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on Central Banking |
| By: | Benigno, Pierpaolo; Woodford, Michael |
| Abstract: | We consider a general class of nonlinear optimal policy problems involving forward-looking constraints (such as the Euler equations that are typically present as structural equations in DSGE models), and show that it is possible, under regularity conditions that are straightforward to check, to derive a problem with linear constraints and a quadratic objective that approximates the exact problem. The LQ approximate problem is computationally simple to solve, even in the case of moderately large state spaces and flexibly parameterized disturbance processes, and its solution represents a local linear approximation to the optimal policy for the exact model in the case that stochastic disturbances are small enough. We derive the second-order conditions that must be satisfied in order for the LQ problem to have a solution, and show that these are stronger, in general, than those required for LQ problems without forward-looking constraints. We also show how the same linear approximations to the model structural equations and quadratic approximation to the exact welfare measure can be used to correctly rank alternative simple policy rules, again in the case of small enough shocks. |
| Keywords: | optimization |
| JEL: | C61 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5964&r=cba |
| By: | Sergio Rebelo; Carlos A. Vegh |
| Abstract: | The influential Krugman-Flood-Garber (KFG) model of balance of payment crises assumes that a fixed exchange rate is abandoned if and only if international reserves reach a critical threshold value. From a positive standpoint, the KFG rule is at odds with many episodes in which the central bank has plenty of international reserves at the time of abandonment. We study the optimal exit policy and show that, from a normative standpoint, the KFG rule is suboptimal. We consider a model in which the fixed exchange rate regime has become unsustainable due to an unexpected increase in government spending. We show that, when there are no exit costs, it is optimal to abandon immediately. When there are exit costs, the optimal abandonment time is a decreasing function of the size of the fiscal shock. For large fiscal shocks immediate abandonment is optimal. Our model is consistent with the evidence that many countries exit fixed exchange rate regimes with plenty of international reserves in the central bank's vault. |
| JEL: | F31 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12793&r=cba |
| By: | Jean Boivin; Marc Giannoni |
| Abstract: | Standard practice for the estimation of dynamic stochastic general equilibrium (DSGE) models maintains the assumption that economic variables are properly measured by a single indicator, and that all relevant information for the estimation is summarized by a small number of data series. However, recent empirical research on factor models has shown that information contained in large data sets is relevant for the evolution of important macroeconomic series. This suggests that conventional model estimates and inference based on estimated DSGE models might be distorted. In this paper, we propose an empirical framework for the estimation of DSGE models that exploits the relevant information from a data-rich environment. This framework provides an interpretation of all information contained in a large data set, and in particular of the latent factors, through the lenses of a DSGE model. The estimation involves Markov-Chain Monte-Carlo (MCMC) methods. We apply this estimation approach to a state-of-the-art DSGE monetary model. We find evidence of imperfect measurement of the model's theoretical concepts, in particular for inflation. We show that exploiting more information is important for accurate estimation of the model's concepts and shocks, and that it implies different conclusions about key structural parameters and the sources of economic fluctuations. |
| JEL: | C10 C32 C53 E01 E32 E37 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberte:0332&r=cba |
| By: | Laxton, Doug; N'Diaye, Papa; Pesenti, Paolo |
| Abstract: | The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions on whether the zero interest floor (ZIF) is binding. It uses a two-country general-equilibrium simulation model calibrated to the Japanese economy vis-à-vis the rest of the world. Negative demand shocks have more prolonged and startling effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. More open economies hit the ZIF for a shorter period of time, and with less harmful effects. Deflationary supply shocks have different implications according to whether they are concentrated in the tradables rather than the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding. |
| Keywords: | deflation; monetary policy rules; zero interest rate floor |
| JEL: | E17 E52 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5997&r=cba |
| By: | George-Marios Angeletos; Alessandro Pavan |
