|
on Central Banking |
| By: | James D. Hamilton |
| Abstract: | This paper explores the properties of daily changes in the prices for near-term fed funds futures contracts. The paper finds these contracts to be excellent predictors of the fed funds rate, and shows that the claim of a nonzero term premium in the short-horizon contracts is more sensitive to outliers than previous research appears to have recognized. I find some statistically significant evidence of serial correlation in the daily changes, but this accounts for only a tiny part of the one-day movements and there is essentially zero predictability for horizons longer than one day. Settlement futures prices for each day appear to incorporate the information embodied in that day's term structure of longer-horizon Treasury securities. Previous employment growth makes a statistically significant contribution to predicting futures price changes, though again this could only account for a tiny part of the daily variance. The paper concludes that futures prices provide a very useful measure of the daily changes in the market's expectation of near-term changes in Fed policy. |
| JEL: | E44 E5 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13112&r=cba |
| By: | Steven B. Kamin; Trevor A. Reeve; Nathan Sheets |
| Abstract: | In recent years, a number of studies have analyzed the experiences of a broad range of industrial economies during periods when their current account deficits have narrowed. Such studies identified systematic aspects of external adjustment, but it is unclear how good a guide the experience of other countries may be to the effects of a future narrowing of the U.S. external imbalance. In contrast, this paper focuses in depth on the historical experience of external adjustment in the United States. Using data from the past thirty-five years, we compare economic performance in episodes during which the U.S. trade balance deteriorated and episodes during which it adjusted. We find trade balance adjustment to have been generally benign: U.S. real GDP growth tended to fall, but not to a statistically significant extent; housing construction slumped; inflation generally rose modestly; and although nominal interest rates tended to rise, real interest rates fell. The paper then compares these outcomes to those in foreign industrial economies. We find that the economic performance of the United States during periods of external adjustment is remarkably similar to the foreign experience. Finally, we also examine the performance of the foreign industrial economies during the periods of U.S. deterioration and adjustment. Contrary to concerns that U.S. adjustment will prove injurious to foreign economies, our analysis suggests that the foreign economies fared reasonably well during past periods when the U.S. trade deficit narrowed: the growth of domestic demand and real GDP abroad generally strengthened during such episodes, although inflation and interest rates tended to rise as well. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:892&r=cba |
| By: | Kenneth N. Kuttner (Oberlin College, Department of Economics); Adam S. Posen (Peterson Institute for International Economics) |
| Abstract: | This paper assesses the effects of central bank governor appointments on financial market expectations of monetary policy. To measure these effects, we assemble a new dataset of appointment announcements from 15 countries, and conduct an event study analysis on exchange rates, bond yields, and stock prices. The analysis reveals a significant reaction of exchange rates and bond yields to unexpected appointments. The reactions are not unidirectional, and thus do not suggest new governors suffer from a generic credibility problem. Federal Reserve chairman appointments stand out in terms of their unusually pronounced effects on financial markets. |
| Keywords: | Central banking, Monetary policy, Credibility, Financial markets, Event study analysis |
| JEL: | E58 E61 G14 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp07-3&r=cba |
| By: | Timothy J. Kehoe; Kim J. Ruhl |
| Abstract: | International trade is frequently thought of as a production technology in which the inputs are exports and the outputs are imports. Exports are transformed into imports at the rate of the price of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a change in the terms of trade acts as a productivity shock. Or does it? In this paper, we show that this line of reasoning cannot work in standard models. Starting with a simple model and then generalizing, we show that changes in the terms of trade have no first-order effect on productivity when output is measured as chain-weighted real gross domestic product. The terms of trade do affect real income and consumption in a country, and we show how measures of real income change with the terms of trade at business cycle frequencies and during financial crises. |
| JEL: | E23 F41 F43 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13111&r=cba |
| By: | Campbell, Rachel; Koedijk, Kees; Lothian, James R; Mahieu, Ronald J |
