexis Anagnostopoulos; Italo Bove; Karl Schlag; Omar Licandro |
| Abstract: | We provide a simple theory of in.ation inertia in a staggered price setting framework a la Calvo (1983). Contrary to Calvo.s formulation, the frequency of price changes is allowed to vary according to an evolutionary criterion. Inertia is the direct result of gradual adjustment in this frequency following a permanent change in the rate of money growth. |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2006-25&r=cba |
| By: | Amartya Lahiri; Rajesh Singh; Carlos A. Vegh |
| Abstract: | A famous dictum in open economy macroeconomics -- which obtains in the Mundell-Fleming world of sticky prices and perfect capital mobility -- holds that the choice of the optimal exchange rate regime should depend on the type of shock hitting the economy. If shocks are predominantly real, a flexible exchange rate is optimal, whereas if shocks are mainly monetary, a fixed exchange rate is optimal. There is no obvious reason, however, why this paradigm should be the most appropriate one to think about this important issue. Arguably, asset market frictions may be as pervasive as goods market frictions (particularly in developing countries). In this light, we show that in a model with flexible prices and asset market frictions, the Mundell-Fleming dictum is turned on its head: flexible rates are optimal in the presence of monetary shocks, whereas fixed rates are optimal in response to real shocks. We thus conclude that the choice of an optimal exchange rate regime should depend not only on the type of shock (real versus monetary) but also on the type of friction (goods versus asset market). |
| JEL: | F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12684&r=cba |
| By: | Takatoshi Ito; Yuko Hashimoto |
| Abstract: | This paper examines the price impact and the predictability of the exchange rate movement using the transaction data recorded in the electronic broking system of the spot foreign exchange market. The number of actual deals at the ask (or bid side) for a specified time interval may be regarded as "order flows" to buy (or sell) in Richard Lyons' work. First, the contemporaneous impact of order flows on the quote and deal prices are analyzed. Second, the price predictability is examined. Our forecasting equations of the exchange rate for the next X minutes (X=1, 5, 15, 30) show that coefficients are significantly different from zero in both 5-min and 1-min forecast horizons, but the significance disappears in the 30-minute interval. The t-statistics become larger as the prediction window becomes shorter. Price impacts of deals at one side of the market are significant but short-lived. Market participants, if they can observe and analyze all the transactions information in real time, may be able to extract information to predict the price movements in the following next few minutes. |
| JEL: | F31 F33 G15 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12682&r=cba |
| By: | Matthias Doepke |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:412&r=cba |
| By: | Richard A. Ashley.; Randall J. Verbrugge. |
| Keywords: | Phillips Curve, spectral regression, time series analysis |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:vpi:wpaper:e06-12&r=cba |
| By: | Richard A. Ashley; Randall J. Verbrugge. |
| Keywords: | Phillips Curve, spectral regression, time series analysis. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:vpi:wpaper:e06-11&r=cba |
| By: | Michael D. Bordo; Owen Humpage; Anna J. Schwartz |
| Abstract: | The present set of arrangements for U.S. exchange market intervention policy was largely developed after 1961 during the Bretton Woods era. However, that set had important historical precedents. In this paper we examine precedents to current arrangements, focusing on three historical eras: pre-1934 operations; the Exchange Stabilization Fund operations beginning in 1934; and the Bretton Woods era. We describe operations by the Second Bank of the United States in the pre-Civil War period and then operations by the U.S. Treasury in the post-Civil War period. After establishment of the Federal Reserve in 1914, the New York Fed engaged in isolated exchange market policies in the 1920s and 1930s, first under the direction of the Governor Benjamin Strong until his death in 1928, thereafter, under the direction of his successor, George Harrison. We then examine operations of the Exchange Stabilization Fund that the Gold Reserve Act of 1934 created as a Treasury Department agency. We exploit unique unpublished sources to analyze its dealings with the Banque de France and the Bank of England before and after the Tripartite Agreement. Finally, based on a unique data set of all U.S. Treasury and Federal Reserve foreign-exchange transactions, we discuss U.S. efforts from 1961 through 1972 to defend the dollar's parity under the Bretton Woods system. |
