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on Central Banking |
| By: | Michael Woodford (Columbia University) |
| Abstract: | This paper was presented as the 2006 W.A. Mackintosh Lecture at Queen's University. I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a longrun relationship between money growth and inflation. (Here I give particular attention to the implications of "two-pillar Phillips curves" of the kind proposed by Gerlach (2003).) And fourth, I consider reasons why a monetary policy strategy based solely on short-run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provide a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy. |
| Keywords: | inflation, Phillips curve, monetary policy |
| JEL: | E50 E52 E58 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1104&r=cba |
| By: | Barry E. Jones (Assistant Professor, Department of Economics, State University of New York at Binghamton, PO Box 6000, Binghamton, NY 13902-6000, USA.); Livio Stracca (Counsellor to the Executive Board, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We propose a numerical test of the non-parametric conditions for additive separability between consumption and real money balances, building on Varian (1983). If additive separability is rejected, then real balances enter into the theoretical IS curve. We test whether or not monetary assets and consumption are additively separable for the euro area using quarterly data from 1991 to 2005. Previous results using a parametric approach suggest that real balances can be excluded from the IS curve. We find that additive separability is violated over this sample period. After 1992, however, violations involve only a few observations and are in some instances related to measurement problems in the data. Overall, our results tend to support the claim that perfect non-separability between consumption and real balances is implausible, but that non-separabilities may not be very important empirically. At the same time, we reject additive separability throughout if we extend the sample period back to the 1980s, a period characterised by higher volatility in inflation and money growth. JEL Classification: C14, C63, E41. |
| Keywords: | Non-parametric testing, Revealed Preference, Additive Separability, Money, IS Curve. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060704&r=cba |
| By: | Luca Dedola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stefano Neri (Bank of Italy, Via Nazionale, 91 , 00184 Roma, Italy.) |
| 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 parameterers. 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. JEL Classification: C3, E3. |
| Keywords: | Technology shocks, DSGE models, Bayesian VAR methods, Identification. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060705&r=cba |
| By: | Clements, Michael P. (University of Warwick); Galvão, Ana Beatriz (Queen Mary, University of London); Kim, Jae H. (Monash University) |
| Abstract: | Quantile forecasts are central to risk management decisions because of the widespread use of Value-at-Risk. A quantile forecast is the product of two factors : the model used to forecast volatility, and the method of computing quantiles from the volatility forecasts. In this paper we calculate and evaluate quantile forecasts of the daily exchange rate returns of five currencies. The forecasting models that have been used in recent analyses of the predictability of daily realized volatility permit a comparison of the predictive power of different measures of intraday variation and intraday returns in forecasting exchange rate variability. The methods of computing quantile forecasts include making distributional assumptions for future daily returns as well as using the empirical distribution of predicted standardized returns with both rolling and recursive samples. Our main ?ndings are that the HAR model provides more accurate volatility and quantile forecasts for currencies which experience shifts in volatility, such as the Canadian dollar, and that the use of the empirical distribution to calculate quantiles can improve forecasts when there are shifts. |
| Keywords: | realized volatility ; quantile forecasting ; MIDAS ; HAR ; exchange rates |
| JEL: | C32 C53 F37 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:777&r=cba |
| By: | Olli Castrén (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Chiara Osbat (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthias Sydow (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We apply the Campbell-Shiller return decomposition to exchange rate returns and fundamentals in a stationary panel vector autoregression framework. The return decomposition is then used to analyse how different investor segments react to news as captured by the different return components. The results suggest that intrinsic value news are dominating for equity investors and speculative money market investors while investors in currency option markets react strongly to expected return news. The equity and speculative money market investors seem able to distinguish between transitory and permanent FX movements while options investors mainly focus on transitory movements. We also find evidence that offsetting impact on the various return components can blur the effect of macroeconomic data releases on aggregate FX excess returns. JEL Classification: C23, F31, F32, G15. |
| Keywords: | FX return prediction, investor flows, news surprises, panel estimation, stationary VAR. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060706&r=cba |
