nep-cba New Economics Papers
on Central Banking
Issue of 2008‒08‒21
29 papers chosen by
Alexander Mihailov
University of Reading

  1. Financial Stability, the Trilemma, and International Reserves By Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor
  2. Daily Monetary Policy Shocks and the Delayed Response of New Home Sales By James D. Hamilton
  3. What's News in Business Cycles By Stephanie Schmitt-Grohe; Martin Uribe
  4. What's a Recession, Anyway? By Edward E. Leamer
  5. Monetary Aggregates and Liquidity in a Neo-Wicksellian Framework By Matthew Canzoneri; Robert E. Cumby; Behzad Diba; David Lopez-Salido
  6. The Macroeconomic Implications of a Key Currency By Matthew Canzoneri; Robert E. Cumby; Behzad Diba; David Lopez-Salido
  7. What horizon for targeting inflation? By Q. Farooq Akram.
  8. Federal Reserve Information during the Great Moderation By Antonello D’Agostino; Karl Whelan
  9. Monetary Policy by Committee:Consensus, Chairman Dominance or Simple Majority? By RIBONI, Alessandro; RUGE-MURCIA, Francisco J.
  10. Prices and Exchange Rates: A Theory of Disconnection By Jose Antonio Rodriguez Lopez
  11. Nonlinearity as an Explanation of the Forward Exchange Rate Anomaly By Derek Bond; Niall Hession; Michael J Harrison; Edward J O’Brien
  12. Monetary stabilisation in a currency union of small open economies By Marcelo Sánchez
  13. Productivity and Exchange Rate Dynamics: Supporting the Harrod-Balassa-Samuelson Hypothesis through an ‘Errors in Variables’ Analysis By Pham Van Ha and Tom Kompas
  14. Adjusting Government Policies for Age Inflation By John B. Shoven; Gopi Shah Goda
  16. An Economic Model of the Planning Fallacy By Markus K. Brunnermeier; Filippos Papakonstantinou; Jonathan A. Parker
  17. Crises and Sudden Stops: Evidence from International Bond and Syndicated-Loan Markes By Graciela L. Kaminsky
  18. Inflation, Investment and Growth: a Banking Approach By Gillman, Max; Kejak, Michal
  19. Do Central Banks Respond to Exchange Rate Movements? Some New Evidence from Structural Estimation By Wei Dong
  21. Government spending volatility and the size of nations By Davide Furceri; Marcos Poplawski Ribeiro
  22. Efficiency Improvement from Restricting the Liquidity of Nominal Bonds By Shouyong Shi
  23. Global Food Crisis & Inflationary Pressures: Short and Medium to Long Term Policy Options By Abbas, Syed Kanwar
  24. Owner-Occupied Housing Costs and Bias in the Irish Consumer Price Index By Colm McCarthy
  25. Are Emerging Asia’s Reserves Really Too High? By Marta Ruiz-Arranz; Milan Zavadjil
  26. The Phillips Curve and the Italian Lira, 1861-1998 By Alessandra Del Boca; Michele Fratianni; Franco Spinelli; Carmine Trecroci
  27. What Can Taylor Rules Say About Monetary Policy in Latin America? By Carvalho, Alexandre; Moura, Marcelo L.
  28. Monetary Transmission in an Emerging Targeter: The Case of Brazil By A. R. Pagan; Luis Catão; Douglas Laxton
  29. Understanding the Inflationary Process in the GCC Region: The Case of Saudi Arabia and Kuwait By Maher Hasan; Hesham Alogeel

  1. By: Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor
    Abstract: The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt.
    JEL: E44 E58 F21 F31 F36 F41 N10 O24
    Date: 2008–08
  2. By: James D. Hamilton
    Abstract: This paper offers an explication of the hump-shaped response of real economic activity to changes in monetary policy, focusing on the particular channel operating through new home sales. I suggest that the conventional notion of a monetary policy shock as a surprise change in the fed funds rate is misspecified. The primary news for market participants is not what the Fed just did, but is instead new information about what the Fed is going to do in the near future. Revisions in these anticipations show up instantaneously in long-term mortgage rates. Although mortgage rates respond well before the Fed actually changes its target rate, home sales do not respond until much later. The paper attributes this delay to cross-sectional heterogeneity in search times. This framework offers a description of the lags in the effects of monetary policy that is both more detailed, allowing us in principle to measure the consequences at the daily frequency, and more believable than traditional measures.
