nep-cba New Economics Papers
on Central Banking
Issue of 2006‒12‒09
35 papers chosen by
Alexander Mihailov
University of Reading

  1. Solving for Country Portfolios in Open Economy Macro Models By Devereux, Michael B; Sutherland, Alan
  2. Indeterminacy in a Forward Looking Regime Switching Model By Farmer, Roger E A; Waggoner, Daniel F; Zha, Tao
  3. Strong Goal Independence and Inflation Targets By Baltensperger, Ernst; Fischer, Andreas M; Jordan, Thomas J.
  4. Incorporating Judgement in Fan Charts By Österholm, Pär
  5. The Phillips Curve Under State-Dependent Pricing By Bakhshi, Hasan; Khan, Hashmat; Rudolf, Barbara
  6. Losing our Marbles in the New Century? The Great Rebalancing in Historical Perspective By Meissner, Christopher M; Taylor, Alan M
  7. New Keynesian Models, Durable Goods and Collateral Constraints By Monacelli, Tommaso
  8. Inflation as a Redistribution Shock: Effects on Aggregates and Welfare By Doepke, Matthias; Schneider, Martin
  9. Euro-Dollar Real Exchange Rate Dynamics in an Estimated Two-Country Model: What is Important and What is Not By Rabanal, Pau; Tuesta Reátegui, Vicente
  10. Econometrics: A Bird’s Eye View By John F. Geweke; Joel L. Horowitz; M. Hashem Pesaran
  11. Stochastic Gradient versus Recursive Least Squares Learning By Sergey Slobodyan; Anna Bogomolova,; Dmitri Kolyuzhnov
  12. Asset Return Dynamics and Learning By Wiliam Branch; George W. Evans
  13. The nature of the decision-making process for central banks' interventions in the FX market: Evidence from the Bank of Japan. By Michel Beine; Oscar Bernal; Jean-Yves Gnabo; Christelle Lecourt
  14. Welfare Effects of the Euro Cash Changeover By Christoph Wunder; Johannes Schwarze; Gerhard Krug; Bodo Herzog
  15. Interest rate pass-through estimates from vector autoregressive models By Johann Burgstaller
  16. Bank income and profits over the business and interest rate cycle By Johann Burgstaller
  17. The Role of Interest Rates in Business Cycle Fluctuations in Emerging Market Countries: The Case of Thailand By Ivan Tchakarov; Selim Elekdag
  18. New-Keynesian Macroeconomics and the Term Structure By Bekaert, Geert; Cho, Seonghoon; Moreno, Antonio
  19. Inflation Implications of Rising Government Debt By Giannitsarou, Chryssi; Scott, Andrew
  21. Political Pressure on Central Banks: The Case of the Czech National Bank By Adam Geršl
  22. Neo-Keynesian and Neo-Classical Macroeconomic Models: Stability and Lyapunov Exponents By Jan Kodera; Karel Sladký; Miloslav Vošvrda
  23. Production, Capital Stock and Price Dynamics in a Simple Model of Closed Economy By Jan Kodera; Miroslav Vošvrda
  24. Entry of Foreign Banks and their Impact on Host Countries By Lehner, Maria; Schnitzer, Monika
  25. The Impacts of Capital Adequacy Requirements on Emerging Markets By Ray Barrell; Sylvia Gottschalk
  26. Business Cycle Moderation - Good Policies or Good Luck: Evidence and Explanations for the Euro Area By M.S.Rafiq
  27. Financial Crisis, Effective Policy Rules and Bounded Rationality in a New Keynesian Framework By Ali Al-Eyd; Stephen Hall
  28. Nation Formation and Genetic Diversity By Desmet, Klaus; Le Breton, Michel; Ortuño-Ortín, Ignacio; Weber, Shlomo
  29. Entry rates and the risks of misalignment in the EU8 By Tatiana Fic; Ray Barrell; Dawn Holland
  30. Political Economy of Public Deficit: Perspectives for Constitutional Reform By Adam Geršl
  31. Exchange Rates in the New EU Accession Countries: What Have We Learned from the Forerunners? By Katerina Smídková; Aleš Bulir
  32. The Maastricht Inflation Criterion: How Unpleasant is Purgatory? By Jaromir Hurnik; Aleš Bulir
  33. A Fiscal Rule That Has Teeth: A Suggestion for a "Fiscal Sustainability Council" Underpinned by the Financial Markets By Petr Hedbávný; Ondřej Schneider; Jan Zápal
  34. What Are Their Words Worth? Political Plans And Economic Pains Of Fiscal Consolidations In New EU Member States By Ondřej Schneider; Jan Zápal
  35. The Legitimacy of Redistribution: the Czech Republic in International Comparison By Sirovatka, Tomas; Valentova, Marie

  1. By: Devereux, Michael B; Sutherland, Alan
    Abstract: Open economy macroeconomics typically abstracts from portfolio structure. But the recent experience of financial globalization makes it important to understand the determinants and composition of gross country portfolios. This paper presents a simple approximation method for computing equilibrium financial portfolios in stochastic open economy macro models. The method is widely applicable, easy to implement, and delivers analytical solutions for optimal gross portfolio positions in any combination of types of assets. It can be used in models with any number of assets, whether markets are complete or incomplete, and can be applied to stochastic dynamic general equilibrium models of any dimension, so long as the model is amenable to a solution using standard approximation methods.
