|
on Central Banking |
| By: | Charles Goodhart |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp172&r=cba |
| By: | Roger E.A. Farmer; Daniel F. Waggoner; Tao Zha |
| Abstract: | This paper studies a New Keynesian model in which monetary policy may switch between regimes. We derive sufficient conditions for indeterminacy that are easy to implement and we show that the necessary and sufficient condition for determinacy, provided by Davig and Leeper, is necessary but not sufficient. More importantly, we use a two-regime model to show that indeterminacy in a passive regime may spill over to an active regime no matter how active the latter regime is. As a result, a passive monetary policy is more damaging than has been previously thought. Our results imply that the propagation of shocks in an active regime, such as that of the Federal Reserve in the post-1982 period, may be substantially affected by the possibility of a return to a passive regime of the kind that was followed in the 1960s and 1970s. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2007-12&r=cba |
| By: | Domenico Delli Gatti; Mauro Gallegati; Bruce C. Greenwald; Joseph E. Stiglitz |
| Abstract: | In this paper we propose an Open Economy Financial Accelerator model along the lines of Greenwald-Stiglitz (1993) close in spirit but different in many respects from the one proposed by Greenwald (1998.) The first goal of the paper is to provide a taxonomy of the effects of a devaluation in this context. The direct (first round) effect on output, taking as given net worth and interest rate, is negative for domestic firms (due to the input cost effect) and positive for exporting firms (due to a positive foreign debt effect). The indirect (second round) wealth effect (on output through net worth, taking as given the interest rate) is uncertain, depending on the relative size of the domestic and exporting firms. There is also an indirect effect on output through the response of the domestic interest rate to a devaluation due to the risk premium effect. Due to the uncertainty on the sign of most of these effects, it is difficult to assess the overall impact of a devaluation. One cannot rule out, however, an economy-wide contractionary effect of a devaluation. If the devaluation affects negatively the net worth of domestic firms, the domestic interest rate may rise (due to the risk premium effect), exerting an additional contractionary impact on output. If, on top of that, the monetary authorities force a further increase of the interest rate in an effort to curb the exchange rate, the contractionary effect will be emphasized. |
| JEL: | E4 E5 F4 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13244&r=cba |
| By: | Jordi Galí; Luca Gambetti |
| Abstract: | The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidence points to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behind the observed changes. |
| Keywords: | Great Moderation, structural VAR, technology shocks, monetary policy rules, labor hoarding |
| JEL: | E32 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1041&r=cba |
| By: | James B. Bullard; Aarti Singh |
| Abstract: | We study a stylized theory of the volatility reduction in the U.S. after 1984—the Great Moderation—which attributes part of the stabilization to less volatile shocks and another part to more difficult inference on the part of Bayesian households attempting to learn the latent state of the economy. We use a standard equilibrium business cycle model with technology following an unobserved regime-switching process. After 1984, according to Kim and Nelson (1999a), the variance of U.S. macroeconomic aggregates declined because boom and recession regimes moved closer together, keeping conditional variance unchanged. In our model this makes the signal extraction problem more difficult for Bayesian households, and in response they moderate their behavior, reinforcing the effect of the less volatile stochastic technology and contributing an extra measure of moderation to the economy. We construct example economies in which this learning effect accounts for about 30 percent of a volatility reduction of the magnitude observed in the postwar U.S. data. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-027&r=cba |
| By: | Narayana Kocherlakota |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:843644000000000161&r=cba |
| By: | Nadine Leiner-Killinger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Víctor López Pérez; Roger Stiegert (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Giovanni Vitale (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The need for structural reforms in the euro area has often been advocated. These reforms would improve the welfare of euro area citizens and also, as a welcome side-effect, facilitate the conduct of monetary policy. Against this background, a particularly relevant question that can be posed is whether monetary policy should help implement structural reforms. The objective of this paper is to provide a review of the existing literature on structural reforms in Economic and Monetary Union (EMU) and to discuss the possible ways in which monetary policy could support the structural reform process. In the context of EMU, the main conclusions that emerge are that the monetary policy for the euro area is not the appropriate tool for mitigating the potential and uncertain short-term costs of reforms or for providing incentives for structural reforms at the national level. However, credible monetary policy aimed at price stability can improve the functioning of the supply side of the economy and contribute to an environment which is conducive to welfare-enhancing structural changes. In addition, the ECB’s contribution to the implementation of structural reforms takes the form of analysis, assessment and communication. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20070066&r=cba |
