nep-cba New Economics Papers
on Central Banking
Issue of 2008‒06‒13
34 papers chosen by
Alexander Mihailov
University of Reading

  1. Modeling the Phillips curve with unobserved components By Harvey, A.
  2. Identification of New Keynesian Phillips Curves from a Global Perspective. By Dees, S.; Pesaran, M.H.; Smith, L.V.; Smith, R.P.
  3. Forecasting Economic and Financial Variables with Global VARs By Pesaran, M.H.; Schuermann, T.; Smit, L.V.
  4. Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective By Marika Karanassou; Hector Sala; Dennis J. Snower
  5. A Statistical Comparison of Alternative Identification Schemes for Monetary Policy Shocks By Markku Lanne; Helmut Luetkepohl
  6. Modeling Expectations with Noncausal Autoregressions By Markku Lanne; Pentti Saikkonen
  7. Testing the New Keynesian Model on U.S. and Euro Area Data By Juselius, Mikael
  8. Do Peso Problems Explain the Returns to the Carry Trade? By A. Craig Burnside; Martin S. Eichenbaum; Isaac Kleshchelski; Sergio Rebelo
  9. Nominal Rigidities, News-Driven Business Cycles, and Monetary Policy By KOBAYASHI Keiichiro; NUTAHARA Kengo
  10. How forward-looking is the Fed? Direct estimates from a `Calvo-type' rule By Vasco Gabriel; Paul Levine; Christopher Spencer
  11. On the (ir)relevance of direct supply-side effects of monetary policy By Vasco Gabriel; Paul Levine; Christopher Spencer; Bo Yang
  12. Much Ado About Nothing: American Jobs and the Rise of Service Outsourcing to China and India By Runjuan Liu; Daniel Trefler
  13. Inflation Persistence in New EU Member States: Is It Different Than in the Euro Area Members? By Michal Franta; Branislav Saxa; Katerina Smidkova
  14. The Macroeconomic Implications of Rising Wage Inequality in the United States By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  15. The Effects of Anticipated Future Change in the Monetary Policy Regime By Juraj Antal; Frantisek Brazdik
  16. Why and How to Assess Inflation Target Fulfilment By Jan Filacek
  17. Incomes Policies, Expectations and the NAIRU By Wolfgang Pollan
  18. Long Memory and Non-Linearities in International Inflation By Giovanni Caggiano; Efrem Castelnuovo
  19. Oil Price Shocks, Macroeconomics Stability and Welfare in a Small Open Economy By Deren Unalmis, Ibrahim Unalmis and Derya Filiz Unsal
  20. The zero growth model with expected inflation: further insights. A consistent and inflation neutral formulation for the cost of equity By Ignacio Velez-Pareja
  21. Taylor-type rules versus optimal policy in a Markov-switching economy¤ By Fernando Alexandre; Pedro Bação; Vasco Gabriel
  22. MARKET RISK DYNAMICS AND COMPETITIVENESS AFTER THE EURO: Evidence from EMU Members By Juan Piñeiro Chousa,; Artur Tamazian,; Davit N. Melikyan,
  23. Real Exchange Rate Behavior: New Evidence with Linear and Non-linear Endogenous Break(s) By Chan, Tze-Haw; Chong, Lee Lee; Khong, Wye Leong Roy
  24. Cognitive Constraints and Reversibility of International Economic Institutions. The Case of the European Monetary System By Maurizio Mistri
  25. Further Theoretical and Empirical Evidence on Money to Growth Relation By Alexandru Minea; Christophe Rault; Patrick Villieu
  26. From the Bancor to the Euro. And Further on to the Intor? By Heinz Handler
  27. Bridging Economic Theory Models and the Cointegrated Vector Autoregressive Model By Framroze Moller, Niels
  28. A Pragmatic Approach to Capital Account Liberalization By Eswar S. Prasad; Raghuram Rajan
  29. Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis By Inês Drumond
  31. Some New Insights into Currency Boards: Evidence from Bulgaria By Alexandru Minea; Christophe Rault
  32. Transmission of Exchange Rate Shocks into Domestic Inflation: The Case of the Czech Republic By Oxana Babetskaia-Kukharchuk
  33. Structural breaks and Purchasing Power Parity in the CEE and Post-War former Yugoslav States By Robert J. Sonora; Josip Tica
  34. Exchange Rate Volatility and Exports: New Empirical Evidence from the Emerging East Asian Economies By Chit, Myint Moe; Rizov, Marian; Willenbockel, Dirk