    Keywords: country profiles; solution methods
    JEL: E52 E58 F41
    Date: 2006–11
  2. By: Farmer, Roger E A; Waggoner, Daniel F; Zha, Tao
    Abstract: This paper is about the properties of Markov switching rational expectations (MSRE) models. We present a simple monetary policy model that switches between two regimes with known transition probabilities. The first regime, treated in isolation, has a unique determinate rational expectations equilibrium and the second contains a set of indeterminate sunspot equilibria. We show that the Markov switching model, which randomizes between these two regimes, may contain a continuum of indeterminate equilibria. We provide examples of stationary sunspot equilibria and bounded sunspot equilibria which exist even when the MSRE model satisfies a 'generalized Taylor principle'. Our result suggests that it may be more difficult to rule out non-fundamental equilibria in MRSE models than in the single regime case where the Taylor principle is known to guarantee local uniqueness.
    Keywords: indeterminacy; regime switching; Taylor Principle
    JEL: C3 E4 E5
    Date: 2006–11
  3. By: Baltensperger, Ernst; Fischer, Andreas M; Jordan, Thomas J.
    Abstract: Inflation targeting has become the monetary policy framework of the nineties. At the other extreme, several central banks have recently adopted key elements of the inflation targeter's toolkit, but at the same time they have made formal declarations that they are not inflation targeters. Such a position may appear surprising. It indirectly suggests that a reneging strategy is beneficial for some. The paper considers reasons why it may be advantageous for some central banks to distinguish themselves from the inflation targeting strategy. Most importantly, we argue that explicit inflation targets can potentially undermine the goal independence of a central bank.
    Keywords: inflation targeting; medium and strong goal independence; weak
    JEL: E50 E52 E58
    Date: 2006–11
  4. By: Österholm, Pär (Department of Economics)
    Abstract: Within a decision-making group, such as the monetary-policy committee of a central bank,group members often hold differing views about the future of key economic variables. Such differences of opinion can be thought of as reflecting differing sets of judgement. This paper suggests modelling each agent’s judgement as one scenario in a macroeconomic model. Each judgement set has a specific dynamic impact on the system, and accordingly, a particular predictive density – or fan chart – associated with it. A weighted linear combination of the predictive densities yields a final predictive density that correctly reflects the uncertainty perceived by the agents generating the forecast. In a model-based environment, this framework allows judgement to be incorporated into fan charts in a formalised manner.
    Keywords: Forecasts; Predictive density; Linear opinion pool
    JEL: C15 C53 E17 E50
    Date: 2006–11–20
  5. By: Bakhshi, Hasan; Khan, Hashmat; Rudolf, Barbara
    Abstract: This article is related to the large recent literature on Phillips curves in sticky- price equilibrium models. It differs in allowing for the degree of price stickiness to be determined endogenously. A closed-form solution for short-term inflation is derived from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing developed by Dotsey, King and Wolman. This generalized Phillips curve encompasses the New Keynesian Phillips curve (NKPC) based on Calvo-type price-setting as a special case. It describes current inflation as a function of lagged inflation, expected future inflation, current and expected future real marginal costs, and current and past variations in the distribution of price vintages. We find that current inflation depends positively on its own lagged values giving rise to intrinsic persistence as a source of inflation persistence. Also, we find that the state-dependent terms (that is, the variations in the distribution of price vintages) tend to counteract the contribution of lagged inflation to inflation persistence.
    Keywords: inflation dynamics; Phillips curve; state-dependent pricing
    JEL: E31 E32
    Date: 2006–11
  6. By: Meissner, Christopher M; Taylor, Alan M
    Abstract: Great attention is now being paid to global imbalances, the growing U.S. current account deficit financed by growing surpluses in the rest of the world. How can the issue be understood in a more historical perspective? We seek a meaningful comparison between the two eras of globalization: “then” (the period 1870 to 1913) and “now” (the period since the 1970s). We look at the two hegemons in each era: Britain then, and the United States now. And adducing historical data to match what we know from the contemporary record, we proceed in the tradition of New Comparative Economic History to see what lessons the past might have for the present. We consider two of the most controversial and pressing questions in the current debate. First, are current imbalances being sustained, at least in part, by return differentials? And if so, is this reassuring? Second, how will adjustment take place? Will it be a hard or soft landing? Pessimistically, we find no historical evidence that return differentials last forever, even for hegemons. Optimistically, we find that adjustments to imbalances in the past have generally been smooth, even under a regime as hard as the gold standard.
