|
on Central Banking |
| By: | Jordi Galí; Mark Gertler |
| Abstract: | We describe some of the main features of the recent vintage macroeconomic models used for monetary policy evaluation. We point to some of the key differences with respect to the earlier generation of macro models, and highlight the insights for policy that these new frameworks have to offer. Our discussion emphasizes two key aspects of the new models: the significant role of expectations of future policy actions in the monetary transmission mechanism, and the importance for the central bank of tracking of the flexible price equilibrium values of the natural levels of output and the real interest rate. We argue that both features have important implications for the conduct of monetary policy. |
| JEL: | E31 E32 E52 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13542&r=cba |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University) |
| Abstract: | This paper compares two contrasting approaches to robust monetary policy design. The first developed by Hansen and Sargent (2003, 2007) assumes unstructured model uncertainty and uses a minimax robustness criterion to design monetary rules. This contrasts with an older literature that structures uncertainty by seeking rules that are robust across competing views of the economy. This paper carries out and compares robust design exercises using both approaches using a standard ‘canonical New Keynesian model’. We pay particular attention to a number of issues: First, we distinguish three possible forms of the implied game between malign nature and the policymaker in the Hansen-Sargent procedure. Second, in both approaches, we examine the consequences for robust rules of the zero lower bound (ZLB) constraint on the nominal interest rate, the monetary instrument. Finally, again for both types of robustness exercise we explore the implications of policy design when the policymaker is obliged to use simple Taylor-type interest rate rules. |
| Keywords: | robustness, structured and unstructured uncertainty, zero lower bound interest rate constraint |
| JEL: | E52 E37 E58 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0707&r=cba |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); Richard Pierse (University of Surrey) |
| Abstract: | We reassess the gains from monetary policy coordination within the confines of the canonical NOEM in the light of three issues. First, the literature uses a number of cooperative and non-cooperative equilibrium concepts that do not always clearly distinguish commitment and discretionary outcomes, and in some cases adopts inappropriate concepts. Second, our analysis is welfare based. Moreover, as with much of this literature, we adopt a linear-quadratic approximation of the actual non-linear non-quadratic stochastic optimization problem facing the monetary policymakers. Our second objective then is to re-assess welfare gains using an accurate approximation for such a problem, a feature that for the most part is lacking in previous studies. Finally, we examine the issue where the monetary authority is restricted to rules that are operational in two senses: first, the zero lower bound constraint is imposed on the optimal rule and second, we study simple Taylor-type commitment rules that unlike fully optimal rules are easily monitored by the public. |
| Keywords: | monetary rules, open economy, coordination games, commitment, discretion, zero bound constraint |
| JEL: | E52 E37 E58 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0907&r=cba |
| By: | David Backus; Jonathan H. Wright |
| Abstract: | From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25 percentage points, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic uncertainty and financial market volatility, more predictable monetary policy, and the state of the business cycle. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-46&r=cba |
| By: | Frederic S. Mishkin |
| Abstract: | The housing market is of central concern to monetary policy makers. To achieve the dual goals of price stability and maximum sustainable employment, monetary policy makers must understand the role that housing plays in the monetary transmission mechanism if they are to set policy instruments appropriately. In this paper, I examine what we know about the role of housing in the monetary transmission mechanism and then explore the implications of this knowledge for the conduct of monetary policy. I begin with a theoretical and empirical review of the main housing-related channels of the transmission mechanism. These channels include the ways interest rates directly influence the user cost of housing capital, expectations of future house-price movements, and housing supply; and indirectly influence the real economy through standard wealth effects from house prices, balance sheet, credit-channel effects on consumer spending, and balance sheet, credit-channel effects on housing demand. I then consider the interaction of financial stability with the monetary transmission mechanism, and discuss the ways in which the housing sector might be a source of financial instability, and whether such instability could affect the ability of a central bank to stabilize the overall macroeconomy. I conclude with a discussion of two key policy issues. First, how can monetary policy makers deal with the uncertainty with regard to housing-related monetary transmission mechanisms? And second, how can monetary policy best respond to fluctuations in asset prices, especially house prices, and to possible asset-price bubbles? |