| JEL: | E42 N10 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12662&r=cba |
| By: | Richard E. Baldwin; Virginia Di Nino |
| Abstract: | This paper tests whether trade in new goods is partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data set (about 16 million observations) covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members. |
| JEL: | F12 F31 F4 F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12673&r=cba |
| By: | Juan de Dios Tena; Edoardo Otranto |
| Abstract: | This paper is an empirical analysis of the manner in which official interest rates are determined by the Bank of England. We use a nonlinear framework that allow for the separate study of factors affecting the magnitude of positive and negative interest rate changes as well as their probabilities. Using this approach, new kinds of monetary shocks are defined and used to evaluate their impact on the UK economy. Among them, unanticipated negative interest rate changes are especially important. The model generalizes previous approaches in the literature and provides a rich methodology to understand central banks’ decisions and their consequences. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws062007&r=cba |
| By: | George Hondroyiannis (Bank of Greece, Economic Research Department and Harokopio University); P.A.V.B. Swamy (US Bureau of Labour Statistics); George S. Tavlas (Bank of Greece, Economic Research Department); Michael Ulan (Department of State) |
| Abstract: | The relationship between exchange-rate volatility and aggregate export volumes for 12 industrial economies is examined using a model that includes real export earnings of oil-producing economies as a determinant of industrial-country export volumes. A supposition underlying the model is that, given their levels of economic development, oil-exporters’ income elasticities of demand for industrial-country exports might differ from those of industrial countries. Five estimation techniques, including a generalized method of moments (GMM) and random coefficient (RC) estimation, are employed on panel data covering the estimation period 1977:1-2003:4 using three measures of volatility. In contrast to recent studies employing panel data, we do not find a single instance in which volatility has a negative and significant impact on trade. |
| Keywords: | Exchange-rate volatility; Trade; Random-coefficient estimation; Generalized method of moments; Panel |
| JEL: | C23 F3 F31 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:28&r=cba |
| By: | Campa, Jose M. (IESE Business School); Gavilán, Angel (Banco de España) |
| Abstract: | This paper uses an intertemporal model of the current account to evaluate the fluctuations in current account balances experienced by Euro area countries over the last three decades. In the model current account balances are used to smooth consumption and they are driven by expectations about future income and relative prices. This simple model is not rejected for six (Belgium, France, Italy, Netherlands, Portugal, and Spain) of the ten Euro area countries examined, although the model tends to underestimate their current account volatility. The analysis also shows that the relative contributions to current account balances of future output and relative prices differ across countries. Expectations of future growth increased in all Southern European countries at the creation of the Euro but they had considerably diverged by 2005. While in Portugal these expectations are now below its historical mean, in Spain they are at a historical high. |
| Keywords: | Current account; euro; external deficits; economic integration; |
| Date: | 2006–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0651&r=cba |
| By: | Campa, Jose M. (IESE Business School); Goldberg, Linda S. (Bank of New York) |
| Abstract: | In this paper, we use cross-county and time series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods, as well as to non-traded goods. We highlight three reasons for changing pass through at the level of retail prices of goods. First, pass through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors. This means that the costs of imported goods as well as home tradable goods have heightened sensitivity to import prices and exchange rates. The final channel we consider is whether there have been changing sector expenditures on distribution services, with the direction of change negatively correlated with pass through into final consumption prices. We find that this channel, which has been a means of insulating consumption prices from import content and exchange rates, has not systematically changed in recent years. The balance of effects weighs in favor of increased sensitivity of consumption prices to exchange rates, even if exchange-rate pass-through into import prices has declined for some types of goods. |