| Abstract: | We review Irving Fisher’s seminal work on UIP and on the closely related equation linking interest rates and inflation. Like Fisher, we find that the failures of UIP are connected to individual episodes in which errors surrounding exchange rate expectations are persistent, but eventually transitory. We find considerable commonality in deviations from UIP and PPP, suggesting that both of these deviations are driven by a common factor. Using a dynamic latent factor model, we find that deviations from UIP are almost entirely due to forecasting errors in exchange rates, a result consistent with those reported by Fisher a century ago. |
| Keywords: | Expectations formation; Irving Fisher; small-sample problems; UIP |
| JEL: | F31 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6294&r=cba |
| By: | Jane Ihrig; Steven B. Kamin; Deborah Lindner; Jaime Marquez |
| Abstract: | This paper evaluates the hypothesis that globalization has increased the role of international factors and decreased the role of domestic factors in the inflation process in industrial economies. Toward that end, we estimate standard Phillips curve inflation equations for 11 industrial countries and use these estimates to test several predictions of the globalization and inflation hypothesis. Our results provide little support for that hypothesis. First, the estimated effect of foreign output gaps on domestic consumer price inflation is generally insignificant and often of the wrong sign. Second, we find no evidence that the trend decline in the sensitivity of inflation to the domestic output gap observed in many countries owes to globalization. Finally, and most surprisingly, our econometric results indicate no increase over time in the responsiveness of inflation to import prices for most countries. However, even though we find no evidence that globalization is affecting the parameters of the inflation process, globalization may be helping to stabilize real GDP and hence inflation. Over time, the volatility of real GDP growth has declined by more than the volatility of domestic demand, suggesting that net exports increasingly are acting to buffer output from fluctuations in domestic demand. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:891&r=cba |
| By: | C.A.E Goodhart; D.P. Tsomocos |
| Abstract: | On the macro-economic policy side of Central Banking a remarkable consensus has been emerging over the last two decades. This covers both the applicable theoretical framework for analysing the transmission mechanism of monetary policy and also the appropriate institutional structure for the Central Bank to deploy its macro-economic policies. There is no such consensus on the appropriate theoretical framework for the analysis of financial stability. Indeed some would claim that there is no proper theoretical framework for this function in being at all. However, we propose one such framework based on the work of Goodhart, Sunirand and Tsomocos (2004, 2005, 2006a and b). |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2007fe04&r=cba |
| By: | Fecht, Falko; Grüner, Hans Peter; Hartmann, Philipp |
| Abstract: | This paper compares four forms of inter-regional financial risk sharing: (i) segmentation, (ii) integration trough the secured interbank market, (ii) integration trough the unsecured interbank market, (iv) integration of retail markets. The secured interbank market is an optimal risk-sharing device when banks report liquidity needs truthfully. It allows diversification without the risk of cross-regional financial contagion. However, free-riding on the liquidity provision in this market restrains the achievable risk-sharing as the number of integrated regions increases. In too large an area this moral hazard problem becomes so severe that either unsecured interbank lending or, ultimately, the penetration of retail markets is preferable. Even though this deeper financial integration entails the risk of contagion it may be beneficial for large economic areas, because it can implement an efficient sharing of idiosyncratic regional shocks. Therefore, the enlargement of a monetary union, for example, extending the common interbank market might increase the benefits of also integrating retail banking markets through cross-border transactions or bank mergers. We discuss these results in the context of the ongoing debate on European financial integration and the removal of bank branching restrictions in the United States during the 1990s, and we derive implications for the relationship between financial integration and financial stability. Last we illustrate the scope for cross-regional risk sharing with data on non-performing loans for the European Union, Switzerland and the United States. |
| Keywords: | cross border lending; financial contagion; financial integration; interbank market |
| JEL: | F36 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6311&r=cba |
| By: | Michael D. Bordo; Michael J. Dueker; David C. Wheelock |
| Abstract: | This paper examines the association between monetary policy and stock market booms and busts in the United States, United Kingdom, and Germany during the 20th century. Booms tended to arise when output growth was rapid and inflation was low, and end within a few months of an increase in inflation and monetary policy tightening. Latent variable VAR analysis of post-war data finds that inflation has had a particularly strong impact on market conditions, with disinflation shocks moving the market toward a boom and positive inflation shocks moving the market toward a bust. We conclude that central banks can contribute to financial market stability by minimizing unanticipated changes in inflation. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-20&r=cba |
