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on Central Banking |
| By: | Michael Woodford |
| Abstract: | It has recently become popular to argue that globalization has had or will soon have dramatic consequences for the nature of the monetary transmission mechanism, and it is sometimes suggested that this could threaten the ability of national central banks to control inflation within their borders, at least in the absence of coordination of policy with other central banks. In this paper, I consider three possible mechanisms through which it might be feared that globalization can undermine the ability of monetary policy to control inflation: by making liquidity premia a function of "global liquidity" rather than the supply of liquidity by a national central bank alone; by making real interest rates dependent on the global balance between saving and investment rather than the balance in one country alone; or by making inflationary pressure a function of "global slack" rather than a domestic output gap alone. These three fears relate to potential changes in the form of the three structural equations of a basic model of the monetary transmission mechanism: the LM equation, the IS equation, and the AS equation respectively. I review the consequences of global integration of financial markets, final goods markets, and factor markets for the form of each of these parts of the monetary transmission mechanism, and find that globalization, even of a much more thorough sort than has yet occurred, is unlikely to weaken the ability of national central banks to control the dynamics of inflation. |
| JEL: | E31 E52 F41 F42 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13329&r=cba |
| By: | Michael Woodford |
| Abstract: | I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a long-run relationship between money growth and inflation. And fourth, I consider reasons why a monetary policy strategy based solely on short-run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provides a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy. |
| JEL: | E52 E58 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13325&r=cba |
| By: | Andrew Atkeson; V. V. Chari; Patrick J. Kehoe |
| Abstract: | The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always desirable; transparency is only if policymakers cannot commit. Interest rates, which can be made endogenously tight, have a natural advantage over money growth and exchange rates, which cannot. As prices, interest and exchange rates are more transparent than money growth. All else equal, the best instrument is interest rates and the next-best, exchange rates. These findings are consistent with the observed instrument choices of developed and less-developed economies. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:394&r=cba |
| By: | Michael B. Devereux (University of British Columbia); Hans Genberg (Hong Kong Monetary Authority, Hong Kong Institute for Monetary Research) |
| Abstract: | A central aspect of the recent debate on global imbalances and the US current account deficit is the role of the exchange rate peg being followed by China and other Asian economies. While one view has stressed the need for Asian currency appreciation, another focuses on the importance of fiscal adjustment and more generally adjustment in relative savings rates in the US and Asian economies. This paper develops a simple two-region open economy macroeconomic model to analyze the alternative impacts of currency appreciation and fiscal adjustment on the current account. We stress a number of structural features of emerging Asian economies that may make currency appreciation an ineffective means of current account adjustment relative to fiscal policy changes. In addition, we note that there may be a welfare conflict between regions on the best way to achieve adjustment. |
| Keywords: | Current Account, Currency Appreciation |
| JEL: | E52 E58 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:172006&r=cba |
| By: | Matthieu Darracq Pariès (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Stéphane Adjemian (CEPREMAP & GAINS, Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.); Stéphane Moyen (Centre d‘Études des Politiques Économiques (EPEE), Université d‘Évry Val d‘Essonne, 4, bld Francois Mitterand, 91025 Évry Cedex, France.) |
| Abstract: | The objective of this paper is to examine the main features of optimal monetary policy within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a medium scale closed economy DSGE for the euro area. Then, we study the properties of the Ramsey allocation through impulse response, variance decomposition and counterfactual analysis. In particular, we show that, controlling for the zero lower bound constraint, does not seem to limit the stabilization properties of optimal monetary policy. We also present simple monetary policy rules which can "approximate" and implement the Ramsey allocation reasonably well. Such optimal simple operational rules seem to react specifically to nominal wage inflation. Overall, the Ramsey policy together with its simple rule approximations seem to deliver consistent policy messages and may constitute some useful normative benchmarks within medium to large scale estimated DSGE framework. However, this normative analysis based on estimated models reinforces the need to improve the economic micro-foundation and the econometric identification of the structural disturbances. JEL Classification: E4, E5. |
