|
on Central Banking |
| By: | Athanasios Orphanides; John C. Williams |
| Abstract: | This paper examines the robustness characteristics of optimal control policies derived un- der the assumption of rational expectations to alternative models of expectations. We assume that agents have imperfect knowledge about the precise structure of the economy and form expectations using a forecasting model that they continuously update based on incoming data. We find that the optimal control policy derived under the assumption of rational expectations can perform poorly when expectations deviate modestly from rational expectations. We then show that the optimal control policy can be made more robust by deemphasizing the stabilization of real economic activity and interest rates relative to infla- tion in the central bank loss function. That is, robustness to learning provides an incentive to employ a "conservative" central banker. We then examine two types of simple monetary policy rules from the literature that have been found to be robust to model misspecification in other contexts. We find that these policies are robust to empirically plausible parame- terizations of the learning models and perform about as well or better than optimal control policies. |
| JEL: | E52 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-17&r=cba |
| By: | Andrew Atkeson; Vyjayanthi Chari; Patrick Kehoe |
| Abstract: | Monetary policy instruments di¤er in tightness. how closely they are linked to in.a- tion. and transparency. how easily they can be monitored. Tightness is always desirable, while transparency is desirable only if policymakers cannot commit to future policies. We show that because interest rates can be made endogenously tight they have a natural advantage over both money growth and exchange rates. We also show that interest rates and exchange rates, because they are prices, are more transparent than money growth and thus have a natural advantage over money growth. Our model provides some insights into why developed economies tend to use inter- est rates as their primary policy instrument and why less-developed economies, in which interest rates are not available as an instrument, tend to use exchange rates. |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cas:wpaper:cas_rn_2007_1&r=cba |
| By: | C.A.E. Goodhart; P. Sunirand; D.P. Tsomocos |
| Abstract: | The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility. |
| Keywords: | interest rates, monetary base, bank capital, financial stability, monetary policy |
| JEL: | D58 E44 G28 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2008fe26&r=cba |
| By: | Rochelle M. Edge; Thomas Laubach; John C. Williams |
| Abstract: | This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies uncertainty about the model’s dynamics, utility-based welfare criterion, and the “natural” rates of output and interest that would prevail absent nominal rigidities. We estimate the degree of uncertainty regarding natural rates due to parameter uncertainty. We find that optimal Taylor rules under parameter uncertainty respond less to the output gap and more to price inflation than would be optimal absent parameter uncertainty. We also show that policy rules that focus solely on stabilizing wages and prices yield welfare outcomes very close to the first-best. |
| JEL: | E5 |
| Date: | 3008–05 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-16&r=cba |
| By: | Nicoletta Batini (International Monetary Fund); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University) |
| Abstract: | We build a small open-economy model with partial dollarization–households hold wealth in domestic currency and a foreign currency as in Felices and Tuesta (2006). The degree of dollarization is endogenous to the extent of exchange rate stabilization by the central bank. We identify the optimal monetary policy response under com-mitment and discretion and assess the optimal degree of exchange rate stabilization inthis set up, drawing policy implications for countries that target inflation in economies of this kind. |
| Keywords: | dollarized economies, optimal monetary policy, managed exchange rates, inflation-forecast-based rules |
| JEL: | E52 E37 E58 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2008-004&r=cba |
| By: | Barry E. Jones (Department of Economics, Binghamton University, PO Box 6000 Binghamton, NY 13902, USA.); Livio Stracca (Counsel to the Executive Board, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Narrow and broad money measures (including Divisia aggregates) have been found to have explanatory power for UK output in backward-looking specifications of the IS curve. In this paper, we explore whether or not real balances enter into a forward-looking IS curve for the UK, building on the theoretical framework of Ireland (2004). To do this, we test for additive separability between consumption and money over a sizeable part of the post-ERM period using non-parametric methods. If consumption and money are not additively separable, then real money balances enter into the forward-looking IS curve (the converse does not hold, however). A main finding is that the UK data seem to be broadly consistent with additive separability for the the more recent period from 1999 to 2007. JEL Classification: C14, C43, C63, E21, E41. |
| Keywords: | Additive Separability, IS Curve, Non-Parametric Tests, Measurement Error, Divisia Monetary Aggregates. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080904&r=cba |
| By: | John Weeks (Professor Emeritus, School of Oriental and African Studies, University of London) |
