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on Central Banking |
| By: | Alan S. Blinder; Michael Ehrmann; Marcel Fratzscher; Jakob de Haan; David-Jan Jansen |
| Abstract: | Over the last two decades, communication has become an increasingly importantaspect of monetary policy. These real-world developments have spawned a huge newscholarly literature on central bank communicationmostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:170&r=cba |
| By: | Obstfeld, Maurice; Shambaugh, Jay C; Taylor, Alan M |
| Abstract: | The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt. |
| Keywords: | banking crises; capital flight; central banks; exchange rate regimes; financial development; foreign exchange; global imbalances; Guidotti-Greenspan rule; international liquidity; intervention; lender of last resort; net foreign assets; sterilization; sudden stop |
| JEL: | E44 E58 F21 F31 F36 F41 N10 O24 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6693&r=cba |
| By: | Blanchard, Olivier J; Galí, Jordi |
| Abstract: | We construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation trade-off and for the conduct of monetary policy. We proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. We show the role of labour market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of labour market frictions and real wage rigidities. We show the nature of the trade-off between inflation and unemployment stabilization, and its dependence on labour market characteristics. We draw the implications for optimal monetary policy. |
| Keywords: | Labour market frictions; New Keynesian Model; real wage rigidities; search model; sticky prices; unemployment |
| JEL: | E32 E50 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6765&r=cba |
| By: | Blanchard, Olivier J; Galí, Jordi |
| Abstract: | We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labour markets, and (d) improvements in monetary policy. We conclude that all four have played an important role. |
| Keywords: | Great Moderation; Monetary policy credibility; Real wage rigidities; Sticky Prices |
| JEL: | E32 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6631&r=cba |
| By: | Flood, Robert P; Rose, Andrew K |
| Abstract: | This paper applies the Meese-Rogoff (1983a) methodology to the stock market. We compare the out-of-sample forecasting accuracy of various time-series and fundamentals-based models of aggregate stock prices. We stick as close as possible to the original Meese-Rogoff sample and methodology. Just as Meese and Rogoff found for the case of exchange rates, we find that a random walk model of stock prices performs as well as any estimated model at one to twelve month horizons, even though we base forecasts on actual future fundamentals of dividends and earnings. Using this metric and for this sample period, aggregate stock prices seem to be as difficult to model empirically as exchange rates. |
| Keywords: | aggregate; dividend; earning; exchange; forecast; fundamental; growth; model; rate |
| JEL: | F37 G12 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6714&r=cba |
| By: | Corsetti, Giancarlo |
| Abstract: | What can be learnt from revisiting the Optimal Currency Areas (OCA) theory 50 years from its birth, in light of recent advances in open economy macro and monetary theory? This paper presents a stylized micro-founded model of the costs of adopting a common currency, relative to an ideal benchmark in which domestic monetary authorities pursue country-specific efficient stabilization. Costs from (a) limiting monetary autonomy and (b) giving up exchange rate flexibility are examined in turn. These costs will generally be of the same magnitude as the costs of the business cycle. However, to the extent that exchange rates do not perform the stabilizing role envisioned by traditional OCA theory, a common monetary policy can be as efficient as nationally differentiated policies, even when shocks are strongly asymmetric, provided that the composition of aggregate spending tends to be symmetric at union-wide level. Convergence in consumption (and spending) patterns thus emerges as a possible novel attribute of countries participating in an efficient currency area. |
| Keywords: | Exchange Rate Regime; International Policy Coordination; New Open Macro Macroeconomics; Optimal Monetary Policy; Optimum Currency Area |
| JEL: | E31 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6712&r=cba |
| By: | Eichengreen, Barry |
| Abstract: | The thesis of this paper is that there is no historical precedent for Europe’s monetary union (EMU). While it is possible to point to similar historical experiences, the most obvious of which were in the 19th century, occurred in Europe, and had “union” as part of their names, EMU differs from these earlier monetary unions. The closer one looks the more uncomfortable one becomes with the effort to draw parallels on the basis of historical experience. It is argued that efforts to draw parallels between EMU and monetary unions past are more likely to mislead than to offer useful insights. Where history is useful is not in drawing parallels but in pinpointing differences. It is useful for highlighting what is distinctive about EMU. |
| Keywords: | European Monetary Union |
| JEL: | F15 N14 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6642&r=cba |
| By: | Charles Goodhart |
| Abstract: | The relative liquidity of financial assets is significantly influenced by the Central Bank’s willingness to buy such assets, or to accept them as collateral, in the course of providing additional cash to banks. Those assets which the Central Bank will deal in for such purposes become more liquid, and more marketable, than those that the Central Bank will not. When the banking system as a whole is short of cash, it has no other recourse than to go to the Central Bank for assistance. The Central Bank has to provide this, since otherwise interest rates will rise very sharply, given the banks’ inelastic demand for cash reserves. A Central Bank’s choice, in practice, is the price (interest rate) at which it will supply the requisite cash, not the volume of high-powered cash reserves to supply. Normally a Central Bank will supply just enough cash to hold very short-term (e.g. overnight) rates close to the policy rate, chosen generally on broad macro-economic grounds, e.g. to maintain medium-term price stability. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp179&r=cba |
| By: | Evans, George W; Honkapohja, Seppo |
| Abstract: | Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents' learning. We use the standard New Keynesian model to illustrate this problem and survey the key results about interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications including policy design under perpetual learning, estimated models with learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation. |
| Keywords: | determinacy; fluctuations; imperfect knowledge; interest-rate setting; learning; stability |
| JEL: | D84 E31 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6640&r=cba |
| By: | Evans, George W; Honkapohja, Seppo |
| Abstract: | We consider "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, i.e. 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: | adaptive learning; Commitment; determinacy; interest-rate setting; stability |
| JEL: | D84 E31 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6641&r=cba |
| By: | Wieland, Volker |
| Abstract: | This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode price-setting firms' expect inflation to be highly persistent and opt for backward-looking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation is found to influence the likelihood that firms switch from backward-looking indexation to the central bank's targets. As firms abandon backward-looking indexation the costs of disinflation decline further. We show that an inflation targeting strategy that employs temporary targets can benefit from lower disinflation costs due to the reduction in backward-looking indexation. |
| Keywords: | disinflation; indexation; inflation targeting; learning; monetary policy; New-Keynesian model; recursive least squares |
| JEL: | E32 E41 E43 E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6749&r=cba |
| By: | Corsetti, Giancarlo; Martin, Philippe; Pesenti, Paolo |
| Abstract: | Most analyses of the macroeconomic adjustment required to correct global imbalances ignore net exports of new varieties of goods and services and do not account for firms' net entry in the product market. In this paper we revisit the macroeconomics of trade adjustment in the context of the classic `transfer problem,' using a model where the set of exportables, importables and nontraded goods is endogenous. We show that exchange rate movements associated with adjustment are dramatically lower when the above features are accounted for, relative to traditional macromodels. We also find that, for reasonable parameterizations, consumption and employment (hence welfare) are not highly sensitive to product differentiation, and change little regardless of whether adjustment occurs through movements in relative prices or quantities. This result warns against interpreting the size of real depreciation associated with trade rebalancing as an index of macroeconomic distress. |
| Keywords: | current account; extensive margin; global imbalances; transfer problem |
| JEL: | F32 F41 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6660&r=cba |
| By: | Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín |
