|
on Central Banking |
| By: | Carmen M. Reinhart; Kenneth S. Rogoff |
| Abstract: | Is the 2007-2008 U.S. sub-prime mortgage financial crisis truly a new and different phenomena? Our examination of the longer historical record finds stunning qualitative and quantitative parallels to 18 earlier post-war banking crises in industrialized countries. Specifically, the run-up in U.S. equity and housing prices (which, for countries experiencing large capital inflows, stands out as the best leading indicator in the financial crisis literature) closely tracks the average of the earlier crises. Another important parallel is the inverted v-shape curve for output growth the U.S. experienced as its economy slowed in the eve of the crisis. Among other indicators, the run-up in U.S. public debt and is actually somewhat below the average of other episodes, and its pre-crisis inflation level is also lower. On the other hand, the United States current account deficit trajectory is worse than average. A critical question is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which case growth may fall significantly below trend for an extended period. Or will it prove like one of the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response. |
| JEL: | E44 F30 N20 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13761&r=cba |
| By: | Thierry Bracke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthieu Bussière (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Fidora (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we take a systematic look at global imbalances. First, we provide a definition of the phenomenon, and relate global imbalances to widening external positions of systemically important economies that reflect distortions or entail risks for the global economy. Second, we provide an operational content to this definition by measuring trends in external imbalances over the past decade and putting these in a historical perspective. We argue that three main features set today’s situation apart from past episodes of growing external imbalances - (i) the emergence of new players, in particular emerging market economies such as China and India, which are quickly catching up with the advanced economies; (ii) an unprecedented wave of financial globalisation, with more integrated global financial markets and increasing opportunities for international portfolio diversification, also characterised by considerable asymmetries in the level of market completeness across countries; and (iii) the favourable global macroeconomic and financial environment, with record high global growth rates in recent years, low financial market volatility and easy global financing conditions over a long time period of time, running at least until the summer of 2007. Finally, we provide an analytical overview of the fundamental causes and drivers of global imbalances. The central argument is that the increase in imbalances has been driven by a unique combination of structural and cyclical determinants. JEL Classification: F2, F32, F33, F41. |
| Keywords: | Gobal imbalances, current account, incomplete financial globalisation, structural factors, cyclical factors. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080078&r=cba |
| By: | Evans , George W (University of Oregon and University of St. Andrews); Honkapohja, Seppo (Bank of Finland and University of Cambridge) |
| Abstract: | We consider the robust stability of a rational expectations equilibrium, which we define as stability under discounted (constant gain) least-squares learning, for a range of gain parameters. We find that for operational forms of policy rules, ie rules that do not depend on contemporaneous values of endogenous aggregate variables, many interest-rate rules do not exhibit robust stability. We consider a variety of interest-rate rules, including instrument rules, optimal reaction functions under discretion or commitment, and rules that approximate optimal policy under commitment. For some reaction functions we allow for an interest-rate stabilization motive in the policy objective. The expectations-based rules proposed in Evans and Honkapohja (2003, 2006) deliver robust learning stability. In contrast, many proposed alternatives become unstable under learning even at small values of the gain parameter. |
| Keywords: | commitment; interest-rate setting; adaptive learning; stability; determinacy |
| JEL: | D84 E31 E52 |
| Date: | 2007–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_031&r=cba |
| By: | Morten Ravn; Stephanie Schmitt-Grohe; Martin Uribe |
| Abstract: | A number of empirical studies document that marginal cost shocks are not fully passed through to prices at the firm level and that prices are substantially less volatile than costs. We show that in the relative-deep-habits model of Ravn, Schmitt-Grohe, and Uribe (2006), firm-specific marginal cost shocks are not fully passed through to product prices. That is, in response to a firm-specific increase in marginal costs, prices rise, but by less than marginal costs leading to a decline in the firm-specific markup of prices over marginal costs. Pass-through is predicted to be even lower when shocks to marginal costs are anticipated by firms. In our model unanticipated firm-specific cost shocks lead to incomplete pass-through (or a decline in markups) of about 20 percent and anticipated cost shocks are associated with incomplete pass-through of about 50 percent. The model predicts that cost pass-through is increasing in the persistence of marginal cost shocks and U-shaped in the strength of habits. The relative-deep-habits model implies that conditional on marginal cost disturbances, prices are less volatile than marginal costs. |
| Keywords: | Deep Habit formation, Markups, Cost Pass-Through |
| JEL: | D1 D4 L1 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/06&r=cba |
| By: | Wohltmann, Hans-Werner; Winkler, Roland |
