nep-cba New Economics Papers
on Central Banking
Issue of 2006‒12‒01
38 papers chosen by
Alexander Mihailov
University of Reading

  1. What is global excess liquidity, and does it matter? By Rasmus Rüffer; Livio Stracca
  2. How wages change - micro evidence from the International Wage Flexibility Project By William T. Dickens; Lorenz Götte; Erica L. Groshen; Steinar Holden; Julián Messina; Mark E. Schweitzer; Jarkko Turunen; Melanie E. Ward
  3. The Effects of Age and Job Protection on the Welfare Costs of Inflation and Unemployment: a Source of ECB anti-inflation bias? By BECCHETTI LEONARDO; CASTRIOTA STEFANO; GIUNTELLA OSEA
  4. Structural Breaks and Optimal Monetary Policy By MATTESINI FABRIZIO; NISTICO' SALVATORE
  5. FIRM INVESTMENT AND MONETARY POLICY<br />TRANSMISSION IN THE EURO AREA By Jean-Bernard Chatelain; Andrea Generale; Ignacio Hernando; Ulf Von Kalckreuth; Philip Vermeulen
  6. Heterogeneity of Central Bankers and Inflationary Pressure By Bugarin, Mauricio; Carvalho. Fabia A.
  7. Staff, Functions, and Staff Costs at Central Banks: An International Comparison with a Labor-demand Model By Jorge Galán Camacho; Miguel Sarmiento
  8. Informal central bank independence: an analysis for three European countries By DAVID COBHAM; STEFANIA COSCI; MATTESINI FABRIZIO
  9. A Deliberative Independent Central Bank By Erwin Jericha; Martin Schürz
  10. Fundamental inflation uncertainty By Charlotta Groth; Jarkko Jääskelä; Paolo Surico
  11. Optimal monetary policy rules with labor market frictions By Ester Faia
  12. Geography or skills - What explains Fed watchers’ forecast accuracy of US monetary policy? By Helge Berger; Michael Ehrmann; Marcel Fratzscher
  13. The yen real exchange rate may be stationary after all: evidence from non-linear unit root tests By Georgios Chortareas; George Kapetanios
  14. The (Ir)relevance of the NRU for Policy Making: The Case of Denmark By Marika Karanassou; Hector Sala; Pablo F. Salvador
  15. Fear of Floating and the External Effects of Currency Unions By Thomas Plümper; Vera E. Troeger
  16. Modelling Central Bank Intervention Activity under Inflation Targeting By Horvath, Roman
  17. Chartist Trading in Exchange Rate Theory By Selander, Carina
  18. Bayesian inference in cointegrated VAR models - with applications to the demand for euro area M3 By Anders Warne
  19. Optimal currency shares in international reserves - the impact of the euro and the prospects for the dollar By Elias Papaioannou; Richard Portes; Gregorios Siourounis
  20. Equilibrium of incomplete markets with money and intermediate banking system By Monique Florenzano; Stella Kanellopoulou; Yannis Vailakis
  21. Okun's Law, Creation of Money and the Decomposition of the Rate of Unemployment By Mussard, Stéphane; Philippe, Bernard
  22. Risk, Nonconvergence and Cycles: A Two-Country Model By Tomoo Kikuchi
  23. When Does Domestic Saving Matter for Economic Growth? By Philippe Aghion; Diego Comin; Peter Howitt
  24. Current State of Cross-Border Banking By Christiaan van Laecke; Dirk Schoenmaker
  25. A result on output feedback linear quadratic control By Engwerda,Jacob; Weeren,.Arie
  26. Linear quadratic games : an overview By Engwerda,Jacob
  27. Algorithms for computing Nash equilibria in deterministic LQ games By Engwerda,Jacob
  28. On Prices in Myrdal's Monetary Theory By Alexander Tobon
  30. Public Debt, Fiscal Solvency, and Macroeconomic Uncertainty in Latin America: The Cases of Brazil, Colombia, Costa Rica, and Mexico By Mendoza, Enrique G.; Oviedo, P. Marcelo
  31. Credibility of Exchange Rate Policies in Selected EU New Members: Evidence from High Frequency Data By Jarko Fidrmuc; Roman Horváth
  32. Optimal emerging market fiscal policy when trend output growth is unobserved By Gregory Thwaites
  33. The yield curve as a predictor and emerging economies By Arnaud Mehl
  34. Fiscal rules for debt sustainability in emerging markets: the impact of volatility and default risk By Adrian Penalver; Gregory Thwaites
  35. Hot Money Inflows in China : How the People's Bank of China Took up the Challenge By Vincent Bouvatier
  36. LA TASA DE INTERÉS NATURAL EN COLOMBIA By Juan José Echavarría; Enrique López Enciso; Martha Misas Arango; Juana Tellez Corredor
  37. Inflación y dinero en Colombia: otro modelo P-estrella By Andrés González; Luis Fernando Melo; Carlos Esteban Posada
  38. El efecto de las intervenciones cambiarias: la experiencia colombiana 2004-2006 By Hernández Monsalve, Mauricio Alberto; Mesa Callejas, Ramón Javier

  1. By: Rasmus Rüffer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper endeavours to provide a comprehensive analysis of the nature and the possible importance of “global excess liquidity”, a concept which has attracted considerable attention in recent years. The contribution of this paper is threefold. First, we present some conceptual discussion on the meaning of excess liquidity in advanced countries with developed financial markets. Second, we report some descriptive analysis on the degree of co-movement of several possible measures of excess liquidity and spill-overs between them for a relatively large sample of industrialised and developing countries. Third, we estimate a VAR model for an aggregate of the major industrialised countries and analyse the transmission of shocks to global excess liquidity to the global economy, including possible cross-border spill-over effects to a number of domestic variables in the world’s three largest economies (the US, the euro area and Japan). JEL Classification: E52, F42.