| Keywords: | Exchange rate; pass through; import prices; distribution margins; consumer prices; imported inputs; |
| Date: | 2006–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0653&r=cba |
| By: | Eickmeier, Sandra; Hofmann, Boris; Worms, Andreas |
| Abstract: | This paper analyzes how bank lending to the private nonbank sector responds dynamically to aggregate supply, demand and monetary policy shocks in Germany and the euro area. The results suggest that the dynamic responses in the two areas are broadly similar, although there are some differences in the relative contribution of the three shocks to the development of output, prices, interest rates and bank loans over time. In order to assess the role of bank lending in the transmission of macroeconomic shocks, we perform counterfactual simulations and analyze the dynamic responses of German loan sub-aggregates in order to test the distributional implications of potential credit market frictions. The results suggest that there is no evidence that loans amplify the transmission of macroeconomic fluctuations or that a “financial accelerator” via bank lending exists. |
| Keywords: | Business cycle fluctuations, bank lending, SVAR model, sign restrictions |
| JEL: | E32 E44 G21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:5098&r=cba |
| By: | Antonia López Villavicencio (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) |
| Abstract: | Based on an behavioral equilibrium exchange rate model, this paper examines the determinants of the real effective exchange rate and evaluates the degree of misalignment of a group of currencies since 1980. Within a panel cointegration setting, we estimate the relationship between exchange rate and a set of economic fundamentals, such as traded-nontraded productivity differentials and the stock of foreign assets. Having ascertained the variables are integrated and cointegrated, the long-run equilibrium value of the fundamentals are estimated and used to derive equilibrium exchange rates and misalignments. Although there is statistical homogeneity, some structural differences were found to exist between advanced and emerging economies. |
| Keywords: | Equilibrium exchange rates, panel data, cointegration, emerging economies, misalignments, error correction models. |
| JEL: | C33 F31 F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea0605&r=cba |
| By: | Michael Fidora (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Christian Thimann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper focuses on the role of real exchange rate volatility as a driver of portfolio home bias, and in particular as an explanation for differences in home bias across financial assets. We present a Markowitz-type portfolio selection model in which real exchange rate volatility induces a bias towards domestic financial assets as well as a stronger home bias for assets with low local currency return volatility. We find empirical support in favour of this hypothesis for a broad set of industrialised and emerging market countries. Not only is real exchange rate volatility an important factor behind bilateral portfolio home bias, but we find that a reduction of monthly real exchange rate volatility from its sample mean to zero reduces bond home bias by up to 60 percentage points, while it reduces equity home bias by only 20 percentage points. JEL Classification: F30, F31, G11, G15. |
| Keywords: | Home bias, exchange rate volatility, risk, portfolio investment, global financial markets; capital flows. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060685&r=cba |
| By: | Marius Jurgilas (University of Connecticut) |
| Abstract: | This paper analyzes interbank markets under currency boards. Under such an environment, problematic endogeneity issues common to other monetary regimes do not arise. Using daily data from the interbank markets in Bulgaria and Lithuania we show, that contrary to the existing literature, overnight interest rates tend to decrease towards the end of the reserve holding period. Empirical results are supported by a finite horizon heterogeneous agents model showing that interest rates tend to decrease in the case of excess aggregate reserves in the banking system. Results contrast with Quir'os and Mendiz'abal (2006) who find that interest rates should be increasing regardless of the outstanding aggregate liquidity in the market. We also show that responsiveness of banks to interest rate changes diminishes as the end of reserve holding period approaches. Under certain circumstances this could lead to multiple equilibria with increasing or decreasing interest rates. |
| Keywords: | Interbank market, Currency board |
| JEL: | E52 E58 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2006-19&r=cba |
