nep-cba New Economics Papers
on Central Banking
Issue of 2007‒10‒20
29 papers chosen by
Alexander Mihailov
University of Reading

  1. News and Business Cycles in Open Economies By Jaimovich, Nir; Rebelo, Sérgio
  2. Monetary policy, expected inflation and inflation risk premia By Ravenna , Federico; Seppälä, Juha
  3. Endogenous Indexing and Monetary Policy Models By Mash, Richard
  4. Two Reasons Why Money and Credit May be Useful in Monetary Policy By Lawrence Christiano; Roberto Motto; Massimo Rostagno
  5. Actual versus Perceived Central Bank Transparency: The Case of the European Central Bank By Cruijsen, C. van der; Eijffinger, S.C.W.
  6. Learning in Real Time: Theory and Empirical Evidence from the Term Structure of Survey Forecasts By Patton, Andrew J; Timmermann, Allan G
  7. Interest Rate Rules and Welfare in Open Economies By Ozge Senay
  8. The Impact of News on Higher Moments By Eric Jondeau; Michael Rockinger
  9. Technology Shocks and Employment in Open Economies By Tervala, Juha
  10. Aggregating Phillips Curves By Jean Imbs; Eric Jondeau; Florian Pelgrin
  11. Declining Valuations And Equilibrium Bidding In Central Bank Refinancing Operations By Christian Ewerhart; Nuno Cassola; Natacha Valla
  12. Is Unemployment More Costly Than Inflation? By David G. Blanchflower
  13. Fear, Unemployment and Migration By David G. Blanchflower; Chris Shadforth
  14. A Model of an Optimum Currency Area By Ricci, Luca Antonio
  15. A microfounded sectoral model for open economies By Plasmans J.; Fornero J.; Michalak T.
  16. Nominal Rigidities and The Real Effects of Monetary Policy in a Structural VAR Model By Pham The Anh
  17. Os mecanismos de transmissão da política monetária: uma abordagem teórica By Cláudio Gontijo
  18. Accession to the Euro-Area: A Stylized Analysis Using a NK Model By Van Aarle B.; Garretsen H.; Moons C.
  19. Monetary policy in the New-Keynesian model: An application to the Euro-Area By Moons C.; Garretsen H.; Van Aarle B.; Fornero J.
  20. Monetary Policy Shocks in the Euro Area and Global Liquidity Spillovers By Joao Sousa; Andrea Zaghini
  21. What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve? By Álvarez, Luis J.
  22. Trade Costs and Some Puzzles in International Macroeconomics By Luke Willard
  23. Why are the Effects of Recent Oil Price Shocks so Small? By Torsten Schmidt; Tobias Zimmermann
  24. The Stability and Growth Pact, Fiscal Policy Institutions, and Stabilization in Europe By Carlos Marinheiro
  25. The External Finance Premium and the Macroeconomy: US post-WWII Evidence By F. DE GRAEVE
  26. Computing Stochastic Dynamic Economic Models with a Large Number of State Variables: A Description and Application of a Smolyak-Collocation Method By Benjamin Malin; Dirk Krueger; Felix Kubler
  27. Monetary Policy and Swedish Unemployment Fluctuations By Alexius, Annika; Holmlund, Bertil
  28. Modelling Inflation in Croatia By Maruška Vizek; Tanja Broz
  29. Real exchange rate dynamics in Macedonia: Old wisdoms and new insights By Bogoev, Jane; Terzijan, Sultanija Bojceva; Petrovska, Magdalena

  1. By: Jaimovich, Nir; Rebelo, Sérgio
    Abstract: It is well known that the neoclassical model does not generate comovement among macroeconomic aggregates in response to news about future total factor productivity. We show that this problem is generally more severe in open economy versions of the neoclassical model. We present an open economy model that generates comovement both in response to sudden stops and to news about future productivity and investment-specific technical change. We find that comovement is easier to generate in the presence of weak short-run wealth effects on the labour supply, adjustment costs to labour, and/or investment, and whenever the real interest rate faced by the economy rises with the level of net foreign debt.
