nep-cba New Economics Papers
on Central Banking
Issue of 2007‒02‒17
27 papers chosen by
Alexander Mihailov
University of Reading

  1. The economic impact of central bank transparency: a survey By Cruijsen,Carin van der; Eijffinger,Sylvester
  2. Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach By Frank Smets; Raf Wouters
  3. Evaluating An Estimated New Keynesian Small Open Economy Model By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
  4. New Keynesian macroeconomics: Entry For New Palgrave Dictionary of Economics, 2nd Edition By Dixon, Huw
  5. Price Stickiness in Ss Models: New Interpretations of Old Results By Ricardo J. Caballero; Eduardo M.R.A. Engel
  6. China’s Exchange Rate Appreciation in the Light of the Earlier Japanese Experience By McKinnon, Ronald
  7. Monetary Policy Committees in Action: Is There Room for Improvement? By Philipp Maier
  8. Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms By Ansgar Belke; Daniel Gros
  9. Hysteresis and Nairu in the Euro Area By Camille Logeay; Silke Tober
  10. Talks, financial operations or both? Generalizing central banks’ FX reaction functions By Oscar Bernal; Jean-Yves Gnabo
  11. Monetary Policy and the Political Support for a Labor Market Reform By Álvaro Aguiar; Ana Paula Ribeiro
  12. Socio-political and economic determinants of de facto monetary institutions and inflationary outcomes By Fabrizio Carmignani; Emilio Colombo; Patrizio Tirelli
  13. Monetary policy, macroeconomic policy mix and economic performance in the Euro area By Eckhard Hein; Achim Truger
  14. Inflation Persistence and Tax-Push Inflation in Germany and in the Euro Area: A Symptom of Macroeconomic Mismanagement? By Joerg Bibow
  15. Can Opacity of a Credible Central Bank Explain Excessive Inflation? By Baeriswyl, Romain; Cornand, Camille
  16. Currency Crises and Monetary Policy in Economies with Partial Dollarisation of Liabilities By Peter Flaschel; Christian Proano; Willi Semmler
  17. Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs By Mirko Abbritti
  18. Estimating Germany's Potential Output By Gustav Horn; Camille Logeay; Silke Tober
  19. On Skill Heterogeneity, Human Capital, and Inflation By Radhika Lahiri; Elisabetta Magnani
  20. On the relationship between inflation persistence and temporal aggregation By Ivan Paya; K Holden; A Duarte
  21. Disequilibrium Macroeconomic Dynamics, Income Distribution and Wage-Price Phillips Curves By Ekkehard Ernst; Peter Flaschel; Christian Proano; Willi Semmler
  22. The Class Content of Preferences Towards Anti-Inflation and Anti Unemployment Policies By Arjun Jayadev
  23. Monetary hyperinflations, speculative hyperinflations and modelling the use of money. By Alexandre Sokic
  24. Interactions des politiques monétaire et budgétaires en union monétaire : évaluation dans un cadre nouveau keynésien By Pascale Duran-Vigneron
  25. The Role of Banks in the Transmission of Monetary Policy in the Baltics By Köhler, Matthias; Hommel, Judith; Grote, Matthias
  26. The Transmission Mechanism of Monetary Policy in Colombia Major Changes and Current Features By Hernando Vargas
  27. Inflation persistence in the euro-area, US, and new members of the EU: Evidence from time-varying coefficient models By Zsolt Darvas; Balázs Varga

  1. By: Cruijsen,Carin van der; Eijffinger,Sylvester (Tilburg University, Center for Economic Research)
    Abstract: We provide an up-to-date overview of the literature on the desirability of central bank transparency from an economic viewpoint. Since the move towards more transparency, a lot of research on its effects has been carried out. First, we show how the theoretical literature has evolved, by looking into branches inspired by Cukierman and Meltzer (1986) and by investigating several, more recent, research strands (e.g. coordination and learning). Then, we summarize the empirical literature which has been growing more recently. Last, we discuss whether: -the empirical research resolves all theoretical question marks, -how the findings of the literature match the actual practice of central banks, and -where there is scope for more research.
    Keywords: central bank transparency;monetary policy;survey
    JEL: E31 E52 E58
    Date: 2007
  2. By: Frank Smets (ECB, CEPR and University of Ghent); Raf Wouters (NBB, Research Department)
    Abstract: Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the “Great Moderation”?