| Keywords: | DSGE models, Monetary policy, Bayesian estimation, Welfare calculations. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070803&r=cba |
| By: | Athanasios Orphanides; John C. Williams |
| Abstract: | We examine the performance and robustness properties of monetary policy rules in an estimated macroeconomic model in which the economy undergoes structural change and where private agents and the central bank possess imperfect knowledge about the true structure of the economy. Policymakers follow an interest rate rule aiming to maintain price stability and to minimize fluctuations of unemployment around its natural rate but are uncertain about the economy's natural rates of interest and unemployment and how private agents form expectations. In particular, we consider two models of expectations formation: rational expectations and learning. We show that in this environment the ability to stabilize the real side of the economy is significantly reduced relative to an economy under rational expectations with perfect knowledge. Furthermore, policies that would be optimal under perfect knowledge can perform very poorly if knowledge is imperfect. Efficient policies that take account of private learning and misperceptions of natural rates call for greater policy inertia, a more aggressive response to inflation, and a smaller response to the perceived unemployment gap than would be optimal if everyone had perfect knowledge of the economy. We show that such policies are quite robust to potential misspecification of private sector learning and the magnitude of variation in natural rates. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-33&r=cba |
| By: | GOLLIER, Christian |
| Date: | 2007–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:7220&r=cba |
| By: | Luca Benati (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Giovanni Vitale (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | We jointly estimate the natural rate of interest, the natural rate of unemployment, expected inflation, and potential output for the Euro area, the United States, Sweden, Australia, and the United Kingdom. Particular attention is paid to time-variation in (i) the data-generation process for inflation, which we capture via a time-varying parameters specification for the Phillips curve portion of the model; and (ii) the volatilities of disturbances to inflation and cyclical (log) output, which we capture via break tests. Time-variation in the natural rate of interest is estimated to have been comparatively large for the United States, and especially for the Euro area, and smaller for Australia and the United Kingdom. Overall, natural rate estimates are characterised by a significant extent of uncertainty. JEL Classification: E31, E32, E52. |
| Keywords: | monetary policy, natural rate of interest, time-varying parameters; Monte Carlo integration, median-unbiased estimation, endogenous break tests, bootstrapping. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070797&r=cba |
| By: | Charles Engel; Nelson C. Mark; Kenneth D. West |
| Abstract: | Standard models of exchange rates, based on macroeconomic variables such as prices, interest rates, output, etc., are thought by many researchers to have failed empirically. We present evidence to the contrary. First, we emphasize the point that "beating a random walk" in forecasting is too strong a criterion for accepting an exchange rate model. Typically models should have low forecasting power of this type. We then propose a number of alternative ways to evaluate models. We examine in-sample fit, but emphasize the importance of the monetary policy rule, and its effects on expectations, in determining exchange rates. Next we present evidence that exchange rates incorporate news about future macroeconomic fundamentals, as the models imply. We demonstrate that the models might well be able to account for observed exchange-rate volatility. We discuss studies that examine the response of exchange rates to announcements of economic data. Then we present estimates of exchange-rate models in which expected present values of fundamentals are calculated from survey forecasts. Finally, we show that out-of-sample forecasting power of models can be increased by focusing on panel estimation and long-horizon forecasts. |
| JEL: | F31 F41 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13318&r=cba |
| By: | Glenn D. Rudebusch; John C. Williams |
| Abstract: | We show that professional forecasters have essentially no ability to predict future recessions a few quarters ahead. This is particularly puzzling because, for at least the past two decades, researchers have provided much evidence that the yield curve, specifically the spread between long- and short-term interest rates, does contain useful information at that forecast horizon for predicting aggregate economic activity and, especially, for signaling future recessions. We document this puzzle and suggest that forecasters have generally placed too little weight on yield curve information when projecting declines in the aggregate economy. |
| Keywords: | Economic forecasting ; Recessions |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2007-16&r=cba |
