nep-cba New Economics Papers
on Central Banking
Issue of 2008‒07‒05
29 papers chosen by
Alexander Mihailov
University of Reading

  1. Optimal Central Bank Transparency By Eijffinger, Sylvester C W; Hoogduin, Lex; van der Cruijsen, Carin A B
  2. Governing the Governors: A Clinical Study of Central Banks By Frisell, Lars; Roszbach, Kasper F.; Spagnolo, Giancarlo
  3. The Continuing Puzzle of Short Horizon Exchange Rate Forecasting By Kenneth S. Rogoff; Vania Stavrakeva
  4. Exchange Rate Regimes and the Extensive Margin of Trade By Paul R. Bergin; Ching-Yi Lin
  5. Crisis and Responses: the Federal Reserve and the Financial Crisis of 2007-2008 By Stephen G. Cecchetti
  6. The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets By Lane, Philip R.; Shambaugh, Jay C
  7. Monetization of Public Goods Provision: A possible solution for the free-rider problem By KOBAYASHI Keiichiro; NAKAJIMA Tomoyuki
  8. Does immigration affect the Phillips curve? Some evidence for Spain By Samuel Bentolila; Juan J. Dolado; Juan F. Jimeno
  9. Persistent Real Exchange Rates By Alok Johri; Amartya Lahiri
  10. Money and Nominal Bonds By Marchesiani, Alessandro; Senesi, Pietro
  11. Menu Costs and Inflation Asymmetries Some Micro Data Evidence By Peter Karadi; Adam Reiff
  12. Restaurant Prices and the Minimum Wage By Fougère, Denis; Gautier, Erwan; Le Bihan, Hervé
  13. Short-term forecasting of GDP using large monthly datasets – A pseudo real-time forecast evaluation exercise By K. Barhoumi; S. Benk; R. Cristadoro; A. Den Reijer; A. Jakaitiene; P. Jelonek; A. Rua; K. Ruth; C. Van Nieuwenhuyze; G. Rünstler
  14. Forecasting Macroeconomic Variables Using Large Datasets: Dynamic Factor Model versus Large-Scale BVARs By Rangan Gupta; Alain Kabundi
  15. What Do Reaction Functions Tell Us About Central Bank Preferences? By Steffen Elstner; Amer Tabakovic
  16. Disinflation and the NAIRU in a New-Keynesian New-Growth Model By Rannenberg, Ansgar
  17. Macroeconomics and ARCH By James D. Hamilton
  18. The Quantity Theory of Money in Historical Perspective By Michael Graff
  19. The Political Economics Side of the J-Curve By António Caleiro
  20. Capital Flows and Exchange Rates An empirical Analysis By Gregorios Siourounis
  21. Signal Extraction and Hyperinflations with a Responsive Monetary Policy By Judit Temesvary
  22. Loss Aversion By Pavlo R. Blavatskyy
  23. Benchmarking the Lisbon Strategy By Klaus Masuch; Ramon Gómez-Salvador; Nadine Leiner-Killinger; Rolf Strauch; Jarkko Turunen; Melanie Ward-Warmedinger; Jan De Mulder; Harald Stahl; Yvonne McCarthy; Daphne Nicolitsas; Aitor Lacuesta; Mathilde Ravanel; Piero Cipollone; Christelle Olsommer; Alfred Stiglbauer; Álvaro Novo; Klara Stovicek; Heidi Schauman; Almut Balleer; Kieran McQuinn; Pasqualino Montanaro; Alfonso Rosolia; Eliana Viviano; Cláudia Filipa Duarte; Matija Vodopivec
  24. On Choosing an Exchange Rate Regimes in Emerging Economies By Adamcik, Santiago
  25. Testing for PPP Using SADC Real Exchange Rates By Thabo Mokoena; Rangan Gupta; Renee van Eyden
  26. A Dynamic Factor Model for Forecasting Macroeconomic Variables in South Africa By Rangan Gupta; Alain Kabundi
  27. Half-Life Deviations from PPP in the SADC By Thabo Mokoena; Rangan Gupta; Renee van Eyden
  28. An Estimated New Keynesian Model for Israel By Argov, Eyal; Elkayam, David
  29. Estimation of weights for the Monetary Conditions Index in Poland By Andrzej Toroj

  1. By: Eijffinger, Sylvester C W; Hoogduin, Lex; van der Cruijsen, Carin A B
    Abstract: Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to this optimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight to the conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of private sector inflation forecasts. Inflation then is set in a more backward looking manner resulting in higher inflation persistence. By using a panel data set on the transparency of 100 central banks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while there are central banks that would benefit from further transparency increases, some might already have reached the limit.
