|
on Central Banking |
| By: | Faraglia, Elisa; Marcet, Albert; Scott, Andrew |
| Abstract: | A growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market approach to debt management is valid even when the government only issues non-contingent bonds. A number of authors conclude from this approach that governments should issue long term debt and invest in short term assets. We argue that the conclusions of this approach are too fragile to serve as a basis for policy recommendations. This is because bonds at different maturities have highly correlated returns, causing the determination of the optimal portfolio to be ill-conditioned. To make this point concrete we examine the implications of this approach to debt management in various models, both analytically and using numerical methods calibrated to the US economy. We find the complete market approach recommends asset positions which are huge multiples of GDP. Introducing persistent shocks or capital accumulation only worsens this problem. Increasing the volatility of interest rates through habits partly reduces the size of these positions but at the cost of introducing extreme volatility in asset holdings. Across these simulations we find no presumption that governments should issue long term debt - policy recommendations can be easily reversed through small perturbations in the specification of shocks or small variations in the maturity of bonds issued. We further extend the literature by removing the assumption that governments every period costlessly repurchase all outstanding debt. This exacerbates the size of the required positions, worsens their volatility and in some cases produces instability in debt holdings. We conclude that it is very difficult to insulate fiscal policy from shocks by using the complete markets approach to debt management. Given the limited variability of the yield curve using maturities is a poor way to substitute for state contingent debt. The result is the positions recommended by this approach conflict with a number of features that we believe are important in making bond markets incomplete e.g allowing for transaction costs, liquidity effects, etc..Until these features are all fully incorporated we remain in search of a theory of debt management capable of providing robust policy insights. |
| Keywords: | Complete Markets; Debt Management; Government Debt; Maturity Structure; Yield Curve |
| JEL: | E43 E62 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6859&r=cba |
| By: | Ruediger Bachmann (Yale University); Ricardo J. Caballero (MIT); Eduardo Engel (Cowles Foundation, Yale University) |
| Abstract: | The sensitivity of U.S. aggregate investment to shocks is procyclical: the initial response increases by approximately 50% from the trough to the peak of the business cycle. This feature of the data follows naturally froma DSGE model with lumpy microeconomic capital adjustment. Beyond explaining this specific time variation, our model and evidence provide a counterexample to the claim that microeconomic investment lumpiness is inconsequential for macroeconomic analysis. |
| Keywords: | Ss model, RBC model, Time-varying impulse response function, History dependence, Conditional heteroscedasticity, Aggregate shocks, Sectoral shocks, Idiosyncratic shocks, Adjustment costs |
| JEL: | E10 E22 E30 E32 E62 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1566-r&r=cba |
| By: | Stefan Niemann; Paul Pichler; Gerhard Sorger |
| Abstract: | This paper studies optimal fiscal and monetary policy in a stochastic economy with imperfectly competitive product markets and a discretionary government. We find that, in the flexible price economy, optimal time-consistent policy implements the Friedman rule independently of the degree of imperfect competition. This result is in contrast to the Ramsey literature, where the Friedman rule emerges as the optimal policy only if markets are perfectly competitive. Second, once nominal rigidities are introduced, the Friedman rule ceases to be optimal, inflation rates are low and stable, and tax rates are relatively volatile. Finally, optimal time-consistent policy under sticky prices does not generate the near-random walk behavior of taxes and real debt that can be observed under optimal policy in the Ramsey problem. A common reason for these results is that the discretionary government, in an effort to asymptotically eliminate its time-consistency problem, accumulates a large net asset position such that it can finance its expenditures via the associated interest earnings. |
| Date: | 2008–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:654&r=cba |
| By: | Berriel, Tiago; Sinigaglia, Daniel |
| Abstract: | This is the complete technical appendix to "Optimal Fiscal and Monetary Policy under Sectorial Heterogeneity". |
| JEL: | E62 E52 |
| Date: | 2008–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9081&r=cba |
| By: | James Murray (Indiana University Bloomington) |