| By: | Morten O. Ravn; Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | Using structural VAR analysis, we document that in a panel of industrialized countries, an increase in government purchases leads to an expansion in output and private consumption, a deterioration in the trade balance, and a depreciation of the real exchange rate (i.e., a decrease in the domestic CPI relative to the exchange-rate adjusted foreign CPI). We propose an explanation for these observed effects based on the deep habit mechanism. We estimate the key parameters of the deep-habit model employing a limited information approach. The predictions of the estimated deep-habit model fit remarkably well the observed responses of output, consumption, the trade balance, and the real exchange rate to an unanticipated government spending shock. In addition, the deep-habit model predicts that in response to an anticipated increase in government spending consumption and wages fail to increase on impact, which is consistent with the empirical evidence stemming from the narrative identification approach. In this way, the deep-habit model reconciles the findings of the SVAR and narrative literatures on the effects of government spending shocks. |
| JEL: | E32 E6 F41 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13328&r=cba |
| By: | Hakan Berument; Ebru Yuksel |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0702&r=cba |
| By: | Robert Amano; Kevin Moran; Stephen Murchison; Andrew Rennison |
| Abstract: | This paper studies the steady-state costs of inflation in a general-equilibrium model with real per capita output growth and staggered nominal price and wage contracts. Our analysis shows that trend inflation has important effects on the economy when combined with nominal contracts and real output growth. Steady-state output and welfare losses are quantitatively important even for low values of trend inflation. Further, we show that nominal wage contracting is quantitatively more important than nominal price contracting in generating these losses. This important result does not arise from price dispersion per se but from an effect of nominal output growth on the optimal markup of monopolistically competitive labour suppliers. We also demonstrate that accounting for productivity growth is important for calculating the welfare costs of inflation. Indeed, the presence of two percent productivity growth increases the welfare costs of inflation in our benchmark specification by a factor of four relative to the no-growth case. |
| Keywords: | Inflation, costs and benefits, wage and price rigidities |
| JEL: | E0 E5 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0720&r=cba |
| By: | Sauer, Stephan |
| Abstract: | Liquidity problems lie at the heart of crises on financial markets as demonstrated in this paper by detailed descriptions of the stock market crash in 1987, the LTCM-crisis in 1998 and the financial market consequences of 11 September 2001. The events also demonstrate that modern central banks, in particular the U.S. Federal Reserve under Alan Greenspan, provided emergency liquidity to limit the negative effects of such crises. However, the anecdotal and empirical evidence from the three crises shows that such emergency liquidity assistance implies risks to goods price stability if it is not focused on the interbank market and quickly sterilised. |
| Keywords: | Liquidity Crises; Financial Stability; Monetary Policy |
| JEL: | E58 E44 G10 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:2011&r=cba |
| By: | Yifan Hu; Timothy Kam |
| Abstract: | We construct a monetary model where government bonds also provide liquidity service. Liquid government bonds create an endogenous interest-rate spread; affect equilibrium allocations and inflation by altering the Ramsey planner’s sequence of implementability and sticky-price constraints. The trade-off confronting a planner in a sticky-price world, shown in recent literature, between using inflation surprise and labor-income tax is modified by the existence of the liquid bond. We find that the more sticky prices become, the more the planner stabilizes prices and also creates less distortionary and less volatile income taxes by taxing the liquidity service of bonds in order to replicate ex post real state-contingent debt. |
| JEL: | E42 E52 E63 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2006-472&r=cba |
| By: | Taner Yigit |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0706&r=cba |
| By: | Hakan Berument; Yilmaz Akdi; Seyit Mumin Cilasun; Hasan Olgun |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0701&r=cba |
| By: | Taner Yigit; Banu Demir |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0705&r=cba |
| By: | Ricardo Llaudes (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | This paper studies the effects and the transmission mechanism of unexpected monetary policy shocks in an open economy setting within the context of a VAR framework. It considers an economy with two sectors, a tradable sector and a non-tradable sector. For a given country, economic sectors are defined according to the proportion of output that is exported to other countries. This paper departs from the standard literature in that it tries to isolate the differential effects that monetary policy shocks may have on these two distinct sectors of the economy. The results show that the behavior of these two sectors varies whithin a country, with the tradable sector showing a higher degree of responsiveness to policy shocks than the non-tradable. This result is robust across the different countries in the sample and for a synthetic aggregate. The evidence presented gives an indication that industrial structure may be an important component for the analysis of monetary policy. JEL Classification: C32, E52, F31, F42. |