    Keywords: Global excess liquidity, monetary policy, open economy, international economics.
    Date: 2006–11
  2. By: William T. Dickens (The Brookings Institution, 1775 Massachusetts Avenue, NW Washington, D.C. 20036, USA.); Lorenz Götte (Institute for Empirical Research in Economics, University of Zurich, Blümlisalpstrasse 10, CH-8006 Zürich, Switzerland.); Erica L. Groshen (Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, USA.); Steinar Holden (University of Oslo, Box 1095 Blindern, 0317 Oslo, Norway.); Julián Messina (University of Salerno, Via Ponte don Melillo, 84084 Fisciano (SA), Italy.); Mark E. Schweitzer (Federal Reserve Bank of Cleveland, P.O. Box 6387 Cleveland, Ohio 44101-1387, USA.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Melanie E. Ward (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: How do the complex institutions involved in wage setting affect wage changes? The International Wage Flexibility Project provides new microeconomic evidence on how wages change for continuing workers. We analyze individuals’ earnings in 31 different data sets from sixteen countries, from which we obtain a total of 360 wage change distributions. We find a remarkable amount of variation in wage changes across workers. Wage changes have a notably non-normal distribution; they are tightly clustered around the median and also have many extreme values. Furthermore, nearly all countries show asymmetry in their wage distributions below the median. Indeed, we find evidence of both downward nominal and real wage rigidities. We also find that the extent of both these rigidities varies substantially across countries. Our results suggest that variations in the extent of union presence in wage bargaining play a role in explaining differing degrees of rigidities among countries. JEL Classification: E3, J3, J5.
    Keywords: Wage setting, Wage change distributions, Downward nominal wage rigidity, Downward real wage rigidity.
    Date: 2006–11
    Abstract: This paper extends the well known Di Tella et al. (2001 and 2003) analyses on the welfare costs of inflation and unemployment based on self-reported happiness data by looking at age and job market characteristic splits in a sample which includes more recent years and new countries. With both one and two stage estimating procedures we find support for the hypothesis that the relative welfare cost of unemployment versus inflation is higher than one (in contrast with the “equal-to-one” implicit assumption of the Misery Index). We also observe that the relative cost of unemployment is much higher in intermediate age cohorts and in low job protection countries. This might contribute to explain the higher concern for the level of economic activity of central bankers in countries with younger population
    Date: 2006–11
    Abstract: This paper analyzes the optimal behavior of the Central Bank in an economy characterized by balanced growth. Consistently with the view of Perron (1989) and di®erently from the standard approach in DNK literature, we model the dynamics of productivity as following a trend-stationary model subject to infrequent breaks; accordingly we characterize periods of productivity slowdown as structural breaks in trend-growth. We show that breaks in trend-growth a®ect the dynamics of in°ation, the preferences of a welfare-maximizing Cen- tral Bank and optimal monetary policy. We show that in periods of productivity slowdown, optimal monetary policy should not only guarantee the appropriate response to productivity shocks, but also take into consideration the change in trend-growth in responding to cost-push shocks. Moreover, we show that during productivity slow- downs the gains from commitment are higher than during phases of high productivity growth, while the consequences of a discretionary policy, albeit optimal, may be higher in°ation instability. JEL classification: E12, E44, E52
    Date: 2006–07
  5. By: Jean-Bernard Chatelain (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre], PSE - Paris-Jourdan Sciences Economiques - [CNRS : UMR8545] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale des Ponts et Chaussées][Ecole Normale Supérieure de Paris]); Andrea Generale (Banca d´Italia - [Banca d´Italia]); Ignacio Hernando (Bank of Spain - [Bank of Spain]); Ulf Von Kalckreuth (Bundesbank - [Bundesbank]); Philip Vermeulen (ECB - European Central Bank - [European Central Bank])
    Abstract: This paper presents a comparable set of results on the monetary transmission channels on firm<br />investment (the interest rate channel and the broad credit channel) for the four largest euro-area<br />countries (Germany, France, Italy and Spain), using particularly rich micro datasets for each<br />country containing over 215,000 observations from 1985 to 1999. For each of those countries,<br />investment relationships are estimated explaining investment by its user cost, sales and cash flow.<br />A first result is that investment is sensitive to user cost changes in all those four countries. This<br />implies an operative interest channel in these euro-area countries. A second result is that investment<br />in all countries is quite sensitive to cash flow movements. However, only in Italy do smaller firms<br />react more to cash flow movements than large firms, implying that a broad credit channel might not<br />be equally pervasive in all countries.
