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on Central Banking |
| By: | Hughes Hallett, Andrew; Libich, Jan; Stehlík, Petr |
| Abstract: | Monetary and Fiscal policies interact in many ways. Recently the stance of fiscal policy in a number of countries has raised concerns about the risks for the outcomes of monetary policy. This paper first shows that these concerns are justified since, under ambitious fiscal policy makers, inflation 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 solution, the paper proposes an asynchronous game framework that generalises the standard commitment analysis. It allows concurrent and partial commitment; both policies may be committed at the same time for varying degrees or different periods. It is demonstrated that these undesirable outcomes can be prevented if monetary commitment is sufficiently strong relative to fiscal commitment. Interestingly, that monetary commitment cannot only resist fiscal pressure, but also discipline and ambitious fiscal policy maker to achieve socially desirable outcomes for both policies. We extend the setting to the European monetary union case with a common central bank and many fiscal policy makers, to show that these results carry over. The implication therefore is: by explicitly committing to a long run inflation target, the central bank can not only ensure its credibility, but also indirectly induce more disciplined fiscal policies. The paper shows that these predictions are broadly supported empirically. |
| Keywords: | asynchronous moves; Battle of sexes; commitment; Game of chicken; inflation targeting; monetary-fiscal interactions |
| JEL: | C73 E61 E63 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6586&r=cba |
| By: | Luisa Lambertini (University of Surrey); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University) |
| Abstract: | We analyze the interaction of monetary and fiscal policies in a monetary union where the common central bank is more conservative than the fiscal authorities. When monetary and fiscal policies are discretionary, we find that the Nash equilibrium is sub-optimal with higher output and lower inflation than the cooperative Ramsey op- timum. In a further example of counterproductive cooperative, we find that fiscal cooperation makes matters worse. We also examine cooperative and non-cooperative fiscal policy in the case where the central bank can commit and has the same prefer- ences as the fiscal authorities. |
| Keywords: | fiscal-monetary policy interactions, fiscal cooperation and non-cooperation. |
| JEL: | F33 F42 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1707&r=cba |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); Bo Yang (University of Surrey) |
| Abstract: | Macroeconomics research has changed profoundly since the Kydland-Prescott seminal paper. In order to address the Lucas Critique, modelling now is based on microfoundations treating agents as rational utility optimizers. Bayesian estimation has produced models which are more data consistent than those based simply on calibration. With micro-foundations and new linear-quadratic techniques, normative policy based on welfare analysis is now possible. In the open economy, policy involves a ‘game’ with policymakers and private institutions or private individuals as players. This paper attempts to reassess the Kydland-Prescott contribution in the light of these developments. |
| Keywords: | Monetary rules, commitment, discretion, open economy, coordination gains. |
| JEL: | E52 E37 E58 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1807&r=cba |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); George Perendia (London Metropolitan University) |
| Abstract: | Most DSGE models and methods make inappropriate asymmetric information assumptions. They assume that all economic agents have full access to measurement of all variables and past shocks, whereas the econometricians have no access to this. An alternative assumption is that there is symmetry, in that the information set available to both agents and econometricians is incomplete. The reality lies somewhere between the two, because agents are likely to be subject to idiosyncratic shocks which they can observe, but are unable to observe other agents’ idiosyncratic shocks, as well as being unable to observe certain economy-wide shocks; however such assumptions generally lead to models that have no closed-form solution. This research aims to compare the two alternatives - the asymmetric case, as commonly used in the literature, and the symmetric case, which uses the partial information solution of Pearlman et al. (1986) using standard EU datasets. We use Bayesian MCMC methods, with log-likelihoods accounting for partial information. The work then extends the data to allow for a greater variety of measurements, and evaluates the effect on estimates, along the lines of work by Boivin and Giannoni (2005). |
