nep-cba New Economics Papers
on Central Banking
Issue of 2007‒03‒03
thirty-two papers chosen by
Alexander Mihailov
University of Reading

  1. Financial Integration, Financial Deepness and Global Imbalances By Mendoza, Enrique G; Quadrini, Vincenzo; Ríos-Rull, José-Víctor
  2. Financial Globalization and Monetary Policy By Devereux, Michael B; Sutherland, Alan
  3. The Valuation Channel of External Adjustment By Fabio Ghironi; Jaewoo Lee; Alessandro Rebucci
  4. Anticipated Fiscal Policy and Adaptive Learning By George W. Evans; Seppo Honkapohja; Kaushik Mitra
  5. Optimal Monetary Policy and Expectation Driven Business Cycles By Guo, Shen
  6. Optimal Opportunistic Monetary Policy in A New-Keynesian Model By M. Marzo; I. Strid; P. Zagaglia
  7. Welfare Gains from Optimal Policy in a Partially Dollarized Economy By Carlos Gustavo Machicado
  8. Monetary policy in a small open economy with a preference for robustness By Richard Dennis; Kai Leitemo; Ulf Söderström
  9. Monetary policy with heterogeneous and misspecified expectations By Michele Berardi
  10. The Returns to Currency Speculation in Emerging Markets By Burnside, A Craig; Eichenbaum, Martin; Rebelo, Sérgio
  11. Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates By Pierre-Richard Agénor; Peter J. Montiel
  12. Price setting in the euro area: some stylised facts from individual producer price data By Philip Vermeulen; Daniel Dias; Maarten Dossche; Erwan Gautier; Ignacio Hernando; Roberto Sabbatini; Harald Stahl
  13. The Term Structure of Real Rates and Expected Inflation By Andrew Ang; Geert Bekaert; Min Wei
  14. A state-level analysis of the great moderation By Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
  15. Monetary conservatism and fiscal policy By Klaus Adam; Roberto M. Billi
  16. Fiscal Policy in an Estimated Model of the European Monetary Union By Aurélien Eyquem (CREM - CNRS)
  17. SUSTAINABILITY OF FISCAL DEFICITS: THE U.S. EXPERIENCE 1929-2004 By Ananda Jayawickrama; Tilak Abeysinghe
  18. Seigniorage By Buiter, Willem H
  19. Home bias, exchange rate disconnect, and optimal exchange rate policy By Jian Wang
  20. Price Stickiness in Ss Models: New Interpretations of Old Results By Ricardo J. Caballero; Eduardo M.R.A. Engel
  21. The New Keynesian Phillips Curve: from Sticky Inflation to Sticky Prices By Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
  22. Observed Inflation Forecasts and the New Keynesian Phillips Curve By Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
  23. Endogenous State Prices, Liquidity, Default, and the Yield Curve By Raphael A. Espinoza; Charles A. E. Goodhart; Dimitrios P. Tsomocos
  24. Balanced growth and the great ratios: new evidence for the US and UK By Cliff L. F. Attfield; Jonathan R. W. Temple
  25. Measurement of monetary aggregates across countries By Yueh-Yun C. O'Brien
  26. Unit Labor Cost Growth Differentials in the Euro Area, Germany, and the US : Lessons from PANIC and Cluster Analysis By Ulrich Fritsche; Vladimir Kuzin
  27. The Boston Fed study of consumer behavior and payment choice: a survey of Federal Reserve System employees By Marques Benton; Krista Blair; Marianne Crowe; Scott Schuh
  28. The impact of evolving labor practices and demographics on U.S. inflation and unemployment By John V. Duca; Carl M. Campbell, III
  29. Do Foreign Currency Deposits Promote or Deter Financial Development in Low-Income Countries? An Empirical Analysis of Cross-Country Data By Kubo, Koji
  30. Vector autoregressions and reduced form representations of DSGE models By Federico Ravenna
  31. The Transmission Mechanism of Monetary Policy in Colombia Major Changes and Current Features By Hernando Vargas H.
  32. The credibility of the Venezuela crawling-band system By María I. Campos; José L. Torres; Esmeralda Villegas

  1. By: Mendoza, Enrique G; Quadrini, Vincenzo; Ríos-Rull, José-Víctor
    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.
