|
on Central Banking |
| By: | Rochelle M. Edge; Thomas Laubach; John C. Williams |
| Abstract: | This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies not only uncertainty about the dynamics of the economy. It also implies uncertainty about the model's utility-based welfare criterion and about the economy's natural rate measures of interest and output. We analyze the characteristics and performance of alternative monetary policy rules given the estimated uncertainty regarding parameter estimates. We find that the natural rates of interest and output are imprecisely estimated. We then show that, relative to the case of known parameters, optimal policy under parameter uncertainty responds less to natural-rate terms and more to other variables, such as price and wage inflation and measures of tightness or slack that do not depend on natural rates. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-56&r=cba |
| By: | Jordi Galí |
| Abstract: | Constant interest rate (CIR) projections are often criticized on the grounds that they are inconsistent with the existence of a unique equilibrium in a variety of forward-looking models. This note shows how to construct CIR projections that are not subject to that criticism, using a standard New Keynesian model as a reference framework. |
| Keywords: | Interest rate peg, in.ation targeting, conditional forecasts, interest rate rules, multiple equilibria |
| JEL: | E37 E58 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1057&r=cba |
| By: | Marvin Goodfriend |
| Abstract: | This article tells how the world achieved a working consensus on the core principles of monetary policy. The story begins with the muddled state of affairs in the late 1970s. It then asks: How did Federal Reserve policy produce an understanding of the practical principles of monetary policy? How did formal institutional support abroad for targeting low inflation follow from an international acceptance of these ideas? And how did a consensus theoretical model develop in academia? The article tells how the modern theoretical consensus known as the New Neoclassical Synthesis (aka, the New Keynesian model) reinforces key advances: the priority for price stability, the targeting of core rather than headline inflation, the importance of credibility for low inflation, and preemptive interest rate policy supported by transparent objectives and procedures. The conclusion identifies important practical issues that remain to be explored in theory. |
| JEL: | E3 E4 E5 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13580&r=cba |
| By: | Edward Nelson; Anna J. Schwartz |
| Abstract: | Paul Krugman’s essay “Who Was Milton Friedman?” seriously mischaracterizes Friedman’s economics and his legacy. In this paper we provide a rejoinder to Krugman on these issues. In the course of setting the record straight, we provide a self-contained guide to Milton Friedman’s impact on modern monetary economics and on today’s central banks. We also refute the conclusions that Krugman draws about monetary policy from the experiences of the United States in the 1930s and of Japan in the 1990s. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-048&r=cba |
| By: | Robert J. Shiller |
| Abstract: | There has been a widespread perception in the past few years that long-term asset prices are generally high because monetary authorities have effectively kept long-term interest rates, which the market uses to discount cash flows, low. This perception is not accurate. Long-term interest rates have not been especially low. What has changed to produce high asset prices appears instead to be changes in popular economic models that people actually rely on when valuing assets. The public has mostly forgotten the concept of "real interest rate." Money illusion appears to be an important factor to consider. |
| JEL: | G12 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13558&r=cba |
| By: | Frederick van der Ploeg |
| Abstract: | Using the results of risk-adjusted linear-quadratic-Gaussian optimal control with perfect and imperfect observation of the economy, we obtain prudent Taylor rules for monetary policies and also allow for imperfect information and cautious Kalman filters. A prudent central bank adjusts the nominal interest rate more aggressively to changes in the inflation gap, especially if the volatility of cost-push shocks is large. If the interest rate impacts the output gap after a lag, the interest also responds to the output gap, especially with strong persistence in aggregate demand. Prudence pushes up this reaction coefficient as well. If data are poor and appear with a lag, a prudent central bank responds less strongly to new measurements of the output gap. However, prudence attenuates this policy reaction and biases the prediction of the output gap upwards, particularly if output targeting is important. Finally, prudence requires an extra upward (downward) bias in its estimate of the output gap before it feeds into the policy rule if inflation is above (below) target. This reinforces nominal interest rate reactions. A general lesson is that prudent predictions are neither efficient nor unbiased. |
| Keywords: | prudence, optimal monetary policy, Taylor rules, measurement errors, prediction |
| JEL: | C6 D8 E4 E5 E6 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2007/40&r=cba |
| By: | Michael B Devereux; Alan Sutherland |
| Abstract: | This paper presents a general approximation method for characterizing timevarying equilibrium portfolios in a two-country dynamic general equilibrium model. The method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios. |
| Keywords: | Country portfolios, solution methods. |
| JEL: | E52 E58 F41 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0706&r=cba |
| By: | Chris Tsoukis (London Metropolitan University); George Kapetanios (Queen Mary, University of London); Joseph Pearlman (London Metropolitan University) |