    JEL: E44 E52
    Date: 2008–08
  3. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: In this paper, we perform a structural Bayesian estimation of the contribution of anticipated shocks to business cycles in the postwar United States. Our theoretical framework is a real-business-cycle model augmented with four real rigidities: investment adjustment costs, variable capacity utilization, habit formation in consumption, and habit formation in leisure. Business cycles are assumed to be driven by permanent and stationary neutral productivity shocks, permanent investment-specific shocks, and government spending shocks. Each of these shocks is buffeted by four types of structural innovations: unanticipated innovations and innovations anticipated one, two, and three quarters in advance. We find that anticipated shocks account for more than two thirds of predicted aggregate fluctuations. This result is robust to estimating a variant of the model featuring a parametric wealth elasticity of labor supply.
    JEL: C11 C51 E13 E32
    Date: 2008–08
  4. By: Edward E. Leamer
    Abstract: Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse.
    JEL: E3 E32 E37
    Date: 2008–08
  5. By: Matthew Canzoneri; Robert E. Cumby; Behzad Diba; David Lopez-Salido
    Abstract: Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modeled. Critics contend that these models are incomplete and unsuitable for monetary-policy evaluation. Our Banks and Bonds model starts with a standard neo-Wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks. The Banks and Bonds model gives a more complete description of the economy, but the neo-Wicksellian model has the virtue of simplicity. Our purpose here is to see if the neo-Wicksellian model gives a reasonably accurate account of macroeconomic behavior in the more complete Banks and Bonds model. We do this by comparing the models' second moments, variance decompositions and impulse response functions. We also study the role of monetary aggregates and velocity in predicting inflation in the two models.
    JEL: E40 E50
    Date: 2008–08
  6. By: Matthew Canzoneri; Robert E. Cumby; Behzad Diba; David Lopez-Salido
    Abstract: What are the macroeconomic consequences of the dominant role of the dollar in the international monetary system? Here, we present a calibrated two country model in which exports are invoiced in the key currency, and government bonds denominated in the key currency are held internationally to facilitate trade. Domestic government bonds and money are held in each country to facilitate domestic transactions. Our model generates deviations from uncovered interest parity that are as volatile as some empirical estimates, but much too small by others. Our model also speaks to some other empirical anomalies, such as the Backus - Smith puzzle. Shocks affecting asset supplies -- such as bond financed tax cuts, and open market operations -- have large effects in our model because they generate non-Ricardian changes in household wealth. Generally, shocks emanating from the key currency country do more to destabilize the world economy than equal sized shocks coming from the other country. Similarly, monetary and fiscal policy innovations in the key currency country are more potent than those in the other country. On the other hand, the key currency country is more vulnerable to financial market turbulence, such as a sell off of key currency bonds, which can lower consumption dramatically.
    JEL: F3 F4 F41
    Date: 2008–08
  7. By: Q. Farooq Akram. (Norges Bank (Central Bank of Norway))
    Abstract: We investigate optimal horizons for targeting inflation in response to different shocks and their properties under alternative preferences of an inflation-targeting central bank. Our analysis is based on a well specified macroeconometric model of Norway, but we examine how alternative specifications of its key equations would affect our results. We find that the optimal horizon is highly shock-specific, precluding general conclusions for demand and supply shocks. An extension of the horizon with concern for output and/or interest rate fluctuations beyond some shock-specific level proves counterproductive. The size of a given shock does not affect the horizon unless the central bank cares about interest rate volatility, while its sign does not matter unless the model is non-linear. The optimal horizon in response to a combination of shocks cannot be derived from those for each of the shocks, as different shocks may amplify or modify the effects of each other. In this case, however, sources of shocks as well as their sizes and signs become relevant, leading to complex dynamics of inflation and output. Successful inflation targeting in such cases may require a complex interest rate response. The optimal horizon generally increases with the degree of persistence in a shock and decreases with the strength of stabilisation mechanisms in the model.