| Abstract: | The purpose of this paper is to solve linear dynamic rational expectations models with anticipated shocks by using the generalized Schur decomposition method. We also determine the optimal unrestricted and restricted policy responses to temporary as well as permanent shocks which both are anticipated by the public. In particular, our method is useful for the analysis of optimal monetary policy in New Keynesian dynamic general equilibrium models. |
| Keywords: | Anticipated Shocks, Optimal Monetary Policy, Rational Expectations, Generalized Schur Decomposition |
| JEL: | C32 C61 E52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:6877&r=cba |
| By: | Julio J. Rotemberg |
| Abstract: | This paper starts by discussing consumers' cognitive and emotional reaction to posted prices. Cognitively, some consumers do not appear to make effective use of price information to maximize their consumption-based utility. Emotionally, prices can induce regret and anger among consumers. The optimal responses of firm's prices to these reactions can explain why firms charge prices below marginal cost for many goods and why they keep their prices rigid. This explanation of price rigidity has the advantage of being consistent with the observation that the typical size of price increases is nearly invariant to inflation. Lastly, the paper turns to some government policies regarding prices that appear to have some consumer support. It argues that both laws against price gouging and laws regulating the terms of mortgages may have support because consumers recognize that many people do not optimize their consumption effectively and because they are angry at firms that take advantage of this. These attitudes can also explain consumer support for monetary policies that maintain a low level of average inflation. |
| JEL: | D11 L11 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13754&r=cba |
| By: | Philip Arestis (Department of Land Economy, University of Cambridge); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under ‘normal’ circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in ‘exceptional’ circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of ‘rules versus discretion’ has, thus, reappeared as the synthesis of ‘rules cum discretion’, in essence as inflation-forecast targeting. |
| Keywords: | optimal monetary policy, flexible rules, constrained discretion, central bank independence, inflation targeting |
| JEL: | E52 E58 E61 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-13&r=cba |
| By: | Philip Arestis (Department of Land Economy, University of Cambridge); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under ‘normal’ circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in ‘exceptional’ circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of ‘rules versus discretion’ has, thus, reappeared as the synthesis of ‘rules cum discretion’, in essence as inflation-forecast targeting. |
| Keywords: | optimal monetary policy, flexible rules, constrained discretion, central bank independence, inflation targeting |
| JEL: | E52 E58 E61 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2007-53&r=cba |
| By: | Stephen McKnight (Department of Economics, University of Reading); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper re-considers the importance of trade openness for equilibrium determinacy when monetary policy is characterized by interest-rate rules. We develop a two-country, sticky-price model where money enters the utility function in a non-separable manner. Forward- and current-looking policy rules that react to domestic or consumer price inflation are analyzed. It is shown that the introduction of real balance effects substantially limits the validity of the Taylor principle and challenges recent conclusions concerning the relative desirability of the inflation indicator targeted. |
| Keywords: | Real indeterminacy; Open-economy macroeconomics; Interest-rate rules; Monetary policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2007-52&r=cba |
| By: | Stephen McKnight (Department of Economics, University of Reading); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper re-considers the importance of trade openness for equilibrium determinacy when monetary policy is characterized by interest-rate rules. We develop a two-country, sticky-price model where money enters the utility function in a non-separable manner. Forward- and current-looking policy rules that react to domestic or consumer price inflation are analyzed. It is shown that the introduction of real balance effects substantially limits the validity of the Taylor principle and challenges recent conclusions concerning the relative desirability of the inflation indicator targeted. |
| Keywords: | Real indeterminacy; Open-economy macroeconomics; Interest-rate rules; Monetary policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-12&r=cba |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the conditions under which interest-rate rules induce real equilibrium indeterminacy in a two-country, sticky-price, monetary model. Using a discrete-time framework, we employ the two most commonly used timing assumptions on which money balances enter into the utility function. This paper shows that the tim- ing equivalence result derived for a closed-economy no longer holds for open economies. This arises because modifications in the trading environment impact on the behavior of the real exchange rate. Consequently this helps explain the seemingly contradictory findings in the literature on real indeterminacy in open economies. Furthermore it challenges the belief that domestic inflation targeting is superior to consumer price inflation targeting, in minimizing aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-09&r=cba |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper presents a two-country sticky-price model that allows for capital and investment spending. It analyzes the conditions for equilibrium determinacy under alternative interest-rate rules that react to either domestic or consumer price inflation. It is shown that in the presence of investment, real indeterminacy is considerably easier to obtain once trade