    Keywords: central bank transparency; inflation persistence; monetary policy
    JEL: E31 E52 E58
    Date: 2008–06
  2. By: Frisell, Lars; Roszbach, Kasper F.; Spagnolo, Giancarlo
    Abstract: Recent research on central bank governance has focused mainly on their monetary policy task. As the sub-prime loan market turmoil reminded us - central banks play a crucial role in financial markets not only in setting monetary policy, but also in ensuring their soundness and stability. In this paper we study the specific corporate governance structures of a number of central banks in light of their complex role of inflation guardians, bankers’ banks, financial industry regulators/supervisors and, in some cases, competition authorities and deposit insurance agencies. We review their current institutional arrangements, e.g. formal objectives, ownership, board and governor appointment rules, term limits and compensation, using both existing surveys and newly collected information; and we contrast them with the structures suggested in the corporate and public governance literatures, where present. Our analysis highlights a striking variety in central bank governance structures and a number of specific issues that appear unsatisfactorily addressed by existing research, including the incentive structure for governor and board members, the balance between central banks’ multiple objectives, and the need for term limits or post-employment restrictions.
    Keywords: accountability; bank regulation; board structure; central bank independence; central banks; cooling-off periods; governance; governor remuneration; regulatory capture; term limits
    JEL: E58 G18 G34 G38
    Date: 2008–06
  3. By: Kenneth S. Rogoff; Vania Stavrakeva
    Abstract: Are structural models getting closer to being able to forecast exchange rates at short horizons? Here we argue that over-reliance on asymptotic test statistics in out-of-sample comparisons, misinterpretation of some tests, and failure to sufficiently check robustness to alternative time windows has led many studies to overstate even the relatively thin positive results that have been found. We find that by allowing for common cross-country shocks in our panel forecasting specification, we are able to generate some improvement, but even that improvement is not entirely robust to the forecast window, and much of the gain appears to come from non-structural rather than structural factors.
    JEL: C52 C53 F31 F47
    Date: 2008–06
  4. By: Paul R. Bergin; Ching-Yi Lin
    Abstract: This paper finds that currency unions and direct exchange rate pegs raise trade through distinct channels. Panel data analysis of the period 1973-2000 indicates that currency unions have raised trade predominantly at the extensive margin, the entry of new firms or products. In contrast, direct pegs have worked almost entirely at the intensive margin, increased trade of existing products. A stochastic general equilibrium model is developed to understand this result, featuring price stickiness and firm entry under uncertainty. Because both regimes tend to reliably provide exchange rate stability over the horizon of a year or so, which is the horizon of price setting, they both lead to lower export prices and greater demand for exports. But because currency unions historically are more durable over a longer horizon than pegs, they encourage firms to make the longer-term investment needed to enter a new market. The model predicts that when exchange rate uncertainty is completely and permanently eliminated, all of the adjustment in trade should occur at the extensive margin.
    JEL: F4
    Date: 2008–06
  5. By: Stephen G. Cecchetti
    Abstract: Realizing that their traditional instruments were inadequate for responding to the crisis that began on 9 August 2007, Federal Reserve officials improvised. Beginning in mid-December 2007, they implemented a series of changes directed at ensuring that liquidity would be distributed to those institutions that needed it most. Conceptually, this meant America's central bankers shifted from focusing solely on the size of their balance sheet, which they use to keep the overnight interbank lending rate close to their chosen target, to manipulating the composition of their assets as well. In this paper, I examine the Federal Reserve's conventional and unconventional responses to the financial crisis of 2007-2008.