| Abstract: | In recent years there has been a growing interest in macro models with heterogeneity in information and complementarity in actions. These models deliver promising positive properties, such as heightened inertia and volatility. But they also raise important normative questions, such as whether the heightened inertia and volatility are socially undesirable, whether there is room for policies that correct the way agents use information in equilibrium, and what are the welfare effects of the information disseminated by the media or policy makers. We argue that a key to answering all these questions is the relation between the equilibrium and the socially optimal degrees of coordination. The former summarizes the private value from aligning individual decisions, whereas the latter summarizes the value that society assigns to such an alignment once all externalities are internalized. |
| JEL: | C72 D62 D82 E3 E5 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12778&r=cba |
| By: | Paul R. Bergin; Reuven Glick |
| Abstract: | This paper documents significant time-variation in the degree of global price convergence over the last two decades. In particular, there appears to be a general U-shaped pattern with price dispersion first falling and then rising in recent years, a pattern which is remarkably robust across country groupings and commodity groups. This time-variation is difficult to explain in terms of the standard gravity equation variables common in the literature, as these tend not to vary much over time or have not risen in recent years. However, regression analysis indicates that this time-varying pattern coincides well with oil price fluctuations, which are clearly time-varying and have risen substantially since the late 1990s. As a result, this paper offers new evidence on the role of transportation costs in driving international price dispersion. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-50&r=cba |
| By: | Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Ragnar Nymoen (Department of Economics, University of Oslo) |
| Abstract: | We investigate the importance of employing a valid model for monetary policy analysis. Specifically, we investigate the economic significance of differences in specification and empirical validity of models. We consider three alternative econometric models of wage and price inflation in Norway. We find that differences in model specification as well as in parameter estimates across models can lead to widely different policy recommendations. We also find that the potential loss from basing monetary policy on a model that may be invalid, or on a suite of models, even when it contains the valid model, can be substantial, also when gradualism is exercised as a concession to model uncertainty. Furthermore, possible losses from such a practice appear to be greater than possible losses from failing to choose the optimal policy horizon to a shock within the framework of a valid model. Our results substantiate the view that a model for policy analysis should necessarily be empirically valid and caution against compromising this property for other desirable model properties, including robustness. |
| Keywords: | Model uncertainty; Econometric modelling; Economic significance; Robust monetary policy. |
| JEL: | C52 E31 E52 |
| Date: | 2006–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_13&r=cba |
| By: | Peter J. Klenow; Jonathan L. Willis |
| Abstract: | In the U.S. and Europe, prices change somewhere between every six months and once a year. Yet nominal macro shocks seem to have real effects lasting well beyond a year. "Sticky information" models, as posited by Sims (2003), Woodford (2003), and Mankiw and Reis (2002), can reconcile micro flexibility with macro rigidity. We simulate a sticky information model in which price setters do not update their information on macro shocks as often as they update their information on micro shocks. Compared to a standard menu cost model, price changes in this model reflect older macro shocks. We then examine price changes in the micro data underlying the U.S. CPI. These price changes do not reflect older information, thereby exhibiting a similar response to that of the standard menu cost model. However, the empirical test hinges on staggered information updating across firms; it cannot distinguish between a full information model and a model where firms have equally old information. |
| Keywords: | Prices |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-13&r=cba |
| By: | Michael T. Kiley |
| Abstract: | I estimate sticky-price and sticky-information models of price setting for the United States via maximum-likelihood techniques, reaching several conclusions. First, the sticky-price model fits best, and captures inflation dynamics as well as reduced-form equations once hybrid-behavior is allowed. Second, the importance of hybrid behavior in sticky-price models is potentially consistent with a role for some information imperfections, such as sticky information, as a complement to nominal price rigidities. Finally, the favorable results herein for the hybrid sticky-price model when evaluated by statistics that summarize the relative fit of different models is consistent with the existing literature that is both supportive and dismissive of such models, as this literature has largely ignored fit in evaluating such models. Many previous studies have focused on ancillary issues, such as the standard errors associated with certain parameters or Granger-causality tests that may not provide much information about sticky-price models. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-45&r=cba |
| By: | Edward S. Knotek II |