| 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-Grohé, 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: | cost pass-through; deep habits; markups |
| JEL: | D1 D4 L1 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6674&r=cba |
| By: | Galí, Jordi; Gambetti, Luca |
| Abstract: | The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labour productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidence points to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behind the observed changes. |
| Keywords: | Great Moderation; Labour hoarding; Monetary policy rules; Structural VARs; Technology Shocks |
| JEL: | E32 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6632&r=cba |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | Policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models faces two challenges: estimation of parameters that are relevant for policy trade-offs and treatment of estimated deviations from the cross-equation restrictions. This paper develops and explores policy analysis approaches that are based on either the generalized shock structure for the DSGE model or the explicit modeling of deviations from cross-equation restrictions. Using post-1982 U.S. data, we first quantify the degree of misspecification in a state-of-the art DSGE model and then document the performance of different interest rate feedback rules. We find that many of the policy prescriptions derived from the benchmark DSGE model are robust to the various treatments of misspecifications considered in this paper, but that quantitatively the cost of deviating from such prescriptions varies substantially. |
| Keywords: | Time-series analysis ; Monetary policy ; Stochastic analysis ; Econometric models |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:321&r=cba |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | This paper discusses prior elicitation for the parameters of dynamic stochastic general equilibrium (DSGE) models and provides a method for constructing prior distributions for a subset of these parameters from beliefs about the moments of the endogenous variables. The empirical application studies the role of price and wage rigidities in a New Keynesian DSGE model and finds that standard macro time series cannot discriminate among theories that differ in the quantitative importance of nominal frictions. |
| Keywords: | Time-series analysis ; Business cycles ; Stochastic analysis ; Keynesian economics ; Equilibrium (Economics) |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:320&r=cba |
| By: | Canova, Fabio; López-Salido, J David; Michelacci, Claudio |
| Abstract: | We analyze the effects of neutral and investment-specific technology shocks on hours and output. Long cycles in hours are captured in a variety of ways. Hours robustly fall in response to neutral shocks and robustly increase in response to investment specific shocks. The percentage of the variance of hours (output) explained by neutral shocks is small (large); the opposite is true for investment specific shocks. `News shocks' that generically change expectations about future productivity, are uncorrelated with the estimated technology shocks. |
| Keywords: | Long cycles; News shocks; Structural VARs; Technology disturbances |
| JEL: | E00 J60 O33 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6720&r=cba |
| By: | Mumtaz, Haroon; Surico, Paolo |
| Abstract: | Several industrialised countries have had a similar inflation experience in the past 30 years, with inflation high and volatile in the 1970s and the 1980s but low and stable in the most recent period. We explore the dynamics of inflation in these countries via a time-varying factor model. This statistical model is used to describe movements in inflation that are idiosyncratic or country specific and those that are common across countries. In addition, we investigate how comovement has varied across the sample period. Our results indicate that there has been a decline in the level, persistence and volatility of inflation across our sample of industrialised countries. In addition, there has been a change in the degree of comovement, with the level and persistence of national inflation rates moving more closely together since the mid-1980s. |
| Keywords: | factor model; Low inflation; monetary policy; time variation |
| JEL: | E30 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6767&r=cba |
| By: | Orphanides, Athanasios; Wieland, Volker |
| Abstract: | Monetary policy analysts often rely on rules-of-thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules-of-thumb should draw on policymakers' forecasts of key variables such as inflation and unemployment or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor rule that relies on outcomes may be due to systematic responses to information captured in policymakers' own projections. We investigate this proposition in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC's own projections rather than observed outcomes. Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections. |
| Keywords: | FOMC; forecasts; monetary policy; policy rules |
| JEL: | E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6748&r=cba |
| By: | Eichenbaum, Martin; Jaimovich, Nir; Rebelo, Sérgio |
| Abstract: | We assess the importance of nominal rigidities using a new weekly scanner data set from a major U.S. retailer, that contains information on prices, quantities, and costs for over 1,000 stores. We find that nominal rigidities are important but do not take the form of sticky prices. Instead, nominal rigidities take the form of inertia in reference prices and costs, defined as the most common prices and costs within a given quarter. Weekly prices and costs fluctuate around reference values which tend to remain constant over extended periods of time. Reference prices are particularly inertial and have an average duration of roughly one year. So, nominal rigidities are present in our data, even though weekly prices change very frequently, roughly once every two weeks. We argue that the retailer chooses the frequency with which it resets references prices so as to keep the realized markups within plus/minus twenty percent of the desired markup over reference cost. |
| Keywords: | markups; nominal cost inertia; nominal price inertia |
| JEL: | E30 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6709&r=cba |
| By: | Elekdag, Selim; Lalonde, Rene; Laxton, Doug; Muir, Dirk; Pesenti, Paolo |
| Abstract: | We develop a five-region version (Canada, a group of oil exporting countries, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labour income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption. |
| Keywords: | DSGE models; Oil prices; World economy |
| JEL: | E66 F32 F47 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6700&r=cba |
| By: | Gersbach, Hans; Hahn, Volker |
| Abstract: | We examine whether the publication of forecasts concerning the likely future conduct of monetary policy is socially desirable. Introducing a new central bank loss function that accounts for the deviations from announcements, we incorporate forecasts about future inflation and interest rates into a dynamic monetary model. We show that the announcement of future interest rates is always socially detrimental. However, medium-term inflation projections tend to increase welfare. |
| Keywords: | central banks; commitment; ECB; Federal Reserve; policy inclinations; transparency |
| JEL: | E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6761&r=cba |
| By: | Sarno, Lucio; Valente, Giorgio |
| Abstract: | Using novel real-time data on a broad set of economic fundamentals for five major US dollar exchange rates over the recent float, we employ a predictive procedure that allows the relationship between exchange rates and fundamentals to evolve over time in a very general fashion. Our key findings are that: (i) the well-documented weak out-of-sample predictive ability of exchange rate models may be caused by poor performance of model-selection criteria, rather than lack of information content in the fundamentals; (ii) the difficulty of selecting the best predictive model is largely due to frequent shifts in the set of fundamentals driving exchange rates, which can be interpreted as reflecting swings in market expectations over time. However, the strength of the link between exchange rates and fundamentals is different across currencies. |
| Keywords: | economic fundamentals; exchange rates; forecasting |
| JEL: | F31 G10 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6638&r=cba |
| By: | Jongen, Ron; Verschoor, Willem F C; Wolff, Christian C; Zwinkels, Remco C.J. |
| Abstract: | This paper analyzes the sources of the differential beliefs of market participants in the foreign exchange market and their relative role in forming exchange rate expectations. We find that there are distinct periods of high and low dispersion and document that dispersion arises because of a combined effect of market participants holding individual information and attach different weights to some elements of the common information set. In addition to these two effect, we also document evidence of the existence of different types of agents and find that chartist rules are predominantly used at the shorter spectrum of the forecast horizon and fundamentalist rules are predominantly used at the longer spectrum of the forecast horizon. Finally, our evidence suggests that the relationship between market volatility and trader dispersion tends to be significant and positive for different measures of both trader heterogeneity and market volatility. |
