nep-cba New Economics Papers
on Central Banking
Issue of 2007‒02‒24
forty-nine papers chosen by
Alexander Mihailov
University of Reading

  1. Current Account Deficits in Rich Countries By Olivier Blanchard
  2. On Current Account Surpluses and the Correction of Global Imbalances By Sebastian Edwards
  3. Current accounts in the euro area: An intertemporal approach By José M. Campa; Ángel Gavilán
  4. Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data By Boivin, Jean; Giannoni, Marc; Mihov, Ilian
  5. Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach By Smets, Frank; Wouters, Rafael
  6. Financial Integration, Financial Deepness and Global Imbalances By Enrique G. Mendoza; Vincenzo Quadrini; Jose-Victor Rios-Rull
  7. "Global Imbalances, Bretton Woods II, and Euroland's Role in All This" By Joerg Bibow
  8. US Imbalances: The Role of Technology and Policy By Bems, Rudolfs; Dedola, Luca; Smets, Frank
  9. "Dark Matter: Some Reflections on the Current Account Debate" By Tanweer Akram; Haider A. Khan
  10. On The Sustainability Of THE EU’s Current Account Deficits. By Mark J. Holmes; Jesus Otero; Theodore Panagiotidis
  11. Dollarization and Financial Integration By Arellano, Cristina; Heathcote, Jonathan
  12. On the Relationship between Fiscal Plans in the European Union: An Empirical Analysis Based on Real-Time Data By Beetsma, Roel; Giuliodori, Massimo
  13. Money in Monetary Policy Design under Uncertainty: The Two-Pillar Phillips Curve versus ECB-Style Cross-Checking By Beck, Günter; Wieland, Volker
  14. Currency Areas and International Assistance By Tim Worrall; Pierre M. Picard
  15. Transmitting shocks to the economy: The contribution of interest and exchange rates and the credit channel By Edda Claus; ris Claus
  16. Forming Priors for DSGE Models (and How It Affects the Assessment of Nominal Rigidities) By Del Negro, Marco; Schorfheide, Frank
  17. News Shocks and Optimal Monetary Policy By Guido Lorenzoni
  18. Pension systems, Intergenerational Risk Sharing and Inflation By Beetsma, Roel; Bovenberg, A Lans
  19. Random Walk Expectations and the Forward Discount Puzzle By Bacchetta, Philippe; van Wincoop, Eric
  20. International Capital Flows By Eric Van Wincoop; Cedric Tille
  21. Collective Risk Management in a Flight to Quality Episode By Ricardo J. Caballero; Arvind Krishnamurthy
  22. Monetary Policy and Open-Economy Uncertainty By Alessandro Flamini
  23. Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate By Anton Nakov
  24. "Fixed and Flexible Exchange Rates and Currency Sovereignty" By C. Sardoni; L. Randall Wray
  25. Money market uncertainty and retail interest rate fluctuations: A cross-country comparison By Burkhard Raunig; Johann Scharler
  26. Solving Endogeneity in Assessing the Efficacy of Foreign Exchange Market Interventions By Seok Gil Park
  27. Testing the Opportunistic Approach to Monetary Policy By Christopher Martin; Costas Milas
  28. Inflation Persistence and the Phillips Curve Revisited By Marika Karanassou; Dennis J. Snower
  29. Fiscal Policy Switching: Evidence from Japan, the U.S., and the U.K. By Arata Ito; Tsutomu Watanabe; Tomoyoshi Yabu
  30. Debt and the Effects of Fiscal Policy By Favero, Carlo A; Giavazzi, Francesco
  31. Central Bank intraday collateral policy and implications for tiering in rtgs payment systems By John P. Jackson; Mark J. Manning
  32. A note on the national contributions to euro area M3 By Mehrotra, Aaron
  33. Heterogeneity and learning in inflation expectation formation: an empirical assessment By Emiliano Santoro; Damjan Pfajfar
  34. Is Numérairology the Future of Monetary Economics? Unbundling Muméraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate By Buiter, Willem H
  35. Seigniorage By Willem H. Buiter
  36. Union Relative Wage Effects, New Evidence, and a Survey of Their Implications for Wage Inflation By Orley Ashenfelter
  37. Market Power and Wage Inflation. By Daniel Hamermesh
  38. Trade Unions and the Rate of Change of Money Wages in the U.S. By Orley Ashenfelter; George Johnson; John Pencavel
  39. Hitting and Hoping? Meeting the Exchange Rate and Inflation Criteria During a Period of Nominal Convergence By John Lewis
  40. Intertemporal Investment Strategies under Inflation Risk By Carl Chiarella; Chih-Ying Hsiao; Willi Semmler
  41. The Returns to Currency Speculation in Emerging Markets By Craig Burnside; Martin Eichenbaum; Sergio Rebelo
  42. Country Size and the Transfer Effect By Vahagn Galstyan
  43. Forecasting with Panel Data By Badi H. Baltagi
  44. Pricing to market of Italian exporting firms By Roberto Basile; Sergio de Nardis; Alessandro Girardi
  45. BEMOD: a DSGE model for the Spanish economy and the rest of the Euro area By Javier Andrés; Pablo Burriel; Ángel Estrada
  46. "Expensive Living: The Greek Experience under the Euro" By Taun N. Toay; Theodore Pelagidis
  47. Purchasing Power Parity: The Irish Experience Re-visited By Derek Bond; Michael J. Harrison; Edward J. O'Brien
  48. Monetary policy through the “credit-cost channel”. Italy and Germany By Giuliana Passamani; Roberto Tamborini
  49. Monetary Policy and Macroeconomic Stability in Latin America: The Cases of Brazil, Chile, Colombia and Mexico By Luiz de Mello; Diego Moccero

  1. By: Olivier Blanchard
    Abstract: Current account imbalances have steadily increased in rich countries over the last 20 years. While the U.S. current account deficit dominates the numbers and the news, other countries, especially within the Euro area, are also running large deficits. These deficits are different from the Latin American deficits of the early 1980s, or the Mexican deficit of the early 1990s. They involve rich countries; they reflect mostly private saving and investment decisions, and fiscal deficits often play a marginal role; and the deficits are financed mostly through equity, FDI, and own-currency bonds rather than through bank lending. Yet, there appears a widely shared worry that these deficits are too large, and government intervention is required. My purpose, in this lecture, is to examine the logic of this argument. I ask the following question: Assume that deficits reflect private saving and investment decisions. Assume also that people and firms have rational expectations. Should the government intervene, and, if so, how? To answer the question, I construct a simple benchmark. In the benchmark, the outcome is first best and there is no need nor justification for government intervention. I then introduce simple distortions in either goods, labor, or financial markets, and characterize the equilibrium in each case. I derive optimal policy and the implications for the current account. I show that optimal policy may or may not lead to smaller current account deficits. I see the model and the extensions very much as a first pass. Sharper conclusions require a better understanding of the exact nature and the extent of distortions, and we do not have it. Such understanding is needed however to improve the quality of the current debate.