| Abstract: | This paper inspects the standard policy rule that under a flexible exchange rate regime with perfectly elastic capital flows monetary policy is effective and fiscal policy is not. The logical validity of the statement requires that the domestic price level effect of devaluation be ignored. The price level effect is noted in some textbooks, but not analysed. When it is subjected to a rigorous analysis, the interaction between exchange rate changes and domestic price level changes render the standard statement false. The logically correct statement would be, under a flexible exchange rate regime with perfectly elastic capital flows the effectiveness of monetary policy depends on the values of the import share and the sum of the trade elasticities. Monetary policy will be more effective than fiscal policy if and only if the sum of the trade elasticities exceeds the import share. Inspection of data from developing countries indicates a low effectiveness of monetary policy under flexible exchange rates. In the more general case of less than perfectly elastic capital flows, the conditions for monetary policy to be more effective than fiscal policy are even more restrictive. Use of empirical evidence on trade shares and interest rate differentials suggest that for most countries fiscal policy would prove more effective than monetary policy under a flexible exchange rate regime. In any case, the general theoretical assertion that monetary policy is more effective is incorrect. The results sustain the standard Keynesian conclusion that fiscal policy is more effective, whether the exchange rate is fixed or flexible. (...) |
| Keywords: | The Effectiveness of Monetary Policy Reconsidered |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ipc:pubipc:1616109&r=cba |
| By: | Richard Dennis |
| Abstract: | The Calvo pricing model that lies at the heart of many New Keynesian business cycle models has been roundly criticized for being inconsistent both with time series data on inflation and with micro-data on the frequency of price changes. In this paper I develop a new pricing model whose structure can be interpreted in terms of menu costs and infor- mation gathering/processing costs, that usefully addresses both criticisms. The resulting Phillips curve encompasses the partial-indexation model, the full-indexation model, and the Calvo model, and can speak to micro-data in ways that these models cannot. Taking the Phillips curve to the data, I ?nd that the share of ?rms that change prices each quar- ter is about 60 percent and, reflecting the importance of information gathering/processing costs, that most ?rms that change prices use indexation. Exploiting an isomorphism result, I show that these values are consistent with estimates implied by the partial-indexation model. |
| JEL: | C11 C52 E31 E52 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-19&r=cba |
| By: | Nautz, Dieter; Schmidt, Sandra |
| Abstract: | This paper investigates how the implementation of monetary policy affects the dynamics and the volatility of the federal funds rate. Since the early 1980s, the most important changes in the Fed’s conduct of monetary policy refer to the role of the federal funds rate target and the reserve requirement system. We show that the improved communication and transparency regarding the federal funds rate target has significantly increased the Fed’s influence on the federal funds rate since 1994. By contrast, the declining role of required reserves in the U.S. has contributed to higher federal funds rate volatility. Our results suggest that the planned introduction of remunerated reserves will further enhance the controllability of the federal funds rate. |
| Keywords: | Dynamics and Volatility of the Federal Funds Rate, Monetary Policy Implementation, Central Bank Communication, Reserve Requirements |
| JEL: | C22 E43 E52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:7297&r=cba |
| By: | Fischer, Andreas M. (Swiss National Bank); Ranaldo, Angelo (Swiss National Bank) |
| Abstract: | Does global currency volume increase on days when the Federal Open Market Committee (FOMC) meets? To test the hypothesis of excess currency volume on FOMC days, we use a novel data set from the Continuous Linked Settlement (CLS) Bank. The CLS measure captures roughly half of the global trading volume in foreign exchange (FX) markets. We find strong evidence that trading volume increases in the order of 5% across currency areas on FOMC days during 2003 to 2007. This result holds irrespective of the size of price changes in currency markets and FOMC policy shocks. The new evidence of excess FX trading on FOMC days is inconsistent with standard models of the asset market approach with homogenous agents. |
| Keywords: | Trading volume; FOMC; Global linkages |
| JEL: | F31 G12 |
| Date: | 2008–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2008_009&r=cba |
| By: | Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sarah M. Lein (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | This paper analyzes the impact of the media on consumers' inflation expectations. We distinguish two channels through which media can influence expectations. First, the intensity of news coverage on inflation plays a role (volume channel). Second, the content of these reports matters (tone channel). Employing a unique data set capturing media reports on inflation in Germany comprising 01/1998-12/2006 we are able to discriminate between these two effects. We find that the volume effect generally improves the accuracy of consumer forecasts while the tone channel induces a media bias. |
| Keywords: | Monetary policy, expectation formation, media coverage, media bias |
| JEL: | E52 D83 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:08-201&r=cba |
| By: | MArdi Dungey; Renee Fry; Brenda Gonzales-Hermosillo; Vance L. Martin; Chrismin Tang |
| Abstract: | This paper investigates whether fi?nancial crises are alike by considering whether a single modelling framework can fi?t multiple distinct crises in which contagion effects link markets across national borders and asset classes. The crises con- sidered are Russia and LTCM in the second half of 1998, Brazil in early 1999, dot-com in 2000, Argentina in 2001-2005, and the recent U.S. subprime mortgage and credit crisis in 2007. Using daily stock and bond returns on emerging and developed markets from 1998 to 2007, the empirical results show that fi?nancial crises are indeed alike, as all linkages are statistically important across all crises. However, the strength of these linkages does vary across crises. Contagion chan- nels are widespread during the Russian/LTCM crisis, are less important during subsequent crises until the subprime crisis, where again the transmission of con- tagion becomes rampant. |
| JEL: | C51 G15 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-15&r=cba |
| By: | Raphael A. Espinoza; Dimitrios P. Tsomocos |