| Keywords: | Monetary shock, small open economy, structural VAR. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070799&r=cba |
| By: | Michael B. Devereux (University of British Columbia); Makoto Saito (Hitotsubashi University) |
| Abstract: | This paper constructs a model in which the currency composition of national portfolios is an essential element in facilitating capital flows between countries. In a two country environment, each country chooses optimal nominal bond portfolios in face of real and nominal risk. Current account deficits are financed by increases in domestic currency debt, but balanced by increases in foreign currency credit. This is combined with an evolution of risk-premiums such that the rate of return on the debtor country¡¦s gross liabilities is lower than the return on its gross assets. This ensures stability of the world wealth distribution. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:112006&r=cba |
| By: | Marco J. Lombardi (University of Pisa, Lungarno Pacinotti 43, 56126 Pisa, Italy.); Silvia Sgherri (De Nederlandsche Bank and International Monetary Fund, Postbus 98, 1000 AB Amsterdam, Netherlands.) |
| Abstract: | Following the 2000 stockmarket crash, have US interest rates been held "too low" in relation to their natural level? Most likely, yes. Using a structural neo-Keynesian model, this paper attempts a real-time evaluation of the US monetary policy stance while ensuring consistency between the specification of price adjustments and the evolution of the economy under flexible prices. To do this, the model's likelihood function is evaluated using a Sequential Monte Carlo algorithm providing inference about the time-varying distribution of structural parameters and unobservable, nonstationary state variables. Tracking down the evolution of underlying stochastic processes in real time is found crucial (i) to explain postwar Fed's policy and (ii) to replicate salient features of the data. JEL Classification: E43, C11, C15. |
| Keywords: | Natural Interest Rate; DSGE Models; Bayesian Analysis; Particle Filters. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070794&r=cba |
| By: | Marco Lombardi; Silvia Sgherri |
| Abstract: | Following the 2000 stockmarket crash, have US interest rates been held "too low" in relation to their natural level? Most likely, yes. Using a structural model, this paper attempts a real-time assessment of the US monetary policy while ensuring consistency between the specification of price adjustments and the evolution of the economy under flexible prices. To do this, the model's likelihood function is evaluated using particle filtering, allowing for sequential inference about the time-varying distribution of structural parameters and unobservable, nonstationary state variables. Accounting for real-time expectations and time variation in underlying equilibrium levels is found crucial (i) to explain postwar Fed's policy and (ii) to replicate salient features of the data. |
| Keywords: | Natural Interest Rate; DSGE Models; Bayesian Analysis; Particle Filters |
| JEL: | C33 G3 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:142&r=cba |
| By: | Sauer, Stephan |
| Abstract: | This paper provides a framework to analyse emergency liquidity assistance of central banks on financial markets in response to aggregate and idiosyncratic liquidity shocks. The model combines the microeconomic view of liquidity as the ability to sell assets quickly and at low costs and the macroeconomic view of liquidity as a medium of exchange that influences the aggregate price level of goods. The central bank faces a trade-off between limiting the negative output effects of dramatic asset price declines and more inflation. Furthermore, the anticipation of central bank intervention causes a moral hazard effect with investors. This gives rise to the possibility of an optimal monetary policy under commitment. |
| Keywords: | Liquidity shocks; Financial crises; Liquidity provision principle; Greenspan put; Optimal monetary policy intervention |
| JEL: | E58 E44 G18 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:2012&r=cba |
| By: | Peter McAdam (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Alpo Willman (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | We implement a tractable state-dependent Calvo price-setting signal dependent on inflation and aggregate competitiveness. This allows us to derive a New Keynesian Phillips Curve (NKPC) expressed in terms of the actual levels of variables - rather than in-deviation from “steady state” form - and thus a specification which is not regime-dependent. A consequence of our approach is that ex-ante all firms face the same optimization problem. This state-dependent NKPC nests the conventional hybrid NKPC form as a special case. Finally, we demonstrate the usefulness of our approach by, first, analyzing the persistence and variability of inflation shocks under different inflation regimes and then comparing our state-dependent and timedependent NKPCs on US data. JEL Classification: E31, E32. |