| By: | Gregory E. Givens |
| Abstract: | This paper examines the impact of unemployment insurance on the propagation of monetary disturbances in a staggered price model of the business cycle. To motivate a role for risk sharing behavior, I construct a quantitative equilibrium model that gives prominence to an efficiency-wage theory of unemployment based on imperfectly observable labor effort. Dynamic simulations reveal that under a full insurance arrangement, staggered price-setting is incapable of generating persistent real effects of a monetary shock. Introducing partial insurance, however, bolsters the amount of endogenous wage rigidity present in the model, enriching the propagation mechanism. Positive real persistence appears in versions of the model that exclude capital accumulation as well as in versions that do not. |
| Keywords: | Unemployment, Partial Insurance, Staggered Prices, Endogenous Persistence |
| JEL: | E24 E31 E32 E52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:mts:wpaper:200710&r=cba |
| By: | Ester Faia (Universitat Pompeu Fabra) |
| Abstract: | In recent decades, capital account liberalization in emerging economies has often been followed by a surge in capital inflows, despite the presence of severe informational asymmetries for foreign lenders. Empirical studies have shown that in emerging economies financial liberalization has led to an increase in consumption volatility (also relative to output). I use a small open economy model where foreign lending to households is constrained by an endogenous borrowing limit. Borrowing is secured by collateral in the form of durable investment whose accumulation is subject to adjustment costs. This economy is able to replicate the aforementioned stylized fact in response to various shocks (productivity, foreign demand and government expenditure). I find that financial liberalization reduces welfare since it increases the volatility of consumption and employment. |
| Keywords: | endogenous borrowing limit, financial liberalization, consumption volatility. |
| JEL: | E52 F1 |
| Date: | 2007–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:92&r=cba |
| By: | Michael F. Gallmeyer; Burton Hollifield; Francisco Palomino; Stanley E. Zin |
| Abstract: | We examine the relationship between monetary-policy-induced changes in short interest rates and yields on long-maturity default-free bonds. The volatility of the long end of the term structure and its relationship with monetary policy are puzzling from the perspective of simple structural macroeconomic models. We explore whether richer models of risk premiums, specifically stochastic volatility models combined with Epstein-Zin recursive utility, can account for such patterns. We study the properties of the yield curve when inflation is an exogenous process and compare this to the yield curve when inflation is endogenous and determined through an interest-rate/Taylor rule. When inflation is exogenous, it is difficult to match the shape of the historical average yield curve. Capturing its upward slope is especially difficult as the nominal pricing kernel with exogenous inflation does not exhibit any negative autocorrelation - a necessary condition for an upward sloping yield curve as shown in Backus and Zin (1994). Endogenizing inflation provides a substantially better fit of the historical yield curve as the Taylor rule provides additional flexibility in introducing negative autocorrelation into the nominal pricing kernel. Additionally, endogenous inflation provides for a flatter term structure of yield volatilities which better fits historical bond data. |
| JEL: | E4 G0 G1 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13245&r=cba |
| By: | Gaurav Saroliya |
| Abstract: | The New-Keynesian (NK) business cycle model has presented itself as a potential "workhorse" model for business cycle analysis. This paper seeks to assess afresh the performance of the baseline NK model and its various extensions. The main theme of the paper is that although the dynamic NK literature has secured a robust defence to criticism arising, inter alia, on account of lack of microfoundations, it still has a long way to go in terms of providing a fully satisfactory model of the business cycle. In this regard, it is conjectured that explicitly accounting for the role of heterogeneity in business-cycle dynamics could lead towards a viable solution. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:07/20&r=cba |