| Abstract: | We review the main New Keynesian inflation equations that have arisen as a result of aggregation from individual firms' price rigidities. We find that, on the whole, they cannot account for inflation persistence, a key feature of the empirical dynamics of inflation, and with important policy implications. The only exception seems to be when price stickiness is combined with wage rigidity and staggering. |
| Keywords: | Inflation rigidity, Price stickiness, Phillips curve |
| JEL: | E31 E32 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp619&r=cba |
| By: | David Andolfatto (Simon Fraser University, Canada and The Rimini Centre for Economics Analysis, Italy.); Scott Hendry (Bank of Canada, Canada); Kevin Moran (UniversitŽ Laval, Canada) |
| Abstract: | Several recent papers report evidence of an apparent statistical bias in in‡ation expectations and interpret these …ndings as overturning the rational expectations hypothesis. In this paper, we investigate the validity of such an interpretation. We present a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along several dimensions. By construction, model agents form “rational” expectations. We run a standard regression on equilibrium realizations of in‡ation and in‡ation expectations over sample periods corresponding to those tests performed on actual data and …nd evidence of an apparent bias in in‡ation expectations. Our experiments suggest that this incorrect inference is largely the product of a small sample problem, exacerbated by short-run learning dynamics in response to infrequent shifts in monetary policy regimes. |
| Keywords: | Regime changes; Learning dynamics; Monte Carlo exp eriments; Sample size. |
| JEL: | E47 E52 E58 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:27-07&r=cba |
| By: | Costas Milas (Keele University, UK and The Rimini Centre for Economics Analysis, Italy.); Christopher Martin (Brunel University, UK) |
| Abstract: | This paper argues that existing empirical models of interest rate rules are too simplistic. The hybrid Phillips curve implies that policymakers should respond to both current and expected future inflation rates, in contrast to existing models. We provide evidence that UK policymakers do this. |
| Keywords: | optimal monetary policy; inflation persistence; Phillips curve |
| JEL: | C51 C52 E52 E58 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:36-07&r=cba |
| By: | Horag Choi; Nelson C. Mark; Donggyu Sul |
| Abstract: | We study the evolution of the U.S. current account in a two-country dynamic stochastic endowment model in which a single non-state contingent bond is the only internationally traded asset. The paper focuses on the world `saving glut' as the primary cause of continual deterioration in the current account and departs from the standard framework by introducing a three-parameter model of the subjective discount factor that depends on societal (per capita) variables that are external to household choices. When agents in the model are presented with U.S. and rest-of-world endowment data as the realization of the exogenous state vector, endogenously driven short-run international differences in subjective discounting that display increasing relative U.S. impatience create saving and current account imbalances that matches patterns observed in the data. |
| JEL: | F32 F41 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13571&r=cba |
| By: | Jean-Paul Lam (University of Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.); Florian Pelgrin (University of Lausanne, Switzerland) |
| Abstract: | Many papers for example Jensen (2002) and Walsh (2003) have shown that in a New Keynesian model with a significant degree of forward-looking behaviour, policy regimes that target either the change in the output-gap (speed limit targeting) or nominal income growth can considerably reduce the size of the stabilization biasÐthe inefficiency that arises when a central bank conducts policy under discretion as opposed to commitment. Inflation targeting can also reduce the size of the stabilization bias but unless inflation expectations in the model are predominantly backward-looking, this targeting regime does not perform as well as speed limit or nominal income growth targeting. Jensen (2002) and Walsh (2003) obtain their results using a New Keynesian model where changes in the policy rate affect macroeconomic variables immediately. In this paper, we compare the performance of several targeting regimes by using a New Keynesian model that includes a delayed response of monetary policy as a result of information lags. We find two results that are substantially different from Jensen (2002) and Walsh (2003). First the size of the stabilization bias is considerably reduced. Second, a regime that targets inflation outperforms a regime that targets either the change in the output-gap or the growth in nominal income even when inflation expectations are very forward-looking. |
| Keywords: | Stabilization bias, Inflation Targeting, Discretion, Commitment, Information Lag |
| JEL: | E52 E58 E62 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:39-07&r=cba |
| By: | Etienne Farvaque (Equippe - Universités de Lille, Faculté des Sciences Economiques et Sociales, France.); Norimichi Matsueda (School of Economics, Kwansei Gakuin University, Japan.); Pierre-Guillaume Méon (DULBEA, Université libre de Bruxelles, Brussels,) |
| Abstract: | This paper relates the volatility of interest rates to the collective nature of monetary policymaking in monetary unions. Several decision rules are modelled, including hegemonic and democratic procedures, and also committees headed by a chairman. A ranking of decision rules in terms of the volatility of policy rates is obtained, showing that the presence of a chairman has a cooling e¤ect. However, members of a monetary union are better off under symmetric rules (voting, consensus, bargaining), unless they themselves chair the union. The results are robust to the inclusion of heterogeneities among members of the monetary union. |
| Keywords: | Monetary Policy Committees, Decision Procedures, Interest-rate, Monetary Union |