    JEL: E62 F41
    Date: 2007–02
  2. By: Sebastian Edwards
    Abstract: In this paper I analyze the nature of external adjustments in current account surplus countries. I ask whether a realignment of world growth rates -- with Japan and Europe growing faster, and the U.S. growing more slowly -- is likely to solve the current situation of global imbalances. The main findings may be summarized as follows: (a) There is an important asymmetry between current account deficits and surpluses. (b) Large surpluses exhibit little persistence through time. (c) Large and abrupt reductions in surpluses are a rare phenomenon. (d) A decline in GDP growth, relative to long term trend, of 1 percentage point results in an improvement in the current account balance -- higher surplus or lower deficit -- of one quarter of a percentage point of GDP. Taken together, these results indicate that a realignment of global growth -- with Japan and the Euro Zone growing faster, and the U.S. moderating its growth -- would only make a modest contribution towards the resolution of global imbalances. This means that, even if there is a realignment of global growth, the world is likely to need significant exchange rate movements. This analysis also suggests that a reduction in China's (very) large surplus will be needed if global imbalances are to be resolved.
    JEL: F02 F31 F32
    Date: 2007–02
  3. By: José M. Campa (IESE Business School); Ángel Gavilán (Banco de España)
    Abstract: This paper uses an intertemporal model of the current account to evaluate the fluctuations in current account balances experienced by Euro area countries over the last three decades. In the model current account balances are used to smooth consumption and they are driven by expectations about future income and relative prices. This simple model is not rejected for six (Belgium, France, Italy, Netherlands, Portugal, and Spain) of the ten Euro area countries examined, although the model tends to underestimate their current account volatility. The analysis also shows that the relative contributions to current account balances of future output and relative prices differ across countries. Expectations of future growth increased in all Southern European countries at the creation of the Euro but they had considerably diverged by 2005. While in Portugal these expectations are now below its historical mean, in Spain they are at a historical high.
    Keywords: intertemporal current account, financial integration, current account balances, euro area
    JEL: F32 F36
    Date: 2006–12
  4. By: Boivin, Jean; Giannoni, Marc; Mihov, Ilian
    Abstract: This paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor-augmented vector autoregression estimated on a large data set. On the basis of this estimation, we establish eight facts: (1) Macroeconomic shocks explain only about 15% of sectoral inflation fluctuations; (2) The persistence of sectoral inflation is driven by macroeconomic factors; (3) While disaggregated prices respond quickly to sector-specific shocks, their responses to aggregate shocks are small on impact and larger thereafter; (4) Most prices respond with a significant delay to identified monetary policy shocks, and show little evidence of a 'price puzzle'' contrary to existing studies based on traditional VARs; (5) Categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least; (6) The observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power; (7) Prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks; (8) The sector-specific components of prices and quantities move in opposite directions.
    Keywords: factor-augmented VAR; monetary policy; price stickiness
    JEL: C3 D2 E31 E4 E5
    Date: 2007–02
  5. By: Smets, Frank; Wouters, Rafael
    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: business cycle; DSGE models; monetary policy
    JEL: E4 E5
    Date: 2007–02
  6. By: Enrique G. Mendoza; Vincenzo Quadrini; Jose-Victor Rios-Rull
    Abstract: Large and persistent global financial imbalances need not be the harbinger of a world financial crash. Instead, we show that these imbalances can be the outcome of financial integration when countries differ in financial markets deepness. In particular, countries with more advanced financial markets accumulate foreign liabilities in a gradual, long-lasting process. Differences in financial deepness also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of non-diversifiable equity and FDI. Abstracting from the potential impact of globalization on financial development, liberalization leads to sizable welfare gains for the more financially-developed countries and losses for the others. Three empirical observations motivate our analysis: (1)financial deepness varies widely even amongst industrial countries, with the United States ranking at the top; (2) the secular decline in the U.S. net foreign asset position started in the early 1980s, together with a gradual process of international capital markets liberalization; (3) net exports and current account balances are negatively correlated with indicators of financial development.
    JEL: E21 F3 F32 F41
    Date: 2007–02
  7. By: Joerg Bibow
    Abstract: Approaching the issue of mounting global imbalances from the perspective of the ÒBretton Woods II hypothesis,Ó this paper argues that the popular preoccupation with ChinaÕs supposed export-led development strategy is misplaced. It also suggests, similar to JapanÕs depression, subdued growth in Euroland for most of the time since the Maastricht Treaty has been of first-order importance in these developments. Germany is identified as being at the heart of the European trouble. Globally, there is an ongoing clash between two approches to macroeconomic policy making: a highly dogmatic German approach, and a very pragmatic Anglo-Saxon one. The low levels of interest at which global demand imbalances have been smoothed out financially reflect deficient global demand in an environment of vast supply-side opportunities. After contributing greatly to the build-up of imbalances, Euroland is unlikely to play any constructive part in their unwinding. Hampered by an exchange-rate policy vacuum, a small-country mindset, and soaring intra-area imbalances, Euroland is also illpositioned to cope with fading external growth stimuli.
    Date: 2006–12
  8. By: Bems, Rudolfs; Dedola, Luca; Smets, Frank
    Abstract: This paper investigates the role of three likely factors in driving the steady deterioration of the US external balance: US technology developments, changes in the US government fiscal position and the Fed’s monetary policy. Estimating several Vector Autoregressions on US data over the period 1982:2 to 2005:4 we identify five structural shocks: a multi-factor productivity shock; an investment-specific technology shock; a monetary policy shock; and a fiscal revenue and spending shock. Together these shocks can account for the deterioration and subsequent reversal of the trade balance in the 1980s. Productivity improvements and fiscal and monetary policy easing also play an important role in the increase of the external deficit since 2000, but these structural shocks can not explain why the trade balance deteriorated in the second half of the 1990s.
