nep-cba New Economics Papers
on Central Banking
Issue of 2008‒05‒10
34 papers chosen by
Alexander Mihailov
University of Reading

  1. Essential Interest-Bearing Money (2008) By Andolfatto, David
  2. Optimal operational monetary policy rules in an endogenous growth model: a calibrated analysis By Arato, Hiroki
  3. Testing a DSGE model of the EU using indirect inference By David Meenagh; Patrick Minford; Michael Wickensy
  4. Sacrifice ratio dispersion within the Euro Zone:<br />What can be learned about implementing a Single Monetary Policy? By Marilyne Huchet-Bourdon; Jean-Jacques Durand; Julien Licheron
  5. Equilibrium Determinacy of Endogenous Growth with Generalized Taylor Rule: A Discrete-Time Analysis By Seiya Fujisaki
  6. A Naïve Sticky Information Model of Households’ Inflation Expectations By Lanne, Markku; Luoma, Arto; Luoto, Jani
  7. Reforming the IMF: Lessons from Modern Central Banking By Philipp Maier; Eirc Santor
  8. Productive government expenditure and fiscal sustainability By Arai, Real
  9. Breaking the Impediments to Budgetary Reforms: Evidence from Europe By Ashoka Mody; Stefania Fabrizio
  10. A New Fiscal Rule: Should Israel go Swiss? By Xavier Debrun; Natan P. Epstein; Steven A. Symansky
  11. Income Taxation, Interest-Rate Control and Macroeconomic Stability with Balanced-Budget By Seiya Fujisaki; Kazuo Mino
  12. The Monetary Model Strikes Back: Evidence from the World By Valerie Cerra; Sweta Chaman Saxena
  13. Taylor-type rules versus optimal policy in a Markov-switching economy By Fernando Alexandre; Pedro Bação; Vasco Gabriel
  14. Regime Switching, Learning, and the Great Moderation By James Murray
  15. The Effects of Joining a Monetary Union on Output and Inflation Variability in Accession Countries By Holtemöller, Oliver
  16. The Backward Bending Phillips Curves: A Simple Model By Thomas I Palley
  17. Hyperbolic Discounting and the Phillips Curve By Graham, Liam; Snower, Dennis J.
  18. Evaluating the New Keynesian Phillips Curve under VAR-Based Learning By Fanelli, Luca
  19. Business Cycles in Small Developed Economies: The Role of Terms of Trade and Foreign Interest Rate Shocks By Jaime Guajardo
  20. Price Dynamics in an Exchange Economy By Steven Gjerstad
  21. Achieving a Soft Landing: The Role of Fiscal Policy By Daniel Leigh
  22. Real Interest Rates, Intertemporal Prices and Macroeconomic Stabilization A Journey Through the History of Economic Thought By Peter Spahn
  23. Non-linear adjustment in law of one price deviations and physical characteristics of goods By Berka, Martin
  24. Insiders-Outsiders, Transparency and the Value of the Ticker By Giovanni Cespa; Thierry Foucault
  25. Keynesian Models of Deflation and Depression Revisited: Inside Debt and Price Flexibility By Thomas I Palley
  26. Risk Aversion By Pavlo R. Blavatskyy
  27. Issues on the choice of Exchange Rate Regimes and Currency Boards – An Analytical Survey By Moheeput, Ashwin
  28. The Implications of Aging for the Structure and Stability of Financial Markets By Jane D'Arista
  29. Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey By Hakan Berument; Nukhet Dogan; Aysit Tansel
  30. Long Run Determinants of Real Exchange Rates in Latin America By Jorge Carrera; Romain Restout
  31. Challenges to Monetary Policy in the Czech Republic—An Integrated Monetary and Fiscal Analysis By Céline Allard; Sònia Muñoz
  32. Striving to Be "Clearly Open" and "Crystal Clear": Monetary Policy Communication of the CNB By Katerina Smídková; Ales Bulir
  33. Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia By Herman kamil
  34. Pass-Through of External Shocks to Inflation in Sri Lanka By Nombulelo Duma

  1. By: Andolfatto, David
    Abstract: I consider a model of intertemporal trade where agents lack commitment, agent types are private information, there is an absence of recordkeeping, and societal penalties are infeasible. Despite these frictions, I demonstrate that policy can be designed to implement the first-best allocation as a (stationary) competitive monetary equilibrium. The optimal policy requires a strictly positive interest rate with the aggregate interest expenditure financed in part by an inflation tax and in part by an incentive-compatible lump-sum fee. An illiquid bond is essential only in the event that paying interest on money is prohibitively costly.