| JEL: | D70 E43 E58 F33 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:dul:wpaper:07-11rs&r=cba |
| By: | Chengsi Zhang (School of Finance, Renmin University of China); Denise R. Osborn (Economics, School of Social Sciences, University of Manchester); Dong Heon Kim (Department of Economics, Korea University) |
| Abstract: | The New Keynesian Phillips Curve model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that backward-looking inflation inertia dominates the dynamics of the short-run aggregate supply curve. This inconsistency is examined by investigating multiple structural changes in the NKPC for the US between 1960 and 2005, employing both inflation expectations survey data and a rational expectations approximation. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing empirical support for sticky price models over the last two decades. A break in the intercept of the NKPC is also identified around 2001 and this may be associated with US monetary policy in that period. |
| Keywords: | New Keynesian Phillips Curve, inflation survey forecasts, sticky prices, structural breaks, monetary policy |
| JEL: | E31 E37 E52 E58 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:0715&r=cba |
| By: | Le, Vo Phuong Mai (Cardiff Business School); Gillman, Max (Cardiff Business School); Minford, Patrick (Cardiff Business School) |
| Abstract: | The paper derives a Taylor condition as part of the agent's equilibrium behavior in an endogenous growth monetary economy. It shows the assumptions necessary to make it almost identical to the original Taylor rule, and that it can interchangably take a money supply growth rate form. From the money supply form, simple policy experiments are conducted. A full central bank policy model is derived that includes the Taylor condition along with equations comparable to the standard aggregate-demand/aggregate-supply model. |
| Keywords: | Taylor Rule ;endogenous growth; money supply; policy model |
| JEL: | E51 E52 O0 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2007/29&r=cba |
| By: | Vitale, Paolo |
| Abstract: | We formulate a market microstructure model of exchange determination we employ to investigate the impact of informed trading on exchange rates and on foreign exchange (FX) market conditions. With our formulation we show how strategic informed agents influence exchange rates via both portfolio-balance and information effects. We outline the connection which exists between the private value of information, market efficiency, liquidity and exchange rate volatility. Our model is also consistent with recent empirical research on the microstructure of FX markets. |
| Keywords: | exchange rate dynamics; foreign exchange micro structure; order flow; private information |
| JEL: | D82 G14 G15 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6553&r=cba |
| By: | Alfred V. Guender (University of Canterbury) |
| Abstract: | This paper explores an issue that arises in the delegation process. The paper shows that a myopic central banker, one who treats expectations as constant in setting discretionary policy, can replicate the behavior of output and inflation under policy from a timeless perspective. For that to happen, society must delegate a price level target or a speed limit policy to a central banker who is more weight-conservative than society. |
| Keywords: | New Keynesian Model; Price Level Targeting; Speed Limit Policy; Conservative Central Banker |
| JEL: | E3 E5 |
| Date: | 2007–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:07/04&r=cba |
| By: | Fernando Alexandre (Universidade do Minho - NIPE); Pedro Bação (GEMF and Universidade de Coimbra); John Driffill (Birkbeck College, University of London) |
| Abstract: | We evaluate the macroeconomic performance of different monetary policy rules when there is exchange rate uncertainty. We do this in the context of a non-linear rational expectations model. The exchange rate is allowed to deviate from its fundamental value and the persistence of the deviation is modeled as a Markov switching process. Our results suggest that taking into account the switching nature of the economy is important only in extreme cases. |
| Keywords: | : Exchange Rates, Monetary Policy, Markov Switching. |
| JEL: | E52 E58 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:26/2007&r=cba |
| By: | Costas Milas (Keele University, UK and The Rimini Centre for Economics Analysis, Italy.); Christopher Martin (Brunel University, UK); Ram Sharan Kharel (Brunel University, UK) |
| Abstract: | We estimate a flexible non-linear monetary policy rule for the UK to examine the response of policymakers to the real exchange rate. We have three main findings. First, policymakers respond to real exchange rate misalignment rather than to the real exchange rate itself. Second, policymakers ignore small deviations of the exchange rate; they only respond to real exchange under-valuations of more than 4% and over-valuations of more than 5%. Third, the response of policymakers to inflation is smaller when the exchange rate is over-valued and larger when it is under-valued. None of these responses is allowed for in the widely-used Taylor rule, suggesting that monetary policy is better analysed using a more sophisticated model, such as the one suggested in this paper. |
| Keywords: | monetary policy, asset prices, nonlinearity |
| JEL: | C51 C52 E52 E58 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:37-07&r=cba |
| By: | Patrick J. Kehoe; Virgiliu Midrigan |
| Abstract: | The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods have differing degrees of price stickiness then relatively more sticky goods tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatiity fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. We show that allowing for pricing complementarities leads to a modest improvement in the theory’s predictions for persistence but little improvement in the theory’s predictions for conditional variances. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:656&r=cba |