| Keywords: | Calvo Price Staggering, New Keynesian Phillips Curves, State-Dependency, Firm-Level Optimization, Regime Dependency. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070806&r=cba |
| By: | Philippe BACCHETTA; Eric VAN WINCOOP |
| Abstract: | Two well-known, but seemingly contradictory, features of exchange rates are that they are close to a random walk while at the same time exchange rate changes are predictable by interest rate differentials. In this paper we investigate whether these two features of the data may in fact be related. In particular, we ask whether the predictability of exchange rates by interest differentials naturally results when participants in the FX market adopt random walk expectations. We find that random walk expectations can explain the forward premium puzzle, but only if FX portfolio positions are revised infrequently. In contrast, with frequent portfolio adjustment and random walk expectations, we find that high interest rate currencies depreciate much more than what UIP would predict. |
| Keywords: | excess returns; incomplete information; predictability |
| JEL: | E4 F3 G1 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:07.01&r=cba |
| By: | Elke Hahn (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | This paper investigates the impact of exchange rate shocks on sectoral activity and prices in the euro area. Using a VAR framework it provides evidence on the magnitude and speed of the impact of exchange rate shocks on activity in all main euro area sectors and on activity and producer prices in a large set of sub-sectors of industry (excluding construction). Substantial heterogeneity in the impact of exchange rate shocks across sectors is identified as regards both activity and prices. According to our results, among the main euro area sectors an exchange rate shock has the strongest impact on value added in industry (excl. construction) and trade and transportation services. Within industry (excl. construction), among its main sub-sectors all of the impact on production comes via manufacturing, while among the main industrial groupings (MIGs), capital and intermediate goods production respond most strongly. As regards the impact on prices, among the sub-sectors of industry (excl. construction), the impact is largest on producer prices in electricity, gas and water supply, and in line with this producer prices in MIG energy are most sensitive to an exchange rate shock. JEL Classification: C32, E31. |
| Keywords: | Exchange Rate Pass-Through, Sectoral Activity and Prices, Euro area. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070796&r=cba |
| By: | Jonathan Chiu |
| Abstract: | This paper studies the effects of monetary policy in an inventory theoretic model of money demand. In this model, agents keep inventories of money, despite the fact that money is dominated in rate of return by interest bearing assets, because they must pay a fixed cost to transfer funds between the asset market and the goods market. Unlike the exogenous segmentation models in the literature, the timings of money transfers are endogenous. By allowing agents to choose the timings of money transfers, the model endogenizes the degree of market segmentation as well as the magnitude of liquidity effects, price sluggishness and variability of velocity. First, I show that the endogenous segmentation model can generate the positive long run relationship between money growth and velocity in the data which the exogenous segmentation model fails to capture. Second, I show that the short run effects of money shocks in an exogenous segmentation model (such as the linear inflation response to money shock, the liquidity effect and the sluggish price adjustment) are not robust. In an endogenous segmentation model, the equilibrium response to money shocks is non-linear and non-monotonic. Moreover, for large money shocks, there is no liquidity effect and no sluggish price adjustment. |
| Keywords: | Transmission of monetary policy; Monetary policy framework |
| JEL: | E31 E41 E50 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-46&r=cba |
| By: | Yin-wong Cheung (University of California, Santa Cruz); Dickson Tam (Hong Kong Institute for Monetary Research); Matthew S. Yiu (Hong Kong Institute for Monetary Research) |
| Abstract: | One argument for floating the Chinese renminbi (RMB) is to insulate China¡¦s monetary policy from the US effect. However, we note that both theoretical considerations and empirical results do not offer a definite answer on the link between exchange rate arrangement and policy dependence. We examine the empirical relevance of the argument by analyzing the interactions between the Chinese and US interest rates. Our empirical results, which appear robust to various assumptions of data persistence, suggest that the US effect on the Chinese interest rate is quite weak. Apparently, even with its de facto peg to the US dollar, China has alternative measures to retain its policy independence and de-link its interest rates from the US rate. In other words, the argument for a flexible RMB to insulate China¡¦s monetary policy from the US effect is not substantiated by the observed interest rate interactions. |