    Keywords: Investment, Monetary Transmission Channels, User Cost of Capital
    Date: 2006–11–08
  6. By: Bugarin, Mauricio; Carvalho. Fabia A.
    Date: 2006–10
  7. By: Jorge Galán Camacho; Miguel Sarmiento
    Abstract: During the period 2000-2004 central banks sustained a generalized reduction in their staff, which was accompanied, in most cases, with significant increases in staff costs. This could obey to an enhanced interest of central banks in focusing on their core functions. In fact, central banks have changed the ways they perform their operative functions (e.g. currency operations, payment systems operation, printing notes, etc.) through different strategies aimed at gathering the participation of third parties. These strategies differ according to the relationship that central banks have with the financial sector and the government, as well as to their historical tradition and modernization trend. To explain the effect of these changes on the staff, we estimated a short-term labor demand function for 66 central banks using a panel data model with random effects. Results indicate that central banks’ labor demand is strongly determined by the country’s population, economic development level and changes in operative functions, as well as by staff costs. In addition, we found a low employment-wage elasticity suggesting the presence of a flexible budgetary constrain in central banks.
    Date: 2006–11–01
    Abstract: Changes in formal and informal central bank independence (CBI) in France, Italy and the UK in the period from the mid-1970s to the 1990s are examined; the major changes occurred in the 1990s, after the disinflations of the 1980s. Broad trends in the informal independence of central banks, defined as the ability to pursue price stability regardless of the government’s preferences, are identified on the basis of a monetary policy narrative and an analysis of a set of qualitative determinants of informal independence. The most important determinants are the social/political acceptance that monetary policy is the sphere of the central bank, the existence of anti-inflationary commitments in the form of intermediate targets for monetary policy, the degree of social consensus on the means and ends of macroeconomic policy, and the relative technical expertise of the central bank. These broad trends help to explain some of the inflation experience of the 1980s and 1990s which cannot be understood in terms of changes to formal CBI.
    Date: 2005–09
  9. By: Erwin Jericha (Vienna University of Technology); Martin Schürz (Oesterreichische Nationalbank, Economic Analysis Division)
    Abstract: The paper develops a communication game that is applied to the question of central bank policy and independence. The game is about the preferred degree of conservatism of monetary policy and the game setting consists of a principal (politics), an agent (central bank) and an observer (financial market participants). The extent of the welfare losses depends on the degree of knowledge, the endogenized signaling of financial market participants and the probability whether the degree of conservatism in monetary policy is adequate to nature. Consequently, a mechanism to minimize welfare losses of the principal has to be implemented. It is shown how the introduction of an institutional control mechanism with a countervailing goal function will improve the utilities for the principal.
    Keywords: accountability, agency losses, principal agent model
    JEL: E58 E59 E61 C79
    Date: 2006–06–11
  10. By: Charlotta Groth; Jarkko Jääskelä; Paolo Surico
    Abstract: We develop a method of quantifying the uncertainty surrounding the estimates of the fundamental inflation implied by the New Keynesian Phillips Curve (NKPC). The uncertainty is represented as a band around the fundamental inflation, and encompasses the sampling uncertainty of both the estimates of the structural parameters and the estimates of the VAR used to form a projection of real marginal costs. An empirical application on UK and US data confirms that fundamental inflation tracks actual inflation reasonably well in both countries. For the United Kingdom the confidence band is sufficiently narrow, relative to the sample variance of inflation, to identify a number of periods where the predictions of the NKPC do not fully capture movements in actual inflation. In contrast, considerable uncertainty surrounds the estimates of fundamental inflation for the United States.
  11. By: Ester Faia (Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005, Barcelona, Spain.)
    Abstract: This paper studies optimal monetary policy rules in a framework with sticky prices, matching frictions and real wage rigidities. Optimal monetary policy is given by a constrained Ramsey plan in which the monetary authority maximizes the agents’ welfare subject to the competitive economy relations and the assumed monetary policy rule. I find that optimal policy should deviate from the strict inflation targeting since the policy maker faces a typical unemployment/inflation trade-off. In this context and unlike a standard New Keynesian model stabilizing inflation is not sufficient to stabilize the marginal cost (hence the output gap) since the latter also depends on the evolution of unemployment. The matching frictions add a congestion externality since the number of unemployed in the market and their bargaining power reduce the probability of forming matches. Hence optimal monetary policy features unemployment targeting along with inflation targeting. JEL Classification: E52, E24.