| JEL: | E2 E44 E58 R21 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13518&r=cba |
| By: | Giancarlo Corsetti; Gernot J. Mueller |
| Abstract: | In this paper, we study the co-movement of the government budget balance and the trade balance at business cycle frequencies. In a sample of 10 OECD countries we find that the correlation of the two time series is negative, but less so in more open economies. Moreover, for the US the crosscorrelation function is S-shaped. We analyze these regularities taking the perspective of international business cycle theory. First, we show that a standard model delivers predictions broadly in line with the evidence. Second, we show that conditional on spending shocks the model predicts a perfect correlation of the budget balance and the trade balance. Yet, the effect of spending shocks on the trade balance is contained if an economy is not very open to trade. |
| Keywords: | Fiscal Policy, Twin deficits, Openness, Business Cycle |
| JEL: | F41 F42 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2007/20&r=cba |
| By: | Michael Ehrmann; Marcel Fratzscher; Refet S. Gürkaynak; Eric T. Swanson |
| Abstract: | We study the convergence of European bond markets and the anchoring of inflation expectations in euro area countries using high-frequency bond yield data for France, Germany, Italy and Spain. We find that Economic and Monetary Union (EMU) has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels, unconditional daily fluctuations, and conditional responses to major macroeconomic data announcements. Our findings also suggest a substantial increase in the anchoring of long-term inflation expectations since EMU, particularly for Italy and Spain, which since monetary union have seen their long-term interest rates become much lower, much less volatile, and much better anchored in response to news. Finally, the reaction of far-ahead forward interest rates to macroeconomic announcements has converged substantially across euro area countries and even been eliminated over time, thus underlining not only market integration but also the credibility that financial markets attach to monetary policy in the euro area. |
| Keywords: | Bond market |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2007-24&r=cba |
| By: | S. Boragan Aruoba; Christopher J. Waller; Randall Wright |
| Abstract: | We revisit classic questions concerning the effects of money on investment in a new framework: a two-sector model where some trade occurs in centralized and some in decentralized markets, as in recent monetary theory, but extended to include capital. This allows us to incorporate novel elements from the microfoundations literature on trading with frictions, including stochastic exchange opportunities, alternative pricing mechanisms, etc. We calibrate models with bargaining and with price taking in the decentralized market. |
| Keywords: | Money ; Capital ; Monetary policy |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0714&r=cba |
| By: | Jan Libich; Andrew Hughes Hallett; Petr Stehlik |
| Abstract: | Monetary and ?scal policies interact in many ways. Recently, the stance of ?scal policy in a number of countries (including the EU and the US) has raised concerns about risks for the outcomes of monetary policy. Our paper ?rst shows that these concerns are justi?ed since - under an ?ambitious??scal policymaker - in?ation bias and lack of monetary policy credibility may obtain in equilibrium, even if the central banker is fully independent, patient, and ?responsible?. To reach a possible solution the paper proposes a novel asynchronous game theoretic framework that generalizes the standard commitment concept. Most importantly, it allows for concurrent and partial commitment, ie both policies may be committed at the same time, and may do so with varying degrees. It is demonstrated that the undesirable scenario can be prevented if monetary commitment is su¢ ciently strong relative to ?scal commitment. Interestingly, such strong monetary commitment can not only resist ?scal pressure, but also ?discipline?an ambitious ?scal policymaker and achieve socially desirable outcomes for both policies. We then extend the setting to the European monetary union case with a common central bank and many heterogeneous ?scal policymakers and show that these ?ndings carry over. The policy implication therefore follows: by more explicitly committing to a numerical (long-run) in?ation target, the ECB, the Fed, and others would not only ensure their credibility, but also indirectly induce a reduction in the size of the budget de?cit and debt. The paper concludes by showing that all our predictions are empirically supported. |
| JEL: | E61 E63 C73 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2007-21&r=cba |
| By: | Andrew Hughes Hallett; Jan Libich; |
| Abstract: | This paper generalizes and quali?es an in?uential monetary policy result due to Rogo¤ (1985) by taking ?scal policy, and ?scal-monetary interactions, into account. It shows that an appointment of a conservative central banker may, under a range of circum- stances, (i) increase the average level of inflation; or (ii) decrease this level too much, producing deflation; and/or (iii) reverse the direction of the monetary response to shocks (from tightening to easing and vice versa). We show the conditions under which this can happen. |
| JEL: | E61 E63 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2007-20&r=cba |
| By: | Sharon Blei |