| Keywords: | partial information, DSGE models, Bayesian maximum likelihood |
| JEL: | C11 C13 D58 D82 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1607&r=cba |
| By: | V. V. Chari; Patrick J. Kehoe |
| Abstract: | Robert Solow has criticized our 2006 Journal of Economic Perspectives essay describing "Modern Macroeconomics in Practice." Solow eloquently voices the commonly heard complaint that too much macroeconomic work today starts with a model with a single type of agent. We argue that modern macroeconomics may not end too far from where Solow prefers. He is also critical of how modern macroeconomists use data to construct models. Specifically, he seems to think that calibration is the only way that our models encounter data. To the contrary, we argue that modern macroeconomics uses a wide variety of empirical methods and that this big-tent approach has served macroeconomics well. Solow also questions our claim that modern macroeconomics is firmly grounded in economic theory. We disagree and explain why. |
| JEL: | E12 E13 E2 E20 E21 E22 E32 E4 E5 E52 E58 E6 E62 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13655&r=cba |
| By: | Corsetti, Giancarlo |
| Abstract: | 'New open economy macroeconomics' (NOEM) refers to a body of literature embracing a new theoretical framework for policy analysis in open economy, aiming to overcome the limitations of the Mundell-Fleming model while preserving the empirical wisdom and policy friendliness of traditional analysis. NOEM contributions have developed general equilibrium models with imperfect competition and nominal rigidities, to reconsider conventional views on the transmission of monetary and exchange rate shocks; they have contributed to the design of optimal stabilization policies, identifying international dimensions of optimal monetary policy; and they have raised issues about the desirability of international policy coordination. |
| Keywords: | exchange rates; international policy coordination; Mundell-Fleming model; open economy models; stabilization policy |
| JEL: | F33 F40 F41 F42 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6578&r=cba |
| By: | Rafael Santos; Aloisio Araujo |
| Abstract: | We study the interplay between the central bank transparency, its credibility, and the inflation target level. Based on a model developed in the spirit of the global games literature, we argue that whenever a weak central bank adopts a high degree of transparency and a low target level, a bad and self confirmed type of equilibrium may arise. In this case, an over-the-target inflation becomes more likely. The central bank is considered weak when favorable state of nature is required for the target to be achieved. On the other hand, if a weak central bank opts for less ambitious goals, namely lower degree of transparency and higher target level, it may avoid confidence crises and ensure a unique equilibrium for the expected inflation. Moreover, even after ruling out the possibility of confidence crises, less ambitious goals may be desirable in order to attain higher credibility and hence a better coordination of expectations. Conversely, a low target level and a high central bank transparency are desirable whenever the economy has strong fundamentals and the target can be fulfilled in many states of nature. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:140&r=cba |
| By: | Ricardo Reis; Mark W. Watson |
| Abstract: | This paper uses a dynamic factor model for the quarterly changes in consumption goods' prices to separate them into three components: idiosyncratic relative-price changes, aggregate relative-price changes, and changes in the unit of account. The model identifies a measure of "pure" inflation: the common component in goods' inflation rates that has an equiproportional effect on all prices and is uncorrelated with relative price changes at all dates. The estimates of pure inflation and of the aggregate relative-price components allow us to re-examine three classic macro-correlations. First, we find that pure inflation accounts for 15-20% of the variability in overall inflation, so that most changes in inflation are associated with changes in goods' relative prices. Second, we find that the Phillips correlation between inflation and measures of real activity essentially disappears once we control for goods' relative-price changes. Third, we find that, at business-cycle frequencies, the correlation between inflation and money is close to zero, while the correlation with nominal interest rates is around 0.5, confirming previous findings on the link between monetary policy and inflation. |
| JEL: | C32 C43 E31 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13615&r=cba |
| By: | Paul R. Bergin; Robert C. Feenstra |