    Keywords: Optimal monetary policy rules, matching frictions, wage rigidity.
    Date: 2006–11
  12. By: Helge Berger (Free University Berlin, Department of Economics, Boltzmannstrasse 20, 12161 Berlin, Germany.); 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: The paper shows that there is a substantial degree of heterogeneity in forecast accuracy among Fed watchers. Based on a novel database for 268 professional forecasters since 1999, the average forecast error of FOMC decisions varies 5 to 10 basis points between the best and worst-performers across the sample. This heterogeneity is found to be related to both the skills of analysts – such as their educational and employment backgrounds – and to geography. In particular, there is evidence that forecasters located in regions which experience more idiosyncratic economic conditions perform worse in anticipating monetary policy. Moreover, systematic forecaster heterogeneity is economically important as it leads to greater financial market volatility after FOMC meetings. Finally, Fed communication may exert an influence on forecast accuracy. JEL Classification: E52, E58, G14.
    Keywords: monetary policy, forecast, Federal Reserve, FOMC, geography, skills, heterogeneity, survey data, communication, United States.
    Date: 2006–11
  13. By: Georgios Chortareas; George Kapetanios
    Abstract: The empirical literature that tests for purchasing power parity (PPP) by focusing on the stationarity of real exchange rates has so far provided, at best, mixed results. The behaviour of the yen real exchange rate has most stubbornly challenged the PPP hypothesis and deepened this puzzle. This paper contributes to this discussion by providing new evidence on the stationarity of bilateral yen real exchange rates. We employ a non-linear version of the Augmented Dickey-Fuller test, based on an exponentially smooth-transition autoregressive model (ESTAR) that enhances the power of the tests against mean-reverting non-linear alternative hypotheses. Our results suggest that the bilateral yen real exchange rates against the other G7 and Asian currencies were mean reverting during the post-Bretton Woods era. Thus, the real yen behaviour may not be so different after all but simply perceived to be so due to the use of a restrictive alternative hypothesis in previous tests.
  14. By: Marika Karanassou (Queen Mary, University of London, and IZA); Hector Sala (Universitat Autònoma de Barcelona, and IZA); Pablo F. Salvador (Universitat Autònoma de Barcelona, and Universitat de Girona)
    Abstract: We reconsider the central role of the natural rate of unemployment (NRU) in forming policy decisions. We show that the unemployment rate does not gravitate towards the NRU due to frictional growth, a phenomenon that encapsulates the interplay between lagged adjustment processes and growth in dynamic labour market systems. We choose Denmark as the focal point of our empirical analysis and find that the NRU explains only 33% of the unemployment variation, while frictional growth accounts for the remaining 67%. Therefore, our theoretical and empirical findings raise serious doubts as to whether the NRU should play a key instrumental role in policy making.
    Keywords: Unemployment, Natural rate of unemployment, Labour market dynamics, Frictional growth, Chain reaction theory
    JEL: E22 E24 J21
    Date: 2006–11
  15. By: Thomas Plümper; Vera E. Troeger
    Abstract: The introduction of the Euro has considerably affected the de facto monetary policy autonomy – defined as statistical independence from monetary policy in the key currency areas – in countries outside the European Currency Union. Using a standard open economy framework we argue that de facto monetary policy autonomy has significantly declined for countries that dominantly trade with the ECU and slightly increased that dominantly trade with the Dollar-Zone. The predictions of our model find support in the data. We estimate the influence of the Bundesbank/ECB’s and the Fed’s monetary policies on various country groups. The de facto monetary policy autonomy of both non-Euro EU-members and EFTA countries declined with the introduction of Euro. This effect was slightly stronger for the EU member countries than for EFTA countries as our theory predicts. At the same time, the de facto monetary policy autonomy of Australia and New Zealand vis-à-vis the US Dollar has (moderately) increased. This finding also supports our theoretical model.
    Date: 2006–11–16
  16. By: Horvath, Roman
    Abstract: Using daily data from the Czech Republic in 1/1/1998-31/12/2002, we find that foreign exchange intervention activity is determined by the degree of exchange rate misalignment and lagged intervention. Additionally, inflation targeting regime is a binding constraint of intervention activity.