    JEL: E5
    Date: 2008–06
  6. By: Lane, Philip R.; Shambaugh, Jay C
    Abstract: Recently, there have been numerous advances in modelling optimal international portfolio allocations in macroeconomic models. A major focus of this literature has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios.
    Keywords: exchange rates; Financial globalization; international portfolios
    JEL: F31 F32
    Date: 2008–06
  7. By: KOBAYASHI Keiichiro; NAKAJIMA Tomoyuki
    Abstract: We consider a new method of public goods provision: monetization. The government makes a particular public good the specie of money and commits itself to buy the public good at a predetermined nominal price and adjust money supply so that the ratio between the public good reserve and money supply equals a predetermined reserve ratio. In a two-country model, in which one country issues international currency and the other issues domestic currency, we show that if the government that issues the international currency adopts a monetization policy, it can attain both the optimal level of public goods provision and equal cost sharing for the public goods provision between the two countries by choosing the nominal price of the public good and the reserve ratio appropriately. In this case, the international free-rider problem is completely resolved.
    Date: 2008–06
  8. By: Samuel Bentolila (CEMFI); Juan J. Dolado (Universidad Carlos III de Madrid); Juan F. Jimeno (Banco de España)
    Abstract: The Phillips curve has flattened in Spain over 1995-2006: unemployment has fallen by 15 percentage points, with roughly constant inflation. This change has been more pronounced than elsewhere. We argue that this stems from the immigration boom in Spain over this period. We show that the New Keynesian Phillips curve is shifted by immigration if natives' and immigrants' labor supply or bargaining power differ. Estimation of the curve for Spain indicates that the fall in unemployment since 1995 would have led to an annual increase in inflation of 2.5 percentage points if it had not been largely offset by immigration.
    Keywords: Phillips curve, immigration
    JEL: E31 J64
    Date: 2008–06
  9. By: Alok Johri; Amartya Lahiri
    Abstract: Three well known facts that characterize exchange rate data are: (a) the high correlation between bilateral nominal and real exchange rates; (b) the high degree of persistence in real exchange rate movements; and (c) the high volatility of real exchange rates. This paper attempts a joint, albeit partial, rationalization of these facts in an environment with no staggered contracts and where prices are preset for only one quarter. There are two key innovations in the paper. First, we augment a standard two-country open economy model with learning-by-doing in production at the firm level. This induces monopolistically competitive firms to endogeneize the productivity effect of their price setting behavior. Specifically, firms endogenously choose not to adjust prices by the full proportion of a positive monetary shock in order to take advantage of the productivity benefits of higher production. Second, we introduce habits in leisure. This makes the labor supply decision dynamic and adds an additional source of propagation. We show that the calibrated model can quantitatively reproduce significant fractions of the aforementioned facts. Moreover, as in the data, the model also produces a positive correlation between the terms of trade and the nominal exchange rate.
    Keywords: Real exchange rate movements, endogenous price stickiness, learning-by-doing
    JEL: F1 F2
    Date: 2008–06
  10. By: Marchesiani, Alessandro; Senesi, Pietro
    Abstract: This paper studies an economy with trading frictions, ex post heterogeneity and nominal bonds in a model à la Lagos and Wright (2005). It is shown that a strictly positive interest rate is a sufficient condition for the allocation with nominal bonds to be welfare improving. This result comes from the protection against the inflation tax.
    Keywords: money; search; nominal bonds and taxation
    JEL: H20 E40 H63
    Date: 2007–11–22
  11. By: Peter Karadi (New York University); Adam Reiff (Central Bank of Hungary)
    Abstract: The paper explains the observed asymmetric inflation response to value-added tax (VAT) changes in Hungary by calibrating a standard sectoral menu cost model on a new micro-level CPI data set. The model is able to reproduce important moments of the data, and finds that the asymmetry can be explained by the interaction of menu costs, (sectoral) trend inflation and forward-looking firms, thereby it provides direct evidence to the argument of Ball and Mankiw (1994).