    Keywords: comovement; news; open economy
    JEL: F4
    Date: 2007–10
  2. By: Ravenna , Federico (University of California, Department of Economics.); Seppälä, Juha (University of Illinois, Department of Economics)
    Abstract: Within a New Keynesian business cycle model, we study variables that are normally unobservable but are very important for the conduct of monetary policy, namely expected inflation and inflation risk premia. We solve the model using a third-order approximation that allows us to study time-varying risk premia. Our model is consistent with rejection of the expectations hypothesis and the business-cycle behaviour of nominal interest rates in US data. We find that inflation risk premia are very small and display little volatility. Hence, monetary policy authorities can use the difference between nominal and real interest rates from index-linked bonds as a proxy for inflation expectations. Moreover, for short maturities current inflation is a good predictor of inflation risk premia. We also find that short-term real interest rates and expected inflation are significantly negatively correlated and that short-term real interest rates display greater volatility than expected inflation. These results are consistent with empirical studies that use survey data and index-linked bonds to obtain measures of expected inflation and real interest rates. Finally, we show that our economy is consistent with the Mundell-Tobin effect: increases in inflation are associated with higher nominal interest rates, but lower real interest rates.
    Keywords: term structure of interest rates; monetary policy; expected inflation; inflation risk premia; Mundell-Tobin effect
    JEL: E43 E44 E50 G12
    Date: 2007–10–11
  3. By: Mash, Richard
    Abstract: Models in which firms use a rule of thumb or partial indexing in price setting are prominent in the recent monetary policy literature. The extent to which these firms adjust their prices to lagged inflation has been taken as fixed. We consider the implications of firms choosing the optimal degree of indexation so these simple pricing rules deliver prices as close as possible to those which would be chosen optimally. We find that the degree of indexation depends on the extent of persistence in the economy such that models with constant indexation are vulnerable to the Lucas critique. We also study the interactions between firms’ price setting and the macroeconomic environment finding that, for the models which appear most plausible on microeconomic grounds, the Nash equilibrium between firms and the policy maker is characterised by zero indexation and zero macroeconomic persistence.
    Keywords: Indexing, Monetary Policy, Phillips Curve, Inflation Persistence, Microfoundations
    JEL: E22 E52 E58
    Date: 2007
  4. By: Lawrence Christiano; Roberto Motto; Massimo Rostagno
    Abstract: We describe two examples which illustrate in different ways how money and credit may be useful in the conduct of monetary policy. Our first example shows how monitoring money and credit can help anchor private sector expectations about inflation. Our second example shows that a monetary policy that focuses too narrowly on inflation may inadvertently contribute to welfare-reducing boom-bust cycles in real and financial variables. The example is of some interest because it is based on a monetary policy rule fit to aggregate data. We show that a policy of monetary tightening when credit growth is strong can mitigate the problems identified in our second example.
    JEL: E41 E44 E52 E58
    Date: 2007–10
  5. By: Cruijsen, C. van der; Eijffinger, S.C.W. (Tilburg University, Center for Economic Research)
    Abstract: Central banks have become more and more transparent about their monetary policy making process. In the central bank transparency lit- erature the distinction between actual and perceived central bank trans- parency is often lacking. However, as perceptions are crucial for the ac- tions of economic agents this distinction matters. A discrepancy between actual and perceived transparency may exist because of incomplete or in- correct transparency knowledge and other (psychological) factors. Even financial experts, the most important channel through which the central bank can influence the economy, might suffer from misaligned perceptions. We investigate the mismatch between actual and perceived transparency and its relevance by analyzing data of a Dutch household survey on the European Central Bank?s transparency. To benefit from higher trans- parency perceptions the European Central Bank might feel tempted to stress its transparency strengths, but hide its transparency weaknesses.
    Keywords: Central bank transparency;Perceptions;Survey;CentERpanel;Behavioral Economics.