| By: | Pierre L. Siklos (Wilfrid Laurier University and Viessmann Research Centre Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.); Martin T. Bohl (WestfŠlische Wilhelms-University MŸnster, Germany) |
| Abstract: | This paper estimates forward-looking and forecast-based Taylor rules for France, Germany, Italy, and the euro area. Performing extensive tests for over-identifying restrictions and instrument relevance, we find that asset prices can be highly relevant as instruments in policy rules. While asset prices improve Taylor rule estimates, different assets prove most relevant across countries and this result could be seen as complicating the tasks of the European Central Bank. Encompassing tests show that forecast-based outperform forward-looking Taylor rules. A policy implication is that central banks ought to release their own forecasts and the basis upon which they are generated. |
| Keywords: | Monetary policy reaction functions, Asset prices, Instruments, European Central Bank |
| JEL: | E52 E58 C52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:32-07&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:6916&r=cba |
| By: | Pierfederico Asdrubali (John Cabot University); Soyoung Kim (Department of Economics, Korea University) |
| Abstract: | We recognize that intertemporal models of the current account (Frankel and Razin with Yuen 1996, or Baxter and Crucini 1993) imply a theory of consumption smoothing channels, and thus we build an empirical model on the theoretical foundations of Sachs (1982)¡¯s optimizing model in order to analyze the intertemporal smoothing role of saving components (fixed investments, inventories and trade balance). The estimation is conducted in a VAR framework, in which the minimal identifying restrictions are consistent with both the ¡±intertemporal approach to the current account¡± and the empirical consumption smoothing literature. Through the use of impulse response functions following different types of shocks, we find that for the OECD countries the bulk of intertemporal smoothing has been carried out domestically, through gross fixed investments and inventories, but the trade balance has also played a relevant ? albeit volatile ? smoothing role. We also determine the dynamic role of each component: the trade balance and inventories are mostly used as short-run smoothing tools while fixed investment provides more and more smoothing over time. Since our framework can accommodate various models of the current account, we can address some empirical puzzles, such as the ¡±excess sensitivity of investment¡± anomaly (Glick and Rogoff, JME 1995) and the ¡±saving-investment puzzle¡± (Feldstein and Horioka, EJ 1980). |
| Keywords: | Consumption smoothing channels, Intertemporal approach to the current account, VAR, Feldstein-Horioka puzzle, Capital mobility |
| JEL: | F41 F32 F36 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:0723&r=cba |
| By: | Cuciniello Vincenzo |
| Abstract: | In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that a centralized wage setting (CWS) and central bank conservatism (CBC) curb unemployment only if labor market distortions are sizeable. When labor distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. The comparison between the national monetary policy (NMP) regime and the monetary union (MU) reveals that a move to a MU boosts inflation in the absence of strategic effects. However, when strategic interactions between CB(s) and trade unions are taken into account, the shift to a MU unambiguously increases welfare and employment when monopoly distortions are sizeable either in presence of a sufficiently conservative CB or with fully CWS. Conversely, when labor market distortions are less relevant, the paper shows that an ultra-populist CB or atomistic wage setters are optimal for the society and a shift to a MU regime is unambiguously welfare improving. |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0014&r=cba |
| By: | Di Bartolomeo Giovanni; Rossi Lorenza |
| Abstract: | This paper investigates the effects of monetary policy in presence of heterogeneous consumers. We study the effectiveness (quantitative effects) of monetary policy and equilibrium determinacy properties of a New Keynesian DSGE model where a fraction of households cannot smooth consumption. We show that two-demand regimes can emerge (according to the “slope” of IS curve) and that the main unconventional results, stressed by recent literature, only hold in the unconventional case of an IS curve positively sloped. |
| Keywords: | Heterogeneous consumers, liquidity constraints, determinacy, demand regimes |
| JEL: | E61 E63 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0024&r=cba |
| By: | Di Bartolomeo Giovanni; Manzo Marco |
| Abstract: | Following the recent developments of the literature on stabilization policies, this paper investigates the effect of tax distortions on equilibrium determinacy in a New Keynesian economy with rule-of-thumb consumers and capital accumulation. In particular, we focus on the inter-action between monetary policy and tax distortions in supporting the saddle-path equilibrium under the assumptions of balanced budget and monetary policy satisfying a Taylor rule. |
| Keywords: | rule-of-thumb consumers, equilibrium determinacy, fiscal and monetary policy inter-actions, and tax distortions |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0013&r=cba |
| By: | Costas Milas (Keele University, UK and The Rimini Centre for Economics Analysis, Rimini, Italy.) |