    Keywords: current account adjustment; exorbitant privilege; global imbalances; return differentials
    JEL: F20 F30 F32 F40 F50 N10 N20
    Date: 2006–11
  7. By: Monacelli, Tommaso
    Abstract: Econometric evidence suggests that, in response to monetary policy shocks, durable and non-durable spending comove positively, and durable spending exhibits a much larger sensitivity to the policy shocks. A standard two-sector New Keynesian model with free borrowing persistently exhibits a co-movement problem: if spending contracts in one sector, it expands in the other. We argue that, even when durable prices are flexible, the introduction of a collateral constraint on borrowing and the consideration of durables as collateral assets generate both a correct sectoral co-movement and a procyclical response of durable consumption to policy shocks. In this vein, collateral constraints act as a substitute of nominal rigidity in durable prices. However, since in the model nominal non-indexed debt and the collateral constraint generate alternative channels for monetary non-neutrality, our framework leaves room for relaxing the assumption of price stickiness also for nondurable goods prices, in line with some recent micro-based evidence. In a limit case of fully flexible prices in both sectors, a policy shock still generates a sizeable degree of monetary non-neutrality, as well as the correct sectoral co-movement. In this vein, collateral constraints act as a substitute of price stickiness altogether.
    Keywords: collateral constraint; durable goods; sticky prices
    JEL: E52 E62 F41
    Date: 2006–11
  8. By: Doepke, Matthias; Schneider, Martin
    Abstract: Episodes of unanticipated inflation reduce the real value of nominal claims and thus redistribute wealth from lenders to borrowers. In this study, we consider redistribution as a channel for aggregate and welfare effects of inflation. We model an inflation episode as an unanticipated shock to the wealth distribution in a quantitative overlapping-generations model of the U.S. economy. While the redistribution shock is zero sum, households react asymmetrically, mostly because borrowers are younger on average than lenders. As a result, inflation generates a decrease in labour supply as well as an increase in savings. Even though inflation-induced redistribution has a persistent negative effect on output, it improves the weighted welfare of domestic households.
    Keywords: aggregate effects; inflation; redistribution; welfare
    JEL: D31 D58 E31 E50
    Date: 2006–11
  9. By: Rabanal, Pau; Tuesta Reátegui, Vicente
    Abstract: Central puzzles in international macroeconomics are why fluctuations of the real exchange rate are so volatile with respect to other macroeconomic variables, and the contradiction of efficient risk-sharing. Several theoretical contributions have evaluated alternative forms of pricing under nominal rigidities along with different asset markets structures to explain real exchange dynamics. In this paper, we use a Bayesian approach to estimate a standard two-country New Open Economy Macroeconomics (NOEM) using data for the United States and the Euro Area, and perform model comparisons to study the importance of departing from the law of one price and complete markets assumptions. Our results can be summarized as follows. First, we find that the baseline model does a good job in explaining real exchange rate volatility, but at the cost of implying too high volatility in output and consumption. Second, the introduction of incomplete markets allows the model to better match the volatilities of all real variables. Third, introducing sticky prices in local currency pricing (LCP) improves the fit of the baseline model, but not by as much as by introducing incomplete markets. Finally, we show that monetary shocks have played a minor role in explaining the behaviour of the real exchange rate, while both demand and technology shocks have been important.
    Keywords: Bayesian estimation; model comparison; real exchange rates
    JEL: C11 F41
    Date: 2006–11
  10. By: John F. Geweke (University of Iowa); Joel L. Horowitz (Northwestern University); M. Hashem Pesaran (CIMF, University of Cambridge and IZA Bonn)
    Abstract: As a unified discipline, econometrics is still relatively young and has been transforming and expanding very rapidly over the past few decades. Major advances have taken place in the analysis of cross sectional data by means of semi-parametric and non-parametric techniques. Heterogeneity of economic relations across individuals, firms and industries is increasingly acknowledged and attempts have been made to take them into account either by integrating out their effects or by modeling the sources of heterogeneity when suitable panel data exists. The counterfactual considerations that underlie policy analysis and treatment evaluation have been given a more satisfactory foundation. New time series econometric techniques have been developed and employed extensively in the areas of macroeconometrics and finance. Non-linear econometric techniques are used increasingly in the analysis of cross section and time series observations. Applications of Bayesian techniques to econometric problems have been given new impetus largely thanks to advances in computer power and computational techniques. The use of Bayesian techniques have in turn provided the investigators with a unifying framework where the tasks of forecasting, decision making, model evaluation and learning can be considered as parts of the same interactive and iterative process; thus paving the way for establishing the foundation of "real time econometrics". This paper attempts to provide an overview of some of these developments.