| Abstract: | This paper studies how a rise in China's share of U.S. imports could lower pass-through of exchange rates to U.S. import prices. We develop a theoretical model with variable markups showing that the presence of exports from a country with a fixed exchange rate could alter the competitive environment in the U.S. market. In particular, this encourages exporters from other countries to lower markups in response to a U.S. depreciation, thereby moderating the pass-through to import prices. Free entry is found to further moderate the pass-through, in that a U.S. depreciation encourages entry of exporters whose costs are shielded by the fixed exchange rate, which further intensifies the competitive pressure on other exporters. The model predicts that certain conditions are necessary to facilitate this 'China explanation' for falling pass-through, including a 'North America bias' in U.S. preferences. The model also produces a log-linear structural equation for pass-through regressions indicating how to include the China share. Panel regressions over 1993–1999 support the prediction that a high China share in imports lowers pass-through to U.S. import prices. |
| JEL: | F4 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13620&r=cba |
| By: | Barnett, William A.; Duzhak, Evgeniya A. |
| Abstract: | Grandmont (1985) found that the parameter space of the most classical dynamic models are stratified into an infinite number of subsets supporting an infinite number of different kinds of dynamics, from monotonic stability at one extreme to chaos at the other extreme, and with many forms of multiperiodic dynamics between. The econometric implications of Grandmont’s findings are particularly important, if bifurcation boundaries cross the confidence regions surrounding parameter estimates in policy-relevant models. Stratification of a confidence region into bifurcated subsets seriously damages robustness of dynamical inferences. Recently, interest in policy in some circles has moved to New Keynesian models. As a result, in this paper we explore bifurcation within the class of New Keynesian models. We develop the econometric theory needed to locate bifurcation boundaries in log-linearized New-Keynesian models with Taylor policy rules or inflation-targeting policy rules. Central results needed in this research are our theorems on the existence and location of Hopf bifurcation boundaries in each of the cases that we consider. |
| Keywords: | Bifurcation; Hopf bifurcation; Euler equations; New Keynesian macroeconometrics; Bergstrom-Wymer model |
| JEL: | C3 C5 E3 |
| Date: | 2007–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6005&r=cba |
| By: | Bask, Mikael (Bank of Finland Research) |
| Abstract: | We embed an expectations-based optimal policy rule into a DSGE model for a small open economy that is augmented with trend extrapolation or chartism, which is a form of technical trading, in currency trade to examine the prerequisites for monetary policy. We find that a unique REE that is least-squares learnable is often the outcome when there is a limited amount of trend extrapolation, but that a less flexible inflation rate targeting may cause a multiplicity of REE. We also compute impulse-response functions for key macroeconomic variables to study how the economy returns to steady state after being hit by a shock. |
| Keywords: | determinacy; DSGE model; least-squares learning; targeting rule; technical trading; monetary policy |
| JEL: | C62 E52 F31 F41 |
| Date: | 2007–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_021&r=cba |
| By: | Bask, Mikael (Bank of Finland Research) |
| Abstract: | We embed different instrument rules into a New Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, this paper focuses on conditions for a determinate, least-squares learnable rational expectations equilibrium (REE). Under an interest rate rule with only contemporaneous macroeconomic data, the intensity of technical trading or trend-seeking in currency trade does not affect these conditions, except in the case of an extensive use of trend-seeking. On the other hand, if the central bank uses only forward-looking information in its interest rate rule, a determinate and learnable REE is a less likely outcome when trend-seeking in currency trade becomes more popular. The interest rate rule followed by the central bank in the model incorporates interest rate smoothing. |
| Keywords: | determinacy; DSGE model; interest rate rule; least-squares learning; technical trading |
| JEL: | C62 E52 F31 F41 |
| Date: | 2007–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_022&r=cba |
| By: | Bask, Mikael (Bank of Finland Research) |
| Abstract: | A DSGE model with a Taylor rule is augmented with an evolutionary switching between technical and fundamental analyses in currency trade, where the fractions of these trading tools are determined within the model. Then, a shock hits the economy. As a result, chaotic dynamics and long swings may occur in the exchange rate, which are appealing features of the model given existing empirical evidence on chaos and long swings in exchange rate fluctuations. |