    JEL: E4
    Date: 2008–05–03
  2. By: Arato, Hiroki
    Abstract: We construct an endogenous growth model with new Keynesian-type sticky prices and wages. In this model, monetary policy affects long-run output growth. We characterize the optimal operational monetary policy rule in this economy. We find that even though stabilization of output growth increases long-run output growth, the optimal monetary policy rule is the rule that makes interest rate respond to price and wage actively and output growth mutely, similar as in exogenous growth models. We also find that the optimal monetary policy rule virtually maximizes mean growth. These results suggest that although long-run growth is important for welfare, new Keynesian's claim that monetary policy should stabilize nominal variables is highly robust.
    Keywords: Monetary policy; Sticky price and wage; Business cycle fluctuations; Productivity growth
    JEL: E32 O41 E52
    Date: 2008–05
  3. By: David Meenagh; Patrick Minford; Michael Wickensy
    Abstract: We use the method of indirect inference, using the bootstrap, to test the Smets and Wouters model of the EU against a VAR auxiliary equation describing their data; the test is based on the Wald statistic. We find that their model generates excessive variance compared with the data. If the errors are scaled down, then the original model marginally passes the Wald test. We compare a New Classical version of the model which passes the test but generates a combination of excessive inflation variance and inadequate output variance. If the large consumption and investment errors are removed as possibly due to low frequency events, then the New Classical version passes easily while the original version is strongly rejected.
    Keywords: Bootstrap, DSGE Model, VAR model, Model of EU, indirect inference, Wald statistic.
    JEL: C12 C32
    Date: 2008–03
  4. By: Marilyne Huchet-Bourdon (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université Rennes I - Université de Caen); Jean-Jacques Durand (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université Rennes I - Université de Caen); Julien Licheron (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université Rennes I - Université de Caen)
    Abstract: This article focuses on the comparison of sacrifice ratios as an indicator for structural dispersion within the euro area over the period 1972-2003. Estimates of the sacrifice ratio, defined as the cumulative output cost arising from permanent inflation reduction, are obtained using structural VAR models. Results from sub-period analysis as well as ten-year-period rolling estimates lead to two main conclusions. Firstly empirical evidence displays a recent increase in the average sacrifice ratio, which can be linked to the simultaneous decrease in the average inflation rate: this negative relationship between the initial level of inflation and the cost of disinflation can be seen as a justification for the choice of an inflation objective close to 2% for the European Central Bank (ECB) rather than a target of perfect price stability, potentially very damaging. Secondly, we can't provide evidence of any reduction in European sacrifice ratio dispersion, which would suggest that the nominal convergence triggered by the Maastricht Treaty didn't involve a true reduction of structural differences. It is likely to be a problem in the stance of a single monetary policy, since structural differences imply asymmetric responses of real national economies to the same monetary impulse.
    Keywords: Sacrifice ratio; monetary policy; convergence; Economic and Monetary Union (EMU)
    Date: 2008–09–30
  5. By: Seiya Fujisaki (Graduate School of Economics, Osaka University)
    Abstract: This paper examines equilibrium determinacy of a discrete-time AK growth model with a generalized Taylor rule under which interest rate responds to the growth rate of real income as well as to the rate of inflation. We use the standard money-in-the-utility formulation in which money is superneutral on the balanced-growth path. We show that even in such a simple environment, the generalized Taylor rule may yield indeterminacy of equilibrium easily. We also demonstrate that equilibrium determinacy depends on the timing of money holding of households as well.