| By: | Emmanuel Dhyne (Banque Nationale de Belgique and Université de Mons-Hainaut); Catherine Fuss (Banque Nationale de Belgique and Université Libre de Bruxelles); M. Hashem Pesaran (CIMF, Cambridge University, University of Southern California and IZA); Patrick Sevestre (Paris School of Economics, Université Paris 1 Panthéon-Sorbonne and Banque de France) |
| Abstract: | This paper presents a simple model of state-dependent pricing that allows identification of the relative importance of the degree of price rigidity that is inherent to the price setting mechanism (intrinsic) and that which is due to the price’s driving variables (extrinsic). Using two data sets consisting of a large fraction of the price quotes used to compute the Belgian and French CPI, we are able to assess the role of intrinsic and extrinsic price stickiness in explaining the occurrence and magnitude of price changes at the outlet level. We find that infrequent price changes are not necessarily associated with large adjustment costs. Indeed, extrinsic rigidity appears to be significant in many cases. We also find that asymmetry in the price adjustment could be due to trends in marginal costs and/or desired mark-ups rather than asymmetric cost of adjustment bands. |
| Keywords: | sticky prices, nominal intrinsic and extrinsic rigidities, micro non-linear panels |
| JEL: | C51 C81 D21 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2793&r=cba |
| By: | Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | I introduce distortionary taxes on consumption, labor and capital income into a New Keynesian model with Calvo pricing and nominal bonds. I study the relation between tax instruments and optimal monetary policy by computing simple rules for monetary and fiscal policy when one tax instrument at a time varies, while the other two are fixed at their steady-state level. The optimal rules maximize the second-order approximation to intertemporal utility. Three results emerge: (a) when prices are sticky, perfect inflation stabilization is optimal independently from the tax instrument adopted; (b) the optimal degree of responsiveness of monetary policy to output varies depending on which tax instrument induces fluctuations in the average tax rate; (c) when prices are flexible, fiscal rules that prescribe unexpected variations in the price level to support debt changes are always welfare-maximizing. |
| Keywords: | Nominal rigidities; distortionary taxation; monetary-policy rules |
| JEL: | E52 E61 E63 |
| Date: | 2007–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2007_0005&r=cba |
| By: | Jim Malley; Apostolis Philippopoulos; Ulrich Woitek |
| Abstract: | This paper develops a dynamic stochastic general equilibrium model to examine the quantitative macroeconomic implications of countercyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity which is the particular market failure justifying policy intervention. We subject the model to productivity shocks and use either government consumption or investment to react to the output gap or the public debt-to-output ratio. If the object of fiscal policy is purely to stabilize output or debt volatility, then our results suggest substantial reductions can be obtained, especially with respect to output. In stark contrast, however, a formal general equilibrium welfare assessment of the volatility implications of these alternative instrument/target combinations reveals the welfare gains from active policy, measured as a share of consumption, to be very modest. |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2007_02&r=cba |
| By: | Jan Zápal (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Economics Department, London School of Economics, University of London) |
| Abstract: | This paper focuses on dynamics of government spending over the business cycle. The literature on this topic has yet mainly focused on the issue of anti- or pro- cyclicality of fiscal policy. Only recently some researchers brought up a notion that response of fiscal policy might display great deal of asymmetry with respect to economic upturns and downturns. This is known as cyclical bias which arises when government expenditure increases more in cyclical downturns than it decreases in cyclical upturns, or vice versa. Empirical estimates of the sign and degree of cyclical bias show strong evidence in favour of the hypothesis that fiscal authorities do react with a great deal of asymmetry. Among other things, the presence of cyclical bias in government spending has been proposed as an explanation or mechanism which lies behind its unprecedented increase in most OECD countries over the last several decades. The aim of this paper is to show that a similar asymmetry of government spending dynamics can also be found in fiscal data of new EU member countries. We estimate the sign and degree of cyclical bias and compare it to estimates from other countries. Finally, we tackle the question of whether there is any statistically significant influence of political economy variables on the estimated degree of asymmetry. |
| Keywords: | Cyclical Bias; New EU member states; Fiscal policy |