    Keywords: Foreign exchange intervention; central bank; inflation targeting
    JEL: E58 E52 F31 F33
    Date: 2006–05–10
  17. By: Selander, Carina (Department of Economics, Umeå University)
    Abstract: This thesis consists of four papers, of which paper 1 and 4 are co-written with Mikael Bask. Paper [1] <p> implements chartists trading in a sticky-price monetary model for determining the exchange rate. It is <p> demonstrated that chartists cause the exchange rate to "overshoot the overshooting equilibrium" of a <p> sticky-price monetary model. Chartists base their trading on a short-long moving average. The <p> importance of technical trading depends inversely on the time horizon in currency trade. The exchange <p> rate's perfect foresight path near long-run equilibrium is derived and it is demonstrated that the shorter <p> the time horizon, the greater the exchange rate overshooting. <p> The aim of Paper [2] is to see how the dynamics of the basic target zone model changes when <p> chartists and fundamentalists are introduced. Chartists use technical trading and the relative importance <p> of technical and fundamental analyses depend on the time horizon in currency trade. The model also <p> includes realignment expectations, which increase with the weight of chartists. The introduction of <p> chartists may significantly reduce and reverse, the so-called "honeymoon effect" of a fully credible <p> target zone. Further, chartists may cause the correlation between the exchange rate and the <p> instantaneous interest rate differential to become either positive or negative. <p> Using a chartist-fundamentalist set-up, Paper [3] derives the effects on the current exchange rate of <p> central bank intervention. Fundamentalists have rational expectations and chartists use so called <p> support and resistance levels in their trading. This technique results in chartists having both <p> bandwagon expectations and regressive expectations. Chartists may enhance or suppress the effect of <p> intervention depending on their expectations. The results indicate that a chartist channel exists. <p> The aim of Paper [4] is threefold; (i) to investigate if there is a unique rational expectations <p> equilibrium (REE) in a new Keynesian macroeconomic model augmented with technical trading, (ii), <p> to investigate if the unique REE is adaptively learnable and, (iii), to investigate if this unique and <p> adaptively learnable REE is desirable in an inflation rate targeting regime. The monetary authority is <p> using a Taylor rule when setting the interest rate. A main conclusion is that a robust Taylor rule <p> implies that the monetary authority should increase (decrease) the interest rate when the CPI inflation <p> rate increases (decreases) and when the currency gets stronger (weaker).
    Keywords: Chartist Trading; Foreign Exchange; Overshooting; Sterilized Intervention; Target zone; Taylor rules
    JEL: E43 E52 F31 F33 F37 F41
    Date: 2006–11–20
  18. By: Anders Warne (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: The paper considers a Bayesian approach to the cointegrated VAR model with a uniform prior on the cointegration space. Building on earlier work by Villani (2005b), where the posterior probability of the cointegration rank can be calculated conditional on the lag order, the current paper also makes it possible to compute the joint posterior probability of these two parameters as well as the marginal posterior probabilities under the assumption of a known upper bound for the lag order. When the marginal likelihood identity is used for calculating these probabilities, a point estimator of the cointegration space and the weights is required. Analytical expressions are therefore derived of the mode of the joint posterior of these parameter matrices. The procedure is applied to a money demand system for the euro area and the results are compared to those obtained from a maximum likelihood analysis. JEL Classification: C11, C15, C32, E41.
    Keywords: Bayesian inference, cointegration, lag order, money demand, vector autoregression.
    Date: 2006–11
  19. By: Elias Papaioannou (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Richard Portes (London Business School, Sussex Place, Regent's Park, London NW1 4SA, United Kingdom); Gregorios Siourounis (London Business School, Sussex Place, Regent's Park, London NW1 4SA, United Kingdom)
    Abstract: Foreign exchange reserve accumulation has risen dramatically in recent years. The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away from the US dollar. A major portfolio shift would significantly affect exchange rates and the status of the dollar as the dominant international currency. We develop a dynamic mean-variance optimization framework with portfolio rebalancing costs to estimate optimal portfolio weights among the main international currencies. Making various assumptions on expected currency returns and the variance-covariance structure, we assess how the euro has changed this allocation. We then perform simulations for the optimal currency allocations of four large emerging market countries (Brazil, Russia, India and China), adding constraints that reflect a central bank’s desire to hold a sizable portion of its portfolio in the currencies of its peg, its foreign debt and its international trade. Our main results are: (i) The optimizer can match the large share of the US dollar in reserves, when the dollar is the reference (risk-free) currency. (ii) The optimum portfolios show a much lower weight for the euro than is observed. This suggests that the euro may already enjoy an enhanced role as an international reserve currency ("punching above its weight"). (iii) Growth in issuance of euro-denominated securities, a rise in euro zone trade with key emerging markets, and increased use of the euro as a currency peg, would all work towards raising the optimal euro shares, with the last factor being quantitatively the most important. JEL Classification: F02, F30, G11, G15.
    Keywords: Currency optimizer, euro, foreign reserves, international currencies.
    Date: 2006–11
  20. By: Monique Florenzano (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Stella Kanellopoulou (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Yannis Vailakis (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: This paper studies a simple stochastic two-period general equilibrium exchange model with money, an incomplete market of nominal assets, and a competitive banking system, intermediate between consumers and a Central Bank. There is a finite number of agents, consumers and banks. Default is not permitted. The public policy instruments are, besides real taxes implicit in the model, public debt and creation of money both implemented at the first period. The equilibrium existence is established under a Gains to trade hypothesis and the assumption that banks have a non zero endowment of money at each date-event of the model.