| Abstract: | This paper examines how the estimation results for a standard New Keynesian model with constant gain least squares learning is sensitive to the stance taken on agents beliefs at the beginning of the sample. The New Keynesian model is estimated under rational expectations and under learning with three different frameworks for how expectations are set at the beginning of the sample. The results show that initial beliefs can have an impact on the predictions of an estimated model; in fact previous literature has exposed this sensitivity to explain the changing volatilities of output and inflation in the post-war United States. The results indicate statistical evidence for adaptive learning, however the rational expectations framework performs at least as well as the learning frameworks, if not better, in in-sample and out-of-sample forecast error criteria. Moreover, learning is not found to better explain time varying macroeconomic volatility any better than rational expectations. Finally, impulse response functions from the estimated models show that the dynamics following a structural shock can depend crucially on how expectations are initialized and what information agents are assumed to have. |
| Keywords: | Learning, expectations, New Keynesian model, maximum likelihood |
| JEL: | C13 E31 E50 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2008-017&r=cba |
| By: | Christopher W. Crowe; Ellen E. Meade |
| Abstract: | This paper examines the current level of central bank independence (CBI) and transparency in a broad sample of countries using newly constructed measures, and looks at the evolution in both measures from an earlier time period. Increases in CBI have tended to occur in more democratic countries and in countries with high levels of past inflation. More independent central banks in turn tend to be more transparent, while transparency is also positively correlated with measures of national institutional quality. Exploiting the time dimension of our data to eliminate country fixed effects and using instrumental variable estimation to overcome endogeneity concerns, we present evidence that greater CBI is associated with lower inflation. We also find that enhanced transparency practices are associated with the private sector making greater use of information provided by the central bank. |
| Date: | 2008–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/119&r=cba |
| By: | Daron Acemoglu; Michael Golosov; Aleh Tsyvinski |
| Date: | 2008–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002192&r=cba |
| By: | Queijo von Heideken, Virginia (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | This paper aims to evaluate if frictions in credit markets are important for business cycles in the U.S. and the Euro area. For this purpose, I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) by adding frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When I estimate the model with Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favors the model with financial frictions both in the U.S. and the Euro area. Moreover, consistent with common perceptions, financial frictions are larger in the Euro area. |
| Keywords: | Financial frictions; DSGE models; Bayesian estimation |
| JEL: | C11 C15 E32 E40 E50 G10 |
| Date: | 2008–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0223&r=cba |
| By: | Karim Barhoumi; Szilard Benk; Riccardo Cristadoro; Ard Den Reijer; Audrone Jakaitiene; Piotr Jelonek; António Rua; Gerhard Rünstler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Karsten Ruth; Christophe Van Nieuwenhuyze |
| Abstract: | This paper evaluates different models for the short-term forecasting of real GDP growth in ten selected European countries and the euro area as a whole. Purely quarterly models are compared with models designed to exploit early releases of monthly indicators for the nowcast and forecast of quarterly GDP growth. Amongst the latter, we consider small bridge equations and forecast equations in which the bridging between monthly and quarterly data is achieved through a regression on factors extracted from large monthly datasets. The forecasting exercise is performed in a simulated real-time context, which takes account of publication lags in the individual series. In general, we find that models that exploit monthly information outperform models that use purely quarterly data and, amongst the former, factor models perform best. JEL Classification: E37, C53. |
| Keywords: | Bridge models, Dynamic factor models, real-time data flow. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080084&r=cba |
| By: | Eza Al-Zein |
| Abstract: | The paper looks at the relationship between reserve requirements and the choice of the maturity structure of external debt in a general equilibrium setup, by incorporating the role of international lenders. A date- and maturity-specific reserve requirement is a fraction of the debt to be deposited in a non-interest bearing account at the central bank. At maturity, the central bank returns the reserves. There exist some specific combinations of date- and maturity-specific reserve requirements that reduce the vulnerability to bank runs. In such setup, lenders may still want to provide new short-term lending to the bank after a bank run. |
| Keywords: | Working Paper , Reserve requirements , External debt , Bank regulations , Financial crisis , Loans , Central banks , |
| Date: | 2008–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/108&r=cba |
| By: | Richard C. Barnett; Joydeep Bhattacharya; Helle Bunzel (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | In an overlapping generations model, momentary equilibria are defined as points that lie on the intergenerational offer curve, i.e., they satisfy agents’ optimality conditions and market clearing at any date. However, some dynamic sequences commencing from such points may not be considered valid equilibria because they asymptotically violate some economic restriction of the model. The literature has always ruled out such paths. This paper studies a pure-exchange monetary overlapping generations economy in which real balances cycle forever between momentary equilibrium points. The novelty is to show that segments of the offer curve that have been previously ignored, can in fact be used to produce asymptotically valid cyclical paths. Indeed, a cycle can bestow dynamic validity on momentary equilibrium points that had erstwhile been classified as dynamically invalid. |