    Keywords: DSGE models, monetary policy
    JEL: E4 E5
    Date: 2007–02
  3. By: Adolfson, Malin (Research Department, Central Bank of Sweden); Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden)
    Abstract: This paper estimates and tests a new Keynesian small open economy model in the tradition of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003) using Bayesian estimation techniques on Swedish data. To account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank’s instrument rule. A key equation in the model - the uncovered interest rate parity (UIP) condition - is well known to be rejected empirically. Therefore we explore the consequences of modifying the UIP condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate. The results show that the modification increases the persistence and volatility in the real exchange rate and that this model has an empirical advantage compared with the standard UIP specification.
    Keywords: DSGE; VAR; VECM; Open economy; Bayesian inference
    JEL: C11 C53 E17
    Date: 2007–02–01
  4. By: Dixon, Huw (Cardiff Business School)
    Abstract: This dictionary entry defines the development of new Keynesian macroeconomics (NKM) since the 1980s. I argue that the key defining feature NKM is the introduction of imperfect competition, making price and/or wage setting endogenous and hence allowing for a rigorous understanding of nominal rigidity. This has led to a shift away from perfect competition in macroeconomics. The combination of NKM with dynamic macroeconomic modelling has led to the current orthodoxy: the new-neoclassical synthesis. Dynamic wage and price models lead to monetary neutrality in steady-state, non-neutrality out of steady-state. Other themes in NKM include efficiency wage theory and coordination failure.
    Keywords: Keynesian; nominal; rigidity; new
    JEL: E1 E3 E4 B22
    Date: 2007–02
  5. By: Ricardo J. Caballero (MIT); Eduardo M.R.A. Engel (Cowles Foundation, Yale University)
    Abstract: What is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks? The answer to this question ranges from a one-to-one link (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we provide new interpretations of key results in this area. In particular, when price stickiness is measured in terms of the impulse response function, the monetary neutrality result of Caplin and Spulber is not a consequence of aggregation, as is often assumed, but is due instead to properties of the microeconomic impulse response function. We also show that the "selection effect," according to which units that adjust their prices are those that benefit the most, is an important feature of Ss-type models but is neither necessary nor sufficient to account for the higher aggregate flexibility of these models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate price response. The aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
    Keywords: Aggregate price stickiness, Adjustment hazard, Adjustment frequency, Generalized Ss model, Extensive margin, Calvo model, Strategic complementarities
    JEL: E32 E62
    Date: 2007–02
  6. By: McKinnon, Ronald
    Abstract: For creditor countries on the periphery of the dollar standard such as China with current account surpluses, foreign mercantile pressure to appreciate their currencies and become more flexible is misplaced. Just the expectation of variable exchange appreciation seriously disrupts the natural tendency for wage growth to balance productivity growth and thus worsens the (incipient) deflation that China now faces. It could create a zero-interest liquidity trap in financial markets that leaves the central bank helpless to combat future deflation arising out of actual currency appreciation, as with the earlier experience of Japan. Exchange rate appreciation, or the threat of it, causes macroeconomic distress without having any predictable effect on the trade surpluses of creditor economies.
    Keywords: exchange rate, current account, China, Japan
    JEL: F31 F33 F42
    Date: 2006
  7. By: Philipp Maier
    Abstract: More than 80 central banks use a committee to take monetary policy decisions. The composition of the committee and the structure of the meeting can affect the quality of the decision making. In this paper we review economic, experimental, sociological and psychological studies to identify criteria for the optimal institutional setting of a monetary committee. These include the optimal size of the committee, measures to encourage independent thinking, a relatively informal structure of the meeting, and abilities to identify and evaluate individual members’ performances. Using these criteria, we evaluate the composition and operation of monetary policy committees in various central banks. Our findings indicate that e.g. the monetary policy committee of the Bank of England follows committee best-practice, while the committee structure of other major central banks could be improved.