| Abstract: | March 2007 saw an increase of 3.1 percent in the Consumer Price Index (CPI) annual inflation rate and triggered the first explanatory letter from the Governor of the Bank of England to the Chancellor of the Exchequer since the Bank of England was granted operational independence in May 1997. The letter gave rise to a lively debate on whether policymakers should pay attention to the link between inflation and M4 money growth. Using UK data since the introduction of inflation targeting in October 1992, we show that: (i) the relationship between inflation and M4 growth is not stable over time, and (ii) the tendency of M4 to exert inflationary pressures is conditional on annual M4 growth exceeding 10%. Above this threshold, a 1 percentage point increase in the annual growth rate of M4 increases annual inflation by only 0.09 percentage points, whereas a 1 percentage point increase in the disequilibrium between money and its long-run determinants increases annual inflation by only 0.07 percentage points. Since the money effects are very small, the implication is that the Monetary Policy Committee should not be particularly worried for not paying close attention to M4 money movements when setting interest rates. |
| Keywords: | Monetary Policy Committee (MPC), M4, inflation targeting, regimeswitching model. |
| JEL: | C51 C52 E52 E58 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:25-07&r=cba |
| By: | Mattesini Fabrizio; Rossi Lorenza |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0009&r=cba |
| By: | Pål Boug and Andreas Fagereng (Statistics Norway) |
| Abstract: | During the last decades Norwegian exporters have ƒ{ despite various forms of exchange rate targeting ƒ{ faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated VAR framework using the implied conditional variance from a GARCH model as a measure of volatility. Although treating the volatility measure as either a stationary or a non-stationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth ƒ{ in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance. |
| Keywords: | Exports; exchange rate volatility; GARCH; CVAR; forecasting |
| JEL: | C51 C52 F14 F17 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:522&r=cba |
| By: | Mattesini Fabrizio; Rossi Lorenza |
| Abstract: | In this paper we analyze a general equilibrium dynamic stochastic New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The presence of monopoly unions introduces real wage rigidities in the model. We show that as in Blanchard Galì (2005) the so called "divine coincidence" does not hold and a trade-off between inflation stabilization and the output stabilization arises. In particular, a productivity shock has a negative effect on inflation, while a reservation-wage shock has an effect of the same size but with the opposite sign. We derive a welfare-based objective function for the Central Bank as a second order Taylor approximation of the expected utility of the economy's representative household, and we analyze optimal monetary policy under discretion and under commitment. Under discretion a negative productivity shock and a positive exogenous wage shock will require an increase in the nominal interest rate. An operational instrument rule, in this case, will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the efficient rate of interest. The model is calibrated under different monetary policy rules and under the optimal rule. We show that the correlation between productivity shocks and employment is strongly influenced by the monetary policy regime. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is relatively larger than real wage volatility. |
| JEL: | E24 E32 E50 J23 J51 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0023&r=cba |
| By: | Sanjit Dhami; Ali al-Nowaihi |
| Abstract: | The recent experience with low inflation has reopened interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. To reduce the real interest rate, and to stimulate the economy, the modern literature highlights the role of high inflationary expectations. Using the Dixit-Lambertini (2003) framework of strategic policy interaction, we find that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal inflation target given to the Central Bank. Second, the Treasury, who retains control over fiscal policy and acts as leader, is given optimal output and inflation targets. This keeps inflationary expectations sufficiently high and achieves the optimal rational expectations pre-commitment solution. Simulations show that this arrangement is (1) optimal even when the Treasury has no inflation target but follow's the optimal output target and (2) 'near optimal' even when the Treasury follows its own agenda through a suboptimal output target but is willing to follow an optimal inflation target. Finally, if monetary policy is delegated to an independent central bank with an optimal inflation target, but the Treasury retains discretion over fiscal policy, then the outcome can be a very poor one. |
| Keywords: | liquidity trap; strategic monetary-fiscal interaction; optimal Taylor rules |
| JEL: | E63 E52 E58 E61 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:07/15&r=cba |
| By: | Yueh-Yun C. O’Brien |
| Abstract: | This paper compares the reserve requirements of OECD countries. Reserve requirements are the minimum percentages or amounts of liabilities that depository institutions are required to keep in cash or as deposits with their central banks. To facilitate monetary policy implementation, twenty-four of the thirty OECD countries impose reserve requirements to influence their banking systems’ demand for liquidity. These include twelve OECD countries that are also members of the European Economic and Monetary Union (EMU) and twelve non-EMU OECD countries. All EMU countries employ a single reserve requirement system, which is treated as one entity. ; The reserve requirement system for each of the twelve non-EMU countries is discussed separately. The similarities and differences among the thirteen reserve requirement systems are highlighted. The features of reserve requirements covered include: reservable liabilities, required reserve ratios, reserve computation periods, reserve maintenance periods, types of reserve requirements, calculations of required reserves, eligible assets for satisfying reserve requirements, remuneration on reserve balances, non-compliance penalties, carry-over of reserve balances, and required clearing balances. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-54&r=cba |
| By: | Eckhard Hein (IMK at the Hans Boeckler Foundation); Engelbert Stockhammer (Vienna University of Economics and Business Administration) |