| Keywords: | chaotic dynamics; foreign exchange; fundamental analysis; monetary policy; technical analysis |
| JEL: | C65 E32 E44 E52 F31 |
| Date: | 2007–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_019&r=cba |
| By: | Minea, A.; Villieu, P. |
| Abstract: | In this paper, we study maximizing long-run economic growth trade-off in monetary and fiscal policies in an endogenous growth model with transaction costs. We show that both monetary and fiscal policies are subject to threshold effects, a result that gives account of a number of recent empirical findings. Furthermore, the model shows that, to finance public expenditures, maximizing-growth government must choose relatively high seigniorage (respectively income taxation), if “tax evasion” and “financial repression” coefficients are high (respectively low). Thus, our model may explain why some governments resort to seigniorage and inflationary finance, and others rather resort to high tax-rate, as result of maximizing-growth strategies in different structural environments (notably concerning tax evasion and financial repression). In addition, the model allows examining how the optimal mix of government finance changes in response to different public debt contexts. |
| Keywords: | endogenous growth, threshold effects, monetary policy, fiscal policy, public deficit, policy mix, tax evasion, financial repression |
| JEL: | E5 E6 H6 O4 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec07:6546&r=cba |
| By: | Josephine M. Smith; John B. Taylor |
| Abstract: | We first document a large secular shift in the estimated response of the entire term structure of interest rates to inflation and output in the United States. The shift occurred in the early 1980s. We then derive an equation that links these responses to the coefficients of the central bank's monetary policy rule for the short-term interest rate. The equation reveals two countervailing forces that help explain and understand the nature of the link and how its sign is determined. Using this equation, we show that a shift in the policy rule in the early 1980s provides an explanation for the observed shift in the term structure. We also explore a shift in the policy rule in the 2002-2005 period and its possible effect on long-term rates. |
| JEL: | E43 E44 E52 E58 E65 G12 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13635&r=cba |
| By: | Erceg, Christopher; Gust, Christopher; López-Salido, J David |
| Abstract: | This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labour supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices. |
| Keywords: | imported intermediate inputs; open economy Phillips Curve; variable markups |
| JEL: | E52 F41 F47 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6574&r=cba |
| By: | Christopher J. Erceg; Christopher Gust; David López-Salido |
| Abstract: | This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labor supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices. |
| JEL: | E52 F41 F47 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13613&r=cba |
| By: | Richard W. Evans |
| Abstract: | Much empirical work has documented a negative correlation between different measures of globalization or openness and inflation levels across countries and across time. However, there is much less work exploring this relationship through structural international models based on explicit microeconomic foundations. This paper asks the question of how the degree of openness of an economy affects the equilibrium inflation level in a simple two-country OLG model with imperfect competition in which the monetary authority in each country chooses the money growth rate to maximize the welfare of its citizens. I find that a higher degree of openness in a country is associated with a higher equilibrium inflation rate. This result is driven by the fact that the monetary authority enjoys a degree of monopoly power in international markets as Foreign consumers have some degree of inelasticity in their demand for goods produced in the Home country. The decision of the monetary authority is then to balance the benefitsof increased money growth that come from the open economy setting with the well-known consumption tax costs of inflation. In addition, I find that the level of imperfect competition among producers within a country is a perfect substitute for the international market power of the monetary authority in extracting the monopoly rents available in this international structure. |
| Keywords: | Globalization ; Equilibrium (Economics) |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:01&r=cba |
| By: | Enrique Martinez-Garcia |