| Abstract: | We show in an exchange economy with liquidity constraints that the volume of trade and asset prices depend on both the supply of liquidity by the Central Bank and on the liquidity of assets and commodities. As a result, monetary aggregates are informative for the assessment of economic developments and the conduct of monetary policy. We also show that the positive correlation between state prices and the future spot rate generates a risk-premium in the term structure of interest rates, even in absence of aggregate uncertainty. These results do not obtain in representative agent models but hold in any monetary economy with heterogeneous agents and short-term liquidity effects, where monetary costs act as transaction costs and the quantity theory of money is verified. |
| Keywords: | liquidity; cash-in-advance constraints; term structure of interest rates |
| JEL: | E43 G12 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2008fe28&r=cba |
| By: | Elena Andreou (University of Cyprus); Alessandra Pelloni (Faculty of Economics, University of Rome "Tor Vergata"); Marianne Sensier (University of Manchester) |
| Abstract: | We provide empirical support for a DSGE model with nominal wage stickiness where growth is driven by learning-by-doing and money shocks and their variance are allowed to impact on long-run output growth. In our theoretical model the variance of monetary shocks has a negative effect on growth, while output volatility is good for growth as a positive relationship exists. Utilising a bivariate GARCH-M model we test the empirical conditional mean and variance relationships of nominal money and production growth rates in the G7 countries. We corroborate the theoretical model predictions with evidence from Bonferroni multiple tests across the G7. |
| Keywords: | growth uncertainty, learning-by-doing, monetary uncertainty, multivariate GARCH-in-mean, nominal rigidity. |
| JEL: | C32 E32 O42 |
| Date: | 2008–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:114&r=cba |
| By: | Justina Fischer; Volker Hahn |
| Keywords: | ECB, trust, European Union, Eurobarometer, panel data, behavioral economics |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0026&r=cba |
| By: | von Hagen, Jurgen; Siedschlag, Iulia (Economic and Social Research Institute (ESRI)) |
| Abstract: | The countries of Central and Eastern Europe went from being largely closed to being largely open to international capital flows. This paper discusses their experience with capital account liberalization and coping with large capital inflows. We start with a discussion of basic economic characteristics and the real convergence achieved so far, and then discuss the pace and sequencing of capital account liberalization and the degree of international financial integration over the past decade. We then analyze trends and patterns of capital inflows in these countries in recent years. These stylized facts are useful for understanding the macroeconomic implications and policy challenges of coping with large capital inflows, which we discuss next. Finally we conclude with policy implications for emerging Asian economies. |
| JEL: | E44 F36 F41 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:esr:opeags:68&r=cba |
| By: | Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Ali M. Kutan (Southern Illinois University Edwardsville and the William Davidson Institute, Michigan); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps Universitaet Marburg) |
| Abstract: | We study the effects of FOMC communication, in particular speeches, on U.S financial markets returns and volatility over the period from 1998 to 2006. Using a GARCH model we empirically analyze the respective and combined influence of speeches, post-meeting statements, monetary policy reports, and testimonies. Firstly, we show that the impact on both returns and volatility is larger if the communication channel is more formal. Secondly, the communications of the Board of Governors (BOG) generally have a larger influence than those of the regional presidents. Thirdly, this tendency also holds when comparing the chairman’s and vice chairman’s impact with that of an “ordinary” BOG member, as well as when splitting the group of regional presidents into “voters” and “non-voters”. However, in the light of a number of unexpected signs of variables and their lack of statistical significance we conclude that Fed speeches by themselves may not be necessarily important events for financial markets. News agencies appear to perform the role of a filter for financial markets, with headlines sometimes substantially deviating from the underlying central bank speeches. |
| Keywords: | Central bank communication, central bank speeches, financial markets, monetary policy |
| JEL: | E52 G14 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200808&r=cba |
| By: | Vincenzo Atella (CEIS & Dipartimento SEFEMEQ - Università di Roma "Tor Vergata"); Marco Centoni (Dipartimento SEGES - Università del Molise); Gianluca Cubadda (Dipartimento SEFEMEQ - Università di Roma "Tor Vergata") |
| Abstract: | This paper contributes to the literature on the role of technology shocks as source of the business cycle in two ways. First, we document that time-series of US productivity and hours are apparently affected by a structural break in the late 60’s, which is likely due to a major change in the monetary policy. Second, we show that the importance of demand shocks over the business cycle has sharply increased after the break. |
| Keywords: | Business cycle, technology shocks, structural breaks |
| JEL: | C32 E32 |
| Date: | 2007–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:105&r=cba |
| By: | Rasmus Fatum (University of Alberta); Michael M. Hutchison (University of California, Santa Cruz, Hong Kong Institute for Monetary Research) |
| Abstract: | Estimating the effect of official foreign exchange market intervention is complicated by the fact that intervention at any point entails a self-selection choice made by the authorities and that no counterfactual is observed. To address these issues, we estimate the counterfactual exchange rate movement in the absence of intervention by introducing the method of propensity score matching to estimate the average treatment effect (ATE) of intervention. To derive the propensity scores we introduce a new intervention reaction function that includes the difference between market expectations and official announcements of macroeconomic developments that can influence the decision to intervene. We estimate the ATE for daily official intervention in Japan over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period and ineffective (or possibly counterproductive) during 2003 and 2004. These results hold up to a variety of robustness tests. Only sporadic and relatively infrequent intervention appears to be effective. |