| Abstract: | In a Post-Keynesian (PK) model we show that inflation targeting monetary policies, as the main stabilisation tool proposed by the New Consensus Model (NCM), in the short run are only adequate for certain values of the model parameters, but are either unnecessary, counterproductive, or limited in their effectiveness for other values. Taking into account medium-run cost and distribution effects of interest rate variations renders monetary policies completely inappropriate as an economic stabiliser. Based on these results we argue that the NCM macroeconomic policy assignment should be replaced by a PK assignment. Enhancing employment without increasing inflation will be possible if macroeconomic policies are coordinated along the following lines: The central bank targets distribution between rentiers, on the hand, and firms and employees, on the other hand, and sets low real interest rates, wage bargaining parties target inflation and fiscal policies are applied for short- and medium-run real stabilisation purposes. |
| Keywords: | Macroeconomic policies, New Consensus Model, Post-Keynesian Model, inflation targeting |
| JEL: | E12 E50 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:10-2007&r=cba |
| By: | Dimitrios D. Thomakos (University of Peloponnese, Greece and The Rimini Centre for Economics Analysis, Italy.); Constantina Kottaridi (University of Peloponnese, Greece); Diego MŽndez-Carbajo (Illinois Wesleyan University, USA) |
| Abstract: | We explore the connection between inflation and its higher-order moments for three economies in the periphery of the European Union (E.U.), Greece, Portugal and Spain. Motivated by a micro-founded model of inflation determination, along the lines of the hybrid New Keynesian Phillips curve, we examine whether and how much does the cross-sectional skewness in producer prices affect the path of inflation. We develop our analysis with the perspective of economic integration/inflation harmonization (in the E.U.) and discuss the peculiarities of these three economies. We find evidence of a strong positive relation between aggregate inflation and the distribution of relative-price changes for all three countries. A potentially important implication of our results is that, if the cross-sectional skewness of prices is directly related to aggregate inflation, not only the direction but also the magnitude of a nominal shock would influence output and inflation dynamics. Moreover, the effect of such a shock could be received asymmetrically, even when countries share a common currency. |
| Keywords: | Inflation; Cross-sectional distribution of prices; Greece, Portugal, Spain; European Union; Harmonization. |
| JEL: | E31 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:43-07&r=cba |
| By: | Raimundo Soto (Instituto de Economía. Pontificia Universidad Católica de Chile.); Ibrahim A. Elbadawi. |
| Abstract: | This paper develops a general equilibrium model of the real exchange rate for a small open economy, taking into account often overlooked characteristics of developing economies, such as the presence of significant aid flows, terms of trade variability, distorting trade taxes, and concentration of exports on natural resources. The equilibrium RER results from the intertemporal, optimal decisions of households on consumption, production, and trade of different goods, conditional upon government policies and external conditions. The model derives a concept of the sustainable current account based on the yield of the discounted present value of net exports which provides a rigorous framework for the computation of the equilibrium RER and misalignment indexes. We test the model in a sample of 73 developing countries in the 1970-2004 period using the PMG estimator proposed by Pesaran et al. (1999) and find it to be an encompassing representation of the data. We also develop a methodology to compute the misalignment of the real exchange rate, which requires to compute the permanent components of the determinants of the RER and to identify the equilibrium path for each country. |
| Keywords: | Real exchange rates, general equilibrium, misalignment, panel data. |
| JEL: | F31 F37 C23 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:324&r=cba |
| By: | Rochelle M. Edge; Michael T. Kiley; Jean-Philippe Laforte |
| Abstract: | This paper provides documentation for the large-scale estimated DSGE model of the U.S. economy used in Edge, Kiley, and Laforte (2007). The model represents part of an ongoing research project (the Federal Reserve Board's Estimated, Dynamic, Optimization-based--FRB/EDO--model project) in the Macroeconomic and Quantitative Studies section of the Federal Reserve Board aimed at developing a DSGE model that can be used to address practical policy questions and the model documented here is the version that was current at the end of 2006. The paper discusses the model's specification, estimated parameters, and key properties. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-53&r=cba |
| By: | J.E. Boscá (University of Valencia, Spain); A. Bustos (Ministry of Economics and Finance, Spain); A. Díaz (Ministry of Economics and Finance, Spain); R. Doménech (University of Valencia, Spain. Economic Bureau of the Prime Minister, Spain); J. Ferri (University of Valencia, Spain); E. Pérez (Ministry of Economics and Finance, Spain); L. Puch (FEDEA, Universidad Complutense and ICAE, Spain) |
| Abstract: | This paper presents a new macroeconomic database for the Spanish economy, REMSDB. The construction of this database has been oriented to conducting medium-term simulations for policy evaluation with the REMS model, a large Rational Expectations macroeconomic Model for Spain. The paper provides a detailed description of the data and documents its main statistical properties. The database is thought to be of major interest to related applications,whether strictly associated with the REMS model or, rather, with empirical macroeconomic studies. |