| Abstract: | Data for the U.S. and the Euro area during the post-Bretton Woods period shows that nominal and real exchange rates are more volatile than consumption, very persistent, and highly correlated with each other. Standard models with nominal rigidities match reasonably well the volatility and persistence of the nominal exchange rate, but require an average contract duration above 4 quarters to approximate the real exchange rate counterparts. I propose a two-country model with financial intermediaries and argue that: First, sticky and asymmetric information introduces a lag in the consumption response to currently unobservable shocks, mostly foreign. Accordingly, the real exchange rate becomes more volatile to induce enough expenditure-switching across countries for all markets to clear. Second, differences in the degree of price stickiness across markets and firms weaken the correlation between the nominal exchange rate and the relative CPI price. This correlation is important to match the moments of the real exchange rate. The model suggests that asymmetric information and differences in price stickiness account better for the stylized facts without relying on an average contract duration for the U.S. larger than the current empirical estimates. |
| Keywords: | Foreign exchange rates |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:02&r=cba |
| By: | Danthine, Jean-Pierre; Kurmann, Andre |
| Abstract: | We develop a reciprocity-based model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wage policy, rent-sharing (between workers and firms) and a measure of wage entitlement are critical to fit the dynamic responses of hours, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers' outside option), on the other hand, are found to play only a negligible role in wage setting. These results are broadly consistent with micro-studies on reciprocity in labour relations but contrast with traditional efficiency wage models which emphasize aggregate labour market variables as the main determinant of wage setting. Overall, the empirical fit of the estimated model is at least as good as the fit of models postulating nominal wage contracts. In particular, the reciprocity model is more successful in generating the sharp and significant fall of inflation and nominal wage growth in response to a neutral technology shock. |
| Keywords: | Efficiency wages; Estimated DSGE models; Reciprocity |
| JEL: | E24 E31 E32 E52 J50 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6587&r=cba |
| By: | Barnett, William A.; Keating, John W.; Kelly, Logan |
| Abstract: | Measuring the economic stock of money, defined to be the present value of current and future monetary service flows, is a difficult asset pricing problem, because most monetary assets yield interest. Thus, an interest yielding monetary asset is a joint product: a durable good providing a monetary service flow and a financial asset yielding a return. The currency equivalent index provides an elegant solution, but it does so by making strong assumptions about expectations of future monetary service flows. These assumptions cause the currency equivalent index to exhibit significant downward bias. In this paper, we propose an extension to the currency equivalent index that will correct for a significant amount of this bias. |
| Keywords: | Currency equivalent index; monetary aggregation; money stock |
| JEL: | E41 |
| Date: | 2007–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6008&r=cba |
| By: | Alpanda, Sami; Honig, Adam |
| Abstract: | This paper examines the extent to which monetary policy is manipulated for political purposes by testing for the presence of political monetary cycles between 1972 and 2001. This is the first study of its kind to include not only advanced countries but also a large sample of developing nations where these cycles are more likely to exist. We estimate panel regressions of a monetary policy indicator on an election dummy and control variables. We do not find evidence of political monetary cycles in advanced countries but find strong evidence in developing nations. Based on our results, we construct a new de facto ranking of central bank independence derived from the extent to which monetary policy varies with the election cycle. Our ranking of CBI is therefore based on the behavior of central banks during election cycles when their independence is likely to be challenged or their lack of independence is likely to be revealed. The ranking also avoids well-known problems with existing measures of central bank independence. |
| Keywords: | Political monetary cycles; central bank independence |
| JEL: | E58 E52 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5898&r=cba |
| By: | Hefeker, Carsten |
| Abstract: | The paper explores the interaction between debt crises and devaluation. Since the optimal level of devaluation in a crisis depends on the level of debt that has to be serviced, a default makes a devaluation less likely. Expected devaluation depends thus on expectations about default which is also a function of the type of policymaker. Therefore, the decision to devalue can be forced upon the government by adverse expectations about default and the type of policymaker in office. I also explore how these uncertainties affect the policymaker’s choice of exchange rate regime. |