| Keywords: | Policy Dependence, Interest Rate Interactions, Exchange Rate Regime |
| JEL: | F33 E5 G15 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:192006&r=cba |
| By: | Timothy Kam; Kirdan Lees; Philip Liu |
| Abstract: | We estimate underlying macroeconomic policy objectives of three of the earliest explicit inflation targeters - Australia, Canada and New Zealand - within the context of a small open economy DSGE model. We assume central banks set policy optimally, such that we can reverse engineer policy objectives from observed time series data. We find that none of the central banks show a concern for stabilizing the real exchange rate. All three central banks share a concern for minimizing the volatility in the change in the nominal interest rate. The Reserve Bank of Australia places the most weight on minimizing the deviation of output from trend. Joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective. |
| JEL: | C51 E52 F41 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2006-473&r=cba |
| By: | Christian Fahrholz (School of Business and Economics, Friedrich-Schiller University Jena, Germany.) |
| Abstract: | Following entrance into the European Union, Central Eastern European Countries (CEECs) are expected to join the European Monetary Union (EMU). These countries may incur considerable costs over the course of their passing through the required Exchange Rate Mechanism II (ERM-II). However, with enough bargaining leverage CEECs may be able to pass some of these costs on to current EMU-members. In turn, a CEEC's leverage depends on their ability to wield successful brinkmanship via an exchange-rate policy characterized by a 'threaten-thy-neighbor' strategy. A two-stage Nash-threat game captures the essentials of the CEECs' phase of ERM-II pass through. |
| Keywords: | Threat game, Nash-bargaining solution, exchange-rate policy, EU-enlargement, EMU |
| JEL: | C72 C78 F33 F51 |
| Date: | 2007–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2007-050&r=cba |
| By: | Josef Baumgartner (WIFO); Ernst Glatzer; Fabio Rumler; Alfred Stiglbauer |
| Abstract: | We provide empirical evidence on the degree and characteristics of price rigidity in Austria by estimating the average frequency of price changes and the duration of price spells from a large data set of individual price records collected for the computation of the Austrian CPI. |
| Keywords: | Consumer prices, sticky prices, frequency and size of price changes, duration of price spells |
| Date: | 2006–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2006:i:277&r=cba |
| By: | Karen J. Horowitz; Mark A. Planting (Bureau of Economic Analysis) |
| JEL: | E60 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:bea:wpaper:0038&r=cba |
| By: | Brent R. Moulton (Bureau of Economic Analysis) |
| JEL: | E60 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:bea:papers:0042&r=cba |
| By: | Bruce T. Grimm (Bureau of Economic Analysis) |
| Abstract: | The statistical discrepancy is equal to gross domestic product less gross domestic income. These two measures are, in principle, the same. The difference reflects less than perfect source data. The paper finds few components that statistically significantly explain the discrepancy in the last 35 years or in major subperiods, and their explanatory power is weak. The paper also finds that comprehensive benchmark revisions of the NIPAs appear to result in reductions in the explanatory power of the components that are likely to be due to reductions in measurement errors. |
| JEL: | E60 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:bea:wpaper:0041&r=cba |
| By: | Heinz Handler (WIFO) |
| Abstract: | The focus of this paper is on the similarities and differences of German and Austrian monetary and exchange rate policies, which are analysed against the background of the economic forces which eventually resulted in the creation of the European Monetary Union. The frontline of the struggle for achieving monetary integration in Europe ran between Germany and France, which enhances the role of the DM as an anchor currency not just for Austria, but for Europe at large. In contrast to the very active role of Germany in the monetary integration process, Austria remained virtually passive. However, utilising her experience with a hard currency policy, Austria made an essential contribution to the stability of the system as a whole. Given a history of just a few years, the stability of, and the future risks for, the European monetary system are elaborated. |
| Keywords: | History of European monetary integration, role of German and Austrian hard currency policies, future of EMU Europäische Währungsunion Hartwährungspolitik Deutschland Österreich |
| Date: | 2007–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2007:i:298&r=cba |
| By: | Nuno Cassola (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Christian Ewerhart (Institute for Empirical Research in Economics (IEW), University of Zurich, Winterthurerstrasse 30, CH-8006, Zurich, Switzerland.); Claudio Morana (Dipartimento di Scienze Economiche e Metodi Quantitativi, Via Perrone 18, 28100, Novara, Italy.) |