| Abstract: | Macroeconomic models with microeconomic foundations face a difficult task: they must be consistent with facts both large and small. This paper proposes a model that combines two strands of the literature on stickiness in order to match both sets of facts. (1) Firms acquire information infrequently, as in Mankiw and Reis (2002), resulting in sticky information. (2) Firms face heterogeneous, fixed menu costs which they must pay to change prices, leading to state-dependent sticky prices at the micro level. I estimate key structural parameters and show that a model of sticky prices in a sticky-information environment is consistent with both micro and macro evidence |
| Keywords: | Prices |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-15&r=cba |
| By: | Guillermo A. Calvo |
| Abstract: | The paper argues that Emerging Market economies (EMs) face financial vulnerabilities that weaken the effectiveness of a domestic Lender of Last Resort (LOLR). As a result, monetary policy is inextricably linked to the state of the credit market. In particular, the central bank should be ready to operate as LOLR during Sudden Stop (of capital inflows) by releasing international reserves in an effective manner. These conditions also impact on optimal monetary policy in normal but high-volatility periods. The paper further argues that during those periods interest rate rules may engender excessive volatility of exchange rates and, thus, that it may be advisable to temporarily supplement those rules by foreign exchange market intervention or outright exchange rate pegging. At a fundamental level, the analysis suggests that the state-of-the-art literature summarized by Woodford (2003) or even more heterodox approaches exemplified by Stiglitz and Greenwald (2003) are likely fall short of providing a satisfactory guide for monetary policy in EMs. |
| JEL: | E52 E58 F32 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12788&r=cba |
| By: | Ellen R. McGrattan; Edward C. Prescott |
| Abstract: | We develop a general equilibrium multicountry model and use it to evaluate concerns of high U.S. current account deficits and a declining net U.S. investment position. We introduce technology capital which can be used by multinationals in some or all of their domestic and foreign operations. Prime examples are brand equity and patents. This capital is intangible and is therefore expensed rather than capitalized. The expensing of the investment implies that there are differences in reported and actual balance of payments and net asset positions. Although our model economy has efficient domestic and international capital markets, the predicted equilibrium paths for the reported series exhibit similar behavior to the observed U.S. time series. Thus, on the basis of our model’s quantitative predictions, we conclude that there is no prima facie evidence that the large current account deficits are a harbinger of a future crisis. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:646&r=cba |
| By: | William T. Dickens; Lorenz Goette; Erica L. Groshen; Steinar Holden; Julian Messina; Mark E. Schweitzer; Jarkko Turunen; Melanie E. Ward |
| 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. |
| Keywords: | Wages |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0620&r=cba |
| By: | Carlsson, Mikael (Research Department, Central Bank of Sweden); Westermark, Andreas (Department of Economics, Uppsala University) |
| Abstract: | In this paper, we outline a baseline DSGE model which enables a straightforward analysis of wage bargaining between firms and households/unions in a model with both staggered prices and wages. Relying on empirical evidence, we assume that prices can be changed whenever wages are changed. This feature of the model greatly reduces the complexity of the price and wage setting decisions; specifically it removes complicated interdependencies between current and future price and wage decisions. In an application of the model we study the interaction between labor-market institutions and monetary policy choices, and the consequences for welfare outcomes. Specifically, we focus on the relative bargaining power of unions. We find that, for a standard specification of the monetary policy rule, welfare is substantially affected by the degree of relative bargaining power, but that this effect can be neutralized by optimal discretionary policy. |
| Keywords: | Monetary Policy; Labor Market; Bargaining |
| JEL: | E52 E58 J41 |
| Date: | 2006–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0199&r=cba |
| By: | Christoph Wunder (University of Bamberg); Johannes Schwarze (University of Bamberg, DIW Berlin and IZA Bonn); Gerhard Krug (Institute for Employment Research (IAB)); Bodo Herzog (German Council of Economic Experts) |
| 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-in-differences |
| JEL: | E31 I31 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2508&r=cba |
| By: | Guglielmo Maria Caporale; Mario Cerrato |
