nep-cba New Economics Papers
on Central Banking
Issue of 2008‒09‒20
38 papers chosen by
Alexander Mihailov
University of Reading

  1. Phillips Curve Inflation Forecasts By James H. Stock; Mark W. Watson
  2. Capital Flow Bonanzas: An Encompassing View of the Past and Present By Carmen M. Reinhart; Vincent R. Reinhart
  3. Learning About Learning in Dynamic Economic Models By David A. Kendrick; Hans M. Amman; Marco P. Tucci
  4. Investigating the structural stability of the Phillips curve relationship By Groen, Jan J J; Mumtaz, Haroon
  5. Resuscitating the wage channel in models with unemployment fluctuations By Kai Christoffel; Keith Kuester
  6. Central Bank Learning and Monetary Policy By Mewael F. Tesfaselassie
  7. Testing a DSGE model of the EU using indirect inference By David Meenagh; Patrick Minford; Michael Wickens
  8. Modelling and forecasting the yield curve under model uncertainty By Paola Donati; Francesco Donati
  9. Price Adjustment to News with Uncertain Precision By Nikolaus Hautsch; Dieter Hess; Christoph Müller
  10. A Proof of Determinacy in the New-Keynesian Sticky Wages and Prices Model By Franke, Reiner; Flaschel, Peter
  11. Short-term interest rate futures as monetary policy forecasts By Giuseppe Ferrero; Andrea Nobili
  12. Fundamentalists vs. chartists: learning and predictor choice dynamics By Michele Berardi
  13. Estimating regime-switching Taylor rules with trend inflation By Castelnuovo , Efrem; Greco , Luciano; Raggi, Davide
  14. International Financial Remoteness and Macroeconomic Volatility By Andrew K. Rose; Mark M. Spiegel
  15. The conduct of global monetary policy and domestic stability By Blake, Andrew P; Markovic, Bojan
  16. Strategic Interaction Among Heterogeneous Price-Setters In An Estimated DSGE Model By Olivier Coibion; Yuriy Gorodnichenko
  17. Durable Goods, Inter-Sectoral Linkages and Monetary Policy By Hafedh Bouakez; Emanuela Cardia; Francisco J. Ruge-Murcia
  18. International monetary co-operation in a world of imperfect information By Tan, Kang Yong; Tanaka, Misa
  19. Dynamically Inconsistent Preferences and Money Demand By Emanuele Millemaci; Robert J. Waldmann
  20. Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical evidence from Canada, Sweden and the UK By Jerome Creel; Paul Hubert
  21. How informative are macroeconomic risk forecasts? An examination of the Bank of England’s inflation forecasts By Knüppel, Malte; Schultefrankenfeld, Guido
  22. Non-linear adjustment of import prices in the European Union By Campa, Jose Manuel; Gonzalez Minguez, Jose M; Sebastia Barriel, Maria
  23. Forecasting Macroeconomic Variables in a Small Open Economy: A Comparison between Small- and Large-Scale Models By Rangan Gupta; Alain Kabundi
  24. Money laundering in a two sector model: using theory for measurement By Amedeo Argentiero; Michele Bagella; Francesco Busato
  25. Panel Cointegration and the Monetary Exchange Rate Model By Basher, Syed A.; Westerlund, Joakim
  26. International evidence on well-being By David G. Blanchflower
  27. The Classical Econometric Model By D.S.G. Pollock
  28. Simple Humans, Complex Insurance, Subtle Subsidies By Jeffrey Liebman; Richard Zeckhauser
  29. Comparing Seasonal Forecasts of Industrial Production By Keith Blackburn; Kyriakos C. Neanidis; M. Emranul Haque
  30. Macroeconomic Effects of Terrorist Shocks in Israel By Denis Larocque; Geneviève Lincourt; Michel Normandin
  31. Exploring agent-based methods for the analysis of payment systems: a crisis model for StarLogo TNG By Luca Arciero; Claudia Biancotti; Leandro DÂ’Aurizio; Claudio Impenna
  32. Dealing with country diversity: challenges for the IMF credit union model By Irwin, Gregor; Penalver, Adrian; Salmon, Chris; Taylor, Ashley
  33. Money as Friction: Conceptual dissonance in Woodford's Interest and Prices By Colin Rogers
  34. Do Frictionless Models of Money and the Price level Make sense? By Colin Rogers
  35. The principle of effective demand and the state of post Keynesian monetary economics By Colin Rogers
  36. The Impact of Capital Inflows on Emerging East Asian Economies: Is Too Much Money Chasing Too Little Good? By Kim, Soyoung; Yang, Doo Yong
  37. Monetary Policy Effects: New Evidence from the Italian Flow of Funds By Riccardo Bonci; Francesco Columba