    JEL: D80 E52 E58
    Date: 2007
  6. By: Patton, Andrew J; Timmermann, Allan G
    Abstract: We develop a theoretical framework for understanding how agents form expectations about economic variables with a partially predictable component. Our model incorporates the effect of measurement errors and heterogeneity in individual forecasters' prior beliefs and their information signals and also accounts for agents' learning in real time about past, current and future values of economic variables. We use the model to develop insights into the term structure of forecast errors, and test its implications on a data set comprising survey forecasts of annual GDP growth and inflation with horizons ranging from 1 to 24 months. The model is found to closely match the term structure of forecast errors for consensus beliefs and is able to replicate the cross-sectional dispersion in forecasts of GDP growth but not for inflation - the latter appearing to be too high in the data at short horizons. Our analysis also suggests that agents systematically underestimated the persistent component of GDP growth but overestimated it for inflation during most of the 1990s.
    Keywords: real time learning; survey forecasts; term structure of forecasts
    JEL: C53 E37
    Date: 2007–10
  7. By: Ozge Senay
    Abstract: This paper analyses the welfare performance of a set of five alternative interest rate rules in an open economy stochastic dynamic general equilibrium model with nominal rigidities. A rule with a lagged interest rate term, high feedback on inflation and low feedback on output is found to yield the highest welfare for a small open economy. This result is robust across different degrees of openness, different sources of home and foreign shocks, alternative foreign monetary rules and different specifications for price setting behaviour. The same rule emerges as both the Nash and cooperative equilibria in a two-country version of the model.
    Keywords: Welfare, Monetary Policy, Interest Rate Rules, Second Order Approximation.
    JEL: E52 E58 F41
    Date: 2007–10
  8. By: Eric Jondeau (University of Lausanne and Swiss Finance Institute); Michael Rockinger (University of Lausanne and Swiss Finance Institute)
    Abstract: In this paper, we extend the concept of News Impact Curve developed by Engle and Ng (1993) to the higher moments of the multivariate returns' distribution, thereby providing a tool to investigate the impact of shocks on the characteristics of the subsequent distribution. For this purpose, we present a new methodology to describe the joint distribution of returns in a non-normal setting. This methodology allows to gain a better understanding of the temporal evolution of the returns' distribution and can be used to analyze the behavior of the optimal portfolio distribution. We apply our methodology to provide stylized facts on the four largest international stock markets. In particular, we document the persistence in large (positive or negative) daily returns. In a multivariate setting, we find that foreign holdings provide a good hedge against changes in domestic volatility after good shocks but a bad hedge after crashes.
    Keywords: Volatility, Skewness, Kurtosis, GARCH model, Multivariate skewed Student t distribution, Stock returns
    JEL: C22 C51 G12
    Date: 2006–11
  9. By: Tervala, Juha
    Abstract: A growing body of empirical evidence suggests that a positive technology shock leads to a temporary decline in employment. A two-country model is used to demonstrate that the open economy dimension can enhance the ability of sticky price models to account for the evidence. The reasoning is as follows. An improvement in technology appreciates the nominal exchange rate. Under producer-currency pricing, the exchange rate appreciation shifts global demand toward foreign goods away from domestic goods. This causes a temporary decline in domestic employment. If the expenditure-switching effect is sufficiently strong, a technology shock also has a negative effect on output in the short run.
    Keywords: Open economy macroeconomics, technology shocks, employment
    JEL: E24 E32 F41
    Date: 2007
  10. By: Jean Imbs (University of Lausanne, HEC and Swiss Finance Institute); Eric Jondeau (University of Lausanne, HEC and Swiss Finance Institute); Florian Pelgrin (University of Lausanne, HEC and CIRANO)
    Abstract: The New Keynesian Phillips Curve is at the center of two raging empirical debates. First,vhow can purely forward looking pricing account for the observed persistence in aggregate inflation. Second, price-setting responds to movements in marginal costs, which should therefore be the driving force to observed inflation dynamics. This is not always the case in typical estimations. In this paper, we show how heterogeneity in pricing behavior is relevant to both questions. We detail the conditions under which imposing homogeneityresults in overestimating a backward-looking component in (aggregate) inflation, and underestimating the importance of (aggregate) marginal costs for (aggregate) inflation. We provide intuition for the direction of these biases, and verify them in French data with information on prices and marginal costs at the industry level. We show that the apparent discrepancy in the estimated duration of nominal rigidities, as implied from aggregate or microeconomic data, can be fully attributable to a heterogeneity bias.