| Keywords: | debt crisis, currency crisis, exchange rate regime |
| JEL: | F33 F34 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec07:6536&r=cba |
| By: | John Lewis; Karsten Staehr |
| Abstract: | Following the Maastricht criteria, a country seeking to join the European Monetary Union cannot have an inflation rate in excess of 1.5 percent plus the average inflation rates in the three 'best performing' EU countries. This inflation reference value is a non-increasing function of the number of EU members. Looking backwards, the effect of increasing the number of EU countries from 15 to 27would have been sizeable in 2003 and 2004, but relatively modest since 2005. Monte Carlo simulations show that the expansion of the EU from 15 to 27 members reduces the expected inflation reference value by 0.15-0.2 percentage points, but with a considerable probability of a larger reduction. The treatment of countries with negative inflation rates in the calculation of the reference value has a major impact on the results. |
| Keywords: | Maastricht Treaty; European Monetary Union; inflation; convergence. |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:151&r=cba |
| By: | Thomas A. Eife (University of Heidelberg, Department of Economics); W. Timothy Coombs (University of Illinois) |
| Abstract: | The discrepancy between popular impressions of how the 2002 changeover to the euro affected prices and its actual impact is perhaps the most surprising consequence of the single currency’s introduction. Following the changeover, perceived inflation rose significantly and returned to its prechangeover level only several months later. This paper argues that people’s inflation misperceptions could have been avoided. Using principles of crisis communication, we identify the mistakes made and present policy recommendations for future changeovers |
| Keywords: | euro changeover, perceived inflation, communication, perceptual crisis |
| JEL: | E50 E60 Y80 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0458&r=cba |
| By: | Constantina Kottaridi; Diego Mendez-Carbajo; Dimitrios Thomakos |
| Abstract: | We explore the connection between inflation and its higherorder 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: | Cross-sectional distribution of prices; Greece, Portugal, Spain, European Union, Harmonization. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:uop:wpaper:0004&r=cba |
| By: | Emmanuel Dubois; Jerome Hericourt; Valerie Mignon |
| Abstract: | The aim of this paper is to gauge quantitatively the macroeconomic costs or gains of EMU membership. Building on the Global VAR framework designed by Pesaran et al. (2004), we want to shed light on the following important questions: What if the euro had never been launched? How would have evolved national outputs and inflation rates? What would have been the consequences for Italy of not participating to Stage 3? We show that we cannot draw any general conclusion for the three largest euro area members, namely Germany, France and Italy. It is however certain that these countries had, and probably still have, conflicting interests regarding the most suitable monetary policy for each of them. Conversely, small euro area members like Finland, the Netherlands and Spain, seem to have benetted from the pre-euro convergence and from the single currency regime. Besides, the single currency regime probably did not have any significant impact on price developments. Finally, the non-participation of Italy to the single currency is quite neutral on the macroeconomic performances of the euro area. |
| Keywords: | Euro; counterfactual analysis; global VAR |
| JEL: | C32 E17 F42 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2007-17&r=cba |
| By: | Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | The economic performances of the Eurozone look weaker than those of the United States over<br />the period 1999-2006, in spite of the fact that the former applies more thoroughly the 'new<br />macroeconomics' governance rules concerning public deficits and inflation control. The<br />literature emphasizes Alan Greenspan's pragmatism when discussing the relative success of<br />the Fed, but the reasons why pragmatism ought to do better than a thorough application of the<br />'new macroeconomics' theoretical recommendations remain unexplored. The paper focuses on<br />the advantage of monetary policy pragmatism in the face of Keynesian uncertainty. More<br />specifically, it points out the trials of the 'new macroeconomics' principles of monetary policy<br />when they are implemented in a Keynesian context, that is, within a system which does not<br />have any 'natural' anchor. |
| Keywords: | Monetary policy; Post Keynesian; Uncertainty |
| Date: | 2007–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00189225_v1&r=cba |
| By: | Anton Nakov; Andrea Pescatori |