    Keywords: global imbalances; open economy; VARs
    JEL: F3 F4
    Date: 2007–02
  9. By: Tanweer Akram (ING Investment Management); Haider A. Khan (GSIS , University of Denver)
    Abstract: The United States has a large and persistent current account deficit. Yet, U.S.'s income receipts from the rest of the world have exceeded its income payments to the rest of the world for many years. This appears to be paradoxical because for a country with a negative net foreign assets position, such as the U.S., international income payments to the rest of the world are likely to exceed its international income receipts. Hausmann and Sturzenegger (2005) offer an explanation of this apparent paradox. They argue that U.S. current account statistics do not properly measure U.S.'s net foreign assets position and that its actual net foreign assets position is measurably better than the officially estimated position primarily due to the existence of intangible corporate capital invested overseas. In their view the debate about the sustainability of the U.S. current account deficit and the negative net foreign assets position is moot because these deficits and debts are either non-existent or fairly small. This paper critically evaluates Hausmann et al's claims and examines the implications of their hypothesis. It offers, within an analytical framework, alternative explanations that are more consistent with the stylized facts.
    Date: 2007–02
  10. By: Mark J. Holmes (Dept of Economics, Waikato University); Jesus Otero (Facultad de Economia, Universidad del Rosario); Theodore Panagiotidis (Department of Economics, Loughborough University)
    Abstract: In this paper, we test for the stationarity of EU current account deficits. Our testing strategy addresses two key concerns with regard to unit root panel data testing, namely (i) the identification of which members-states are stationary, and (ii) the presence of cross-sectional dependence. For this purpose, we employ a moving block bootstrap approach to the Hadri (2000) test. While there is evidence that current account sustainability applies to panels comprising EU members, this is not the case when non-EU economies are considered.
    Keywords: Heterogeneous dynamic panels, current account sustainability, mean reversion, panel stationarity test.
    JEL: C33 F32 F41
    Date: 2007–02
  11. By: Arellano, Cristina; Heathcote, Jonathan
    Abstract: How does a country’s choice of exchange rate regime impact its ability to borrow from abroad? We build a small open economy model in which the government can potentially respond to shocks via domestic monetary policy and by international borrowing. We assume that debt repayment must be incentive compatible when the default punishment is equivalent to permanent exclusion from debt markets. We compare a floating regime to full dollarization. We find that dollarization is potentially beneficial, even though it means the loss of the monetary instrument, precisely because this loss can strengthen incentives to maintain access to debt markets. Given stronger repayment incentives, more borrowing can be supported, and thus dollarization can increase international financial integration. This prediction of theory is consistent with the experiences of El Salvador and Ecuador, which recently dollarized, as well as with that of highly-indebted countries like Italy which adopted the Euro as part of Economic and Monetary Union: in each case, around the time of regime change, spreads on foreign currency government debt declined substantially.
    Keywords: dollarization; sovereign debt
    JEL: F33 F34 F36
    Date: 2007–02
  12. By: Beetsma, Roel; Giuliodori, Massimo
    Abstract: We investigate the interdependence of fiscal policies, and in particular deficits, in the European Union using an empirical analysis based on real-time fiscal data. There are many potential reasons why fiscal policies could be interdependent, such as direct externalities due to cross-border public investments, yardstick competition, tax competition and peer pressure among governments. The advantage of using real-time data is that they better reflect the policymakers’ intentions than revised data. Real-time data allow us to investigate how available information is mapped into policymakers’ plans, while revised data are generally 'polluted' with ad hoc reactions to unexpected developments that have taken place after the plan was made. Controlling for a large set of relevant determinants of primary cyclically adjusted deficits, we find indeed evidence of fiscal policy interdependence. However, the interdependence is rather asymmetrically distributed: the fiscal stances of the large countries affect the fiscal stances of the small countries, but not vice versa.
    Keywords: European Union; fiscal policy interdependence; monetary union; primary cyclically adjusted deficit; real-time data
    JEL: E62 H60
    Date: 2007–02
  13. By: Beck, Günter; Wieland, Volker
    Abstract: The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. In this paper, we explore possible justifications. The case against including money in the central bank's interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. Of course, if one allows for a direct effect of money on output or inflation as in the empirical 'two-pillar' Phillips curves estimated in some recent contributions, it would be optimal to include a measure of (long-run) money growth in the rule. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. Such misperceptions cause a bias in policy setting. We find that cross-checking and changing interest rates in response to sustained deviations of long-run money growth helps the central bank to overcome this bias. Our argument in favour of ECB-style cross-checking does not require direct effects of money on output or inflation.
    Keywords: European Central Bank; monetary policy; monetary policy under uncertainty; money; Phillips curve; quantity theory
    JEL: E32 E41 E43 E52 E58
    Date: 2007–02
  14. By: Tim Worrall (Department of Economics Keele University); Pierre M. Picard (University of Manchester, School of Social Sciences, Department of Economics)
    Abstract: This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risk-sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the previous result.
    Keywords: Monetary Union; Currency Areas; Fiscal Federalism; Limited Commitment; Mutual Insurance
    JEL: F12 F15 F31 F33
    Date: 2007–01
  15. By: Edda Claus; ris Claus
    Abstract: Understanding the transmission channels of shocks is critical for successful policy response. This paper develops a dynamic general equilibrium model to assess the relative importance of the interest rate, the exchange rate and the credit channels in transmitting shocks in an open economy. The relative contribution of each channel is determined by comparing the impulse responses when the relevant channel is suppressed with the impulse responses when all three channels are operating. The results suggest that all three channels contribute to business cycle fluctuations and the transmission of shocks to the economy. But the magnitude of the impact of the interest rate channel crucially depends on the inflation process and the structure of the economy.
