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on Central Banking |
| By: | Charles T. Carlstrom; Timothy S. Fuerst; Matthius Paustian |
| Abstract: | There is growing evidence that the empirical Phillips curve within the US has changed significantly since the early 1980’s. In particular, inflation persistence has declined sharply. The paper demonstrates that this decline is consistent with a standard Dynamic New Keynesian (DNK) model in which: (i) the variability of technology shocks has declined, and (ii) the central bank more aggressively responds to inflation. |
| Keywords: | Inflation (Finance) ; Phillips curve ; Inflation targeting |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0721&r=cba |
| By: | Ariel Burstein; Christopher Kurz; Linda Tesar |
| Abstract: | Countries that are more engaged in production sharing exhibit higher bilateral manufacturing output correlations. We use data on trade flows between US multinationals and their affiliates as well as trade between the United States and Mexican maquiladoras to measure production-sharing trade and its link with the business cycle. We then develop a quantitative model of international business cycles that generates a positive link between the extent of vertically integrated production-sharing trade and internationally synchronized business cycles. A key assumption in the model is a relatively low elasticity of substitution between home and foreign inputs in the production of the vertically integrated good. |
| JEL: | F4 F41 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13731&r=cba |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | This paper takes a somewhat different approach from the recent literature in estimating exchange rate equations. It assumes uncovered interest rate parity and models how expectations are formed. Agents are assumed to base their expectations of future interest rates and prices, which are needed in the determination of the exchange rate, on predictions from a ten equation VAR model. The overall model is estimated by FIML under model consistent expectations. The model generally does better than the random walk model, and its properties are consistent with observed effects on exchange rates from surprise interest rate and price announcements. Also, the focus on expectations is consistent with the large observed short run variability of exchange rates. |
| Keywords: | Exchange rate equations, Uncovered interest rate parity |
| JEL: | F31 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1635&r=cba |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | This paper begins with the expectations theory of the term structure of interest rates with constant term premia and then postulates how expectations of future short term interest rates are formed. Expectations depend in part on predictions from a set of VAR equations and in part on the current and two lagged values of the short term interest rate. The results suggest that there is relevant independent information in both the VAR equations' predictions and the current and two lagged values of the short rate. The model fits the long term interest rate data well, including the 2004-2006 period, which some have found a puzzle. The properties of the model are consistent with the response of the long term U.S. Treasury bond rate to surprise price and employment announcements. The overall results suggest that long term rates can be fairly well explained by modeling expectation formation of future short term rates. |
| Keywords: | Term structure equations, Expectations theory |
| JEL: | E43 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1634&r=cba |
| By: | Guido Ascari (University of Pavia); Tiziano Ropele (Bank of Italy) |
| Abstract: | In the monetary policy literature it is commonly assumed that trend inflation is zero, despite overwhelming evidence that zero inflation is neither empirically relevant nor a practical objective for central bank policy. We therefore extend the standard New Keynesian model to allow for positive trend inflation, showing that even low trend inflation has strong effects on optimal monetary policy and the dynamics of inflation, output, and interest rates. Under discretion, the efficient policy deteriorates and there is no guarantee of determinacy. Even with commitment, targeting non-zero trend inflation leads to substantial welfare losses. Our results serve as a warning against indiscriminate use of models assuming zero trend inflation. |
| Keywords: | Optimal monetary policy, trend inflation |
| JEL: | E31 E52 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_647_07&r=cba |
| By: | Di Bartolomeo Giovanni; Hughes Hallett Andrew; Acocella Nicola |
| Abstract: | This paper shows the relationship between static controllability (the well-known Tinbergen golden rule), and the existence and other properties of the Nash equilibrium in a dynamic setting with rational expectations for future behavior. We show how to determine the existence of equilibrium outcomes; the conditions under which no equilibrium exists; and who will get to dominate (or who will find their policies to have become ineffective) in those equilibria, without having to compute and enumerate all the possible equilibria directly. |
| Keywords: | Policy games, policy effectiveness, controllability, Nash equilibrium existence, rational expectations |
| JEL: | C72 E52 E61 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0034&r=cba |
| By: | Carin van der Cruijsen en Sylvester Eijffinger |
| Abstract: | Central banks have become more and more transparent about their monetary policy making process. In the central bank transparency literature the distinction between actual and perceived transparency is often lacking. However, as perceptions are crucial for the actions of economic agents this distinction matters. We investigate the mismatch between actual and perceived transparency and its relevance by analyzing data of a Dutch household survey on the European Central Bank's transparency. A discrepancy between actual and perceived transparency exists because of incomplete and incorrect transparency knowledge and other (psychological) factors. We find that respondents with relatively high transparency perceptions are more likely to have more trust in the ECB and better alligned inflation perceptions and expectations. Therefore, it might be beneficial for a central bank to increase transparency perceptions, either by improving its actual disclosure practices or by focusing on its transparency strengths in its communicationpolicy. |
