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on Central Banking |
| By: | Robert J. Barro |
| Abstract: | Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year. |
| JEL: | E21 E44 G12 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12763&r=cba |
| By: | Rachel Ngai; Christopher A. Pissarides |
| Abstract: | We study long-run trends in market hours of work and employment shifts across economicsectors driven by uneven TFP growth in market and home production. We focus on thestructural transformation between agriculture, manufacturing and services and on themarketization of home production. The model can rationalize the observed falling or Ushapedpattern for aggregate hours, the shift from agriculture to services and balancedaggregate growth. We find support for the model's predictions in long-run US data. |
| Keywords: | hours of work, labour supply, structural transformation, home production,marketization, balanced growth |
| JEL: | J21 J22 O14 O41 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0746&r=cba |
| By: | Christopher A. Pissarides |
| Abstract: | I examine the dynamic evolutions of unemployment, hours of work and the service sharesince the war in the United States and Europe. The theoretical model brings together allthree and emphasizes technological growth. Computations show that the very lowunemployment in Europe in the 1960s was due to the high productivity growth associatedwith technological catch-up. Productivity also played a role in the dynamics of hours buta full explanation for the fast rise of service employment and the big fall in aggregatehours needs further research. Taxation has played a role but results are mixed. |
| Keywords: | Unemployment, hours of work, service employment, structural change, laborproductivity taxation |
| JEL: | E24 J21 J22 J64 O14 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0757&r=cba |
| By: | Gary D. Hansen |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:416&r=cba |
| By: | Ricardo J. Caballero |
| Abstract: | The world has a shortage of financial assets. Asset supply is having a hard time keeping up with the global demand for store of value and collateral by households, corporations, governments, insurance companies, and financial intermediaries more broadly. The equilibrium response of asset prices and valuations to these shortages has played a central role in global economic developments over the last twenty years. The so-called "global imbalances," the recurrent emergence of speculative bubbles (which recently have transited from emerging markets, to the dot-coms, to real estate, to gold...), the historically low real interest rates and associated "interest-rate conundrum," and even the widespread low inflation environment and deflationary episodes in parts of the world, all fall into place once one adopts this asset shortage perspective. |
| JEL: | E3 E4 E5 F3 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12753&r=cba |
| By: | Sharon Kozicki; P.A. Tinsley |
| Abstract: | Surveys provide direct information on expectations, but only short histories are available at quarterly frequencies or for long-horizon expectations. Longer histories typically contain only semi-annual observations of short-horizon forecasts. The authors fill in the gaps by constructing a 50-year monthly history of expected inflation at all horizons from one month to 10 years that is consistent with inflation data and infrequent survey data. In the process, some models that fit inflation well are found to generate forecasts that bear little resemblance to survey data. Also, survey data on near-term expectations are found to contain considerable information about long-horizon views. The estimated long-horizon forecast series, a measure of the private sector’s perception of the inflation target of monetary policy, has shifted considerably over time and is the source of some of the persistence of inflation. When compared with estimates of the effective inflation goal of policy, these perceptions suggest that monetary policy has been less than fully credible historically. |
| Keywords: | Inflation and prices; Inflation targets; Uncertainty and monetary policy |
| JEL: | E3 E5 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-46&r=cba |
| By: | Thierry Warin |
| Abstract: | This paper surveys the roots of the modern literature on monetary policy, and illustrates the convergence that occurs between open-economy approaches and the micro foundations of monetary policy. From the Banking School versus Currency School debate to the “credibility versus flexibility” refinement, monetary policy has a long history of scholarly works. Although it may be hard to imagine that there is still room for innovations, the current developments of the literature on open-economy monetary policy seem to spawn a new and essential branch. |
| Keywords: | : monetary policy, rules versus discretion, credibility versus flexibility, Banking School, Currency School |
| JEL: | E4 E5 E6 F0 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:0617&r=cba |
| By: | Carlos Thomas |
| Abstract: | I analyze optimal monetary policy in an economy with search and matching frictions in thelabor market and staggered nominal wage and price contracts. In this framework, as opposedto the standard New Keynesian model, preset nominal wages need not have any effect onexisting employment relationships. However, staggered bargaining of nominal wages distortsaggregate job creation and creates inefficient dispersion in hiring rates across firms.Targeting zero inflation (the optimal policy in the standard New Keynesian model) onlymagnifies these distortions. The optimal policy allows for non-zero inflation in response toreal shocks, so as to reduce the rigidity of real wages. Quantitatively, the case against pricestability as the sole goal of monetary policy turns out to be important. |
| Keywords: | search and matching, New Keynesian, staggered nominal wage bargaining |
| JEL: | E52 E32 J40 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0743&r=cba |
| By: | Troy Matheson (Reserve Bank of New Zealand) |
| Abstract: | We describe a simple extension of the Monacelli (2005) small open economy model that incorporates a non-tradable good, habit persistence and price indexation. The empirical fit of eight different specifications of this model is then tested in a Bayesian framework using data for three small open economies: Australia, Canada, and New Zealand. The results show that the model with a non-tradable good fits the data better than the one-good model across all specifications considered. In contrast to Rabanal and Rubio-Ramarez (2005), we find that adding price indexation to either the one- or two-good model deteriorates overall empirical fit. |