| Abstract: | Credit affects the economy via various channels: its price, collateral requirements and the extent of rationing. Would the intensity of monetary transmission be affected by the market structure of the credit industry? Using a spatial competition framework I demonstrate how credit market structure can affect the transmission of monetary policy changes into real activity via the volume of credit. The paper also points that monetary tightening may render lending unprofitable and consequently beget a credit crunch; the extent of credit market robustness to contractive monetary policy is shown to depend on its structural characteristics. |
| Keywords: | Credit ; Monetary policy |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlsp:2007-03&r=cba |
| By: | Pham The Anh (Department of Economics, National Economics University, Vietnam) |
| Abstract: | The paper aims to analyse the question of how cyclical fluctuations might affect long run growth. The analysis is based on a dynamic stochastic general equilibrium model for an imperfectly competitive economy with fully optimising agents. The model is characterized with nominal rigidities, an endogenous technology, and multiple shocks. It predicts either a negative or positive relationship between short run volatility and long run growth depending on the source of shocks and the reaction of the central bank. The model also shows that, even when the negative relationship exits the policy that is designed to stabilise short run volatility may either increase or decrease growth depending on the source of shocks. |
| Keywords: | Imperfect Competition; Nominal Rigidities; Growth; Volatility; Stabilisation Policy |
| JEL: | E31 E37 E52 O42 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:0407&r=cba |
| By: | Zheng Liu; Daniel F. Waggoner; Tao Zha |
| Abstract: | The possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and equilibrium dynamics. In a dynamic stochastic general equilibrium model where the monetary policy rule switches between a dovish regime that accommodates inflation and a hawkish regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult but still possible to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the dovish regime to the hawkish one. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2007-23&r=cba |
| By: | Juan de Dios Tena; Jorge Dresdner; Ivan Araya |
| Abstract: | We propose a new approach to estimate and "hybrid" New Keynesian Phillips Curve (NKPC) that includes demand pressures coming from disequilibrium relations in three different markets: (1) the monetary and financial, (2) the international, and (3) the labor market. In the application, our results show that all three markets contribute to the evolution of inflation. However, the effect of shocks on equilibrium in the labour market and short run movements in cyclical output are relatively more important than other shocks. Based on econometric tests, this specification is proved to be superior to the traditional NKPC that includes a single variable to account for demand pressures. |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws076917&r=cba |
| By: | Nicoletta Batini (International Monetary Fund); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University) |
| Abstract: | We build a two-bloc emerging market - rest of the world model. The emerging market bloc incorporates partial transactions and liability dollarization, as well as financial frictions including a ‘financial accelerator’, where capital financing is partly or totally in foreign currency as in Gertler et al. (2003) and Gilchrist (2003)). Simulations of the model under various ‘operational’ monetary policy rules derived assuming that the central bank maximizes households’ utility point to important results. First, we reaffirm the finding in the literature that financial frictions, especially when coupled with liability dollarization, severely increase the costs of a fixed exchange rate regime. By contrast, transactions dollarization has only a small impact on the choice of the monetary regime. Second, central banks in emerging economies with these frictions should not explicitly target the exchange rate; nor should they implicitly do so by choosing a CPI rather than domestic price inflation target. Third, with dollarization and frictions, the zero lower bound constraint on the nominal interest rate makes simple Taylor-type rules perform much worse in terms of stabilization performance than fully optimal monetary policy. |
| Keywords: | monetary policy, emerging economies, dollarization, financial accelerator |
| JEL: | E52 E37 E58 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0807&r=cba |
| By: | Beechey, Meredith J; Johannsen, Benjamin K; Levin, Andrew |
| Abstract: | This paper compares the recent evolution of long-run inflation expectations in the euro area and the United States, using evidence from financial markets and surveys of professional forecasters. Survey data indicate that long-run inflation expectations are reasonably well-anchored in both economies, but also reveal substantially greater dispersion across forecasters’ long-horizon projections of U.S. inflation. Daily data on inflation swaps and nominal-indexed bond spreads - which gauge compensation for expected inflation and inflation risk - also suggest that long-run inflation expectations are more firmly anchored in the euro area than in the United States. In particular, surprises in macroeconomic data releases have significant effects on U.S. forward inflation compensation, even at long horizons, whereas macroeconomic news only influences euro area inflation compensation at short horizons. |