    Keywords: history of econometrics, microeconometrics, macroeconometrics, Bayesian econometrics, nonparametric and semi-parametric analysis
    JEL: C1 C2 C3 C4 C5
    Date: 2006–11
  11. By: Sergey Slobodyan; Anna Bogomolova,; Dmitri Kolyuzhnov
    Abstract: In this paper, we perform an in—depth investigation of relative merits of two adaptive learning algorithms with constant gain, Recursive Least Squares (RLS) and Stochastic Gradient (SG), using the Phelps model of monetary policy as a testing ground. The behavior of the two learning algorithms is very different. Under the mean (averaged) RLS dynamics, the Self—Confirming Equilibrium (SCE) is stable for initial conditions in a very small region around the SCE. Large distance movements of perceived model parameters from their SCE values, or “escapes”, are observed. On the other hand, the SCE is stable under the SG mean dynamics in a large region. However, actual behavior of the SG learning algorithm is divergent for a wide range of constant gain parameters, including those that could be justified as economically meaningful. We explain the discrepancy by looking into the structure of eigenvalues and eigenvectors of the mean dynamics map under SG learning. Results of our paper hint that caution is needed when constant gain learning algorithms are used. If the mean dynamics map is stable but not contracting in every direction, and most eigenvalues of the map are close to the unit circle, the constant gain learning algorithm might diverge.
    Keywords: Constant gain adaptive learning, E—stability, recursive least squares,stochastic gradient learning.
    JEL: C62 C65 D83 E10 E17
    Date: 2006–10
  12. By: Wiliam Branch (University of Californis - Irvine); George W. Evans (University of Oregon Economics Department)
    Abstract: This paper advocates a theory of expectation formation that incorporates many of the central motivations of behavioral finance theory while retaining much of the discipline of the rational expectations approach. We provide a framework in which agents, in an asset pricing model, underparameterize their forecasting model in a spirit similar to Hong, Stein, and Yu (2005) and Barberis, Shleifer, and Vishny (1998), except that the parameters of the forecasting model, and the choice of predictor, are determined jointly in equilibrium. We show that multiple equilibria can exist even if agents choose only models that maximize (risk-adjusted) expected profits. A real-time learning formulation yields endogenous switching between equilibria. We demonstrate that a real-time learning version of the model, calibrated to U.S. stock data, is capable of reproducing many of the salient empirical regularities in excess return dynamics such as under/overreaction, persistence, and volatility clustering.
    Keywords: Asset pricing, misspecification, behavioral finance, predictability, adaptive learning
    JEL: G12 G14 D82 D83
    Date: 2006–11–13
  13. By: Michel Beine (DULBEA, Free University of Brussels,University of Luxemburg and CESifo.); Oscar Bernal (DULBEA, Free University of Brussels); Jean-Yves Gnabo (University of Namur); Christelle Lecourt (University of Namur)
    Abstract: Intervening in the FX market implies a complex decision process for central banks. Monetary authorities have to decide whether to intervene or not, and if so, when and how. Since the successive steps of this procedure are likely to be highly interdependent, we adopt a nested logit approach to capture their relationships and to characterize the prominent features of the various steps of the intervention decision. Our findings shed some light on the determinants of central bank interventions, on the so-called secrecy puzzle and on the identification of the variables influencing the detection of foreign exchange transactions by market traders.
    Keywords: Central bank interventions; Exchange rates market; Secrecy puzzle; Nested logit
    JEL: E58 F31 G15
    Date: 2006–11
  14. By: Christoph Wunder; Johannes Schwarze; Gerhard Krug; Bodo Herzog
    Abstract: Using merged data from the British Household Panel Survey (BHPS) and the German Socio-Economic Panel (SOEP), this paper applies a parametric difference-in-differences approach to assess the real effects of the introduction of the Euro on subjective well-being. A complementary nonparametric approach is also used to analyze the impact of difficulties with the new currency on well-being. The results indicate a severe loss in well-being associated with the introduction of the new currency, with the predicted probability that a person is contented with his/her household income diminishing by 9.7 percentage points. We calculate a compensating income variation of approximately one-third. That is, an increase in postgovernment household income of more than 30% is needed to compensate for the rather drastic decline in well-being. The reasons for the negative impact are threefold. First, perceived inflation overestimates the real increase in prices resulting in suboptimal consumption decisions. Second, money illusion causes a false assessment of the budget constraint. Third, individuals have to bear the costs from the conversion and the adjustment to the new currency. Moreover, it is thought that losses are smaller when financial ability is higher. However, the impact of difficulties in using and converting the new currency is rather small, and the initial problems were overcome within one year of the introduction of euro cash.
    Keywords: Subjective well-being, euro cash changeover, perceived inflation, difference-indifferences
    JEL: E31 I31
    Date: 2006
  15. By: Johann Burgstaller (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: The empirical literature on interest rate transmission presents diverse and sometimes conflicting estimates. By discussing methodological and specification-related issues, the results of this paper contribute to the understanding of these differences. Eleven Austrian bank lending and deposit rates are utilized to illustrate the pass-through of impulses from monetary policy and banks’ cost of funds. Results from vector autoregressions suggest that the long-run pass-through is higher for movements in the bond market than of changes in money market rates. Deposit rates have no predictive content for lending rates beyond that of market interest rates.
