nep-cba New Economics Papers
on Central Banking
Issue of 2008‒08‒31
39 papers chosen by
Alexander Mihailov
University of Reading

  1. The State of Macro By Olivier J. Blanchard
  2. On the Need for a New Approach to Analyzing Monetary Policy By Andrew Atkeson; Patrick J. Kehoe
  3. Frontiers in Monetary Theory and Policy: Summary of the 2008 International Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan By Ippei Fujiwara; Kazuo Fukuda; Ichiro Muto; Yosuke Shigemi; Wataru Takahashi
  4. The Impact of ECB Monetary Policy Decisions and Communication on the Yield Curve By Claus Brand; Daniel Buncic; Jarkko Turunen
  5. Price-Level versus Inflation Targeting with Financial Market Imperfections By Francisco Covas; Yahong Zhang
  6. Optimality criteria of hybrid inflation-price level targeting By Bokor, László
  7. Monetary Policy Rules and Indeterminacy By Vadim Khramov; Kirill Sosunov
  8. Productivity, Preferences and UIP Deviations in an Open Economy Business Cycle Model By Jagjit S. Chadha
  9. Transmission of business cycle shocks between the US and the euro area. By Martin Schneider; Gerhard Fenz
  10. Learning from Prices: Public Communication and Welfare By Manuel Amador; Pierre-Olivier Weill
  11. Is the Great Moderation Ending? UK and US Evidence By Giorgio Canarella; WenShwo Fang; Stephen M. Miller; Stephen K. Pollard
  12. Euro area money demand and international portfolio allocation - a contribution to assessing risks to price stability By Roberto A. De Santis; Carlo A. Favero; Barbara Roffia
  13. How hard can it be? Inflation control around the world By Thórarinn G. Pétursson
  14. The Euro May over the Next 15 Years Surpass the Dollar as Leading International Currency By Chinn, Menzie; Frankel, Jeffrey
  15. Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter? By Ortiz, Alberto; Pablo, Ottonello; Sturzenegger, Federico; Talvi, Ernesto
  16. Wage Setting Patterns and Monetary Policy: International Evidence By Giovanni Olivei; Silvana Tenreyro
  17. Estimation of De Facto Exchange Rate Regimes: Synthesis of The Techniques for Inferring Flexibility and Basket Weights By Frankel, Jeffrey; Wei, Shang-Jin
  18. The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation? By Stephen G. Hall; George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
  19. Evaluating the German (New Keynesian) Phillips Curve By Rolf Scheufele
  20. Are Bygones not Bygones? Modeling Price Level Targeting with an Escape Clause and Lessons from the Gold Standard By Paul R. Masson; Malik D. Shukayev
  21. The Zero Interest Rate Policy By Tomohiro Sugo; Yuki Teranishi
  22. Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach By Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
  23. Can Central Bank Interventions Affect the Exchange Rate Volatility? Multivariate GARCH Approach Using Constrained Nonlinear Programming By Tolga Caskurlu; Mustafa C. Pinar; Aslihan Salih; Ferhan Salman
  24. Combining Forecast Densities from VARs with Uncertain Instabilities By James Mitchell; Jore, A. S., Vahey, S. P.
  25. Inventory-Theoretic Model of Money Demand, Multiple Goods, and Price Dynamics By Hirokazu Ishise; Nao Sudo
  26. Deciding on Monetary Integration: An Operational Approach By Powell, Andrew; Sturzenegger, Federico
  27. Eurosystem Communication and Financial Market Expectations By Patrick Luennemann and Dirk Mevis Author-Email1: Author-Email2:
  28. Monetary Policy, Beliefs, Unemployment and Inflation; Evidence from the UK By S.G.B. Henry
  29. Capital Account Liberalization: Theory, Evidence, and Speculation By Henry, Peter B.
  30. Money Demand Stability and Inflation: Prediction in the Four Largest EMU Countries By Abelardo Salazar Neaves; Oliver Hossfeld; Jan Hagen; Kai Carstensen
  31. Imperfect exchange rate pass-through : the role of distribution services and variable demand elasticity By Philippe Jeanfils
  32. Financial Accelerator Mechanism in a Small Open By Martha R. López; Juan D. Prada; Norberto Rodríguez Niño
  33. Should Central Banks Burst Bubbles? Some Microeconomic Issues By John R. Conlon
  34. Private Money as a Competing Medium of Exchange By Mark Pingle; Sankar Mukhopadhyay
  35. Dancing with the Devil: A Study of Country Size and the Incentive to Tolerate Money Laundering By Hinnerk Gnutzmann; Killian McCarthy; Brigitte Unger
  36. Das makroökonometrische Modell des IWH: Eine angebotsseitige Betrachtung By Rolf Scheufele
  37. Lines of monetary transmission optimization under conditions of transition economy By Lepushynskyy, Volodymyr
  38. The Euro Changeover in the Slovak Republic: Implications for Inflation and Interest Rates By Felix Hüfner; Isabell Koske
  39. Monetary Pressures and Inflation Dynamics in Turkey: Evidence from P-Star Model By K. Azim Ozdemir; Mesut SaygÝlÝ

  1. By: Olivier J. Blanchard
    Abstract: For a long while after the explosion of macroeconomics in the 1970s, the field looked like a battlefield. Over time however, largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged. Not everything is fine. Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism and herding. None of this deadly however. The state of macro is good. The first section sets the stage with a brief review of the past. The second argues that there has been broad convergence in vision, and the third reviews the specifics. The fourth focuses on convergence in methodology. The last looks at current challenges.
    JEL: E0 E2 E3 E4 E50
    Date: 2008–08
  2. By: Andrew Atkeson; Patrick J. Kehoe
    Abstract: We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate in this data. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central bank's policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk which threaten to push inflation off target. This model, while an improvement on standard models, is considered just a starting point for their revision. It leads to critical questions that researchers need to answer as they continue to revise their approach to monetary policy analysis.
    JEL: E5 E52 E58 E6
    Date: 2008–08
  3. By: Ippei Fujiwara (Director and Deputy Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Kazuo Fukuda (General Manager, Sendai Branch, Bank of Japan (E-mail:; Ichiro Muto (Deputy Director, Global Economic Research Section, International Department, Bank of Japan (E-mail:; Yosuke Shigemi (Director and Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Wataru Takahashi (Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Date: 2008–08
  4. By: Claus Brand (European Central Bank); Daniel Buncic (School of Economics, University of New South Wales); Jarkko Turunen (European Central Bank)
    Abstract: We use intraday changes in money market rates to construct indicators of news about monetary policy stemming separately from policy decisions and from official communication of the ECB, and study their impact on the yield curve. We show that communication may lead to substantial revisions in expectations of monetary policy and, at the same time, exert a significant impact on interest rates at longer maturities. Thereby, the maturity response pattern to communication is hump-shaped, while that to policy decisions is downward sloping.
    Keywords: money market rates; yield curve; ECB; central bank communication
    JEL: E43 E58
    Date: 2008–08
  5. By: Francisco Covas; Yahong Zhang
    Abstract: This paper compares price-level-path targeting (PT) with inflation targeting (IT) in a sticky-price, dynamic, general equilibrium model augmented with imperfections in both the debt and equity markets. Using a Bayesian approach, we estimate this model for the Canadian economy. We show that the model with both debt and equity market imperfections fits the data better and use it to compare PT versus the estimated current IT regime. We find that in general PT outperforms the current IT regime. However, the gain is lower when financial market imperfections are taken into account.
    Keywords: Monetary policy framework; Inflation targets; Economic models
    JEL: E40 E50
    Date: 2008
  6. By: Bokor, László
    Abstract: This paper provides a comprehensive analysis of the relative performance of inflation targeting, price level targeting, and hybrid targeting of them in a simple three-period steady state to steady state economy facing transmission lag, and derives optimal policies implementing commitment solution under all set of hybrid expectations, social preference, and cost-push shock persistence. The main intention of the examination is to reveal the nature of the interrelations between economic and policy parameters.
    Keywords: inflation targeting; price level targeting; hybrid targeting; optimal policy
    JEL: E58 E52 E50
    Date: 2007–09
  7. By: Vadim Khramov (Department of Economics at Higher School of Eeconomics and Centre for Advanced Studies, Moscow, Russia); Kirill Sosunov (State University – Higher School of Economics)
    Abstract: In recent papers it is shown that in the presence of price stickiness, investment and capital accumulation activity, active monetary policy (MP) rules can lead to indeterminacy under various assumptions about the structure of the model. We analyze the conditions for real indeterminacy to occur in the model with capital accumulation. The key assumption is that we add response to output to the monetary policy rule. In our paper we show that adding Current or Expected Output to MP rule substantially changes the conditions for real indeterminacy to occur. In contrast to some existing research we show that under current-looking with respect to output MP rules indeterminacy is almost impossible; under forward-looking with respect to output MP rules indeterminacy is almost impossible under active MP rules and very likely to occur under passive MP rules. We also show that stability conditions are almost not sensitive to changes in capital share in output and aggregate markup. We provide the nominal determinacy analysis and show that active and forward-looking MP rules with respect to output give better results in stabilizing the economy.