    Keywords: Competitive banking system, incomplete markets, nominal assets, money, monetary equilibrium, cash-in-advance constraints, public debt.
    Date: 2006–11–07
  21. By: Mussard, Stéphane (CEPS/INSTEAD, GEREM, GREDI); Philippe, Bernard (GEREM Université de Perpignan)
    Abstract: In this paper, we show that the rate of unemployment in period t depends on GDP and inflation rate in period t-1. We then show that GDP is related to money creation, and subsequently that the rate of unemployment is a decreasing function of this creation.
    Keywords: Creation of Money; Decomposition ; GDP ; Rate of Unemployement
    JEL: E24 E20
    Date: 2006–10
  22. By: Tomoo Kikuchi
    Abstract: We develop an overlapping generations model with asset and capital accumulation to analyze the interaction between the real economy and international asset markets. The world consists of two homogenous countries with an integrated asset market, which differ only in levels of their capital stock. Two period lived consumers transfer wealth over time and across countries by holding international assets with stochastic dividends. Short sale of assets allows poor economy to take credit for productive investment. Yet, risk aversion and expectations may preclude capital stock of both countries from converging while capital flows from the rich to the poor country. The poor country needs sufficiently high capital stock initially to catch up with the rich country. Cycles in capital stocks and international capital flows occur.
    Keywords: International asset market, endogenous cycles, two-country model
    JEL: E44 F43 O11
    Date: 2006–06
  23. By: Philippe Aghion; Diego Comin; Peter Howitt
    Abstract: Can a country grow faster by saving more? We address this question both theoretically and empirically. In our model, growth results from innovations that allow local sectors to catch up with the frontier technology. In relatively poor countries, catching up with the frontier requires the involvement of a foreign investor, who is familiar with the frontier technology, together with effort on the part of a local bank, who can directly monitor local projects to which the technology must be adapted. In such a country, local saving matters for innovation, and therefore growth, because it allows the domestic bank to cofinance projects and thus to attract foreign investment. But in countries close to the frontier, local firms are familiar with the frontier technology, and therefore do not need to attract foreign investment to undertake an innovation project, so local saving does not matter for growth. In our empirical exploration we show that lagged savings is significantly associated with productivity growth for poor but not for rich countries. This effect operates entirely through TFP rather than through capital accumulation. Further, we show that savings is significantly associated with higher levels of FDI inflows and equipment imports and that the effect that these have on growth is significantly larger for poor countries than rich.
    Keywords: Savings, growth, technology adoption, TFP, FDI
    JEL: E2 O2 O3
    Date: 2006–06
  24. By: Christiaan van Laecke; Dirk Schoenmaker
    Date: 2006–11
  25. By: Engwerda,Jacob; Weeren,.Arie (Tilburg University, Center for Economic Research)
    Abstract: In this note we consider the static output feedback linear quadratic control problem. We present both necessary and sufficient conditions under which this problem has a solution in case the involved cost depend only on the output and control variables. This result is used to present both necessary and sufficient conditions under which the corresponding linear quadratic differential game has a Nash equilibrium in case the players use static output feedback control.
    Keywords: LQ theory;Algebraic Riccati equations;Differential games
    JEL: C61 C72 C73
    Date: 2006
  26. By: Engwerda,Jacob (Tilburg University, Center for Economic Research)
    Abstract: In this paper we review some basic results on linear quadratic differential games. We consider both the cooperative and non-cooperative case. For the non-cooperative game we consider the open-loop and (linear) feedback information structure. Furthermore the effect of adding uncertainty is considered. The overview is based on [9]. Readers interested in detailed proofs and additional results are referred to this book.
    Keywords: linear-quadratic games;Nash equilibrium;affine systems;solvability conditions;Riccati equations
    JEL: C61 C72 C73
    Date: 2006
  27. By: Engwerda,Jacob (Tilburg University, Center for Economic Research)
    Abstract: In this paper we review a number of algorithms to compute Nash equilibria in deterministic linear quadratic differential games. We will review the open-loop and feedback information case. In both cases we address both the finite and the infinite-planning horizon.
    Keywords: Algebraic Riccati equations;linear quadratic differential games;Nash equilibria
    JEL: C61 C72 C73
    Date: 2006
  28. By: Alexander Tobon (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: The aim of this paper is to show how Myrdal monetary theory can contribute to the study of the behaviour of prices in disequilibrium. The analysis explains the existence of a cumulative process based on the capacity of the entrepreneur to anticipate price variations. The variation in prices explains the persistence of the cumulative process. This, we argue, represents an opposite view of the one contained in Wicksell's theory. Myrdal's theory leads to the rejection of the quantity theory of money based on Wicksell's approach. This comes as a surprising result knowing Wicksell believed his results confirmed this theory.