| Keywords: | central bank communication; ECB; euro-area inflation; inflation compensation |
| JEL: | E31 E52 E58 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6536&r=cba |
| By: | Lawrence Christiano; Roberto Motto; Massimo Rostagno |
| Abstract: | The US Federal Reserve cut interest rates more vigorously in the recent recession than the European Central Bank did. By comparison with the Fed, the ECB followed a more measured course of action. We use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading. We find that - because there is greater inertia in the ECB's policy rule - the ECB's policy actions actually had a greater stabilizing effect than did those of the Fed. As a consequence, a potentially severe recession turned out to be only a slowdown, and inflation never departed from levels consistent with the ECB's quantitative definition of price stability. Other factors that account for the different economic outcomes in the Euro Area and US include differences in shocks and differences in the degree of wage and price flexibility. |
| JEL: | C51 E47 E52 E58 F0 F00 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13521&r=cba |
| By: | FÈVE, Patrick; MATHERON, Julien; SAHUC, Jean-Guillaume |
| JEL: | E31 E32 E52 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:7771&r=cba |
| By: | Luca Benati and Paolo Surico |
| Abstract: | Most analyses of the U.S. Great Moderation have been based on VAR methods, and have consistently pointed toward good luck as the main explanation for the greater macroeconomic stability of recent years. Using data generated by a New-Keynesian model in which the only source of change is the move from passive to active monetary policy, we show that VARs may misinterpret good policy for good luck. In particular, we detect significant breaks in estimated VAR innovation variances, although in the data generating process the volatilities of the structural shocks are constant across policy regimes. Counterfactual simulations, structural and reduced-form, point toward the incorrect conclusion of good luck. Our results cast doubts on the existing notion that VAR evidence is inconsistent with the good policy explanation of the Great Moderation. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:18&r=cba |
| By: | Mihov, Ilian; Rose, Andrew K |
| Abstract: | We compare the duration and performance of different monetary regimes, especially the contrast between countries those that fix exchange rates and those that target inflation. Inflation targeting is a more durable policy; no country has yet been forced to abandon an inflation target, while many have abandoned fixed exchange rates. Indeed, even though inflation targeting began only in 1990, the duration of inflation targeting regimes is at least as long as, or longer than all alternative monetary regimes for comparable countries. Regime duration also matters in monetary policy; older regimes are typically more successful than younger ones in achieving low inflation. |
| Keywords: | duration; exchange rate targeting; inflation performance; inflation targeting; monetary policy; monetary regimes; money |
| JEL: | E52 E58 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6529&r=cba |
| By: | Irina A. Telyukova; Randall Wright |
| Abstract: | Many individuals simultaneously have significant credit card debt and money in the bank. The credit card debt puzzle is: given high interest rates on credit cards and low rates on bank accounts, why not pay down debt? While some economists go to elaborate lengths to explain this, we argue it is a special case of the rate-of-return-dominance puzzle from monetary economics. We extend standard monetary theory to incorporate consumer debt, which is interesting in its own right since developing models where money and credit coexist is a long-standing challenge. Our model is quite tractable—e.g., it readily yields nice existence and characterization results—and helps puts into context recent discussions of consumer debt. |
| Keywords: | Credit cards ; Consumer credit |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0711&r=cba |
| By: | Piero Ferri; Anna Maria Variato |
| Abstract: | Limits on information have deep economic impact and affect the conduct of economic policy. In the present paper we explore the effect of substantive uncertainty. A macro model is then derived in order to make this condition work at micro economic level too: the investment function implies an interaction between real and financial aspects; the labor market is ruled by imperfect competition; agents are boundedly rational and make their forecasts according to a Markov regime switching rule; and finally monetary authorities learns about the NAIRU. As a result we obtain a model which is mostly keynesian in nature, whose implications can nevertheless be compared with the new neoclassical synthesis models. Simulations are carried out and show the possible appearence of endogenous fluctuations, persistence of oscillations, and the emergence of a trade-off between the control of inflation and the cyclicality of the economy. |
| Keywords: | endogenous cycles, monetary policy, uncertainty, bounded rationality, learning |
| JEL: | E32 E37 E52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:brg:wpaper:0704&r=cba |
| By: | Andrea Pescatori |