| Abstract: | This paper presents further empirical evidence on the relationship between black market and official exchange rates in six emerging economies (Iran, India, Indonesia, Korea, Pakistan, and Thailand). First, it applies both time series techniques and heterogeneous panel methods to test for the existence of a long-run relationship between these two types of exchange rates. Second, it tests formally the validity of the proportionality restriction implying a constant black-market premium. Third, it also analyses the short-run dynamic responses of both markets to shocks. Finally, it tries to shed some light on the determinants of the market premium. Evidence of slow reversion to the long-run equilibrium is found. Further, it appears that capital controls and expected currency devaluation are the two main factors affecting the size of the premium and determining the breakdown in the proportionality relationship. |
| Keywords: | black market and official exchange rates, panel cointegration, impulse response functions |
| JEL: | C23 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1851&r=cba |
| By: | Luca Dedola (European Central Bank, Research Department); Stefano Neri (Bank of Italy, Research Department) |
| Abstract: | This paper estimates the effects of technology shocks in VAR models of the U.S., identified by imposing restrictions on the sign of impulse responses. These restrictions are consistent with the implications of a popular class of DSGE models, with both real and nominal frictions, and with sufficiently wide ranges for their parameters. This identification strategy thus substitutes theoretically-motivated restrictions for the atheoretical assumptions on the time-series properties of the data that are key to long-run restrictions. Stochastic technology improvements persistently increase real wages, consumption, investment and output in the data; hours worked are very likely to increase, displaying a hump-shaped pattern. Contrary to most of the related VAR evidence, results are not sensitive to a number of specification assumptions, including those on the stationarity properties of variables. |
| Keywords: | technology shocks, DSGE models, bayesian VAR methods, identification |
| JEL: | C3 E3 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_607_06&r=cba |
| By: | Sylvain Leduc; Keith Sill |
| Abstract: | An equilibrium model is used to assess the quantitative importance of monetary policy for the post-1984 decline in U.S. inflation and output volatility. The principal finding is that monetary policy played a substantial role in reducing inflation volatility, but a small role in reducing real output volatility. The model attributes much of the decline in real output volatility to smaller TFP shocks. We also investigate the pattern of output and inflation volatility under an optimal monetary policy counterfactual. We find that real output volatility would have been somewhat lower, and inflation volatility substantially lower, had monetary policy been set optimally. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:873&r=cba |
| By: | Fogli, Alessandra; Perri, Fabrizio |
| Abstract: | The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the “great moderation”) and the large and persistent US external imbalance. In this paper we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance. |
| Keywords: | business cycle volatility; current account; net foreign asset position; precautionary saving |
| JEL: | F32 F34 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6010&r=cba |
| By: | Gabriele Galati; Patrick Higgins; Owen F. Humpage; William Melick |
| Abstract: | A vast literature on the effects of sterilized intervention by the monetary authorities in the foreign exchange markets concludes that intervention systematically moves the spot exchange rate only if it is publicly announced, coordinated across countries, and consistent with the underlying stance of fiscal and monetary policy. Over the past fifteen years, researchers have also attempted to determine if intervention has any effects on the dispersion and directionality of market views concerning the future exchange rate. These studies usually focus on the variance around the expected future exchange rate—the second moment. In this paper we demonstrate how to use over-the-counter option prices to recover the risk-neutral probability density function (PDF) for the future exchange rate. Using the yen/dollar exchange rate as an example, we calculate measures of dispersion and directionality, such as variance and skewness, from estimated PDFs to test whether intervention by the Japanese Ministry of Finance had any impact on the higher moments of the exchange rate. We find little or no systematic effect, consistent with the findings of the literature on the spot rate as Japanese intervention during the period 1996-2004 was not publicly announced, rarely coordinated across countries and, in hindsight, probably inconsistent with the underlying stance of monetary policy. |
| Keywords: | Options (Finance) ; Foreign exchange administration |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0618&r=cba |
| By: | Marcellino, Massimiliano |