  1. By: Harvey, A.
    Abstract: The relationship between in.ation and the output gap can be modeled simply and effectively by including an unobserved random walk component in the model. The dynamic properties match the stylized facts and the random walk component satisfies the properties normally required for core in.ation. The model may be generalized to as to include a term for the expectation of next period's output, but it is shown that this is difficult to distinguish from the original specification. The model is fited as a single equation and as part of a bivariate model that includes an equation for GDP. Fitting the bivariate model highlights some new aspects of unobserved components modeling. Single equation and bivariate models tell a similar story: an output gap two per cent above trend is associated with an annual inflation rate that is one percent above core inflation.
    Keywords: Cycle; hybrid new Keynesian Phillips curve; inflation gap; Kalman filter, output gap.
    Date: 2008–01
  2. By: Dees, S.; Pesaran, M.H.; Smith, L.V.; Smith, R.P.
    Abstract: New Keynesian Phillips Curves (NKPC) have been extensively used in the analysis of monetary policy, but yet there are a number of issues of concern about how they are estimated and then related to the underlying macroeconomic theory. The first is whether such equations are identified. To check identification requires specifying the process for the forcing variables (typically the output gap) and solving the model for inflation in terms of the observables. In practice, the equation is estimated by GMM, relying on statistical criteria to choose instruments. This may result in failure of identification or weak instruments. Secondly, the NKPC is usually derived as a part of a DSGE model, solved by log-linearising around a steady state and the variables are then measured in terms of deviations from the steady state. In practice the steady states, e.g. for output, are usually estimated by some statistical procedure such as the Hodrick-Prescott (HP) filter that might not be appropriate. Thirdly, there are arguments that other variables, e.g. interest rates, foreign inflation and foreign output gaps should enter the Phillips curve. This paper examines these three issues and argues that all three benefit from a global perspective. The global perspective provides additional instruments to alleviate the weak instrument problem, yields a theoretically consistent measure of the steady state and provides a natural route for foreign inflation or output gap to enter the NKPC.
    Keywords: Global VAR (GVAR), identification, New Keynesian Phillips Curve, Trend-Cycle decomposition.
    JEL: C32 E17 F37 F42
    Date: 2008–01
  3. By: Pesaran, M.H.; Schuermann, T.; Smit, L.V.
    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 1979Q1-2003Q4 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 2004Q1-2005Q4. Forecasts are obtained for 134 variables from 26 regions made up of 33 countries covering about 90% of world output. The forecasts are compared to typical benchmarks: univariate autoregressive and random walk models. Building on the forecast combination literature, the effects of model and estimation uncertainty on forecast outcomes are examined by pooling forecasts obtained from different GVAR models estimated over alternative sample periods. Given the size of the modeling problem, and the heterogeneity of economies considered — industrialised, emerging, and less developed countries — as well as the very real likelihood of possibly 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 competitors, especially for output, inflation and real equity prices.
    Keywords: Forecasting using GVAR, structural breaks and forecasting, average forecasts across models and windows, financial and macroeconomic forecasts.
    JEL: C32 C51 C53
    Date: 2008–01
  4. By: Marika Karanassou (Queen Mary, University of London); Hector Sala (Universitat Autonoma de Barcelona); Dennis J. Snower (Kiel Institute for the World Economy)
    Abstract: The conventional wisdom that inflation and unemployment are unrelated in the long-run implies the compartmentalisation of macroeconomics. While one branch of the literature models inflation dynamics and estimates the unemployment rate compatible with inflation stability, another one determines the real economic factors that drive the natural rate of unemployment. In the context of the new Phillips curve (NPC), we show that frictional growth, i.e. the interplay between lags and growth, generates an inflation-unemployment tradeoff in the long-run. We thus argue that a holistic framework, like the chain reaction theory (CRT), should be used to jointly explain the evolution of inflation and unemployment. A further attraction of the CRT approach is that it provides a synthesis of the traditional structural macroeconometric models and the (structural) vector autoregressions (VARs)
    Keywords: Natural rate of unemployment; new Phillips Curve; frictional growth; inflation-unemployment tradeoff; inflation dynamics; unemployment dynamics; impulse response function
    JEL: E24 E31
    Date: 2008–05
  5. By: Markku Lanne; Helmut Luetkepohl
    Abstract: Different identification schemes for monetary policy shocks have been proposed in the literature. They typically specify just-identifying restrictions in a standard structural vector autoregressive (SVAR) framework. Thus, in this framework the different schemes cannot be checked against the data with statistical tests. We consider different approaches how to use the data properties to augment the standard SVAR setup for identifying the shocks. Thereby it becomes possible to test models which are just identified in a standard setting. For monthly US data it is found that a model where monetary shocks are induced via the federal funds rate is the only one which cannot be rejected when the data properties are used for identification.