    Keywords: equilibrium determinacy, the Taylor rules, endogenous growth, timing of money holdings
    JEL: O42 E52
    Date: 2008–04
  6. By: Lanne, Markku; Luoma, Arto; Luoto, Jani
    Abstract: This paper provides a simple epidemiology model where households, when forming their inflation expectations, rationally adopt the past release of inflation with certain probability rather than the forward-looking newspaper forecast as suggested in Carroll [2003, Macroeconomic Expectations of Households and Professional Forecasters, Quarterly Journal of Economics, 118, 269-298]. The posterior model probabilities based on the Michigan survey data strongly support the proposed model. We also extend the agent-based epidemiology model by deriving for it a simple adaptation, which is suitable for estimation. Our results show that this model is able to capture the heterogeneity in households’ expectations very well.
    Keywords: Inflation expectations; heterogeneous expectations; survey expectations; sticky information; Bayesian analysis
    JEL: D84 C53 C82 E31 C11
    Date: 2008
  7. By: Philipp Maier; Eirc Santor
    Abstract: The authors examine the institutional and governance framework of modern central banks to determine whether there are lessons that can be applied to the International Monetary Fund's (IMF's) institutional framework. Such a comparison is appealing for two reasons. First, both central banks and the IMF carry out tasks that can be described as "delegated responsibilities." Second, while monetary policy has yielded mixed results in many countries for decades, it has recently enjoyed considerable success in reducing inflation. Substantial changes to the institutional frameworks of central banks have, at least partly, contributed to this success. This raises a simple question: can the lessons learned from modern central banking help to strengthen the governance of the IMF? The authors argue they can. Governance reform would enhance the IMF's decision-making process and make the Fund more transparent and accountable, thus improving the effectiveness of its main instruments -- surveillance and lending. The reforms proposed by the authors in this paper should not be viewed as immediately achievable goals; rather, they constitute a set of guiding principles for long-term governance reform.
    Keywords: International topics
    JEL: F3
    Date: 2008
  8. By: Arai, Real
    Abstract: We consider an overlapping generations model in which public spending directly contributes to grow up productivity as Barro (1990) and a government comforms the constant spending-GDP and debtspending ratio rules. We analyse policy effects on fiscal sustainability, growth rate and welfare. This paper gives some remarks as follows: First, we demonstrate that when spending-GDP ratio rises it may be more sustainable fiscal policy. Second, we show analytically that if higher spending-GDP ratio is more sustainable fiscal policy, it brings higher growth rate in both short-term and long-term. Third, such policy change is Pareto improving. These remarks are not obtained in previous researches on fiscal sustainability.
    JEL: E62 H54 H63
    Date: 2008–05–02
  9. By: Ashoka Mody; Stefania Fabrizio
    Abstract: Under what conditions are budget institutions likely to be strengthened? We find that fiscal deficits do not help in focusing policymakers on undertaking reforms. To the contrary, the larger the deficit, the lower is the likelihood of reforms. Large deficits apparently imply strong claims on the budget and, hence, generate unwillingness to impose self-discipline. As such, countries will tend to move either to small fiscal deficits and good institutions or large deficits and weak institutions. Economic shocks (if they are large enough) can help build a constituency for improving budget institutions. However, if forgiving markets accommodate economic shocks, even such pressure may be insufficient. Forwardlooking and credible leadership appears to be an important ingredient of the solution.
    Date: 2008–04–01
  10. By: Xavier Debrun; Natan P. Epstein; Steven A. Symansky
    Abstract: We propose a fiscal rule that fulfills a specific debt reduction objective while maintaining significant fiscal flexibility-two overarching concerns in Israel. Not unlike the Swiss "debt brake," the rule incorporates an error-correction mechanism (ECM) through which departure from the debt objective affects binding medium-run expenditure ceilings. Two variants of our ECM rule are shown to be superior to a comparable deficit rule in terms of attaining the debt objective and allowing for fiscal stabilization while supporting medium-term expenditure planning. Given its relative sophistication, a proper implementation of the ECM rule requires supportive fiscal institutions, including independent input and assessment.