| Keywords: | E32, E37 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:0704&r=cba |
| By: | Mariagnese Branchi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christian Dieden (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Wim Haine (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Csaba Horwáth (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Andrew Kanutin (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Linda Kezbere (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The preparations for the introduction of the euro in 1999 involved the need for a new set of statistics for the euro area. Since then, significant progress has been made with regard to the coverage, timeliness and accuracy of these statistics. The reliability of the first releases – i.e. their stability in the process of later revisions – is an important quality-related feature. New data releases for the euro area have generally shown a very small or no bias, i.e. data revisions have been very modest and comparable with those of, for example, the United States or Japan. Despite the relatively small size of revisions, however, their combination with the low growth of the euro area economy may have drawn attention to such revisions of economic data for the euro area. This paper quantifies the revisions to selected key indicators in the period from the start of Monetary Union in 1999 to July 2007 and compares them with the corresponding medium term averages (1999-2006). The analysis covers the euro area, its six largest member countries, the United Kingdom, the United States and Japan. For this purpose, available time series for the various periods involved are used, series that record all revisions to published statistical data releases. The analysis is carried out separately for GDP growth and its expenditure components, for employment, unemployment rates, compensation per employee, labour cost indicators, industrial production, retail trade turnover and consumer prices. Overall, the evidence presented in this paper suggests that euro area data releases have generally shown a very small or no bias and have been more stable than those for individual euro area countries. Furthermore, recent euro area data show levels of revisions similar to those of the past, or levels of revisions that stabilised after the implementation of harmonised statistical concepts had largely been completed. JEL classification: E01, E21, E24, E31, E5 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20070074&r=cba |
| By: | Christoph Moser (University of Mainz, Department of Economics,); Axel Dreher (KOF Swiss Economic Institute, ETH Zurich) |
| Abstract: | Central bank governor changes in emerging markets may convey important signals about future monetary policy. Based on a new daily data set, this paper examines the reactions of foreign exchange markets, domestic stock market indices and sovereign bond spreads to central bank governor changes. The data cover 20 emerging markets over the period 1992-2006. We find that the replacement of a central bank governor negatively affects financial markets on the announcement day. This negative effect is mainly driven by irregular changes, i.e., changes occurring before the scheduled end of tenure, sending negative signals about perceived central bank independence. Personal characteristics of the central banker, to the contrary, are less important for market reactions. We find no evidence that changes in the central banker’s conservatism affect the reactions of the markets. Finally, market reactions are similar in countries with high and low degrees of central bank independence. |
| Keywords: | central bank governor turnover, monetary policy, emerging markets, risk premium |
| JEL: | E58 E42 F30 G14 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:07-177&r=cba |
| By: | Magdalena Morgese Borys; Roman Horvath |
| Abstract: | In this paper, we examine the effects of Czech monetary policy on the economy within VAR and the structural VAR framework. Subject to various sensitivity tests, we find that contractionary monetary policy shock has a negative effect on the degree of economic activity and price level, both with a peak response after one year or so. Regarding the prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price persistence. There is a rationale in using the real-time output gap instead of current GDP growth as using the former results in much more precise estimates. There is no evidence for price puzzle within the system. The results indicate a rather persistent appreciation of domestic currency after monetary tightening with a gradual depreciation afterwards. |
| Keywords: | Monetary policy transmission, VAR, real-time data, sectoral prices. |
| JEL: | E52 E58 E31 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp339&r=cba |
| By: | Soyoung Kim (Department of Economics, Korea University) |
| Abstract: | This paper develops a new methodology to infer the de facto exchange rate regime, based on a structural VAR model with sign restrictions. The methodology is applied to data from eleven emerging markets that recently experienced a currency crisis. The main findings are: (1) to be consistent with the “Hollow Middle?hypothesis, many countries moved toward hard pegs, such as dollarization and a currency board, or more flexible exchange rate arrangements that are close to the free float in the post-crisis period; and (2) the cases where a country over-states its exchange rate flexibility (including the case of “Fear of Floating? are found in all samples, but such cases tend to be less frequently found in the post-crisis period than in the pre-crisis period. |
| Keywords: | De Facto Exchange Rate Regime, structural VAR, Fear of Floating, Hollow Middle, Currency Crisis |
| JEL: | F33 E52 F31 C32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:0712&r=cba |
| By: | Axel Dreher; Silvia Marchesi; James Raymond Vreeland |
