|
on Central Banking |
| By: | Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia |
| Abstract: | This paper shows that the explanation of the decline in the volatility of GDP growth since the mid-eighties is not the decline in the volatility of exogenous shocks but rather a change in their propagation mechanism. |
| Keywords: | Great Moderation; Information; Shocks |
| JEL: | C32 C53 E32 E37 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6600&r=cba |
| By: | Alessandro Riboni; Francisco Ruge-Murcia |
| Abstract: | This short paper employs individual voting records of the Monetary Policy Committee (MPC) of the Bank of England to study heterogeneity in policy preferences among committee members. The analysis is carried out using a simple generalization of the standard Neo Keynesian framework that allows members to differ in the weight they give to output compared with inflation stabilization and in their views regarding optimal inflation and natural output. Results indicate that, qualitatively, MPC members are fairly homogeneous in their policy preferences, but that there are systematic quantitative differences in their policy reaction functions that are related to the nature of their membership and career background. |
| Keywords: | Committees; reaction functions; Bank of England |
| JEL: | G23 G32 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:157&r=cba |
| By: | William Coleman |
| Abstract: | It is argued that inflation creates private incentives for (socially costly) inside money to supplant (socially costless) outside money. Consequently, the familiar 'shoe leather cost' of inflation, that operates through a reduced demand for money under inflation, is supplemented by a separate social cost of inflation that operates through an increased supply of (inside) money under inflation. It is further argued that allowance of the costliness of an inflation-induced expansion of inside money changes the character of the distribution of the costs of inflation. Certain suppliers of inside money may experience a net gain from an inflation. The upshot is that inflation is no longer necessarily a 'common enemy', but may be welcomed by some economic interests. |
| JEL: | E42 E51 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2007-486&r=cba |
| By: | Finocchiaro, Daria (Research Department, Central Bank of Sweden); Queijo von Heideken, Virginia (Research Department, Central Bank of Sweden) |
| Abstract: | The substantial fluctuations in house prices recently experienced by many industrialized economies have stimulated a vivid debate on the possible implications for monetary policy. In this paper, we ask whether the U.S. Fed, the Bank of Japan and the Bank of England have reacted to house prices. We study the responses of these central banks by estimating a structural model for each country where credit constrained agents borrow against real estate. The main result is that house price movements did play a separate role in the U.K. and Japanese central bank reaction functions, while they did not in the U.S. |
| Keywords: | House prices; monetary policy; DSGE models; Bayesian estimation |
| JEL: | E31 E44 E52 E58 |
| Date: | 2007–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0217&r=cba |
| By: | D'Agostino, A; Surico, P |
| Abstract: | We construct a measure of global liquidity using the growth rates of broad money for the G7 economies. Global liquidity produces forecasts of US inflation that are significantly more accurate than the forecasts based on US money growth, Phillips curve, autoregressive and moving average models. The marginal predictive power of global liquidity is strong at three years horizons. Results are robust to alternative measures of inflation. |
| JEL: | C53 C22 E37 E47 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6277&r=cba |
| By: | Andersson, Michael K. (Monetary Policy Department, Central Bank of Sweden); Karlsson, Gustav (Monetary Policy Department, Central Bank of Sweden); Svensson, Josef (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | This paper describes the official Riksbank forecasts for the period 2000-06. The forecast variables are those that are important for monetary policy analysis, i.e. inflation, GDP, productivity, employment, labour force, unemployment and financial variables such as interest rate and foreign exchange rate. The Riksbank’s forecasts are presented and analyzed and compared with alternative forecasts, that is, those from other institutions and simple statistical models. One important message from the study is that macroeconomic forecasts are associated with an appreciable uncertainty; the forecast errors are often sizeable. The forecast memory, defined as how far the forecasts are more informative than the variables unconditional mean, is usually limited to the first year. Furthermore, we find that the inflation forecasts exhibit several appealing features, such as a predictability memory that (possibly) includes the second year, relatively low RMSE and weak efficiency. The forecasts for the investigated real variables are shown to be less precise and they have a shorter forecast memory. The exchange rate predictions demonstrate the least accurate (of the investigated variables) forecasts. Compared to other forecasters, the Riksbank’s predictions are often more accurate. This holds for a comparison with the National Institute of Economic Research, even though the differences are statistically insignificant, as well as for a comparison with the participants in the Consensus Forecasts panel, where the Riksbank’s predictions often are among the best. We also find indications that misjudgements for productivity growth have had effects on forecasts for both inflation and GDP, but the results suggest that the Riksbank has considered available information in an acceptable fashion. This is also true for the undertaken revisions (from one forecast occasion to another) of the published forecasts. |
| Keywords: | Judgements; Forecast Evaluation; Central Bank; Inflation; GDP; RMSE |
| JEL: | E27 E37 E52 |
| Date: | 2007–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0218&r=cba |
| By: | Bentolila, Samuel; Dolado, Juan José; Jimeno, Juan Francisco |
| Abstract: | The Phillips curve has flattened in Spain over 1995-2006: unemployment has fallen by 15 percentage points, with roughly constant inflation. This change has been more pronounced than elsewhere. We argue that this stems from the immigration boom in Spain over this period. We show that the New Keynesian Phillips curve is shifted by immigration if natives’ and immigrants’ labour supply or bargaining power differ. Estimation of the curve for Spain indicates that the fall in unemployment since 1995 would have led to an annual increase in inflation of 2.5 percentage points if it had not been largely offset by immigration. |
| Keywords: | Immigration; Phillips curve |
| JEL: | E31 J64 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6604&r=cba |