    Keywords: Monetary policy transmission; interest rate pass-through; retail interest rates; vector autoregression; impulse-response functions
    JEL: E43 E52 G21
    Date: 2005–12
  16. By: Johann Burgstaller (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: If and how the conduct of the banking sector contributes to the propagation of aggregate shocks has become a prominent empirical research question. This study explores what a cyclicality analysis of net interest margins and spreads, as well as profitability figures, can contribute to the discussion. By using time series data for the Austrian banking sector from 1987 to 2005, it is found that many of these measures fall in economic upturns. Net interest income from granting loans and taking deposits from non-banks, however, evolves procyclically and increases with rising interest rates. Combined with the observation that the margins’ countercyclical variations are rather small, it can be concluded that there is no striking evidence for a financial accelerator caused by the Austrian banking sector.
    Keywords: Bank interest margins; business cycles; financial accelerator; impulse response analysis
    JEL: E32 G21
    Date: 2006–07
  17. By: Ivan Tchakarov; Selim Elekdag
    Abstract: Emerging market countries have enjoyed an exceptionally favorable economic environment throughout 2004, 2005, and early 2006. In particular, accommodative U.S. monetary policy in recent years has helped create an environment of low interest rates in international capital markets. However, if world interest rates were to take a sudden upward course, this would lead to less hospitable financing conditions for emerging market countries. The purpose of this paper is to measure the effects of world interest rate shocks on real activity in Thailand. The analysis incorporates balance sheet related credit market frictions into the IMF’s Global Economy Model (GEM) and finds that Thailand would best minimize the adverse effects of rising world interest rates if it were to follow a flexible exchange rate regime.
    Keywords: Interest rates , Thailand , Business cycles , Emerging markets , Exchange rate regimes , International trade , Economic models ,
    Date: 2006–05–10
  18. By: Bekaert, Geert; Cho, Seonghoon; Moreno, Antonio
    Abstract: This article complements the structural New-Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro-model with unobservable processes for the inflation target and the natural rate of output which are filtered from macro and term structure data. We find that term structure information helps generate large and significant estimates of the Phillips curve and real interest rate response parameters. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. The inflation target dominates the variation in the 'level factor' whereas monetary policy shocks dominate the variation in the 'slope and curvature factors'.
    Keywords: inflation target; monetary policy; Phillips curve; term structure of interest rates
    JEL: E31 E32 E43 E52 G12
    Date: 2006–11
  19. By: Giannitsarou, Chryssi; Scott, Andrew
    Abstract: The intertemporal budget constraint of the government implies a relationship between a ratio of current liabilities to the primary deficit with future values of inflation, interest rates, GDP and narrow money growth and changes in the primary deficit. This relationship defines a natural measure of fiscal balance and can be used as an accounting identity to examine the channels through which governments achieve fiscal sustainability. We evaluate the ability of this framework to account for the fiscal behaviour of six industrialised nations since 1960. We show how fiscal imbalances are mainly removed through adjustments in the primary deficit (80-100%), with less substantial roles being played by inflation (0-10%) and GDP growth (0-20%). Focusing on the relation between fiscal imbalances and inflation suggests extremely modest interactions. This post WWII evidence suggests that the widely anticipated future increases in fiscal deficits, need not necessarily have a substantial impact on inflation.
    Keywords: fiscal deficit; fiscal sustainability; government debt; inflation; intertemporal budget constraint
    JEL: E31 E62
    Date: 2006–11
  20. By: Philip Liu
    Abstract: The importance of the time-consistency poblem depends critically on the model one is working with and its parameterizations. This paper attempts to quantify the magnitude of stabilization bias for a small open economy using an empirically estimated micro-founded dynamic stochastic general equilibrium model. The resultant model is used to investigate the degree to which precommitment policy can improve welfare. Rather than presenting a point estimate of the welfare gain measures, the paper maps out the entire distribution of the welfare gain using the Bayesian posterior distribution of the model's parameters. The welfare improvement is an increasing function of the weight the central bank places on exchange rate variability. However, there is no simple relationship between the gains from precommitment and the degree of openness of the economy.
    JEL: C15 C51 E17 E61
    Date: 2006–12
  21. By: Adam Geršl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank, Prague, Czech Republic)
    Abstract: As the independence of national central banks in the European Union is one of the main institutional features of the monetary constitution of the EU, the paper tries to find out whether central banks are factually independent in their decisions about interest rates if they face political pressure. The Havrilesky (1993) methodology of the political pressure on central banks is applied to the Czech National Bank, a central bank of one of the new EU Member States, in order to test whether the conducted monetary policy has been influenced by political pressure from various interest groups.
    Keywords: political economy; monetary policy; pressure groups
    JEL: E52 D78
    Date: 2006–04
  22. By: Jan Kodera; Karel Sladký; Miloslav Vošvrda (Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague, Czech Republic; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The non-linear approach to economic dynamics enables us to study traditional economic models using modified formulations and different methods of solution. In this article we compare dynamical properties of Keynesian and Classical macroeconomic models. We start with an extended dynamical IS-LM neoclassical model generating behaviour of the real product, interest rate, expected inflation and the price level over time. Limiting behaviour, stability, and existence of limit cycles and other specific features of these models will be compared.