openness is permitted. Consequently we argue that sufficiently open economies should adopt a backward-looking rule and sufficiently closed economies should employ a current-looking rule, in order to minimize policy induced aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2007-51&r=cba |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper presents a two-country sticky-price model that allows for capital and investment spending. It analyzes the conditions for equilibrium determinacy under alternative interest-rate rules that react to either domestic or consumer price inflation. It is shown that in the presence of investment, real indeterminacy is considerably easier to obtain once trade openness is permitted. Consequently we argue that sufficiently open economies should adopt a backward-looking rule and sufficiently closed economies should employ a current-looking rule, in order to minimize policy induced aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-11&r=cba |
| By: | Aßmann, Christian |
| Abstract: | Several empirical studies are concerned with measuring the effect of currency and current account crises on economic growth. Using different empirical models this paper serves two aspects. It provides an explicit assessment of country specific factors influencing the costs of crises in terms of economic growth and controls via a treatment type model for possible sample selection governing the occurrence of crises in order to estimate the impact on economic growth correctly. The applied empirical models allow for rich intertemporal dependencies via serially correlated errors and capture latent country specific heterogeneity via random coe±cients. For accurate estimation of the treatment type model a simulated maximum likelihood approach employing efficient importance sampling is used. The results reveal significant costs in terms of economic growth for both crises. Costs for reversals are linked to country specific variables, while costs for currency crises are not. Furthermore, shocks explaining current account reversals and growth show strong significant positive correlation. |
| Keywords: | Currency crises, Current account reversals, Treatment Model, Discrete dependent variable, Efficient Importance Sampling, Panel Data |
| JEL: | C15 C23 C33 F32 O10 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:6878&r=cba |
| By: | Campbell, R.A.J.; Koedijk, C.G.; Lothian, J.R.; Mahieu, R.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | We review Irving Fisher’s seminal work on UIP and on the closely related equation linking interest rates and inflation. Like Fisher, we find that the failures of UIP are connected to individual episodes in which errors surrounding exchange rate expectations are persistent, but eventually transitory. We find considerable commonality in deviations from UIP and PPP, suggesting that both of these deviations are driven by a common factor. Using a dynamic latent factor model, we find that deviations from UIP are almost entirely due to expectational errors in exchange rates, rather than attributable to the risk premium; a result consistent with those reported by Fisher a century ago. |
| Keywords: | Irving Fisher;UIP;PPP;inflation;interest rates;exchange rates |
| Date: | 2007–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765010774&r=cba |
| By: | Allen Head (Queen's University); Junfeng Qiu (Central University of Finance and Economics, Beijing) |
| Abstract: | Optimal monetary policy is studied in an environment in which money plays an essential role in facilitating exchange and aggregate shocks affect individual agents asymmetrically. Exchange may be conducted using either bank deposits (inside money) or fiat currency (outside money). A central monetary authority both controls the stock of outside money and pursues an interest rate policy that affects the rate at which private banks create inside money. We find that the optimal monetary policy requires management of both interest rates and the quantity of outside money. By controlling interest rates the monetary authority can affect the price level in the short-run and adjust households' consumption, thus providing insurance against unfavorable aggregate shocks. The feasibility of the interest rate policy requires a minimum rate of trend inflation that may be positive and in principle quite large. The paper thus links two principal components of monetary policy: the optimal interest rate policy and the optimal long-run inflation rate. |
| Keywords: | banking, inside money, elastic money, monetary policy, inflation, zero bound |
| JEL: | E43 E51 E52 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1152&r=cba |
| By: | Christoph Thoenissen |
| Abstract: | This paper shows that a canonical flexible price international real business cycle model with incomplete financial markets can address the exchange rate volatility puzzle, the exchange rate persistence puzzle, the consumption real exchange rate anomaly, as well as the quantity anomaly. Crucial for the success of the model is the choice of the elasticity of substitution between home and foreign produced goods. The paper shows that the range of this parameter which allows the model to address these international macroeconomics anomalies is very narrow. Furthermore, the paper highlights an anomalous relationship between real exchange rate persistence and the elasticity of substitution between home and foreign-produced goods. |
| Keywords: | real exchange rate dynamics, incomplete ?nancial markets, Backus-Smith puzzle, exchange rate persistence, trade elasticity. |
| JEL: | F31 F41 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0803&r=cba |
| By: | Filippo Taddei |