| Keywords: | exchange rates; expectations; heterogeneity; survey data |
| JEL: | F31 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6738&r=cba |
| By: | Kerstin Bernoth; Andrew Hughes Hallet; John Lewis |
| Abstract: | Empirical fiscal policy reaction functions based on ex post data cannot be said to describe fiscal policymakers intentions, since they utilise data which did not exist when their decisions were made. A characterisation of what fiscal policymakers were trying to do requires real time data. This paper compares fiscal policy reaction functions for 14 European countries over the period 1994-2006 using both types of data. We exploit the information contained in real-time and ex post data and develop a new approach to estimate the automatic and discretionary fiscal policy responses to changing economic conditions. This avoids the uncertainties and inaccuracies associated with filtering the data upfront in an attempt to estimate potential output or the structural budget. We find that the often commented upon pro-cyclicality of discretionary policy arises only with ex post data; the real time data suggests that policymakers are seeking to run counter cyclical discretionary policy, but find it hard to do so in practice due to data constraints. Compared to elsewhere in the literature, our model yields lower estimates of the automatic fiscal response and stronger estimates of the discretionary fiscal response to an output gap. |
| Keywords: | Fiscal Policy; Real Time Data; Discretion |
| JEL: | E62 E61 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:169&r=cba |
| By: | Bernoth, Kerstin; Hughes Hallett, Andrew; Lewis, John |
| Abstract: | Empirical fiscal policy reaction functions based on ex-post data cannot be said to describe fiscal policymakers intentions because they utilise data which did not exist when their decisions were made. A characterisation of what fiscal policy makers were trying to do requires real time data. This paper compares fiscal policy reaction functions for 14 European countries over the period 1995-2006 using both types of data. We exploit the information contained in real time and ex-post data and develop a new approach to estimating the automatic and discretionary fiscal policy responses to changing economic conditions. This avoids the uncertainties and inaccuracies associated with filtering the data in an attempt to estimate potential output or the structural budget. We find that the often commented on pro-cyclicality of discretionary policy only arises in the ex-post data; the real time data suggests that policymakers have tried to run counter-cyclical discretionary policy, but find it hard to do so due to data constraints. Compared to elsewhere in the literature, our model yields lower estimates of the automatic fiscal responses and stronger estimates of the discretionary responses to the output gap. |
| Keywords: | Discretion; Fiscal Policy; Real Time Data |
| JEL: | E61 E62 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6758&r=cba |
| By: | Paul De Grauwe; Frauke Skudelny |
| Abstract: | The aim of this paper is to find out whether the Balassa-Samuelson effect is important in EMU. We use panel data going from 1970 to 1995 for the current EU members in order to estimate the long run effect of bilateral differences in productivity growth differential between the traded and non-traded goods sector on bilateral inflation differentials. The regression results indicate a significant effect of the productivity differential, as proposed by the theory. According to our regression results, the impact of a productivity shock on the inflation differential can be quite substantial, going up to an 8% increase in the inflation differential. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0015&r=cba |
| By: | Giacomini, Raffaella; Rossi, Barbara |
| Abstract: | We propose new methods for comparing the relative out-of-sample forecasting performance of two competing models in the presence of possible instabilities. The main idea is to develop a measure of the relative “local forecasting performance” for the two models, and to investigate its stability over time by means of statistical tests. We propose two tests (the “Fluctuation test” and the test against a “One-time Reversal”) that analyze the evolution of the models’ relative performance over historical samples. In contrast to previous approaches to forecast comparison, which are based on measures of “global performance”, we focus on the entire time path of the models’ relative performance, which may contain useful information that is lost when looking for the model that forecasts best on average. We apply our tests to the analysis of the time variation in the out-of-sample forecasting performance of monetary models of exchange rate determination relative to the random walk. |
| Keywords: | Predictive Ability Testing, Instability, Structural Change, Forecast Evaluation |
| JEL: | C22 C52 C53 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:08-4&r=cba |
| By: | Pavlova, Anna; Rigobon, Roberto |
| Abstract: | We study the comovement among stock prices and among exchange rates in a three-good three-country Centre-Periphery dynamic equilibrium model in which the Centre’s agents face portfolio constraints. We characterize equilibrium in closed form for a broad class of portfolio constraints, solving for stock prices, terms of trade, and portfolio holdings. We show that portfolio constraints generate wealth transfers between the Periphery countries and the Centre, which increase the comovement of the stock prices across the Periphery. We associate this excess comovement caused by portfolio constraints with the phenomenon known as contagion. The model generates predictions consistent with other important empirical results such as amplification and flight-to-quality effects. |
| Keywords: | asset pricing; contagion; International finance; portfolio constraints; terms of trade; wealth transfer |
| JEL: | F31 F36 G12 G15 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6647&r=cba |
| By: | Stehn, Sven Jari; Vines, David |
| Abstract: | Leith and Wren-Lewis (2007) have shown that government debt is returned to its pre-shock level in a New Keynesian model under optimal discretionary policy. This has two important implications for monetary and fiscal policy. First, in a high-debt economy, it may be optimal for discretionary monetary policy to cut the interest rate in response to a cost-push shock - thereby violating the Taylor principle - although this will not be true if inflation is significantly persistent. Second, the optimal fiscal response to such a shock is more active under discretion than commitment, whatever the degree of inflation persistence. |
| Keywords: | Fiscal Policy; Government Debt; Monetary Policy; Stabilisation Bias |
| JEL: | E52 E60 E61 E63 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6696&r=cba |
| By: | M. Hashem Pesaran; Til Schuermann; L. Vanessa Smith |
| Abstract: | This paper considers the problem of forecasting real and financial macroeconomic variables across a large number of countries in the global economy. To this end, a global vector autoregressive (GVAR) model previously estimated over the 1979:Q1-2003:Q4 period by Dees, de Mauro, Pesaran, and Smith (2007) is used to generate out-of-sample one-quarter- and four-quarters-ahead forecasts of real output, inflation, real equity prices, exchange rates, and interest rates over the period 2004:Q1-2005:Q4. Forecasts are obtained for 134 variables from twenty-six regions made up of thirty-three countries and covering about 90 percent of world output. The forecasts are compared to typical benchmarks: univariate autoregressive and random walk models. Building on the forecast combination literature, the paper examines the effects of model and estimation uncertainty on forecast outcomes by pooling forecasts obtained from different GVAR models estimated over alternative sample periods. Given the size of the modeling problem and the heterogeneity of the economies considered, industrialized, emerging, and less developed countries, as well as the very real likelihood of multiple structural breaks, averaging forecasts across both models and windows makes a significant difference. Indeed, the double-averaged GVAR forecasts performed better than the benchmark forecasts, especially for output, inflation, and real equity prices. |
| Keywords: | Economic forecasting ; Time-series analysis ; Econometric models ; Vector autoregression |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:317&r=cba |
| By: | Paul De Grauwe; Hans Dewachter; Yunus Aksoy |
| Abstract: | In this paper we compare the stabilizing properties of the EMU to those of a ERM system, controlled by Germany. We find that in general the EMU will provide better stabilization of inflation, output and the interest rate than the EMS system. However, these results only apply if the ECB can effectively control monetary policy.\ In the case that the ECB-representatives do not coordinate and take a nationalistic point of view, the EMS regime is preferred by various countries. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9921&r=cba |
| By: | Tille, Cédric; van Wincoop, Eric |