| Abstract: | A theoretical model for growth or inflation should be able to reproduce the empirical features of these variables better than competing alternatives. Therefore, it is common practice in the literature, whenever a new model is suggested, to compare its performance with that of a benchmark model. However, while the theoretical models become more and more sophisticated, the benchmark typically remains a simple linear time series model. Recent examples are provided, e.g., by articles in the real business cycle literature or by new-keynesian studies on inflation persistence. While a time series model can provide a reasonable benchmark to evaluate the value added of economic theory relative to the pure explanatory power of the past behavior of the variable, recent developments in time series analysis suggest that more sophisticated time series models could provide more serious benchmarks for economic models. In this paper we evaluate whether these complicated time series models can really outperform standard linear models for GDP growth and inflation, and should therefore substitute them as benchmarks for economic theory based models. Since a complicated model specification can over-fit in sample, i.e. the model can spuriously perform very well compared to simpler alternatives, we conduct the model comparison based on the out of sample forecasting performance. We consider a large variety of models and evaluation criteria, using real time data and a sophisticated bootstrap algorithm to evaluate the statistical significance of our results. Our main conclusion is that in general linear time series models can be hardly beaten if they are carefully specified, and therefore still provide a good benchmark for theoretical models of growth and inflation. However, we also identify some important cases where the adoption of a more complicated benchmark can alter the conclusions of economic analyses about the driving forces of GDP growth and inflation. Therefore, comparing theoretical models also with more sophisticated time series benchmarks can guarantee more robust conclusions. |
| Keywords: | growth; inflation; non-linear models; time-varying models |
| JEL: | C2 C53 E30 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6012&r=cba |
| By: | Andrea Nobili (Bank of Italy); Stefano Neri (Bank of Italy) |
| Abstract: | This paper studies the transmission of monetary policy shocks from the US to the euro-area using a two-country structural VAR with no exogeneity assumption. The analysis reveals the following results. First, in response to an unexpected increase in the Federal funds rate, the euro immediately depreciates with respect to the dollar and then appreciates in line with the prediction of the uncovered interest parity condition. Second, there is evidence of a temporary positive spillover to euro-area output in the short run, while a negative effect emerges in the medium run. Third, the contribution of the trade balance channel to the transmission of monetary shocks is negligible. Finally, the degree of pass-through of the exchange rate changes onto euro-area consumer prices is incomplete and small in the short run, while it is close to zero in the medium run. |
| Keywords: | VAR, Monetary Policy, International transmission |
| JEL: | C32 E52 F42 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_606_06&r=cba |
| By: | Baldwin, Richard; Di Nino, Virginia |
| Abstract: | This paper tests whether trade in new goods is partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data set (about 16 million observations) covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members. |
| Keywords: | Eurozone trade effects; extensive margin; heterogenous firms; Melitz model |
| JEL: | F12 F21 F33 F4 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5973&r=cba |
| By: | Harry Flam; Hakan Nordström |
| Abstract: | We estimate that the euro has increased trade within the eurozone by about 26 per cent and trade between the eurozone and outsiders by about 12 per cent on average for the years 2002-2005 compared to 1995-1998. The percentage increases were smaller for products that were exported every year during the sample period than for products that were not, indicating significant and substantial effects on the extensive margin of trade. The euro effects were concentrated to semi-finished and finished products, in particular to industries with highly processed products such as pharmaceuticals and machinery. |
| JEL: | F10 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1881&r=cba |
| By: | Chiara Scotti |
| Abstract: | This paper studies when and by how much the Fed and the ECB change their target interest rates. I develop a new nonlinear bivariate framework, which allows for elaborate dynamics and potential interdependence between the two countries, as opposed to linear feedback rules, such as a Taylor rule, and I use a novel real-time data set. A Bayesian estimation approach is particularly well suited to the small data sample. Empirical results support synchronization between the central banks and non-zero correlation between mag- nitude shocks, but they do not support follower behavior. Institutional factors and inflation represent relevant variables for timing decisions of both banks. Inflation rates are important factors for magnitude decisions, while output plays a major role in US magnitude decisions. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:875&r=cba |
| By: | Roberto Golinelli (University of Bologna, Department of Economics); Sandro Momigliano (Bank of Italy, Economic Research Department) |
| Abstract: | We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policy-makers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behaviour of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favourable. |
| Keywords: | fiscal policy, real-time information, euro-area countries, stabilisation policies, fiscal rules, political budget cycle |
| JEL: | E61 D72 E62 H60 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_609_06&r=cba |
| By: | Angel Asensio |