    Keywords: Mixed normal distribution, structural vector autoregressive model, vector autoregressive process
    JEL: C32
    Date: 2008
  6. By: Markku Lanne; Pentti Saikkonen
    Abstract: This paper is concerned with univariate noncausal autoregressive models and their potential usefulness in economic applications. We argue that noncausal autoregressive models are especially well suited for modeling expectations. Unlike conventional causal autoregressive models, they explicitly show how the considered economic variable is affected by expectations and how expectations are formed. Noncausal autoregressive models can also be used to examine the related issue of backward-looking or forward-looking dynamics of an economic variable. We show in the paper how the parameters of a noncausal autoregressive model can be estimated by the method of maximum likelihood and how related test procedures can be obtained. Because noncausal autoregressive models cannot be distinguished from conventional causal autoregressive models by second order properties or Gaussian likelihood, a detailed discussion on their specification is provided. Motivated by economic applications we explicitly use a forward-looking autoregressive polynomial in the formulation of the model. This is di¤erent from the practice used in previous statistics literature on noncausal autoregressions and, in addition to its economic motivation, it is also convenient from a statistical point of view. In particular, it facilitates obtaining likelihood based diagnostic tests for the specified orders of the backward-looking and forward-looking autoregressive polynomials. Such test procedures are not only useful in the specification of the model but also in testing economically interesting hypotheses such as whether the considered variable only exhibits forward-looking behavior. As an empirical application, we consider modeling the U.S. in.ation dynamics which, according to our results, is purely forward-looking.
    Date: 2008
  7. By: Juselius, Mikael
    Abstract: I apply the Johansen and Swensen (1999, 2004) method of testing exact rational expectations within the cointegrated VAR (Vector Auto-Regressive) model, to testing the New Keynesian (NK) model. This method permits the testing of rational expectation systems, while allowing for non-stationary data. The NK-model is tested on quarterly U.S. and Euro area time series data. I find that the restrictions implied by the core equations of the NK-model are rejected regardless of sample periods or measures of real marginal costs. I also provide a tentative explanation of the results favored by previous researches.
    Keywords: New Keynesian Phillips curve, cointegration, vector autoregressive model
    JEL: C32 C52 E31 E52
    Date: 2008
  8. By: A. Craig Burnside; Martin S. Eichenbaum; Isaac Kleshchelski; Sergio Rebelo
    Abstract: Currencies that are at a forward premium tend to depreciate. This 'forward- premium puzzle' is an egregious deviation from uncovered interest parity. We document the properties of the carry trade, a currency speculation strategy that exploits this anomaly. This strategy consists of borrowing low-interest-rate currencies and lending high-interest-rate currencies. We first show that the carry trade yields a high Sharpe ratio that is not a compensation for risk. We then consider a hedged version of the carry trade which protects the investor against large, adverse currency movements. This strategy, implemented with currency options, yields average payoffs that are statistically indistinguishable from the average payoffs to the standard carry trade. We argue that this finding implies that the peso problem cannot be a major determinant of the payoff to the carry trade.
    JEL: F31
    Date: 2008–06
  9. By: KOBAYASHI Keiichiro; NUTAHARA Kengo
    Abstract: A news-driven business cycle is a business cycle in which positive news about the future causes a current boom defined as simultaneous increases in consumption, labor, investment, and output. Standard real business cycle models do not generate it. In this paper, we find that a fairly popular market friction, sticky prices, can be a source of a news-driven business cycle and that it can be generated due to news about future technology growth, technology level, and expansionary monetary policy shock. The key mechanism is that markups vary through nominal rigidities when the news arrives.