| Keywords: | Foreign Exchange Intervention, Bank of Japan, Self-Selection, Matching Methods |
| JEL: | E58 F31 G15 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:022008&r=cba |
| By: | Masato Shizume (Research Institute for Economics and Business Administration, Kobe University) |
| Abstract: | Temin [1989] and Eichengreen [1992] argue that monetary policy played a key role in each country's economic performance during the Great Depression, and that some European policymakers hesitated to pursue an expansionary monetary policy even after departing from gold. Why did these policymakers not pursue the opportunities they were able to pursue to the fullest extent? This study explores this issue by looking at the case of Japan, focusing on the constraints it faced and the remedies available to it as a small, open economy. This study explores the relationship between interest rates in Japan and in the major international financial centers, using a new series of representative long-term interest rates and narratives. This study reveals that Japan imposed a restrictive monetary policy on itself even after departing from the gold standard. Japan did so because it needed to maintain its ties both with its trading partners and with the international financial markets. |
| JEL: | E42 N15 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:208&r=cba |
| By: | Malin Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arne Gieseck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Beatrice Pierluigi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Nick Vidalis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This study presents some stylised facts on wage growth differentials across the euro area countries in the years before and in the first eight years after the introduction of Economic and Monetary Union (EMU) in 1999. The study shows that wage growth dispersion, i.e. the degree of difference in wage growth at a given point in time, has been on a clear downward trend since the early 1980s. However, wage growth dispersion across the euro area countries still appears to be higher than the degree of wage growth dispersion within West Germany, the United States, Italy and Spain. Differences in wage growth rates between individual euro area countries and the euro area in the years before and in the first eight years after the introduction of EMU appear to be positively related to the respective differences between their Harmonised Index of Consumer Prices (HICP) inflation and average HICP inflation in the euro area. Conversely, relative wage growth differentials across euro area countries have been somewhat unrelated to relative productivity growth differentials. Some countries combine positive wage growth differentials and negative productivity growth differentials vis-à-vis the euro area average over an extended period – and hence positive unit labour cost growth differentials. These countries run the risk of accumulating competitiveness losses and it is therefore a challenge to ensure that the necessary adjustment mechanisms operate fully, in the sense that wage developments are sufficiently flexible and reflect productivity developments. Wage growth persistence within individual euro area countries – largely reflecting inflation persistence and certain institutional factors – might also have contributed somewhat to wage growth differentials across the euro area countries. Moreover, wage level convergence has also played a role in explaining wage growth patterns in the 1980s and the 1990s. However, since 1999, the link between the initial compensation level and the subsequent growth rate of compensation per employee appears barely significant. The study also shows a limited co-movement of wage growth across countries, even in the context of a high degree of business cycle synchronisation seen in the last few years. This suggests that the impact on wage growth of country-specific developments across euro area countries has been larger than the impact of common cyclical developments and external shocks. This could reflect the normal and desirable working of adjustment mechanisms, which – in an optimally functioning currency union with synchronised business cycles – would take place via price and cost and wage developments. On the other hand, structural impediments, for example a relatively low degree of openness in domestically-oriented sectors in some countries, might prevent a stronger link between the degree of synchronisation of wage growth rates and business cycles. JEL Classification: E24, E31, C10. |
| Keywords: | Cross-country wage dispersion, wage and productivity levels across countries and sectors. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080090&r=cba |
| By: | Lorca-Susino, Maria |
| Abstract: | Until the 19th and mid-20th centuries, economic theory explained that the economic status of a country was represented by the strength of its currency.2 This strength is measured by the exchange rate of one currency vis-á-vis another currency, a “zero-sum” game in which one currency gains what the other loses. In fact, during the 19th century, the strength of the Pound Sterling facilitated Britain’s global hegemonic political and economic power known as the Pax Britanica. During the 20th century, the strength of the US dollar represented both the economic and political hegemony of the US around the world known as the Pax Americana. Nowadays, the weakness of the US dollar is making specialists wonder if we are witnessing the end of Pax Americana and the beginning of something else, possibly a Pax Europea, led by the strength of the euro. This is the argument surrounding the current behaviour of the US$-€ exchange rate and its effect on the economic performance of these two economic blocs. While the current exchange rate between the US dollar and the euro has been considered a blessing for the US, it has become a matter of concern for most Eurozone countries. In fact, we are witnessing an unprecedented scenario where the country with a weak currency is actually pleased and the group of countries with a strong currency is worried. The strength of the euro is becoming irritating for the Eurozone and, nevertheless, the weakness of the US dollar is also pushing it to the brink of losing its status as a global currency. This exchange rate debate is accompanied by another debate concerning how the latest monetary policy actions taken by the US and Eurozone monetary authorities3, aimed at solving current economic imbalances, are affecting the US$-€ exchange rate. Scholars, economists, and politicians argue that these monetary policies seem unable to solve today’s economic problems in the EU as well as in the Eurozone, but are having a tremendous impact on the US$-€ exchange rate. This paper will explain in layman’s terms the relationship (or lack thereof) between two of today’s most important economic issues: the US dollar and euro exchange rate, and the monetary policy behind it. |