| Abstract: | The paper studies the effects of heterogeneity upon the monetary and fiscal-budgetary policy interactions in a Keynesian monetary union. As a result of interactions, some of our results contrast sharply with the ones in studies that consider separately monetary, fiscal and budgetary policies. Other non-conventional mechanisms are identified in connection with the supply-side effects of fiscal taxes variations. As concerns policy responses to inherited unemployment, the central bank profile proves notably to be crucial in determining the magnitude of the instrument moves that are required to achieve the objectives. Simulations suggest that heterogeneity is likely to introduce more sources of non conventional effects and to enforce adverse interactions, especially in contexts of high unemployment. However, provided authorities are able to control the distributive conflict and its inflationary consequences, it is beneficial for the union that monetary policy specializes in countering the common effects of shocks, because that pushes governments to concentrate in countering the idiosyncratic effects. Employment targets require then lower instruments responses, as a result of efficiency gains. |
| Keywords: | Monetary policy;Fiscal policy;Monetary union;Macroeconomic governance;Post-Keynesian |
| Date: | 2006–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00120406_v1&r=cba |
| By: | Spencer D. Krane |
| Abstract: | Economic activity depends on agents' real-time beliefs regarding the persistence in the shocks they currently perceive to be hitting the economy. This paper uses an unobserved components model of forecast revisions to examine how the professional forecasters comprising the Blue Chip Economic Consensus have viewed such shocks to GDP over the past twenty years. The model estimates that these forecasters attribute more of the variance in the shock to GDP to permanent factors than to transitory developments. Both shocks are significantly correlated with incoming high-frequency indicators of economic activity; but for the permanent component, the correlation is driven by recessions or other periods when activity was weak. The forecasters' shocks also differ noticeably from those generated by some simple econometric models. Taken together, the results suggest that agents? expectations likely are based on broader information sets than those used to specify most empirical models and that the mechanisms generating expectations may differ with the perceived state of the business cycle. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-19&r=cba |
| By: | Neary, J Peter |
| Abstract: | This paper reviews alternative approaches to measuring an economy's cost competitiveness and proposes some new measures inspired by the economic theory of index numbers. The indices provide a theoretical benchmark for estimated real effective exchange rates, but differ from standard measures in that they are based on marginal rather than average sectoral shares in GDP or employment. The use of the new indices is illustrated by some simple calculations which highlight the potential exposure of the Irish economy to fluctuations in the euro-sterling exchange rate. |
| Keywords: | competitiveness; economic theory of index numbers; European Monetary Union (EMU); real effective exchange rates (REERs) |
| JEL: | C43 F40 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5982&r=cba |
| By: | Ju, Jiandong; Wei, Shang-Jin |
| Abstract: | International capital flows from rich to poor countries can be regarded as either too small (the Lucas paradox in a one-sector model) or too large (when compared with the logic of factor price equalization in a two-sector model). To resolve the paradoxes, we introduce a non-neo-classical model which features financial contracts and firm heterogeneity. In our model, free trade in goods does not imply equal returns to capital across countries. In addition, rich patterns of gross capital flows emerge as a function of financial and property rights institutions. A poor country with an inefficient financial system may simultaneously experience an outflow of financial capital but an inflow of FDI, resulting in a small net flow. In comparison, a country with a low capital-to-labor ratio but a high risk of expropriation may experience outflow of financial capital without compensating inflow of FDI. |
| Keywords: | capital bypass circulation; expropriation risk; financial development; gross capital flow; heterogeneous entrepreneurs |
| JEL: | F11 F21 F33 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5981&r=cba |
| By: | Gregory H. Bauer; Clara Vega |
| Abstract: | Existing studies using low-frequency data have found that macroeconomic shocks contribute little to international stock market covariation. However, these papers have not accounted for the presence of asymmetric information where sophisticated investors generate private information about the fundamentals that drive returns in many countries. In this paper, we use a new microstructure data set to better identify the effects of private and public information shocks about U.S. interest rates and equity returns. High-frequency private and public information shocks help forecast domestic money and equity returns over daily and weekly intervals. In addition, these shocks are components of factors that are priced in a model of the cross section of international returns. Linking private information to U.S. macroeconomic factors is useful for many domestic and international asset pricing tests. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:872&r=cba |