| Keywords: | Central bank transparency; Perceptions; Survey; CentERpanel; Behavioral Economics |
| JEL: | D80 E52 E58 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:163&r=cba |
| By: | Melecky, Martin |
| Abstract: | This paper proposes a measure of synchronization in the movements of relevant domestic and foreign fundamentals for choosing suitable currency for denomination of foreign debt. The selection of explanatory variables for exchange rate volatility is motivated using a New Keynesian Policy model. The model predicts that not only traditional optimal currency area variables, but also variables considered by the literature on currency preferences, such as money velocity, should be relevant for explaining exchange rate volatility. The findings show that measures of inflation synchronization, money velocity synchronization, and interest rate synchronization can be useful indicators for decisions on the currency denomination of foreign debt. |
| Keywords: | Debt Markets,Emerging Markets,Currencies and Exchange Rates,,Economic Theory & Research |
| Date: | 2008–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4458&r=cba |
| By: | Hasko, Harri (Bank of Finland Research) |
| Abstract: | Shocks to monetary and fiscal policy have played a major role in public debt developments in the OECD countries since the mid-1970s. According to the applied VAR approach, these shocks, taken together, explained, on average, about half of the forecast error variation in the debt to GDP ratio, while the share of shocks to GDP growth was close to 30 percent. In contrast, shocks to inflation and the debt ratio itself played in most cases only a minor role. However, the inflation shocks were vital in initiating the public debt problems, as the increase in actual inflation, and particularly the persistence of high inflation expectations in the 1980s, led to a prolonged period of high real interest rates. Learning the implications of greater monetary discipline therefore gave rise to ‘some unpleasant fiscal arithmetic’ which aggravated debt problems. In most countries fiscal policy aimed at correcting the deterioration in fiscal balances, but the progress was in most cases slow and delayed. It is noticeable that public debt developments have been quite similar in both the United States and the euro area despite differences in fiscal policy and the role of the public sector. Shocks to GDP growth, inflation and monetary policy, which have been more similar in both continents, explain about two thirds of the forecast error variation of the debt to GDP ratio, while shocks to fiscal policy explain about 20 percent. |
| Keywords: | public debt dynamics; fiscal policy; monetary policy; VAR models |
| JEL: | C22 E62 H62 |
| Date: | 2008–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_028&r=cba |
| By: | Lorenzo Forni (Bank of Italy); Libero Monteforte (Bank of Italy); Luca Sessa (Bank of Italy) |
| Abstract: | This paper describes a dynamic stochastic general equilibrium model featuring a fraction of non-Ricardian agents in order to estimate the effects of fiscal policy in the euro area by means of Bayesian techniques. The model accounts for distortionary taxation on labor and capital income and on consumption, while expenditures are broken down into purchases of goods and services, compensation of public employees, and transfers to households. A newly computed quarterly dataset of fiscal variables is used. Our results point to a prevalence of mild Keynesian effects of fiscal policy. In particular, although innovations in fiscal policy variables tend to be rather persistent, government purchases of goods and services and compensation of public employees have small and short-lived expansionary effects on private consumption, while innovations in transfers to households show a slightly more sizeable and lasting effect. On the revenue side, decreases in labor income and consumption tax rates have a sizable effect on consumption and output, while a reduction in capital tax favors investment and output in the medium run. Finally, with the exception of transfers to households and labor income tax rates, most fiscal policy variables contribute little to the cyclical variability of the main macro variables. |
| Keywords: | fiscal policy, distortionary taxation, DSGE modeling, Bayesian estimation |
| JEL: | E32 E62 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_652_07&r=cba |
| By: | Teresa Leal (Department of Economics and Statistics, University of Huelva, Dr. Cantero Cuadrado 6, 21071 Huelva, Spain.); Javier J. Pérez (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Mika Tujula (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jean-Pierre Vidal (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | While fiscal forecasting and monitoring has its roots in the accountability of governments for the use of public funds in democracies, the Stability and Growth Pact has significantly increased interest in budgetary forecasts in Europe, where they play a key role in the EU multilateral budgetary surveillance. In view of the increased prominence and sensitivity of budgetary forecasts, which may lead to them being influenced by strategic and political factors, this paper discusses the main issues and challenges in the field of fiscal forecasting from a practitioner’s perspective and places them in the context of the related literature. JEL Classification: H6, E62, C53. |
| Keywords: | Fiscal policies, government budget, forecasting, monitoring. |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070843&r=cba |
| By: | Rubens Penha Cysne (EPGE/FGV); David Turchick |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:666&r=cba |