| Keywords: | US dolla; euro; Monetary Policy; INTOR |
| JEL: | E5 A10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9556&r=cba |
| By: | Genberg, Hans; He, Dong; Leung, Frank |
| Abstract: | This paper reviews the performance of the Hong Kong dollar Linked Exchange Rate system since the introduction of the three refinements to it in May 2005. It presents an analytical framework which argues that, in a fully credible exchange rate target zone regime, the spot exchange rate normally stays inside the band but does not have a natural tendency to converge towards the centre of the zone. While a certain level of interest rate differential between the Hong Kong dollar and the US dollar may persist, it should not grow significantly larger than what is implied by the width of the Convertibility Zone. Judged against this framework, the developments since May 2005 point to increased credibility of the refined Linked Exchange Rate system. |
| Keywords: | Hong Kong dollar linked exchange rate system |
| JEL: | E58 F31 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9440&r=cba |
| By: | Laurent Bilke (Lehman Brothers, 25 Bank Street, London E14 5LE, United Kingdom.); Livio Stracca (Counsel to the Executive Board, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We propose a new core inflation measure for the Euro area which places the emphasis on the more lasting, i.e. persistent, price developments at a disaggregated level. The importance of each component of the HICP is reweighted according to its relative persistence, as measured by the sum of the autoregressive coefficients or by an indicator of mean reversion. Unlike headline inflation, our baseline core inflation measure is highly correlated with ECB monetary policy decisions, which could mean that it contains ex ante (pre monetary policy) information on inflationary pressure. JEL Classification: E31. |
| Keywords: | Core inflation, inflation persistence. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080905&r=cba |
| By: | Pontiggia, Dario |
| Abstract: | This paper studies different types of commitment policy in an economy where the deterministic steady state is inefficient. We show how a policy suggested by the approach of policy design entails positive long-run inflation, even in the purely forward-looking canonical New Keynesian model. The long-run inflation target is robust to inflation persistence due to backward-looking rule-of-thumb behaviour by price setters. The optimal long-run inflation target is positive in all but one of the six theoretical cases studied. We evaluate policies on the basis of both the deterministic equilibrium and the stochastic equilibrium and present robustness analysis in terms of two structural parameters. |
| Keywords: | Optimal monetary policy; inflation persistence; policy rules; timeless perspective |
| JEL: | E5 E3 |
| Date: | 2008–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9534&r=cba |
| By: | James Forder |
| Abstract: | In his Nobel lecture, Friedman built on his earlier argument for a 'natural rate of unemployment' by painting a picture of an economics profession which, as a result of foolish mistakes, had accepted the Phillips curve as offering a lasting trade-off between inflation and unemployment and were thereby led to advocate a policy of inflation. It is argued here that in fact the orthodox economists of the time did not accept Phillips' analysis; almost no one made the mistakes in question; and very few advocated inflation on bases vulnerable to Friedman's theoretical critique. The Phillips curve was put to various uses, but advocating inflation was hardly amongst them. It is suggested that one lasting result of the uncritical acceptance of Friedman's history is to limit what appears to be within the reasonable range of views about macroeconomic policy. |
| Keywords: | Phillips Curve, Inflation, Friedman |
| JEL: | B22 B31 E12 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:398&r=cba |
| By: | James Forder |
| Abstract: | The 'expectations critique', usually attributed to Friedman or Phelps and dated towards the end of the 1960s, in fact originates much earlier. And rather than being an insight properly attributable to a particular individual, it was, by that time, a commonplace of economic discussion. This much is easy to establish. It is argued that the common attribution arises at least in part because the Keynesians unwisely chose to express their disagreement with Friedman in terms of expectations rather than in terms of the existence of the natural rate of unemployment. As a result, forty years later, it has become hard to see that two separate points ever existed. |
| Keywords: | Phillips Curve, Inflation, Expectations Critique |
| JEL: | B22 B31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:399&r=cba |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria) |
| Abstract: | Two recent studies have found markedly different measures of the welfare cost of inflation in South Africa, obtained through the estimation of long-run money demand relationships using cointegration and long-horizon approaches. Realizing that the monetary aggregate and the interest rate variables are available at higher frequencies than the measure of income and that long-run properties of data are unaffected under alternative methods of time aggregation, we test for the robustness of the two estimation procedures under temporal aggregation and systematic sampling. Our results indicate that the long-horizon method is more robust to alternative methods of time aggregation, and, given this the welfare cost of inflation in South Africa for an inflation target band of 3 percent to 6 percent lies between 0.15 percent and 0.41 percent. |