| By: | Erwan Gautier (Banque de France, DGEI-DIR-RECFIN 41-1391, 31 rue Croix-des-petits-champs, 75049 Paris Cedex 01, France.) |
| Abstract: | This paper provides some new empirical features on price setting behaviour for French producers using micro data underlying the producer and business-services price indices over the period 1994-2005. Some crucial methodological issues on the collection of producer prices are raised. Then, the main features of producers'price setting are presented - producer prices are modified quite frequently and by small amounts. A high heterogeneity across sectors is also observed: business-services prices change less often than industrial producer prices. The data lend some support to predictions of both time- and state-dependence models: Taylor contracts are not unusual but prices also respond to the changes in the firm's economic conditions. Nevertheless, time-dependent models are shown to be the most relevant theories to explain the producer price rigidity. JEL Classification: E31, D43, L11, L16. |
| Keywords: | Price stickiness, price duration, producer price index, frequency of price change. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060699&r=cba |
| By: | Alfred V. Guender (University of Canterbury) |
| Abstract: | Given highly persistent cost-push shocks, the relative performance of nominal income growth targeting depends critically on the size of two key parameters. Barring extreme preferences, nominal income growth targeting performs fairly well relative to commitment and pure discretion for small values of the Phillips Curve parameter. |
| Keywords: | Nominal Income Growth Targeting; Timeless Perspective; Discretion; Standard Commitment |
| JEL: | E3 E5 |
| Date: | 2006–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:06/15&r=cba |
| By: | Alfred V. Guender (University of Canterbury); Yu Xie |
| Abstract: | This paper shows how the exchange rate affects the price-setting behavior of monopolistically competitive firms in the sticky price framework that gives rise to a forward-looking Phillips Curve at the aggregate level. The open economy Phillips Curve differs from its closed economy counterpart in that the real exchange rate exerts a direct effect on domestic inflation. The exchange rate channel in the Phillips Curve is pivotal in determining the optimal policy setting in an open economy. On balance, we find only scant empirical evidence for the existence of a direct exchange rate channel in the Phillips Curve in a sample of six OECD countries. Indeed, the forward-looking Phillips Curve does not receive much backing from the data. The use of highly aggregated data may account for the poor fit. |
| Keywords: | Open economy Phillips Curve; Exchange rate channel; Output gap |
| JEL: | E3 F4 |
| Date: | 2006–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:06/16&r=cba |
| By: | Maria A. Caraballo; Carlos Usabiaga |
| Abstract: | This paper analyses the effects of supply shocks on the Spanish inflation rate. Our goal is to determine if there is a homogeneous behaviour across regions with regard to that issue or if, on the contrary, there are regions more inflationary than others. In this sense, this paper tries to throw some light on the causes of the recent increase in the Spanish inflation rate and the relation of this fact with the evolution of oil prices. The methodology applied is based on the seminal paper of Ball and Mankiw (1995). Those authors assume that a good proxy for supply shocks is the third moment of the distribution of changes in relative prices, and show that for no trend inflation regimes the presence of nominal rigidities, like menu costs, implies a positive relationship between inflation and skewness -i.e., the supply shocks-, that is magnified by the variance of the distribution. In order to achieve these goals, we have chosen the 1993-2005 period, given that it fulfils the features required to apply the methodology above mentioned. The data used are the monthly consumer price indexes of each region, disaggregated in 57 categories. As a first stage, we have checked that the skewness of the distribution of changes in relative prices is a good proxy for supply shocks. After that, the relationship between inflation and the higher moments of the distribution is estimated. Moreover, control variables as interest rates and unemployment rates have been introduced. The analysis has been carried out in two ways. On one hand, each region is analysed separately and, on the other hand, we have used panel data techniques in order to test homogeneity across regions. Our results point out that Spanish regions show a common pattern with regard to inflation behaviour and that they are vulnerable to supply shocks. |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa06p335&r=cba |
| By: | Thomas A. Eife (University of Heidelberg, Department of Economics); W. Timothy Coombs (University of Illinois) |
| Abstract: | The gap between actual and perceived inflation is one of the more unexpected consequences of the euro changeover in January 2002. In this note we argue that this gap was caused by a lack of preparation and experience of the authorities to appropriately communicate with the public during the changeover. Using principles of crisis communication we identify the mistakes made and give policy recommendations for future changeovers. |
| Keywords: | crisis communication, transformative explanation, perceived inflation, euro changeover |