| By: | Dong Fu |
| Abstract: | This paper extracts information on inflation expectations, the real interest rate, and various risk premiums by exploring the underlying common factors among the actual inflation, University of Michigan consumer survey inflation forecast, yields on U.S. nominal Treasury bonds, and particularly, yields on Treasury Inflation Protected Securities (TIPS). Our findings suggest that a significant liquidity risk premium on TIPS exists, which leads to inflation expectations that are generally higher than the inflation compensation measure at the 10-year horizon. On the other hand, the estimated expected inflation is mostly lower than the consumer survey inflation forecast at the 12-month horizon. Survey participants slowly adjust their inflation forecasts in response to inflation changes. The nominal interest rate adjustment lags inflation movements, too. Our model also edges out a parsimonious seasonal AR(2) time series model in the one-step-ahead forecast of inflation. |
| Keywords: | Inflation (Finance) |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0705&r=cba |
| By: | Anthony Landry |
| Abstract: | This paper extracts information on inflation expectations, the real interest rate, and various risk premiums by exploring the underlying common factors among the actual inflation, University of Michigan consumer survey inflation forecast, yields on U.S. nominal Treasury bonds, and particularly, yields on Treasury Inflation Protected Securities (TIPS). Our findings suggest that a significant liquidity risk premium on TIPS exists, which leads to inflation expectations that are generally higher than the inflation compensation measure at the 10-year horizon. On the other hand, the estimated expected inflation is mostly lower than the consumer survey inflation forecast at the 12-month horizon. Survey participants slowly adjust their inflation forecasts in response to inflation changes. The nominal interest rate adjustment lags inflation movements, too. Our model also edges out a parsimonious seasonal AR(2) time series model in the one-step-ahead forecast of inflation. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0706&r=cba |
| By: | Luisa Corrado (Faculty of Economics, University of Cambridge and University of Rome, Tor Vergata.); Marcus Miller (Department of Economics, University of Warwick and CEPR); Lei Zhang (Department of Economics, University of Warwick.) |
| Abstract: | In this paper we show how trading rules can generate excess volatility in the exchange rate through repeated entry and exit of currency "bears" and "bulls". This is something of a caricature: but it allows us to show that official action can have self-ful.lling e¤ects as market composition shifts in ways that support official stabilization. Intervention if and when the rate moves outside what Williamson has labelled "monitoring bands" can reduce market volatility as the effect of the policy is to select endogenously traders from the market whose expectations match official intervention. |
| Keywords: | Monitoring Rules, Monitoring Band, Bear and Bull Traders, Excess Volatility, Central Bank Volatility |
| JEL: | D52 F31 G12 |
| Date: | 2007–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:91&r=cba |
| By: | Giulio PALOMBA ([n.a.]); Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia); Emma SARNO ([n.a.]) |
| Abstract: | In this paper we introduce new definitions of pairwise and multivariate similarity between short-run dynamics of inflation rates in terms of equality of forecast functions and show that in the context of invertible ARIMA processes the Autoregressive distance introduced by Piccolo (1990) is a useful measure to evaluate such similarity. Then, we study the similarity of shortrun inflation dynamics across EU-15 area countries during the Euro period. Consistent with studies on inflation differentials and inflation persistence, our findings suggest that after seven years from the launch of the Euro the degree of similarity of short-run inflation dynamics across EU countries is still weak. |
| Keywords: | Euro, autoregressive metric, inflation dynamics |
| JEL: | C23 E31 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:289&r=cba |
| By: | Joao Miguel Sousa (Banco de Portugal); Andrea Zaghini (Banca d'Italia) |
| Abstract: | The paper constructs a global monetary aggregate, namely the sum of the key monetary aggregates of the G5 economies (US, Euro area, Japan, UK, and Canada), and analyses its indicator properties for global output and inflation. Using a structural VAR approach we find that after a monetary policy shock output declines temporarily, with the downward effect reaching a peak within the second year, and the global monetary aggregate drops significantly. In addition, the price level rises permanently in response to a positive shock to the global liquidity aggregate. The similarity of our results with those found in country studies might supports the use of a global monetary aggregate as a summary measure of worldwide monetary trends. |
| Keywords: | Monetary policy, Structural VAR, Global economy. |