| Keywords: | Cointegration, Long-Horizon Regression, Money Demand, Time Aggregation, Welfare Cost of Inflation. |
| JEL: | C15 C32 C43 E31 E41 E52 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200825&r=cba |
| By: | Eric Mayer (University of Würzburg, Department of Economics, Würzburg, Germany); Oliver Grimm (Center of Economic Research at ETH Zurich) |
| Abstract: | In this paper, we explore the benefits from a supply-side oriented fiscal tax policy within the framework of a New Keynesian DSGE model. We show that countercyclical tax rules, which are contingent on the observed welfare gap or alternatively on the markup shock and levied on value added, reduce remarkably the inverse impact of cost push shocks. We state that the tax rule establishes a path for the evolution of marginal cost at the firm level that largely prevents built up of price dispersion. We highlight that this tax policy is also effective under a balancedbudget regime. Hence, fiscal policy can disencumber monetary policy in the light of cost push shocks. |
| Keywords: | Countercyclical fiscal policy, welfare costs, nominal rigidities |
| JEL: | E32 E61 E62 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:08-88&r=cba |
| By: | Marianna Valentinyi-Endrész (Magyar Nemzeti Bank); Zoltán Vásáry (Magyar Nemzeti Bank) |
| Abstract: | This paper employs the methodology of Wilson (1997) on Hungarian data to conduct a macro stress test in relation to banks’ corporate loan portfolio. First, sector specific models of bankruptcy are estimated, where the bankruptcy frequency is linked to the general health of the economy. Data on bankruptcy filings in Hungary between 1995 and 2005 are used. Then, after identifying relevant shocks, the estimated models are employed in Monte Carlo simulation to conduct a stress test on the Hungarian banking sector. Various loss measures are defined to quantify the impact of shocks and evaluate the resilience of the Hungarian banking sector. The sensitivity of the stress test results to the endogeneity of LGD and the prevailing macro environment are also examined. |
| Keywords: | credit risk, bankruptcy, macro stress testing. |
| JEL: | C32 G21 G33 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2008/2&r=cba |
| By: | David Cobham (Heriot-Watt University, Edimburgh); Stefania Cosci (LUMSA, Rome); Fabrizio Mattesini (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | Changes in formal and informal central bank independence (CBI) in France, Italy and the UK in the period from the mid-1970s to the 1990s are examined; the major changes occurred in the 1990s, after the disinflations of the 1980s. Broad trends in the informal independence of central banks, defined as the ability to pursue price stability regardless of the government’s preferences, are identified on the basis of a monetary policy narrative and an analysis of a set of qualitative determinants of informal independence. The most important determinants are the social/political acceptance that monetary policy is the sphere of the central bank, the existence of antiinflationary commitments in the form of intermediate targets for monetary policy, the degree of social consensus on the means and ends of macroeconomic policy, and the relative technical expertise of the central bank. These broad trends help to explain some of the inflation experience of the 1980s and 1990s which cannot be understood in terms of changes to formal CBI. |
| Keywords: | Monetary policy, central bank independence, inflation |
| JEL: | E42 E58 |
| Date: | 2008–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:116&r=cba |
| By: | Thierry Bracke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Fidora (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Since the late-1990s, the global economy is characterised by historically low risk premia and an unprecedented widening of external imbalances. This paper explores to what extent these two global trends can be understood as a reaction to three structural shocks in different regions of the global economy - (i) monetary shocks (“excess liquidity” hypothesis), (ii) preference shocks (“savings glut” hypothesis), and (iii) investment shocks (“investment drought” hypothesis). In order to uniquely identify these shocks in an integrated framework, we estimate structural VARs for the two main regions with widening imbalances, the United States and emerging Asia, using sign restrictions that are compatible with standard New Keynesian and Real Business Cycle models. Our results show that monetary shocks potentially explain the largest part of the variation in imbalances and financial market prices. We find that havings shocks and investment shocks explain less of the variation. Hence, a “liquidity glut” may have been a more important driver of real and financial imbalances in the US and emerging Asia than a “savings glut”. JEL Classification: E2, F32, F41, G15. |
| Keywords: | Global imbalances, global liquidity, savings glut, investment drought, current account, structural VARs. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080911&r=cba |
| By: | Yin-wong Cheung (University of California, Santa Cruz, USA, Hong Kong Institute for Monetary Research); Hiro Ito (Portland State University, Portland, USA) |
| Abstract: | We examine the empirical determinants of the demand for international reserves and compare the experiences of some Asian and Latin American economies. Our empirical results indicate that different vintages of the model of international reserves give different inferences about the appropriate level of international reserves. The developed and developing economies have equations of the demand for international reserves that are quite different from each other. Further, the Asian economies and the Latin American economies have different empirical determinants of the demand for international reserves. Our results highlight the complexity of evaluating whether an economy is holding an excessive or deficient level of international reserves ¨C the inference can be heavily dependent on the choice of a benchmark model. A direct comparison affirms the perception that the Asian economies tend to hold more international reserves than the Latin American economies. |