    Keywords: Menu Cost, Inflation Asymmetry, Sectoral Heterogeneity, Value-Added Tax
    JEL: E30
    Date: 2007–10
  12. By: Fougère, Denis; Gautier, Erwan; Le Bihan, Hervé
    Abstract: We examine the effect of the minimum wage on restaurant prices. For that purpose, we estimate a price rigidity model by exploiting a unique dataset of individual price quotes used to calculate the Consumer Price Index in France. We find a positive and significant impact of the minimum wage on prices. We obtain that the effect of the minimum wage on prices is very protracted. The aggregate impact estimated with our model takes more than a year to fully pass through to retail prices.
    Keywords: Inflation; Minimum wage; Price stickiness; Restaurant prices
    JEL: D43 E31 L11
    Date: 2008–06
  13. By: K. Barhoumi; S. Benk; R. Cristadoro; A. Den Reijer; A. Jakaitiene; P. Jelonek; A. Rua; K. Ruth; C. Van Nieuwenhuyze; G. Rünstler (ECB, DG Research)
    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.
    Keywords: Bridge models, Dynamic factor models, real-time data flow
    JEL: E37 C53
    Date: 2008–06
  14. By: Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg)
    Abstract: This paper uses two-types of large-scale models, namely the Dynamic Factor Model (DFM) and Bayesian Vector Autoregressive (BVAR) Models based on alternative hyperparameters specifying the prior, which accommodates 267 macroeconomic time series, to forecast key macroeconomic variables of a small open economy. Using South Africa as a case study and per capita growth rate, inflation rate, and the short-term nominal interest rate as our variables of interest, we estimate the two-types of models over the period 1980Q1 to 2006Q4, and forecast one- to four-quarters-ahead over the 24-quarters out-of-sample horizon of 2001Q1 to 2006Q4. The forecast performances of the two large-scale models are compared with each other, and also with an unrestricted three-variable Vector Autoregressive (VAR) and BVAR models, with identical hyperparameter values as the large-scale BVARs. The results, based on the average Root Mean Squared Errors (RMSEs), indicate that the large-scale models are better-suited for forecasting the three macroeconomic variables of our choice, and amongst the two types of large-scale models, the DFM holds the edge.
    Keywords: Dynamic Factor Model, BVAR, Forecast Accuracy
    JEL: C11 C13 C33 C53
    Date: 2008–06
  15. By: Steffen Elstner; Amer Tabakovic
    Abstract: Since Taylor’s 1993 paper researchers have devoted a lot effort to estimation of monetary policy rules. Taylor showed that a simple central bank reaction function, with the interest rate as monetary policy instrument and inflation and output gap as explanatory variables, mimics the Fed funds rate pretty well during the period from 1987 to 1992. Often, the Taylor rule coefficients are interpreted as if they reflect central bank’s preferences. However, this may be misleading. In this paper we show that Taylor rule coefficients are complicated terms consisting of preference parameters as well as parameters given by the structure of the economy. We illustrate our conclusion that Taylor rule coefficients cannot be interpreted as reflecting central bank preferences by estimating standard forward-looking Taylor rules for the Bundesbank, the Fed and UK and confront these with our results obtained by a multi-equation GMM approach in order to detect central bank preferences.