    Keywords: Myrdal; monetary equilibrium; cumulative process; prices; profit
    Date: 2006–10–19
  29. By: Jean-Bernard Chatelain (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre], PSE - Paris-Jourdan Sciences Economiques - [CNRS : UMR8545] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale des Ponts et Chaussées][Ecole Normale Supérieure de Paris]); Andre Tiomo (CREST - Centre de Recherche en Économie et Statistique - [INSEE] - [ École Nationale de la Statistique et de l'Administration Économique])
    Abstract: Using a large panel of 6946 French manufacturing firms, this paper investigates the effect<br />of sales, of the cost of capital and of liquidity constraint variables (cash flow or cash<br />stock) on the stock of capital from 1990 to 1999. The user cost elasticity is at the most<br />0.26 in absolute terms for all the firms of the sample. Three groups of firms representing<br />around 20 per cent of the sample (firms facing a high risk of bankruptcy, firms belonging<br />to the capital goods sector, firms making extensive use of trade credit) are more sensitive<br />to cash flow. Risky firms are less sensitive to sales, when cash stock replaces cash flow.<br />Simulations following shocks of interest rate (related to monetary policy shocks), provides<br />short run contemporaneous elasticities of investment with respect to interest rate through<br />the user cost and through debt repayments taken into account in cash flow.
    Keywords: Investment, User Cost of Capital, Liquidity Constraints, Monetary Policy<br />Shocks.
    Date: 2006–11–08
  30. By: Mendoza, Enrique G.; Oviedo, P. Marcelo
    Abstract: The ratios of public debt as a share of GDP of Brazil, Colombia, and Mexico were 12 percentage points higher on average during the period 1996-2005 than in the period 1990-1995. Costa Rica's debt ratio remained stable but at a high level near 50 percent. Is there reason to be concerned for the solvency of the public sector in these economies? We provide an answer to this question based on the quantitative predictions of a variant of the framework proposed by Mendoza and Oviedo (2006). This methodology yields forward-looking estimates of debt ratios that are consistent with fiscal solvency for a government that faces revenue uncertainty and can issue only non-state-contingent debt. In this environment, aversion to a collapse in outlays leads the government to respect a ``natural debt limit" equal to the annuity value of the primary balance in a ``fiscal crisis." A fiscal crisis occurs after a long sequence of adverse revenue shocks and public outlays adjust to their tolerable minimum. The debt limit also represents a credible commitment to remain able to repay even in a fiscal crisis. The debt limit is not, in general, the same as the sustainable debt, which is driven by the probabilistic dynamics of the primary balance. The results of a baseline scenario question the sustainability of current debt ratios in Brazil and Colombia, while those in Costa Rica and Mexico are inside the limits consistent with fiscal solvency. In contrast, current debt ratios are found to be unsustainable in all four countries for plausible changes to lower average growth rates or higher real interest rates. Moreover, sustainable debt ratios fall sharply when default risk is taken into account.
    Keywords: fiscal sustainability; public debt; sovereign default
    JEL: F3
    Date: 2006–11–27
  31. By: Jarko Fidrmuc (Department of Economics, University of Munich; CESifo; Faculty of Mathematics, Physics and Informatics, Comenius University Bratislava); Roman Horváth (Czech National Bank, Prague, Czech Republic; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We examine the daily exchange rate dynamics in selected EU new member states (Czech Republic, Poland, Romania, and Slovakia) using GARCH and TARCH models between 1999 and 2004. We show that these countries tried to reduce volatility of the spot exchange rate despite their official policy of free floating and inflation targeting. However, we find that the low credibility of exchange rate policy implied higher volatility of exchange rates when it substantially deviated from the implicit target rates for all countries. Finally, we find significant asymmetric effects of the volatility of exchange rates in all new member states.
    Keywords: Exchange rates; target zones; ERM II; inflation targeting; GARCH
    JEL: F31 C22 C23
    Date: 2006–10
  32. By: Gregory Thwaites
    Abstract: This paper is concerned with how fiscal policy in emerging markets should respond to economic fluctuations. We model the behaviour of a fiscal authority in an emerging market country who can use external borrowing to smooth the effects of exogenous output shocks on domestic agents’ private consumption. We focus on the policy implications of the facts that (1) the GDP process in emerging markets is characterised by a relatively volatile trend growth rate, and (2) that policymakers cannot directly observe the output gap or the trend GDP growth rate. We have two key findings. First, we find that risk-averse policymakers who face EME-style output processes (ie processes dominated by shocks to the trend growth rate) should run tighter fiscal policies, with lower average debt-GDP ratios, than those in industrialised countries, who face different output processes. Second, our baseline parameterisation suggests that EME policymakers should run countercyclical fiscal policies. This result contrasts with other papers which have used optimising frameworks and the features of EME output processes to rationalise the observed procyclicality of EME fiscal policies or external balances. Simulations suggest that the welfare costs of naively running a fiscal policy that would be appropriate for an industrialised country are around 1% of certainty-equivalent consumption, but this result is sensitive to parameterisation. We find that a simple rule-of-thumb policy that stabilises the debt-GDP ratio in every period entails much smaller welfare losses.
