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on Central Banking |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper analyzes the value of communication in the implementation of monetary policy. The central bank is uncertain about the current state of the economy. Households and firms are uncertain about the statistical properties of aggregate variables, including nominal interest rates, and must learn about their dynamics using historical data. Given these uncertainties, when the central bank implements optimal policy, the Taylor principle is not sufficient for macroeconomic stability: for reasonable parameterizations self-fulfilling expectations are possible. To mitigate this instability, three communication strategies are contemplated: i) communicating the precise details of the monetary policy -- that is, the variables and coefficients; ii) communicating only the variables on which monetary policy decisions are conditioned; and iii) communicating the inflation target. The first two strategies restore the Taylor principle as a sufficient condition for stabilizing expectations. In contrast, in economies with persistent shocks, communicating the inflation target fails to protect against expectations driven fluctuations. These results underscore the importance of communicating the systematic component of monetary policy strategy: announcing an inflation target is not enough to stabilize expectations -- one must also announce how this target will be achieved. |
| JEL: | D84 E52 E58 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13259&r=cba |
| By: | Christian Broda; David E. Weinstein |
| Abstract: | Japanese monetary and fiscal policy uses the consumer price index as a metric for price stability. Despite a major effort to improve the index, the Japanese methodology of calculating the CPI seems to have a large number of deficiencies. Little attention is paid in Japan to substitution biases and quality upgrading. This implies that important methodological differences have emerged between the U.S. and Japan since the U.S. started to correct for these biases in 1999. We estimate that using the new corrected U.S. methodology, Japan's deflation averaged 1.2 percent per year since 1999. This is more than twice the deflation suggested by Japanese national statistics. Ignoring these methodological differences misleading suggests that American real per capita consumption growth has been growing at a rate that is almost 2 percentage points higher than that of Japan between 1999 and 2006. When a common methodology is used Japan's growth has been much closer to that of the U.S. over this period. Moreover, we estimate that the bias of the Japanese CPI relative to a true cost-of-living index is around 2 percent per year. This overstatement in the Japanese CPI in combination with Japan's low inflation rate is likely to cost the government over 69 trillion yen -- or 14 percent of GDP -- over the next 10 years in increased social security expenses and debt service. For monetary policy, the overstatement of inflation suggests that if the BOJ adopts a formal inflation target without changing the current CPI methodology a lower band of less than 2 percent would not achieve its goal of price stability. |
| JEL: | E31 E5 H6 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13255&r=cba |
| By: | Bruce Preston; Mauro Roca |
| Abstract: | This paper solves a real business cycle model with heterogeneous agents and uninsurable income risk using perturbation methods. A second order accurate characterization of agent's optimal decision rules is given, which renders the implications of aggregation for macroeconomic dynamics transparent. The role of cross-sectional holdings of capital in determining equilibrium dynamics can be directly assessed. Analysis discloses that an individual's optimal saving decisions are almost linear in their own capital stock giving rise to permanent income consumption behavior. This provides an explanation for the approximate aggregation properties of this model documented by Krusell and Smith (1998): the distribution of capital does not affect aggregate dynamics. While the variance-covariance properties of endogenous variables are almost entirely determined by first order dynamics, the second order dynamics, which capture properties of the wealth distribution, are nonetheless important for an individual's mean consumption and saving decisions and therefore the mean equilibrium capital stock. Policy evaluation exercises therefore need to take account of these higher order terms. |
| JEL: | C6 D52 E21 E32 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13260&r=cba |
| By: | Ferrara, Laurent |
| Abstract: | In this paper, we propose a new coincident monthly indicator to detect in real-time the start and the end of an economic recession phase for the Euro area. In this respect, we use the methodology proposed in Anas and Ferrara (2002, 2004) as regards the recession indicator for the US, based on Markov-Switching processes popularized in economics by Hamilton (1989). By using a set of four monthly time series, we show that this start-end recession indicator (SERI) is able to reproduce all the recession phases experienced by the Euro area since 1970. Concerning the last low phase of the growth cycle in the Euro area, started in 2001, empirical results show that the Euro area experienced a ÃÂë quasi-recession ÃÂû phase, located between the end of the 2001 year and the beginning of 2002, without a global recession. This is due to a lack of diffusion of this phenomena among the main Eurozone countries, though it was synchronized. |
| Keywords: | Recession; real-time; probabilistic indicator; Euro area. |
| JEL: | C51 E32 C32 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4042&r=cba |
| By: | Assenza, Tiziana |
| Abstract: | The appealing feature of Kiyotaki and Moore's Financial Accelerator model (Kiyotaki and Moore, 1997, 2002) is the linkage of asset price changes and borrowing constraints. This framework therefore is the natural vehicle to explore the net worth channel of the monetary transmission mechanism. In the original model, however, all the variables, credit included, are in real terms. In order to assess the impact of monetary policy the model must be reformulated to fit a monetary economy. In the present paper we model a monetary economy with financing constraints adopting the Money In the Utility function (MIU) approach.The occurrence of multiple equilibria is a likely outcome of the dynamics generated by the model. A change in the growth rate of money supply can affect real out- put through the impact of inflation on net worth. In a sense the monetary transmission mechanism we are focusing on consists of a combination of the inflation tax effect and the net worth channel. Contrary to the traditional view, at least for some parameter restrictions, an increase of the inflation tax can bring about an increase of aggregate output. |