| Keywords: | Foreign Exchange Reserves, Macro Determinants, Financial Factors, Institutional Variables, Excessive Hoarding of International Reserves |
| JEL: | F31 F33 F34 F36 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:072008&r=cba |
| By: | Kang Shi (The Chinese University of Hong Kong, Hong Kong Institute for Monetary Research); Juanyi Xu (Hong Kong University of Science and Technology, Simon Fraser University, Hong Kong Institute for Monetary Research) |
| Abstract: | This paper develops a small open economy model with sticky prices to show why a flexible exchange rate policy is not desirable in East Asian emerging market economies. We argue that weak input substitution between local labor and import intermediates in traded goods production and extensive use of foreign currency in export pricing in these economies can help to explain this puzzle. In the presence of these two trade features, the adjustment role of the exchange rate is inhibited, so even a flexible exchange rate cannot stabilize the real economy in face of external shocks. Instead, due to the high exchange rate pass-through, exchange rate changes will lead to instability in both inflation and production cost. As a result, a fixed exchange rate may dominate a monetary policy rule with high exchange rate flexibility in terms of welfare. In a sense, our finding provides a rationale for the "fear of floating" phenomenon in these economies. That is, "fear of floating" may be central banks' rational reaction when these economies are constrained by the trade features mentioned above. |
| Keywords: | Input Substitution, Export Pricing, Exchange Rate Flexibility, Welfare |
| JEL: | F3 F4 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:102008&r=cba |
| By: | Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Josef Pöschl (The Vienna Institute for International Economic Studies, wiiw); A. Mihailov; Waltraut Urban (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Sándor Richter (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Gábor Hunya (The Vienna Institute for International Economic Studies, wiiw); Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Zdenek Lukas (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | After a period of exceptionally high growth in the whole region of Central, East and Southeast Europe in the past two years, there has been some slowdown in GDP growth. Nevertheless growth remains largely robust. In particular the new member states of the EU (NMS) appear to be largely decoupled from negative global impacts, experiencing only a moderate slowdown in growth, except for the Baltics. The NMS feel, of course, the effects of external price or supply shocks. These effects should however be transient, provided there are no further price shocks in world markets. These are the main results of the medium-term forecast published by the Vienna Institute for International Economic Studies (wiiw). The resilience of the NMS derives from growing labour productivity partly offsetting the combined effects of appreciating currencies and rising wage costs. Therefore the slowdown is generally more moderate than commonly expected (with the exception of the Baltic countries, where more pronounce adjustments took place). The semi-sovereign monetary policies pursued in the major NMS bear many risks, yet on the whole they have proven effective in preventing the rise of both excessive credit booms and excessive real appreciation. The economies of the EU candidate and potential candidate countries in Southeast Europe continue to catch up vis-à-vis the EU. Southeast Europe (SEE-7: Albania, Bosnia and Herzegovina, Croatia, Macedonia, Montenegro, Serbia and Turkey) has turned into a high-growth region in recent years, but some deceleration of real GDP growth has become visible there too. The slowdown was most pronounced in Turkey after several years of very high growth. We reckon with an improving international business climate and expect the SEE-7 to return to higher growth by the year 2010. Inflation has calmed down, but it is still a matter of concern especially in Serbia and Turkey, the two countries where its dynamism was accompanied by currency depreciation against the euro. The countries are also faced with higher bills for imports of energy and food, so that the gap in the current account has widened. Unemployment is high, a fact that will not change substantially during the next few years. Inflation calms down: The whole region was hit by the external price shock that swiftly resulted in a rapid surge in domestic prices for food and energy. The report argues that the worldwide hike in energy and food prices in the period 2007-2008 is primarily a supply-side shock caused by production shortfalls that can be traced back to weather conditions or specific factors restricting production. Authorities in the countries of Central, East and Southeast Europe seem to be taking the current inflation acceleration in an unusually light manner. Some of the countries (those on a fixed exchange rate regime) lack the means to respond. Others respond weakly (if at all) because they expect a growth slowdown and harbour concerns over the continuing appreciation of local currencies. In the longer term, inflation and unit labour costs are shown to be moving mostly in tandem. Rising wages will not incur much of an inflationary risk as long as roughly matched by gains in labour productivity. As this holds true on the whole for the NMS, their longer-term inflation prospects are quite good. Price-wage spirals are not expected to spin out of control. In the absence of another round of world-market price shocks, inflation will subside fairly quickly. In the West Balkans, the inflationary spike will also be overcome relatively swiftly. Disinflation, however, will be slower in Kazakhstan, Russia, Turkey and Ukraine, given that it will be starting from much higher levels than elsewhere. The Russian economy has been booming in the past decade, largely owing to surging energy prices and export revenues. Apart from rising assertiveness, the shadow side of this boom has been widespread corruption and deteriorating external relations ' not only with the EU. The key challenges are ' apart from the fight against corruption