    Keywords: Transmission channels, open economy, general equilibrium model
    Date: 2007–02–19
  16. By: Del Negro, Marco; Schorfheide, Frank
    Abstract: In Bayesian analysis of dynamic stochastic general equilibrium (DSGE) prior distributions for some of the taste-and-technology parameters can be obtained from microeconometric or pre-sample evidence, but it is difficult to elicit priors for the parameters that govern the law of motion of unobservable exogenous processes. Moreover, since it is challenging to formulate beliefs about the correlation of parameters, most researchers assume that all model parameters are independent of each other. We provide a simple method of constructing prior distributions for (a subset of) DSGE model parameters from beliefs about the moments of the endogenous variables. We use our approach to investigate the importance of nominal rigidities and show how the specification of prior distributions affects our assessment of the relative importance of different frictions.
    Keywords: Bayesian analysis; DSGE models; model comparisons; nominal rigidities; prior elicitation
    JEL: C32 E3
    Date: 2007–02
  17. By: Guido Lorenzoni
    Abstract: This paper studies monetary policy in a model where output fluctuations are caused by shocks to public beliefs on the economy's fundamentals. I ask whether monetary policy can offset the effect of these shocks and whether this offsetting is socially desirable. I consider an environment with dispersed information and two aggregate shocks: a productivity shock and a "news shock" which affects aggregate beliefs. Neither the central bank nor individual agents can distinguish the two shocks when they hit the economy. The main results are: (1) despite the lack of superior information an appropriate monetary policy rule can change the economy's response to the two shocks; (2) monetary policy can achieve full aggregate stabilization, that is, it can induce a path for aggregate output that is identical to that which would arise under full information; (3) however, full aggregate stabilization is typically not optimal. The fact that monetary policy can tackle the two shocks separately is due to two crucial ingredients. First, agents are forward looking. Second, current fundamental shocks will become public information in the future and the central bank will be able to respond to them at that time. By announcing its response to future information, the central bank can influence the expected real interest rate faced by agents with different beliefs and, thus, induce an optimal use of the information dispersed in the economy.
    JEL: D83 E32 E52
    Date: 2007–02
  18. By: Beetsma, Roel; Bovenberg, A Lans
    Abstract: We investigate intergenerational risk sharing in two-pillar pension systems with a pay-as-you-go pillar and a funded pillar. We consider shocks in productivity, depreciation of capital and inflation. The funded pension pillar can be either defined contribution or defined benefit, with benefits defined in real or nominal terms or indexed to wages. Optimal intergenerational risk sharing can be achieved only in the presence of a defined benefit pension system with appropriate restrictions on investment policy of the funded pillar. In this way, both generations have similar exposures to financial and human capital risks.
    Keywords: (funded) pensions; fiscal policy; nominal assets; overlapping generations; risk sharing
    JEL: E21 H55 J18
    Date: 2007–02
  19. By: Bacchetta, Philippe; van Wincoop, Eric
    Abstract: Two well-known, but seemingly contradictory, features of exchange rates are that they are close to a random walk while at the same time exchange rate changes are predictable by interest rate differentials. In this paper we investigate whether these two features of the data may in fact be related. In particular, we ask whether the predictability of exchange rates by interest differentials naturally results when participants in the FX market adopt random walk expectations. We find that random walk expectations can explain the forward premium puzzle, but only if FX portfolio positions are revised infrequently. In contrast, with frequent portfolio adjustment and random walk expectations, we find that high interest rate currencies depreciate much more than what UIP would predict.
    Keywords: excess return; incomplete information; predictability
    JEL: E4 F3 G1
    Date: 2007–02
  20. By: Eric Van Wincoop; Cedric Tille
    Abstract: The sharp increase in both gross and net capital flows over the past two decades has led to a renewed interest in their determinants. Most existing theories of international capital flows are in the context of models with only one asset, which only have implications for net capital flows, not gross flows. Moreover, there is no role for capital flows as a result of changing expected returns and risk-characteristics of assets as there is no portfolio choice. In this paper we develop a method for solving dynamic stochastic general equilibrium open-economy models with portfolio choice. We show why standard first and second-order solution methods no longer work in the presence of portfolio choice, and extend them giving special treatment to the optimality conditions for portfolio choice. We apply the solution method to a particular two-country, two-good, two-asset model and show that it leads to a much richer understanding of both gross and net capital flows. The approach highlights time-varying portfolio shares, resulting from time-varying expected returns and risk characteristics of the assets, as a potential key source of international capital flows.
    JEL: F32 F36 F41
    Date: 2007–01
  21. By: Ricardo J. Caballero; Arvind Krishnamurthy
    Abstract: We present a model of optimal intervention in a flight to quality episode. The reason for intervention stems from a collective bias in agents' expectations. Agents in the model make risk management decisions with incomplete knowledge. They understand their own shocks, but are uncertain of how correlated their shocks are with systemwide shocks, treating the latter uncertainty as Knightian. We show that when aggregate liquidity is low, an increase in uncertainty leads agents to a series of protective actions -- decreasing risk exposures, hoarding liquidity, locking-up capital -- that reflect a flight to quality. However, the conservative actions of agents leave the aggregate economy over-exposed to negative shocks. Each agent covers himself against his own worst-case scenario, but the scenario that the collective of agents are guarding against is impossible. A lender of last resort, even if less knowledgeable than private agents about individual shocks, does not suffer from this collective bias and finds that pledging intervention in extreme events is valuable. The intervention unlocks private capital markets.
    JEL: E30 E44 E5 F34 G1 G21 G22 G28
    Date: 2007–02
  22. By: Alessandro Flamini (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: This paper focuses on optimal monetary policy in presence of uncertainty of the structural parameters that characterize an open economy. The framework is a Markov jump-linear-quadratic new Keynesian model, where the central bank searches for the optimal policy in a non certainty equivalence environment. Comparing CPI and domestic inflation targeting, this paper shows that the latter implies considerably less variability in the central bank distribution forecast of the economic dynamics. In particular, the variability of the interest rates distribution forecast is much larger with CPI inflation targeting. The paper also shows that domestic inflation targeting is much less sensitive than CPI inflation targeting to interest rate smoothing and cost-push shocks.
    Keywords: Inflation Targeting; uncertainty; Markov jump linear quadratic system; non-certainty equivalence; small open-economy; optimal monetary policy; domestic and CPI inflation.