| Abstract: | Using panel data for 157 countries over the period 1999-2005 we empirically investigate the politics involved in IMF economic forecasts. We find a systematic bias in growth and inflation forecasts. Our results indicate that countries voting in line with the US in the UN General Assembly receive lower inflation forecasts. As the US is the Fund’s major shareholder, this result supports the hypothesis that the Fund’s forecasts are not purely based on economic considerations. We further find inflation forecasts are systematically biased downwards for countries with greater IMF loans outstanding relative to GDP, indicating that the IMF engages in “defensive forecasting.” Countries with a fixed exchange rate regime also receive low inflation forecasts. Considering the detrimental effects that inflation can have under such an exchange rate regime, we consider this evidence consistent with the Fund’s desire to preserve economic stability. |
| Keywords: | IMF; Economic Forecasts; Political Influence |
| JEL: | C23 D72 F33 F34 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:124&r=cba |
| By: | Pierre L. Siklos (Wilfrid Laurier University and Viessmann Research Centre Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.); Yang Zhang (University of Ottawa, Canada) |
| Abstract: | The time profile of inflation in China resembles the one experienced in major industrial countries. Given the uncertainty surrounding the sources of economic shocks, this paper compares results from three sets of alternative identification conditions, namely the standard Blanchard-Quah approach, the approach of Cover, Enders, and Hueng (2006), as well as the model considered by Bordo, Landon-Lane and Redish (2004). Our principal finding is that inflation in China has been primarily driven by monetary factors. While aggregate supply factors may have pushed inflation to cross the threshold leading to deflation, monetary policy is primarily responsible for Chinese inflationary outcomes. |
| JEL: | E31 E32 C32 C52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:34-07&r=cba |
| By: | Li Wang; John Whalley |
| Abstract: | Given the rapidly growing reserves in Asia (China, Japan, Korea, Taiwan) and the pressures from trading partners to revalue, there is a need to examine commercial policy in more than a pure barter model. Here we evaluate the joint impacts of exchange rate appreciation on trade flows and country surpluses using a general equilibrium trade model with a simple monetary structure in which the trade surplus is endogenously determined in the exchange rate setting country and the exchange rate is exogenous. We illustrate its application to the Chinese case using calibration to 2005 data. Our results, while elasticity dependent, suggest that the impacts of Renminbi (RMB) revaluation on the surplus are proportionally larger than on trade flows, and that changes in trade flows can be substantial. Different treatments of China's processing trade have small impact on changes in China's trade flow under RMB appreciation, but significant impacts on the change in the surplus. Results are elasticity dependent; larger substitution elasticities in preferences yield larger effects on trade flows and the surplus. |
| JEL: | E5 F3 F43 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13586&r=cba |
| By: | Alina Spiru |
| Abstract: | In this study, the degree of convergence of inflation rates of Central and East European economies to a variety of measures of European norm inflation is assessed using a range of techniques. These include unit root testing based upon panels of data and - an innovation to the pertinent literature - tests of nonlinear convergence. The results suggest that while convergence can be revealed in a number of cases, there is some sensitivity associated with the testing framework, in particular whether time series or panel methods are used. Furthermore, the inflation convergence performance of the CEE countries is conditional on the chosen inflation benchmark, the composition of the panel and the correlations among members. Moreover, by conducting a battery of linearity tests, it is found that nonlinear inflation convergence is virtually ubiquitous for the period that includes the accession of the Central and Eastern European former transition economies into the EU. |
| Keywords: | inflation convergence, panel data, linearity tests |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:005221&r=cba |
| By: | Juan Carlos Cuestas (Universidad de Alicante) |
| Abstract: | The aim of this paper is to analyse the empirical fulfilment of PPP in a number of Central and Eastern European countries. For this purpose we apply two different unit root tests in order to control for two sources of nonlinearities, i.e. Bierens (1997) and Kapetanios, Shin and Snell (2003). We find that PPP holds in most of these countries once account has been taken of nonlinear deterministic trends and smooth transitions. |
| Keywords: | PPP, Real Exchange Rate, Unit Roots, nonlinearities, Central and East Europe |
| JEL: | C32 F15 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2007-22&r=cba |
| By: | Nandwa, Boaz; Mohan, Ramesh |
| Abstract: | The flexible price monetary model assumes that both the purchasing power parity (PPP) and uncovered interest parity (UIP) hold continuously. In addition, the model posits that money market equilibrium exists, which helps to determine the exchange rate. This paper explores exchange rate determination in low-income economies by applying a monetary model to Kenya to examine the exchange rate dynamics in a post-float exchange rate regime. We apply a multivariate cointegration and error correction model (ECM) to investigate whether the long-run exchange rate equilibrium and the rate of adjustment to the long-run equilibrium hold, respectively. Finally, we evaluate the relative performance of ECM versus a random walk framework in the out-of-sample forecasting. We find that the random walk performs better than the restricted model. |
| Keywords: | Exchange rate; volatility; regime changes; Kenyan Shilling |
| JEL: | C32 F31 E58 C53 |
| Date: | 2007–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5581&r=cba |