| By: | Samuel Bentolila (CEMFI, CEPR and CESifo); Juan J. Dolado (Universidad Carlos III de Madrid, CEPR and IZA); Juan F. Jimeno (Banco de España, CEPR and IZA) |
| 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:iza:izadps:dp3249&r=cba |
| By: | Ivano Azzini; Riccardo Girardi; Marco Ratto (Euro-area Economy Modelling Centre) |
| Abstract: | In the Bayesian estimation of DSGE models with DYNARE (specifically the Matlab Version for Windows), most of the computing time is devoted to the posterior estimation with the Metropolis algorithm. Usually, the Metropolis is run using multiple parallel chains, to allow more careful convergence testing. In this work we describe a way to parallelize the multiple-chain Metropolis algorithm within the Dynare Framework, running parallel chains on different processors to reduce computational time. To do so, we aimed at the easiest and cheapest possible strategy, i.e. the one which requires the lower level of modification in the basic DYNARE routines and does not need any licensed toolbox. Despite the fact that parallelizing the Metropolis-Hasting algorithm is intrinsically easy (the different chains are completely independent each other and do not require communication between them), MatLab software does not allow concurrent programming, or in other terms it does not support multi-threads, without the use of MatLab Distributed Computing Toolbox. The general idea is that when the execution of the Metropolis should start, instead of running it inside the MatLab session, the control of the execution is passed to the operating system that allows for multi-threading and concurrent threads are launched on different processors. When the metropolis computations are concluded the control is given back to the original MatLab session for post-processing Markov Chain results. |
| Keywords: | North-South, DSGE models, DYNARE, Matlab, Windows, Parallel Computing |
| JEL: | C63 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:eem:wpaper:1&r=cba |
| By: | Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor); Leonardo Gambacorta (Bank of Italy); David Marqués (European Central Bank, Monetary Policy Directorate) |
| Abstract: | The dramatic increase in securitisation activity has modified the functioning of credit markets by reducing the fundamental role of liquidity transformation performed by financial intermediaries. We claim that the changing role of banks from “originate and hold” to “originate, repackage and sell” has also modified banks’ abilities to grant credit and the effectiveness of the bank lending channel of monetary policy. Using a large sample of European banks, we find that the use of securitisation appears to shelter banks’ loan supply from the effects of monetary policy. Securitisation activity has also strengthened the capacity of banks to supply new loans but this capacity depends upon business cycle conditions as well as upon banks’ risk positions. In this respect the recent experience of the sub-prime mortgage loans crisis is very instructive. |
| Keywords: | asset securitisation, bank lending channel, monetary policy |
| JEL: | E44 E52 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_653_07&r=cba |
| By: | Vajanne, Laura (Department of Financial Markets and Statistics) |
| Abstract: | Since the introduction of the single currency in 1999, major progress has been made towards achieving an integrated European capital and financial market. Available evidence suggests, nevertheless, that the degree of integration varies greatly depending on market segment. Retail banking markets are generally seen to be much less integrated than other segments of financial markets. Most consumers still buy retail financial services from domestic suppliers, cross-border entry of financial services firms is rare – even if it is growing – and the range of products available or terms attached thereto differ substantially across euro area countries. The purpose of this paper is to assess integration of retail banking in the euro area from January 2003 to December 2006. The empirical analysis is based on a monthly panel of recently published harmonised interest rates from euro area monetary financial institutions. We estimate two commonly used measures of convergence, namely â- and ó-convergence, to assess the speed and degree of integration. Tests for convergence are based on a panel unit root test. The tests provide evidence of a process of convergence in retail banking credit interest rates for households and non-financial corporations and show this convergence has recently being continuing. Thus, even if there are substantial cross-country differences in interest rate levels, progress towards integration is observable. |
| Keywords: | financial market integration; euro area interest rates; panel data estimation |
| JEL: | F36 G21 |
| Date: | 2008–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_027&r=cba |
| By: | Axel Dreher (KOF Swiss Economic Institute, ETH Zurich); Stefanie Walter (University of Zurich, Institute for Political Science, and ETH Zurich, Switzerland) |
| Abstract: | Using panel data for 68 countries over the period 1975-2002 this paper examines how IMF programs, disbursed loans, and compliance with conditionality affect the risk of currency crises and the outcome of such crises. Specifically, we investigate whether countries with previous IMF intervention are more likely to experience currency crises. In a second step, we analyze the IMF’s impact on a country’s decision to adjust the exchange rate, once a crisis occurred. We find that IMF involvement reduces the probability of a crisis. Once in a crisis, IMF programs significantly increase the probability that the authorities devalue the exchange rate. The amount of loans and compliance with conditionality have no impact. Our results suggest that the IMF – contrary to the Fund’s critics – does indeed fulfill its functions of promoting exchange rate stability and helping its members to correct macroeconomic imbalances. |
| Keywords: | IMF programs, growth, compliance, conditionality |
| JEL: | F33 F34 O57 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:08-186&r=cba |