    Keywords: Working Paper , Israel ,
    Date: 2008–04–07
  11. By: Seiya Fujisaki (Graduate School of Economics, Osaka University); Kazuo Mino (Graduate School of Economics, Osaka University)
    Abstract: This paper studies stabilization effects of fiscal and monetary policy rules in the context of a standard real business cycle model with money. We assume that the fiscal authority adjusts the rate of income tax subject to the balanced-budget constraint, while the monetary authority controls the nominal interest rate by observing inflation. Inspecting macroeconomic stability of the steady state equilibrium of the model economy, we demonstrate that whether or not policy rules eliminate the possibility of sunspot-driven fluctuations critically depends upon the appropriate combination of progressiveness of taxation and activeness of interest-rate control.
    Keywords: balanced budget, interest rate control, determinacy of equilibrium
    JEL: E52 E62 E63
    Date: 2008–04
  12. By: Valerie Cerra; Sweta Chaman Saxena
    Abstract: We revisit the dramatic failure of monetary models in explaining exchange rate movements. Using the information content from 98 countries, we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals. We also find fundamentalsbased models very successful in beating a random walk in out-of-sample prediction.
    Keywords: Exchange rates , Forecasting models ,
    Date: 2008–03–28
  13. By: Fernando Alexandre (NIPE and University of Minho); Pedro Bação (GEMF and Faculdade de Economia, Universidade de Coimbra); Vasco Gabriel (Department of Economics, University of Surrey, UK and NIPE-UM)
    Abstract: We analyse the effect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modeled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of financial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.
    Keywords: Asset Prices, Monetary Policy, Markov Switching
    JEL: E52 E58
    Date: 2008
  14. By: James Murray (Indiana University Bloomington)
    Abstract: This paper examines the "bad luck" explanation for changing volatility in U.S. inflation and output when agents do not have rational expectations, but instead form expectations through least squares learning with an endogenously changing learning gain. It has been suggested that this type of endogenously changing learning mechanism can create periods of excess volatility without the need for changes in the variance of the underlying shocks. Bad luck is modeled into a standard New Keynesian model by augmenting it with two states that evolve according to a Markov chain, where one state is characterized by large variances for structural shocks, and the other state has relatively smaller variances. To assess whether learning can explain the Great Moderation, the New Keynesian model with volatility regime switching and dynamic gain learning is estimated by maximum likelihood. The results show that learning does lead to lower variances for the shocks in the volatile regime, but changes in regime is still significant in differences in volatility from the 1970s and after the 1980s.
    Keywords: Learning, regime switching, great moderation, New Keynesian model, maximum likelihood
    JEL: C13 E31 E50
    Date: 2008–04
  15. By: Holtemöller, Oliver
    Abstract: New EU member countries are supposed to adopt the Euro as soon as economic convergence is achieved. This paper analyzes the effects of joining a monetary union on output and inflation variability in small acceding countries. An asymmetric macroeconomic two-country model is specified and combined with two different monetary policy regimes: (i) national monetary policy, (ii) monetary union. The performance of the two regimes is analyzed in terms of inflation and output variability for a broad range of structural parameter specifications.
    Keywords: European monetary union; open economy macroeconomic models; optimal monetary policy
    JEL: F42 E52 F41
    Date: 2007–12–14
  16. By: Thomas I Palley
    Abstract: This paper develops a simple macroeconomic model of the backward bending Phillips curve that allows easy comparison with the neo-Keynesian and new classical models of the Phillips curve. There are two separate explanations of the backward bending Phillips curve and the model incorporates both. One explanation focuses on near-rational inflation expectations and aggregation of expectations across workers. The other explanation focuses on nominal wage setting behavior and aggregation of nominal wage behavior across sectors. The paper concludes with some observations about the implications of the backward bending Phillips curve for monetary policy.
    Keywords: Backward bending Phillips curve, minimum unemployment rate of inflation
    JEL: E00 E31 E52
    Date: 2008
  17. By: Graham, Liam (University College London); Snower, Dennis J. (Kiel Institute for the World Economy)
    Abstract: Using a standard dynamic general equilibrium model, we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long-run effects on real variables.