| Keywords: | overlapping generations models, monetary equilibria, cycles, minimum consumption requirements |
| JEL: | E31 E42 E63 |
| Date: | 2007–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2007-12&r=cba |
| By: | Eichengreen, Barry |
| Abstract: | Alexander Swoboda is one of the originators of the bipolar view that capital mobility creates pressure for countries to abandon intermediate exchange rate arrangements in favor of greater flexibility and harder pegs. This paper takes another look at the evidence for this hypothesis using two popular de facto classifications of exchange rate regimes. That evidence supports the bipolar view for the advanced countries, the sample for which it was originally developed, but not obviously for emerging markets and other developing countries. One interpretation of the contrast is that there is a tendency to move away from intermediate regimes in the course of economic and financial development, implying that emerging markets and other developing countries will eventually abandon intermediate regimes as well. Another interpretation is that the advanced countries have been faster to abandon soft pegs because they have been faster to develop attractive alternatives, notably Europe’s monetary union. In this view, other countries are unlikely to abandon soft pegs because of the absence of the distinctive political conditions that have made the European alternative feasible. A final interpretation is that the advanced countries have been able to abandon soft peg because of their success in substituting inflation targeting for exchange rate targeting as the anchor for monetary policy. The paper presents some evidence for this view, which suggests the feasibility of further movement by emerging markets and developing countries in the direct of greater exchange rate flexibility. |
| Keywords: | exchange rate regimes; exchange rates |
| JEL: | F30 F31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6868&r=cba |
| By: | Harris, Mark; Spencer, Christopher |
| Abstract: | We examine the dissent voting record of the Bank of England Monetary Policy Committee (MPC) in its first decade. Probit estimates indicate the impact of career experience on dissent voting is negligible, whereas the impact of forecast inflation is pronounced. In addition to finding a role for dynamics, we also find a role for unobserved heterogeneity in the form of member-specific fixed-effects, suggesting previous literature characterizing voting behavior as largely determined by whether members are appointed from within or outside the ranks of Bank of England staff (internal and external members respectively) is overly simplistic. |
| Keywords: | Bank of England; Monetary Policy Committee; career background effects; dissent voting; unobserved heterogeneity |
| JEL: | D7 E5 C35 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9100&r=cba |
| By: | Jaromír Beneš; Andrew Binning; Kirdan Lees (Reserve Bank of New Zealand) |
| Abstract: | Central bank policymakers often cast judgement about macroeconomic forecasts in reduced form terms, basing this on off-model information that is not easily mapped to a structural DSGE framework. We show how to compute forecasts conditioned on policymaker judgement that are the most likely conditional forecasts from the perspective of the DSGE model, thereby maximising the influence of the model structure on the forecasts. We suggest using a simple implausibility index to track the magnitude and type of policymaker judgement. This is based on the structural shocks required to return policymaker judgement. We show how to use the methods for practical use in the policy environment and also apply the techniques to condition DSGE model forecasts on: (i) the long history of published forecasts from the Reserve Bank of New Zealand; (ii) constant interest rate forecasts; and (iii) inflation forecasts from a Bayesian VAR currently used in the policy environment at the Reserve Bank of New Zealand. |
| Keywords: | DSGE models; monetary policy; conditional forecasts |
| JEL: | C51 C53 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2008/10&r=cba |
| By: | Adamcik, Santiago |
| Abstract: | This paper discusses that many of the exaggerated claims that globalization has been an important element in the reduction of the inflation in the recent years do not come true. The globalization has, however, the potential to contribute to the stabilization of economies and this has been crucial element in promoting the growth of economies. The paper, therefore, analyzes four issues on the impact of the globalization upon the mechanisms of monetary transmission and arrives at the following findings. ( 1 ) The globalization did not reduce the sensibility of inflation to the domestic production gaps and in consequence to the effectiveness of the monetary policy,. ( 2 ) The gaps in the product of external economies do not play a more important role than in other times,.( 3 ) The domestic monetary policy maintains still the control on the domestic interest rates and that way pursuing the stabilization of inflation and the product,.( 4 ) The globalization affects, by means of different forms, the mechanisms of monetary transmission |