| By: | Dimitrios Sideris (Bank of Greece, Economic Research Department and University Ioannina, Department of Economics); Nicholas G. Zonzilos (Bank of Greece, Economic Research Department) |
| Abstract: | The present paper presents a quarterly econometric model for the Greek economy, the GR-MCM model. The model has been developed as part of a larger project within the European System of Central Banks (ESCB), the Multi-Country Model (MCM). The model combines short-run Keynesian dynamics determined by demand with a neoclassical steady state driven by supply factors. A well-specified long-run supply side is fully and simultaneously estimated. As far as the econometric methodology is concerned, the equilibrium relationships are estimated using cointegration analysis, whereas the dynamic equations are specified as error correction models. Standard simulations result in plausible short to long-run responses to exogenous shocks, thus indicating that the model can be useful for policy analysis experiments. |
| Keywords: | Econometric Modelling; Cointegration Techniques; Simulation Results |
| JEL: | C50 E17 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:20&r=cba |
| By: | Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Nicholas S. Magginas (National Bank of Greece) |
| Abstract: | This paper evaluates the role of inflation-forecast heterogeneity in US monetary policy making. The deviation between private and central bank inflation forecasts is identified as a factor increasing inflation persistence and thus calling for a policy reaction. An optimal policy rule is derived by the minimization under discretion of a standard central bank loss function subject to a Phillips curve, modified to include the forecast deviation, and a forward-looking aggregate demand equation. This rule, which itself includes the forecast deviation as an additional argument, is estimated for the period 1974-1998, covering the Chairmanships of Arthur Burns, Paul Volcker and Alan Greenspan, by using real-time forecasts of inflation and the output gap obtained from the FOMC’s Greenbook and the Survey of Professional Forecasters. The estimated rule remains remarkably stable over the whole sample period, challenging the conventional view of a structural break following Volcker’s appointment as Chairman of the Fed. Finally, the substantial decline in the significance of the interest-rate smoothing term in the rule indicates that monetary policy inertia may, to a large extent, be an artifact of serially correlated inflation-forecast errors that feed into policy decisions in real time. |
| Keywords: | Forward-looking model; Monetary policy reaction function; Expectations formation; Inflation expectations |
| JEL: | D84 E31 E43 E52 E58 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:35&r=cba |
| By: | Schumacher, Christian; Breitung, Jörg |
| Abstract: | This paper discusses a factor model for estimating monthly GDP using a large number of monthly and quarterly time series in real-time. To take into account the different periodicities of the data and missing observations at the end of the sample, the factors are estimated by applying an EM algorithm combined with a principal components estimator. We discuss the in-sample properties of the estimator in real-time environments and methods for out-of-sample forecasting. As an empirical application, we estimate monthly German GDP in real-time, discuss the nowcast and forecast accuracy of the model and the role of revisions. Furthermore, we assess the contribution of timely monthly data to the forecast performance. |
| Keywords: | monthly GDP, EM algorithm, principal components, factor models |
| JEL: | C53 E37 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:5097&r=cba |
| By: | George S. Tavlas (Bank of Greece, Economic Research Department); P.A.V.B. Swamy (US Bureau of Labour Statistics) |
| Abstract: | A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally. |
| Keywords: | Time-varying-coefficient model; Inflation-unemployment trade-off; “Objective” probability; Spurious correlation; Rational expectation; Coefficient driver |
| JEL: | C51 E31 E42 E50 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:34&r=cba |
| By: | Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Nicholas S. Magginas (National Bank of Greece) |