    Keywords: technology spillovers; trade; investment; panel cointegration
    Date: 2008–03
  16. By: Rannenberg, Ansgar
    Abstract: Unemployment in the big continental European economies like France and Germany has been substantially increasing since the mid 1970s. So far it has been difficult to empirically explain the increase in unemployment in these countries via changes in supposedly employment unfriendly institutions like the generosity and duration of unemployment benefits. At the same time, there is some evidence produced by Ball (1996, 1999) saying that tight monetary policy during the disinflations of the 1980s caused a subsequent increase in the NAIRU, and that there is a relationship between the increase in the NAIRU and the size of the disinflation during that period across advanced OECD economies. There is also mounting evidence suggesting a role of the slowdown in productivity growth, e.g. Nickell et al. (2005), IMF (2003), Blanchard and Wolfers (2000). This paper introduces endogenous growth into an otherwise standard New Keynesian model with capital accumulation and unemployment. We subject the model to a cost push shock lasting for 1 quarter, in order to mimic a scenario akin to the one faced by central banks at the end of the 1970s. Monetary policy implements a disinflation by following a standard interest feedback rule calibrated to an estimate of a Bundesbank reaction function. About 40 quarters after the shock has vanished, unemployment is still about 1.7 percentage points above its steady state, while annual productivity growth has decreased. Over a similar horizon, a higher weight on the output gap increases employment (i.e. reduces the fall in employment below its steady state). Thus the model generates an increase in unemployment following a disinflation without relying on a change to labour market structure. We are also able to coarsely reproduce cross country differences in unemployment. A higher disinflation generated by a larger cost push shock causes a stronger persistent increase in unemployment, the correlation noted by Ball. For a given cost push shock, a policy rule estimated for the Bundesbank produces stronger persistent increase in unemployment than a policy rule estimated for the Federal Reserve. Testable differences in real wage rigidity between continental Europe and the United States, namely the presence of the labour share in the wage setting function for Europe with a negative coefficient but it's absence in the U.S. also imply different unemployment outcomes following a cost push shock: If the real wage does not depend on the labour share, the persistent increase in unemployment is about one percentage point smaller than in it's presence. To the extent that the wage setting structure is due to labour market rigidities, "Shocks and Institutions" jointly determine the unemployment outcome, as suggested by Blanchard and Wolfers (2000). We also perform a comparison of the second moments of key variables of the model with German data for a period ranging from 1970 to 1990. We find that it matches the data better than a model without endogenous growth but with otherwise identical features. This is particularly true for the persistence in employment as measured by first and higher order autocorrelation coefficients.
    Keywords: Monetary Policy; Monetary Econmics; Unemployment; NAIRU; Natural Rate of Unemployment;
    JEL: O42 E0 E30 J01
    Date: 2008–06–08
  17. By: James D. Hamilton
    Abstract: Although ARCH-related models have proven quite popular in finance, they are less frequently used in macroeconomic applications. In part this may be because macroeconomists are usually more concerned about characterizing the conditional mean rather than the conditional variance of a time series. This paper argues that even if one's interest is in the conditional mean, correctly modeling the conditional variance can still be quite important, for two reasons. First, OLS standard errors can be quite misleading, with a "spurious regression" possibility in which a true null hypothesis is asymptotically rejected with probability one. Second, the inference about the conditional mean can be inappropriately influenced by outliers and high-variance episodes if one has not incorporated the conditional variance directly into the estimation of the mean, and infinite relative efficiency gains may be possible. The practical relevance of these concerns is illustrated with two empirical examples from the macroeconomics literature, the first looking at market expectations of future changes in Federal Reserve policy, and the second looking at changes over time in the Fed's adherence to a Taylor Rule.
    JEL: E52
    Date: 2008–06
  18. By: Michael Graff (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: The paper reconstructs the origins of the quantity theory of money and its applications. Against the background of the history of money, it is shown that the theory was flexible enough to adapt to institutional change and thus succeeded in maintaining its relevance. To this day, it is useful as an analytical framework. Although, due to Goodhart's Law, it now has only limited potential to guide monetary policy and was consequently abandoned by most central banks, an empirical analysis drawing on a panel data set covering more than hundred countries from 1991 to the present confirms that the theory still holds: a positive correlation between the excess growth rate of the stock of money and the rate of inflation cannot be rejected. Yet, while the correlation holds for the whole sample, proportionality is driven by a small number of influential observations with very high inflation
    Keywords: Quantity theory of money, demand for money, monetary targeting
    JEL: B10 E41 E58
    Date: 2008–04
  19. By: António Caleiro (Department of Economics, University of Évora)
    Abstract: About twenty years ago, an article by van der Ploeg analysed the implications of the J-curve effect for the political business cycle in a small open economy [van der Ploeg (1989c)]. It was then shown that a sudden jump on the exchange rates in the election day should be observed if the government, in order to maximise its popularity, explores a J-curve effect. As a way of celebrating this work, that should have been more influential, it is presented in the paper a simulation study, which confirms that exchange rate overvaluation result a la van der Ploeg.