| Abstract: | A small number of countries have issued real indexed sovereign debt in recent year. This type of contracts could improve risk sharing between debtor countries and international creditors and diminish the probability of occurrence of debt crises. However, it is not clear the magnitude of these effects in terms of welfare. Furthermore, it has not been analyzed whether the design of the existing contracts was optimal. This paper addresses these issues. We characterize the optimal features of indexed debt contracts in a dynamic stochastic equilibrium framework with incomplete markets and compare them to existing ones. Finally, we obtain a quantitative approximation of the welfare effects of indexation. We find that the optimal contract improves welfare and features payments increasing in the state of the economy. Existing real indexed contracts usually entail payments increasing in the state of the economy. However, they also feature threshold levels of the chosen real variable that trigger payments. We argue that the latter are usually suboptimal. Calibrating our model to Argentina’s economy we find that the welfare gains from introducing indexed debt are equivalent to an increase of between 0.6% and 2%. |
| Keywords: | GDP-indexed Debt, Country Portfolio, Contingent Debt. |
| JEL: | F34 F37 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:66&r=cba |
| By: | Philippe Moutot (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alexander Jung (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The ECB’s monetary policy has received considerable attention in recent years. This is less the case, however, for its regular monetary policy preparation and decision-making process. This paper reviews how the factors usually considered as critical for the success of a central banking system and the federal nature of the Eurosystem are intertwined with its overall design and the functioning of its committee architecture. In particular, it examines the procedures for preparing monetary policy decisions and the role of the decision-making bodies and the committees therein. We suggest that technical committees, involving all national central banks (NCBs), usefully contribute to the regular processing of a vast amount of economic, financial and monetary data, as well as to the consensus building at the level of the Governing Council. A federal organisational structure, including a two-tier committee structure with the Executive Board taking the lead in preparing the monetary policy decisions and the Governing Council in charge of the decisions with collective responsibility for them, as well as committee work at the various hierarchical levels, contributes to the efficiency of the ECB’s monetary policy decision-making, and thereby facilitates the maintenance of price stability in the euro area. A fully-fledged committee structure has also contributed to the smooth integration of non-euro area Member States into the Eurosystem’s monetary policy decision-making process. JEL Classification: E42, E58, F33, F42. |
| Keywords: | European economic and monetary integration, monetary arrangements, central banks and their policies. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080079&r=cba |
| By: | Kilponen , Juha (Bank of Finland Research); Milne, Alistair (Cass Business School, City University, London and Bank of Finland Research) |
| Abstract: | Building on Cecchetti and Li (2005), we show that the bank lending channel affects monetary policy trade-offs only when interest rates affect marginal costs of production (ie when there is a cost channel of monetary policy) in the New Keynesian monetary policy model. In our calibrated model the resulting impact of the bank lending channel on output-inflation trade-offs is quantitatively small and of ambiguous sign. When bank capital varies counter cyclically and bank loan rates have a relatively large impact on marginal costs, variation of bank loan margins improves monetary policy trade-offs. The new Basel accord, by increasing capital requirements during economic downturns, offsets this beneficial impact. |
| Keywords: | bank capital; bank lending; capital buffers; pro-cyclicality; capital regulation; cost channel; credit channel; loan margins; monetary trade-offs |
| JEL: | E51 E52 G21 |
| Date: | 2007–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_033&r=cba |
| By: | Karel Mertens; Morten O. Ravn |
| Abstract: | We provide empirical evidence on the effects of tax liability changes in the United States. We make a distinction between “surprise” and “anticipated” tax shocks. Surprise tax cuts give rise to a large boom in the economy. Anticipated tax liability tax cuts are instead associated with a contraction in output, investment and hours worked prior to their implementation. After their implementation, anticipated tax liability cuts lead to an economic expansion. We build a DSGE model with changes in tax rates that may be anticipated or not, estimate key parameters using a simulation estimator and show that it can account for the main features of the data. We argue that tax shocks are empirically important for U.S. business cycles and that the Reagan tax cut, which was largely anticipated, was a main factor behind the early 1980’s recession. |
| Keywords: | Fiscal policy, tax liabilities, anticipation effects, structural estimation |
| JEL: | E20 E32 E62 H30 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/05&r=cba |
| By: | Renee Fry; Vance L. Martin; Chrismin Tang |
| Abstract: | A new class of tests of contagion is proposed which identifies transmission channels of financial market crises through changes in higher order moments of the distribution of returns such as coskewness. Applying the framework to test for contagion in real estate and equity markets following the Hong Kong crisis in 1997-1998 and the US subprime mortgage crisis in 2007 shows that the coskewness based tests of contagion detect additional channels that are not identified by the correlation based tests. Implications of contagion in pricing exchange options where there is a change in higher order comoments of returns on the underlying assets, are also investigated. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-01&r=cba |
| By: | António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Davide Furceri (University of Illinois at Chicago, Department of Economics (M/C 144), 601 S. Morgan Street, Chicago, 60607, Illinois, USA.) |