| Abstract: | The present paper studies optimal monetary policy when the representative agent assumption is abandoned and financial wealth heterogeneity across households is introduced. Incomplete markets make households incapable of perfectly insuring against interest rate and inflation risk, creating a trade-off between price level and debt-servicing stabilization. We derive a welfare-based loss function for the policymaker, which includes an additional target related to the cross-sectional distribution of household debt. The extent of the deviation from price stability depends on the initial level of debt dispersion. Using U.S. microdata to calibrate the model, we find an optimal inflation volatility equal to almost 20 percent of the actual volatility of the last 15 years. Finally, the paper studies the design of optimal simple implementable rules. Superinertial rules, which imply a hump-shaped interest rate response to shocks, significantly outperform standard rules. |
| Keywords: | Monetary policy ; Interest rates ; Inflation (Finance) ; Consumer credit |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0709&r=cba |
| By: | Piero Ferri; Anna Maria Variato |
| Abstract: | The paper discusses the dynamic properties of a macro model with an investment function based upon both real and financial aspects and a labor market ruled by imperfect competition. The model is then enriched by a monetary policy rule and by agents who forecast according to a time series strategy based upon a Markov process. Simulations show the persistence of oscillations even in the presence of the Taylor rule. The relevance of such financial aspects as cash flows and debts can create a trade-off between the control of inflation and the cyclicality of the economy. Furthermore, instability and debt-deflation phenomena can arise. |
| Keywords: | endogenous cycles, monetary policy, learning |
| JEL: | E32 E37 E52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:brg:wpaper:0703&r=cba |
| By: | David Laidler (University of Western Ontario) |
| Abstract: | In today's discussions of central banking, maintaining macro-financial stability tends to be treated as ancillary to the pursuit of price level goals. This is in strong contrast to the earlier literature, where financial stability was often the main concern of the theory of central banking. This theme is explore first from the point of view of the monetarist tradition, in which a key feature of financial crises was the onset of an excess demand for money which the central bank in its capacity as lender of last resort had an obligation to relieve; and then from that of a later Wicksellian tradition, where co-ordination failures in the inter-temporal allocation of resources that it was monetary policy's task to avoid, were emphasized. Though there are no long-lost sure cures for financial instability awaiting discovery in the older literature, its emphasis on the potential for markets to fail to clear provides a helpful perspective on the phenomenon, often missing from modern models of the conduct of monetary policy. |
| Keywords: | financial stability; financial instability; crises; co-ordination failure; lender of last resort; inflation; monetarism; forced saving; Wicksell |
| JEL: | B13 B22 E31 E32 E58 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20073&r=cba |
| By: | Michael P. Clements (University of Warwick); Ana Beatriz Galvão (Queen Mary, University of London) |
| Abstract: | Many macroeconomic series such as US real output growth are sampled quarterly, although potentially useful predictors are often observed at a higher frequency. We look at whether a mixed data-frequency sampling (MIDAS) approach can improve forecasts of output growth. The MIDAS approach is compared to other ways of making use of monthly data to predict quarterly output growth. The MIDAS specification used in the comparison employs a novel way of including an autoregressive term. We find that the use of monthly data on the current quarter leads to significant improvement in forecasting current and next quarter output growth, and that MIDAS is an effective way of exploiting monthly data compared to alternative methods. We also exploit the best method to use the monthly vintages of the indicators for real-time forecasting. |
| Keywords: | Mixed data frequency, Coincident indicators, Real-time forecasting, US output growth |
| JEL: | C51 C53 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp616&r=cba |
| By: | Fabio Canova |
| Abstract: | This chapter highlights the problems that structural methods and SVAR approaches have when estimating DSGE models and examining their ability to capture important features of the data. We show that structural methods are subject to severe identification problems due, in large part, to the nature of DSGE models. The problems can be patched up in a number of ways but solved only if DSGEs are completely reparametrized or respecified. The potential misspecification of the structural relationships give Bayesian methods an hedge over classical ones in structural estimation. SVAR approaches may face invertibility problems but simple diagnostics can help to detect and remedy these problems. A pragmatic empirical approach ought to use the flexibility of SVARs against potential misspecification of the structural relationships but must firmly tie SVARs to the class of DSGE models which could have have generated the data. |
| Keywords: | DSGE models, SVAR models, Identification, Invertibility, Misspecification, Small Samples. |
| JEL: | C10 C52 E32 E50 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1054&r=cba |