    Keywords: New Keynesian Phillips Curve, Heterogeneity, Inflation Persistence, Marginal Costs.
    JEL: C10 C22 E31 E52
    Date: 2007–02
  11. By: Christian Ewerhart (University of Zurich); Nuno Cassola (European Central Bank); Natacha Valla (Banque de France)
    Abstract: Among the most puzzling observations for the euro money market are the bid shading in the weekly refinancing operations and the development of interest rate spreads. To explain these observations, we consider a standard divisible-good auction à la Klemperer and Meyer (1989) with uniform or discriminatory pricing, and place it in the context of a secondary market for interbank credit. The analysis links the observations for the euro area to the endogenous choice of collateral in credit transactions. We also discuss the Eurosystem’s apparent preference for the discriminatory pricing rule.
    Keywords: Eurosystem, discriminatory auction, bid shading, collateral
    JEL: D44 E52
    Date: 2007–07
  12. By: David G. Blanchflower
    Abstract: Previous literature has found that both unemployment and inflation lower happiness. This paper extends the literature by looking at more countries over a longer time period. It also considers the impacts on happiness of GDP per capita and interest rates. I find, conventionally, that both higher unemployment and higher inflation lower happiness. Interest rates are also found to enter happiness equations negatively. Changes in GDP per capita have little impact on more economically developed countries, but do have a positive impact in the poorest countries -- consistent with the Easterlin hypothesis. I find that unemployment depresses well-being more than inflation. The least educated and the old are more concerned about unemployment than inflation. Conversely, the young and the most educated are more concerned about inflation. An individual's experience of high inflation over their adult lifetime lowers their current happiness over and above the effects from inflation and unemployment. Unemployment appears to be more costly than inflation in terms of its impact on wellbeing.
    JEL: E24 E31
    Date: 2007–10
  13. By: David G. Blanchflower; Chris Shadforth
    Abstract: UK population growth over the past thirty-five years has been remarkably low in comparison with other countries; the population grew by just 7% between 1971 and 2004, less than all the other EU15 countries. The UK population has grown at a faster pace since the turn of the millennium. Both the inflow and outflow rates have risen, but the inflow rate has risen more rapidly recently, with an influx of workers from Eastern European. The propensity to come to the UK to work is higher the lower is a) GDP per capita b) life satisfaction in each of the East European countries. There is reason to believe that the majority of those who have arrived in the UK from Eastern Europe have not come permanently. When surveyed only 9% said they expected to stay for more than two years. Hence, in our view it is inappropriate to call them migrants, whereas in fact they should more appropriately be considered temporary or guest workers. There is evidence that, as a result of this increase in the flow of workers from Eastern Europe, the fear of unemployment has risen in the UK which appears to have contained wage pressures. We argue that the influx of workers from Eastern Europe has tended to increase supply by more than it has increased demand in the UK (in the short run). We argue that this has acted to reduce inflationary pressures and reduce the natural rate of unemployment.
    JEL: J31 J61
    Date: 2007–10
  14. By: Ricci, Luca Antonio
    Abstract: This paper develops a model of the circumstances under which it is beneficial to participate in a currency area. The proposed two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real and monetary shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, and transactions costs. The effect of openness on the net benefits is ambiguous, contrary to the usual argument that more open economies are better candidates for a currency area. Also, prospective member countries do not necessarily agree on whether a given currency union should be created.