    JEL: E52 E58 F41
    Date: 2006–12
  23. By: Anton Nakov (Banco de España; Universitat Pompeu Fabra)
    Abstract: Recent treatments of the issue of a zero floor on nominal interest rates have been subject to some important methodological limitations. These include the assumption of perfect foresight or the introduction of the zero lower bound as an initial condition or a constraint on the variance of the interest rate, rather than an occasionally binding non-negativity constraint. This paper addresses these issues offering a global solution to a standard dynamic stochastic sticky price model with an explicit occasionally binding non-negativity constraint on the nominal interest rate. It turns out that the dynamics and sometimes the unconditional means of the nominal rate, inflation and the output gap are strongly affected by uncertainty in the presence of the zero lower bound. Commitment to the optimal rule reduces unconditional welfare losses to around one-tenth of those achievable under discretionary policy, while constant price level targeting delivers losses which are only 60% larger than under the optimal rule. Even though the unconditional performance of simple instrument rules is almost unaffected by the presence of the zero lower bound, conditional on a strong deflationary shock simple instrument rules perform substantially worse than the optimal policy.
    Keywords: monetary policy, zero floor, interest rate
    JEL: E31 E32 E37 E52
    Date: 2006–12
  24. By: C. Sardoni; L. Randall Wray
    Abstract: This paper provides an analysis of KeynesÕs original ÒBancorÓ proposal as well as more recent proposals for fixed exchange rates. We argue that these schemes fail to pay due attention to the importance of capital movements in todayÕs economy, and that they implicitly adopt an unsatisfactory notion of money as a mere medium of exchange. We develop an alternative approach to money based on the notion of currency sovereignty. As currency sovereignty implies the ability of a country to implement monetary and fiscal policies independently, we argue that it is necessarily contingent on a countryÕs adoption of floating exchange rates. As illustrations of the problems created for domestic policy by the adoption of fixed exchange rates, we briefly look at the recent Argentinean and European experiences. We take these as telling examples of the high costs of giving up sovereignty (Argentina and the European countries of the EMU) and the benefits of regaining it (Argentina). A regime of more flexible exchange rates would have likely produced a more viable and dynamic European economic system, one in which each individual country could have adopted and implemented a mix of fiscal and monetary policies more suitable to its specific economic, social, and political context. Alternatively, the euro area will have to create a fiscal authority on par with that of the U.S. Treasury, which means surrendering national authority to a central governmentÑan unlikely possibility in todayÕs political climate. We conclude by pointing out some of the advantages of floating exchange rates, but also stress that such a regime should not be regarded as a sort of panacea. It is a necessary condition if a country is to retain its sovereignty and the power to implement autonomous economic policies, but it is not a sufficient condition for guaranteeing that such policies actually be aimed at providing higher levels of employment and welfare.
    Date: 2007–01
  25. By: Burkhard Raunig (Oesterreichische Nationalbank, Economic Studies Division, Vienna, Austria); Johann Scharler (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: This paper analyzes empirically the relationship between money market uncertainty and unexpected deviations in retail interest rates in a sample of 10 OECD countries. We find that, with the exception of the US, money market uncertainty has only a modest impact on the conditional volatility of retail interest rates. Even for the US we find that the effects of money market uncertainty are spread out over time. Our results are consistent with the hypothesis that banking relationships include implicit insurance arrangements and thereby reduce uncertainty.
    Keywords: Interest Rate Pass-Through; Relationship Banking; Conditional Volatility
    JEL: E43 G21
    Date: 2007–02
  26. By: Seok Gil Park (Indiana University)
    Abstract: Sterilized foreign exchange market interventions have been suspected of being inefficient by many empirical studies, but they are plagued by endogeneity problems. To solve the problems, this paper identifies a system that depicts interactions between the interventions and the foreign exchange rate. The model shows that the interventions are effective when the interventions alter the market participants' conditional expectations of the rate without decreasing the conditional variances. This paper estimates Markov-switching type policy reaction functions by conditional MLE, and market demand/supply curves by IV estimation with generated regressors. The empirical results verify that the interventions of the Bank of Korea from 2001 to 2002 were indeed effective.
    Keywords: Sterilized intervention, Endogeneity, Markov-switching policy function
    JEL: F31 E58 G15
    Date: 2007–02
  27. By: Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: The Opportunistic Approach to Monetary Policy is an influential but untested model of optimal monetary policy. We provide the first tests of the model, using US data from 1983Q1-2004Q1. Our results support the Opportunistic Approach. We find that policymakers respond to the gap between inflation and an intermediate target that reflects the recent history of inflation. We find that there is no response of interest rates to inflation when inflation is within 1intermediate target.
    Keywords: Monetary policy, zone of discretion, intermediate inflation target.
    JEL: C51 C52 E52 E58
    Date: 2007–01
  28. By: Marika Karanassou (Queen Mary, University of London and IZA); Dennis J. Snower (Kiel Institute for World Economics, CEPR and IZA)
    Abstract: A major criticism against staggered nominal contracts is that they give rise to the so called "persistency puzzle" - although they generate price inertia, they cannot account for the stylised fact of inflation persistence. It is thus commonly asserted that, in the context of the new Phillips curve (NPC), inflation is a jump variable. We argue that this "persistency puzzle" is highly misleading, relying on the exogeneity of the forcing variable (e.g. output gap, marginal costs, unemployment rate) and the assumption of a zero discount rate. We show that when the discount rate is positive in a general equilibrium setting (in which real variables not only affect inflation, but are also influenced by it), standard wage-price staggering models can generate both substantial inflation persistence and a nonzero inflation-unemployment tradeoff in the long-run. This is due to frictional growth, a phenomenon that captures the interplay of nominal staggering and permanent monetary changes. We also show that the cumulative amount of inflation undershooting is associated with a downward-sloping NPC in the long-run.