| By: | Atella, Vincenzo; Centoni, Marco; Cubadda, Gianluca |
| Abstract: | This paper contributes to the literature on the role of technology shocks as source of the business cycle in two ways. First, we document that time-series of US productivity and hours are apparently affected by a structural break in the late 60’s, which is likely due to a major change in the monetary policy. Second, we show that the importance of demand shocks over the business cycle has sharply increased after the break. |
| Keywords: | Business cycle, technology shocks, structural breaks. |
| JEL: | C32 E32 |
| Date: | 2007–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:mol:ecsdps:esdp07041&r=cba |
| By: | Mark Mink; Jan P.A.M. Jacobs; Jakob de Haan |
| Abstract: | We develop multivariate measures of synchronicity and co-movement of business cycles. In addition to synchronicity, the co-movement measure takes differences between cycle amplitudes into account that have been overlooked in most previous studies. We apply the new measures to the euro area. Synchronicity and co-movement for the region as a whole do not exhibit a clear upward tendency. Although several countries saw the similarity of their business cycle vis-`a-vis the euro area reference cycle increase, national business cycles remain fairly diverse. Changes in business cycle amplitudes cause most of the observed change in cycle co-movement. |
| JEL: | E32 F02 F42 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2007-19&r=cba |
| By: | Claire Economidou; Clemens Kool |
| Abstract: | This paper empirically investigates output and consumption asymmetries in the Eurozone and enlarged EU over the period 1992-2007, and their consequences for monetary policy. Our results reveal that the introduction of the euro has little impact on output asymmetry so far; however, it has led to somewhat greater consumption smoothing. The UK, Denmark and Sweden are no less asymmetric than the average Eurozone member state and could probably enter the EMU without significant macroeconomic costs. New EU member states are diverse but display higher output and, in particular, consumption asymmetries. This warrants caution against too quick expansion of the EMU. |
| Keywords: | Integration, Macroeconomic Asymmetries, Welfare Gains, Risk Sharing, Euro |
| JEL: | E32 F15 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0724&r=cba |
| By: | Elizabeth Klee |
| Abstract: | This paper uses operational problems at commercial banks in sending Fedwire payments as a proxy for aggregate uncertainty in end-of-day Fed account positions and then examines funds market behavior on those days. The results suggest that increased uncertainty is associated with a deviation of the federal funds rate from the FOMC’s target rate, the magnitude depending on the severity of the difficulty, the payment volume of the affected participant, and the time of day. Moreover, discount window borrowing picks up on days with operational difficulties. These effects are generally transitory, and markets revert back to previous levels the next day. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-49&r=cba |
| By: | Christian Dreger; Konstantin Kholodilin; Kirsten Lommatzsch; Jiri Slacalek; Przemyslaw Wozniak |
| Abstract: | In this paper we investigate the effects of EU enlargement on price convergence. The internal market is expected to boost integration and increase efficiency and welfare through a convergence of prices in product markets. Two principal drivers are crucial to explain price developments. On the one hand, higher competition exerts a downward pressure on prices because of lower mark ups. On the other hand, the catching up process of low income countries leads to a rise in the price levels and higher inflation over a transition period. Using comparative price levels for 41 product categories price convergence can be established. However, the speed of convergence is rather slow, with half lives around 10 years. The enlargement has slightly stimulated convergence towards the mean price, and this impact is robust across different groups of countries. Moreover, the driving forces of convergence are explored. In line with theoretical predictions, the rise in competition exerts a downward pressure on prices, while catching up of low income countries leads to a rise in price levels and higher inflation. The findings have important implications, as price convergence facilitates the working of common economic policies. |
| Keywords: | EU enlargement, price convergence, catching up and competition |
| JEL: | E31 F15 C33 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp730&r=cba |
| By: | Anton Nakov; Andrea Pescatori |
| Abstract: | An exogenous oil price shock raises inflation and contracts output, similar to a negative productivity shock. In the standard New Keynesian model, however, this does not generate any trade-off between inflation and output gap volatility: under a strict inflation-targeting policy, the output decline is exactly equal to the efficient output contraction in response to the shock. Modeling the oil sector from optimizing first principles rather than assuming an exogenous oil price, we show that the presence of a dominant oil supplier (OPEC) leads to inefficient fluctuations in the oil price markup. The latter reflects a dynamic distortion of the production process, and as a result, stabilizing inflation does not automatically stabilize the distance of output from first-best. Our model is a step away from discussing the effects of exogenous oil price changes and toward analyzing the implications of the underlying shocks that cause the oil price to change in the first place. |