| Abstract: | The ability of the New Keynesian Phillips curve to explain US inflation dynamics when official central bank forecasts (Greenbook forecasts) are used as a proxy for inflation expectations is examined. The New Keynesian Phillips curve is estimated on quarterly data spanning the period 1970Q1-1998Q2 against the alternative of the Hybrid Phillips curve, which allows for a backward-looking component in the price-setting behavior in the economy. The results are compared to those obtained using actual data on future inflation as conventionally employed in empirical work under the assumption of rational expectations. The empirical evidence provides, in contrast to most of the relevant literature, considerable support for the standard forward-looking New Keynesian Phillips curve when inflation expectations are measured using official inflation forecasts. In this case, lagged inflation terms become insignificant in the hybrid specification. The usefulness of real unit labor cost as the preferred proxy for real marginal cost in recent empirical work on the Phillips curve is confirmed by our results. |
| Keywords: | Money demand; Inflation; Phillips curve; Real marginal cost; Real-time data; GMM estimation |
| JEL: | C13 C52 E31 E37 E50 E52 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:38&r=cba |
| By: | Hugh Rockoff |
| Abstract: | This paper explores some of the scholarship that influenced Milton Friedman and Anna J. Schwartz's "A Monetary History". It shows that the ideas of several Chicago economists -- Henry Schultz, Henry Simons, Lloyd Mints, and Jacob Viner -- left clear marks. It argues, however, that the most important influence may have been Wesley Clair Mitchell and his classic book "Business Cycles" (1913). Mitchell, and the NBER, provided the methodology for "A Monetary History", in particular the emphasis on compiling long time series of monthly data and analyzing the effects of specific variables on the business cycle. A common methodology and the stability of monetary relationships produced similar conclusions about money. Friedman and Schwartz deemphasized Mitchell's "bank-centric" view of the monetary transmission process, but they reinforced Mitchell's conclusion that money had an independent, predictable, and important influence on the business cycle. |
| JEL: | B22 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12666&r=cba |
| By: | Guglielmo Maria Caporale; Alexandros Kontonikas |
| Abstract: | This paper investigates the relationship between inflation and inflation uncertainty in twelve EMU countries. A time-varying GARCH model is estimated to distinguish between short-run and steady-state inflation uncertainty. The effects of the introduction of the Euro in 1999 are then examined introducing a dummy variable. Overall, it appears that post-1999 steady-state inflation has generally remained stable, steady-state inflation uncertainty and inflation persistence have both increased, and the relationship between inflation and inflation uncertainty has broken down in many countries. When the break dates are determined endogenously, the adjustment is found to have taken place before the introduction of the Euro. |
| Keywords: | inflation, inflation uncertainty, inflation persistence, time-varying parameters, GARCH models, ECB, EMU |
| JEL: | C22 E31 E52 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1842&r=cba |
| By: | Faidon Kalfaoglou (Bank of Greece); Alexandros Sarris (Food and Agricultural Organization of the United Nations and University of Athens) |
| Abstract: | This paper evaluates the role of inflation-forecast heterogeneity in US monetary policy making. The deviation between private and central bank inflation forecasts is identified as a factor increasing inflation persistence and thus calling for a policy reaction. An optimal policy rule is derived by the minimization under discretion of a standard central bank loss function subject to a Phillips curve, modified to include the forecast deviation, and a forward-looking aggregate demand equation. This rule, which itself includes the forecast deviation as an additional argument, is estimated for the period 1974-1998, covering the Chairmanships of Arthur Burns, Paul Volcker and Alan Greenspan, by using real-time forecasts of inflation and the output gap obtained from the FOMC’s Greenbook and the Survey of Professional Forecasters. The estimated rule remains remarkably stable over the whole sample period, challenging the conventional view of a structural break following Volcker’s appointment as Chairman of the Fed. Finally, the substantial decline in the significance of the interest-rate smoothing term in the rule indicates that monetary policy inertia may, to a large extent, be an artifact of serially correlated inflation-forecast errors that feed into policy decisions in real time. |
| Keywords: | Market discipline, transparency, bank risk |
| JEL: | G18 G21 G28 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:36&r=cba |
| By: | Julia Lendvai (University of Namur, Department of Economics; Rempart de la Vierge, 8, B-5000, Namur, Belgium.) |