| Abstract: | This paper contributes to the existing literature on central bank repo auctions. It is based on a structural econometric approach, whereby the primitives of bidding behavior (individual bid schedules and bid-shading components) are directly estimated. With the estimated parameters we calibrate a theoretical model in order to illustrate some comparative static results. Overall the results suggest that strategic and optimal behavior is prevalent in ECB tenders. We find evidence of a statistically significant bid-shading component, even though the number of bidders is very large. Bid-shading increases with liquidity uncertainty and decreases with the number of participants. JEL Classification: G21, G12, D44, E43, E50. |
| Keywords: | Repo auctions, monetary policy implementation, primary money market market, multi unit auctions, discriminatory auctions, collateral, central bank, nonparametric estimation. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070793&r=cba |
| By: | Donato Masciandaro; Maria Nieto; Henriette Prast |
| Abstract: | This paper focuses on the financing of banking supervision. Countries are classified according to who finances banking supervision the tax payer and/or the supervised industry -, and how the budget and fees are determined. We show that funding regimes differ across countries. Public funding is more often found when banks are supervised by the central bank, while supervision funded via a levy on the regulated banks is more likely in the case of a separate financial authority. Finally, some countries apply mixed funding. In general, there is a trend toward more private funding. We also find a relation between sources of financing and accountability arrangements. Public financing is associated with accountability towards the parliament, while private financing is more likely to go hand in hand with accountability towards the government. The financing issue is important because the financing regime may affect the behaviour of the supervisor and hence the quality of supervision. Regulatory capture, industry capture and the supervisor's self interest may affect supervisory policy. No theoretical model has been developed prescribing the optimal financing of supervision. Our results suggest that the actual choice of financing is a casual one, not based on either considerations of incentive-compatability or on the beneficiary approach. As it is to be expected that financial regulation will become more internationally organized in the future, careful analysis of the financing issue will become even more relevant. |
| Keywords: | banking supervision; budgetary independence; accountability; financial governance; central banks; financial authorities. |
| JEL: | C33 G3 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:141&r=cba |
| By: | Hans Genberg (Hong Kong Monetary Authority, Hong Kong Institute for Monetary Research) |
| Abstract: | Financial integration in East Asia is actively being pursued and will in due course lead to substantial mobility of capital between economies in the region. Plans for monetary cooperation as a prelude to monetary integration and ultimately monetary unification are also proposed. These plans often suggest that central banks should adopt some form of common exchange rate policy in the transition period towards full monetary union. This paper argues that this is a dangerous path in the context of highly integrated financial markets. An alternative approach is proposed where independent central banks coordinate their monetary policies through the adoption of common objectives and by building an appropriate institutional framework. When this coordination process has progressed to the point where interest rate developments are similar across the region, and if in the meantime the required institutional infrastructure has been build, the next step towards monetary unification can be taken among those central banks that so desire. The claim is that this transition path is likely to be robust and will limit the risk of currency crises. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:152006&r=cba |
| By: | Tony Makin |
| Abstract: | This paper develops a new international monetary framework for analysing the domestic and international repercussions of China’s exchange rate policy in the context of its rapid development. This straightforward framework reveals that misalignment of the yuan against major currencies artificially assists China’s output growth, contributes to global imbalances and limits household consumption, slowing the rise in living standards. Meanwhile, China’s Western trading partners, most notably the United States and the European Union, simultaneously experience external deficits, lower output and saving due to exchange rate misalignment. |
| Keywords: | output, expenditure, economic development, exchange rate misalignment, trading partners, global imbalances |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:deg:conpap:c012_012&r=cba |
| By: | Jinzao Chen |
| Abstract: | This paper employs the behavioral equilibrium exchange rate (BEER) model to estimate the equilibrium real exchange rate of Renminbi (RMB) and the exchange rate misalignment in China, which covers the period from 1994q1 to 2006q2. Using the most precise and recent data, the main findings of the paper are that (1) since 1994q1, RMB equilibrium exchange rate has exhibited a steady appreciation, but from the 1999q3 to the recent period, it started to depreciate. And (2) that RMB real exchange rate has been under-valuated during the most part of sample period, but this misalignment has a trend to become smaller and small, and in recent after-reform period, a small degree of over-evaluation replaces this under-valuation. |