    Date: 2008–06
  10. By: Vasco Gabriel (University of Surrey); Paul Levine (University of Surey); Christopher Spencer (University of Surrey)
    Abstract: We estimate an alternative type of monetary policy rule, termed Calvo rule, according to which the central bank is assumed to target a discounted in?nite sum of future expected in?ation. Compared to conventional in?ation forecast-based rules, which are typically of the Taylor-type with discrete forward looking horizons, this class of rule is less prone to the problem of indeterminacy. Parameter estimates obtained from GMM estimation provide support for Calvo-type rules, suggesting that the Federal Reserve targeted a mean forward horizon of between 4 and 8 quarters.
    Keywords: Calvo-type interest rules; In?ation Forecast Based rules; GMM; Indeterminacy.
    JEL: C22 E58
    Date: 2008–06
  11. By: Vasco Gabriel (University of Surrey); Paul Levine (University of Surey); Christopher Spencer (University of Surrey); Bo Yang (University of Surrey)
    Abstract: The relevance of direct supply-side effects of monetary policy in a New Keynesian DSGE model is studied. We extend a model with several nominal and real frictions by introducing a cost channel of monetary transmission and allowing for non-separability of money and consumption in the utility of the representative household. These fea- tures have important theoretical consequences for the output-inflation trade-off and indeterminacy of interest rate rules. The empirical evidence for these effects are then examined using a Bayesian maximum likelihood framework complemented with GMM single-equation estimation. Both estimation strategies point to weak evidence for the cost channel and non-separable utility.
    Keywords: New Keynesian model, Bayesian maximum likelihood estimation, GMM, non-separable utility, cost channel.
    JEL: E42 E52 C11
    Date: 2008–06
  12. By: Runjuan Liu; Daniel Trefler
    Abstract: We examine the impact on U.S. labor markets of offshore outsourcing in services to China and India. We also consider the reverse flow or 'inshoring' which is the sale of services produced in the United States to unaffiliated buyers in China and India. Using March-to-March matched CPS data for 1996-2006 we examine the impacts on (1) occupation and industry switching, (2) weeks spent unemployed as a share of weeks in the labor force, and (3) earnings. We precisely estimate small positive effects of inshoring and smaller negative effects of offshore outsourcing. The net effect is positive. To illustrate how small the effects are, suppose that over the next nine years all of inshoring and offshore outsourcing grew at rates experienced during 1996-2005 in business, professional and technical services i.e., in segments where China and India have been particularly strong. Then workers in occupations that are exposed to inshoring and offshore outsourcing (1) would switch 4-digit occupations 2 percent less often, (2) would spend 0.1 percent less time unemployed, and (3) would earn 1.5 percent more. These are not annual changes – they are changes over nine years – and are thus best described as small positive effects.
    JEL: F16
    Date: 2008–06
  13. By: Michal Franta; Branislav Saxa; Katerina Smidkova
    Abstract: Is inflation persistence in the new EU Member States (NMS) comparable to that in the euro area countries? We argue that persistence may not be as different between the two country groups as one might expect. We confirm that one should work carefully with the usual estimation methods when analyzing the NMS, given the scope of the convergence process they went through. We show that due to frequent breaks in inflation time series in the NMS, parametric statistical measures assuming a constant mean deliver substantially higher persistence estimates for the NMS than for the euro area countries. Employing a time-varying mean leads to the reversal of this result and suggests similar or lower inflation persistence for the NMS compared to euro area countries. Structural measures show that backward-looking behavior may be a more important component in explaining inflation dynamics in the NMS than in the euro area countries.
    Keywords: Inflation persistence, new hybrid Phillips curve, new member states, timevarying mean.
    JEL: E31 C22 C11 C32
    Date: 2007–12
  14. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: In recent decades, the US wage structure has been transformed by a rising college premium, a narrowing gender gap, and increasing persistent and transitory residual wage dispersion. This paper explores the implications of these changes for cross-sectional inequality in hours worked, earnings and consumption, and for welfare. The framework for the analysis is an incomplete-markets overlapping-generations model in which individuals choose education and form households, and households choose consumption and intra-family time allocation. An explicit production technology underlies equilibrium prices for labor inputs differentiated by gender and education. The model is parameterized using micro data from the PSID, the CPS and the CEX. With the changing wage structure as the only primitive force, the model can account for the key trends in cross-sectional US data. We also assess the role played by education, labor supply, and saving in providing insurance against shocks, and in exploiting opportunities presented by changes in the relative prices of different types of labor.