| Abstract: | This paper analyses the effects in terms of size and volatility of government revenue and spending on growth in OECD and EU countries. The results of the paper suggest that both variables are detrimental to growth. In particular, looking more closely at the effect of each component of government revenue and spending, the results point out that i) indirect taxes (size and volatility); ii) social contributions (size and volatility); iii) government consumption (size and volatility); iv) subsidies (size); and v) government investment (volatility) have a sizeable, negative and statistically significant effect on growth. JEL Classification: E62, H50, O40. |
| Keywords: | Fiscal policy, government size, fiscal volatility, economic growth. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070849&r=cba |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Under inflation targeting inflation exhibits negative serial correlation in the United Kingdom, and little or no persistence in Canada, Sweden and New Zealand, and estimates of the indexation parameter in hybrid New Keynesian Phillips curves are either equal to zero, or very low, in all countries. Analogous results hold for the Euro area–and for France, Germany, and Italy–under European Monetary Union; for Switzerland under the new monetary regime; and for the United States, the United Kingdom and Sweden under the Gold Standard: under stable monetary regimes with clearly defined nominal anchors, inflation appears to be (nearly) purely forward-looking, so that no mechanism introducing backward-looking components is necessary to fit the data. These results question the notion that the intrinsic inflation persistence found in post-WWII U.S. data–captured, in hybrid New Keynesian Phillips curves, by a significant extent of backward-looking indexation–is structural in the sense of Lucas (1976), and suggest that building inflation persistence into macroeconomic models as a structural feature is potentially misleading. JEL Classification: E31, E42, E47, E52, E58. |
| Keywords: | Inflation, European Monetary Union, inflation targeting, Gold Standard, Lucas critique, median-unbiased estimation, Markov Chain Monte Carlo. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070851&r=cba |
| By: | Linzert, Tobias; Schmidt, Sandra |
| Abstract: | In this paper we employ a time series econometric framework to explore the structural determinants of the spread between the euro overnight rate and the ECB’s policy rate (EONIA spread) aiming to explain the widening of the EONIA spread in the period from mid-2004 to mid-2006. We mainly estimate a model of the EONIA spread from March 2004 until August 2006. The analysis identifies possible driving forces underlying the evolution of the spread over time and aims to quantify the impact of specific factors on the observed upward shift. We show that the increase in the EONIA spread can for the largest part be explained by the current liquidity deficit. Moreover, tight liquidity conditions as well as an increase in banks’ uncertainty about the liquidity conditions lead to a significant upward pressure on the spread. ECB’s liquidity policy only has a significant impact on the reduction of the spread if a loose policy is conducted during the last week of an MRO. Interestingly, interest rate expectations have not been found to have an important influence. |
| Keywords: | Overnight Market Rate (EONIA), Interest Rate Determination, Monetary Policy Implementation, Operational Framework |
| JEL: | C22 E43 E52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:6896&r=cba |
| By: | Candelon Bertrand; Muysken Joan; Vermeulen Robert (METEOR) |
| Abstract: | By distinguishing between discretionary and non-discretionary fiscal policy, this paper analyses the stability of fiscal rules for EMU countries before and after the Maastricht Treaty. Using both Instrumental Variables and GMM techniques, it turns out that discretionary fiscal policy remains procyclical after 1992. This result contradicts the previous findings of Galí and Perotti (2003). It also appears that fiscal rules differ between large and small countries: especially large countries follow a procyclical discretionary policy. Furthermore, the paper shows that discretionary fiscal policy does exhibit different behaviour facing supply or demand constraints. The procyclical discretionary policy is followed mainly during upswings, when supply constraints are prevalent. Finally, there is no support for the presence of a ‘fatigue effect’ in fiscal discipline. |
| Keywords: | macroeconomics ; |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2007050&r=cba |
| By: | Tödter, Karl-Heinz; Manzke, Bernhard |
| Abstract: | This paper reviews theory and evidence of the welfare effects of inflation from a costbenefit perspective. Basic models and selected empirical results are discussed. Historically, in assessing the welfare effects of inflation, the distortion of money demand played a prominent role. More recently, interactions of inflation and taxation came into focus. Growth effects of inflation as well as welfare effects of unanticipated inflation and of inflation uncertainty are also addressed. To assess the policy question whether inflation should be reduced or eliminated, the costs of disinflation play a role. Finally, the trade-off between the benefits of reducing inflation and the costs of disinflation is discussed and an overall assessment of the net welfare effects of achieving price stability is provided. |
| Keywords: | Inflation, price stability, welfare costs and benefits, distortions, money demand, consumption allocation, tax-inflation interaction |
| JEL: | D61 E21 E31 E41 H21 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6884&r=cba |
| By: | Ricardo Gimeno (Banco de España); José Manuel Marqués (Banco de España) |