| By: | Olivier Allain (Universite Paris Descartes - Université Paris Descartes - Paris V, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | Recent papers have reconsidered the paradox of profits, that is the difficulty to explain how monetary profits can be generated when firms borrow only the wage bill to finance their production. In this article, we use a stock-flow consistent approach give a solution to this paradox assuming that, when firms sell goods at prices which exceed their unit costs, the realised monetary profits are not used to pay back banks. These profits then remain in the circuit, allowing additional transactions. In a sense, profits result from their own expenditure. According to this interpretation, the velocity of money is higher than one because some monetary units are used in several transactions of goods. |
| Keywords: | paradox of profits; circulation; endogenous money;velocity of money; stock-flow consistent approach |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00196485_v1&r=cba |
| By: | Demary, Markus |
| Abstract: | We extend the model by DeGrauwe and Grimaldi (2006, EER) by currency transaction taxes. This model explains the exchange rate behavior by the interaction of heterogeneous traders who display either trend chasing behavior or rely on a return of the exchange rate back to its arbitrage free fundamental value. Within this model framework we can show analytically that the steady-state of the original model is unaffected by the transaction tax rate. We inferred from numerical simulations that the transaction tax is able to reduce the number of speculative equilibria to zero. Moreover, we show that the tax will lead to a faster convergence of the system back to its fundamental steady state. |
| Keywords: | Currency Transaction Taxes, Exchange Rates, Financial Market Volatility, Heterogenous Agents Model, Numerical Simulation |
| JEL: | C15 F31 F32 G15 G18 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:6796&r=cba |
| By: | Don H Kim |
| Abstract: | This paper discusses various challenges in the specification and implementation of "macro-finance" models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. I classify macro-finance models into pure latent-factor models ("internal basis models") and models which have observed macroeconomic variables as state variables ("external basis models"), and examine the underlying assumptions behind these models. Particular attention is paid to the issue of unspanned short-run fluctuations in macro variables and their potentially adverse effect on the specification of external basis models. I also discuss the challenge of addressing features like structural breaks and time-varying inflation uncertainty. Empirical difficulties in the estimation and evaluation of macro-finance models are also discussed in detail. |
| Keywords: | Term structure of interest rates, inflation expectations, macro-finance modeling, no-arbitrage models |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:240&r=cba |
| By: | Gregor Baeurle; Daniel Burren |
| Abstract: | Chari, Kehoe and McGrattan (2007) (CKM) show that a large class of dynamic stochastic general equilibrium (DSGE) models with various frictions and shocks is observationally equivalent to a benchmark real business cycle (RBC) model with correlated “wedges” in the RBC model's first-order conditions. The wedges in the static first-order conditions of the RBC model can be readily computed by evaluating the first-order conditions at the data and then solving for the wedges. In contrast, identification of the “investment wedge” in the RBC model's dynamic Euler equation requires the researcher to make assumptions about the expectation formation by agents in the RBC model. In particular, CKM assume that expectations are formed as if, from the perspective of the model's agents, wedges followed a vector autoregressive process of order one (VAR(1)). We show that wedges generally do not have a VAR(1) representation, implying that CKM's procedure is based on model-inconsistent expectations. We also provide an alternative, model-consistent approach to modeling expectation formation. On the former issue, we present a necessary and sufficient ``rank condition'' under which a detailed economy can be mapped into a benchmark model where wedges follow a VAR(1) process. On the latter issue, we suggest that the information set underlying the expectation formation should not only contain current wedges, but also all predetermined variables. |
| Keywords: | Business Cycle Accounting; Model Consistent Expectations |
| JEL: | C50 E10 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp0705&r=cba |
| By: | Ian Babetskii; Fabrizio Coricelli; Roman Horvath |
| Abstract: | The paper provides an empirical analysis of inflation persistence in the Czech Republic using 412 detailed product-level consumer price indexes underlying the consumer basket over the period from 1994:M1 to 2005:M12. Subject to various sensitivity tests, our results suggest that raw goods and non-durables, followed by services, display smaller inflation persistence than durables and processed goods. Inflation seems to be somewhat less persistent after the adoption of inflation targeting in 1998. There is also evidence for aggregation bias, that is, aggregate inflation is found to be more persistent than the underlying detailed components. Price dispersion, as a proxy for the degree of competition, is found to be negatively related to inflation persistence, suggesting that competition is not conducive to reducing persistence. |
| Keywords: | Inflation dynamics, inflation targeting, persistence. |
| JEL: | D40 E31 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/1&r=cba |
| By: | Jan Bruha; Jiri Podpiera; Stanislav Polak |
| Abstract: | In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run paths of a converging emerging market economy. The model’s novel feature is the inclusion of quality investment to the standard framework of applied general equilibrium two-country models. This extension proves crucial ingredient for explanation of the trend in real exchange rate. Using a case study calibration of productivity and deep parameters for the Czech economy we demonstrate the ability of the model to consistently explain dynamics in key macroeconomic variables that are essential inputs for commonly used ‘gap models’ in monetary policy practice. |
| Keywords: | Convergence, monetary policy, two-country modeling. |
| JEL: | F12 F41 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/3&r=cba |
| By: | Heather D. Gibson (Bank of Greece); Jim Malley (University of Glasgow and CESifo) |
| Abstract: | This paper estimates the magnitude of the Balassa-Samuelson effect for Greece. We calculate the effect directly, using sectoral national accounts data, which permits estimation of total factor productivity (TFP) growth in the tradeables and nontradeables sectors. Our results suggest that it is difficult to produce one estimate of the BS effect. Any particular estimate is contingent on the definition of the tradeables sector and the assumptions made about labour shares. Moreover, there is also evidence that the effect has been declining through time as Greek standards of living have caught up on those in the rest of the world and as the non-tradeables sector within Greece catches up with the tradeables. |
| Keywords: | Balassa-Samuelson effect, inflation, productivity |
| JEL: | E31 F36 F41 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:63&r=cba |