| By: | Natacha Gilson |
| Abstract: | This paper examines the demand and supply shocks observed in the present Eurozone member states and those observed in some neighboring countries. The analysis is based on recent data and each Eurozone member country is compared with an aggregate series corresponding to an area made up of the entire Eurozone minus the country being compared. The results of the study confirm that, even when the series are corrected by removing the country being compared, the disturbances observed in large Eurozone countries are well correlated with the disturbances observed in other Eurozone member countries. |
| Keywords: | shocks, Eurozone, optimal currency area |
| JEL: | E42 F31 F33 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1878&r=cba |
| By: | Balázs Égert |
| Abstract: | This paper analyses the effectiveness of foreign exchange interventions in Croatia, the Czech Republic, Hungary, Romania, Slovakia and Turkey using the event study approach. Interventions are found to be effective only in the short run when they ease appreciation pressures. Central bank communication and interest rate steps considerably enhance their effectiveness. The observed effect of interventions on the exchange rate corresponds to the declared objectives of the central banks of Croatia, the Czech Republic, Hungary and perhaps also Romania, whereas this is only partially true for Slovakia and Turkey. Finally, interventions are mostly sterilized in all countries except Croatia. Interventions are not much more effective in Croatia than in the other countries studied. This suggests that unsterilized interventions do not automatically influence the exchange rate. |
| Keywords: | central bank intervention, foreign exchange intervention, verbal intervention, central bank communication, Central and Eastern Europe, Turkey |
| JEL: | F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1869&r=cba |
| By: | Agnieszka Stazka |
| Abstract: | This paper investigates, using the SVAR model of Clarida and Gali (1994), the sources of real exchange rate fluctuations in eight Central and East European new EU member states. Theoretically, one should expect the real exchange rates of Exchange Rate Mechanism II participants to be primarily driven by temporary shocks and those of ERM II “outs” by permanent shocks. Our results reveal an opposite pattern. We conclude that the sources of real exchange rate movements – and the usefulness of nominal exchange rates as shock absorbing instruments – were not the decisive factor behind these countries’ decisions concerning the ERM II participation. |
| Keywords: | exchange rate fluctuations, Central and Eastern Europe, ERM II, SVAR |
| JEL: | C32 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1876&r=cba |
| By: | Gunther Schnabl |
| Abstract: | Both before and after the Asian crisis, the dollar has been the dominant anchor and reserve currency in East Asia. Due to underdeveloped capital markets and the limited international role of their domestic currencies, the East Asian countries (except Japan) are likely to continue to stabilize exchange rates and to accumulate international reserves. Yet expectations of further dollar depreciation may trigger a re-orientation of exchange rate policies based on basket strategies. Rolling econometric estimations of the basket structures in East Asia suggest growing weights for the Japanese yen in most East Asian currency baskets. The role of the euro as a reserve currency in East Asia remains uncertain. |
| Keywords: | East Asia, currency basket, exchange rate policies, international role of the euro |
| JEL: | E58 F31 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1873&r=cba |
| By: | Lane, Philip R. (The Institute for International Integration Studies) |
| Abstract: | This paper addresses the dynamics of the Swedish external position, with a particular focus on its inter-relation with the external value of the krona. We argue that financial globalisation means that a broader conceptual framework is required, whereby exchange rate fluctuations operate through the ‘valuation channel’ of external adjustment, in addition to the traditional trade balance channel. In the other direction, we highlight that the projected trend for the trade balance is an important influence on the long-term prospects for the krona. Finally, we seek to assess the future direction for the Swedish net foreign asset position by investigating the likely impact of demographic change and shifts in the Swedish position in the world income distribution. |
| Keywords: | real exchange rate; external adjustment; Sweden |
| JEL: | F00 F20 F30 |
| Date: | 2006–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0200&r=cba |
| By: | Vipul Bhatt (Indian Council for Research on International Economic Relations); Arvind Virmani (Indian Council for Research on International Economic Relations) |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ind:icrier:164&r=cba |
| By: | John Geweke; Joel Horowitz; M. Hashem Pesaran |
| 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: | C10 C20 C30 C40 C50 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1870&r=cba |