| Keywords: | Globalizacion; Inflacion; Politica Monetaria |
| JEL: | E58 E31 E42 G15 E44 |
| Date: | 2008–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9227&r=cba |
| By: | Riccardo Cristadoro (Bank of Italy, Economic Outlook and Monetary Policy Research Department); Andrea Gerali (Bank of Italy, Economic Outlook and Monetary Policy Research Department); Stefano Neri (Bank of Italy, Economic Outlook and Monetary Policy Research Department); Massimiliano Pisani (Bank of Italy, Economic Outlook and Monetary Policy Research Department) |
| Abstract: | A two-country model that incorporates many features proposed in the New Open Economy Macroeconomics literature is developed in order to replicate the volatility of the real exchange rate and its disconnect with macroeconomic variables. The model is estimated using data for the euro area and the U.S. and Bayesian methods. The analysis delivers the following results: (a) international price discrimination, home bias and shocks to the uncovered interest rate parity (UIRP) condition are key features to replicate the variance of the real exchange rate; (b) home bias, shocks to the UIRP condition and to production technologies help replicating the disconnect;(c) distribution services intensive in local nontradeables are an important source of international price discrimination. |
| Keywords: | International business cycle, Exchange rate volatility, Exchange rate pass-through, International transmission. |
| JEL: | F32 F33 F41 C11 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_660_08&r=cba |
| By: | Joaquin Novella Izquierdo; Joan Ripoll i Alcon (Universitat de Barcelona) |
| Abstract: | This paper presents an eclectic model that systematizes the dynamics of self-fulfilling crises, using the main aspects of the three typologies of third generation models, to describe the stylized facts that hasten the withdrawal of a pegged exchange rate system. The most striking contributions are the implications for economic policy as well the vanishing role of exchange rate as an instrument of macroeconomic adjustment, when balance-sheet effects are a real possibility. |
| Keywords: | speculative attack, financial liberalization, financial panic, financial and exchange rate crisis |
| JEL: | F41 F43 E44 F31 F32 F34 F36 E52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2008196&r=cba |
| By: | Reginaldo P. Nogueira Junior; Miguel Leon-Ledesma |
| Abstract: | This paper investigates the empirical evidence on exchange rate pass through (ERPT) into CPI inflation for a set of emerging and developed countries. We argue that, theoretically, ERPT may be nonlinear in contrast to standard linear estimates in the literature. We use smooth transition models to investigate several possible sources of these nonlinearities. The results suggest that, although the sources of nonlinearities vary considerably across countries, they appear to be important. We find that for four countries ERPT responds nonlinearly to inflation and for three of them it responds nonlinearly to the output gap. We also find an asymmetric response of ERPT with respect to the magnitude of exchange rate changes for only two out of six countries. Finally, for some emerging markets, ERPT seems to be affected nonlinearly by measures of macroeconomic instability. |
| Keywords: | Exchange rate pass-through; smooth transition regression models |
| JEL: | E31 E52 F41 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:0801&r=cba |
| By: | Ludger Linnemann (University of Bonn); Andreas Schabert (University of Dortmund) |
| Abstract: | We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government spending to private consumption than the reference policy; ii) is procyclical under technology shocks and countercyclical under demand shocks (while the public spending ratio to private consumption is always countercyclical); iii) stabilizes employment, in some cases even at the cost of higher consumption volatility; iv) is qualitatively unaltered in a sticky price version with jointly optimal monetary and fiscal policy. |
| Keywords: | Optimal fiscal policy; government spending; labor market frictions; unemployment; stabilization policy |
| JEL: | E62 E32 |
| Date: | 2008–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080024&r=cba |
| By: | Fernando M. Gonçalves |
| Abstract: | Official accumulation of foreign reserves may be perceived as interventions to influence the exchange rate, undermining the credibility of floating exchange rates and inflation targets. This paper develops a theoretical framework to study the interaction between reserve accumulation and monetary policy. The model uncovers a trade-off between the speed of reserve accumulation and anti-inflationary credibility. Under reasonable assumptions, delegation of intervention and monetary policy decisions to separate government agencies allows faster reserve accumulation, while centralization of these decisions results in a more stable economy. The analysis underscores the importance of rather overlooked institutional features of policymaking in open economies. |
| Date: | 2008–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/96&r=cba |
| By: | Eichengreen, Barry; Flandreau, Marc |