    Keywords: inflation, unemployment, Phillips curve, nominal inertia, monetary policy, dynamic general equilibrium
    JEL: E20 E40 E50
    Date: 2008–04
  18. By: Fanelli, Luca
    Abstract: This paper proposes the econometric evaluation of the New Keynesian Phillips Curve (NKPC) in the euro area, under a particular specification of the adaptive learning hypothesis. The key assumption is that agents’ perceived law of motion is a Vector Autoregressive (VAR) model, whose coefficients are updated by maximum likelihood estimation, as the information set increases over time. Each time new data is available, likelihood ratio tests for the crossequation restrictions that the NKPC imposes on the VAR are computed and compared with a proper set of critical values which take the sequential nature of the test into account. The analysis is developed by focusing on the case where the variables entering the NKPC can be approximated as nonstationary cointegrated processes, assuming that the agents’ recursive estimation algorithm involves only the parameters associated with the short run transient dynamics of the system. Results on quarterly data relative to the period 1981–2006 show that: (i) the euro area inflation rate and the wage share are cointegrated; (ii) the cointegrated version of the ‘hybrid’ NKPC is sharply rejected under the rational expectations hypothesis; (iii) the model is supported by the data over relevant fractions of the chosen monitoring period, 1986–2006, under the adaptive learning hypothesis, although this evidence does not appear compelling.
    Keywords: Adaptive learning, cointegration, cross-equation restrictions, forward-looking model of inflation dynamics, New Keynesian Phillips Curve
    JEL: C32 C52 D83 E10
    Date: 2008
  19. By: Jaime Guajardo
    Abstract: Empirical evidence for small developed economies finds that consumption is procyclical and as volatile as output, and real net exports are coutercyclical. Earlier studies have not been able to reproduce these regularities in a DSGE small open economy model when productivity shocks drive the business cycles and households have a normal intertemporal elasticity of substitution. Instead, these studies have reduced this elasticity to make consumption more procyclical and volatile and real net exports countercyclical. This paper shows that a standard model can reproduce these regularities, without lowering the intertemporal substitution, if the terms of trade and foreign interest rate are added as source of business cycle fluctuations. These shocks, compared to productivity shocks, make consumption and investment more volatile and procyclical relative to output, and make real net exports countercyclical.
    Date: 2008–04–04
  20. By: Steven Gjerstad
    Abstract: The pure exchange model is the foundation of the neoclassical theory of value, yet equilibrium predictions and models of price adjustment for this model remained untested prior to the experiment reported in this paper. With the exchange economy replicated several times, prices and allocations converge sharply to the competitive equilibrium in continuous double auction (CDA) trading. Convergence is evaluated by comparing the extent of price adjustment within each market replication (or trading period) to the extent of adjustment across trading periods: most observed price adjustment occurs within trading periods, so price adjustment data are evaluated with the Hahn process model (Hahn and Negishi [1962]), which is a disequilibrium model of within-period trades. Estimation demonstrates that the model is consistent with observed price paths within each period of the exchange economy. The model is augmented with an additional assumption – based on observations from this experiment – that the initial trade price in period t+1 is randomly drawn from the interval between the minimum and maximum trade prices in period t. The estimated within-period adjustment rule, combined with this across-period adjustment rule, generates price paths similar to data from an experiment session.
    Keywords: Competitive equilibrium, disequilibrium dynamics, continuous double auction, experimental economics, exchange economy, Hahn process, neoclassical theory of value, tatonnement, unit root tests
    JEL: C22 C92 D41 D44 D51
    Date: 2007–11
  21. By: Daniel Leigh
    Abstract: This paper utilizes an open-economy New Keynesian overlapping generations model to assess the extent to which fiscal policy, along side an inflation-forecast-based monetary policy, could enhance macroeconomic stability in Colombia. The model simulations indicate that, in addition to stabilizing output and inflation, a stronger response of the fiscal balance to excess tax revenue would reduce the burden on the central bank of adjusting interest rates, lessen the associated degree of exchange rate volatility, and contribute to a more stable external current account balance. The analysis also assesses how the success of fiscal policy in enhancing macroeconomic stability depends on the type of shock, the response of monetary policy, and the length of fiscal policy implementation lags.