    Keywords: Indeterminacy, Monetary Policy Rules, Capital Accumulation Activity
    JEL: E52 E31 E22
    Date: 2008–07
  8. By: Jagjit S. Chadha
    Abstract: We show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.
    Keywords: current account dynamics; real exchange rates; incomplete markets; financial frictions
    JEL: E32 F32 F41
    Date: 2008–08
  9. By: Martin Schneider (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,); Gerhard Fenz (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,)
    Abstract: We analyze the transmission of structural shocks between the US and the euro area within a two-country VAR framework. For that purpose, we simultaneously identify cost-push, demand and monetary policy shocks for both countries using sign restrictions. Our results show that domestic shocks explain the largest share of the forecast error variances for GDP, consumer prices and the interest rate in both countries in the short run, whilst spillovers from the other country and global factors gain importance in the medium run. The strength of the shock transmission between the two countries is quite symmetric. Our approach to the identification of structural shocks allows us to construct confidence bands that account both for estimation and identification uncertainty. We find impulse responses to domestic shocks to be significant while spillovers across countries are insignificant.
    Keywords: VAR, shock transmission, sign restrictions, Metropolis-Hastings, confidence intervals, bootstrap.
    JEL: C32 E37 E40
    Date: 2008–07–21
  10. By: Manuel Amador; Pierre-Olivier Weill
    Abstract: We study the effect of releasing public information about productivity or monetary shocks when agents learn from nominal prices. While public releases have the benefit of providing new information, they can have the cost of reducing the informational efficiency of the price system. We show that, when agents have private information about monetary shocks, the cost can dominate, in that public releases increase uncertainty about fundamentals. In some cases, public releases can create or eliminate multiple equilibria. Our results are robust to adding velocity shocks, imperfectly observable prices, large idiosyncratic shocks, and introducing a bond market.
    JEL: D83 E40 E58 E61
    Date: 2008–08
  11. By: Giorgio Canarella (California State University, Los Angeles, and University of Nevada, Las Vegas); WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada, las Vegas); Stephen K. Pollard (California State University, Los Angeles)
    Abstract: The Great Moderation, the significant decline in the variability of economic activity, provides a most remarkable feature of the macroeconomic landscape in the last twenty years. A number of papers document the beginning of the Great Moderation in the US and the UK. In this paper, we use the Markov regime-switching models of Hamilton (1989) and Hamilton and Susmel (1994) to document the end of the Great Moderation. The Great Moderation in the US and the UK begin at different point in time. The explanations for the Great Moderation fall into generally three different categories -- good monetary policy, improved inventory management, or good luck. Summers (2005) argues that a combination of good monetary policy and better inventory management led to the Great Moderation. The end of the Great Moderation, however, occurs at approximately the same time in both the US and the UK. It seems unlikely that good monetary policy would turn into bad policy or that better inventory management would turn into worse management. Rather, the likely explanation comes from bad luck. Two likely culprits exist . energy-price and housing-price shocks
    Keywords: Great Moderation, Regime switching, SWARCH
    JEL: C32 E32 O40
    Date: 2008–08
  12. By: Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Carlo A. Favero (IGIER – Università Commerciale Luigi Bocconi, Via Salasco 5, 20136 Milan, Italy.); Barbara Roffia (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany)
    Abstract: The long-run relationship between money and prices in the euro area embedded in traditional money demand models with income and interest rates broke down after 2001. We develop a money demand model where investors hold a diversi?fied portfolio with money, domestic and foreign stocks and long-term bonds in which, in addition to the classical wealth effect, also a size and an international portfolio allocation effects arise. The estimated model identifi?es three cointegrating vectors stable over the sample 1980-2007 - a long-run money demand, which depends on income and all risky assets' returns, and two equilibria for the euro area and the US fi?nancial markets. Steady state equilibrium of nominal M3 growth is estimated to be about 7% in 2007 with large standard errors mainly due to uncertainty in asset prices. The gap between actual euro area M3 growth and model-based ?fitted or predicted values helps forecast euro area inflation. JEL Classification: E41, E44, E52, G11, G15.
    Keywords: Euro area money demand, inflation forecasts, monetary policy, portfolio allocation.