| JEL: | E52 E31 E44 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4049&r=cba |
| By: | Paul SÃÂöderlind; Angelo Ranaldo |
| Abstract: | We study high-frequency exchange rate movements over the sample 1993-2006. We document that the (Swiss) franc, euro, Japanese yen and the pound tend to appreciate against the U.S. dollar when (a) S&P has negative returns; (b) U.S. bond prices increase; and (c) when currency markets become more volatile. In these situations, the franc appreciates also against the other currencies, while the pound depreciates. These safe haven properties of the franc are visible for different time granularities (from a few hours to several days), during both "ordinary days" and crisis episodes and show some non-linear features. |
| Keywords: | high-frequency data, crisis episodes, non-linear effects |
| JEL: | F31 G15 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2007:2007-22&r=cba |
| By: | Gregor W. Smith (Department of Economics, Queen's University) |
| Abstract: | Estimating linear rational expectations models requires replacing the expectations of future, endogenous variables either with forecasts from a fully solved model, or with the instrumented actual values, or with forecast survey data. Extending the methods of McCallum (1976) and Gottfries and Persson (1988), I show how to pool these methods and also use actual, future values of these variables to improve statistical efficiency. The method is illustrated with an application using SPF survey data in the US Phillips curve, where the output gap plays a significant role but lagged inflation plays none. |
| Keywords: | rational expectations, recursive projection, Phillips curve |
| JEL: | E37 C53 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1129&r=cba |
| By: | Belloc, Marianna; Federici, Daniela |
| Abstract: | This paper develops a NATREX (NATural Real EXchange rate) model for two large economies, the Eurozone and the United States. The NATREX approach has already been adopted to explain the medium-long term dynamics of the real exchange rate in a number of industrial countries. So far, however, it has been applied to a one-country framework where the "rest of the world" is treated as given. In this paper, we build a NATREX model where the two economies are fully specified and allowed to interact. Our theoretical model offers the basis for empirical estimation of the euro/dollar equilibrium exchange rate that will be carried out in future research. JEL classification: F31; F36; F47 |
| Keywords: | Key words: NATREX; equilibrium exchange rate; euro/dollar; structural approach |
| JEL: | F43 F41 F36 F31 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4046&r=cba |
| By: | Tomer Shachmurove (Social Science Computing Center, University of Pennsylvania); Yochanan Shachmurove (Department of Economics, University of Pennsylvania and The City College of The City University of New York) |
| Abstract: | This paper utilizes Vector Auto Regression (VAR) models to analyze the interdependence among exchange rates of twelve Asian-Pacific nations, Australia, China, Indonesia, Japan, Malaysia, New Zealand, Philippines, South Korea, Singapore, Taiwan, Thailand, and Vietnam. The daily data span from 1995 to 2004. It finds strong regional foreign exchange dependency, varying from 32 to 73 percent. This network of markets is highly correlated, with shocks to one reverberating throughout the region. Despite the linkages of the Chinese exchange rate to the United States dollar, the Chinese foreign exchange is not as independent with respect to its South-Asian neighbors as previously thought. |
| Keywords: | : Exchange rates, Asian- Pacific region, Australia, China, Indonesia, Japan, Malaysia, New Zealand, Philippines, South Korea, Singapore, Taiwan, Thailand, Vietnam, Correlograms, Impulse Responses, Variance Decompositions, Interdependence |
| JEL: | F0 F3 G0 C3 C5 E4 P0 |
| Date: | 2007–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:07-019&r=cba |
| By: | Schnabl, Gunther; Hoffmann, Andreas |
| Abstract: | We show how since the mid 1980s expansionary monetary policies in the large economies and âÃÂÃÂvagabonding liquidityâÃÂàhave contributed to bubbles in the new and emerging markets. Based on the monetary overinvestment theories of Hayek and Wicksell we describe a wave of bubbles and crises that was initiated in Japan by an expansionary monetary policy in the mid 1980s. After the burst of the Japanese bubble and sharply declining interest rates in Japan, carry trade transmitted the bubbles to East Asia (Asian crisis) and the new markets in the developed economies. After the end of the irrational exuberance in the new markets, new bubbles emerged in the US real estate market and possibly currently in China and Central and Eastern Europe. Because particularly Japan and the US have tended to lower interest rates in response to financial crisis, the low interest rate policies in the large countries and thereby speculative exaggerations may continue. According to Wicksell and Hayek a higher level of interest rates in the large countries would reveal the structural distortions that have come along with the ample liquidity supply. |
| Keywords: | Bubbles; Boom-bust cycles; Capital Flows; Emerging Markets; Hayek; Wicksell. |
| JEL: | E52 E44 B53 E32 |
| Date: | 2007–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4019&r=cba |
| By: | Chowdhury, Khorshed (University of Wollongong) |
| Abstract: | This paper examines the time series properties of real exchange rate indices of Australia in the presence of structural break. Traditional unit root procedures have low power when structural break is ignored. By including structural change in the data, PerronâÃÂÃÂs (1997) Additive Outlier model was found optimal. Three indices (Trade-weighted index (TWI), Export-weighted index (EWI) and Import-weighted index (IWI) are found to be stationary while G7 GDP-weighted index (G7WI) was found non-stationary. The estimated break dates correspond to the period of huge real GDP downturn in Australia (early 1990s), and the global recession in the early 1980s affecting the G7 countries. |
| Keywords: | Real exchange rate, purchasing power parity, unit root, structural break. |
| JEL: | F13 F31 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:uow:depec1:wp07-05&r=cba |