    Keywords: Central bank research; Monetary policy framework
    JEL: C92 D70 E58
    Date: 2007
  8. By: Ansgar Belke (University of Hohenheim and IZA); Daniel Gros (Centre for European Policy Studies, Brussels and San Paolo IMI Asset Management, Milan)
    Abstract: This paper deals with potential instabilities in the Eurozone stemming from an insufficient interplay between monetary policy and reform effort on the one hand and the emergence of intra-Euro area divergences on the other. As a first step, we assess the effect of EMU on structural reform and investigate this question by an examination of the relationship between fixed exchange rates and reform in two wider samples of countries. We also stress that loose monetary conditions, which prevailed until some months ago, can also manifest themselves in asset price inflation, notably in the housing market. When these bubbles burst (e.g., when housing prices stop rising) this often leads to a prolonged period of economic instability and weakness rather than consumer price inflation. As a second step, we point out that risks for EMU are not only increasing because longer-term disequilibria become evident in fiscal and monetary policy, but also because serious divergences are now appearing within the Euro area which threaten its long-term cohesiveness. The most manifest example of this threat comes from what promises to be a long-term divergence between Germany and Italy, which for the time being was offset by asynchronous developments of house prices in both countries. There are still large differences within the Euro area, with the small countries performing much better than the large ones on almost every indicator. This suggests that better policies can make a large difference even if monetary policy is the same for everybody.
    Keywords: asset prices, international competitiveness, EMU, instabilities, labor markets, monetary policy regime, structural reform
    JEL: D78 E52 E61
    Date: 2007–01
  9. By: Camille Logeay (IMK at the Hans Boeckler Foundation); Silke Tober (IMK at the Hans Boeckler Foundation)
    Abstract: This paper analyses the Nairu in the Euro Area and the influence that hysteresis had on its development. Using the Kalman-filter technique we find that the Nairu has varied considerably since the early seventies. The Kalman-filter technique is applied here using explicit exogenous variables. In order to test for hysteresis, the dependence of the Nairu on actual unemployment and long-term unemployment is estimated and found to be significant for the Euro Area and Germany respectively. The existence of hysteresis effects implies the possibility of a long-run non-superneutrality of monetary policy.
    Keywords: Nairu, hysteresis, Kalman Filter, Phillips curve, superneutrality
    JEL: C32 E32 E52
    Date: 2005–07
  10. By: Oscar Bernal (DULBEA, Free University of Brussels); Jean-Yves Gnabo (University of Namur)
    Abstract: This paper generalizes central banks’ FX interventions reaction functions to include oral interventions alongside actual ones. Using Japanese data for the 1991-2004 period, we estimate an ordered probit explaining the occurrence of each type of intervention and evaluating the extent to which oral and actual interventions are substitutes or complements. Our results indicate that monetary authorities tend to adopt progressively stronger measures as the exchange rate behaves in an increasingly unfavorable way. This suggests that words and acts are used as complements only in extreme cases.
    Keywords: Central banks; Foreign exchange market; Interventions; Communication policy
    JEL: E58 F31 G15
    Date: 2007–02
  11. By: Álvaro Aguiar (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal); Ana Paula Ribeiro (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: Lagged benefits relative to costs can politically block an efficiency-enhancing labor market reform, lending support to the two-handed approach. An accommodating monetary policy, conducted alongside the reform, could help bringing the positive effects of the reform to the fore. In order to identify the mechanisms through which monetary policy may affect the political sustainability of a reform, we add stylized features of the labor market to a standard New-Keynesian model for monetary policy analysis. A labor market reform is modeled as a structural change inducing a permanent shift in the flexible-price unemployment and output levels. In addition to the permanent gains, the impact of the timing and magnitude of the reform-induced adjustments on the welfare of workers - employed and unemployed - is crucial to the political feasibility of the reform. Since the adjustments depend, on one hand, on the macroeconomic structure and, on the other hand, can be influenced by monetary policy, we simulate various degrees of output persistence across different policy rules. We find that, if inertias are present, monetary policy, even when conducted by an independent central bank, affects the political support for the reform. In general, the more expansionary (or the less contractionary) the policy is, the faster is the recovery to the new steady-state equilibrium and, thus, the stronger is the political support.
    Keywords: Monetary policy rules; Labor market reforms; Unemployment benefit; Political economy; New-Keynesian models
    JEL: E24 E37 E52 E61
    Date: 2007–02
  12. By: Fabrizio Carmignani (Department of Economics, University of Milan-Bicocca); Emilio Colombo (Department of Economics, University of Milan-Bicocca); Patrizio Tirelli (Department of Economics, University of Milan-Bicocca)
    Abstract: In this paper we estimate a model where in°ation, a measure of de facto central bank independence and an index of de facto exchange rate regime are simultaneously determined by a set of economic, political and institutional variables. De facto central bank independence is hampered by socio-political turbulence and bene¯ts from the balance of powers between the executive and the parliament. In°ation is explained by de facto central bank independence, by the level and volatility of public expenditure and by the de facto exchange rate regime. Openness (real and ¯nancial) a®ects in°ation through the ex- change rate regime channel. Success in controlling in°ation, in turn is crucial to sustain central bank independence and exchange rate stability.