| Abstract: | This paper extends the New Keynesian model to allow for stochastic shifts in the monetary policy regime. Agents cannot observe the regime and use a Bayesian learning rule to make optimal inferences. Price setting is adapted to this environment - lagged expectations about monetary policy influence the current inflation rate through an indexation rule. No structural inflation persistence is assumed. We show that this model can capture stylized facts about short-run inflation dynamics both in periods of transition and in stable environments. The role of expectations increases after regime shifts. This creates a link between the degree of inflation persistence and the stability and transparency of monetary policy. Thereby, our model can explain observed changes in inflation persistence. JEL Classification: E30, E31, E32. |
| Keywords: | Inflation dynamics, regime shifts, Bayesian learning, inflation persistence. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060684&r=cba |
| By: | Athanasios Papadopoulos (Department of Economics, University of Crete, Greece); Moïse Sidiropoulos (Université Louis Pasteur, FRANCE) |
| Abstract: | The purpose of this paper is to provide theoretical arguments and explore for empirical evidence for the rationale that low inflation persistence may be achieved either by setting up an independent Central Bank or by an exchange-rate based policy. Our theoretical analysis states that the degree of Central Bank independence and exchange rate policy changes affect the inflation persistence. In addition, our empirical analysis, which concerns with selected EMU countries (France, Germany, Greece, Italy and Spain for the period 1980-1998) validates the argument. In this exercise the most likely date for the change in regime is detected by a procedure based upon the recent work of Perron (1997), where the null hypothesis of a unit root is set against the alternative of stationarity about a single broken trend line. |
| Keywords: | Exchange rate policy, Central Bank independence, inflation persistence, EMU |
| JEL: | E31 E42 E58 C22 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0107&r=cba |
| By: | Clements, Michael P (Department of Economics, University of Warwick); Galvão, Ana Beatriz (Bank of Portugal) |
| Abstract: | Although many macroeconomic series such as US real output growth are sampled quarterly, many potentially useful predictors are observed at a higher frequency. We look at whether a recently developed mixed data-frequency sampling (MIDAS) approach can improve forecasts of output growth and inflation. We carry out a number of related real-time forecast comparisons using various indicators as explanatory variables. We find that MIDAS model forecasts of output growth are more accurate at horizons less than one quarter using coincident indicators ; that MIDAS models are an effective way of combining information from multiple indicators ; and that the forecast accuracy of the unemployment-rate Phillips curve for inflation is enhanced using the MIDAS approach. |
| Keywords: | Data frequency ; multiple predictors ; combination ; real-time forecasting |
| JEL: | C51 C53 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:773&r=cba |
| By: | Giorgio Fagiolo (Corresponding author, Dipartimento di Scienze economiche (Università di Verona)); Mauro Napoletano; Andrea Roventini |
| Abstract: | This work explores some distributional properties of aggregate output growth-rate time series. We show that, in the majority of OECD countries, output growth-rate distributions are well-approximated by symmetric exponential-power densities with tails much fatter than those of a Gaussian. Fat tails robustly emerge in output growth rates independently of: (i) the way we measure aggregate output; (ii) the family of densities employed in the estimation; (iii) the length of time lags used to compute growth rates. We also show that fat tails still characterize output growth-rate distributions even after one washes away outliers, autocorrelation and heteroscedasticity. |
| Keywords: | Output Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential-Power Distributions, Laplace Distributions, Output Dynamics. |
| JEL: | C1 E3 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:36&r=cba |
| By: | Bluedorn, John; Bowdler, Christopher |