    Keywords: Monetary policy, Inflation targeting, Horizon
    JEL: C53 E31 E52
    Date: 2008–01–24
  8. By: Antonello D’Agostino (Central Bank); Karl Whelan (University College Dublin)
    Abstract: Using data from the period 1970-1991, Romer and Romer (2000) showed that Federal Reserve forecasts of inflation and output were superior to those provided by commercial forecasters. In this paper, we show that this superior forecasting performance deterio- rated after 1991. Over the decade 1992-2001, the superior forecast accuracy of the Fed held only over a very short time horizon and was limited to its forecasts of inflation. In addition, the performance of both the Fed and the commercial forecasters in pre- dicting inflation and output, relative to that of “naive” benchmark models, dropped remarkably during this period.
    Date: 2007–12–22
  9. By: RIBONI, Alessandro; RUGE-MURCIA, Francisco J.
    Abstract: This paper studies the theoretical and empirical implications of monetary policy making by committee under three different voting protocols. The protocols are a consensus model, where super-majority is required for a policy change; an agenda-setting model, where the chairman controls the agenda; and a simple majority model, where policy is determined by the median member. These protocols give preeminence to different aspects of the actual decision making process and capture the observed heterogeneity in formal procedures across central banks. The models are estimated by Maximum Likehood using interest rate decisions by the committees of five central banks, namely the Bank of Canada, the Bank of England, the European Central Bank, the Swedish Riksbank, and the U.S. Federal Reserve. For all central banks, results indicate that the consensus model is statically superior to the alternative models. This suggests that despite institutionnal differences, committees share unwritten rules and informal procedures that deliver observationally equivalent policy decisions.
    Keywords: Committees, voting models, status-quo bias, median voter
    JEL: D7 E5
    Date: 2008
  10. By: Jose Antonio Rodriguez Lopez (Department of Economics, University of California-Irvine)
    Abstract: I present partial and general equilibrium versions of a sticky-wage model of exchange rate pass-through with heterogeneous producers and endogenous markups. The model's results are consistent with a story of substantial expenditure-switching effects of exchange rate changes in the presence of low levels of exchange rate pass-through to firm-level and aggregate import prices. After an exchange rate shock, aggregate import prices are subject to a survivorship bias due to changes in the extensive margin of trade. At the firm level, each producer adjusts its markups depending on its own productivity and the change in the competition environment generated by the exchange rate movement. Firm-level price responses are asymmetric -- different for appreciations and depreciations -- and adjustments in the intensive margin of trade are substantial. The general equilibrium model, solved with a second-order solution method, preserves the partial equilibrium results and shows how firm relocations increase the persistence of exogenous shocks.
    Keywords: Exchange rate pass-through; Heterogeneous firms; Endogenous markups
    JEL: F12 F41
    Date: 2008–07
  11. By: Derek Bond (University of Ulster); Niall Hession (University of Ulster); Michael J Harrison (University College Dublin); Edward J O’Brien (European Central Bank)
    Abstract: This paper shows that nonlinearity can provide an explanation for the forward exchange rate anomaly (Fama, 1984). Using sterling-Canadian dollar data, and modelling nonlinearity of unspecified form by means of a random field, we find strong evidence of time-wise nonlinearity and, significantly, obtain parameter estimates that conform with theory to a high degree of precision: the anomaly disappears.
    Keywords: Forward exchange rate anomaly; nonlinearity; random field regression
    JEL: C22 F31
    Date: 2007–12–30
  12. By: Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany)
    Abstract: This paper studies stabilisation policies in a multi-country currency union of small open economies. It abstracts from key factors favouring currency union formation, such as reduced transaction costs and enhanced credibility, which are exogenous to the factors studied here. Demand-side shocks hamper monetary union stabilisation unless members face identical output-inflation tradeoffs and their business cycles are perfectly synchronised. Under supply shocks, welfare implications from joining a currency union are less clear cut. In particular, when these shocks are common across participating countries a tradeoff arises whereby the latter bene?t if they are relatively open but are at a disadvantage in case they are of small size. Monetary-?scal interaction leads to a free rider problem, with area-wide supply shocks eliciting higher interest rate variability. Compared with the case of real wage rigidity, increased real wage ?exibility mitigates the free rider problem. Higher trade union decentralisation overall favours a currency union. The present multi-country currency union setup should not be seen as an attempt at settling the sharp differences that exist in the literature. Our model could be modi?ed in order to derive results that are valid in more realistic environments. These include the analysis of public debt considerations in the case of ?scal policies, and both institutional and (further) macroeconomic aspects in the area of wage determination. JEL Classification: E52, E58, F33, F42, E63.