    Keywords: Infation, central bank independence, exchange rate regime, system estimation
    JEL: E52 E58 C31
  13. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Achim Truger (IMK at the Hans Boeckler Foundation)
    Abstract: In order to explain slow growth and high unemployment in the Euro area, in particular if compared to the USA, we follow a macroeconomic policy view focussing on the more restrictive stance of monetary, fiscal and wage policies in the Euro area. In the present paper we focus on the particular role of monetary policy, because the European Central Bank (ECB) seems to be the major obstacle to higher growth and employment. Analysing the macroeconomic policy mix, wage policies and fiscal policies are taken into account at the outset, but then the determinants of ECB policies are assessed in more detail. Our analysis confirms that it is the ECB's overemphasising a too low inflation target which is a major problem for macroeconomic performance in the Euro area. The ECB is too exclusively occupied with inflation and wage developments and pays too little attention to the development of real variables. In order to improve growth and employment and to limit the risks of deflation in the largest economy of the Euro area, Germany, it is therefore required that the ECB raises its inflation target and that the central bank focuses more on real economic activity.
    Keywords: Monetary policy, macroeconomic policy mix, Euro area
    JEL: E52 E58 E61 E63 E65
    Date: 2006–05
  14. By: Joerg Bibow (Franklin College, Lugano, Switzerland)
    Abstract: This study challenges the widely held view that the persistence in Euro area inflation above two percent, which has been observed in the euro area since 2001 despite the economic slump, may have been foremost a reflection of “structural rigidities” in labour and product markets. Accordingly, structural reforms that eliminate these rigidities are presented as necessary and sufficient conditions for boosting growth and purging inflation persistence. This view misses the fact that series of hikes in indirect taxes and administered prices contributed significantly to price increases in the euro area. Governments’ consolidation efforts in view of stagnation-induced budgetary pressures thus caused “tax-push inflation”, i.e. a persistent and sizeable upward distortion in headline inflation. Since inflation above two percent has, in turn, forestalled more growth-supportive monetary policies, the euro area has become stuck in a vicious circle of protracted domestic demand stagnation and budgetary pressures that continue to nurture tax push.
    Date: 2006–01
  15. By: Baeriswyl, Romain; Cornand, Camille
    Abstract: Excessive inflation is usually attributed to the lack of central bank’s credibility. In this context, most of the literature considers transparency a means to establish central bank’s credibility. The contribution of this paper is twofold. First, it shows that, even in the absence of inflationary bias, a credible central bank may find it optimal to implement an accommodating monetary policy in response to cost-push shocks whenever the uncertainty surrounding its monetary instrument is high. Indeed, the degree of central bank’s transparency influences the effectiveness of its policy to stabilize inflation in terms of output gap, and thereby whether it will implement an expansionary or contractionary policy in response to cost-push shocks. Second, it stresses that transparency is not just a means to achieve credibility but is essential per se for the optimality of monetary policy of a fully credible central bank.
    Keywords: monetary policy; differential information; transparency; cost-push shocks
    JEL: E58 E52 D82
    Date: 2007–02
  16. By: Peter Flaschel (University of Bielefeld); Christian Proano (University of Bielefeld, IMK at the Hans Boeckler Foundation); Willi Semmler (New School for Social Research, New York)
    Abstract: The right response to a speculative attack on the domestic currency by monetary authorities in a country with liabilities in US dollars has been a matter of hot debate among academics and policy makers especially after the East Asian Crisis. Using a modified version of the currency crisis model discussed in Proano, Flaschel and Semmler (2005) the authors show that an increase of the domestic interest rate by the central bank as a response to the speculative attack can have serious negative effects on aggregate demand by depressing the investment activity of those domestic firms which are not indebted in foreign currency. The authors demonstrate that in specific situations the standard (IMF supported) increase of the domestic interest rate might not be the best response to a speculative attack on the domestic currency from a medium term point of view.
    Keywords: Mundell-Fleming-Tobin model, liability dollarisation, debt-financed investment, financial crisis, currency crisis, deflation.