| JEL: | E32 E62 H30 H50 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2007_15&r=cba |
| By: | Oliver Grimm; Stefan Ried |
| Abstract: | We use a two-country model with a central bank maximizing union-wide welfare and two fiscal authorities minimizing comparable, but slightly different country-wide losses. We analyze the rivalry between the three authorities in seven static games. Comparing a homogeneous with a heterogeneous monetary union, we find welfare losses to be significantly larger in the heterogeneous union. The best-performing scenarios are cooperation between all authorities and monetary leadership. Cooperation between the fiscal authorities is harmful to both the whole union’s and the country-specific welfare. |
| Keywords: | monetary union, heterogeneities, policy game, simultaneous policy, sequential policy, coordination, discretionary policies. |
| JEL: | E52 E61 F42 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2007-028&r=cba |
| By: | Pontiggia, Dario |
| Abstract: | In this paper we prove that (I) inefficient natural level of output (Friedman (1968)), (II) central bank's desire to stabilize output around a level that is higher than the inefficient natural level of output, (III) long-run Phillips curve trade-off, and (IV) inflation persistence result in optimal positive long-run inflation. The combination of (I), (II), and (III) makes positive inflation forever in principles desirable as it would result in positive output gap forever. Optimal positive steady-state inflation obtains if and only if there is a long-run incentive for positive inflation. Inflation persistence, defined as costly, in terms of output, disinflation, generates a long-run incentive for positive inflation. Optimal positive steady-state inflation obtains in the basic neo-Wicksellian model (Woodford (2003)) with inflation persistence due to backward-looking rule-of-thumb behaviour by price setters. Optimal positive long-run inflation also obtains in what we refer to as the nonmicrofounded model. Prescinding from hyperinflation, the formula for steady-state inflation is capable of providing a positive theory of inflation. |
| Keywords: | Optimal monetary policy; inflation persistence |
| JEL: | E31 |
| Date: | 2007–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3274&r=cba |
| By: | Carlos Pestana Barros; Luis A. Gil-Alana; Pedro Leão |
| Abstract: | Leão (2005) has recently proposed a new explanation for the short run variability of the velocity of money based on the changes in the composition of the expenditure that occur along the business cycle. This paper presents further empirical evidence in favour of Leão’s Expenditure Composition Hypothesis, and draws new implications of this hypothesis for monetary policy. We use a VAR model to analyze the determinants of the velocity of both M1 and M3 in the USA. The main conclusion is that increases in the weight of investment and durable consumption in total expenditure raise the velocity of both narrow and broad money. This is in line with the Expenditure Composition Hypothesis. Furthermore, we draw a new implication of this hypothesis for monetary policy. The more a central bank’s decisions on the interest rate respond to money growth, the more volatile economic growth will be. In other words, a monetary policy strategy - like that of the ECB – which puts emphasis on money growth is de-stabilizing. |
| Keywords: | Velocity of money; monetary policy; business cycle. |
| JEL: | E12 E32 E40 E41 E52 E58 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp102007&r=cba |
| By: | Joseph Byrne; Alexandros Kontonikas; Alberto Montagnoli |
| Abstract: | In this paper, we examine whether UK inflation is characterized by aggregation bias using three sets of increasingly disaggregated inflation data and a battery of univariate and panel unit root tests. Our results support the existence of aggregation bias since while the unit root hypothesis cannot be rejected for aggregate inflation, it can be rejected for some of its sectoral components, with the rejection frequencies increasing when we use more disaggregate data. Results from structural break analysis indicate that monetary policy shifts are the main factor behind breaks in UK inflation. The panel results typically indicate that when sectoral inflation rates are pooled the unit root hypothesis can be rejected. Our results have important implications for applied econometric analysis, macroeconomic theory and for the conduct of monetary policy. |
| Keywords: | Inflation, Unit Root, Disaggregation, Structural Breaks, Panel Data |
| JEL: | C22 C23 E31 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2007_07&r=cba |
| By: | Zsolt Darvas (Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest); Zoltán Schepp (University of Pécs) |
| Abstract: | This paper shows that error correction models assuming that long-maturity forward rates are stationary outperform the random walk in out of sample forecasting at forecasting horizons mostly above one year, for US dollar exchange rates against nine industrial countries’ currencies, using the 1990-2006 period for evaluating the out of sample forecasts. The improvement in forecast accuracy of our models is economically significant for most of the exchange rate series, and statistically significant according to a bootstrap test. Our results are robust to the specification of the error correction model and to the underlying data frequency. |