    Date: 2008–08
  13. By: Thórarinn G. Pétursson
    Abstract: During the last two decades, the level and variability of inflation has declined across the world. Some countries have, however, had more success in controlling inflation than others, and the fact is that these countries are usually the same countries that have been more successful over longer periods. The focus of this paper is to try to understand what factors explain this difference in inflation performance and, in particular, why inflation turns out to be more volatile in very small, open economies and in emerging and developing countries than in the large and more developed ones. Using a country sample of 42 of the most developed countries in the world spanning the period 1985-2005, the results suggest three main explanations: the volatility of currency risk premiums, the degree of exchange rate pass-through to inflation, and the size of monetary policy shocks. These three variables explain about three-quarters of the cross-country variation in inflation volatility. The results are found to be robust to changes in the country sample and to different estimation methods. In particular, they do not seem to arise because of reverse causality due to possible endogeneity of the explanatory variables.
    Date: 2008–08
  14. By: Chinn, Menzie (U of Wisconsin); Frankel, Jeffrey (Harvard U)
    Abstract: The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2025.
    Date: 2008–03
  15. By: Ortiz, Alberto (Boston U); Pablo, Ottonello (Ceres); Sturzenegger, Federico (Harvard University and Universidad Torcuato Di Tella); Talvi, Ernesto (Ceres)
    Abstract: In this paper we ask whether tighter monetary and fiscal policies are the right way to face a sudden stop (a sudden curtailment in capital flows) in a typical emerging economy. We develop exogenous measures of fiscal and monetary policy response and conclude that tighter policies are associated to larger falls in output. The conclusion of the analysis is not so much that macro policies should be relaxed upon a crisis, but that countries should prepare themselves by creating the conditions to be able to act countercyclically upon such events. This entails among other things reducing balance sheet mismatches or strenghtening fiscal results during expansions.
    Date: 2007–11
  16. By: Giovanni Olivei; Silvana Tenreyro
    Abstract: Systematic differences in the timing of wage setting decisions among industrialized countriesprovide an ideal framework to study the importance of wage rigidity in the transmission ofmonetary policy. The Japanese Shunto presents the most well-known case of bunching inwage setting decisions: From February to May, most firms set wages that remain in placeuntil the following year; wage rigidity, thus, is relatively higher immediately after the Shunto.Similarly, in the United States, a large fraction of firms adjust wages in the last quarter of thecalendar year. In contrast, wage agreements in Germany are well-spread within the year,implying a relatively uniform degree of rigidity. We exploit variation in the timing of wagesettingdecisions within the year in Japan, the United States, Germany, the United Kingdom,and France to investigate the effects of monetary policy under different degrees of effectivewage rigidity. Our findings lend support to the long-held, though scarcely tested, view thatwage-rigidity plays a key role in the transmission of monetary policy.
    Keywords: monetary policy, wage rigidity, seasonality
    JEL: E1 E52 E58 E32 E31
    Date: 2008–06
  17. By: Frankel, Jeffrey (Harvard U); Wei, Shang-Jin (Columbia U)
    Abstract: The paper offers a new approach to estimate de facto exchange rate regimes, a synthesis of two techniques. One is a technique that the authors have used in the past to estimate implicit de facto weights when the hypothesis is a basket peg with little flexibility. The second is a technique used by others to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the dollar or some other single major currency, but with a possibly-substantial degree of flexibility around that anchor. Since many currencies today follow variants of Band-Basket-Crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. We try out the technique on twenty-some currencies, over the period 1980-2007. Most are currencies that have officially used baskets as anchors for at least part of this sample period. But a few are known floaters or known simple peggers. In general the synthesis technique seems to work as it should.
    JEL: F31
    Date: 2008–05
  18. By: Stephen G. Hall; George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
    Abstract: The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period’s expectation of future inflation. Most empirical estimates of the NKPC, typically based on Generalized Method of Moments (GMM) estimation, have found a significant role for lagged inflation, producing a “hybrid” NKPC. Using U.S. quarterly data, this paper examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying-coefficient (TVC) estimation, a procedure that allows us to directly confront specification biases and spurious relationships. Using three separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.
    Keywords: New Keynesian Phillips Curve; time-varying coefficients; spurious relationships
    JEL: C51 E31
    Date: 2008–08
  19. By: Rolf Scheufele
    Abstract: This paper evaluates the New Keynesian Phillips Curve (NKPC) and its hybrid variant within a limited information framework for Germany. The main interest rests on the average frequency of price re-optimization of firms. We use the labor income share as the driving variable and consider a source of real rigidity by allowing for a fixed firm-specific capital stock. A GMM estimation strategy is employed as well as an identification robust method that is based upon the Anderson-Rubin statistic. We find out that the German Phillips Curve is purely forward looking. Moreover, our point estimates are consistent with the view that firms re-optimize prices every two to three quarters. While these estimates seem plausible from an economic point of view, the uncertainties around these estimates are very large and also consistent with perfect nominal price rigidity where firms never re-optimize prices. This analysis also offers some explanations why previous results for the German NKPC based on GMM differ considerably. First, standard GMM results are very sensitive to the way how orthogonality conditions are formulated. Additionally, model misspecifications may be left undetected by conventional J tests. Taken together, this analysis points out the need for identification robust methods to get reliable estimates for the NKPC.