    JEL: E21 I21 I31 J2 J31
    Date: 2008–06
  15. By: Juraj Antal; Frantisek Brazdik
    Abstract: In this paper, we investigate the effects of an anticipated future change in monetary policy regime in small open economies targeting either inflation or the exchange rate. The announcement of a future change in the monetary policy regime triggers an immediate change in the behavior of households and firms. As a result the economy starts to behave differently even though the current monetary policy rule remains the same for the whole period before the monetary policy regime change. Thus, the behavior of economic agents over the transitory period to the new monetary policy rule depends not only on the current monetary policy rule in this transitory period, but also on the anticipated future monetary policy regime. Given a common future monetary policy regime, the behavior of inflation and exchange rate targeting economies converges after the announcement.
    Keywords: Macroeconomics, new Keynesian DSGE models, small open economy,monetary policy rules, regime change.
    JEL: E17 E31 E52 E58 E61 F02 F41
    Date: 2007–12
  16. By: Jan Filacek
    Abstract: The ex post analysis of inflation target fulfilment plays an important role in an inflation targeting framework. The major benefits of ex post analysis are threefold. First, it might improve the forecast accuracy. Second, it helps central bank staff and board members to understand the capabilities and limitations of the forecasts used in their decision-making. Third, it enhances monetary policy transparency and credibility. The primary aim of this paper is to propose a methodological framework for inflation target fulfilment assessment based on partial simulations, as applied in the Czech National Bank. In order to demonstrate the applicability of this framework we analyse the performance of the Czech National Bank between 2002 and 2006. We show that a large part of the inflation target misses in this period can be assigned to bias in the variables describing external developments.
    Keywords: Central bank, inflation target, monetary policy performance.
    JEL: E47 E58
    Date: 2007–12
  17. By: Wolfgang Pollan (WIFO)
    Abstract: Since the 19960s, several countries have adopted incomes policies in various forms to control inflation that had been interpreted as the result of a distributional struggle between business and labour unions. Recent writings on the NAIRU, however, ignore past policy interventions in the wage and price setting system, in the formation and propagation of inflation expectations, in particular. Some of the problems inherent in such an approach are illustrated in this paper by applying the standard tools of NAIRU analysis to the Austrian economy, an economy that has been subject to a variety of policy measures.
    Keywords: NAIRU, incomes policies, expectations, Lucas critique
    Date: 2008–03–31
  18. By: Giovanni Caggiano (University of Padua); Efrem Castelnuovo (University of Padua)
    Abstract: This paper investigates inflation dynamics in a panel of 20 OECD economies using an approach based on the sample autocorrelation function (ACF). We find that inflation is characterized by long-lasting fluctuations, which are similar across countries and that eventually revert to a potentially time-varying mean. The cyclical and persistent behavior of inflation does not belong to the class of linear autoregressive processes but rather to a more general class of nonlinear and long memory models. Recent theoretical contributions on heterogeneity in price setting and aggregation offer a rationale to our results. Finally, we draw the monetary policy implications of our findings.
    Keywords: AutoCorrelation Function, long-memory, inflation persistence, inflation targeting, heavy tails.
    JEL: E52 E58 C22
    Date: 2008–05
  19. By: Deren Unalmis, Ibrahim Unalmis and Derya Filiz Unsal
    Abstract: Since the beginning of 2000s the world economy has witnessed a sub-stantial increase in oil prices, which is seen to be an important source of economic fluctuations, causing high inflation, unemployment and low or negative growth rates. Recent experience, however, has not validated this view. Despite rising oil prices, world output growth has been strong, and although inflation has recently been increasing, it is relatively much lower compared with the 1970s. This paper focuses on the causes of oil price increases and their macroeconomic effects. Different from most of the recent literature on the subject, which understands the price of oil to be an exogenous process, we model the price of oil endogenously within a dynamic stochastic general equilibrium (DSGE) framework. Specifically, using a new Keynesian small open economy model, we analyse the effects of an increase in the price of oil caused by an oil supply shock and an oil demand shock. Our results indicate that the effects of an oil demand shock and an oil supply shock on the small open economy are quite different. In addition, we investigate the sensitivity of the general equilibrium outcomes to the degrees of oil dependence and openness, as well as the strength of the response of monetary policy authority to the inflation. Finally, we evaluate the welfare implications of alternative monetary policy regimes.