| Abstract: | The surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice, an aspect that was largely cast aside when the ad-hoc portfolio balance models of the 1970s were replaced by models of optimizing agents. We develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two-country dynamic stochastic general equilibrium (DSGE) model. Our focus is on the time-variation in portfolio allocation following shocks, and the resulting capital flows. We show how endogenous time-variation in expected returns and risk, which are the key determinants of portfolio choice, affect capital flows in often subtle ways. The model is shown to be consistent with a broad range of empirical evidence. An additional contribution of the paper is to overcome the technical difficulty of solving DSGE models with portfolio choice by developing a broadly applicable solution method |
| Keywords: | home bias; international capital flows; portfolio allocation |
| JEL: | F32 F36 F41 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6705&r=cba |
| By: | Buiter, Willem H |
| Abstract: | The paper reviews the arguments for and against monetary union among the six members of the Gulf Cooperation Council - the United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait. Both technical economic arguments and political economy considerations are discussed I conclude that there is an economic case for GCC monetary union, but that it is not overwhelming. The lack of economic integration among the GCC members is striking. Without anything approaching the free movement of goods, services, capital and persons among the six GCC member countries, the case for monetary union is mainly based on the small size of all GCC members other than Saudi Arabia, and their high degree of openness. Indeed, even without the creation of a monetary union, there could be significant advantages to all GCC members, from both an economic and a security perspective, from greater economic integration, through the creation of a true common market for goods, services, capital and labour, and from deeper political integration. The political arguments against monetary union at this juncture appear overwhelming, however. The absence of effective supranational political institutions encompassing the six GCC members means that there could be no effective political accountability of the GCC central bank. The surrender of political sovereignty inherent in joining a monetary union would therefore not be perceived as legitimate by an increasingly politically sophisticated citizenry. I believe that monetary union among the GCC members will occur only as part of a broad and broadly-based movement towards far-reaching political integration. And there is little evidence of that as yet. |
| Keywords: | convergence; currency union; exchange rate regime; GCC |
| JEL: | E42 E52 E63 F33 F42 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6639&r=cba |
| By: | Lane, Philip R.; Milesi-Ferretti, Gian Maria |
| Abstract: | The deterioration in the U.S. net external position in recent years has been much smaller than the extensive net borrowing associated with large current account deficits would have suggested. This paper examines the sources of discrepancies between net borrowing and accumulation of net liabilities for the U.S. economy over the past 25 years. In particular, it highlights and quantifies the role played by net capital gains on the U.S. external portfolio and ‘residual adjustments’ in explaining this discrepancy. It discusses whether these ‘residual adjustments’ are likely to be originating from measurement errors in external assets and liabilities, financial flows, or capital gains, and explores the implications of these conjectures for the U.S. financial account and external position. |
| Keywords: | capital flows; current account; external adjustment; external assets and liabilities; Financial integration; net foreign asset position |
| JEL: | F21 F32 F41 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6655&r=cba |
| By: | Paustian, Matthias; von Hagen, Jürgen |
| Abstract: | Due to the lack of pertinent evidence, there is currently no agreement on how to introduce nominal rigidities into monetary macroeconomic models. We examine the role of alternative assumptions about the wage and price setting mechanisms for the assessment of the welfare costs of nominal rigidities and the performance of alternative monetary policy rules in an otherwise standard New Keynesian general equilibrium model. We find that the choice of a particular price and wage setting scheme matters quantitatively for the welfare costs of nominal rigidities. However, qualitative statements such as the welfare ranking of alternative monetary policy rules are robust to changes in contracting schemes. The difference between sticky nominal contracts and sticky information matters more than the difference in the age distribution of prices wages and information implied by alternative price and wage setting schemes. |
| Keywords: | Calvo Pricing; Monetary Policy Rules; Nominal Rigidities; Sticky Information; Taylor Contracts |
| JEL: | E32 E52 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6726&r=cba |
| By: | Raquel Fonseca (RAND, 1776 Main Street P.O. Box 2138 Santa Monica, CA 90407-2138, USA); Lise Patureau (THEMA Université de Cergy-Pontoise, 33, boulevard du Port 95011 Cergy-Pontoise Cedex, France); Thepthida Sopraseuth (EPEE Université d’Evry and PSE, 4 Bd F. Mitterand, 91025 Evry Cedex, France) |
| Abstract: | This paper investigates the sources of business cycle comovement within the New Open Economy Macroeconomy framework. It sheds new light on the business cycle comovement issue by examining the role of cross-country divergence in labor market institutions. We first document stylized facts supporting that heterogeneous labor market institutions are associated with lower cross-country GDP correlations among OECD countries. We then investigate this fact within a two-country dynamic general equilibrium model with frictions on the good and labor markets. On the good-market side, we model monopolistic competition and nominal price rigidity. Labor market frictions are introduced through a matching function à la Mortensen and Pissarides (1999). Our conclusions disclose that heterogenous labor market institutions amplify the crosscountry GDP differential in response to aggregate shocks. In quantitative terms, they contribute to reduce cross-country output correlation, when the model is subject to real and/or monetary shocks. Our overall results show that taking into account labor market heterogeneity improves our understanding of the quantity puzzle. |
| Keywords: | International business cycle, Search, Labor market institutions, Wage bargaining |
| JEL: | E24 E32 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2008-14&r=cba |
| By: | Beetsma, Roel; Giuliodori, Massimo |
| Abstract: | We explore how fiscal policies in the OECD have responded to unexpected information about the economy during the period 1995-2006. In particular, we first estimate standard fiscal rules using ex-ante data (i.e. forecasts). We then estimate how fiscal policy reacts to new information, especially on the business cycle. In this second step, we use various approaches in dealing with potential endogeneity and changes in data construction methodology after the ex ante data were released. All variants lead to similar results. There are marked differences between ex-ante behaviour and responses to new information, as well as between fiscal policy of the EU countries and the other OECD countries. In particular, the EU countries react in a pro-cyclical way to unexpected changes in the output gap, while the responses of the other OECD countries are a-cyclical. However, ex ante fiscal policy is a-cyclical for the EU countries and counter-cyclical for the other countries. |
| Keywords: | cyclicality; EU; first-release data; Fiscal policy; OECD; real-time data |
| JEL: | E62 H60 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6692&r=cba |
| By: | Fischer, Andreas M; Ranaldo, Angelo |
| Abstract: | Does global currency volume increase on days when the Federal Open Market Committee (FOMC) meets? To test the hypothesis of excess currency volume on FOMC days, we use a novel data set from the Continuous Linked Settlement (CLS) Bank. The CLS measure captures roughly half of the global trading volume in foreign exchange (FX) markets. We find strong evidence that trading volume increases in the order of 5% across currency areas on FOMC days during 2003 to 2007. This result holds irrespective of the size of price changes in currency markets and FOMC policy shocks. The new evidence of excess FX trading on FOMC days is inconsistent with standard models of the asset market approach with homogenous agents. |
| Keywords: | FOMC; Global linkages; Trading volume |
| JEL: | F31 G12 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6753&r=cba |
| By: | Kristien Smedts |
| Abstract: | This paper analyzes a stylized theoretical framework to examine optimal portfolio selection in an international context with an explicit focus on the effect of the exchange rate. More specifically, we study how the elimination of the exchange rate induces shifts in the optimal international portfolio. We show that the effect of the elimination of the exchange rate on the optimal portfolio is twofold. First, the volatility of the international portfolio changes (volatility effect of the exchange rate), and second, the national market prices of risk converge to common international market prices of risk (price effect of the exchange rate). This induces important shifts in the optimal international portfolio. |
| Keywords: | International Financial Markets, Portfolio Diversification, Foreign Exchange. |
| JEL: | G11 G15 F31 F21 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0404&r=cba |