    Keywords: international imbalances; portfolio composition; precautionary savings
    JEL: F36 F4
    Date: 2007–02
  2. By: Devereux, Michael B; Sutherland, Alan
    Abstract: The process of financial globalization has significantly altered the environment in which national monetary policy authorities operate. What implications does this have for the design of monetary policy? The question can be properly addressed only in the context of a model where monetary policy interacts with financial market efficiency. This paper is concerned with the effects of monetary policy when international portfolio choice is endogenous. We analyze the link between monetary policy and gross national bond and equity portfolios. With endogenous portfolio structure and incomplete markets, monetary policy takes on new importance due to its impact on the distribution of returns on nominal assets. Despite this, we find that the case for price stability as an optimal monetary rule still remains. In fact, it is reinforced. Even without nominal price rigidities, price stability has a welfare benefit through its enhancement of the risk sharing properties of nominal bond returns.
    Keywords: international risk sharing; portfolio choice
    JEL: E52 E58 F41
    Date: 2007–02
  3. By: Fabio Ghironi; Jaewoo Lee; Alessandro Rebucci
    Abstract: Ongoing international financial integration has greatly increased foreign asset holdings across countries, enhancing the scope for a "valuation channel" of external adjustment (i.e., the changes in a country's net foreign asset position due to exchange rate and asset price changes). We examine this channel of adjustment in a dynamic stochastic general equilibrium model with international equity trading in incomplete asset markets. We show that the risk-sharing properties of international equity trading are tied to the distribution of income between labor income and profits when equities are defined as claims to firm profits in a production economy. For a given level of international financial integration (measured by the size of gross foreign asset positions), the quantitative importance of the valuation channel of external adjustment depends on features of the international transmission mechanism such as the size of financial frictions, substitutability across goods, and the persistence of shocks. Finally, moving from less to more international financial integration, risk sharing through asset markets increases, and valuation changes are larger, but their relative importance in net foreign asset dynamics is smaller.
    JEL: F32 F41 G11 G15
    Date: 2007–02
  4. By: George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge); Kaushik Mitra (University of St Andrews)
    Abstract: We consider the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations. To model this we assume that agents combine limited structural knowledge with a standard adaptive learning rule. We analyze these issues using two well-known set-ups, an endowment economy and the Ramsey model. In our set-up there are important deviations from both rational expectations and purely adaptive learning. Our approach could be applied to many macroeconomic frameworks.
    Keywords: Taxation, expectations, Ramsey model
    JEL: E62 D84 E21 E43
    Date: 2007–02–18
  5. By: Guo, Shen
    Abstract: We explore the optimal response of central bank when a news shock hits the economy, that is, agents’ optimistic expectation of an improvement in technology does not realize. Ramsey optimal policy and simple policy rules are studied in a two-sector model with price rigidities in each of non-durable and durable sector. We find that a simple policy rule reacting to the inflation rates in both non-durable and durable sector with appropriate weights can mimic the performance of the Ramsey policy closely. Another interesting result is that monetary policy plays an important role in generating expectation driven business cycles.
    Keywords: News shocks; Expectation driven business cycles; Optimal monetary policy
    JEL: E52 E32
    Date: 2007–02–10
  6. By: M. Marzo; I. Strid; P. Zagaglia
    Date: 2006–09
  7. By: Carlos Gustavo Machicado (Institute for Advanced Development Studies)
    Abstract: This paper evaluates welfare under optimal monetary and fiscal policy in a dynamic stochastic model of currency substitution and capital. It shows that in a partially dollarized economy, the main optimal policy results, i.e. the Friedman Rule and the zero capital tax, hold. Welfare implications of these optimal policies are computed for the Bolivian economy using a second-order approximation technique. The primary conclusions are that the welfare gains under optimal monetary policy are negligible. The welfare gains when optimal fiscal policy is considered alone or in conjunction with optimal monetary policy are sizable and come from the increase in real variables and also by the increase in real balances in local currency. Thus, welfare gains are negatively related to dollarization.
    Keywords: Dollarization, Optimal Fiscal and Monetary Policy, Second-order approximation technique.
    JEL: F31 E61 E63
    Date: 2006–09
  8. By: Richard Dennis; Kai Leitemo; Ulf Söderström
    Abstract: We use robust control techniques to study the effects of model uncertainty on monetary policy in an estimated, semi-structural, small-open-economy model of the U.K. Compared to the closed economy, the presence of an exchange rate channel for monetary policy not only produces new trade-offs for monetary policy, but it also introduces an additional source of specification errors. We find that exchange rate shocks are an important contributor to volatility in the model, and that the exchange rate equation is particularly vulnerable to model misspecification, along with the equation for domestic inflation. However, when policy is set with discretion, the cost of insuring against model misspecification appears reasonably small.