    Keywords: Monetary union, stabilisation, welfare, small open economies, fi?scal policy, wage setting.
    Date: 2008–08
  13. By: Pham Van Ha and Tom Kompas
    Abstract: Standard tests of the Harrod-Balassa-Samuelson (HBS) hypothesis treat productivity levels in and across countries as fixed and observable, and offer little empirical support for the hypothesis. If productivity follows a jump-diffusion process, these standard tests will generate biased estimates, measuring productivity levels with error. This paper instead proposes an ‘errors in variables’ approach to correct this bias, and finds support for the HBS hypothesis assuming a jump-diffusion process in productivity. Empirical results are obtained for a data set available for the United States, Japan, West Germany and France over the period 1960 to 1996.
    Date: 2008
  14. By: John B. Shoven; Gopi Shah Goda
    Abstract: Government policies that are based on age do not adjust to the fact that a given age is associated with a higher remaining life expectancy and lower mortality risk relative to earlier time periods due to improvements in mortality. We examine four possible methods for adjusting the eligibility ages for Social Security, Medicare, and Individual Retirement Accounts to determine what eligibility ages would be today and in 2050 if adjustments for mortality improvement were taken into account. We find that historical adjustment of eligibility ages for age inflation would have increased ages of eligibility by approximately 0.15 years annually. Failure to adjust for mortality improvement implies the percent of the population eligible to receive full Social Security benefits and Medicare will increase substantially relative to the share eligible under a policy of age adjustment.
    JEL: H51 H55 J11 J14
    Date: 2008–08
  15. By: Samuel Bentolila; Juan J. Dolado; Juan F. Jimeno (CEMFI, Centro de Estudios Monetarios y Financieros)
    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: 2007–12
  16. By: Markus K. Brunnermeier; Filippos Papakonstantinou; Jonathan A. Parker
    Abstract: People tend to underestimate the work involved in completing tasks and consequently finish tasks later than expected or do an inordinate amount of work right before projects are due. We present a theory in which people underpredict and procrastinate because the ex-ante utility benefits of anticipating that a task will be easy to complete outweigh the average ex-post costs of poor planning. We show that, given a commitment device, people self-impose deadlines that are binding but require less smoothing of work than those chosen by a person with objective beliefs. We test our theory using extant experimental evidence on differences in expectations and behavior. We find that reported beliefs and behavior generally respond as our theory predicts. For example, monetary incentives for accurate prediction ameliorate the planning fallacy while incentives for rapid completion aggravate it.
    JEL: D10 D80 E21
    Date: 2008–08
  17. By: Graciela L. Kaminsky
    Abstract: The crises in Mexico, Thailand, and Russia in the 1990s spread quite rapidly to countries as far apart as South Africa and Pakistan. In the aftermath of these crises, many emerging economies lost access to international capital markets. Using data on international primary issuance, this paper studies the determinants of contagion and sudden stops following those crises. The results indicate that contagion and sudden stops tend to occur in economies with financial fragility and current account problems. They also show that high integration in international capital markets exposes countries to sudden stops even in the absence of domestic vulnerabilities.
    JEL: F30 F36
    Date: 2008–08
  18. By: Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: Investment and growth are found empirically to be negatively affected by inflation. Yet evidence also supports a positive Tobin effect whereby greater capital intensities and lower real interest rates result. The negative investment and positive capital intensity effects appear hard to reconcile. We present a model with both effects by requiring investment to be exchanged for, rather than frictionlessly being acquired, so that an inflation tax lowers investment but still induces a reallocation of factor inputs from labor towards capital. Thereby the economy captures the investment, Tobin and growth effects simultaneously.