    Keywords: Oil price, small open economy, demand and supply shocks
    JEL: C68 E12 F41 F42
    Date: 2008–05
  20. By: Ignacio Velez-Pareja
    Abstract: The Constant Growth Model attributed to Gordon (the Gordon Model) is one of the most known and popular models in Corporate Finance. In this work we show that even with adjustments in the calculation of the proper Weighted Average Cost of Capital, WACC, in order to grant that the model with zero real growth and inflation is inflation neutral it has some inconsistencies. We develop a formulation for Ke, the cost of levered equity that is consistent and is inflation neutral. We identify problems of consistency and non inflation neutrality when using the Weighted Average Cost of Capital, WACC.
    Date: 2008–06–04
  21. By: Fernando Alexandre (University of Minho); Pedro Bação (University of Coimbra); Vasco Gabriel (University of Surrey)
    Abstract: We analyse the e®ect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modelled 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 ¯nancial 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: 2008–06
  22. By: Juan Piñeiro Chousa,; Artur Tamazian,; Davit N. Melikyan,
    Abstract: In this paper we propose an empirical model that considers theoretical facts on the relationship between real exchange rates and the net exports of the economy to supplement the interaction of a number of financial and economic factors with the stock market. We discuss the impact of exchange rate fluctuations on market risk in terms of Value at Risk (VaR). Our empirical findings show that common currency introduction produced increments in VaR whereas European stock returns are more sensitive to changes in competitiveness regarding the EMU rather than national exports. Finally, we show that the synchronisation of variation in competitiveness through the introduction of a single currency has made these changes more decisive in explaining financial market fluctuations.
    Keywords: Euro, Competitiveness, Market Risk, Net Export, Value-at-Risk, Volatility
    JEL: F33 G24 G28 O24
    Date: 2008–02–01
  23. By: Chan, Tze-Haw; Chong, Lee Lee; Khong, Wye Leong Roy
    Abstract: Using monthly frequency data from 1981 to 2005, we test for the potential mean reversion of Japan-US real exchange rates using newly improved unit root tests allowing for endogenous (unknown) break(s) in the linear as well as non-linear manner. Both countries have contributed vital proportion in global trading on top of being the major trading partner to each other since 1960s. We identify structural breaks in 1985 and 1994 respectively via the Lumsdaine and Papell (1997)’s linear test, but the results were against the PPP hypothesis. The Saikkonen and LÄutkepohl, (2002)’s test, however, provides sufficient supports for non-linear adjustment of real exchange towards long run PPP. In addition, stronger evidence for PPP is found in the post-1994 period, in conjunction with the small persistence of real exchange deviations (half-life less than a year). Also, the exchange rate misalignment is less evident after the Plaza Accord 1985. In brief, our findings reveal that the Japanese authority has shown some form of PPP-oriented rule as a basis for their exchange rate policies, in the presence of structural break(s) and non-linearity.
    Keywords: Real Exchange Rates; Endogenous Breaks; Non-linearity; Half-life
    JEL: C52 C12 N15 F31
    Date: 2008–04–28
  24. By: Maurizio Mistri (University of Padua)
    Abstract: This paper builds on the case study of the birth and death of the fixed exchange rate system in Western Europe, prior to the launch of the Euro. The analysis of this case aims to highlight how "new" international economic institutions may suffer the processes of "preference reversals" and thereby implode. De facto, the paper focuses on the cognitive factors that are deemed to have played an important role in determining the originating decision-making processes in favour of a system of fixed exchange rates and, then, in determining the abandonment of that system. After briefly explaining events such as the "currency snake" and the "European Monetary System" (EMS), the paper highlights how processes of this nature are conditional on the extent of the limits of rationality of the decision-making agents, with the consequence of producing cognitive imbalances. These imbalances are determined by the "fuzziness" with which agents evaluate not only opposing objectives, in particular those of employment and the balance of payments, but especially objectives achievable in an intertemporal dimension (Walliser, 2008: ch. 4). In fact, we illustrate how the actual inflationary differentials between the countries concerned determine the imbalances in the balances of payments. We also highlight how the policies to bring inflation under control can determine changes in the electorate in the preferences defined in the area of economic policies. The collapse of the monetary snake and the European Monetary System is representative of such a change in preferences. The conceptual framework of analysis used is that of temporary equilibria.