    Keywords: Optimum currency areas, cost-benefit analysis, exchange rate regimes, currency union, monetary integration
    JEL: E42 E52 E61 F02 F31 F33 F36 F4 H77 J61
    Date: 2007
  15. By: Plasmans J.; Fornero J.; Michalak T.
    Abstract: In this paper we derive a microfounded macro New Keynesian model for open economies, be them large or small. We consider habit formation in consumption, sectoral linkages for tradable and non-tradable goods, capital stock investments with variable capital utilization, domestic and foreign governments, imperfect (exchange rate) pass-through in import prices and incomplete international financial markets. Sticky nominal prices and wages are modeled in Calvo and Taylor staggered ways. The model economy is composed of a continuum of infinitely-lived consumers and producers of final and intermediate goods. We provide a very general loglinearization method, from which we can easily obtain various special cases, as trend inflation or steady-state log-linearizations. Numerical simulations of the two-country sectoral model are provided for a relatively large number of structural shocks as domestic and foreign productivity shocks in final tradables and non-tradables, money demand shocks and a shock in the exchange rate. Such a model is well suited for monetary policy analysis at the international level and risk analysis.
    Date: 2006–12
  16. By: Pham The Anh (Department of Economics, National Economics University, Vietnam)
    Abstract: The paper proposes an empirical VAR for the UK open economy in order to measure the effects of monetary policy shocks from 1981 to 2003. The identification of the VAR structure is based on short-run restrictions that are consistent with the general implications of a New Keynesian model. The identification scheme used in the paper is successful in identifying monetary policy shocks and solving the puzzles and anomalies regarding the effects of monetary policy shocks. The estimated dynamic impulse responses and the forecast error variance decompositions show a consistency with the New Keynesian approach and other available theories.
    Keywords: Structural VAR; Nominal Rigidities; Monetary Policy Shocks; New Keynesian Theory
    JEL: C30 E30 E32 E52
    Date: 2007–06
  17. By: Cláudio Gontijo (UFMG)
    Abstract: This article examines critically the dominant theory of the monetary transmission mechanisms. It shows that monetary policy has abandoned the money supply as the instrument for inflationary control in favor of the interest rate. Formed in the market of bank reserves, the basic interest rate represents the opportunity cost of capital, which makes it a variable that affects the value of real and financial assets, impacting the supply of money and credit and, through the "wealth effects" and the availability of credit, the demand for consumption goods, housing and inventories fluctuations, which is the most important variable to explain economic downturns. It shows that the main effects of aggregate demand variations are felt through changes in real output and not in prices. Considering the success of cambial anchoring in curbing high inflation/hyperinflation and the failure of aggregate-demand-based stabilization programs, it concludes that perhaps the main channel through which changes in the interest rate affects the price level is the exchange rate, though the money supply still has a secondary role.
    JEL: E31
    Date: 2007–10
  18. By: Van Aarle B.; Garretsen H.; Moons C.
    Abstract: This paper analyses the accession to the Euro-Area by new members using a stylized new-Keynesian model. We analyze macro-economic adjustment in the pre- and post accession case and calculate welfare in both situations to obtain net benefit/loss from accession. It is shown how the effects of accession is related to the conduct of monetary policy and fiscal policy in the pre- and post accession case. The simulation examples point at the potential costs that accession might entail due its consequences on monetary and fiscal policy design. These consequences from accession in terms of macro-economic stabilization ability of monetary and fiscal policies have not always been fully acknowledged and need attention in our opinion.
    Date: 2007–06
  19. By: Moons C.; Garretsen H.; Van Aarle B.; Fornero J.
    Abstract: This paper analyses monetary policy in a stylized new-Keynesian model. A number of issues are focused upon: (i) optimal monetary policy under commitment or discretion vs. ad-hoc monetary policy based on simple rules, (ii) the effects of fiscal policies and foreign variables on monetary policy, (iii) the effects of fiscal deficit and interest rate smoothing objectives and the amount of forward-looking in the model. The model is estimated for the Euro-Area. Using simulations of the estimated model, it is analyzed how these aspects might affect monetary policy of the ECB and macro-economic fluctuations in the Euro-Area.
    Date: 2007–06
  20. By: Joao Sousa (Banco de Portugal); Andrea Zaghini (Banca d’Italia)
    Abstract: We analyse the international transmission of monetary policy shocks with a focus on the effects of foreign liquidity on the euro area. We estimate two domestic structural VAR models for the euro area and then we introduce a global liquidity aggregate. The impulse responses show that a positive shock to foreign liquidity leads for the euro area to a permanent increases in M3 and in the price level, a temporary rise in real output and a temporary appreciation of the euro real effective exchange rate. Moreover, we find that innovations in global liquidity play an important role in explaining price and output fluctuations.