    Keywords: Monetary policy
    Date: 2007
  9. By: Michele Berardi
    Abstract: In recent literature on monetary policy and learning, it has been suggested that private sector’s expectations should play a role in the policy rule implemented by the central bank, as they could improve the ability of the policymaker to stabilize the economy. Private sector’s expectations, in these studies, are often taken to be homogeneous and rational, at least in the limit of a learning process. In this paper, instead, we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium. We investigates the impact of this heterogeneity in expectations on central bank’s policy implementation and on the ensuing economic outcomes.
    Date: 2006
  10. By: Burnside, A Craig; Eichenbaum, Martin; Rebelo, Sérgio
    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.
    Keywords: carry trade; exchange rate; uncovered interest parity
    JEL: F3 F41
    Date: 2007–02
  11. By: Pierre-Richard Agénor; Peter J. Montiel
    Abstract: This paper develops a simple static model with credit market imperfections and flexible prices for monetary policy analysis in a fixed-exchange rate economy. Lending rates are set as a premium over the cost of borrowing from the central bank. The premium itself depends on firms' net worth. In the basic framework, banks' funding sources are perfect substitutes and the provision of liquidity by the central bank is perfectly elastic at the prevailing refinance rate. The model is used to perform a variety of experiments, such as changes in the refinance and reserve requirement rates, central bank auctions, shifts in the premium and contract enforcement costs, and changes in public spending and world interest rates. The analysis is then extended to examine credit targeting and sterilization policies.
    Date: 2006
  12. By: Philip Vermeulen (European Central Bank); Daniel Dias (Banco de Portugal); Maarten Dossche (National Bank of Belgium); Erwan Gautier (Banque de France); Ignacio Hernando (Banco de España); Roberto Sabbatini (Banca d’Italia); Harald Stahl (Deutsche Bundesbank)
    Abstract: This paper documents producer price setting in 6 countries of the euro area: Germany, France, Italy, Spain, Belgium and Portugal. It collects evidence from available studies on each of those countries and also provides new evidence. These studies use monthly producer price data. The following five stylised facts emerge consistently across countries. First, producer prices change infrequently: each month around 21% of prices change. Second, there is substantial cross-sector heterogeneity in the frequency of price changes: prices change very often in the energy sector, less often in food and intermediate goods and least often in non-durable non- food and durable goods. Third, countries have a similar ranking of industries in terms of frequency of price changes. Fourth, there is no evidence of downward nominal rigidity: price changes are for about 45% decreases and 55% increases. Fifth, price changes are sizeable compared to the inflation rate. The paper also examines the factors driving producer price changes. It finds that costs structure, competition, seasonality, inflation and attractive pricing all play a role in driving producer price changes. In addition producer prices tend to be more flexible than consumer prices.
    Keywords: price-setting, producer prices
    JEL: E31 D40 C25
    Date: 2007–02
  13. By: Andrew Ang; Geert Bekaert; Min Wei
    Abstract: Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time-varying prices of risk, and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve in the U.S. is fairly flat around 1.3%. In one real rate regime, the real term structure is steeply downward sloping. An inflation risk premium that increases with maturity fully accounts for the generally upward sloping nominal term structure.
    JEL: C50 E31 E32 E43 G12
    Date: 2007–02
  14. By: Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
    Abstract: A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s. Using an empirical model of business cycles, we extend this line of research to state-level employment data and find significant heterogeneity in the timing and magnitude of the state-level volatility reductions. In fact, some states experience no statistically-important reductions in volatility. We then exploit this cross sectional heterogeneity to evaluate hypotheses about the origin of the aggregate volatility reduction. We show that states with relatively high concentrations in the durable-goods and extractive industries tended to experience later breaks. We interpret these results as contradictory to hypotheses that the Great Moderation could have been caused by improved inventory management or less-volatile shocks to energy and/or productivity. Instead, we find results that are more consistent with the view that the most significant contributor to the volatility reduction was improved monetary policy.