  33. By: Arnaud Mehl (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper investigates the extent to which the slope of the yield curve in emerging economies predicts domestic inflation and growth. It also examines international financial linkages and how the US and the euro area yield curves help to predict. It finds that the domestic yield curve in emerging economies has in-sample information content even after controlling for inflation and growth persistence, at both short and long forecast horizons, and that it often improves out-of-sample forecasting performance. Differences across countries are seemingly linked to market liquidity. The paper further finds that the US and the euro area yield curves also have in- and out-of-sample information content for future inflation and growth in emerging economies. In particular, for emerging economies that have an exchange rate peg to the US dollar, the US yield curve is often found to be a better predictor than these economies’ own domestic curve and to causally explain their movements. This suggests that monetary policy changes and short-term interest rate pass-through are key drivers of international financial linkages through movements from the low end of the yield curve. JEL Classification: E44, F3, C5.
    Keywords: emerging economies, yield curve, forecasting, international linkages.
    Date: 2006–11
  34. By: Adrian Penalver; Gregory Thwaites
    Abstract: The determinants of public debt dynamics – real interest rates, the real exchange rate, output growth and the primary fiscal balance – are typically more volatile in emerging market economies than in industrialised countries. Capital markets also typically demand higher interest rates from emerging markets when their debt dynamics deteriorate. This paper considers how these characteristics affect the choice of fiscal policy rules in emerging markets. We estimate an econometric model of the determinants of public debt dynamics on Brazilian data and use this model to simulate the effect of different fiscal policy rules for future paths of debt. We then derive the set of fiscal policy rules which stabilise public debt dynamics. We find that macroeconomic forecast uncertainty and feedback among the endogenous variables (principally from the debt-GDP ratio to interest rates) force the policy rule to be significantly more responsive to changes in public debt. Rules that would stabilise debt in a fully known world may not do so when the policymaker is faced with a realistic pattern of shocks. The method we employ may be a useful addition to the toolkit of domestic and international policymakers when assessing fiscal rules and debt sustainability.
  35. By: Vincent Bouvatier (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: This paper investigates hot money inflows in China. The financial liberalization comes into effect and the effectiveness of capital controls tends to diminish over time. As a result, China is fuelled by hot money inflows. The US interest rate cut since 2001 and expectations of exchange rate adjustments are the main factors explaining these capital inflows. This study use the Bernanke and Blinder (1988) model extended to an open economy to examine implications of hot money inflows for the Chinese economy. A Vector Error Correction Model (VECM) on monthly data from March 1995 to March 2005 is estimated to investigate the recent upsurge in foreign reserves and shows that the interaction between domestic credit and foreign reserves was stable and consistent with monetary stability. Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this result.
    Keywords: Hot money inflows, domestic credit, VECM, Granger causality.
    Date: 2006–11–03
  36. By: Juan José Echavarría; Enrique López Enciso; Martha Misas Arango; Juana Tellez Corredor
    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.
    Date: 2006–10–01
  37. By: Andrés González; Luis Fernando Melo; Carlos Esteban Posada
    Abstract: Este documento reporta los resultados de la estimación de una versión reciente del modelo P-estrella de Gerlach y Svensson (2003) para Colombia (1980: I - 2005: IV) y sus predicciones. El modelo está diseñado para explicar la brecha de inflación (tasa observada menos la meta) con base en dos brechas: la brecha monetaria y la de producto. De acuerdo con sus resultados, la brecha de producto carece de efectos significativos en tanto que la brecha monetaria tiene un efecto significativo positivo sobre la de inflación.
    Date: 2006–11–01
  38. By: Hernández Monsalve, Mauricio Alberto; Mesa Callejas, Ramón Javier
    Abstract: El objetivo de este artículo es medir el tamaño relativo de las intervenciones cambiarias realizadas en el periodo de la revaluación del peso, entre 2004 y 2006, y calcular la efectividad de éstas en cuanto a sus efectos sobre la media y la varianza del tipo de cambio nominal. La propuesta de un modelo de determinación del tipo de cambio, que parte del modelo de balance de portafolio, y el uso de un índice de intervención construido para el caso colombiano, permiten concluir que las intervenciones del Banco de la República, con miras a defender el régimen de flotación controlada, han tenido efectos pequeños y transitorios en el nivel y la varianza del tipo de cambio, presentando rezagos de varios días y siendo descontadas rápidamente por el mercado
    Keywords: intervenciones esterilizadas; régimen cambiario; flotación controlada; mercado cambiario; tipo de cambio; modelo de portafolio
    JEL: E58 F31 E52 G11
    Date: 2006–10

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