    Keywords: Inflation dynamics; Phillips Curve; Weak Instruments; Optimal Instruments
    JEL: E31 C13 C52
    Date: 2008–08
  20. By: Paul R. Masson; Malik D. Shukayev
    Abstract: Like the gold standard, price level targeting (PT) involves not letting past deviations of inflation be bygones; both regimes return the price level (or price of gold) to its target. The experience of suspension of the gold standard in World War I, resumption in the 1920s (for some countries at a different parity), and final abandonment is reviewed. It suggests that PT would likely operate with an escape clause that allowed rebasing of the price target in the face of large output declines. Using a calibrated general equilibrium model, we show that such an escape clause can produce multiple equilibria. For some parameterizations, there is a low credibility equilibrium (with high expectation of a reset) associated with high output volatility and frequent resets. These problems reduce the expectational advantage of PT over inflation targeting.
    Keywords: Credibility; Monetary policy framework
    JEL: E31 E52
    Date: 2008
  21. By: Tomohiro Sugo (Research and Statistics Department, Bank of Japan (E-mail: tomohiro.sugou; Yuki Teranishi (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi
    Abstract: This paper derives a generalized optimal interest rate rule that is optimal even under a zero lower bound on nominal interest rates in an otherwise basic New Keynesian model with inflation inertia. Using this optimal rule, we investigate optimal entrance and exit strategies of the zero interest rate policy (ZIP) under the realistic model with inflation inertia and a variety of shocks. The simulation results reveal that the shapes of the entrance and exit strategies in a ZIP change considerably according to the forward- or backward-lookingness of the economy and the size of the shocks. In particular, for large shocks that result in long ZIP periods, the time to the start (end) of the ZIP period is earlier (later) in an economy with inflation inertia than in a purely forward-looking economy. However, these outcomes are surprisingly converse to small shocks that result in short ZIP periods.
    Keywords: Zero Interest Rate Policy, Optimal Interest Rate Rule
    JEL: E52 E58
    Date: 2008–08
  22. By: Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
    Abstract: This paper compares the different dynamics of the simple sum monetary aggregates and the Divisia monetary aggregate indexes over time, over the business cycle, and across high and low inflation and interest rate phases. Although traditional comparisons of the series sometimes suggest that simple sum and Divisia monetary aggregates share similar dynamics, there are important differences during certain periods, such as around turning points. These differences cannot be evaluated by their average behavior. We use a factor model with regime switching. The model separates out the common movements underlying the monetary aggregate indexes, summarized in the dynamic factor, from individual variations in each individual series, captured by the idiosyncratic terms. The idiosyncratic terms and the measurement errors reveal where the monetary indexes differ. We find several new results. In general, the idiosyncratic terms for both the simple sum aggregates and the Divisia indexes display a business cycle pattern, especially since 1980. They generally rise around the end of high interest rate phases – a couple of quarters before the beginning of recessions – and fall during recessions to subsequently converge to their average in the beginning of expansions. We find that the major differences between the simple sum aggregates and Divisia indexes occur around the beginnings and ends of economic recessions, and during some high interest rate phases. We note the policy relevance of the inferences. Indeed, as Belongia (1996) has observed in this regard, "measurement matters."
    Keywords: Measurement error; monetary aggregation; Divisia index; aggregation; state space; Markov switching; monetary policy; index number theory; factor models
    JEL: E58 E52 E40
    Date: 2007–07
  23. By: Tolga Caskurlu; Mustafa C. Pinar; Aslihan Salih; Ferhan Salman
    Date: 2008
  24. By: James Mitchell; Jore, A. S., Vahey, S. P.
    Abstract: Clark and McCracken (2008) argue that combining real-time point forecasts from VARs of output, prices and interest rates improves point forecast accuracy in the presence of uncertain model instabilities. In this paper, we generalize their approach to consider forecast density combinations and evaluations. Whereas Clark and Mc-Cracken (2008) show that the point forecast errors from particular equal-weight pair wise averages are typically comparable or better than benchmark univariate time series models, we show that neither approach produces accurate real-time forecast densities for recent US data. If greater weight is given to models that allow for the shifts in volatilities associated with the Great Moderation, predictive density accuracy improves substantially.