and bureaucratic obstacles ' the diversification of the economy using Industrial Policy tools and government-sponsored investment programmes. The wiiw forecast for Russian GDP growth in the coming years reckons with ongoing reliance on the (modernized) energy sector, possibly with a few high-tech niches, and an average annual GDP growth of around 6% in 2010. The expected modest growth slowdown appears inevitable, at least until the end of the decade, before any (uncertain) modernization efforts start to bear fruit. Ukraine's economy keeps performing well, largely on account of the booming household consumption backed by expanding credit and generous social transfers. The dramatic surge in food prices has driven consumer inflation to above 30%; however, inflationary pressures should subside in the second half of 2008, not least thanks to the expected good grain harvest. The immediate growth prospects are good. The economic growth is home-driven, the widening external imbalances are covered by strong inflows of FDI, which are likely to pick up further following the country's recent WTO accession. Banking sector problems remain central to the economic development of Kazakhstan. On the positive side, the government has sufficient financial resources to withstand the crisis. Problems resulting from the banking crisis forced us to reduce our forecast for the GDP growth. But we have also revised our inflation forecast downwards primarily due to higher efficiency of government's policy which has included a broad spectrum of measures. Also in China the fast economic growth has moderately cooled down and the slowing down of the global economy will probably have a significant impact only in the months to come. Because of rapidly rising prices, China's policy makers will have to balance measures to fight inflation against the weakening economic outlook. |
| Keywords: | Central and East European new EU member states, Southeast Europe, Balkans, former Soviet Union, China, Turkey, economic forecasts, GDP growth, labour productivity, exchange rates, inflation, EU integration |
| JEL: | O52 O57 P24 P27 P33 P52 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:wii:fpaper:fc:2&r=cba |
| By: | Kelly, Roger (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | Two major events have affected the monetary regime in the United Kingdom in recent years, namely the introduction of inflation targeting, and the granting of operational independence to the Bank of England. In this paper we examine what impact, if any, these events have had on inflation expectations. A series of Granger causality tests are used in order to examine the causal relationship between a measure of prices and inflation expectations. We find evidence that the introduction of inflation targeting caused both the general public and professionals to anchor their expectations, rather than basing them on current RPI inflation. |
| Keywords: | inflation; expectations |
| JEL: | D84 E31 E58 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0024&r=cba |
| By: | Andrew Coleman (Motu Economic and Public Policy Research); Özer Karagedikli (Bank of England) |
| Abstract: | This paper examines the relative size of the effects of New Zealand monetary policy and macroeconomic data surprises on the spot exchange rate, 2 and 5 year swap rate differentials, and the synthetic forward exchange rate schedule. We find that the spot exchange rate and 5 year swap rates respond by a similar magnitude to monetary surprises, implying there is little response of the forward exchange rate to this type of news. In contrast, the spot exchange rate responds by nearly three times as much as 5 year interest rates to CPI and GDP surprises, implying that forward rates appreciate to higher than expected CPI or GDP news. This is in contrast to standard theoretical models and US evidence. Lastly, we show that exchange rates but not interest rates respond to current account news. The implications of these results for monetary policy are considered. |
| Keywords: | New Zealand, interest rates, exchange rates, news |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:mtu:wpaper:08-08&r=cba |
| By: | António Portugal Duarte (GEMF and Faculdade de Economia, Universidade de Coimbra); João Sousa Andrade (GEMF and Faculty of Economics of the University of Coimbra); Adelaide Duarte (GEMF and Faculty of Economics of the University of Coimbra) |
| Abstract: | This work examines the participation of the Portuguese economy in the ERM of the EMS based on some of the main predictions of the target zone literature. The exchange rate distribution reveals that the majority of the observations lie close to the central parity, thus rejecting one of the key predictions of the Krugman (1991) model. Using a M-GARCH model however we confirm that there is a trade-off between exchange rate volatility and interest rates differential volatility. These results express the increased credibility of the Portuguese monetary policy, due manly to the modernisation of the banking and financial system and to the progress made in terms of the disinflation process under an exchange rate target zone policy. In accordance to these results we can say that the participation of the Portuguese escudo in an exchange rate target zone was crucial to create the conditions of stability, credibility and confidence necessary for the adoption of a single currency. |
| Keywords: | Credibility, Exchange rate stability, M-GARCH, ERM, EMS, Volatility and target zones |
| JEL: | C32 C51 F31 F41 G15 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2008-03&r=cba |
| By: | Michael Geiger |
| Abstract: | China’s monetary policy applies to two sets of monetary policy instruments: (i) instruments of the Central Bank (CB), the People’s Bank of China (PBC); and (ii) non-Central Bank (NCB) policy instruments. Additionally, the PBC’s instruments include: (i) price-based indirect; and (ii) quantity-based direct instruments. The simultaneous usage of these instruments leads to various distortions that ultimately prevent the interest rate channel of monetary transmission from functioning. Moreover, the strong influence of quantity-based direct instruments and non-central bank policy instruments bring into question the approach of indirect monetary policy in general. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:unc:dispap:187&r=cba |