    Keywords: macroeconomic models; Keynesian and classical model; nonlinear differential equations; linearization; asymptotical stability; Lyapunov exponents S
    JEL: C00 E12 E13
    Date: 2006–04
  23. By: Jan Kodera (Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague, Czech Republic; University of Economics, Department of Banking and Insurance, Prague, Czech Republic); Miroslav Vošvrda (Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague, Czech Republic; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The purpose of this paper is to study a price level dynamics in a simple four-equation model. A basis of this model is developed from dynamical Kaldorian model which could be noticed very frequently in works of non-linear economic dynamics. Our approach is traditional. The difference is observed in a choice of an investment function. The investment function depending on the difference of logarithm of production and logarithm of capital (logarithm of the productivity of capital) is in a form of the logistic function. These two equations create relatively closed sub-model generating both production and capital stock trajectories. Two other equations describe the price level dynamics as a consequence of money market disequilibrium and continuously adaptive expectation of inflation. Our investigation is firstly aimed to core model dynamics, i.e., a dynamics of the production and capital stock. Secondly is to analyze dynamics of the model as a whole, i.e., to the first part is superadded the price dynamics and expected inflation dynamics depending on both an adaptation parameter of the commodity market and a parameter of the expectation. Thirdly we compute Lyapunov exponents for a simple model of closed economy showing it’s a chaotic behaviour. Simulation studies are performed.
    Keywords: investment ratio; propensity to save; expected inflation; nonlinear system; price dynamics
    JEL: E44
    Date: 2005
  24. By: Lehner, Maria; Schnitzer, Monika
    Abstract: Foreign bank entry is frequently associated with spillover effects for local banks and increasing competition in the local banking market. We study the impact of these effects on host countries. In particular, we ask how these effects interact and how they depend on the competitive environment of the host banking market. An increasing number of banks is more likely to have positive welfare effects the more competitive the market environment, whereas spillovers are less likely to have positive welfare effects the stronger competition. Hence, competitive effects seem to reinforce each other, while spillovers and competition tend to weaken each other.
    Keywords: competition in banking; foreign bank entry; multinational bank; spillovers
    JEL: F37 G21 L13 O16
    Date: 2006–11
  25. By: Ray Barrell; Sylvia Gottschalk
    Abstract: We investigate the macroeconomic impacts of changes in capital adequacy requirements, as developed in the Basel Capital Accords, on Brazil and Mexico. Changes in the capital adequacy requirements of international and domestic banks are considered, since the former adopted the Basel Capital Accord in 1988 and the latter in the mid-90s. Unlike most papers in the budding literature on the effects of the Basel Capital Accords on developing countries, we adopt an empirical approach, grounded in a general equilibrium macroeconometric model, which allows us to examine indirect transmission mechanisms. We first estimate a reduced financial block for Brazil and Mexico, which we integrate into the National Institute's General Equilibrium Model (NiGEM). We then simulate a shock to domestic and international capital adequacy ratios. The simulations show that an increase in capital adequacy ratios-either domestic or international-has adverse impacts on Brazilian and Mexican GDPs. A moderate credit crunch occurs in both cases and in both countries and is accompanied by a rise in lending rates. However, there are important differences in banks' reaction to tighter solvency ratios in each country. In Brazil, international and domestic banks adjust their portfolios by switching from higher-risk loans (private sector) to zero-risk loans (sovereign and public sector), instead of increasing their capital provisions. Sovereign lending, and hence government spending, thus rises sharply in Brazil. This offsets the negative impacts of the fall in private investment that follows the credit crunch. In Mexico, sovereign lending from domestic banks remains largely unaffected by changes in capital adequacy ratios, whereas foreign loans to the Mexican public sector decrease. In both cases, the Mexican private sector bears the bulk of the adjustment of domestic and foreign banks to the new regulatory rules. These findings suggest the existence of a financial "crowding-out", where government borrowing replaces private sector borrowing in domestic banks loans portfolios. Household borrowing including housing loans represents around 5 per cent of GDP in Mexico and about 8 per cent of GDP in Brazil, on average over 1997-2004. These ratios are considerably lower than those of countries such as the UK and the US. In 2000, for instance, total consumer credit in the UK and the US amounted to 73 and 78 per cent of GDP respectively (See Byrne and Davis 2003). This may account for our finding that consumer credit in both countries is not sensitive to changes in solvency ratios. Nonetheless, our simulations show that household consumption in Brazil and Mexico drops following a rise in capital adequacy ratios. The transmission mechanism is carried out through household net wealth. Higher solvency ratios lead to higher interest rates, which, other things unchanged, increase net interest payments of households and thus their net financial wealth. In our model, lower financial wealth results into lower consumption. Overall, given an increase of ½ percentage point in solvency ratios, we found that GDP falls by 3.5 per cent in Brazil, and by 2.2 per cent in Mexico.