    Date: 2008–01
  25. By: Hirokazu Ishise (Department of Economics, Boston University (E-mail:; Nao Sudo (Corresponding author, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Despite the theoretical prediction based on sticky-price models, it is empirically suggested that the tie between the frequencies of price adjustment across goods and the relative price responses of goods (price index of specific goods over non-durable aggregate price index) to a monetary policy change is limited.We offer an alternative view of the price dynamics of goods. We develop a multi-sector extension of an inventory-theoretic model of money demand (segmented market model). In our model, the diversity in the characteristics of goods, that is, durability, luxuriousness and cash intensity (the portion of the payment that is paid by cash in the purchase of goods), yields the dispersion of relative prices responses to a monetary policy shock, across goods. The model implies that the relative prices of durables, luxuries and less cash-intensive goods tend to decline in a monetary contraction. We test the empirical plausibility of our model, using two approaches: a measure of monetary policy shock developed by Romer and Romer (2004), and a factor-augmented VAR used in Bernanke et al. (2005). In both econometric methodologies, we find that the data are consistent with our model, in terms of durability and luxuriousness.
    Keywords: Baumol-Tobin model, Durable; Luxury, Credit goods, Monetary policy
    JEL: E5 E6
    Date: 2008–08
  26. By: Powell, Andrew (Inter-American Development Bank and Universidad Torcuato Di Tella); Sturzenegger, Federico (Harvard U and Universidad Torcuato Di Tella)
    Abstract: We develop a simple, n-country model to consider the costs and benefits of joining a monetary union. Our factor-OCA framework encompasses different approaches and allows us to consider the optimal composition of a monetary union for all the potential members. We illustrate the model in practice with various simulations and we develop two empirical applications based on expanding EMU and on whether there would be a benefit to deepening Nafta to be a monetary union. While some commentators have called for a one-world currency, we find full monetary integration has costs for some countries and benefits for others, perhaps explaining why this remains a controversial issue.
    Date: 2007–09
  27. By: Patrick Luennemann and Dirk Mevis Author-Email1: Author-Email2:
    Abstract: This paper studies the impact of Eurosystem Governing Council communication on financial markets? interest rate expectations based on evidence from bond markets, futures markets and options markets. First,we find that the level, the dispersion and the asymmetry of interest rate expectations are affected on Council meeting days. However, such effects may be relatively short-lived. Moreover, we find that interest rate expectations tend to become less volatile during the black out period. Second, monetary policy meetings tend to affect interest rate expectations much more strongly than data releases. Third, whereas the impact of monetary policy decisions seems to be particularly concentrated and strong around horizons of 2 years, the effect of euro area data releases on rate expectations seem to unfold in a more evenly distributed manner at longer horizons as well. Fourth, keywords may foster the (very) short-run predictability of the Eurosystem monetary policy. However, keywords do not seem to have a systematic impact on interest rate expectations over longer horizons.
    Date: 2008–03
  28. By: S.G.B. Henry
    Abstract: Recent applied macroeconomic research has been concerned with the effects of both labour market reforms and the delegation of monetary policy to an inflation-averse central bank as ways of improving inflation and unemployment outcomes. The experience of the UK over the recent past following the introduction of changes to the labour market in the 1980s and of inflation targeting and instrument independence for the Bank of England in the 1990s, has often been held up as illustrations of the beneficial effects of regime changes of this sort. Others have contradicted these views, including those who have drawn attention to the weakness in the empirical evidence favouring effects from labour market reforms, and others who argue that a combination of beneficial international events and monetary policy mistakes have played an important part in the U.K.’s recent successes. We review the case for regime change from either of these sources; labour market and monetary, in an application to the U.K using an model which integrates both. The results indicate two things; the importance of allowing for the openness of the UK economy in “behavioural” econometric models of the natural rate, and the importance of allowing for policy “mistakes”. Based on our analysis, we conclude that recent changes in UK monetary policy or the labour market institutions seem unlikely to have made an important contribution to the improvements in UK economic performance. Effects originating overseas appear to play an important role in unemployment changes in the U.K. Policy mistakes appear to have had important effects on inflation over the last two decades, and a proper allowance for these is needed before any firm judgements of the benefits of monetary policy delegation can be reached.
    Date: 2008–01
  29. By: Henry, Peter B. (Henry, Peter B.)
    Abstract: Research on the macroeconomic impact of capital account liberalization finds few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. The lion’s share of papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory, because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.