    Keywords: Inflation; investment; growth; Tobin
    JEL: C23 E44 O16 O42
    Date: 2008–08
  19. By: Wei Dong
    Abstract: This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand and the United Kingdom. We develop and estimate a structural general equilibrium two-sector model with sticky prices and wages and limited exchange rate pass-through. Different specifications for the monetary policy rule and the real exchange rate process are examined. The results indicate that the Reserve Bank of Australia, the Bank of Canada and the Bank of England paid close attention to real exchange rate movements, whereas the Reserve Bank of New Zealand did not seem to incorporate exchange rate movements explicitly into their policy rule. With a higher degree of intrinsic inflation persistence, the central bank of New Zealand seems less concerned about future inflation pressure induced by current exchange rate movements. In addition, the structure of the shocks driving inflation and output variations in New Zealand is such that it may be sufficient for the Reserve Bank of New Zealand to only respond to exchange rate movements indirectly through stabilizing inflation and output.
    Keywords: Exchange rates; Monetary policy framework; International topics
    JEL: F3 F4
    Date: 2008
  20. By: Enrique Sentana; Antonio Diez de los Rios (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: Nowadays researchers can choose the sampling frequency of exchange rates and interest rates. If the number of observations per contract period is large relative to the sample size, standard GMM asymptotic theory provides unreliable inferences in UIP regression tests. We specify a bivariate continuous-time model for exchange rate and forward premia robust to temporal aggregation, unlike the discrete time models in the literature. We obtain the UIP restrictions on the continuous-time model parameters, which we estimate efficiently, and propose a novel specification test that compares estimators at different frequencies. Our empirical results based on correctly specified models reject UIP.
    Keywords: Exchange rates, forward premium puzzle, Hausman test, interest rates, Orstein-uhlenbeck process, temporal aggregation.
    JEL: F31 G15
    Date: 2007–09
  21. By: Davide Furceri (European Central Bank and University of Palermo. European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Marcos Poplawski Ribeiro (CEPII and University of Amsterdam. CEPII - Centre d’etudes prospectives et d’informations internationales, 9, rue Gerges Pitard - 75740, Paris, France.)
    Abstract: This paper provides empirical evidence showing that smaller countries tend to have more volatile government spending for a sample of 160 countries from 1960 to 2000. We argue that the larger size of a country decreases the volatility of government spending because it acts as an insurance against idiosyncratic shocks, and it leads to increasing returns to scale due to the higher ability of the government to spread its cost of financing over a larger pool of taxpayers. The results are robust to different time and country samples, different econometric techniques and to several sets of control variables. The analysis also evinces that country size is negatively related to the discretionary part of government spending and to the volatilities of most of the government spending items. JEL Classification: E62, H10.
    Keywords: Fiscal Policy, government size, fiscal volatility, country size.
    Date: 2008–08
  22. By: Shouyong Shi
    Abstract: This paper addresses why it is beneficial for a society to restrict the use of nominal bonds as a means of payment for goods. The model has a centralized asset market and a decentralized goods market. Individuals face matching shocks that affect the marginal utility of consumption, but they cannot insure, borrow or trade assets against such risks. The government imposes a legal restriction to prohibit nominal bonds from being used as a means of payment in a subset of trades. I show that this partial legal restriction can improve the society's welfare. In contrast to the literature, the efficiency role of the restriction exists in the steady state and it does not require the households to be able to trade assets after receiving the shocks. Moreover, even when lump-sum taxes are available, the efficiency role continues to exist under a condition that induces optimal money growth to be above the Friedman rule.
    Keywords: Nominal Bonds; Money; Efficiency; Return dominance
    JEL: E40
    Date: 2008–08–12
  23. By: Abbas, Syed Kanwar
    Abstract: The present paper is an initiative to pin down major factors behind exorbitant inflationary pressures in the global economy. The paper mentions that among other factors productivity shocks, external shocks, inflationary expectations and conversion of food crops into fuel generation are the major drivers of inflation (especially food inflation) in the present inflationary era. An attempt is also made to offer some short and medium to long term policy recommendations in this regard. Especially, the acquisition of internal growth momentum is emphasized to absorb the severity of imported inflation in the global economy as well as in Pakistan’s economic scenario. Last but not the least, the paper highlights that inflationary pressures are more sensitive to the productivity shocks than the impact of monetary policy operations in the short run and therefore, supply side measures along with monetary policy operations are important to control inflationary stance in the emerging economies including Pakistan.