    Keywords: inflation dynamics, persistence, wage-price staggering, new Phillips curve, monetary policy, frictional growth
    JEL: E31 E32 E42 E63
    Date: 2007–02
  29. By: Arata Ito (Graduate Student, Graduate School of Economics, Hitotsubashi University (E-mail:; Tsutomu Watanabe (Institute of Economic Research and Research Center for Price Dynamics, Hitotsubashi University (E-mail: tsutomu.w@srv; Tomoyoshi Yabu (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper estimates fiscal policy feedback rules in Japan, the United States, and the United Kingdom for more than a century, allowing for stochastic regime changes. Estimating a Markov-switching model by the Bayesian method, we find the following: First, the Japanese data clearly reject the view that the fiscal policy regime is fixed, i.e., that the Japanese government adopted a Ricardian or a non-Ricardian regime throughout the entire period. Instead, our results indicate a stochastic switch of the debt-GDP ratio between stationary and nonstationary processes, and thus a stochastic switch between Ricardian and non-Ricardian regimes. Second, our simulation exercises using the estimated parameters and transition probabilities do not necessarily reject the possibility that the debt-GDP ratio may be nonstationary even in the long run (i.e., globally nonstationary). Third, the Japanese result is in sharp contrast with the results for the U.S. and the U.K. which indicate that in these countries the government's fiscal behavior is consistently characterized by Ricardian policy.
    Keywords: Fiscal Policy Rule, Fiscal Discipline, Markov-Switching Regression
    JEL: E62
    Date: 2007–02
  30. By: Favero, Carlo A; Giavazzi, Francesco
    Abstract: Empirical investigations of the effects of fiscal policy shocks share a common weakness: taxes, government spending and interest rates are assumed to respond to various macroeconomic variables but not to the level of the public debt; moreover the impact of fiscal shocks on the dynamics of the debt-to-GDP ratio is not tracked. We analyze the effects of fiscal shocks allowing for a direct response of taxes, government spending and the cost of debt service to the level of the public debt. We show that omitting such a feedback can result in incorrect estimates of the dynamic effects of fiscal shocks. In particular the absence of an effect of fiscal shocks on long-term interest rates - a frequent finding in research based on VAR’s that omit a debt feedback - can be explained by their mis-specification, especially over samples in which the debt dynamics appears to be unstable. Using data for the U.S. economy and the identification assumption proposed by Blanchard and Perotti (2002) we reconsider the effects of fiscal policy shocks correcting for these shortcomings.
    Keywords: fiscal policy; government budget constraint; public debt
    JEL: E62 H60
    Date: 2007–02
  31. By: John P. Jackson; Mark J. Manning
    Abstract: In this paper we present a model of a Real-Time Gross Settlement (RTGS) payment system with tiered membership where settlement is facilitated by intraday credit extensions from the central bank. RTGS systems process and settle payment instructions individually in real time, ensuring intraday finality. Furthermore, central banks typically provide the settlement accounts across which payments are processed; hence, settlement is typically effected in central bank money, thereby eliminating counterparty risks between members once settlement has taken place. The model allows us to examine the key factors that influence both an agent.s decision over whether to participate directly in an RTGS payment system, and a central bank.s decision as to whether to require collateralisation of intraday credit extensions to payment system participants.
    Date: 2007–01
  32. By: Mehrotra, Aaron (Bank of Finland, BOFIT)
    Abstract: We examine developments in national contributions to euro area M3 for a sample of nine euro area countries during 1999–2005. We investigate the co-movements of national contributions with euro area M3 and discuss possible reasons for divergencies in growth rates of national contributions. Finally, we evaluate the information content of national contributions to M3 using formal tests of causality between monetary aggregates, consumer prices and equity prices.
    Keywords: national contribution; M3; euro area
    JEL: E31 E51
    Date: 2007–01–19
  33. By: Emiliano Santoro; Damjan Pfajfar
    Abstract: Relying on Michigan Survey's monthly micro data on inflation expectations we try to determine the main features - in terms of sources and degree of heterogeneity - of inflation expectation formation over different phases of the business cycle. Different learning rules have been applied to the data, in order to test whether agents are learning and whether their expectations are converging towards perfect foresight. Results suggest that behaviour of agents in the right hand side of the distribution is more associated with learning dynamics. Tests for "static" and "dynamic" versions of sticky information are also conducted. Only agents in the middle of the distribution are regularly updating their information sets. Evidence of rational inattention has been found for agents comprised in the upper end of the distribution. We identify three regions of the overall distribution corresponding to different expectation formation processes, which display a heterogeneous response to main macroeconomic indicators : a static or highly autoregressive (LHS) group, a "nearly" rational group (middle), and a group of agents (RHS) behaving in accordance to adaptive learning and sticky information. The latter, generally speaking, are too "pessimistic" as they overreact to macroeconomic fluctuations.
    Keywords: Heterogeneous Expectations, Adaptive Learning, Sticky Information, Survey Expectations
    JEL: E31 C53 D80
    Date: 2006
  34. By: Buiter, Willem H
    Abstract: The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numéraire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numéraire and medium of exchange/means of payment functions of money. The monetary authorities manage the exchange rate between the numéraire ('sterling') and the means of payment ('drachma'). The short nominal interest rate on sterling bonds can then be used to target stability for the sterling price level. The paper puts question marks behind two key bits of conventional wisdom in contemporary monetary economics. The first is the assumption that the monetary authorities define and determine the numéraire used in private transactions. The second is the proposition that price stability in terms of that numéraire is the appropriate objective of monetary policy. The paper also discusses the merits of the next step following the decoupling of the numéraire from the currency: doing away with currency altogether - the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominal rigidities, monetary economics needs to devote more attention to numérairology - the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.
    Keywords: cashless economy; optimal inflation; price level determinacy; zero lower bound
    JEL: E3 E4 E5 E6
    Date: 2007–02
  35. By: Willem H. Buiter
    Abstract: Governments through the ages have appropriated real resources through the monopoly of the 'coinage'. In modern fiat money economies, the monopoly of the issue of legal tender is generally assigned to an agency of the state, the Central Bank, which may have varying degrees of operational and target independence from the government of the day. In this paper I analyse four different but related concepts, each of which highlights some aspect of the way in which the state acquires command over real resources through its ability to issue fiat money. They are (1) seigniorage (the change in the monetary base), (2) Central Bank revenue (the interest bill saved by the authorities on the outstanding stock of base money liabilities), (3) the inflation tax (the reduction in the real value of the stock of base money due to inflation and (4) the operating profits of the central bank, or the taxes paid by the Central Bank to the Treasury. To understand the relationship between these four concepts, an explicitly intertemporal approach is required, which focuses on the present discounted value of the current and future resource transfers between the private sector and the state. Furthermore, when the Central Bank is operationally independent, it is essential to decompose the familiar consolidated 'government budget constraint' and consolidated 'government intertemporal budget constraint' into the separate accounts and budget constraints of the Central Bank and the Treasury. Only by doing this can we appreciate the financial constraints on the Central Bank's ability to pursue and achieve an inflation target, and the importance of cooperation and coordination between the Treasury and the Central Bank when faced with financial sector crises involving the need for long-term recapitalisation or when confronted with the need to mimick Milton Friedman's helicopter drop of money in an economy faced with a liquidity trap.