    Date: 2007–08
  30. By: Abelardo Salazar Neaves; Oliver Hossfeld; Jan Hagen; Kai Carstensen
    Abstract: In this paper we analyze the money demand functions of the four largest EMU countries and of the four-country (EMU-4) aggregate. We identify reasonable and stable money demand relationships for Germany, France and Spain as well as the EMU-4 aggregate. For the case of Italy, results are less clear. From the estimated money demand functions, we derive both EMU-4 and country-specific measures of money overhang. We find that the EMU-4 overhang measure strongly correlates with the countryspecific measures, particularly since the start of EMU, and is useful to predict country-specific inflation. However, it generally does not encompass country-specific money overhang measures as predictors of inflation. Hence, aggregate money overhang is an important, but by far not an exhaustive, indicator fort he disaggregate level
    Keywords: Money demand, stability, money overhang, inflation forecast
    JEL: E41 E52
    Date: 2008–07
  31. By: Philippe Jeanfils (National Bank of Belgium, Research Department)
    Abstract: This paper examines which mechanisms are likely to dampen the price pressures in the wake of exchange rate movements. In addition to nominal frictions frequently used in sticky-price models, it jointly introduces two features that have hitherto been considered separately in the existing literature, i.e. a variable demand elasticity à la Kimball (1995) and distribution services in the form of non-traded goods as in Corsetti and Dedola (2005). The paper explores the respective role of each feature and assesses the quantitative importance of these theoretical explanations for the exchange rate pass-through to a broad range of prices as well as for the real exchange rate and for the trade balance. Segmentation of national markets through distribution services and imperfect competition with variable mark-ups are important for accounting for the observed stability of import prices "at the border". Hence, these mechanisms help to explain the observed stability of import prices in local currency with realistic durations of price contracts.
    Keywords: exchange rate pass-through, general equilibrium
    JEL: F3 F4
    Date: 2008–08
  32. By: Martha R. López; Juan D. Prada; Norberto Rodríguez Niño
    Abstract: Using Bayesian estimation techniques, we estimate a small open economy DSGE model with credit-market imperfections for the Colombian economy. Us- ing the estimated model we investigate what are the sources of business cycle °uctuations. We show that balance-sheet e®ects play an important role in ex- plaining recent Colombian business cycles. We then perform a counterfactual exercise that shows that ¯xed exchange rate regime could have exacerbated the ¯nancial distress in the economy between 1998-1999.
    Date: 2008–08–18
  33. By: John R. Conlon
    Date: 2008–08–13
  34. By: Mark Pingle (Department of Economics, University of Nevada, Reno); Sankar Mukhopadhyay (Department of Economics, University of Nevada, Reno)
    Abstract: Using a relatively mild restriction on the beliefs of the MMEU-apreference functional, in which the decision maker’s degree of ambiguity and degree of pessimism are each parameterized, we present a rather general theory of religious choice in the decision theory tradition, one that can resolve dilemmas, address the many Gods objection, and address the inherent ambiguity. Using comparative static analysis, we are able to show how changes in either the degree of ambiguity or the degree of pessimism can lead a decision maker to “convert” from one religion to another. We illustrate the theory of religious choice using an example where the decision maker perceives three possible religious alternatives.
    Keywords: Private money; Speculative demand; Search theory; Medium of exchange
    JEL: E41 E42 E51
    Date: 2008–08
  35. By: Hinnerk Gnutzmann; Killian McCarthy; Brigitte Unger
    Abstract: The incidence of money laundering, and the zeal with which international anti-money laundering (AML) policy is pursued, varies significantly from country to country, region to region. There are, however, quite substantial social costs associated with a policy of toleration, and this begs the question as to why such variance should exist. In this paper we claim that, due to the globalisation of crime, if a single country should break the model of policy competition which formalises this intuition.
    Keywords: Money Laundering; Policy Competition; Systems Competition
    Date: 2008–08
  36. By: Rolf Scheufele
    Abstract: This paper describes the IWH macroeconometric model, a quarterly structural model for the German Economy. It focuses on the specification and estimation on supply-side aspects of the model. This approach guarantees a theoretical derived long-run model equilibrium. It combines short-run forecasting requirements with a long-run theoretical foundation. For some macroeconomic aggregates short- and long-run effects of supply- and demand shocks are illustrated. Additionally, effects of external shocks are investigated through model simulations to illustrate aggregate model characteristics.
    Keywords: Macroeconometric model; German economy; Policy simulations
    JEL: C3 C51 E17
    Date: 2008–08
  37. By: Lepushynskyy, Volodymyr
    Abstract: An essential condition of the effectiveness of price-stability-based monetary regime is availability of an efficient mechanism for transmission of monetary policy impulses to the real sector of economy. Characteristic of the economy of Ukraine, the same as many other transition economies is the existence of institutional and structural factors that reduce the effectiveness of monetary transmission mechanism. This paper discusses the above mentioned factors and measures aimed to strengthen the efficiency of transmission mechanism of monetary policy.