    Keywords: Monetary policy, Structural VAR, International spillovers
    JEL: E52 F01
    Date: 2007–06
  21. By: Álvarez, Luis J.
    Abstract: The New Keynesian Phillips curve (NKPC) is now the dominant model of inflation dynamics. In recent years, a large body of empirical research has documented price-setting behaviour at the individual level, allowing the assessment of the micro-foundations of pricing models. This paper analyses the implications of 25 theoretical models in terms of individual behaviour and finds that they considerably differ in their ability to match the key micro stylised facts. However, none is available to account for all of them, suggesting the need to develop more realistic micro-founded price setting models.
    Keywords: Pricing models, micro data, Phillips Curve, hazard rate
    JEL: D40 E31
    Date: 2007
  22. By: Luke Willard (Reserve Bank of Australia)
    Abstract: Obstfeld and Rogoff (2001) argue that trade costs provide at least part of the explanation for a number of puzzles in international macroeconomics. Using data on imports to the United States from developed economies, this paper investigates whether trade costs are associated with correlations associated with three of these puzzles: the Feldstein-Horioka saving-investment puzzle; the purchasing power parity real exchange rate persistence puzzle; and the international consumption correlation puzzle. In general there is some evidence in support of Obstfeld and Rogoff’s argument, though the parameters are often imprecisely estimated.
    Keywords: consumption smoothing; Feldstein-Horioka puzzle; purchasing power puzzle; trade
    JEL: F00 F3 F4
    Date: 2007–10
  23. By: Torsten Schmidt; Tobias Zimmermann
    Abstract: Recent oil price shocks have relatively small effects on real economic activity and inflation compared to the experiences of the seventies and the early eighties. In this paper we analyse possible reasons for these phenomena using the example of the German economy. At first, by estimating a VAR-model and calculating impulse responses to an oil price shock it is confirmed that the macroeconomic effects have become much smaller. Moreover, our simulations show that oil price hikes are more closely related to global economic activity since the early nineties.Then, to get a deeper understanding of the structural changes which are responsible for these results we utilize a new Keynesian open economy model. It becomes obvious that the small effects of the recent oil price shocks on the German economy can be explained by a combination of a reduced energy cost share and good luck in terms of a strong growing global economy. Hence, if global economic growth decreases, pure oil price shocks may still have substantial effects on the German economy, even if the energy pricevulnerability has been reduced.These results should be valid also for other oil importing countries, at least from a qualitative point of view.
    Keywords: Oil prices, new Keynesian open economy model
    JEL: E31 E32 F41
    Date: 2007–09
  24. By: Carlos Marinheiro (GEMF and Faculdade de Economia, Universidade de Coimbra)
    Abstract: Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP as always being accused of being too rigid and of forcing procyclicality in fiscal policy. However, in an influential paper Galí and Perotti (2003) concluded that discretionary fiscal policy has actually become more countercyclical in EMU countries after the Maastricht Treaty. This paper concludes that this conclusion resists to several robustness tests using ex-post data, including the use of institutional variables, but not to the use of real-time data. Using ex-post data there is some evidence pointing to a more countercyclical use of discretionary fiscal policy (or at least to a decrease in the use of procyclical discretionary fiscal policy). However, the use of real-time data for the period 1999-2006 reveals that discretionary fiscal policy has been designed to be procyclical. Hence, the actual acyclical behaviour of discretionary fiscal policy in the period after 1999 seems to be simply the result of errors in the forecast of the output gap, and not the result of a change in the intentions of policy makers. As a result, there is no evidence in favour of the view that Maastricht rules have forced euro-area policy-makers to change their behaviour and design countercyclical discretionary fiscal policy.