    Date: 2008–05
  25. By: Alexandru Minea; Christophe Rault; Patrick Villieu
    Abstract: This paper proposes a theoretical growth model where seigniorage can be used to finance productive public spending, and show the existence of nonlinear effects between seigniorage and economic growth. Empirical evidence based on panel regression techniques provides some support for these nonlinear effects on a sample of OECD countries over the 1978-2005 period.
    Keywords: economic growth, nonlinear effects of monetary policy
    JEL: E52 E62 H54
    Date: 2008–02–01
  26. By: Heinz Handler (WIFO)
    Abstract: The current paper analyses the similarities between the Bretton Woods system (BWS) and the Eurozone and looks into the future of the world monetary system. The gold standard, the Keynes Plan and the White Plan are identified as the most important sources of ideas that formed the BWS. Although Keynes was not particularly successful in Bretton Woods, his plan played a decisive role later on in the critique of the BWS as well as in the design of the European Monetary System. Either system was based on the concept of fixed exchange rates which were seen as more apt for international economic relations than flexible rates. In the BWS, fixed rates were seen to be achieved by coordinating economic policies of member states and by sporadic realignments of exchange rates. In the Eurozone, only policy coordination is available to fulfil this function. The favourable experience made so far with the euro may be utilised for monetary integration in other parts of the world. The Eurozone is also considered good practice for any reform of the international monetary system. Given the diverging political and economic goals of the major currency blocks, it may be questioned, however, whether the success of the euro also furthers the idea of developing a single world currency.
    Keywords: Gold standard, Bretton Woods system, European monetary integration, future of the international monetary system, Europäisches Wärhungssystem
    Date: 2008–04–24
  27. By: Framroze Moller, Niels
    Abstract: Examples of simple economic theory models are analyzed as restrictions on the Cointegrated VAR (CVAR). This establishes a correspondence between basic economic concepts and the econometric concepts of the CVAR: The economic relations correspond to cointegrating vectors and exogeneity in the economic model implies the econometric concept of strong exogeneity for â. The economic equilibrium corresponds to the so-called long-run value (Johansen 2005), the comparative statics are captured by the long-run impact matrix, C; and the exogenous variables are the common trends. Also, the adjustment parameters of the CVAR are shown to be interpretable in terms of expectations formation, market clearing, nominal rigidities, etc. The general-partial equilibrium distinction is also discussed.
    Keywords: Cointegrated VAR, unit root approximation, economic theory models, expectations, general equilibrium, DSGE models
    JEL: C32
    Date: 2008
  28. By: Eswar S. Prasad; Raghuram Rajan
    Abstract: Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets. This suggests that the lack of domestic savings is not the primary constraint on growth in these economies, as implicitly assumed in the benchmark neoclassical framework. We explore emerging new theories on both the costs and benefits of capital account liberalization, and suggest how one might adopt a pragmatic approach to the process.
    JEL: F21 F31 F36 F43
    Date: 2008–06
  29. By: Inês Drumond (CEMPRE, Faculdade de Economia, Universidade do Porto)
    Abstract: In order to survey the mechanisms through which the introduction of Basel II bank capital requirements is likely to accentuate the procyclical tendencies of banking, this paper brings together the theoretical literature on the bank capital channel of propagation of exogenous shocks and the literature on the regulatory framework of capital requirements under the Basel Accords. We conclude that, although the theoretical models that revisit the bank capital channel under the new Accord generally support the Basel II procyclicality hypothesis, this issue is still subject to some debate. In particular, the magnitude of the procyclical effects under Basel II should essentially depend on (i) the composition of banks' asset portfolios, (ii) the approach adopted by banks to compute their minimum capital requirements, (iii) the nature of the rating system used by banks, (iv) the view adopted concerning how credit risk evolves through time, (v) the capital buffers over the regulatory minimum held by the banking institutions, (vi) the improvements in credit risk management, and (vii) the supervisor and market intervention under Basel II.