    Keywords: monetary policy; monetary transmission mechanism; transition economy
    JEL: E5
    Date: 2008–05
  38. By: Felix Hüfner; Isabell Koske
    Abstract: In January 2009, the Slovak Republic will adopt the euro and become the 16th member of the euro area. This paper investigates the implications of euro adoption in the Slovak Republic for inflation and interest rates with an attempt to quantify their likely size as well as their consequences for the general public. The empirical analysis – which makes use of the experience of the first-wave euro area countries – suggests that the cash changeover will most likely be associated with a moderate increase in consumer prices, estimated at around 0.3%. Policy measures to reduce this effect include public information campaigns, the conversion of publicly administered prices with the exact conversion rate and the reduction of administrative obstacles to increase supply. The minor purchasing power losses associated with this price increase will not be evenly distributed across the population with higher income households and families with children expected to be harder hit than others. Even though the exchange rate vis-à-vis the euro area will be irrevocably fixed, past appreciations of the koruna are still likely to pass-through to some downward pressure on consumer prices, with the cumulative effect estimated to amount to around 1.5% up to mid-2009. In the longer run, the Balassa-Samuelson effect and other factors affecting catch-up economies may raise the Slovak inflation rate above the euro area level. As capital markets have already fully priced in euro membership, no immediate effect on short- and long-term interest rates in the wholesale markets is to be expected for January 2009. In the longer run, euro adoption can be expected to foster financial integration, thereby leading to a convergence of Slovak retail interest rates towards euro area levels. This reduction in retail interest rates will benefit the general public with mortgage borrowers likely to reap the largest benefits. A potential risk of low real interest rates is the emergence of a boom-bust cycle; prudent fiscal policy and further structural reforms, including enhanced competition, would help to counter any such developments. <P>L’adoption de l’euro par la République slovaque : les implications pour l’inflation et les taux d’intérêt <BR>En janvier 2009, la République slovaque adoptera l'euro et deviendra le 16ème membre de la zone euro. Ce document examine les implications de l'adoption de l'euro dans la République slovaque pour l'inflation et les taux d'intérêt avec une tentative d'évaluer quantitativement leur taille probable aussi bien que leurs conséquences pour la population. L'analyse empirique – qui se sert de l'expérience des pays de la zone euro de la première vague – suggère que le changement des liquidités soit très probablement associé à une augmentation modérée des prix à la consommation, estimée à peu près à 0.3 %. Les mesures politiques pour réduire cet effet incluent des campagnes publiques d'information, la conversion des prix publiquement administrés avec le taux de conversion exact et la réduction d'obstacles administratifs pour augmenter l’offre. Les pertes de pouvoir d'achat mineures associées à cette augmentation des prix ne seront pas également distribuées à travers la population; les ménages aux revenus plus élevés et les familles avec des enfants pourraient être frappés plus durement que les autres. Bien que le taux de change vis-à-vis de la zone euro soit irrévocablement fixé, les appréciations passées de la couronne slovaque pourraient encore se répercuter sur les prix à la consommation; l'effet cumulatif des effets retardés est évalué à environ 1½ pour cent jusqu'au milieu de 2009. À plus long terme, l'effet Balassa-Samuelson et d'autres facteurs affectant des économies en rattrapage peuvent accroître l'inflation slovaque au-dessus du niveau de la zone euro. Comme les marchés financiers ont déjà entièrement tenu compte de l'adhésion de l'euro, aucun effet immédiat sur les taux d'intérêt de grande clientèle à court terme ou à long terme n’est attendu pour janvier 2009. À plus long terme, on peut s'attendre à ce que l'adoption de l'euro favorise l'intégration financière, menant ainsi à une convergence des taux d'intérêt aux particuliers vers les niveaux de la zone euro. Cette réduction de taux d'intérêt aux particuliers profitera au grand public avec des emprunteurs hypothécaires récoltant probablement les plus grands avantages. Un risque potentiel lié aux taux d'intérêt réels bas est l'apparition d’une phase d’essor suivie d’une récession ; une politique fiscale prudente et des nouvelles réformes structurelles, y compris l’amélioration de la compétitivité, aideraient à résister à de tels développements.
    Keywords: Slovak Republic, République slovaque, inflation, inflation, interest rate, taux d'intérêt, euro changeover, adoption de l’euro
    JEL: E31 E43 F36
    Date: 2008–08–12
  39. By: K. Azim Ozdemir; Mesut SaygÝlÝ
    Date: 2008

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