| Abstract: | In this paper we decompose nominal interest rates into real risk-free rates, inflation expectations and risk premia using an affine model that takes as factors the observed inflation rate and the parameters generated in the zero yield curve estimation. We apply this model to the Spanish economy during the 90s, which is an especially challenging exercise given the nominal convergence towards the European Monetary Union (EMU) then under way. The methodology seems to be suitable for other countries currently involved in convergence towards EMU. The evidence indicates that inflation expectations and risk premia account for most of the observed variation in nominal rates, while real risk-free interest rates show a reduction during this period lower than that suggested by other approaches. |
| Keywords: | Real interest rates, Risk Premium, Inflation expectations, Affine Model |
| JEL: | G12 E43 E44 C53 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0802&r=cba |
| By: | Laura Povoledo (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a “New Open Economy” model having prices sticky in the producer’s currency can reproduce the observed fluctuations qualitatively. The answer is positive: the model-implied standard deviations are consistent with the pattern in the data. In particular, tradeable output is more volatile than nontradeable output. A key role in generating this result is played by the greater responsiveness of tradeable output to monetary shocks. Parameter estimates are obtained by Generalised Method of Moments. |
| Keywords: | New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles |
| JEL: | F41 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2007-47&r=cba |
| By: | Laura Povoledo (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a “New Open Economy” model having prices sticky in the producer’s currency can reproduce the observed fluctuations qualitatively. The answer is positive: the model-implied standard deviations are consistent with the pattern in the data. In particular, tradeable output is more volatile than nontradeable output. A key role in generating this result is played by the greater responsiveness of tradeable output to monetary shocks. Parameter estimates are obtained by Generalised Method of Moments. |
| Keywords: | New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles |
| JEL: | F41 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-10&r=cba |
| By: | André de Palma (THEMA,University of Cergy-Pontoise); Moshe Ben-Akiva (Massachusetts Institute of Technology); David Brownstone (University of California at Irvine); Charles Holt (University of Virginia); Thierry Magnac (Toulouse School of Economics); Daniel McFadden (University of California, Berkeley); Peter Moffatt (University of East Anglia); Nathalie Picard (University of Cergy-Pontoise); Kenneth Train (University of California, Berkeley); Peter Wakker (Erasmus University); Joan Walker (Boston University) |
| Abstract: | This paper examines the cross-fertilizations of random utility models with the study of decision making under risk and uncertainty. We start with a description of the Expected Utility (EU) theory and then consider deviations from the standard EU frameworks, involving the Allais paradox and the Ellsberg paradox, inter alia. We then discuss how the resulting Non-EU framework can be modeled and estimated within the framework of discrete choices in static and dynamic contexts. Our objectives in addressing risk and ambiguity in individual choice contexts are to understand the decision choice process, and to use behavioral information for prediction, prescription and policy analysis. |
| Keywords: | discrete choice, decision making, risk, uncertainty, (cumulative) prospect theory, ambiguity |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2008-02&r=cba |
| By: | Monica Billio (Department of Economics, University Of Venice Cà Foscari); Jacques Anas (Coe Rexecode, Paris); Laurent Ferrara (Banque de Frances); Marco Lo Duca (European Central Bank) |
| Abstract: | The class of Markov switching models can be extended in two main directions in a multivariate framework. In the first approach, the switching dynamics are introduced by way of a common latent factor. In the second approach a VAR model with parameters depending on one common Markov chain is considered (MSVAR). We will extend the MSVAR approach allowing for the presence of specific Markov chains in each equation of the VAR (MMSVAR). In the MMSVAR approach we also explore the introduction of correlated Markov chains which allow us to evaluate the relationships among phases in different economies or sectors and introduce causality relationships, which allow a more parsimonious representation. We apply our model to study the relationship between cyclical phases of the industrial production in the US and Euro zone. Moreover, we construct a MMS model to explore the cyclical relationship between the Euro zone industrial production and the industrial component of the European Sentiment Index. |
| Keywords: | Economic cycles, Multivariate models, Markov switching models, Common latent factors, Causality, Euro-zone |
| JEL: | C50 C32 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:32/07&r=cba |
| By: | Andrea Vaona (Istituto Ricerche Economiche, Faculty of Economic Sciences, University of Lugano, Switzerland.) |
| Abstract: | Recent empirical contributions assess time changes in inflation persistence by means of simple autoregressive models. Their reliability is discussed in the light of the econometric literature on model misspecification and it is showed that their results can be misleading due to the omission of relevant variables. |
| Keywords: | inflation persistence, structural breaks, omitted variables, model misspecification, serial correlation. |
| JEL: | E3 E31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:lug:wpaper:0802&r=cba |
| By: | Claudio Borio; Ilhyock Shim |