| Keywords: | Behavior equilibrium exchange rate, cointegration, misalignment, Renminbi |
| JEL: | F31 F32 F41 C32 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:deg:conpap:c012_013&r=cba |
| By: | Arief Ramayandi (Department of Economics, Padjadjaran University) |
| Abstract: | Empirical studies on the process of monetary policy making in a number of advanced economies have shown that a simple policy reaction function (PRF) performs well in explaining the setting of monetary policy. This paper examines an application of a simple PRF in an attempt to broaden the understanding of monetary policy making processes in ?ve developing ASEAN countries. As found to be the case in the more advanced economies, a simple PRF is also found to perform well in explaining the setting of monetary policy in these countries. Moreover, the ?ndings uncover the main drivers behind the conduct of monetary policy and provide a relatively consistent explanation about the monetary policy episodes in the sample economies. |
| Keywords: | Monetary policy, policy reaction function, ASEAN |
| JEL: | E50 E52 E43 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:200707&r=cba |
| By: | Michael Bordo; Ali Dib; Lawrence Schembri |
| Abstract: | This paper revisits Canada's pioneering experience with floating exchange rate over the period 1950–1962. It examines whether the floating rate was the best option for Canada in the 1950s by developing and estimating a New Keynesian small open economy model of the Canadian economy. The model is then used to conduct a counterfactual analysis of the impact of different monetary policies and exchange rate regimes. The main finding indicates that the flexible exchange rate helped reduce the volatility of key macroeconomic variables. The Canadian monetary authorities, however, clearly did not understand all of the implications of conducting monetary policy under a flexible exchange rate and a high degree of capital mobility. The paper confirms that monetary policy was more volatile in the post-1957 period and Canada's macroeconomic performance suffered as a result. |
| Keywords: | Exchange rates; Economic models |
| JEL: | E32 E37 F31 F32 N1 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-45&r=cba |
| By: | Stan du Plessis (Department of Economics, Stellenbosch University); Ben Smit (Bureau of Economic Research, Stellenbosch University); Federico Sturzenegger (Kennedy School of Government, Harvard University) |
| Abstract: | This paper uses an SVAR approach to discuss the cyclicality of fiscal and monetary policy in South Africa since 1994. There is substantial South African literature on this topic, but much disagreement remains. Though not undisputed, there is growing consensus that monetary policy has contributed to the remarkable stabilisation of the South African economy over this period. The evaluation of the role of fiscal policy in stabilisation has been less favourable and there is little evidence that a countercyclical fiscal stance was a priority over this period. This paper considers these issues in an empirical framework that addresses some of the shortcomings in the literature. Specifically, it constructs a structural model in contrast with the reduced form models typically used in the South African literature, incorporates the dynamic interaction between monetary and fiscal shocks on the demand side and supply shocks on the other, and avoids controversy over ‘neutral’ base years and the size of fiscal elasticities. The model confirms the consensus on monetary policy, finding it to have been largely countercyclical since 1994. On fiscal policy, this paper finds evidence of pro-cyclicality, especially in the more recent period, though the policy simulations suggest that the pro-cyclicality of fiscal policy has had little destabilising impact on real output. |
| Keywords: | Stabilisation policy, Monetary policy, Inflation targeting, Fiscal policy, Pro-cyclical policy |
| JEL: | E32 E63 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers43&r=cba |
| By: | Marco Flavio da Cunha Resende (Cedeplar-UFMG); Fabiana Lima (PUC-SP) |
| Abstract: | In this paper two hypotheses about the relationship between monetary policy and investment in the context of the inflation target system were tested. One of these hypotheses is based on the idea of neutrality of money, and the other hypothesis is based on the reject of that idea. An investment equation for the Brazilian economy was estimated (1848-2005), and a proxy for current expectations about monetary policy was adopted as one of the independent variables of the equation. Structural break tests for the equation were conduced by the assumption of changes on the coefficients of the equation after the inflation target system implementation. Another equation using piece-wise dummy variable was estimated. The results highlight that a negative correlation between current expectation of restrictive monetary policy and current investment rose after the inflation target system implementation. |
| Keywords: | inflation target; monetary policy; investment |
| JEL: | E12 E13 E22 E52 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:cdp:texdis:td316&r=cba |