    JEL: E4 E5 E6 H6
    Date: 2007–02
  36. By: Orley Ashenfelter
  37. By: Daniel Hamermesh
  38. By: Orley Ashenfelter; George Johnson; John Pencavel
  39. By: John Lewis
    Abstract: This paper analyses the problem faced by CEECs wishing to join the Euro who must hit both an inflation and exchange rate criterion during a period of nominal convergence. This process requires either an inflation differential, an appreciating nominal exchange rate, or a combination of the two, which makes it difficult to simultaneously satisfy the exchange rate and inflation criteria. The authorities can use their monetary policy to hit one criterion, but must essentially just "hope" to satisfy the other one. The paper quantifies the likely size and speed of these convergence effects, their impact on inflation and exchange rates, and their consequences for the simultaneous compliance with both criteria under an inflation targeting setup and under a fixed exchange rate regime. The key result is that under an inflation targeting regime, the nominal appreciation implied by convergence is not big enough to threaten a breach of the exchange rate criterion, but for countries with fixed exchange rates, inflation is likely to exceed the reference value. This result is robust to plausible changes in the assumed convergence scenario.
    Keywords: Central and Eastern Europe; Nominal Convergence; Euro Adoption
    JEL: E52 E61 E31
    Date: 2007–01
  40. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Chih-Ying Hsiao (School of Finance and Economics, University of Technology, Sydney); Willi Semmler (University of Bielefeld)
    Abstract: This paper studies intertemporal investment strategies under inflation risk by extending the intertemporal framework of Merton (1973) to include a stochastic price index. The stochastic price index gives rise to a two-tier evaluation system: agents maximize their utility of consumption in real terms while investment activities and wealth evolution are evaluated in nominal terms. We include inflation-indexed bonds in the agents? investment opportunity set and study their effectiveness in hedging against inflation risk. A new multifactor term structure model is developed to price both inflation-indexed bonds and nominal bonds, and the optimal rules for intertemporal portfolio allocation, both with and without inflation-indexed bonds are obtained in closed form. The theoretical model is estimated using data of US bond yield, both real and nominal, and S&P 500 index. The estimation results are employed to construct the optimal investment strategy for an actual real market situation. Wachter (2003) pointed out that without inflation risk, the most risk averse agents (with an infinite risk aversion parameter) will invest all their wealth in the long term nominal bond maturing at the end of the investment horizon. We extend this result to the case with inflation risk and conclude that the most risk averse agents will now invest all their wealth in the inflation-indexed bond maturing at the end of the investment horizon.
    Keywords: inflation-indexed bonds; intertemporal asset allocation; inflationary expectations
    Date: 2007–01–01
  41. By: Craig Burnside; Martin Eichenbaum; Sergio Rebelo
    Abstract: The carry trade strategy involves selling forward currencies that are at a forward premium and buying forward currencies that are at a forward discount. We compare the payoffs to the carry trade applied to two different portfolios. The first portfolio consists exclusively of developed country currencies. The second portfolio includes the currencies of both developed countries and emerging markets. Our main empirical findings are as follows. First, including emerging market currencies in our portfolio substantially increases the Sharpe ratio associated with the carry trade. Second, bid-ask spreads are two to four times larger in emerging markets than in developed countries. Third and most dramatically, the payoffs to the carry trade for both portfolios are uncorrelated with returns to the U.S. stock market.
    JEL: F3 F41
    Date: 2007–02
  42. By: Vahagn Galstyan
    Abstract: This paper studies how country size affects the role of the exchange rate in external adjustment. First, the impact of country size on the sensitivity of relative prices to external imbalances is explored in a standard two-country neoclassical model. Second, at the empirical level, a significant effect of external imbalances on relative prices is found. In particular, a trade surplus is associated with a deteriorating terms of trade and a declining relative price of non-traded goods, feeding into a depreciation of the real exchange rate. Estimation for G3 and non-G3 sub-samples reveals a systematic pattern in the sensitivity of relative prices to external imbalances, with the transfer effect stronger in larger countries.
    Keywords: External imbalances; Relative prices; Transfer effect; Country size
    Date: 2007–02–19
  43. By: Badi H. Baltagi (Center for Policy Research, Maxwell School, Syracuse University, Syracuse, NY 13244-1020)
    Abstract: This paper gives a brief survey of forecastiang with panel data. Starting with a simple error component regression model and surveying best linear unbiased prediction under various assumptions of the disturbance term. This includes various ARMA models as well as spatial autoregressive models. The paper also surveys how these forecasts have been used in panel data applications, running horse races between heterogeneous and homogeneous panel data models using out of sample forecasts.
    Keywords: forecasting; BLUP; panel data; spatial dependence; serial correlation; heterogeneous panels.
    JEL: C33
  44. By: Roberto Basile (ISAE - Institute for Studies and Economic Analyses); Sergio de Nardis (ISAE - Institute for Studies and Economic Analyses); Alessandro Girardi (ISAE - Institute for Studies and Economic Analyses)
    Abstract: This paper investigates the pricing-to-market (PTM) behaviour of Italian exporting firms, using quarterly survey data by sector and by region over the period 1999q1-2005q2. A partial equilibrium imperfect competition model provides the structure according to which the orthogonality of structural shocks is derived. Impulse-response analysis shows non-negligible reactions of exportdomestic price margins to unanticipated changes in cost competitiveness and in foreign and domestic demand levels, even though these effects appear to be of a transitory nature. For the period 1999-2001 a typical PTM behaviour emerges, while during the most recent years favourable foreign demand conditions allowed firms to increase their export-domestic price margins in face of a strong deterioration of their cost competitiveness. Macroeconomic implications of the observed PTM behaviour are also discussed.