| Abstract: | In the economic environment that has been emerging over the last couple of decades, it is more likely that the occasional build-up of financial imbalances, typically in the form of unsustainable credit and asset price booms, will occur against the background of low and stable inflation, posing a potential threat to financial and macroeconomic stability. This means that the scope for monetary policy to lean against the build-up may be more constrained than in the past, when those imbalances would normally develop alongside rising inflation. This puts a premium on a strengthening of the macroprudential orientation of prudential frameworks, designed to restrain the build up of the imbalances and to make the financial system better able to withstand their unwinding. In this paper, we review the progress made in this direction in recent years. We conclude that there is now a much keener awareness of the importance of a macroprudential orientation but that progress in making it operational, while considerable, has been slower. The main obstacles are of an analytical and, above all, institutional/political economy nature. We suggest ways in which these obstacles could be addressed and underline the potential complementary role that adjustments in monetary policy frameworks could play. |
| Keywords: | financial stability, price stability, financial imbalances, macroprudential, financial regulation and supervision, monetary policy |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:242&r=cba |
| By: | Kempa, Michal (University of Helsinki) |
| Abstract: | In this paper I analyse the determinants of commercial banks’ demand for reserves in the interbank market. I first document the pattern in the Eurosystem, where banks deviate from the required reserves balance at the start of the maintenance period only to meet the requirements closer to the settlement day. Using my model I show that this behaviour can be explained by certain trade-related frictions and costs. Examples include potential extra expenses tied to large transactions or the asymmetry between the cost of borrowing and profits from lending. I also find that borrowing decisions can be largely unaffected by current liquidity, which has important implications for the implementation of central bank monetary policy: in order to influence the level of interest rates, the central bank must focus on controlling market expectations. |
| Keywords: | money markets; EONIA; liquidity effect |
| JEL: | E43 E52 E58 |
| Date: | 2007–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_030&r=cba |
| By: | Fitzenberger, Bernd; Franz, Wolfgang; Bode, Oliver |
| Abstract: | This paper provides new estimates of a time–varying NAIRU for Germany taking account of the structural break caused by German unification based on the Kalman Filter and on a partially linear model as two alternatives. Estimating a standard Phillips curve, the sum of coefficients associated with expected inflation is far beyond unity, whatever measure of expected inflation rates is employed. Therefore, either the NAIRU concept is not applicable to Germany or, as it is our suggestion, one estimates the unemployment rate that is compatible with a tolerable inflation rate of say 2 percent following roughly the inflation target put forward by the European Central Bank. The estimates presented in this paper suggest that the NAIRU compatible with 2 percent inflation in Germany is currently around 7 percent if the definition of unemployment follows the concept of the ILO. In contrast to the consensus in the literature, our estimates suggest furthermore that the NAIRU in Germany has not increased since the early 1990’s. |
| Keywords: | NAIRU, unemployment, inflation, Phillips curve, Okun’s Law, German unification, Kalman Filter, partially linear model |
| JEL: | C22 E24 E31 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:6890&r=cba |
| By: | M. FRÖMMEL |
| Abstract: | The choice of an exchange rate arrangement affects exchange rate volatility: higher flexibility goes ahead with increasing volatility and vice versa (Flood and Rose 1995, 1999). We investigate five Central and Eastern European countries between 1994 and 2004. The analysis merges two approaches, the GARCH-model (Bollerslev 1986) and the Markov Switching- Model (Hamilton 1989). We discover switches between high and low volatility regimes consistent with policy settings for Hungary, Poland and, less pronounced, the Czech Republic, whereas Romania and Slovakia do not show a clear picture. |
| Keywords: | CEEC, exchange rate volatility, regime switching GARCH, Markov switching model, transition economies |
| JEL: | E42 F31 F36 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:07/487&r=cba |
| By: | Pietro ALESSANDRINI (Universita' Politecnica delle Marche, Dipartimento di Economia); Michele FRATIANNI (Indiana University, Graduate School of Business Bloomington) |
| Abstract: | There is a broad consensus that the current, large US current-account deficits financed with foreign capital inflows at low interest rates cannot continue forever; there is much less consensus on when the system is likely to end and how badly it will end. The paper resurrects the basic principles of the plan Keynes wrote for the Bretton Woods Conference to propose an alternative to the current international monetary system. We argue for the creation of a supranational bank money that would coexist along side national currencies and for the establishment of a new international clearing union. The new international money would be created against domestic earning assets of the Fed and the ECB. In addition to recording credit and debit entries of the supranational bank money, the new agency would determine the size of quotas, the size and time length of overdrafts, and the coordination of monetary policies. The substitution of supranational bank money for dollars would harden the external constraint of the United States and resolve the n-1 redundancy problem. |
| Keywords: | Keynes Plan, exchange rates, external imbalances, international monetary system, key currency, supranational bank money |
| JEL: | E42 E52 F33 F36 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:310&r=cba |
| By: | Pami Dua (Department of Economics, Delhi School of Economics, Delhi, India and Economic Cycle Research Institute, New York); Arunima Sinha (Department of Economics, Columbia University, New York, NY) |