| By: | Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | Shocks to the marginal efficiency of investment are the most important drivers of business cycle fluctuations in U.S. output and hours. Moreover, like a textbook demand shock, these disturbances drive prices higher in expansions. We reach these conclusions by estimating a dynamic stochastic general equilibrium (DSGE) model with several shocks and frictions. We also find that neutral technology shocks are not negligible, but their share in the variance of output is only around 25 percent and even lower for hours. Labor supply shocks explain a large fraction of the variation of hours at very low frequencies, but not over the business cycle. Finally, we show that imperfect competition and, to a lesser extent, technological frictions are the key to the transmission of investment shocks in the model. |
| Keywords: | Business cycles ; Capital investments ; Stochastic analysis ; Equilibrium (Economics) ; Labor supply ; Competition |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:322&r=cba |
| By: | Favero, Carlo A; Giavazzi, Francesco |
| Abstract: | The European Economic and Monetary Union (EMU) has created a new economic area, larger and closer with respect to the rest of the world. Area-specific shocks are thus more important in EMU than country-specific shocks used to be in the previous states, e.g. in Germany. It is thus not surprising that the models built by the staff of the European Central Bank (ECB) to study optimal monetary policy in the Euro area (for instance Smets and Wouters, 2004a, 2004b) typically assume that this works essentially as a closed economy, hit by domestic shocks - the same assumption made in standard models of U.S. monetary policy (see e.g. Christiano et al., 1999 ), where all shocks are domestic with the only possible exception of energy price shocks. Two-country models exist at the ECB (e.g. de Walque, Smets, Wouters, 2005) but they overlook asset price fluctuations and their international comovements. This paper studies monetary policy in the Euro area looking at the variable most directly related to current and expected monetary policy, the yield on long term government bonds. We explore how the behaviour of European long-term rates has been affected by EMU and whether the response of long-term rates to monetary policy has got any closer to that consistent with a closed economy. We find that the level of long-term rates in Europe is almost entirely explained by U.S. shocks and by the systematic response of U.S. and European variables (inflation, short term rates and the output gap) to these shocks. Our results suggest in particular that U.S. variables are more important than local variables in the policy rule followed by European monetary authorities: this was true for the Bundesbank before EMU and has remained true for the ECB, at least so far. Using closed economy models to analyze monetary policy in the Euro is thus inconsistent with the empirical evidence on the determinants of Euro area long-term rates. It is also inconsistent with the way the Governing Council of the ECB appears to make actual policy decisions. We also find that Euro area long rates respond more to financial shocks, in particular shocks to term premia, than they do to monetary policy "shocks" - i.e. instances when the ECB deviates from its rule. This finding point to the importance of incorporating into the analysis of Euro area monetary policy of the effects of fluctuations in international asset prices. |
| Keywords: | DSGE models; ECB; monetary policy; yield curve |
| JEL: | E43 E52 E58 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6654&r=cba |
| By: | Angelini, Elena; Camba-Mendez, Gonzalo; Giannone, Domenico; Reichlin, Lucrezia; Rünstler, Gerhard |
| Abstract: | This paper evaluates models that exploit timely monthly releases to compute early estimates of current quarter GDP (now-casting) in the euro area. We compare traditional methods used at institutions with a new method proposed by Giannone, Reichlin and Small, 2005. The method consists in bridging quarterly GDP with monthly data via a regression on factors extracted from a large panel of monthly series with different publication lags. We show that bridging via factors produces more accurate estimates than traditional bridge equations. We also show that survey data and other `soft' information are valuable for now-casting. |
| Keywords: | Factor Model; Forecasting; Large data-sets; Monetary Policy; News; Real Time Data |
| JEL: | C33 C53 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6746&r=cba |
| By: | Campa, Jose M. (IESE Business School); Gonzalez, Jose M. (Banco de España); Sebastia, Maria (Bank of England) |
| Abstract: | This paper focuses on the non-linear adjustment of import prices in national currency to shocks in exchange rates and foreign prices measured in the exporters' currency of products originating outside the euro area and imported into European Union countries (EU-15). The paper looks at three different types of non-linearities: a) non-proportional adjustment (the size of the adjustment grows more than proportionally with the size of the misalignments); b) asymmetric adjustment to cost-increasing and cost-decreasing shocks, and c) the existence of thresholds in the size of misalignments below which no adjustment takes place. There is evidence of more than proportional adjustment towards long-run equilibrium in manufacturing industries. In these industries, the adjustment is faster the further away current import prices are from their implied long-run equilibrium. In contrast, a proportional linear adjustment cannot be rejected for some other imports (especially within agricultural and commodity imports). There is also strong evidence of asymmetry in the adjustment to long-run equilibrium. Deviations from long-run equilibrium due to exchange rate appreciations of the home currency result in a faster adjustment than those caused by a home currency depreciation. Finally, we also find that adjustment takes place in the industries in our sample only when deviations are above certain thresholds and that these thresholds tend to be somewhat smaller for manufacturing industries than for commodities. |
| Keywords: | exchange rate adjustment; monetary union; |
| JEL: | F31 F36 F42 |
| Date: | 2008–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0734&r=cba |
| By: | Hans Dewachter; Marco Lyrio |
| Abstract: | This paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long-run expectations. The model extends the approach pioneered by Kozicki and Tinsley (2001) by modeling consistently long-run inflation expectations simultaneously with the term structure. This model thus avoids the standard pre-filtering of long-run expectations, as proposed by Kozicki and Tinsley (2001). Application to the U.S. economy shows the importance of long-run inflation expectations in the modeling of long-term bonds. The paper also provides a macroeconomic interpretation for the factors found in a latent factor model of the term structure. More specifically, we find that the standard “level” factor is highly correlated to long-run inflation expectations, the “slope”' factor captures temporary business cycle conditions, while the “curvature” factor represents a clear independent monetary policy factor |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0304&r=cba |
| By: | Yunus Aksoy |
| Abstract: | This paper extends the framework provided by De Grauwe, Dewachter and Aksoy (1998). Monetary policy effectiveness of the European Central Bank (ECB) in the open economy Euroland is addressed. The optimal feedback rules for the member states with the use of the backward looking variables are derived. The role of the real exchange rate is discussed. For alternative scenarios at the ECB Governing Council we simulate the monetary policy effectiveness and provide some welfare analysis. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9920&r=cba |
| By: | Pelin Ilbas |
| Abstract: | This paper evaluates optimal monetary policy rules within the context of a dynamic stochastic general equilibrium model estimated for the Euro Area. Under assumption of an ad hoc loss function for the central bank, we compute the unconditional losses both under discretion and commitment. We compare the performance of unrestricted optimal rules to the performance of optimal simple rules. The results indicate that there are considerable gains from commitment over discretion, probably due to the stabilization bias present under discretion. The lagged variant of the Taylor type of rule that allows for interest rate inertia does relatively well in approaching the performance of the unrestricted optimal rule derived under commitment. On the other hand, simple rules expressed in terms of forecasts to next period’s inflation rate seem to perform relatively worse. |
| Keywords: | optimal rules, commitment, discretion, stabilization bias |
| JEL: | E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0613&r=cba |
| By: | Stephanie E. Curcuru; Tomas Dvorak; Francis E. Warnock |
| Abstract: | Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, using a monthly dataset on the foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors, we find that the returns differential for portfolio securities is near zero, far smaller than previously reported. Examining all U.S. claims and liabilities (portfolio securities as well as direct investment and banking), we find that previous estimates of large differentials are biased upward. The bias owes to computing implied returns from an internally inconsistent dataset of revised data; original data produce a much smaller differential. We also attempt to reconcile our finding of a near zero returns differential with observed patterns of cumulated current account deficits, the net international investment position, and the net income balance. Overall, we find no evidence that the U.S. can count on earning substantially more on its claims than it pays on its liabilities. |