    Keywords: Fiscal policy , Colombia , Monetary policy , Business cycles , Tax revenues ,
    Date: 2008–03–21
  22. By: Peter Spahn
    Abstract: The notion of a "real rate of interest" has been a centre of confusion in the history of economic thought. In neoclassical economics, real interest rates were designed as relative prices of contemporary and future goods and Böhm-Bawerk believed that misalignments were corrected by market forces, restoring the allocation of saving and investment as well as macroeconomic equilibrium. The intertemporal perspective in goods market analysis was modified in Wicksell and Keynes; the focus shifted to financial markets. According to the new Keynesian theory, monetary policy should be used to support intertemporal consumption smoothing. Because investment is neglected, this approach is unable to grasp the intertemporal coordination problem and delivers poor microfoundations for macroeconomic stabilization.
    Keywords: Zinsspannentheorie, Neukeynesianische Makroökonomik, Realzins
    JEL: E4 B1
    Date: 2007–12
  23. By: Berka, Martin
    Abstract: At a level of individual goods, heterogeneity of marginal transaction costs, proxied by price-to-weight ratios and stowage factors, explains a large part of the variation in thresholds of no-adjustment and conditional half-lives of law of one price deviations. Prices of heavier more voluminous) goods deviate further before becoming mean-reverting. Moreover, after becoming mean-reverting, prices of heavier goods converge more slowly. Together with measures of pricing power, market size, distance and exchange rate volatility, these factors explain up to 43% of variation in no-adjustment threshold estimates across 52 goods in US-Canada post Bretton Woods monthly CPI data and are robust in a broader 5-country dataset. They open two avenues for the importance of marginal transaction costs in accounting for real exchange rate persistence: through (a) generating persistence in individual real exchange rate components, and (b) accentuating it by the process of aggregation of heterogeneous components (”aggregation bias” of Imbs, et al. 2005).
    Keywords: Law of One Price Deviations; Real Exchange Rate Persistence; Non-Linearities; transaction costs; Physical Weight; Physical Volume; Threshold Autregres-sive Models
    JEL: F36 F31
    Date: 2006–11
  24. By: Giovanni Cespa (Queen Mary, University of London, CSEF-Università di Salerno, and CEPR); Thierry Foucault (HEC, Paris, GREGHEC, and CEPR)
    Abstract: We consider a multi-period rational expectations model in which risk-averse investors differ in their information on past transaction prices (the ticker). Some investors (insiders) observe prices in real-time whereas other investors (outsiders) observe prices with a delay. As prices are informative about the asset payoff, insiders get a strictly larger expected utility than outsiders. Yet, information acquisition by one investor exerts a negative externality on other investors. Thus, investors' average welfare is maximal when access to price information is rationed. We show that a market for price information can implement the fraction of insiders that maximizes investors' average welfare. This market features a high price to curb excessive acquisition of ticker information.We also show that informational efficiency is greater when the dissemination of ticker information is broader and more timely.
    Keywords: Market data sales, Latency, Transparency, Price discovery, Hirshleifer effect
    JEL: G10 G12 G14
    Date: 2008–04
  25. By: Thomas I Palley
    Abstract: This paper extends Tobin’s (1975) Keynesian analysis of deflation to include a range of additional channels through which deflation exacerbates Keynesian unemployment. The paper provides further theoretical reasons why downward price level adjustment may not solve the Keynesian problem. These arguments challenge the received wisdom that Keynes’ <i>General Theory</i> is a special case resting on downwardly rigid prices and nominal wages. This conventional wisdom has led many economists to recommend policies promoting downward flexibility. These policies have created an environment in which deflation is more likely, giving new relevance to Keynesian analysis of deflation.<p></p>
    Keywords: deflation, liquidity trap, Fisher debt effect, price flexibility
    JEL: E30 E31
    Date: 2008
  26. By: Pavlo R. Blavatskyy
    Abstract: Risk aversion is traditionally defined in the context of lotteries over monetary payoffs. This paper extends the notion of risk aversion to a more general setup where outcomes (consequences) may not be measurable in monetary terms and people may have fuzzy preferences over lotteries, i.e. they may choose in a probabilistic manner. The paper considers comparative risk aversion within neoclassical expected utility theory, a constant error/tremble model and a strong utility model of probabilistic choice (which includes the Fechner model and the Luce choice model as special cases). The paper also provides a new definition of relative riskiness of lotteries.