| Keywords: | bootstrap, forecasting performance, out of sample, random walk, VECM |
| JEL: | E43 F31 F47 |
| Date: | 2007–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:mkg:wpaper:0705&r=cba |
| By: | Michel Beine (CREFI-LSF, Luxembourg University, Luxembourg School of Finance, Luxembourg and DULBEA, Université Libre de Bruxelles, Brussels.); Oscar Bernal (DULBEA, Université Libre de Bruxelles, Brussels.); Jean-Yves Gnabo (jean-yves.gnabo@fundp.ac.be); Christelle Lecourt (FUNDP, Namur) |
| Abstract: | Intervening in the FX market implies a complex decision process for central banks. Monetary authorities have to decide whether to intervene or not, and if so, when and how. Since the successive steps of this procedure are likely to be highly interdependent, we adopt a nested logit approach to capture their relationships and to characterize the prominent features of the various steps of the intervention decision. Our findings shed some light on the determinants of central bank interventions, on the so-called secrecy puzzle and on the identification of the variables influencing the detection of foreign exchange transactions by market traders. |
| Keywords: | FX intervention, Secrecy Puzzle, Market Detection, Nested Logit. |
| JEL: | E58 F31 G15 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:07-013&r=cba |
| By: | Louis N. Christofides (University of Cyprus, University of Guelph, CLLRNet, CESifo and IZA); Paris Nearchou (University of Cyprus) |
| Abstract: | An earlier study of wage agreements, reached in the Canadian unionized sector between 1976-99, found that wage adjustment is characterized by downward nominal rigidity and significant spikes at zero. We extend this earlier approach to encompass the possibility of real as well as nominal wage rigidity. The addition of real wage rigidity variables enhances earlier results and suggests that real rigidity increases significantly the mass in the histogram bin containing the mean anticipated rate of inflation, as well as in adjacent bins. Downward nominal wage rigidities and spikes at zero remain important. |
| Keywords: | real, nominal wage rigidities |
| JEL: | J52 J31 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2799&r=cba |
| By: | Cristina Arellano; Jonathan Heathcote |
| 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, spreads on foreign currency government debt declined substantially around the time of regime change. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:890&r=cba |
| By: | Acharya, Viral V; Shin, Hyun Song; Yorulmazer, Tanju |
| Abstract: | Bank liquidity is a crucial determinant of the severity of banking crises. In this paper, we consider the effect of fire sales and foreign entry on banks' ex ante choice of liquid asset holdings, and the ex post resolution of crises. In a setting with limited pledgeability of risky cash flows and differential expertise between banks and outsiders in employing banking assets, the market for assets clears only at fire-sale prices following the onset of a crisis -- and outsiders may enter the market if prices fall sufficiently low. While fire sales make it attractive for banks to hold liquid assets, foreign entry reduces this incentive. We exhibit international evidence on foreign entry following crises and on banks' ex ante liquidity choice that are consistent with the predictions of the model. Our framework allows us to address the key welfare question as to when there is too much or too little liquidity on bank balance sheets relative to the socially optimal level. |
| Keywords: | crises; distress; limited pledgeability; liquidation cost; systemic risk |
| JEL: | D61 E58 G21 G28 G32 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6309&r=cba |
| By: | Jeffrey A. Frankel; Shang-Jin Wei |
| Abstract: | This paper examines two related issues: (a) the implicit methodology used by the U.S. Treasury in determining whether China and America's other trading partners manipulate their exchange rates, and (b) the nature of the Chinese exchange rate regime since July 2005. On the first issue, we investigate the roles of economic variables consistent with the IMF definition of manipulation - the partners' overall current account/GDP, its reserve changes, and the real overvaluation of its currency - but also some variables suggestive of American domestic political considerations -- the bilateral trade balance, US unemployment, and an election year dummy. The econometric results suggest that the Treasury verdicts are driven heavily by the US bilateral deficit, though other variables also turn out to be quite important. On the issue of China's de facto exchange rate regime, we apply the technique introduced by Frankel and Wei (1994) to estimate implicit basket weights, adding several refinements. Within 2005, the de facto regime remained a peg to the dollar. However, there was a modest but steady increase in flexibility subsequently. We test whether US pressure has promoted RMB flexibility. We also test whether the recent appreciation against the dollar is due to a trend appreciation against the reference basket or a declining weight on the dollar in the reference basket, and suggest that they have different policy implications. |