    Date: 2006–02
  26. By: M.S.Rafiq (Dept of Economics, Loughborough University, United Kingdom)
    Abstract: Economic fluctuations in most of the industrialised world have for over the past 30 years been characterised by declining volatility. This decline has also been a trait witnessed for output fluctuations in the Euro Area. This paper has two objectives. The first is to provide a comprehensive characterisation of the decline in volatility using a large number of Euro area economic time series and a variety of methods designed to describe the time-varying time series processes. The second objective is to provide new evidence on the quantitative importance of various explanations for this ‘great moderation’. This paper focuses on the central elements in the literature contending why real output growth has stabilised. Such factors include shifts in the structure of the economy, improved policies, and a ‘good luck’ factor. Further, this paper goes on to investigate whether cross-country linkages in growth have shifted, perhaps in a way that can help rationalise the stabilisation in output. Taken together, the moderation in volatility is attributable to a combination of improved policy (around 5 - 30 percent) and identifiable forms of good luck that manifest themselves as smaller reduced-form forecast errors (40 percent).
    Keywords: Output Volatility, Monetary Policy, International shocks.
    JEL: E32 E60
    Date: 2006–11
  27. By: Ali Al-Eyd; Stephen Hall
    Abstract: This paper extends a standard open-economy New Keynesian model to examine the efficiency of alternative monetary policy rules (both fixed and nonlinear) during a period of financial crisis. A third-generation “balance sheet effect” is made operational through an endogenous risk premium which impacts on investment. Special attention is given to alternative expectations structures and our findings under both rational expectations and adaptive learning establish the Taylor rule as the dominant policy. Moreover, under adaptive learning, we find additional policy traction and less instrument variability in rules augmented with the exchange rate. Building on the nonlinear policy rule framework, we illustrate the debate stemming from the Asian crisis regarding the prescription of monetary policy in the presence of liability dollarization. Interestingly, under rational expectations, “Traditionalist” (or IMF-prescribed) policy is most effective at mitigating exchange rate variability, while “Revisionist” policy is most effective at mitigating real output variability. All rules in this study, however, advocate a sharp initial interest rate response to the crisis.
    Date: 2006–04
  28. By: Desmet, Klaus; Le Breton, Michel; Ortuño-Ortín, Ignacio; Weber, Shlomo
    Abstract: This paper presents a model of nation formation in which culturally heterogeneous agents vote on the optimal level of public spending. Larger nations benefit from increasing returns in the provision of public goods, but bear the costs of greater cultural heterogeneity. This tradeoff induces agents' preferences over different geographical configurations, thus determining the likelihood of secession and unification. We provide empirical support for choosing genetic distances as a proxy of cultural heterogeneity. By using data on genetic distances, we examine the stability of the current map of Europe and identify the regions prone to secession and the countries that are more likely to merge. Our framework is further applied to estimate the welfare gains from European Union membership.
    Keywords: cultural heterogeneity; European Union; genetic diversity; nation formation; secession; unification
    JEL: D70 F02 H40 H77
    Date: 2006–11
  29. By: Tatiana Fic; Ray Barrell; Dawn Holland
    Abstract: New member states will join the EMU in the coming years. Setting the central parity has been and will be a challenging task, as there is a considerable amount of uncertainty, both from a theoretical and an empirical perspective, surrounding the determination of the optimal exchange rate. In effect, the probability of misalignment of the entry rate can be a non-zero one. Given the possible - if not inevitable - misspecification of the equilibrium rate it is thus advisable to focus on the effects of a misalignment of the entry rate for the economy, as it has implications for countries’ both real and nominal convergence. An overvalued exchange rate would have an adverse impact on a country’s competitiveness and its growth, while an undervalued currency would contribute to an overheating of the economy and an excessive inflation. The objective of this paper is to better understand the role of the entry rates for short run inflation and GDP developments and their implications for the inflation criterion and the real convergence process. Having estimated equilibrium exchange rates for eight out of ten countries that entered the EU in May 2004 - Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Slovenia and Slovakia - we conduct simulations showing what their adjustments to equilibrium would be if their entry rates deviated from the optimal ones.
    Date: 2006–09
  30. By: Adam Geršl (Czech National Bank, Monetary and Statistics Department, Prague, Czech republic; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank, Prague)
    Abstract: The paper uses a dynamic inconsistency model known from monetary policy to assess three alternative proposals how to reform fiscal constitution in order to limit government’s incentive to use fiscal policy for maximizing political support. The return to ever-balanced-budget rule, state-contingent rules, and the establishment of an independent Fiscal Policy Committee with power to set public deficit with the aim of stabilizing the economy are discussed from the constitutional perspective, analyzing different incentives that these proposals create for government and alternative means to enhance credibility of the arrangement.
    Keywords: fiscal policy; dynamic inconsistency; political economy; public deficit
    JEL: E61 E63 P16
    Date: 2005
  31. By: Katerina Smídková; Aleš Bulir
    Abstract: Estimation and simulation of sustainable real exchange rates in some of the new EU accession countries point to potential difficulties in sustaining the ERM2 regime if entered too soon and with weak policies. According to the estimates, the Czech, Hungarian, and Polish currencies were overvalued in 2003. Simulations, conditional on large-model macroeconomic projections, suggest that under current policies those currencies would be unlikely to stay within the ERM2 stability corridor during 2004-10. In-sample simulations for Greece, Portugal, and Spain indicate both a much smaller misalignment of national currencies prior to ERM2, and a more stable path of real exchange rates over the medium term than can be expected for the new accession countries.