    Keywords: Risk aversion, more risk averse than, riskiness, probabilistic choice,expected utility theory, Fechner model, Luce choice model
    JEL: D00 D80 D81
    Date: 2008–04
  27. By: Moheeput, Ashwin (Department of Economics, University of Warwick)
    Abstract: Currency boards have often been at the heart of monetary reforms proposed by the International Monetary Fund (IMF) : they have been instrumental either as a short term crisis management strategy that successfully restores financial order for many countries seeking stabilization in the aftermath of prolonged economic crisis or as a way of importing monetary credibility as part of a medium / long term strategy for conducting monetary policy. As backbone of a credible exchange-rate based stabilisation programme, they have also been the linchpin of several heterodox or orthodox programmes aimed at mitigating hyperinflation. This paper attempts to synthetize our thinking about currency boards by reviewing their strengths and weaknesses and endeavours to seek real world examples to rationalise their applicability as opposed to alternative exchange rate regimes. Architects of international financial stability at the IMF or at central banks often ponder about the prerequisites for such programme to work well. These are also reviewed using appropriate economic theory where necessary. Finally, this paper sheds light on the best exchange rate regime that may be adopted in the intermediate term by those countries wishing to adopt a currency board, not as a quick fix solution to end an economic chaos but rather, as integral part of a long term monetary strategy.
    Keywords: Currency Boards ; IMF ; Crisis Management ; Monetary Credibility ; Heterodox / Orthodox Programs ; Hyperinflation ; Exchange Rate Regimes
    Date: 2008
  28. By: Jane D'Arista
    Abstract: Aging populations have altered saving and investment patterns in many developed and emerging market economies. The structural changes that have occurred have important implications for financial stability and for the conduct of monetary policy. As assets and borrowing shifted from banks to pension funds and other institutional investors, the market-based systems that replaced bank-based systems became more procyclical and more vulnerable to systemic risk. In addition, banks’ receding share of financial assets undermined their role in channeling monetary policy initiatives and thus eroded central banks’ ability to counter excessive credit growth and contraction, defuse asset bubbles and act as effective lenders-of-last-resort in crises. This paper offers policy choices and proposals to address the adverse outcomes of these structural and institutional developments that are likely to intensify under the ongoing pressure of demographic change.
    Keywords: aging, banks, pension funds, financial stability, monetary policy
    Date: 2008
  29. By: Hakan Berument (Bilkent University); Nukhet Dogan (Gazi University); Aysit Tansel (Middle East Technical University)
    Abstract: This paper investigates how macroeconomic policy shocks in Turkey affect the total unemployment and provides evidence on the differential responses of the unemployment by sectors of economic activity. Our paper extends the previous work in two respects. First, we consider not only the response of total unemployment but also the response of unemployment by sectors of economic activity. Second, we consider not only the effect of monetary policy shocks, but also the effects of several other macroeconomic shocks. The quarterly data used which covers the period 1988:01 to 2004:04 from Turkey. A VAR model with a recursive order is employed to estimate the effects of shocks in real GDP, price, exchange rate, interbank interest rate, money supply and own sectoral unemployment on unemployment by sectors of economic activity. The results indicate that the positive income shock is followed by a decrease in unemployment in all economic activity groups during the initial periods except the unemployment in the Electricity sector and the Community Services sector. A positive money shock decreases unemployment in sectors of Mining, Manufacturing, Construction, Wholesale-Retail Trade, Transportation and, Finance-Insurance. Opposite results are obtained with the interbank interest rate shocks. Even if, they are not statistically significant, a positive interbank interest rate shock increases the unemployment in all economic activities at the initial levels but derives down the unemployment in the Agriculture and the Community Services sectors at the initial level. Moreover, a positive price shock increases unemployment in all economic sectors in the long run except the Mining and the Community Services. Thus, unemployment in different sectors of economic activity responds differently to various macroeconomic policy shocks.