| JEL: | F3 F59 O1 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13100&r=cba |
| By: | Kilian, Lutz; Rebucci, Alessandro; Spatafora, Nikola |
| Abstract: | This paper studies the effects of demand and supply shocks in the global crude oil market on several measures of countries’ external balance, including the oil trade balance, the non-oil trade balance, the current account and changes in net foreign assets (NFA) during 1975–2004. We explicitly take a multilateral and global perspective. In addition to the United States, the Euro area and Japan, we consider a number of regional aggregates including oil-exporting economies and middle-income oil-importing economies. Our first result is that the effect of oil shocks on the merchandise trade balance and the current account, which depending on the source of the shock can be large, depends critically on the response of the non-oil trade balance, and differs systematically between the United States and other oil importing countries. Second, using the Lane-Milesi-Ferretti NFA data set, we document the presence of large and systematic (if not always statistically significant) valuation effects in response to oil shocks, not only for the United States, but also for other oil-importing economies and for oil exporters. Our estimates suggest that increased international financial integration will tend to cushion the effect of oil shocks on NFA positions for major oil exporters and for the United States, but may amplify it for other oil importers. |
| Keywords: | Balance of payments; External balances; International financial integration; Oil demand shocks; Oil prices; Oil supply shocks |
| JEL: | F32 F36 O16 O57 Q43 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6303&r=cba |
| By: | Nadeem Ilahi; Ghiath Shabsigh |
| Abstract: | Oil funds have become increasingly popular in oil exporting countries during the recent surge in oil prices. However, the literature on the contribution is small, tends to focus narrowly on their fiscal benefits, and concludes that they are redundant of such funds-in other words, that well designed fiscal management and policy are adequate substitutes for oil funds. This paper argues that a broader focus is needed in judging the effectiveness of such funds. We test whether oil funds help reduce macroeconomic volatility. The econometric estimation results from a 30-year panel data set of 15 countries with and without oil funds suggest that oil funds are associated with reduced volatility of broad money and prices and lower inflation. However, there is a statistically weak negative association between the presence of an oil fund and volatility of the real exchange rate. |
| Date: | 2007–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/96&r=cba |
| By: | B. MERLEVEDE; K. SCHOORS; B. VAN AARLE |
| Abstract: | This paper develops and estimates a small macroeconomic model of the Russian economy. The model is tailored to analyze the impact of the oil price, the exchange rate, private sector confidence and fiscal policy on economic performance. The model does very well in explaining Russia’s recent economic history in the period 1995-2004. Simulations suggest that the Russian economy is vulnerable to downward oil price shocks. We substantiate two mechanisms that mitigate the economic effects of oil price shocks, namely the stabilisation brought by the Oil Stabilisation Fund and the Dutch disease effect. The negative effect of a shock in private sector confidence on real GDP is comparable to the effect of an oil price shock, although the transmission of both shocks runs along different channels. The fiscal policies of the Putin administration temper economic fluctuations caused by oil price shocks, but it remains to be seen whether these policies will be continued. |
| Keywords: | Russia, Macroeconomic Modeling, Macroeconomic stabilization |
| JEL: | C70 E17 E58 E63 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:07/461&r=cba |
| By: | Nienke Oomes; Katerina Kalcheva |
| Abstract: | In this paper, we assess whether recent economic developments in Russia are symptomatic of Dutch Disease. We first provide a brief review of the literature on Dutch Disease and the natural resource curse. We then discuss the symptoms of Dutch Disease, which include (1) real exchange rate appreciation; (2) slower manufacturing growth; (3) faster service sector growth; and (4) higher overall wages. We test these predictions for Russia while carefully controlling for other factors that could have led to similar symptoms. We conclude that, while Russia has all of the symptoms, the diagnosis of Dutch Disease remains to be confirmed. |
| Date: | 2007–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/102&r=cba |
| By: | Idrees Khawaja (Pakistan Institute of Development Economics, Islamabad.); Musleh-ud Din (Pakistan Institute of Development Economics, Islamabad.) |