| Abstract: | We analyze the international transmission of interest rates under pegged and non-pegged exchange rate regimes, demonstrating that transmission depends upon the informational properties of a base countryÂ’s interest rate change. We differentiate between interest rate movements which are predictable/unpredictable and dependent/independent (i.e., a function of non-monetary factors such as cost-push inflation). Under capital mobility, we show that predictable or dependent interest rate changes should elicit interest rate pass-through for an imperfectly credible peg that is less than unity, whilst interest rate changes that are unpredictable and independent should elicit pass-through greater than unity. Using a real-time identification of unpredictable and independent U.S. federal funds rate changes, we provide evidence consistent with these propositions. When the federal funds rate change is unpredictable and independent, the joint hypothesis of unit within-month pass-through to pegs and zero within-month pass-through to non-pegs cannot be rejected. The same hypothesis is strongly rejected following actual, aggregate federal funds rate changes which include predictable and dependent components. In a dynamic context, we find that maximum interest rate pass-through to pegs is delayed. Moreover, even though there is a full transmission of unpredictable and independent federal funds rate changes, they explain only a small portion of pegged regime interest rate changes. Keywords; interest rate pass-through, monetary policy identification, open economy trilemma, exchange rate regime. JEL Classification: F33, F41, F42 |
| URL: | http://d.repec.org/n?u=RePEc:stn:sotoec:0615&r=cba |
| By: | Yiannis Stournaras (Bank of Greece and University of Athens) |
| Abstract: | In an aggregate supply, aggregate demand model of an open economy with imperfect competition in labour and product markets, the effectiveness of monetary and fiscal policies depends on the degree of wage indexation, the exchange rate regime and the currency denomination of the international prices of raw materials, such as oil. In a two country world with a floating exchange rate, real consumer wage rigidity and the prices of imported raw materials fixed in the currency of Country 2, monetary policy is effective only in Country 2, but fiscal policy is relatively more effective in Country 1. These results may explain certain characteristics and have certain implications for economic policy in the US and the Eurozone. |
| Keywords: | Open economy macroeconomics, real exchange rate, oil price denomination |
| JEL: | F41 Q43 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:26&r=cba |
| By: | Antonia López Villavicencio (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona); Josep Lluís Raymond Bara (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) |
| Abstract: | This paper explores the real exchange rate behavior in Mexico from 1960 until 2005. Since the empirical analysis reveals that the real exchange rate is not mean reverting, we propose that economic fundamental variables affect its evolution in the long-run. Therefore, based on equilibrium exchange rate paradigms, we propose a simple model of real exchange rate determination which includes the relative labor productivity, the real interest rates and the net foreign assets over a long period of time. Our analysis also considers the dynamic adjustment in response to shocks through impulse response functions derived from the multivariate VAR model. |
| Keywords: | real exchange rate, purchasing power parity, Balassa-Samuelson effect, error correction models, bounds cointegration test. |
| JEL: | C32 F31 F41 F49 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea0606&r=cba |
| By: | Juan José Echavarría Soto; Enrique López Enciso; Martha Misas Arango; Juana Téllez Corredor; Juan Carlos Parra Alvarez |
| Abstract: | En este artículo se estima para Colombia la tasa de interés natural (TIN) para el período 1982-2005, con base en las metodologías propuestas por Laubach y Williams (2001) y Mésonnier y Renne (2004). Un modelo neokeynesiano es la base de la estimación de la TIN de “mediano plazo” como una variable no observada que cambia en el tiempo. Tal estimación se realiza mediante un filtro de Kalman que estima simultáneamente la TIN y la brecha del producto para la economía colombiana. Se sugiere que la política monetaria fue contraccionista en 1998 y 1999, y relativamente expansiva en los años recientes, aún cuando los resultados no son tan claros cuando se trabaja con los promedios móviles de la TIN. La brecha del producto ha sido positiva en 2003 y 2004, confirmando los resultados de otros trabajos en el área. |
| Keywords: | Tasa natural de interés, variables no observadas, producto potencial, filtro de Kalman. Classification JEL: E43; E52; C32. |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:412&r=cba |
| By: | Peter Backé; Cezary Wójcik |