    Keywords: Macroeconomics ; Econometric models ; Monetary policy
    Date: 2007
  15. By: Klaus Adam; Roberto M. Billi
    Abstract: Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment robustly generates too much inflation. A conservative monetary authority thus remains desirable. When fiscal policy is determined before monetary policy each period, the monetary authority should focus exclusively on stabilizing inflation, as this eliminates the steady state biases associated with lack of monetary and fiscal commitment. It also leads to stabilization policy that is close to if not fully optimal.
    Date: 2007
  16. By: Aurélien Eyquem (CREM - CNRS)
    Abstract: We explore the welfare implications of several fiscal policies in an estimated two-country New Open Economy Macroeconomics (NOEM) model of the EuropeanMonetary Union (EMU). The model features incomplete financial markets and home bias in final consumption baskets. We define the optimal monetary and fiscal policy and contrast the (small) contribution of financial markets incompleteness to welfare losses. We also investigate the welfare implications of simple public spending rules. We find (i) that welfare maximizing public spending rules imply significant welfare losses with respect to the optimal policy - equivalent to an average 7.3% drop in permanent consumption and (ii) that estimated public spending rules imply low welfare losses with respect to welfare maximizing rules - equivalent to an average 1% drop in permanent consumption. In our framework, these losses can be reduced by either promoting a deeper trade integration in the EMU, or by increasing the number of available fiscal instruments.
    Keywords: Monetary Union, Fiscal Stabilization, Optimal Monetary and Fiscal Policy, Welfare Analysis, Fiscal Rules
    JEL: E52 E61 E62 E63 F32
    Date: 2007
  17. By: Ananda Jayawickrama (Department of Economics, National University of Singapore); Tilak Abeysinghe (Department of Economics, National University of Singapore)
    Abstract: Recurrent large fiscal deficits and accumulating public debt frequently ring alarm bells around the world on the sustainability of U.S. federal fiscal policy. The present-value borrowing constraint, which states that, for the fiscal policy to be sustainable the current debt stock should match the discounted sum of expected future primary surpluses, provides a framework for analysing fiscal sustainability. Incorporating rational expectations we extend the methodology developed by Hamilton and Flavin (1986) to test the sustainability hypothesis in a cointegrating framework that can accommodate both stationary and non-stationary variables. Our model predicts dynamically diverse episodes of the debt series extremely well. Our results support the hypothesis that the U.S. government is solvent despite the large increase in the debt stock in recent years.
    Keywords: Fiscal Policy Sustainability, Present-value Borrowing Constraint, Rational Expectations, Cointegration.
    JEL: E62 H62 H63
  18. By: Buiter, Willem H
    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.
    Keywords: central bank budget constraint; coordination of monetary and fiscal policy; inflation targeting; inflation tax
    JEL: E4 E5 E6 H6
    Date: 2007–02
  19. By: Jian Wang
    Abstract: This paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations. The paper first demonstrates in a two-country Dynamic Stochastic General Equilibrium (DSGE) model, that the home bias in consumption is important to duplicate the exchange rate volatility and exchange rate disconnect documented in the data. When home bias is high, the shock to Uncovered Interest-rate Parity (UIP) can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables, such as GDP, almost untouched. The model predicts the volatility of the real exchange rate relative to that of GDP increases with the extent of home bias. This relation is strongly supported by the data. Then a second-order accurate solution method is employed to solve the model and compare the conditional welfare under different policy regimes. The results suggest that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations. In particular, when the central bank does not take a strong stance against the inflation rate, exchange rate stabilization may induce substantial welfare loss. The model also suggests no welfare gain from the international monetary cooperation, which extends Obstfeld and Rogoff s (2002) findings to a DSGE model.
    Date: 2007
  20. By: Ricardo J. Caballero (MIT and NBER); Eduardo M.R.A. Engel (Department of Economics, 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 propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial price rigidity. The first result we revisit is Caplin and Spulber's monetary neutrality model. We show that when price stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, but is due instead to the absence of price-stickiness at the microeconomic level. We also show that the “selection effect,” according to which units that adjust their prices are those that benefit the most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss-type 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
  21. By: Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
    Abstract: The New Keynesian Phillips Curve (NKPC) model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that inflation inertia, rather than inflation expectations, dominate the dynamics of the short-run aggregate supply curve. This paper examines this inconsistency by investigating multiple structural changes in the NKPC for the US over 1968-2005. Both inflation expectations survey data and a rational expectations approximation are used to capture expectations. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing support for the empirical coherence of sticky prices models over the last two decades. A further break in the intercept of the NKPC is identified around 2001 and this may be associated with monetary policy in the recent period.