    Keywords: Fiscal policy, stabilization, Stability and Growth Pact, institutional arrangements, realtime data
    JEL: E62 H62
    Date: 2007
  25. By: F. DE GRAEVE
    Abstract: The central variable of theories of financial frictions -the external finance premium- is unobservable. This paper distils the external finance premium from a DSGE model estimated on US macroeconomic data. Within the DSGE framework, movements in the premium can be given an interpretation in terms of shocks driving business cycles. A key result is that the estimate -based solely on non-financial macroeconomic data- picks up over 70% of the dynamics of lower grade corporate bond spreads. The paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected.
    Keywords: external finance premium, financial frictions, DSGE, Bayesian estimation
    JEL: E4 E5 G32
    Date: 2007–09
  26. By: Benjamin Malin; Dirk Krueger; Felix Kubler
    Abstract: We describe a sparse grid collocation algorithm to compute recursive solutions of dynamic economies with a sizable number of state variables. We show how powerful this method may be in applications by computing the nonlinear recursive solution of an international real business cycle model with a substantial number of countries, complete insurance markets and frictions that impede frictionless international capital flows. In this economy the aggregate state vector includes the distribution of world capital across different countries as well as the exogenous country-specific technology shocks. We use the algorithm to efficiently solve models with 2, 4, and 6 countries (i.e., up to 12 continuous state variables).
    JEL: C68 C88 F41
    Date: 2007–10
  27. By: Alexius, Annika; Holmlund, Bertil
    Abstract: A widely spread belief among economists is that monetary policy has relatively short-lived effects on real variables such as unemployment. Previous studies indicate that monetary policy affects the output gap only at business cycle frequencies, but the effects on unemployment may well be more persistent in countries with highly regulated labor markets. We study the Swedish experience of unemployment and monetary policy. Using a structural VAR we find that around 30 percent of the fluctuations in unemployment are caused by shocks to monetary policy. The effects are also quite persistent. In the preferred model, almost 30 percent of the maximum effect of a shock still remains after ten years.
    Keywords: Unemployment, Monetary policy, structural VARs
    JEL: E24 J60
    Date: 2007
  28. By: Maruška Vizek; Tanja Broz (The Institute of Economics, Zagreb)
    Abstract: The aim of this paper is to construct a quarterly inflation model for Croatia. In order to model inflation dynamics se use the general-to-specific approach. The advantage of this approach is its ability to deliver results based on underlying economic theories of inflation, which are also consistent with the properties of the data. A two step procedure is followed. In the first step, the long-run sectoral analysis of inflation sources is conducted, yielding long-run determinants of inflation (mark-up, excess money, nominal effective exchange rate and the output gap). In the second step, we estimate an equilibrium error correction model of inflation deploying, among other variables of interest, long-run solutions derived in the first step. The derived model of inflation suggests that mark-up and excess money relationships are very important for explaining the short-run behaviour of inflation, as well as the output gap and nominal effective exchange rate, import prices, interest rates and narrow money. Comparing the results of the model suggests that short-run inflation is more responsive to supply side and exchange rate changes than to monetary conditions.
    Keywords: inflation modelling, cointegration, general-to-specific, Croatia
    JEL: C51 C53 E31 E37
    Date: 2007–06
  29. By: Bogoev, Jane; Terzijan, Sultanija Bojceva; Petrovska, Magdalena
    Abstract: The ambition of this paper is to analyse real exchange rate dynamics in Macedonia relying on a highly disaggregated dataset. We complement the indirect evidence reported in Loko and Tuladhar (2005) and we provide direct evidence on the irrelevance of the Balassa-Samuelson effect for overall inflation via service prices in the CPI. Furthermore, we estimate variants of the BEER model. We show that alternative econometric techniques and data definitions bear an impact on the robustness of the estimation results. Overall, productivity, government consumption and the openness variables were found to be fairly robust in terms of sign and size. An increase/decrease in the productivity variables is associated with an appreciation/depreciation of the real effective exchange rate. Given that the B-S effect admittedly has a very limited role to play through nontradable prices in the CPI, this relationship could be explained by the (inverse) quality effect proposed by Loko and Tuladhar and, possibly in addition to that, by the nontradable component of tradable prices.
    Keywords: real exchange rate, Balassa-Samuelson, Macedonia
    JEL: E31 F31 O11 P17
    Date: 2007

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