| Abstract: | We present new evidence on the currency composition of foreign exchange reserves in the 1920s and 1930s. Contrary to the presumption that the pound sterling continued to dominate the U.S. dollar in central bank reserves until after World War II, we show that the dollar first overtook sterling in the mid-1920s. This suggests that the network effects thought to lend inertia to international currency status and to create incumbency advantages for the dominant international currency do not apply in the reserve currency domain. Our new evidence is similarly incompatible with the notion that there is only room in the market for one dominant reserve currency at a point in time. Our findings have important implications for our understanding of interwar monetary history but also for the prospects of the dollar and the euro as reserve currencies. |
| Keywords: | international currency; international reserves; reserve currency |
| JEL: | F31 F33 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6869&r=cba |
| By: | Katsuyuki Shibayama |
| Abstract: | This article studies inventories and monetary policy by estimating VAR models. The complex roots detected in our estimation generate cycles of around 55 to 70 months, which are quite close to actual business cycle lengths. This implies that production and inventories follow damped oscillations (stable sine curves), implying that a boom is the seed of the following recession, and vice versa. Interestingly, the peaks and troughs of policy interest rate precedes those of production in the U.S. (i.e., forward-looking monetary policy), but not in Japan. The central banks in both countries react sharply to demand shocks, but not to supply shocks, because booms after positive demand shocks last longer as .rms replenish reduced inventories, while booms after positive supply shocks are short-lived as the initial accumulation of inventories suppresses production in subsequent periods. |
| Keywords: | inventories; inventory cycle; business cycle; monetary policy; damped oscillations; phase shift; spectrum |
| JEL: | E32 E58 C32 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:0806&r=cba |
| By: | Mariano Kulish (Reserve Bank of Australia); Daniel Rees (Reserve Bank of Australia) |
| Abstract: | Long-term nominal interest rates in a number of inflation-targeting small open economies have tended to be highly correlated with those of the United States. This observation has recently lent support to the view that the long end of the yield curve is determined abroad. We set up and estimate a micro-founded two-block small open economy model to study the co-movement of long-term nominal interest rates of different currencies. The expectations hypothesis together with uncovered interest rate parity, which both hold in our model, can account for much of the co-movement of interest rates observed in the data. |
| Keywords: | term structure of interest rates; yield curve; small open economy; DSGE model; transmission mechanism |
| JEL: | E43 E52 E58 F41 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2008-03&r=cba |
| By: | Cars Hommes (University of Amsterdam); Florian Wagener (University of Amsterdam) |
| Abstract: | Traditional finance is built on the rationality paradigm. This chapter discusses simple models from an alternative approach in which financial markets are viewed as complex evolutionary systems. Agents are boundedly rational and base their investment decisions upon market forecasting heuristics. Prices and beliefs about future prices co-evolve over time with mutual feedback. Strategy choice is driven by evolutionary selection, so that agents tend to adopt strategies that were successful in the past. Calibration of "simple complexity models" with heterogeneous expectations to real financial market data and laboratory experiments with human subjects are also discussed. |
| Keywords: | Asset pricing; heterogeneous beliefs; empirical validation; forecasting experiments |
| JEL: | C13 C91 C92 D84 G12 |
| Date: | 2008–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080054&r=cba |
| By: | John Geanakoplos |
| Date: | 2008–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002225&r=cba |
| By: | K. Vela Velupillai |
| Abstract: | Frank Ramsey's classic framing of the dynamics of optimal savings, [51] as one to be solved as a problem in the calculus of variations and Ragnar Frisch's imaginative invoking of a felicitous Wicksellian metaphor to provide the impulse-propagation dichotomy, in a stochastic dynamic framework, for the tackling the problem of business cycles [17], have come to be considered the twin fountainheads of the mathematization of macroeconomics in its dynamic modes - at least in one dominant tradition. The intertemporal optimization framework of a rational agent, viewed as a signal processor, facing the impulses that are propagated through the mechanisms of a real economy, provide the underpinnings of the stochastic dynamic general equilibrium (SDGE) model that has become the benchmark and frontier of current macroeconomics. In this paper, on the 80th anniversary of Ramsey's classic and the 75th anniversary of Frisch's Cassel Festschrift contribution, an attempt is made to characterize the mathematization of macroeconomics in terms of the frontier dominance of recursive methods. There are, of course, other - probably more enlightened - ways to tell this fascinating story. However, although my preferred method would have been to tell it as an evolutionary development, since I am not sure that where we are represents progress, from where we were, say 60 years ago, I have chosen refuge in some Whig fantasies. |