| Abstract: | This paper tests and explains the impact of the East Asian crisis on India’s exchange rate. To examine this, an index of currency pressure is estimated for four countries -- Thailand, South Korea, Malaysia and India covering the period just before, during and after the crisis. A contagion model with panel data for these four countries is also estimated during the crisis period. On the basis of the panel data estimates, the paper concludes that while India experienced some effects of the crisis, these were not substantive. This is partly attributed to the role of stabilisation policy in India that included intervention in the foreign exchange market by the central bank, phased tightening of monetary policy and restrictions on capital flows. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:158&r=cba |
| By: | Özer Karagedikli; Pierre L. Siklos (Reserve Bank of New Zealand) |
| Abstract: | We conduct a high frequency event analysis to estimate the effects of monetary policy surprises, data surprises, and central bank verbal statements on the New Zealand-US dollar and the New Zealand-Australian dollar exchange rates. We find data surprises and monetary policy surprises have significant and large effects on exchange rate movements. More importantly, RBNZ interest rate decisions have a largely permanent impact on the exchange rate. Significantly, the impact of the published interest rate track seems to explain some 10 per cent additional variation in the exchange rate. |
| JEL: | E43 E44 E52 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2008/02&r=cba |
| By: | Aaron Drew; Özer Karagedikli (Reserve Bank of New Zealand) |
| Abstract: | The Reserve Bank of New Zealand (RBNZ) is regarded as one of the most transparent central banks in the world. Recent research suggests that one benefit of such transparency is that financial markets better anticipate a central bank's reaction to incoming data, and in relation, do not over-react to macroeconomic data surprises. In this paper, we provide some institutional details of how the RBNZ communicates its monetary policy decisions to financial markets and conduct an events analysis to test whether there are any transparency benefits in the pricing of New Zealand's yield curve. In line with the recent empirical literature, our results suggest that short-term interest rates tend to react appropriately to the data flow, while longer term interest rates are not unduly influenced. We also show that market reactions tend to be in line with the RBNZ's inflation target objective. |
| JEL: | E43 E44 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2008/01&r=cba |
| By: | Luiz de Mello; Diego Moccero; Jean-Yves Gnabo |
| Abstract: | The bulk of recent literature on foreign-exchange interventions has overlooked the potential interdependencies that may exist between these operations and the conduct of monetary policy. This is the case even under inflation targeting and especially in emerging-market economies, because central banks often explicitly reserve the right to intervene to calm disorderly markets and to accumulate foreign reserves, and when the exchange rate is perceived as out of step with fundamentals. This paper uses a friction model to estimate intervention reaction functions and the associated marginal effects for Brazil and the Czech Republic since adoption of inflation targeting in these countries in 1999 and 1998, respectively. The main findings are that: i) in both countries interventions occur predominantly to reduce exchange-rate volatility, while in Brazil the central bank also reacts to exchange-rate deviations from medium-term trends; ii) there are strong, asymmetric threshold effects in the reaction functions, and interventions are more likely and of higher magnitudes when they are carried out to depreciate than to appreciate the domestic currency; and iii) interventions seem to take place independently of contemporaneous monetary policy in Brazil, but not in the Czech Republic, where both policies appear to be interrelated. <P>Interdépendance entre politique monétaire et interventions sur le marché du change dans des régimes de ciblage d’inflation : le cas du Brésil et de la République tchèque <BR>La littérature récente sur les interventions de banques centrales sur le marché des changes a négligé l’interdépendance potentielle qui peut exister entre ces opérations et la politique monétaire. Pourtant, la question de l’interdépendance se pose même lorsque les économies adoptent un ciblage inflation, en particulier pour les pays émergeants, car les banques centrales se réservent, en général, ouvertement le droit d’intervenir pour calmer les désordres de marché, accumuler des réserves, ou réajuster le niveau du taux de change lorsque celui-ci ne semble pas en phase avec les fondamentaux. Cet article utilise un modèle de friction afin d’estimer une fonction de réaction sur le marché du change et les effets marginaux qui y sont associés pour le Brésil et la République Tchèque, à partir du moment où ces deux pays ont adopté un ciblage d’inflation (i.e., respectivement 1999 et 1998). Les principaux résultats sont que : i) les interventions visent principalement à réduire la volatilité du taux de change dans les deux pays, toutefois, la Banque centrale brésilienne réagit également aux déviations du taux de change par rapport à la tendance de moyen terme ; ii) il y a une forte asymétrie dans le comportement des banques centrales : les interventions sont plus importantes et plus probables lorsque la banque centrale doit déprécier plutôt qu’apprécier sa monnaie ; enfin iii) la politique d’interventions semble être indépendante de la politique monétaire pour le Brésil, alors qu’elles sont liées dans le cas de la République tchèque. |
| Keywords: | intervention, intervention, monetary policy, politique monétaire, Brazil, Brésil, Czech Republic, République tchèque |
| JEL: | C24 E52 F31 |
| Date: | 2008–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:593-en&r=cba |