    Keywords: Exchange rates , European Union , Real effective exchange rates , Foreign investment ,
    Date: 2005–02–22
  32. By: Jaromir Hurnik; Aleš Bulir
    Abstract: The Maastricht inflation criterion, designed in the early 1990s to bring "high-inflation" EU countries in line with "low-inflation" countries prior to the introduction of the euro, poses challenges for both new EU member countries and the European Central Bank. While the criterion has positively influenced the public stance toward low inflation, it has biased the choice of the disinflation strategy toward short-run, fiat measures-rather than adopting structural reforms with longer-term benefits-with unpleasant consequences for the efficiency of the eurozone transmission mechanism. The criterion is also unnecessarily tight for new member countries as it mainly reflects cyclical developments.
    Date: 2006–06–27
  33. By: Petr Hedbávný (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Ondřej Schneider (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jan Zápal (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: In this paper, we set out to examine an efficient fiscal-policy framework for a monetary union. We illustrate that fiscal policy’s bias toward budget deficit only temporarily ceased at the end of the 20th century as European countries endeavored to qualify for euro-zone membership, which compelled strict limits on budgetary deficits. We then explore which mechanisms might instill a sense of fiscal disciple in governments. We find that most mechanisms suffer from the incentive-incompatible setup whereby governments restrict their own fiscal-policy freedom. We argue that even multilateral fiscal rules, such as the EU’s Stability and Growth Pact, suffer from the same endogeneity flaw. Consequently, we argue that a fiscal rule must incorporate an external authority that would impartially assess fiscal-policy developments. Using U.S. debt and bond-market data at the state level, we show that financial markets represent a good candidate as, vis-á-vis the American states, they do differentiate state debt according to the level of debt. We thus argue for a fiscal institution - what we call the Fiscal Sustainability Council - that would actively bring financial markets into the fiscal-policy process, and we explain the technique whereby this could be effected.
    Keywords: fiscal policy; European Union; sustainability
    JEL: E6 H6 H87
    Date: 2005
  34. By: Ondřej Schneider (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jan Zápal (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; London School of Economics and Political Science)
    Abstract: In this paper, we track behaviour of fiscal authorities of the ten new EU member states (NSM) in the period which immediately preceded their EU accession. We first present basic stylized facts about public budgets of those countries. The paper then analyses reasons which led to periods of fiscal consolidations in NMS. Secondly, we also present evidence from Pre-Accession Economic and Convergence programmes of NMSs concerning planed steps of fiscal authorities and try to contrast them with reality. Throughout the paper, we identify two different groups of countries which significantly differ in their fiscal behaviour. On the one side is group of Baltic countries displaying strong reform effort and responsible fiscal policy usually supported by strong economic growth. On the second extreme, we identify fiscally irresponsible central European countries and two Mediterranean islands displaying lax fiscal policies and little political will to implement costly reforms. Somewhere between stand Slovenia and Slovakia, first without strong reform performance yet with budget deficit in compliance with Stability and Growth Pact and later for its recent reform efforts. Our key finding concerning behaviour of fiscally irresponsible group of countries is that their current problems with high budget deficits originate in their lax approach and inability to implement politically costly expenditure cuts which is apparent from their revision of budget plans and endeavour to shift envisioned deficit reduction into the future. Yet, this strategy has led those countries to uncomfortable position vis-a-vis European fiscal rules.
    Keywords: fiscal policy; new member states; consolidations; Stability and Growth Pact; Excessive Deficit Procedure; Convergence Programmes banking
    Date: 2006–06
  35. By: Sirovatka, Tomas (Faculty of Social Sciences, Masaryk Univesity Brno); Valentova, Marie (CEPS/INSTEAD, Luxembourg)
    Abstract: In this paper we pay attention to the legitimacy of the principles, scope and purpose of redistribution in Czech society. We use data from international surveys from the second half of the nineties, including European Values Study 1999 and ISSP 1996 – module Role of the Government and some national Czech surveys. We claim that Czech society does not favour extensive redistribution at the level of principles. Nevertheless, demand for redistribution is stronger compared to the other European countries and preferences for state responsibility and redistribution increased during nineties. Furthermore, the purpose of redistribution seems to play a central role. While benefits for marginalised groups are not supported, mainstream benefits should be increased according to the public, and the strategies to improve human capital and capabilities to adapt in the labour market gain support as well. The Czech public also prefers to combine collective (social) protection with private supplementary insurance schemes against risks of the contemporary society. There are remarkable differences in most of the above described attitudes among social classes. The above described findings may be explained by the social consequences of market transition: specifically by impacts of new social risks differentiated according to class position combined with restrictive social policies implemented during the nineties.
    Keywords: Lagitimacy; Redistribution ; Social Protection
    Date: 2006–11

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