    Keywords: Exchange rates, J-Curve, Partisan Business Cycles, Political Business
    JEL: E31 E32 F31
    Date: 2008
  20. By: Gregorios Siourounis
    Abstract: This paper investigates the empirical relationship between capital flows and nominal ex-change rates for five major countries. It is well known that no theory based on current account or interest rates has ever been shown to work empirically at short to medium horizons. Recent international finance theory, however, suggests that currencies are influenced by capital flows as much as by current account balances and log-term interest rates. Using unrestricted VAR's we document the following: a) Incorporating net cross-border equity flows into linear exchange rate models can improve their in-sample performance. Using net cross-border bond flows, however, has no such effect; b) Positive shocks to home equity returns (relative to foreign markets) are associated with short-run home currency appreciation and equity inflow. Positive shocks to home interest rates (relative to foreign countries) cause currency movements that are not consistent with uncovered interest rate parity (UIP); c) An equity-augmented linear model supports exchange rate predictability and outperforms a random walk in several cases. Such superior forecast performance, however, depends on the exchange rate and the forecast horizon.
    Keywords: Net equity flows, net bond flows, equity returns, interest rates, and nominal exchange rates.
    Date: 2008
  21. By: Judit Temesvary (Department of Economics, Cornell University, Ithaca)
    Abstract: This paper develops a multi-period extension of the Lucas (1972) overlapping generations "island" model with endogenous monetary policy (based on the minimization of a loss function over inflation and output deviations) and stochastic realization of the "allocation" of the young people across the two islands. These allocation realizations are interpreted as output shocks (since only the young people produce). The paper examines two cases: the certainty case when the exact monetary policy is known to the young, and uncertainty case where the young receive only a mixed signal of the output shock and the monetary policy weights through the price (the signal extraction problem). In the certainty case, the neutrality result holds. In the uncertainty case, even monetary shocks have real effects as a result of the signal extraction problem. After characterizing the resulting price function by its constant elasticity to the signal, we derive values of this elasticity and the monetary policy weights such that hyperinflations will develop. We find that for certain weights, hyperinflations can develop even when the price function is concave in the signal. Finally, we formulate a particular convex case of the price function (making distributional assumptions) to analyze the price and monetary policy examples and statics as functions of the weights on the inflation and output deviation terms.
    Keywords: Rational expectations, Neutrality of Money, Signal Extraction Problem, Loss function, Hyperinflations, High inflations
    JEL: E3 E4 E5
    Date: 2007–10
  22. By: Pavlo R. Blavatskyy
    Abstract: Loss aversion is traditionally defined in the context of lotteries over monetary payoffs. This paper extends the notion of loss 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 implications of loss aversion are discussed for expected utility theory and rankdependent utility theory as well as for popular models of probabilistic choice such as the constant error/tremble model and a strong utility model (that includes the Fechner model of random errors and Luce choice model as special cases).