| JEL: | E50 E60 Y80 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0435&r=cba |
| By: | Efrem Castelnuovo (University of Padua) |
| Abstract: | This paper estimates a reduced-form model for the short-term U.S. inflation expectations and assesses the empirical relevance of the role played by some proxies of the business cycle in shaping forecasters’ projections. In particular, we consider both standard indicators of the "domestic" economic slack (such as the U.S. output and unemployment gap) and "global" measures of the business cycle (their G7 counterparts). Two main findings stand out. First, all the measures of economic slack we take into account turn out to be statistically significant when considered one at a time. Second, horserace regressions contrasting domestic and global measures of economic slack favors the latter, i.e. when global indicators are considered, domestic indicators take the wrong sign and lose their significance. These results are robust to the introduction of several additional indicators of inflationary pressures in the empirical model. Rolling regressions confirm our findings also at a subsample level. Overall, our results suggest that further research is needed for better understanding the role played by measures of the international economic slack in predicting the U.S. inflation expectations. |
| Keywords: | inflation expectations, output gap, unemployment gap, domestic factors, global factors |
| JEL: | F02 E31 E52 E58 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0031&r=cba |
| By: | Péter Gábriel (Magyar Nemzeti Bank); Klára Pintér (Magyar Nemzeti Bank) |
| Abstract: | Our paper aims to assess how the Magyar Nemzeti Bank’s communication affects financial asset prices. We find that the central bank plays the most important role in influencing long-term yields. The effect on the exchange rate is less pronounced, while short-term yields are influenced only by the communication related to the exchange rate. Analysing the direction and channels of communication we observe two asymmetries. The central bank is more successful in signalling monetary policy tightening than easing and with the increase of time horizon the written communication gains in importance and dominates the verbal forms. |
| Keywords: | communication, transmission mechanism. |
| JEL: | C22 E43 E52 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2006/9&r=cba |
| By: | Andreas S. Andreou (University of Cyprus); George A. Zombanakis (Bank of Greece) |
| Abstract: | This paper applies computational intelligence methods to exchange rate forecasting. In particular, it employs neural network methodology in order to predict developments of the Euro exchange rate versus the U.S. Dollar and the Japanese Yen. Following a study of our series using traditional as well as specialized, non-parametric methods together with Monte Carlo simulations we employ selected Neural Networks (NNs) trained to forecast rate fluctuations. Despite the fact that the data series have been shown by the Rescaled Range Statistic (R/S) analysis to exhibit random behaviour, their internal dynamics have been successfully captured by certain NN topologies, thus yielding accurate predictions of the two exchange-rate series. |
| Keywords: | Exchange - rate forecasting, Neural networks |
| JEL: | C53 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:49&r=cba |
| By: | Zsolt Darvas (Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest); Zoltán Schepp (University of Pécs) |
| Abstract: | Using eight unit root tests and a stationarity test and three decades of monthly data for the currencies between the US, Germany, UK and Switzerland, we find that, while spot exchange rates are non-stationary, long maturity forward rates are stationary. |
| Keywords: | forward exchange rate, unit root tests |
| JEL: | C22 F31 |
| Date: | 2006–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:mkg:wpaper:0603&r=cba |
| By: | Gergely Kiss (Magyar Nemzeti Bank); Márton Nagy (Magyar Nemzeti Bank); Balázs Vonnák (Magyar Nemzeti Bank) |
| Abstract: | Credit to the private sector has been growing very rapidly in a number of Central and Eastern European countries in recent years. The main question is whether this dynamics is an equilibrium convergence process or may rather pose stability risks. Using panel econometric techniques, this paper attempts to identify the equilibrium credit/GDP levels of the new EU countries, disentangling the observed growth into an equilibrium trend and an excess (boom) component. In the paper the pooled mean group estimator was used for its flexibility and efficiency. Using instrumental variable technique we tested whether long run endogeneity affects the consistency. The estimations show that large part of the credit growth in new member states can be explained by the catching-up process, and, in general, credit/GDP ratios are below the levels consistent with macroeconomic fundamentals. However, in Latvia and Estonia credit growth is found to be significantly faster than what would be justified along the equilibrium path. |
| Keywords: | financial deepening, credit growth, transition economies, panel econometrics, endogeneity bias. |
| JEL: | E44 O16 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2006/10&r=cba |
| By: | Bayangos, V.B. |
| Keywords: | exchange rate; monetary transfers; Philippines; |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:iss:wpaper:434&r=cba |