| JEL: | E52 F01 |
| Date: | 2007–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:89&r=cba |
| By: | Barbara Annicchiarico (University of Rome “Tor Vergata”); Giancarlo Marini (University of Rome “Tor Vergata”); Alessandro Piergallini (CeFiMS, University of London) |
| Abstract: | This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, the operation of wealth effects does not avoid the occurrence of liquidity traps when the central bank implements a Taylor-type interest-rate feedback rule. |
| Keywords: | Wealth Effects, Taylor Rules, Liquidity Traps. |
| JEL: | E31 E52 |
| Date: | 2007–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:103&r=cba |
| By: | Rajeev Dhawan; Karsten Jeske |
| Abstract: | Should a central bank accommodate energy price shocks? Should the central bank use core inflation or headline inflation with the volatile energy component in its Taylor rule? To answer these questions, we build a dynamic stochastic general equilibrium model with energy use, durable goods, and nominal rigidities to study the effects of an energy price shock and its impact on the macroeconomy when the central bank follows a Taylor rule. We then study how the economy performs under alternative parameterizations of the rule with different weights on headline and core inflation after an increase in the energy price. Our simulation results indicate that a central bank using core inflation in its Taylor rule does better than one using headline inflation because the output drop is less severe. In general, we show that the lower the weight on energy price inflation in the Taylor rule, the impact of an energy price increase on gross domestic product and inflation is also lower. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2007-14&r=cba |
| By: | Simona Delle Chiaie (University of Rome, Tor Vergata) |
| Abstract: | This paper contributes to the recent literature that studies the quantitative implications of the imperfect information about potential output for the conduct of monetary policy. By means of Bayesian techniques, a small New Keynesian model is estimated taking explicitly account of the imperfect information problem. The estimation of the structural parameters and of the monetary authorities.objectives is key in assessing the quantitative relevance of the imperfect information problem and in evaluating the robustness of previous exercises based on calibration. Finally, the model allows us to analyse the usefulness of unit labor costs as monetary policy indicator. |
| Date: | 2007–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:94&r=cba |
| By: | Pablo A. Guerron (Department of Economics, North Carolina State University) |
| Abstract: | This paper computes the welfare costs of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. Both steady state and transitional welfare results are reported. I find that a 10 percent inflation entails a steady state welfare cost of 1.9 % of annual consumption. Taking into account trasitional effects, the cost drops to 1.2%. Under some circumstances, the transitional effects can erase most of the steady state welfare losses. The role of nominal frictions such as price/wage sluggishness as well as that of uncertainty are also addressed. |
| Keywords: | Bayesian Estimation, DSGE, Inflation, Welfare, Transtional Dynamics |
| JEL: | E31 E32 E37 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ncs:wpaper:013&r=cba |
| By: | Pablo A. Guerron (Department of Economics, North Carolina State University) |
| Abstract: | This paper explores the effects of using alternative data sets for the estimation of DSGE models. I find that the estimated structural parameters and the model's outcomes are sensitive to the variables used for estimation. Depending on the set of variables the point estimate for habit formation ranges from 0.70 to 0.97. Similarly, the interest-smoothing coefficient in the Taylor rule fluctuates between 0.06 and 0.76. In terms of the model's predictions, if interest rates are excluded during estimation, the estimated structural coefficients are such that the model forecasts a strong deflation following an expansionary monetary expansion. More importanlty, three ways to assess different observable sets are proposed. Based on these measures, I find that that including the price of investment in the data set delivers the best results. |
| Keywords: | Bayesian Estimation, DSGE, Variable Selection, Impulse Response, Entropy |
| JEL: | C32 E32 E37 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ncs:wpaper:012&r=cba |
| By: | Benjamin D. Keen; Michael R. Pakko |
| Abstract: | In the immediate aftermath of Hurricane Katrina, speculation arose that the Federal Reserve might respond by easing monetary policy. This paper uses a dynamic stochastic general equilibrium (DSGE) model to investigate the appropriate monetary policy response to a natural disaster. We show that the standard Taylor (1993) rule response in models with and without nominal rigidities is to increase the nominal interest rate. That finding is unchanged when we consider the optimal policy response to a disaster. A nominal interest rate increase following a disaster mitigates both temporary inflation effects and output distortions that are attributable to nominal rigidities. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-025&r=cba |