| Keywords: | Investments ; Balance of payments |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:921&r=cba |
| By: | Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea |
| Abstract: | Shocks to the marginal efficiency of investment are the most important drivers of business cycle fluctuations in US output and hours. Moreover, these disturbances drive prices higher in expansions, like a textbook demand shock. We reach these conclusions by estimating a DSGE model with several shocks and frictions. We also find that neutral technology shocks are not negligible, but their share in the variance of output is only around 25 percent, and even lower for hours. Labour supply shocks explain a large fraction of the variation of hours at very low frequencies, but not over the business cycle. Finally, we show that imperfect competition and, to a lesser extent, technological frictions are the key to the transmission of investment shocks in the model. |
| Keywords: | Bayesian; DSGE model; endogenous markups; imperfect competition |
| JEL: | C11 E30 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6739&r=cba |
| By: | Ugo Marani (in collaboration with Carlo Altavilla) |
| Abstract: | The aim of the research is the evaluation of the exchange rate of the Euro after the first six months of its existence. The main interpretative hypotheses of the research can be summarised in the following points: (i) the evolution of the Euro external value is strictly connected with the agents’ confidence on real, financial and foreign exchange markets; (ii) the ECB monetary policy strategy influenced negatively (or at least neglected) the agents’ confidence and expectations already affected by the negative cyclical conditions of european economy; (iii) the resulting portfolio reallocation determined a short-term capital outflow in favour of US Dollar denominated assets and, hence, an Euro depreciation. The consistency of the whole framework is checked by variables as the Industrial Sentiment, the Interest-Rate Spread, the Implied Volatility of exchange rates, the Risk Reversal, and by the building of a Structural Autoregressive Model. |
| JEL: | E58 F31 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9923&r=cba |
| By: | Carlo Altavilla |
| Abstract: | The paper compares the di¤erent timing and magnitude of mon-etary shocks across European countries. The problem the European Central Bank faces in setting a single monetary policy rule is analyzed starting from the di¤erences in the monetary transmission mechanism across EMU members. The econometric methodology applied is the Structural Vector Autoregression with constraints both on contem-poraneous and long term relationships among the variables of the estimated models. The results suggest the presence of asymmetric response to a monetary policy shock. In contrast with some empirical studies, the comparative analysis of the EMU members’ response to a contractionary monetary policy shock does not lead to an unambigu-ous positive relationship between country size and response widht. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0022&r=cba |
| By: | Annick Bruggeman; Marie Donnay |
| Abstract: | In this paper we gradually construct a monthly encompassing monetary model on the basis of its two constituting components: a money demand and a loan demand model. Each of the three models pays special attention to the intermediation role of banks by modelling the relation between the retail bank interest rates and the short-term market interest rate. The encompassing monetary model accounts for the possible interactions between money and loans induced by the intermediation role of the banking sector, which is represented in this paper by its interest rates setting behaviour. Our analysis indicates that, over the period January 1981-September 2001, our monthly money demand model corroborates the existing quarterly evidence. The same does not hold for our loan demand model where a correcting variable for the mergers and acquisitions wave of 1999-2000 is added as an exogenous variable to stabilise the loan demand equation. Our encompassing monetary model rejects the frequently used assumption of complete separability in the pricing of loans and deposits. It provides also some evidence on the existence of a bank lending channel in the euro area, although there is some indication of a possible instability in the link between money and loans towards the end of the sample period. The estimation of the Structural-VECM highlights very rich dynamics in the system. The common trends method results in the identification of seven shocks: an aggregate supply shock, an inflation objective shock, an institutional shock, a money demand shock, a loan demand shock, a banking shock and a monetary policy instrument shock. The first three shocks are permanent shocks, responsible for the main variability in the macro-economic variables in the long run; while the last four shocks are temporary ones, affecting the economy only in the short and medium run. |
| Keywords: | Euro area, Cointegration, Structural VECM, Money demand, Loan demand, Banking intermediation. |
| JEL: | C32 E41 E43 E50 G21 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0309&r=cba |
| By: | M. van leuvensteijn; C. Kok Sørensen; J.A. Bikker; A.A.R.J.M. van Rixtel |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loanmarket competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. |
| Keywords: | Monetary transmission; banks; retail rates; competition; panel data; |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:171&r=cba |
| By: | Pierre Bajgrowicz (University of Geneva); Olivier Scaillet (University of Geneva and Swiss Finance Institute) |
| Abstract: | We revisit the apparent historical success of technical trading rules on daily prices of the Dow Jones index. First, we use the False Discovery Rate as a new approach to data snooping. The advantage of the FDR over existing methods is that it is more powerful and not restricted only to the best rule in the sample. Second, we perform persistence tests and conclude that an investor would not have been able to select ex ante the future best-performing rules. Finally, we show that the performance fully disappears once transaction costs are taken into account. |
| Keywords: | Technical Trading, False Discovery Rate,Persistence, Transaction Costs. |
| JEL: | C12 C15 G11 G14 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0805&r=cba |
| By: | Michiel van Leuvensteijn; Christoffer Kok Sørensen; Jacob A. Bikker; Adrian A.R.J.M. van Rixtel |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. |
| Keywords: | Monetary transmission; banks; retail rates; competition; panel data |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:103&r=cba |
| By: | Marie Donnay; Hans Degryse |
| Abstract: | The pass-through from the money market rate to several bank lending rates and the government bond rate is investigated for 12 European countries over the period 1980-2000, by applying a SVAR based on the Cholesky decomposition. Simulations of a one percent point rise in the money market rate, performed for all countries, reveal divergences within and between countries in the dynamics of the lending rate pass-through. Subsequently, this pass-through is introduced in an enlarged SVAR model to account for the intermediation role of banks in the transission process of monetary policy to the real economy, for 7 European countries. The simulation results indicate a significant role for the banking sector. Moreover some asymmetries in the price of credit both within and across countries in Europe exist. The different effects on the real economy (private consumption and investment) depend on the magnitude of the lending rate pass-through. |
| Keywords: | Transmission of monetary policy, EMU, Bank intermediation, Lending rates, Pass-through, SVAR, Impulse response analysis |
| JEL: | E43 E44 E52 G21 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0117&r=cba |
| By: | Jeanne, Olivier; Rancière, Romain |
| Abstract: | We present a model of the optimal level of international reserves for a small open economy seeking insurance against sudden stops in capital flows. We derive a formula for the optimal level of reserves, and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. However, the recent build-up of reserves in emerging market Asia seems in excess of what would be implied by an insurance motive against sudden stops. |
| Keywords: | balance-of-payments crises; International Reserves; Sudden Stops |
| JEL: | F32 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6723&r=cba |
| By: | Leonardo Bartolini; Spence Hilton; James McAndrews |
| Abstract: | We track 38,000 money market trades from execution to delivery and return to provide a first empirical analysis of settlement delays in financial markets. In line with predictions from recent models showing that financial claims are settled strategically, we document a tendency by lenders to delay delivery of loaned funds until the afternoon hours. We find that banks follow a simple strategy to manage the risk of account overdrafts - delaying the settlement of large payments relative to that of small payments. More sophisticated strategies, such as increasing settlement delays when own liquid balances are low and when dealing with small trading partners, play a marginal role. We also find evidence of strategic delay in the return of borrowed funds, although we can explain a smaller fraction of the dispersion in delays in the return than in the delivery leg of money market lending. |