    Keywords: Pricing to market, survey data, panel-VAR models
    JEL: E30 F31 F41
    Date: 2006–06
  45. By: Javier Andrés (Banco de España; Universidad de Valencia); Pablo Burriel (Banco de España); Ángel Estrada (Oficina Económica de Presidencia del Gobierno)
    Abstract: In this paper we present the theoretical foundations and the simulation results obtained with a new dynamic general equilibrium model developed at the Banco de España for the Spanish economy and the rest of Euro area. The model is designed to help in simulating the effect of alternative shocks on the main aggregate variables. The main contributions of this work from a theoretical perspective are the modelling of a monetary union composed of two regions, the inclusion of housing as a durable good with its own sector of production and the degree and detail of the disaggregation considered for each country in the model, which replicates the Quarterly National Accounts. On the empirical side, the main contribution is the detailed calibration of the most important ratios of the Spanish and rest of the Euro area economies.
    Keywords: sdge model, open economy, simulation, shocks, macroeconomic policies
    JEL: E32 E50 F41
    Date: 2006–11
  46. By: Taun N. Toay; Theodore Pelagidis
    Abstract: Apart from its widely accepted direct advantages, the introduction of the euro has been accompanied by a surge of inflation in most of the EU member states. At the same time, wagesÐin part, wages of the unskilledÐare relatively losing ground, while the purchasing power of the average European seems also to have weakened since the introduction of the single currency. In this paper we deal with five relevant central issues to interpret "expensiveness" in Greece. First, we examine to what extent recent inflation trends are attributable to the constraints imposed by the monetary unionÐnamely negative demand disturbances in certain Greek regions. Second, we investigate to what extent these patterns are also due to the adoption of the euroÐincluding conversion period effectsÐover product market and other domestic rigidities. Third, we investigate the impact of seasonal effects on inflation, in the context of the Greek so-called traditional "petit-bourgeois capitalism." Fourth, we explore the extent to which unemployment is another factor that drives wages and purchasing power down. Fifth, we apply the Balassa-Samuelson effect to see whether it constitutes the culprit for price hikes in nontradable products in particular. We find that all the aforementioned factors contribute to the Greek expensiveness.
    Date: 2006–12
  47. By: Derek Bond (University of Ulster); Michael J. Harrison (Department of Economics, Trinity College); Edward J. O'Brien (European Central Bank)
    Abstract: This paper looks at issues surrounding the testing of purchasing power parity using Irish data. Potential difficulties in placing the analysis in an I(1)/I(0) framework are highlighted. Recent tests for fractional integration and nonlinearity are discussed and used to investigate the behaviour of the Irish exchange rate against the United Kingdom and Germany. Little evidence of fractionality is found but there is strong evidence of nonlinearity from a variety of tests. Importantly, when the nonlinearity is modelled using a random field regression, the data conform well to purchasing power parity theory, in contrast to the findings of previous Irish studies, whose results were very mixed.
    JEL: C22 F31 F41
    Date: 2006–11
  48. By: Giuliana Passamani; Roberto Tamborini
    Abstract: In this paper we wish to extend the empirical content of the "credit-cost channel" of monetary policy that we proposed in Passamani and Tamborini (2005). In the first place, we replicate the econometric estimation of the model for Italy, to which we add Germany. We find confirmation that, in both countries, firms' reliance on bank loans (“credit channel”) makes aggregate supply sensitive to bank interest rates (“cost channel”), which are in turn driven by the inter-bank rate controlled by the central bank plus a credit risk premium charged by banks on firms. The second extension consists of a formal econometric analysis of the idea that the interest rate is an instrument of control for the central bank. The empirical results of the CCC model that, according to Johansen and Juselius (2003), innovations in the inter-bank rate qualify this variables as a "control variable" in the system. Hence we replicate the Johansen and Juselius technique of simulation of rule-based stabilization policy. This is done for both Italy and Germany, on the basis of the respective estimated CCC models, taking the inter-bak rate as the instrument and the inflation of 2% as the target. As a result, we find confirmation that inflation-targeting by way of inter-bank rate control, grafted onto the estimated CCC model, would stabilize inflation through structural shifts of the "AS curve", that is, the path of realizations in the output-inflation space.
    Keywords: Macroeconomics and monetary economics, Monetary transmission mechanisms, Structural cointegration models, Italian economy, German economy
    JEL: E51 C32
    Date: 2006
  49. By: Luiz de Mello; Diego Moccero
    Abstract: In 1999, new monetary policy regimes were adopted in Brazil, Chile, Colombia and Mexico, combining inflation targeting with floating exchange rates. These regime changes have been accompanied by lower volatility in the monetary stance in Brazil, Colombia and Mexico, despite higher inflation volatility in Brazil and Colombia. This paper estimates a conventional New Keynesian model for these four countries and shows that: i) the post-1999 regime has been associated with greater responsiveness by the monetary authority to changes in expected inflation in Brazil and Chile, while in Colombia and Mexico monetary policy has become less counter-cyclical, ii) lower interest-rate volatility in the post-1999 period owes more to a benign economic environment than to a change in the policy setting, and iii) the change in the monetary regime has not yet resulted in a reduction in output volatility in these countries. <P>Politique monétaire et stabilité macroéconomique en Amérique latine : Brésil, Chili, Colombie et Mexique <BR>De nouveaux régimes monétaires ont été adoptés par le Brésil, le Chili, la Colombie et le Mexique en 1999. Basés sur le ciblage de l’inflation et des taux de change flottants, ces régimes ont été accompagnés d’une réduction de la volatilité de la politique monétaire au Brésil, en Colombie et au Mexique, en dépit de l’augmentation de la volatilité de l’inflation au Brésil et en Colombie. Ce document estime un modèle conventionnel du type « New Keynesian » pour ces quatre pays et démontre que: i) les autorités monétaires ont réagi plus fortement aux changements des expectatives d’inflation à partir de 1999 au Brésil et au Chili, tandis que la politique monétaire est devenue moins contre-cyclique en Colombie et au Mexique, ii) la réduction de la volatilité du taux d’intérêt à partir de 1999 est due à un environnement économique plus favorable plutôt qu’à l’adoption d’un nouveau régime monétaire, et iii) le changement du régime monétaire n’a pas encore conduit à une réduction de la volatilité de l’activité en ces pays.
    JEL: C15 C22 E52 O52
    Date: 2007–02–14

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