| By: | Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA); Dennis J. Snower (Kiel Institute for the World Economy, Christian-Albrechts-University of Kiel and CEPR) |
| Abstract: | This paper analyses the relation between US inflation and unemployment from the perspective of "frictional growth," a phenomenon arising from the interplay between growth and frictions. In particular, we examine the interaction between money growth (on the one hand) and various real and nominal frictions (on the other). In this context we show that monetary policy has not only persistent, but permanent real effects, giving rise to a long-run inflation-unemployment tradeoff. We evaluate this tradeoff empirically and assess the impact of productivity, money growth, budget deficit, and trade deficit on the US unemployment and inflation trajectories during the nineties. |
| Keywords: | Inflation dynamics, Unemployment dynamics, Phillips curve, Roaring nineties |
| JEL: | E24 E31 E51 E62 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp604&r=cba |
| By: | Claudia Canals (La Caixa); Xavier Gabaix (Massachusetts Institute of Technology (MIT) - Department of Economics); Josep M. Vilarrubia (Banco de España); David Weinstein (Columbia University - Department of Economics) |
| Abstract: | International Macroeconomics has long sought an explanation for current account fluctuations that matches the data. The approaches have typically focused on better models and new macroeconomic variables. We demonstrate the limitations of this approach by showing that idiosyncratic shocks are an important cause of macroeconomic volatility even for large countries. When explaining these fluctuations, standard macroeconomic models generally assume that firms are small and that their microeconomic shocks cancel out. We show that the high degree of concentration of bilateral trade flows means that idiosyncratic shocks can have a significant impact on aggregate economic fluctuations. We theoretically develop a descomposition components. Taking the model to data on bilateral trade flows from 1970 to 1997, we find that the most comprehensive macroeconomic model can only account for at most half of the observed variance in trade account volumes of each country. Thus, this paper highlights the importance of considering disaggregated data when modeling the current account. |
| Keywords: | trade balance, trade concentration, firms, empirical |
| JEL: | F41 F32 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0721&r=cba |
| By: | John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA) |
| Abstract: | This paper examines the extent to which changes in imports or exports of U.S. consumer goods and services occurs in response to a change in the exchange rate, 1960 -2000. The data used are taken from the Economic Report of the President, 2002. The findings indicate that an increase in the trade weighted exchange rate of about one percent is associated with an increase in imports of consumer goods of approximately $1 billion dollars the year after the change. The same level increase seems associated with a decline in con-sumer goods exports of about $0.75 billion dollars. |
| JEL: | F00 F40 F43 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rpi:rpiwpe:0709&r=cba |
| By: | Dimitrios Varvarigos (Dept of Economics, Loughborough University) |
| Abstract: | In a model where seignorage provides the financing instrument for the government’s budget, public spending volatility has an adverse effect on long-run growth. This negative relationship arises because the incidence of volatility in this type of public policy is responsible for higher average money growth, thus induces individuals to devote less time/effort towards capital accumulation. Another implication of the model is that policy variability provides a possible argument behind the positive correlation between inflation and inflation variability. |
| Keywords: | Growth, Inflation, Seignorage, Volatility |
| JEL: | E13 E31 O42 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2007_18&r=cba |
| By: | Richard B. Freeman |
| Abstract: | The paper documents the large cross-country differences in labor institutions that make them a candidate explanatory factor for the divergent economic performance of countries and reviews what economists have learned about the effects of these institutions on economic outcomes. It identifies three ways in which institutions affect economic performance: by altering incentives, by facilitating efficient bargaining, and by increasing information, communication, and trust. The evidence shows that labor institutions reduce the dispersion of earnings and income inequality, which alters incentives, but finds equivocal effects on other aggregate outcomes, such as employment and unemployment. Given weaknesses in the cross-country data on which most studies focus, the paper argues for increased use of micro-data, simulations, and experiments to illuminate how labor institutions operate and affect outcomes. |