    Date: 2006
  22. By: Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
    Abstract: Estimating the micro-founded New Keynesian Phillips Curve using rational inflation expectation proxies has often found that the output gap is not a valid measure of inflation pressure. This paper investigates the empirical success of the NKPC in explaining US inflation, using observed measures of inflation expectations and taking account of serial correlation in the stylized NKPC. Contrary to recent results indicating no role for the GDP gap, we find it to be a statistically significant driving variable for inflation while labor income share is generally insignificant. The paper also develops an extended model in which serial correlation is absent and the output gap remains a valid inflation driving force. In most of our estimations, however, lagged inflation dominates the role of inflation expectations, casting doubt on the extent to which price setting is forward-looking over the period 1968 to 2005. From an econometric perspective, the paper uses GMM estimation to account for endogeneity while also addressing concerns raised in recent studies about weak instrumental variables used in estimating NKPC models.
    Date: 2006
  23. By: Raphael A. Espinoza; Charles A. E. Goodhart; Dimitrios P. Tsomocos
    Abstract: We show, in an exchange economy with default, liquidity constraints and no aggregate uncertainty, that state prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank. Our model is derived along the lines of Dubey and Geanakoplos (1992). Two agents trade goods and nominal assets (Arrow-Debreu (AD) securities) to smooth consumption across periods and future states, in the presence of cashin-advance financing costs. We show that, with Von Neumann-Morgenstern logarithmic utility functions, the price of AD securities, are inversely related to liquidity. The upshot of our argument is that agents’ expectations computed using risk-neutral probabilities give more weight in the states with higher interest rates. This result cannot be found in a Lucas-type representative agent general equilibrium model where there is neither trade or money nor default. Hence, an upward yield curve can be supported in equilibrium, even though short-term interest rates are fairly stable. The risk-premium in the term structure is therefore a pure default risk premium.
    Keywords: cash-in-advance constraints; risk-neutral probabilities; state prices; term structure of interest rate
    JEL: E43 G12
    Date: 2007
  24. By: Cliff L. F. Attfield; Jonathan R. W. Temple
    Abstract: Standard macroeconomic models suggest that the ‘great ratios’ of consumptionto output and investment to output should be stable functions of structural parameters. We examine whether the ratios are stationary for the US and UK, allowing for structural breaks that could reflect timevarying parameters. We find stronger evidence for stationarity than previous work. We then use the long-run restrictions associated with the stationarity of the great ratios to extract measures of trend output from the joint behaviour of consumption, investment and output. This approach isattractive because it uses information from several series without requiring restrictive assumptions.
    Date: 2006
  25. By: Yueh-Yun C. O'Brien
    Abstract: This paper compares the compositions and definitions of monetary aggregates being published by the 30 countries belonging to the Organization for Economic Co-operation and Development (OECD) and 10 non-OCED countries. These countries are divided into 5 groups according to the similarity of their monetary aggregates and their membership in the European Union (EU) and/or OECD. The first three groups are countries in the EU who have adopted the European Central Bank's definitions of the monetary aggregates with some variations. Their monetary aggregates are discussed together and presented in one table. The monetary aggregates for the countries in the other two groups are very heterogeneous and each country is discussed separately. The criteria used to classify and define monetary aggregates by individual countries are compared and summarized. Variations among the countries' monetary aggregates resulting from emphasis on different criteria for money definitions are also addressed.
    Date: 2006
  26. By: Ulrich Fritsche; Vladimir Kuzin
    Abstract: Inflation differentials in the Euro area are mainly due to a sustained divergence of wage developments across the Euro area, and narrower differences in labour productivity growth (Alvarez et al., 2006). We investigate convergence of inflation using unit labour cost (ULC) growth and applying PANIC (Bai and Ng, 2004) and cluster procedures (Hobijn and Franses, 2000, Busetti et al., 2006) to Euro area countries as well as US States, US Census Regions and German Länder. Euro area differs in that dispersion in general (and its fraction due to idiosyncratic factors in specific) is larger and common factors are much less important in explaining the variance of ULC growth. We report evidence for convergence clusters in all countries.