| Keywords: | Macrodynamics, Mathematical Economics, Dynamic Economics, Computational Economics. |
| JEL: | B16 B22 B23 C60 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0807&r=cba |
| By: | Hommes, C.H. (Universiteit van Amsterdam); Wagener, F.O.O. (Universiteit van Amsterdam) |
| Abstract: | Traditional finance is built on the rationality paradigm. This chapter discusses simple models from an alternative approach in which financial markets are viewed as complex evolutionary systems. Agents are boundedly rational and base their investment decisions upon market forecasting heuristics. Prices and beliefs about future prices co-evolve over time with mutual feedback. Strategy choice is driven by evolutionary selection, so that agents tend to adopt strategies that were successful in the past. Calibration of "simple complexity models" with heterogeneous expectations to real financial market data and laboratory experiments with human subjects are also discussed. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ams:ndfwpp:08-05&r=cba |
| By: | Barnett, William A.; Jones, Barry E.; Nesmith, Travis D. |
| Abstract: | W. A. Barnett originated the Divisia monetary aggregates, using Diewert's results on superlative index numbers and Barnett's derivation of the user cost of monetary asset services. The resulting Divisia index can be interpreted as a first moment aggregating over growth rates with expenditure shares serving as probabilities. But Theil showed that there are analogous higher order Divisia moments providing distributional information. In this paper we use the Divisia second moments to investigate distributional information in the monetary aggregate growth rates and to measure aggregation error in the Divisia first moments. |
| Keywords: | Divisia monetary aggregates; Divisia second moments; monetary aggregation; monetary policy; distribution effects |
| JEL: | E51 E52 E01 E4 G0 E41 C1 |
| Date: | 2008–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9111&r=cba |
| By: | Brigitte Unger; Joras Ferweda |
| Abstract: | Since ten years, and more so, since September 11, 2001, international organizations such as the IMF, OECD and EU try to combat harmful tax competition, money laundering and terrorist financing. Blacklisting, the naming and shaming of uncooperative countries, was one of the strategies used from the very beginning of this new policy area. An analysis of the black listed countries over time shows, that the black lists got shorter and shorter over time. In 2006, Myanmar was the only country listed for money laundering, until it was finally also removed from the list. The paper wants to explore a) the reasons for removing large countries and especially EU countries from the list b) the wanted and unwanted effects blacklisting had for the named and shamed countries and discusses c) whether this necessarily means the end of blacklisting. We want to show d) a new way of greylisting which might be more compatible with the international diplomatic requirements. We developed a new indicator for rating countries with regard to cooperative behavior for tackling money laundering, which might also allow for benchmarking, a concept probably more accepted within the EU than blacklisting. |
| Keywords: | Money Laundering, Tax Havens, Blacklisting, Naming and Shaming |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0812&r=cba |
| By: | Sabine Herrmann (Deutsche Bundesbank, Wilhelmp-Epstein-Strasse 14, 60431 Frankfurt am Main.); Adalbert Winkler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Global financial integration has been associated with divergent patterns of real convergence and the current account in emerging markets. While countries in emerging Asia have been running sizeable current account surpluses, countries in emerging Europe have been facing large current account deficits. In this paper we test for the relevance of financial market characteristics in explaining this divergence in the catching-up process in Europe and Asia. We assume that the two regions constitute distinct convergence clubs, with the euro area and the United States respectively at their core. In line with the theoretical literature, we find that better developed and more integrated financial markets increase emerging markets’ ability to borrow abroad. Moreover, the degree of financial integration within the convergence clubs – as opposed to the state of financial integration in the global economy – and the extent of reserve accumulation are significant factors in explaining the divergent patterns of real convergence and the current account in the regions under review. JEL Classification: F15, F21, O16, O52, O53. |
| Keywords: | Real convergence, economic integration, saving and investment, current account developments, financial markets, emerging market economies. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080088&r=cba |
| By: | Hayakawa, Kazunobu; Kimura, Fukunari |
| Abstract: | This paper is an empirical investigation of the relationship between exchange rate volatility and international trade, focusing on East Asia. It finds that intra-East Asian trade is discouraged by exchange rate volatility more seriously than trade in other regions because intermediate goods trade in production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of trade. In addition, this negative effect of volatility is mainly induced by the unanticipated volatility and has an even greater impact than that of tariffs. |