| Keywords: | Money market ; Banks and banking ; Game theory ; Electronic funds transfers |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:319&r=cba |
| By: | Straetmans, Stefan; Versteeg, Roald; Wolff, Christian C |
| Abstract: | One of the reasons for governments to use capital controls is to obtain some degree of monetary independence. This paper investigates the link between capital controls and interest differentials/ forward premia. This to test whether they can indeed give governments the power to drive exchange rates away from parity conditions. Two capital control variables are constructed in addition to the standard IMF capital control dummy. These variables are used to determine the date of capital account liberalization in a panel of Western European as well as emerging countries. Results show that capital controls do not give governments extra monetary freedom. There is even some evidence that capital controls decrease the level of monetary freedom governments enjoy for a number of countries. |
| Keywords: | Capital controls; Exchange Rates; Forward premia; Interest differentials; Monetary freedom |
| JEL: | E42 F21 F31 G15 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6727&r=cba |
| By: | Goldberg, Linda S; Tille, Cédric |
| Abstract: | The U.S. dollar holds a dominant place in the invoicing of international trade, along two complementary dimensions. First, most U.S. exports and imports invoiced in dollars. Second, trade flows that do not involve the United States are also substantially invoiced in dollars, an aspect that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that even though exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal policy. |
| Keywords: | center-periphery; exchange rate pass-through; invoicing; monetary policy |
| JEL: | F41 F42 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6704&r=cba |
| By: | Linda Goldberg; Cédric Tille |
| Abstract: | The U.S. dollar plays a key role in international trade invoicing along two complementary dimensions. First, most U.S. exports and imports are invoiced in dollars; second, trade flows that do not involve the United States are often invoiced in dollars, a fact that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that although exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal monetary policy. |
| Keywords: | Dollar, American ; Monetary policy ; International trade ; International finance ; Foreign exchange |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:316&r=cba |
| By: | Joanna Wolszczak-Derlacz |
| Abstract: | This article examines the price dispersion in the European Union in the last fifteen years (1990-2005). The analysis of price convergence is examined on aggregate and disaggregate levels. The macro approach is based on Comparative Price Level index calculated as the ratio between PPPs and exchange rate. The disaggregate analysis utilizes actual prices of 148 individual products sold in the 15 capital cities of the EU. The calculations comprise of sigma and beta convergence adopted from the real growth literature. The different results of the speed of convergence are obtained according to the different econometric methods. Moreover the gravity model is tested to measure the contribution of different factors in explaining the observed convergence pattern. |
| Keywords: | price convergence, international price dispersion, law of one price, |
| JEL: | E31 F36 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0614&r=cba |
| By: | Hans Dewachter; Dirk Veestraeten |
| Abstract: | In this paper we examine asset price dynamics (i.e. the convergence speed) in the event of pre-announced conversion values and dates. The theoretical framework for these dynamics has been developed in De Grauwe, Dewachter and Veestraeten (1999). We examine two instances of conversion, notably the 1879-Resumption of Specie Payments in the USA and the conversion of European currencies into the Euro on January 1, 1999. In our econometric model we treat the underlying fundamentals as unobservable and estimate their evolution via a Kalman filtering technique. Estimation results reveal values for the rate or speed of convergence that are in line with intuition and amount to levels well below (implicit) estimates listed in literature. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9902&r=cba |
| By: | Yunus Aksoy; Tomasz Piskorski |
| Abstract: | Recent empirical research has found that the strong short-term relationship between US monetary aggregates and macroeconomic fundamentals, as outlined in the classical study of M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of B. Friedman and Kuttner (1992) information value approach we reevaluate the vanishing relationship between US monetary aggregates and macroeconomic fundamentals. By using the official US data constructed by Porter and Judson (1996) we find that the currency component of M1 corrected for the foreign holdings of dollars contains valuable information on US macroeconomic fundamentals, such as nominal and real income, as well as inflation. This correction for monetary aggregates is required because the rate of foreign holdings in total money creation is large and unstable. The statistical evidence provided in this paper suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates. |
| Keywords: | foreign holdings, US monetary aggregates, information value, the Friedman-Schwartz's evidence. |
| JEL: | E3 E4 E5 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0107&r=cba |
| By: | Paul De Grauwe |
| Abstract: | The financial crises of the 1990s have given a new impetus to proposals aimed at controlling international capital movements. Well-known economists came out in favour of such controls, giving (some of these) capital controls a new respectability. In this paper we want to evaluate these proposals. In order to do so, it is important to distinguish between the different objectives that are pursued by those who propose capital controls. These objectives are very diverse. The most important ones are the following: A reduction of "excessive" exchange rate variability. A source of revenue for worthwhile international projects (e.g. development aid). Giving the monetary authorities more autonomy in setting domestic interest rates. Stabilisation of an emerging financial crisis due to large scale capital outflows. Preventing excessive capital inflows when countries liberalise their domestic markets. Some proposals for controlling capital movements have been aimed at several of these objectives. The best-known proposal in this category is the Tobin-tax. Other proposals have more narrowly defined objectives. In this paper we analyse some of these proposals and evaluate their effectiveness in achieving their stated objectives. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0002&r=cba |
| By: | Vivien Lewis |
| Abstract: | This paper analyses empirically how changes in productivity affect the real eurodollar exchange rate. We consider the two-sector new open macro model in Benigno and Thoenissen (2003). The model predictions are used, in the form of sign restrictions, to identify productivity shocks in a structural vector autoregression. We estimate economy-wide and traded sector productivity shocks, controlling for demand and nominal factors. Our results show that productivity shocks are much less important in explaining the variation in the euro-dollar exchange rate than are demand and nominal shocks. In particular, productivity can explain part of the appreciation of the dollar in the late 1990s only to the extent that it created a boost to aggregate demand in the US. We find an insignificant contribution of the Balassa-Samuelson effect. |
| Keywords: | real exchange rate, productivity, VAR, sign restrictions |
| JEL: | F41 F31 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0406&r=cba |
| By: | OGAWA Eiji; YOSHIMI Taiyo |
| Abstract: | This paper investigates recent diverging trends among East Asian currencies as well as recent movements of the weighted average value of East Asian currencies (Asian Monetary Unit: AMU) and deviations (AMU Deviation Indicators) of the East Asian currencies from the average values. Our empirical analysis shows that linkages with the US dollar have been weakening since 2001 or 2002 for some of the East Asian countries. On the other hand, the monetary authority of China continues stabilizing the exchange rate of the Chinese yuan against the US dollar even though it announced its adoption of a currency basket system. It is found that the weighted average of East Asian currencies has been appreciating against the US dollar in recent years while depreciating against the currency basket of the US dollar and the euro. Also, deviations among the East Asian currencies have been widening in recent years, reflecting the fact that these countriesf monetary authorities are adopting a variety of exchange rate systems. In other words, a coordination failure in adopting exchange rate systems among these monetary authorities increases volatility and misalignment of intra-regional exchange rates in East Asia. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:08010&r=cba |
| By: | Dirk Veestraeten |