| Abstract: | We assess the extent to which the period of great U.S. macroeconomic stability since the mid-1980s can be accounted for by changes in oil shocks and the oil share in GDP. To do this we estimate a DSGE model with an oil-producing sector before and after 1984 and perform counterfactual simulations. We nest two popular explanations for the Great Moderation: (1) smaller (non-oil) real shocks;and (2) better monetary policy. We find that the reduced oil share accounted for as much as one-third of the inflation moderation and 13% of the growth moderation, while smaller oil shocks accounted for 11% of the inflation moderation and 7% of the growth moderation. This notwithstanding, better monetary policy explains the bulk of the inflation moderation, while most of the growth moderation is explained by smaller TFP shocks. |
| Keywords: | Monetary policy ; Petroleum products - Prices ; Business cycles |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0717&r=cba |
| By: | Rafael Di Tella; Robert MacCulloch |
| Abstract: | We show that data on satisfaction with life from over 600,000 Europeans are negatively correlated with the unemployment rate and the inflation rate. Our preferred interpretation is that this shows that emotions are affected by macroeconomic fluctuations. Contentment is, at a minimum, one of the important emotions that central banks should focus on. More ambitiously, contentment might be considered one of the components of utility. The results may help central banks understand the tradeoffs that the public is willing to accept in terms of unemployment for inflation, at least in terms of keeping the average level of one particular emotion (contentment) constant. An alternative use of these data is to study the particular channels through which macroeconomics affects emotions. Finally, work in economics on the design of monetary policy makes several assumptions (e.g., a representative agent, a summary measure of emotions akin to utility exists and that individuals only care about income and leisure) that can be used to interpret our results as weights in a social loss function. |
| JEL: | E0 E58 H0 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13622&r=cba |
| By: | Tatom, John |
| Abstract: | China-bashing has become a popular media and political sport. This is largely due to the U.S. trade imbalance and the belief, by some, that China is responsible for it because it manipulates its currency to hold down the dollar prices of its goods, unfairly creating a trade advantage that has contributed to the loss of U.S. businesses and jobs. This paper reviews the problem of the large trade imbalance that the United States has with China and its relationship to Chinese exchange rate policy. It examines the link between a Chinese renminbi appreciation and the trade balance and also whether a generalized dollar decline could solve the global or Chinese U.S. trade imbalance. The consensus view explained here is that a renminbi appreciation is not likely to fix either the trade imbalance with China or overall. Though these perceived benefits of a managed float are small or non-existent, perhaps they should be pursued anyway because of small costs or even benefits for China. Section IV looks at the costs of a managed float in terms of the benefits of the earlier peg. Opponents of a fixed dollar/yuan exchange rate ignore the costs of a managed float for China, especially with limits on currency convertibility. These costs are outlined here in order to provide an economic basis for the earlier fixed rate and China’s reluctance to appreciate. Finally it is suggested that the necessary convertibility on capital account, toward which China is moving, could easily result in yuan depreciation under a floating rate regime. This is hardly the end that China critics have in mind and it is not one that would improve U.S. or other trade imbalances with China. |
| Keywords: | exchange rate policy; China; currency manipulation; current account imbalance. |
| JEL: | F41 E58 |
| Date: | 2007–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5366&r=cba |
| By: | Philip Liu |
| Abstract: | This paper examines the sources of Australia’s business cycle fluctuations focusing on the role of international shocks and short run stabilization policy. A VAR model identified using robust sign restrictions derived from an estimated structural model is used to aid the investigation. The results indicate that, in contrast to previous VAR studies, foreign factors contribute over half of domestic output forecast errors whereas innovation from output itself has little effect. Furthermore, monetary policy was largely successful in mitigating the business cycle fluctuations in a counter-cyclical fashion while the floating exchange rate also help offset foreign disturbances. For Australia’s stable economic success, good policy helped but so did good luck. |
| JEL: | E32 E52 E63 F41 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2007-24&r=cba |