| Abstract: | Interest spread of the Pakistan’s banking industry has been on the rise for the last two years. The increase in interest spread discourages savings and investments on the one hand, and raises concerns on the effectiveness of bank lending channel of monetary policy on the other. This study examines the determinants of interest spread in Pakistan using panel data of 29 banks. The results show that inelasticity of deposit supply is a major determinant of interest spread whereas industry concentration has no significant influence on interest spread. One reason for inelasticity of deposits supply to the banks is the absence of alternate options for the savers. The on-going merger wave in the banking industry will further limit the options for the savers. Given the adverse implications of banking mergers for a competitive environment, we argue that to maintain a reasonably competitive environment, merger proposals may be subjected to review by an antitrust authority with the central bank retaining the veto over merger approval. |
| Keywords: | Banks, Determination of Interest Rates, Mergers, Acquisitions |
| JEL: | G21 E43 G34 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2007:22&r=cba |
| By: | Joe Crowley |
| Abstract: | This paper examines interest rate spreads in English-speaking African countries. Higher spreads were found to be associated with lower inflation, a greater number of banks, and greater public ownership of banks. Higher deposit interest rates were found to be associated with lower interest rate spreads, but higher net interest margins. A large increase in spreads in the late 1980s and 1990s may be explained by a strengthening of financial sector supervision. Limited data suggested that poor governance, weak regulatory frameworks and property rights, and higher required reserve ratios are associated with higher spreads. |
| Date: | 2007–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/101&r=cba |
| By: | Michael J. Dueker; Zacharias Psaradakis; Martin Sola; Fabio Spagnolo |
| Abstract: | In this paper we propose a contemporaneous threshold multivariate smooth transition autoregressive (C-MSTAR) model in which the regime weights depend on the ex ante probabilities that latent regime-specific variables exceed certain threshold values. The model is a multivariate generalization of the contemporaneous threshold autoregressive model introduced by Dueker et al. (2007). A key feature of the model is that the transition function depends on all the parameters of the model as well as on the data. The stability and distributional properties of the proposed model are investigated. The C-MSTAR model is also used to examine the relationship between US stock prices and interest rates. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-19&r=cba |
| By: | Moura, Marcelo L. & Lima, Adauto R. S. |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_85&r=cba |
| By: | Stanley Watt; Saade Chami; Donal McGettigan |
| Abstract: | Jordan has seen a large increase in its international reserve holdings in recent years. While a healthy reserve buffer is needed under a fixed exchange rate regime, determining optimal reserve levels is not straightforward. In this paper, we first use several traditional measures of reserves adequacy to compare Jordan's reserve holdings with other emerging market (EM) countries. Subsequently, we analyze Jordan's reserve holdings using a reserves-optimizing model, based on Jeanne and Ranciere (2006) (J-R), but extended to allow reserve holdings to influence the likelihood of a sudden stop. The overall analysis suggests that Jordan's reserve holdings provide sufficient support to sustain the dinar peg and to deal with the most extreme capital account disruptions. |
| Date: | 2007–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/103&r=cba |
| By: | Sonia Munoz |
| Abstract: | Zimbabwe's failure to address continuing central bank quasi-fiscal losses has interfered with both monetary management and the independence and credibility of the Reserve Bank of Zimbabwe (RBZ). Realized quasi-fiscal losses are estimated to have amounted to about 75 percent of GDP in 2006. Because they were financed by creating money creation or issuing RBZ securities, they contributed to the four-digit inflation reached in 2006. The remedy for the current situation is clearly to eliminate the causes of losses by implementing measures to improve the cash-flow of the bank and restore its financial position. |
| Date: | 2007–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/98&r=cba |
| By: | Norbert Funke; Jens R. Clausen; Sonia Munoz; Bakar Ould-Abdallah; Sharmini Coorey |
| Abstract: | Zimbabwe has currently the highest rate of inflation in the world (an annual rate of 1,730 percent in February, 2007). The high rates of inflation have contributed to the contraction of the economy, which has declined by about 30 percent since 1999. This paper examines the stabilization experience of countries that experienced similar rates of inflation (above 1,000 percent) during 1980-2005 and draws lessons for Zimbabwe. First, with appropriate stabilization policies, the fall in inflation can be very rapid and output normally recovers within the first year or two of stabilization. Second, while reforms need to be comprehensive, a strong upfront fiscal consolidation, including elimination of quasi-fiscal activities, is a critical element of a successful stabilization program. Third, although stabilization itself can be done without significant external financing in the first year, most countries benefited from external policy advice and technical support, including from the IMF, during stabilization and from an increase in financial assistance in subsequent years. |
| Date: | 2007–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/99&r=cba |