| Abstract: | The paper examines pricing of options on target zone exchange rates. The pricing model of Dumas, Jennergren and Näslund (1993) is extended to asymmetric burden sharing in the defence of the target zone. This extension is relevant for various realistic set-ups, such as unilateral target zones. The paper also introduces an alternative pricing model that, in the tradition of Black and Scholes (1973), starts from geometric Brownian motion in which, however, the target zone limits are explicitly taken account of. This approach has a strong appeal from the practical point of view as it is less demanding in terms of required pricing inputs. This, however, goes at the cost of ignoring target zone nonlinearities. Simulations show that the simpler alternative model in most relevant cases moderately underprices by 1% to 3%. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0031&r=cba |
| By: | Assenmacher-Wesche, Katrin; Gerlach, Stefan; Sekine, Toshitaka |
| Abstract: | Recently, the Bank of Japan outlined a “two perspectives” approach to the conduct of monetary policy that focuses on risks to price stability over different time horizons. Interpreting this as pertaining to different frequency bands, we use band spectrum regression to study the determination of inflation in Japan. We find that inflation is related to money growth and real output growth at low frequencies and the output gap at higher frequencies. Moreover, this relationship reflects Granger causality from money growth and the output gap to inflation in the relevant frequency bands. |
| Keywords: | frequency domain; Phillips curve; quantity theory; spectral regression |
| JEL: | C22 E3 E5 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6650&r=cba |
| By: | Hernando Vargas Herrera; Carlos Varela |
| Abstract: | This paper analyzes the evolution and impact of capital flows in Colombia over the past five years. An examination of the nature and composition of the capital flows indicates that to large extent they have originated in foreign direct investment, especially in the oil and mining sectors. The repercussions of capital flows for the stability and fragility of the financial system are also discussed. Finally, some of the challenges faced by the authorities in dealing with the implications of capital flows for the conduct of monetary and exchange rate policies are presented |
| Date: | 2008–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004588&r=cba |
| By: | Mertens, Karel; Ravn, Morten O. |
| 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: | anticipation effects; fiscal policy; structural estimation; tax liabilities |
| JEL: | E20 E32 E62 H30 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6673&r=cba |
| By: | Danny Leung |
| Abstract: | Many empirical studies have examined the cyclical nature of the markup ratio. Until recently, few have attempted to ascertain the changes in the markup over a longer time horizon. These changes are of no less interest in view of the posited effects of increasing import competition and lower inflation on the markup. This paper offers evidence on the evolution of the markups for the Canadian business sector and 33 disaggregate industries over the 1961–2004 period. It is found that the business sector markup has declined since the mid-1980s, and that import competition has made a statistically significant but small contribution to this decline. |
| Keywords: | Econometric and statistical methods |
| JEL: | E31 F41 L11 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-7&r=cba |
| By: | Hans Dewachter; Marco Lyrio; Konstantijn Maes |
| Abstract: | This paper uses reprojection to develop a benchmark to assess ECB monetary policy since January 1999, the start of EMU. We first estimate an essentially affine term structure model for the German SWAP yield curve between 1987:04-1998:12. The German monetary policy is then reprojected onto the EMU period (1999:01-2001:08). We find that the German real interest rate in place during the EMU period is significantly lower than it would have been in case the Bundesbank were still in charge of monetary policy. We also show the effect of EMU on the German SWAP\ yield curve. Short- and medium-term bonds seem to have been more affected than long-term bonds. |
| Keywords: | EMU, ECB, Bundesbank, central bank monetary policy rule, essentially affine term structure model. |
| JEL: | E43 E44 E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0205&r=cba |
| By: | Agnieszka Markiewicz |
| Abstract: | This paper identifies the sources of divergences between current exchange rate policies in Central and Eastern European countries (CEECs). We use an ordered logit model for the official (de jure) and the actual (de facto) exchange rate classifications. We find that the differences of the exchange rate strategies among CEECs cannot be explained by these classifications. Financial and trade openness are the major determinants of divergences among exchange rate strategies in CEECs. More financially and trade integrated countries switch to more rigid regimes. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0501&r=cba |
| By: | Renato Galvão Flôres Junior (EPGE/FGV) |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:674&r=cba |
| By: | Victor Filipe Martins-da-Rocha (Université Paris-Dauphine); Frank Riedel |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:672&r=cba |
| By: | Banerjee, Anindya; Marcellino, Massimiliano |
| Abstract: | This paper brings together several important strands of the econometrics literature: error-correction, cointegration and dynamic factor models. It introduces the Factor-augmented Error Correction Model (FECM), where the factors estimated from a large set of variables in levels are jointly modelled with a few key economic variables of interest. With respect to the standard ECM, the FECM protects, at least in part, from omitted variable bias and the dependence of cointegration analysis on the specific limited set of variables under analysis. It may also be in some cases a refinement of the standard Dynamic Factor Model (DFM), since it allows us to include the error correction terms into the equations, and by allowing for cointegration prevent the errors from being non-invertible moving average processes. In addition, the FECM is a natural generalization of factor augmented VARs (FAVAR) considered by Bernanke, Boivin and Eliasz (2005) inter alia, which are specified in first differences and are therefore misspecified in the presence of cointegration. The FECM has a vast range of applicability. A set of Monte Carlo experiments and two detailed empirical examples highlight its merits in finite samples relative to standard ECM and FAVAR models. The analysis is conducted primarily within an in-sample framework, although the out-of-sample implications are also explored. |
| Keywords: | Cointegration; Dynamic Factor Models; Error Correction Models; Factor-augmented Error Correction Models; FAVAR; VAR |
| JEL: | C32 E17 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6707&r=cba |
| By: | Wolf, Nikolaus |
| Abstract: | The paper examines the timing of exit from the interwar gold-exchange standard for a panel of European countries, based on monthly data over the period January 1928 - December 1936. I show that the decision of exit from gold can be understood in terms of a trade-off between a quite limited set of factors commonly suggested in the theoretical literature on currency crises. A simple and parsimonious econometric framework that nests various hypotheses allows predicting the very month when a country will exit gold in the 1930s. |
| Keywords: | Europe; Gold-Exchange Standard; Interwar Period |
| JEL: | E42 E44 N14 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6685&r=cba |
| By: | Dominique Guillaume; David Stasavage |
| Abstract: | This paper analyses the experience with monetary policy in African countries which have participated in rule-based international monetary arrangements (CFA Franc Zone, Eastern African Currency Board and Rand Monetary Area). It argues that African countries have generally lack the political institutions necessary for governments to credibly commit through domestic institutions (exchange rate pegs or independent central banks). For such countries, monetary unions can provide an alternative source of credible commitment to sound macroeconomic policies, but only when exit from a union is made costly by the existence of parallel regional accords, and only when governance structures of monetary unions have been designed so as to maximise chances for the enforcement of monetary rules. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces09908&r=cba |
| By: | Romain Houssa |
| Abstract: | We analyse the costs of a monetary union in West Africa by means of asymmetric aggregate demand and aggregate supply shocks. Previous studies have estimated the shocks with the VAR model. We discuss the limitations of this approach and apply a new technique based on the dynamic factor model. The results suggest the presence of economic costs for a monetary union in West Africa because aggregate supply shocks are poorly correlated or asymmetric across these countries. Aggregate demand shocks are more correlated between West African countries. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0411&r=cba |
| By: | Liu, G.; Gupta, R.; Schaling, E. (Tilburg University, Center for Economic Research) |
| Abstract: | Journal of Economic Literature Classification: E17, E27, E32, E37, E47 |
| Keywords: | DSGE Model;VAR and BVAR Model;Forecast Accuracy;DSGE Forecasts;VAR Forecasts;BVAR Forecasts |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200832&r=cba |