    JEL: E31 E6
    Date: 2008–07
  24. By: Colm McCarthy (University College of Dublin)
    Abstract: The treatment of owner-occupied housing costs is a recurring problem in the construction of consumer price indices, and there are competing methodologies. In the most widely-used Irish index, the Payments Approach, which attaches a weight to a term involving historical house prices and an interest rate, is used to measure these costs. It is argued that this has resulted in a substantial over-statement of inflation in recent quarters, and that the over-statement will continue for some time. The Irish version of Eurostat’s Harmonised Index of Consumer Prices, recently running well below the CPI, is a more reliable guide. Few national statistical offices use the Payments Approach, and it is argued that the procedure used in Ireland should be reviewed.
    Keywords: Consumer Price Index; Cost of Living Index; Payments Approach; Owner-Occupied Housing
    JEL: C43 C82 D12 E31
    Date: 2007–06–20
  25. By: Marta Ruiz-Arranz; Milan Zavadjil
    Abstract: Empirical analysis does not suggest that reserves are "too high" in the majority of Asian countries, though China may be a special case. Much of the reserve increase in Asia can be explained by an optimal insurance model under which reserves provide a steady source of liquidity to cushion the impact of a sudden stop in capital inflows on output and consumption. Moreover, the benefits of reserves in terms of reduced spreads on privately held external debt further explains the observed growth in reserves since 1997-98. Using threshold estimation techniques, the paper shows that most of Asia can still benefit from higher reserves in terms of reduced borrowing costs.
    Keywords: Asia and Pacific , Reserves , Liquidity , Capital inflows , Production , Consumption , External debt , Emerging markets ,
    Date: 2008–08–06
  26. By: Alessandra Del Boca (University of Brescia); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Franco Spinelli (University of Brescia); Carmine Trecroci (University of Brescia)
    Abstract: We examine Italian inflation rates and the Phillips curve with a very long-run perspective, one that covers the entire existence of the Italian lira from political unification (1861) to the entry of Italy in the European Monetary Union (end of 1998). We first study the volatility, persistence and stationarity of the Italian inflation rate over the long run and across various exchange-rate regimes that have shaped Italian monetary history. Next, we estimate alternative Phillips equations and investigate the extent to which nonlinearities, asymmetries and structural changes characterize the inflation-output trade-off in the long run. We capture the effects of structural changes and asymmetries on the estimated parameters of the inflation-output trade-off relying partly on sub-sample estimates and partly on time-varying parameters estimated with the Kalman filter. Finally, we investigate causal relationships between inflation rates and output and extend the analysis to include the US and the UK for comparison purposes. The inference is that Italy has experienced a conventional inflation-output trade-off only during times of low inflation and stable aggregate supply.
    Keywords: inflation, Phillips curve, Italian lira
    JEL: E31 E32 E5 N10
    Date: 2008–07
  27. By: Carvalho, Alexandre; Moura, Marcelo L.
    Date: 2008–10
  28. By: A. R. Pagan; Luis Catão; Douglas Laxton
    Abstract: This paper lays out a structural model that incorporates key features of monetary transmission in typical emerging-market economies, including a bank-credit channel and the role of external debt accumulation on country risk premia and exchange rate dynamics. We use an SVAR representation of the model to study the monetary transmission in Brazil. We find that interest rate changes have swifter effects on output and inflation compared to advanced economies and that exchange rate dynamics plays a key role in this connection. Importantly, the response of inflation to monetary policy shocks has grown stronger and the output-inflation tradeoff improved since the introduction of inflation targeting.
    Keywords: Brazil , Monetary policy , Inflation targeting , Emerging markets , Bank credit , Interest rates , Developed countries , Economic models , Disinflation ,
    Date: 2008–08–05
  29. By: Maher Hasan; Hesham Alogeel
    Abstract: This paper investigates the factors that affect inflation in the GCC region by examining the inflationary processes in Saudi Arabia and Kuwait. The paper utilizes a model that accounts for foreign factors affecting inflation, such as trading partners' inflation and exchange rate pass-through effect, as well as domestic influences. The analysis concludes that, in the long run, higher inflation in trading partners' countries is the main driving force for inflation in the two countries, with significant but lower contributions from the exchange rate pass-through effect and oil prices. Demand and money supply shocks affect inflation in the short run.
    Keywords: Inflation , Saudi Arabia , Kuwait , Money supply , Exchange rate stability , Bilateral trade , Cooperation Council for the Arab States of the Gulf ,
    Date: 2008–08–06

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