    Keywords: Unit labor costs, inflation, European Monetary Union, Germany, United States of America, convergence, convergence clubs, panel unit root tests, PANIC
    JEL: E31 O47 C32 C33
    Date: 2007
  27. By: Marques Benton; Krista Blair; Marianne Crowe; Scott Schuh
    Abstract: The way people pay for goods and services is changing dramatically, but little data and research on consumer behavior and payment choice are publicly available. This paper describes the results of a survey of payment behavior and attitudes taken by Federal Reserve employees in 2004. Major contributions of the survey are that it asks: 1) why payment choices are made; 2) why individual payment behavior has changed; and 3) why individual-specific payment characteristics matter for payment choice. Although the survey is not statistically representative of U.S. consumers, and thus may not provide accurate estimates of aggregate U.S. payment trends, many results are consistent with data from more representative payment surveys. For example, the data show a trend away from check-writing and toward electronic and emerging payment methods, but the choice of payment method depends on the type of payment, amount of payment, and other complex factors. Also, cost, convenience, and control over timing are the most important characteristics determining respondents' adoption and use of payment methods. We find that payment characteristics vary widely across respondents, partly because of inherent heterogeneity but perhaps also because of measurement error, misperception, or inadequate information (lack of consumer education). Cross-sectional evidence shows that respondents tend to use payment methods in a manner broadly consistent with their reported assessents of the payment characteristics.
    Keywords: Payment systems ; Consumer behavior ; Electronic funds transfers ; Checks
    Date: 2007
  28. By: John V. Duca; Carl M. Campbell, III
    Abstract: Since the early 1990s, NAIRU estimates have declined and unemployment duration has risen relative to the unemployment rate. These developments may have arisen from the aging of the workforce or practices reducing job turnover. We assess the internal consistency of these hypotheses using simulation methods and test their external consistency using modified NAIRU models. We find that demographics cannot fully account for changes in the NAIRU, consistent with Staiger, Stock, and Watson (2001) and in contrast to Shimer (1998, 2001). Instead, our results attribute shifts in the NAIRU and duration to a combination of shifts in demographics and job turnover.
    Date: 2007
  29. By: Kubo, Koji
    Abstract: Foreign currency deposits (FCD) are prevalent in many low-income developing countries, but their impact on bank lending has rarely been examined. An examination of cross-country data indicates that a higher proportion of FCD in total deposits is associated with growth in private credit only in inflationary circumstances (over 24 percent of the annual inflation rate). FCD can lead to a decline in private credit below this threshold level of inflation. Given that FCD exhibit persistence, deregulating them in low-income countries may do more harm than good on financial development in the long term, notably after successful containment of inflation.
    Keywords: Developing countries, Money, Banks, Finance, Foreign currency deposits, Financial development, Low-income countries, Inflation, Dollarization
    JEL: F36 G21
    Date: 2007–01
  30. By: Federico Ravenna (University of California)
    Abstract: Dynamic Stochastic General Equilibrium models are often tested against empirical VARs or estimated by minimizing the distance between the model's and the VAR impulse response functions. These methodologies require that the data-generating process consistent with the DSGE theoretical model has a VAR representation. This paper discusses the assumptions needed for a finite-order VAR(p) representation of any subset of a DSGE model variables to exist. When a VAR(p) is only an approximation to the true VAR, the paper shows that the truncated VAR(p) may return largely incorrect estimates of the impulse response function. The results do not hinge on an incorrect identification strategy or on small sample bias. But the bias introduced by truncation can lead to bias in the identification of the structural shocks. Identification strategies that are equivalent in the true VAR representation perform differently in the approximating VAR.
    Keywords: vector autoregression, dynamic stochastic general equilibrium model, business cycle shocks
    JEL: C13 C22 E32
    Date: 2006–08
  31. By: Hernando Vargas H.
    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.
    Date: 2007–02–01
  32. By: María I. Campos; José L. Torres; Esmeralda Villegas
    Abstract: This paper studies the credibility of the Venezuela crawling-band exchange rate regime during the period July, 1996-February, 2002. We show that, introducing some modifications, the credibility analysis widely applied to target zone regimes can also be used in studying the credibility of crawling- band regimes. In analyzing the credibility of the Venezuela crawling band, first we use the so-called simple credibility tests developed by Svensson (1991). Additionally, we estimate the expected rate of realignment using the drift- adjustment method. Both the credibility tests and the drift-adjustment method give similar results, showing that the crawling-band system was highly credible during the period.
    Date: 2006–04–01

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