    Keywords: Bank Capital Channel, Basel Accords, Business Cycles, Procyclicality
    JEL: E44 G28
    Date: 2008–06
  30. By: Irene Andreou; Gilles Dufrenot; Alain Sand-Zantman; Aleksandra Zdzienicka-Durand
    Abstract: We propose a measure of the probability of crises associated with an aggregate indicator, where the percentage of false alarms and the proportion of missed signals can be combined to give an appreciation of the vulnerability of an economy. In this perspective, the important issue is not only to determine whether a system produces true predictions of a crisis, but also whether there are forewarning signs of a forthcoming crisis prior to its actual occurrence. To this end, we adopt the approach initiated by Kaminsky, Lizondo and Reinhart (1998), analyzing each indicator and calculating each threshold separately. We depart from this approach in that each country is also analyzed separately, permitting the creation of a more “custom-made” early warning system for each one.
    Keywords: Currency Crisis, Early Warning System, Composite Indicator, Eastern Europe.
    JEL: F31 F47
    Date: 2007–05–01
  31. By: Alexandru Minea; Christophe Rault
    Abstract: The presence of a Currency Board (CB) monetary system in Bulgaria is a key factor in assessing monetary policy transmission, since a CB implies no monetary autonomy. Using the SVAR technique according to the statistical properties of macroeconomic time series, we propose evidence sustaining the endogeneity of main Bulgarian monetary aggregates to shocks on the ECB interest rate. These results shed a new perspective over CB functioning.
    Keywords: Currency Board, monetary policy, SVAR, Bulgaria.
    JEL: E42 E52
    Date: 2008–01–01
  32. By: Oxana Babetskaia-Kukharchuk
    Abstract: This paper aims at estimating the exchange rate pass-through (ERPT) for the Czech Republic. The existing empirical literature does not come to a consensus about the degree of pass-through to Czech inflation. Since there is no unique approach regarding how to measure ERPT, we use various specifications found in the pass-through literature for the Czech Republic. In addition, we estimate the pass-through along the distribution chain in the spirit of McCarthy (2007). We try to explore the properties of exchange rate shock transmission into Czech consumer prices by comparing impulse responses among 11 specifications estimated on data transformed in monthly differences and in annual rates. Equilibrium pass-through is estimated with the help of the VEC model. In addition, we try to account for possible variation in time. The simplest approach is a re-estimation of VAR models on two sub-periods. Our second strategy is the estimation of the error correction equation with the Kalman filter. Finally, we explore how the pass-through differs between tradable (3 sub-groups) and non-tradable goods. We find that the speed of exchange rate shock transmission to all prices is quite high. However, in absolute terms, ERPT does not exceed 25 – 30%.
    Keywords: Exchange rate pass-through, inflation, Kalman filter, VAR, VECM.
    JEL: E31 E52 E58 F31
    Date: 2007–12
  33. By: Robert J. Sonora (Department of Economics, School of Business Administration, Fort Lewis College); Josip Tica (Faculty of Economics and Business, University of Zagreb)
    Abstract: In this paper we investigate purchasing power parity in the CEE and post-War former-Yugoslav states during EU integration process 1994-2006. This work stems from longer term tests of real exchange rate convergence in the former Yugoslavia. This period is of interest on two fronts: First, it investigates real exchange dynamics in the aftermath of war financed in part through seignorage; and second, we investigate the level of economic integration with the European Union following the break up of the former Yugoslavia. Given the short run nature of the available data we use panel unit root tests with and without structural breaks. Preliminary results suggest that real exchange rates between the former Yugoslav states and Germany are stationary when breaks are accounted for. Given the size of nominal shocks in the region, particularly in the early 1990s, preliminary results indicate that convergence to the long run equilibrium is relatively quick.
    Keywords: purchasing power parity, Economic Integration, panel unit root tests
    JEL: E31 F22
    Date: 2008–06–05
  34. By: Chit, Myint Moe; Rizov, Marian; Willenbockel, Dirk
    Abstract: This paper examines the impact of bilateral real exchange rate volatility on real exports of five emerging East Asian countries among themselves as well as to thirteen industrialised countries. We explicitly recognize the specificity of the exports between the emerging East Asian and industrialised countries and employ a generalized gravity model that combines a traditional long-run export demand model with gravity type variables. In the empirical analysis we use a panel comprising 25 years of quarterly data and perform unit-root and cointegration tests to verify the long-run relationship among the regression variables. The results provide strong evidence that exchange rate volatility has a negative impact on the exports of emerging East Asian countries. These results are robust across different estimation techniques and do not depend on the variable chosen to proxy exchange rate uncertainty.
    Keywords: Trade; uncertainty; exchange rate fluctuations; East Asia;
    JEL: O53 O24 F14 F31
    Date: 2008–03

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