| Abstract: | Credit to the private sector has risen rapidly in many Central and Eastern European EU Member States (MS) and acceding countries (AC) in recent years. The lending boom has recently been particularly strong in the segment of loans to households, primarily mortgage-based housing loans, and in those countries that operate currency boards or other forms of hard pegs. The main aim of this paper is to propose a conceptual framework to analyze the observed developments with a view to exploring some policy implications at a stage in which these countries are preparing for their prospective integration with the euro area. To achieve this, we first use a stylized New Neoclassical Synthesis (NNS) framework, which has recently been advanced by Goodfriend (2002) and Goodfriend and King (2000). We then discuss the implications of the NNS model for credit dynamics and ensuing monetary policy challenges. Specifically, we emphasize consumption smoothing as an important channel of the observed credit expansion and we show how it is related to and how it affects the monetary policy making in MS and AC. In doing so, we place our discussion in the context of the monetary integration process in general and the nominal convergence process in particular. |
| Keywords: | credit booms, new neoclassical synthesis, currency boards, euro area, convergence process |
| JEL: | E50 F30 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1836&r=cba |
| By: | Özlem Önder (Department of Economics, Ege University) |
| Abstract: | This paper presents empirical evidence supporting instability of the Phillips curve in Turkey. We employ the multiple structural break models and the Markov switching models and then evaluate the performance of the two models. The data pertains to the monthly inflation rate in Turkey for the period of 1987-2004. The results show that the Turkish Phillips curve is not linear. There exists no evidence on the asymmetry in the inflation response to output gap. The persistence of inflation is found to be much lower than in linear models. After 2001 slight decline in persistence of inflation is observed. |
| Keywords: | Phillips curve, multiple structural change models, Markov switching models |
| JEL: | C52 E31 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ege:wpaper:0602&r=cba |
| By: | Christos Papazoglou (Bank of Greece, Economic Research Department and Panteion University) |
| Abstract: | Two major stylized facts that emerged during the early transition experience of the economies of Central and Eastern Europe were the fall in output and the appreciation of the real exchange rate. In this paper, we attempt to give a theoretical explanation, beyond that found in the existing literature, for the emergence of these two facts, which relies on the role of two basic characteristics of these economies in the early stages of transition. The first refers to their structure involving the existence of an almost liberalized price system for domestic output, a large part of which, however, was still produced by state firms and the second to the nature of the disturbances they initially encountered. |
| Keywords: | Transition economies, real exchange rate dynamics, output decline, structural reform, price liberalization. |
| JEL: | F41 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:29&r=cba |
| By: | Arghyrou, Michael G (Cardiff Business School) |
| Abstract: | We model Greek monetary policy in the 1990s and use our findings to address two interrelated questions. First, how was monetary policy conducted in the 1990s so that the hitherto highest-inflation EU country managed to join the euro by 2001? Second, how compatible is the current ECB monetary policy with Greek economic conditions? We find that Greek monetary policy in the 1990s was: (i) primarily determined by foreign (German/ECB) interest rates though still influenced, to some degree, by domestic fundamentals; (ii) involving non- linear output gap effects; (iii) subject to a deficit of credibility culminating in the 1998 devaluation. On the question of compatibility our findings depend on the value assumed for the equilibrium post-euro real interest rate and overall indicate both a reduction in the pre-euro risk premium and some degree of monetary policy incompatibility. Our analysis has policy implications for the new EU members and motivates further research on fast-growing EMU economies. |
| Keywords: | monetary policy; reaction function; non- linear; compatibility; Greece; EMU |
| JEL: | C51 C52 E43 E58 F37 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2006/26&r=cba |
| By: | Matias Vernengo |
| Abstract: | The paper provides a critical analysis of the literature on monetary policy institutions. It presents a critique of the dominant notion of central bank independence, based on the literature on time-inconsistency of monetary policy. An alternative view that emphasizes the role of distributive conflict in establishing monetary policy regimes is developed and used to analyze the Brazilian inflation targeting regime implemented in 1999. The analysis suggests that financial or rentier’s interests benefit from the current monetary regime, while manufacturing and worker’s interests bear the costs. |
| Keywords: | Inflation Targeting, Central Bank Behavior, Distributive Conflict |
| JEL: | E52 E58 F59 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2006_05&r=cba |