    Keywords: Loss aversion, more loss averse than, nonmonetary outcomes, probabilistic choice, rank-dependent utility theory
    JEL: D00 D80 D81
    Date: 2008–06
  23. By: Klaus Masuch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ramon Gómez-Salvador (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Nadine Leiner-Killinger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rolf Strauch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Melanie Ward-Warmedinger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jan De Mulder (Nationale Bank van België/Banque Nationale de Belgique, Boulevard de Berlaimont 14, 1000 Brussels, Belgium.); Harald Stahl (Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany.); Yvonne McCarthy (Central Bank and Financial Services Authority of Ireland, Dame Street, Dublin 1, Ireland.); Daphne Nicolitsas (Bank of Greece, 21, E. Venizelos Avenue, 10250 Athens, Greece.); Aitor Lacuesta (Banco de España, Alcala 50, 28014 Madrid, Spain.); Mathilde Ravanel (Banque de France, 39, rue Croix-des Petits-Champs, 75049 Paris Cedex 01, France.); Piero Cipollone (Banca d'Italia, Via Nazionale 91, 00184 Rome, Italy.); Christelle Olsommer (Banque centrale du Luxembourg, 2 boulevard Royal, 2983 Luxembourg.); Alfred Stiglbauer (Oesterreichische Nationalbank, Otto Wagner Platz 3, 1011 Wien, Austria.); Álvaro Novo (Banco de Portugal, 148, Rua do Comercio, 1101 Lisbon Codex, Portugal.); Klara Stovicek (Banka Slovenije, Slovenska 35, 1505 Ljubljana, Slovenia.); Heidi Schauman (Suomen Pankki - Finlands Bank, P.O. Box 160, 00101 Helsinki, Finland.); Almut Balleer; Kieran McQuinn (Central Bank and Financial Services Authority of Ireland, Dame Street, Dublin 1, Ireland.); Pasqualino Montanaro (Banca d'Italia, Via Nazionale 91, 00184 Rome, Italy.); Alfonso Rosolia (Banca d'Italia, Via Nazionale 91, 00184 Rome, Italy.); Eliana Viviano (Banca d'Italia, Via Nazionale 91, 00184 Rome, Italy.); Cláudia Filipa Duarte (Banco de Portugal, 148, Rua do Comercio, 1101 Lisbon Codex, Portugal.); Matija Vodopivec (Banka Slovenije, Slovenska 35, 1505 Ljubljana, Slovenia.)
    Abstract: The aim of this report, which has been prepared by a Task Force of the Monetary Policy Committee of the Eurosystem, is to describe and analyse the main developments in labour supply and its determinants in the euro area, review the links between labour supply and labour market institutions, assess how well labour supply reflects the demand for labour in the euro area and identify the future challenges for policy-makers. The data available for this report generally cover the period from 1983 to spring 2007. JEL Classification: D02, P11, P16, C43, C61.
    Keywords: Lisbon Strategy, economic governance, benchmarking, benefit of the doubt weighting.
    Date: 2008–06
  24. By: Adamcik, Santiago
    Abstract: This paper discusses that a lot of the debate on selecting an exchange rate regime misses the time. It begins explaining the standard theory of choice between exchange rate regimes, and then explores the fragilities in this theory, specifically when this is applied to emerging economies. Next presents a extent of institutional characteristics that might have influence upon a country to choose either fixed or floating rates , and then turns to the converse question of whether the selection of exchange rate regime may make for the development of some helpful institutional traits. The conclusion is that the election of exchange rate regime is likely to be of second order significance to the development of good fiscal, financial, and monetary institutions in causing macroeconomic achievement in emerging market. A greater dedication in strong institution's development instead of focalizing in the exchange rate regimes could make economies healthier and less propense to the crises, as was observed of late years.
    Keywords: Regimenes de Tipo de Cambio; Economias Emergentes; Inflacion;Currency Board; Soft Pegs; Hard Pegs
    JEL: F4 F3 E5 E4
    Date: 2008–01
  25. By: Thabo Mokoena (South African Reserve Bank, Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria)
    Abstract: This paper attempts to provide evidence indicating that the Purchasing Power Parity (PPP) puzzle is becoming less of a puzzle. It present the results of Augmented Dickey-Fuller (ADF) test, nonlinear tests of nonstationarity, and Bayesian unit root tests, applied to ten SADC countries. The Bayesian tests were found to be biased in favour of a trend stationary model in all cases. It is argued that nonlinear approaches to exchange rate adjustments are likely to provide a firmer basis for inference and stronger support for the PPP in the long-term. This is more so at 1 per cent and 5 per cent levels of significance.