    JEL: E31 E32 E37 E52
    Date: 2006–06
  17. By: Mirko Abbritti (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state and involuntary fluctuations in unemployment. After calibrating the model, through simulations we are able to show that our model with labour market imperfections outperforms the standard NK model as for the persistence of responses to monetary shocks. Besides, the model can be easily used to assess the impact of different market imperfections on both the steady state and the dynamics of the economy. We are also able to show how two economies, differing in their "degrees of imperfection", react to policy or non policy shocks: a rigid economy turns out to be less volatile than a flexible economy. Something that reflects the actual experience of the US (flexible) and European (rigid) economies.
    Keywords: Hiring Costs, Wage Bargaining, Output Gap, New Keynesian Phillips Curve, Monetary Policy
    JEL: E24 E31 E32 E52 J64
    Date: 2007–01
  18. By: Gustav Horn (IMK at the Hans Boeckler Foundation); Camille Logeay (IMK at the Hans Boeckler Foundation); Silke Tober (IMK at the Hans Boeckler Foundation)
    Abstract: Potential output measures a country's attainable aggregate living standard and is thus one of the most important categories of economics. It is also a key indicator for monetary and fiscal policy. Despite its prominence, however, potential output is a difficult concept to pinpoint both theoretically and even more so empirically. The article discusses the reasons for the marked revisions of potential output estimates by major international organisations. The authors then present the results of our attempts to quantify Germany's potential output based on a production function approach coupled with the Kalman-filter technique to estimate the NAIRU. The authors find that potential output and potential output growth greatly depend on how the NAIRU and potential total factor productivity are modelled. Given the difficulties involved in robustly estimating potential output, especially in real time, economic policy makers need to learn to pursue their policy objectives without reference to this variable.
    Keywords: Potential Output, Nairu, Kalman-filter, revisions
    JEL: C5 E32 E52 O11
    Date: 2007–01
  19. By: Radhika Lahiri; Elisabetta Magnani (School of Economics and Finance, Queensland University of Technology)
    Abstract: This paper examines the welfare costs of inflation within a monetary dynamic general equilibrium framework with human capital that incorporates endogenous, ex ante skill heterogeneity among workers. Numerical experiments indicate that, overall, welfare costs are more likely to decrease with increases in skill heterogeneity. An implication of this feature is that a greater degree of skill heterogeneity may be associated with a higher tolerance for inflation, consequently implying a positive correlation between agent heterogeneity and inflation. Using a panel of several countries we empirically test this proposition. Our evidence lends some support to this hypothesis.
  20. By: Ivan Paya; K Holden; A Duarte
    Abstract: This paper examines the impact of temporal aggregation on alternative definitions of inflation persistence. Using the CPI and the core PCE deflator of the US, our results show that temporal aggregation from the monthly to the quarterly to the annual frequency induces persistence in the inflation series.
    Keywords: Aggregation, Inflation, Persistence
    Date: 2006
  21. By: Ekkehard Ernst (OECD); Peter Flaschel (University of Bielefeld); Christian Proano (University of Bielefeld, IMK at the Hans Boeckler Foundation); Willi Semmler (New School for Social Research, New York)
    Abstract: The authors of this paper formulate a disequilibrium AS-AD model based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates. The model consists of a wage and a price Phillips curves, a dynamic IS curve as well as a dynamic employment adjustment equation and a Taylor-rule-type interest rate law of motion. Through instrumental variables GMM system estimation with aggregate time series data for the U.S. and the euro area economies, the authors obtain structural parameter estimates which support the specification of their theoretical model and show the importance of the inflationary climate, as well as of the Blanchard-Katz error correction terms, and indirectly of income distribution, in the dynamics of wage and price inflation in the U.S. and the euro area economies.
    Keywords: AS-AD disequilibrium, wage and price Phillips curves, real wage adjustment
    JEL: E24 E31 E32
    Date: 2006–03
  22. By: Arjun Jayadev
    Abstract: This paper assesses class based preferences towards anti-inflationary and anti-unemployment policy. Using a consistent cross-country social survey, I find that the working class broadly defined, and those with lower occupational skill and status are more likely to prioritize combating unemployment rather than inflation. The result is robust to the inclusion of several plausible controls. The idea that the working class is less ‘relatively inflation averse’ is consistent with earlier predictions coming from large body of political economy research in the 1970s. The finding that inflation and unemployment aversion have a distinct class character has implications for current debates on the implications of macroeconomic policies such as inflation targeting..