    Keywords: Macroeconomic Policy Shocks, Unemployment by Economic Activity
    JEL: E60 E24
    Date: 2008
  30. By: Jorge Carrera (Universidad Nacional de la Plata - Universidad Nacional de la Plata); Romain Restout (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper investigates the long run behavior of real exchange rates in nineteen countries of Latin America over the period 1970 - 2006. Our data does not support the Purchasing Power Parity (PPP) hypothesis, implying that real shocks tend to have permanent effects on Latin America’s real exchange rates. By exploiting the advantage of non stationary panel econometrics, we are able to determinate factors that drive real exchanges rate in the long run : the Balassa-Samuelson effect, government spending, the terms of trade, the openness degree, foreign capital flows and the de facto nominal exchange regime. The latter effect has policy implications since we find that a fixed regime tends to appreciate the real exchange rate. This finding shows the non neutrality of exchange rate regime regarding its effects on real exchange rates. We also run estimations for country subgroups (South America versus Caribbean and Central America). Regional results highlight that several real exchange rates determinants are specific to one geographic zone. Finally, we compute equilibrium real exchange rate estimations. Two main results are derived from the investigation of misalignments, [i ] eight real exchange rates are quite close to their equilibrium level in 2006, and [ii ] our model shows that a part of currencies crises that arose in Latin America was preceded by a real exchange rate overvaluation.
    Keywords: equilibrium real exchange rate ; panel cointegration. ; panel unit roots
    Date: 2008
  31. By: Céline Allard; Sònia Muñoz
    Abstract: This paper uses the Global Integrated Monetary and Fiscal Model (GIMF), a New Keynesian open-economy general equilibrium model suitable for an integrated evaluation of monetary and fiscal policies, to analyze monetary policy challenges facing the Czech Republic. In the context of the recent rising inflation pressures, we analyze how the authorities' fiscal reform package and the planned reduction in the inflation target in 2010 would weigh on the conduct of monetary policy.
    Keywords: Monetary policy , Czech Republic , Inflation targeting , Fiscal policy ,
    Date: 2008–03–25
  32. By: Katerina Smídková; Ales Bulir
    Abstract: The Czech National Bank has a respectable track record in terms of its policy actions and the corresponding inflation outturns. Using a simple forward-looking policy rule, we find that its main communication tools-inflation targets, inflation forecasts, verbal assessments of the inflation risks contained in quarterly inflation reports, and the voting within the CNB Board-provided a clear message in about three out of every four observations in our 2001- 2005 sample.
    Date: 2008–04–04
  33. By: Herman kamil
    Abstract: Policymakers in many emerging markets are attempting to resist currency appreciation while simultaneously meeting targets for inflation. Using the recent experience of Colombia between 2004 and 2007, this paper examines the effectiveness of the Central Bank's intervention in stemming domestic currency appreciation under an inflation targeting regime. The results indicate that exchange rate intervention was effective during 2004-2006, when foreign currency purchases were undertaken during a period of monetary easing. During 2007, on the other hand, intervention was ineffective in reversing or slowing down domestic currency appreciation, as large-scale intervention became incompatible with meeting the inflation target in an overheating economy. Currency derivative markets-which have grown in depth and sophistication-played a key role in blunting the effectiveness of intervention.
    Date: 2008–04–09
  34. By: Nombulelo Duma
    Abstract: This paper investigates pass-through of external shocks (exchange rate, oil price, and import price shocks) to inflation in Sri Lanka. The analysis is based on a vector autoregression (VAR) model that incorporates a distribution chain of pricing. The paper finds low and incomplete pass-through of external shocks to consumer inflation, reflecting a combination of factors including the existence of administered prices, high content of food in the consumption basket, and low persistence and volatility of the exchange rate. External shocks explain about 25 percent of the variation in consumer price inflation, reflecting room for domestic policies in controlling inflation.
    Date: 2008–03–28

This nep-cba issue is ©2008 by Alexander Mihailov. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.