    Keywords: Purchasing Power Parity, Nonlinear Nonstationarity Tests, Bayesian Unit Root Test
    JEL: C11 C22 F31
    Date: 2008–06
  26. By: Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg)
    Abstract: This paper uses the Dynamic Factor Model (DFM) framework, which accommodates a large cross-section of macroeconomic time series for forecasting the per capita growth rate, inflation, and the nominal shortterm interest rate for the South African economy. The DFM used in this study contains 267 quarterly series observed over the period 1980Q1-2006Q4. The results, based on the RMSEs of one- to four-quartersahead out of sample forecasts over 2001Q1 to 2006Q4, indicate the DFM outperforms the NKDSGE in forecasting per capita growth, inflation and the nominal short-term interest rate. Moreover, the DFM performs no worse compared to the VARs, both classical and Bayesian, indicating the blessing of dimensionality.
    Keywords: Dynamic Factor Model, VAR, BVAR, NKDSGE Model, Forecast Accuracy
    JEL: C11 C13 C33 C53
    Date: 2008–06
  27. By: Thabo Mokoena (South African Reserve Bank, Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria)
    Abstract: This paper utilises various recently developed econometric methods to obtain better approximations to the half-life for real exchange rates of ten South African Development Community (SADC) countries and to generate confidence intervals for half-life deviations from the purchasing power parity (PPP). The robust methods of Stock (1991), Elliott and Stock (2001), and Hansen (1999) imply that point estimates of less than 36 months exist, making them compatible with PPP. However, the results of ADF and ADF-GLS tests render the SADC real exchange rates as nonstationary processes, a result that is patently at odds with mean-reversion, implying at the same time the possibility of infinite half-lives. Therefore the empirical results appearing in this paper do not convincingly resolve the half-life version of the PPP puzzle and leaves room for future research in the directions of non-parametric methods and median unbiased confidence intervals.
    Keywords: PPP, Half-life, Real Exchange Rates
    JEL: C12 C15 C23 F30 F31
    Date: 2008–07
  28. By: Argov, Eyal; Elkayam, David
    Abstract: We formulate and estimate a small New Keynesian model for the Israeli economy. Our goal is to construct a small but still realistic model that can be used to support the inflation targeting process. The model contains three structural equations: An open economy Phillips curve for CPI inflation (excluding the housing component), an aggregate demand curve for the output gap and an interest parity condition for the nominal exchange rate. The model is closed with an interest rate reaction function (Taylor-type rule) and an ad hoc equation for the housing component of the CPI, which is dominated by exchange rate changes. In the specification of the model we had to pay special attention to the crucial role of the exchange rate in the transmission of monetary policy in Israel, which has a direct effect on almost 60 percent of the CPI. The model is estimated by the GMM method, using quarterly data for the period 1992:I to 2005:IV. In the estimation of the structural equations we tried to remain as close as possible to the theoretical formulation by restricting the dynamics to one lag at most. We use the model to characterize an "optimal" simple interest rate rule. We find that the monetary authority should respond to an hybrid backward-forward looking rate of inflation and does not benefit from direct reaction to exchange rate measures.
    JEL: E0 E4 E3
    Date: 2007–12
  29. By: Andrzej Toroj (Warsaw School of Economics, National Bank of Poland)
    Abstract: In this paper, we follow the econometric approach to assess relative importance of real interest rate and real exchange rate for the monetary conditions in Poland, quantified as weights for Monetary Conditions Index (MCI). We consider both single- and multiple-equation specifications proposed in the literature with an application to Poland. Although MCI is nowadays broadly considered a rather obsolete indicator in monetary policy conduct, we argue that the econometric framework used for this purpose could be a good departure point when modelling monetary adjustments in a monetary union, provided correct dynamic specification of the models.
    Keywords: Monetary Conditions Index, MCI-ratio, IS curve, Phillips curve, VAR.
    JEL: C22 C32 E52 E59
    Date: 2008–06–23

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