    Keywords: Inflation; Unemployment; Social surveys, Radical Political Economy
  23. By: Alexandre Sokic
    Abstract: The aim of this paper is to clarify the failure of the Cagan model with perfect foresight and to draw new axes for investigation of monetary hyperinflation analysis. Firstly, the paper evaluates the relevancy of the Cagan ad-hoc model with perfect foresight as a theoretical framework for investigating hyperinflation processes. We show that deficits can never generate monetary hyperinflations, confirming the results of Buiter (1987). The only hyperinflationary processes that can occur are speculative hyperinflations. Secondly, the paper assesses consistency of hyperinflationary paths with the optimizing behaviour of representative agents within two perfect foresight inflationary finance frameworks modelling the use of money as a medium of exchange. In the context of a money-in-the-utility framework, the results obtained in the Cagan ad-hoc model with perfect foresight are founded and confirmed. This implies restricting the use of the latter model only to speculative hyperinflations analysis. In the context of a transaction costs based model, we show that deficits can generate monetary hyperinflations. Moreover, speculative hyperinflations remain possible. This result is in sharp contrast to that of the money-in-the-utility framework and implies a demand for money different from the Cagan form.
    JEL: E31 E41
    Date: 2007
  24. By: Pascale Duran-Vigneron
    Abstract: In this paper, we focus on the interactions between monetary and fiscal policies in a two-country model of a monetary union. This model has micro foundations in a framework of monopolistic competition and sticky prices. By simulations, we study the combination of optimal policies face to an asymmetric supply shock in a heterogeneous monetary union. Then we want to explore the contribution of fiscal policies in economic stabilisation according to the form of the asymmetry between the countries.
    Date: 2006
  25. By: Köhler, Matthias; Hommel, Judith; Grote, Matthias
    Abstract: The paper empirically investigates the monetary transmission mechanism in the Baltic States. The analysis of the transmission channels through which monetary policy shocks are transmitted is particularly important for the European Central Bank that makes monetary policy in an enlarged European Monetary Union. The paper focuses on the bank lending channel of monetary transmission due to the importance of banks in the financial system of the Baltic countries. The existence of this transmission channel is tested by using a panel structural approach that distinguishes banks according to size, capitalization, liquidity and ownership structure. The results indicate that a bank lending channel is present in the Baltic States and mainly caused by differences in liquidity.
    Keywords: Monetary Transmission, Bank Lending Channel, Transition Countries
    JEL: E43 E44 G15 G21
    Date: 2006
  26. By: Hernando Vargas
    Abstract: The Colombian economy experienced several shocks in the past ten years. The permanent fall of inflation, the adoption of inflation targeting (IT) and a financial crisis altered the transmission mechanism of monetary policy. Low inflation and IT reduced inflation persistence and contributed to anchor inflation expectations. The evidence is less conclusive with respect to the changes of the responsiveness of inflation to domestic conditions (output or marginal cost gaps). Increased competition may have encouraged a higher degree of price flexibility, but a more stable inflation environment may have raised the sensitivity of aggregate supply to inflation surprises. The short-run money-inflation relationship was broken in the presence of low inflation, exogenous shocks to the demand for money and a policy regime that stabilized short-run interest rates. The sensitivity of aggregate demand to the interest rate varied with the indebtedness of private agents and the credit channel was severed after the financial crisis. The IT regime implied a stabilization of short-run interest rates, making the monetary policy stance and objectives clearer to the public. However, interest rate pass-through appears to be incomplete and seems to respond to the varying importance of the credit channel and the general state of the economy.
    Keywords: Monetary Transmission Mechanisms, Inflation Targeting, Colombian Economy. Classification JEL:E42; E44; E52; E66.
  27. By: Zsolt Darvas (Corvinus University of Budapest); Balázs Varga (Corvinus University of Budapest)
    Abstract: This paper studies inflation persistence with time-varying-coefficient autoregressions in response to recently discovered structural breaks in historical inflation time series of the euro-area and the US. To this end, we compare the statistical properties of the well known ML estimation using the Kalman-filter and the less known Flexible Least Squares estimator by Monte Carlo simulation. We also suggest a procedure for selecting the weight for FLS based on an iterative Monte Carlo simulation technique calibrated to the time series in question. We apply the methods for the study of inflation persistence of the US, the euro-area and the new members of the EU
    Keywords: flexible least squares, inflation persistence, Kalman-filter, time-varying coefficient models
    JEL: C22 E31
    Date: 2007–02–02

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