| Keywords: | Exchange rate volatility, Trade, East Asia, International trade, Foreign exchange |
| JEL: | F10 F31 N75 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper156&r=cba |
| By: | Cordeiro, Jose Luis |
| Abstract: | This paper analyzes some recent theoretical and practical evidence in terms of economic results of different exchange rate systems. It begins with a historical review and a summary of fixed versus flexible exchange rate systems. Then it compares the experiences of recent currency unions, mostly unilateral, and their relative economic performance during the past currency crises in Latin America, East Asia and Eastern Europe. A set of issues is discussed in order to weigh the overall costs and benefits for several economies. These issues include exchange rates, GDP performance, inflation rates and foreign reserves. The case of Argentina is also considered separately, comparing mostly seigniorage costs and interest-rate savings. The benefits and costs of the producers (central banks/governments) and the consumers (citizens) of money are discussed separately. Free banking is also considered in a fast-changing world where there will probably be fewer but better currencies. Not just the euro is a reality now, but maybe the "amero" and the "worldo" or the "mondo" very soon. |
| Keywords: | Exchange rates, Monetary policy, Monetary union, Dollarization, Euroization, Developing countries, Foreign exchange, Finance, International finance, Money |
| JEL: | E42 E52 F02 F30 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper154&r=cba |
| By: | Masahiko Shibamoto (Research Institute for Economics & Business Administration, Kobe University); Ryuzo Miyao (Research Institute for Economics & Business Administration, Kobe University) |
| Abstract: | Since the beginning of the 1990s, Japanese inflation has been relatively stable with slight declines, while output has remained volatile with a prolonged stagnation. This paper attempts to explore possible explanations for these macroeconomic facts based on the aggregate demand and supply framework. Specifically, applying a vector autoregressive framework that allows for correlations between structural disturbances, it examines two broad questions in a unified way: (i) whether the slope of the short-run aggregate supply curve became significantly flattened and/or (ii) whether structural demand and supply shocks are more strongly positive correlated. Our results suggest that positive correlation between structural demand and supply shocks has become stronger since the 1990s, while there is less evidence that the short-run aggregate supply curve has been flattened. We argue that shifts in aggregate demand and supply curves in the same direction lead to larger, permanent effects on output and to limited effects on prices in Japan. |
| Keywords: | Japanese business cycle fluctuations, aggregate demand and supply model, correlation between demand and supply shocks |
| JEL: | C32 E3 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:219&r=cba |
| By: | Mardi Dungey; Adrian Pagan |
| Abstract: | Dungey and Pagan (2000) present an SVAR model of the Australian economy which models macro-economic outcomes as transitory deviations from a deterministic trend. In this paper we extend that model in two directions. Firstly, we relate it to an emerging literature on DSGE modelling of small open economies. Secondly, we allow for both transitory and permanent components in the series and show how this modification has an impact upon the design of macroeconomic models. |
| Date: | 2008–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2008-1&r=cba |
| By: | Céline Rochon; Geneviève Verdier; Leslie Lipschitz |
| Abstract: | We present a stylized real model of the Chinese economy with the objective of explaining two features: (1) domestic production is highly competitive in the sense that an accumulation of capital that raises the marginal product of labor elicits increases in employment and output rather than only in wages; and (2) even though the domestic saving rate is high, foreign direct investment is also substantial. We explain these features in terms of a conventional neoclassical growth model-with no monetary or nominal exchange rate policy-by including two aspects of the economy explicitly in the model: (1) low production wages are sustained by a large reserve army of rural labor which drives internal migration, and (2) domestic capital is distinct from importable capital and complementary with it in production. The results suggest that underlying real phenomena are important in explaining recent history; while nominal renmimbi appreciation may dampen price and wage increases, it would probably not change the real factors that have sustained rapid growth. |
| Keywords: | Working Paper , China, People's Republic of , Economic growth , Competition , Foreign investment , Investment , Savings , Labor supply , Wages , Prices , Exchange rates , |
| Date: | 2008–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/99&r=cba |
| By: | Césaire Meh; Yaz Terajima |