| JEL: | J01 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13242&r=cba |
| By: | Karlygash Kuralbayeva (Lincoln College, University of Oxford) |
| Abstract: | We analyze implications of in.ation persistence for business cycle dynamics following terms of trade and risk-premium shocks in a small open economy, under fixed and flexible exchange rate regimes. We show that the country's adjustment paths are slow and cyclical if there is a signi.cant backward-looking element in the in.ation dynamics and the exchange rate is fixed. We also show that such cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters. In contrast, with an independent monetary policy, flexible exchange rate allows to escape severe cycles, supporting the conventional wisdom about the insulation role of flexible exchange rates. |
| Keywords: | inflation inertia, monetary policy, exchange rates, persistence, Phillips curve, small open economy |
| JEL: | E32 F40 F41 |
| Date: | 2007–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:93&r=cba |
| By: | Hartmut Kogelschatz (University of Heidelberg, Department of Economics) |
| Keywords: | random input output-model, distribution of Leontief inverse, solution |
| JEL: | C13 C15 C30 R15 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0447&r=cba |
| By: | Kowal, Pawel |
| Abstract: | We describe algorithm to find higher order approximations of stochastic rational expectations models near the deterministic steady state. Using matrix representation of function derivatives instead of tensor representation we obtain simple expressions of matrix equations determining higher order terms. |
| Keywords: | perturbation method; DSGE models |
| JEL: | C63 C61 E17 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3913&r=cba |
| By: | Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group) |
| Abstract: | Can one define and test the hypothesis of (un)bounded rationality in stochastic choice tasks without endorsing Bayesianism? Similar to the state specificity of assets, we rely on state-specific goal formation. In a given choice task, the list of state-specific goal levels is optimal if one cannot increase the goal level for one state without having to decrease that for other states. We show that this allows to relate optimality more easily to bounded rationality where we interpret goal levels as aspirations. If for the latter there exist choices satisfying all state-specific aspirations and if one such choice is used, we speak of satisficing which may or may not be optimal. |
| Keywords: | Satisficing, bounded rationality, optimality |
| JEL: | B4 D81 D10 |
| Date: | 2007–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2007-035&r=cba |
| By: | Federico S. Mandelman; Gabriel V. Montes Rojas |
| Abstract: | Should a central bank accommodate energy price shocks? Should the central bank use core inflation or headline inflation with the volatile energy component in its Taylor rule? To answer these questions, we build a dynamic stochastic general equilibrium model with energy use, durable goods, and nominal rigidities to study the effects of an energy price shock and its impact on the macroeconomy when the central bank follows a Taylor rule. We then study how the economy performs under alternative parameterizations of the rule with different weights on headline and core inflation after an increase in the energy price. Our simulation results indicate that a central bank using core inflation in its Taylor rule does better than one using headline inflation because the output drop is less severe. In general, we show that the lower the weight on energy price inflation in the Taylor rule, the impact of an energy price increase on gross domestic product and inflation is also lower. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2007-15&r=cba |
| By: | Stavarek, Daniel |
| Abstract: | This paper estimates the exchange market pressure (EMP) in four Central European countries (Czech Republic, Hungary, Poland, Slovakia) during the period 1993-2006. Therefore, it is one of very few studies focused on this region and the very first paper applying concurrently model-dependent as well as model-independent approach to the EMP estimation on these countries. The results obtained suggest that the approaches are not compatible and lead to absolutely inconsistent findings. They often differ in both identification of principal development trends and estimated magnitude and direction of the pressure. Therefore, any general conclusion on those issues is hard to draw. The paper provides evidence that a shift in the exchange rate regime towards the quasi-fixed ERM II should not lead to increasing EMP. However, it is highly probable that some episodes of the excessive EMP will make the fulfillment of the exchange rate stability criterion more difficult in all countries analyzed unless the criterion will have eased. |
| Keywords: | exchange market pressure; model-dependent approach; model-independent approach; EU New Member States; exchange rate stability criterion |
| JEL: | F36 E42 F31 C32 |
| Date: | 2007–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3906&r=cba |