| Keywords: | Monetary policy ; Petroleum products - Prices ; Business cycles |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0710&r=cba |
| By: | Giovanni Di Bartolomeo (University of Teramo); Lorenza Rossi (University Cattolica del Sacro Cuore, Milan); Massimiliano Tancioni (University of Rome La Sapienza) |
| Abstract: | This paper extends the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model to agents who cannot smooth consumption (i.e. spenders) and are affected by external consumption habits. Although these assumptions are not new, their joint consideration strongly affects some theoretical and empirical results addressed by the recent literature. By deriving closed-form solutions, we identify different demand regimes and show that they are characterized by specific features regarding dynamic stability and monetary policy effectiveness. We also evaluate our model by stochastic simulations obtained from the Bayesian parameters estimates for the G7 economies. From posterior impulse response we address the empirical relevance of the different regimes and provide comparative evidence on the asymmetric effects of monetary policy, resulting from the heterogeneity of the estimated model structures. |
| Keywords: | Rule-of-thumb, habits, monetary policy transmission, determinacy, New Keynesian |
| JEL: | E61 E63 |
| Date: | 2007–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0727&r=cba |
| By: | Graham Bird (University of Surrey); Alex Mandilaras (University of Surrey) |
| Keywords: | international reserves |
| JEL: | F3 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1207&r=cba |
| By: | Graham Bird (University of Surrey); Alex Mandilaras (University of Surrey) |
| Abstract: | Latin American countries have been in the eye of economic and ¯nancial storms several times in recent years. Advice from the International Monetary Fund has consistently highlighted the need for sound fiscal policies and lower debt levels. But is public debt relevant? Following a brief discussion of the theoretical issues involved, this paper examines empirically the relationship between public indebtedness and pressures in the foreign exchange market. Alternative measures are used to capture the latter and the analysis controls for a de facto classi¯cation of exchange rate regimes. Estimations of static and dynamic panels for 28 Latin American and Caribbean (LAC) countries report substantial fiscal effects. |
| Keywords: | currency crises, public debt, latin america |
| JEL: | F30 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1307&r=cba |
| By: | Ara Volkan (Florida Gulf Coast University, Fort Myers); Cem Saatçioðlu (Faculty of Economics, Istanbul University); Levent Korap (Department of Economics, Marmara University) |
| Abstract: | This paper examines the extent to which changes in exchange rates result in changes in Turkish domestic inflation. Specifically, we determine if there has been a change in the magnitude of this impact from the pre-2003 period to the post-2003, when the exchange rates were allowed to float. Employing monthly frequency data, we estimate two impulse-response functions and pass-through coefficients, one derived for the 1994 April-2002 December period using 1994 price indices as base (100) and the other one derived for the 2003January-2006December period using the 2003 price indices as base (100). We confirm that exchange rate shocks feed into domestic inflation, first at the level of manufacturers’ prices and then at the level of consumer prices, and that the impact of the shocks on the price variables of the various stages of the supply chain is different. Our findings indicate that the magnitude of the impact has declined for the post-2003 period by nearly one-half compared to the pre-2003 period during the early stages of the production process reflecting the predominance of the manufacturer price index in determining Turkish inflation rates. In addition, the decline in the exchange rate pass-through impact on domestic prices coincides with a 25 percent decline in the post-2003 consumer price inflation. Regardless, the consideration of the impact of exchange rate changes on the domestic inflationary process is still important when establishing monetary policies for the Turkish economy. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:tek:wpaper:2007/6&r=cba |
| By: | Jumah, Adusei (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria); Kunst, Robert M. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria) |
| Abstract: | We verify whether cocoa prices could be a source of inflation in five countries of the West African region within a framework that includes other variables such as migrant remittances to the region and a fiscal policy variable represented by the government budget deficit. Unlike earlier studies that explicitly use money supply variables, the inclusion of migrant remittances enables us to examine the effect of an international capital flow variable on inflation. The results reveal that the influence of cocoa prices on consumer price inflation is strong and statistically significant. The influence of the budget deficit and the flow of migrant remittance variables on inflation are, however, weak. |
| Keywords: | Inflation, West Africa, Cocoa, Budget deficits, Remittances |
| JEL: | C5 E31 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:219&r=cba |