| Abstract: | There is currently a policy debate on potential refinements to monetary policy regimes in countries with low and stable inflation such as the U.S. and Canada. For example, in Canada, a systematic review of the current inflation targeting framework is underway. An issue that has generally received relatively less attention in this debate is the redistributional effects of inflation. This omission is likely to be important since the welfare costs of inflation depend not only on aggregate effects but also on redistributional consequences. The goal of this paper is to contribute to this policy debate by assessing the redistributional effects of inflation in Canada that arise through the revaluation of nominal assets and liabilities.We find that the redistributional effects of inflation are sizeable even for low and moderate inflation episodes. The main winners are young middle-class households with substantial amounts of mortgage debt. Besides young households, inflation also represents a windfall gain for the government because of its long-term debt. Old households, rich households, and the middle-aged middle-class lose from inflation, largely due to their sizeable holdings of bonds and non-indexed defined benefit pension assets. |
| Keywords: | Monetary policy framework; Sectoral balance sheet; Inflation: costs and benefits; Inflation targets; Inflation and prices |
| JEL: | D31 D58 E31 E50 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-19&r=cba |
| By: | Carlos Eduardo Schönerward da Silva; Matias Vernengo |
| Abstract: | This paper argues that the pass-through in Brazil has fallen compared with estimates in other studies on earlier time periods, and remains low. Whereas pass-through effects where high and close to 1 in the high-inflation period, they seem to have fallen to around 0.2 after the Real Plan stabilization, a number that is similar to the Import Substitution Industrialization (ISI) period of the 1950s and 1960s. Conventional results suggests that low and stable inflation environments lead to low levels of exchange rate pass-through and thus contribute to weakening the ‘fear of floating’ phenomenon experienced by some developing countries. In spite of lower pass-through effects the Brazilian Central Bank has maintained high interest rates in order to control the exchange rate. This paper suggests that ‘fear of inflation’ provides justification for the central bank’s persistent ‘fear of floating.’ |
| Keywords: | Pass-Through, Inflation, Brazil |
| JEL: | E58 F41 O54 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2008_11&r=cba |
| By: | Alfredo Baldini; Marcos Poplawski Ribeiro |
| Abstract: | The paper presents a model of fiscal dominance with borrowing constraints, and provides evidence for a large number of sub-Saharan African countries on the relative importance of fiscal and monetary determinants of inflation. Based on the dynamic response of inflation to different shocks, including nominal public debt, results show that a number of SSA countries were characterized throughout the period 1980-2005 either by chronic fiscally dominant regimes, with weak or no response of primary surpluses to public debt; or by a consistent adoption of a monetary dominant regime. However, a number of countries were also characterized by lack of a clear monetary and fiscal policy regime. The study also finds that changes in nominal public debt affect price variability via aggregate demand effects, suggesting that fiscal outcomes could be a direct source of inflation variability, as predicted by the fiscal theory of the price level. |
| Keywords: | Working Paper , Sub-Saharan Africa , |
| Date: | 2008–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/121&r=cba |
| By: | Omar AlShehabi; Shuang Ding |
| Abstract: | The significant real exchange rate appreciation in Armenia and Georgia since 2003, coupled with persistent current account deficits, raises the question of whether real exchange rates have become overvalued. This paper seeks to identify possible exchange rate misalignment by applying the behavioral equilibrium exchange rate approach, complemented by an analysis of the traditional competitiveness indicators. The results indicate an undervaluation of the Armenian dram and no significant misalignment of the Georgian lari in 2006. |
| Keywords: | Working Paper , Armenia , Georgia , Exchange rate appreciation , Current account deficits , |
| Date: | 2008–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/110&r=cba |
| By: | Márcio Valério Ronci; Misa Takebe; Nisreen Farhan; Amar Shanghavi; Jian-Ye Wang |
| Abstract: | This paper assesses São Tomé and PrÃncipe's monetary and exchange rate arrangements in light of the country's monetary history and the relevant experience of comparable countries in Africa. The study highlights several structural characteristics of São Tomé and PrÃncipe including its very small size, high degree of openness, extensive use of foreign currencies, and inflexible product and factor markets in the consideration of an appropriate monetary and exchange regime. Firmly anchored currency arrangements, defined in this paper to include memberships in monetary unions or hard pegs, are found to be preferable to the status quo of a managed float. The paper applies statistical methods and takes into account other factors to identify the appropriate anchor currency. It stresses that fiscal discipline and prudent debt management are the main prerequisites for a firmly anchored currency arrangement. |
| Keywords: | Working Paper , Exchange rate regimes , São Tomé and PrÃncipe , Currencies , Monetary systems , Debt management , Fiscal management , Small states , |
| Date: | 2008–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/118&r=cba |