| JEL: | C51 E52 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/11&r=cba |
| By: | Domenico Giannone; Troy Matheson (Reserve Bank of New Zealand) |
| Abstract: | This paper introduces a new indicator of core inflation for New Zealand, estimated using a dynamic factor model and disaggregate price data. Using disaggregate price data we can directly compare the predictive performance of our core indicator with a wide range of other ‘core inflation’ measures estimated from disaggregate prices, such as the weighted median and the trimmed mean. Predictive performance is assessed relative to a centred 2 year moving average of past and future annual inflation outcomes. The 2 year centred moving average is used as an analytical approximation of the inflation target from the PTA, which requires the Reserve Bank to keep annual inflation between 1 and 3 per cent on average over the medium term. We find that our indicator produces relatively good estimates of this characterisation of core inflation when compared with estimates derived from a range of other models. |
| JEL: | C32 E31 E32 E52 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/12&r=cba |
| By: | Steven J. Davis; Magnus Henrekson |
| Abstract: | Following a severe contraction in the early 1990s, the Swedish economy accumulated a strong record of output growth coupled with a disappointing performance in the labor market. As of 2005, hours worked per person 20-64 years of age are 10.5 percent below the 1990 peak and a mere one percent above the 1993 trough. Employment rates tell a similar story. Our explanation for Sweden's weak performance with respect to market work activity highlights the role of high tax rates on labor income and consumption expenditures, wage-setting arrangements that compress relative wages, business tax policies that disfavor labor-intensive industries and technologies, and a variety of policies and institutional arrangements that disadvantage younger and smaller businesses. This last category includes tax policies that penalize wealth accumulation in the form of owner-operated businesses, a pension system that steers equity capital and loanable funds to large incumbent corporations, and legally mandated job-security provisions that weigh more heavily on smaller and younger businesses. We describe these features of the Swedish institutional setup and provide evidence of their consequences based largely on international comparisons. |
| JEL: | D13 H30 J20 L52 O52 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12768&r=cba |
| By: | Mete Feridun (Department of Economics, Loughborough University) |
| Abstract: | Economies are susceptible to speculative attacks regardless of whether they use fixed or floating exchange rates. Turkish experience in the last two decades constitutes one of the most prominent examples proving this verdict. It is widely accepted that narrow money (M1) is the most conventional measure of liquidity, excessive growth of which may fuel speculative attacks on the currency. The literature on currency crises clearly lacks a country-specific study that addresses the long-run relationship between this indicator and the speculative pressure in the exchange market. This article aims at filling this gap in the literature using monthly Turkish time series data spanning the period 1984:04- 2006:11. Results of the ADF unit root tests suggest that the series are stationary. Hence, no-cointegration analysis was carried out before the Granger-causality tests. Granger causality tests reveal strong evidence supporting univariate causality running from narrow money (M1) to exchange market pressure. This outcome lends empirical support to the Turkish policy makers’ current efforts to maintain a tight control of the money supply. |
| Keywords: | Speculative attacks; currency crises; domestic credit. |
| JEL: | F3 E44 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_24&r=cba |
| By: | Mete Feridun (Department of Economics, Loughborough University) |
| Abstract: | This article aims at investigating the long-run relationship between stock prices and speculative pressure in the Turkish exchange market through Granger-causality analysis for the period 1986:01-2006:11. For this purpose an Exchange Market Pressure Index is built using the weighted average of exchange rate changes, interest rate changes and foreign exchange reserve changes. This index is then used in pairwise causality analyses with Istanbul Stock Exchange (ISE) National-100 Index. Results of the ADF unit root tests suggest that the series are stationary. Hence, no-cointegration analysis was carried out before the Granger-causality tests. Results of Granger-causality indicates that there exists no long-run relationship between stock prices and the speculative pressure in the exchange market in Turkey. |
| Keywords: | currency crises; stock prices; co-integration; exchange market pressure. |
| JEL: | F3 E44 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_22&r=cba |
| By: | Mete Feridun (Department of Economics, Loughborough University) |
| Abstract: | Economies are susceptible to speculative attacks regardless of whether they use fixed or floating exchange rates. Turkish experience in the last two decades constitutes one of the most prominent examples proving this verdict. It is widely accepted that there is a link between domestic credit and speculative attacks on the currency. Nevertheless, the literature on currency crises clearly lacks a country-specific study that addresses the long-run relationship between this indicator and the speculative pressure in the exchange market. This article aims at filling this gap in the literature using monthly Turkish time series data spanning the period 1984:04- 2006:11. Results of the ADF unit root tests suggest that the series are stationary. Hence, no cointegration analysis was carried out before the Granger-causality tests. Granger causality tests fail to establish a causal relationship between domestic credit and exchange market pressure. |
| Keywords: | Speculative attacks; currency crises; domestic credit. |
| JEL: | F3 E44 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_23&r=cba |