  38. Fluctuation in the International Currency Reserves of Less Developed Countries: HIPC vs Non-HIPC By Augustine A. Boakye; Hassan Molana

  1. By: James H. Stock; Mark W. Watson
    Abstract: This paper surveys the literature since 1993 on pseudo out-of-sample evaluation of inflation forecasts in the United States and conducts an extensive empirical analysis that recapitulates and clarifies this literature using a consistent data set and methodology. The literature review and empirical results are gloomy and indicate that Phillips curve forecasts (broadly interpreted as forecasts using an activity variable) are better than other multivariate forecasts, but their performance is episodic, sometimes better than and sometimes worse than a good (not naïve) univariate benchmark. We provide some preliminary evidence characterizing successful forecasting episodes.
    JEL: C53 E37
    Date: 2008–09
  2. By: Carmen M. Reinhart; Vincent R. Reinhart
    Abstract: A considerable literature has examined the causes, consequences, and policy responses to surges in international capital flows. A related strand of papers has attempted to catalog current account reversals and capital account "sudden stops." This paper offers an encompassing approach with an algorithm cataloging capital inflow bonanzas in both advanced and emerging economies during 1980-2007 for 181 countries and 1960-2007 for a subset of 66 economies from all regions. In line with earlier studies, global factors, such as commodity prices, international interest rates, and growth in the world's largest economies, have a systematic effect on the global capital flow cycle. Bonanzas are no blessing for advanced or emerging market economies. In the case of the latter, capital inflow bonanzas are associated with a higher likelihood of economic crises (debt defaults, banking, inflation and currency crashes). Bonanzas in developing countries are associated with procyclical fiscal policies and attempts to curb or avoid an exchange rate appreciation -- very likely contributing to economic vulnerability. For the advanced economies, the results are not as stark, but bonanzas are associated with more volatile macroeconomic outcomes for GDP growth, inflation, and the external accounts. Slower economic growth and sustained declines in equity and housing prices follow at the end of the inflow episode.
    JEL: F30 F32 F34
    Date: 2008–09
  3. By: David A. Kendrick; Hans M. Amman; Marco P. Tucci
    Abstract: This chapter of the Handbook of Computational Economics is mostly about research on active learning and is confined to discussion of learning in dynamic models in which the systems equations are linear, the criterion function is quadratic and the additive noise terms are Gaussian. Though there is much work on learning in more general systems, it is useful here to focus on models with these specifications since more general systems can be approximated in this way and since much of the early work on learning has been done with these quadratic-linear-gaussian systems. We begin with what has been learned about learning in dynamic economic models in the last few decades. Then we progress to a discussion of what we hope to learn in the future from a new project that is just getting underway. However before doing either of these it is useful to provide a short description of the mathematical framework that will be used in the chapter.
    Keywords: Active learning, dual control, optimal experimentation, stochastic optimization, time-varying parameters, forward looking variables, numerical experiments.
    JEL: C63 E61
    Date: 2008–08
  4. By: Groen, Jan J J (Federal Reserve Bank of New York); Mumtaz, Haroon (Bank of England)
    Abstract: The reduced-form correlation between inflation and measures of real activity has changed substantially for the main developed economies over the post-WWII period. In this paper we attempt to describe the observed inflation dynamics in the United Kingdom, the United States and the euro area with a sequence of New Keynesian Phillips Curve (NKPC) equations that are log-linearised around different, non-zero, steady-state inflation levels. In doing this, we follow a two-step estimation strategy. First, we model the time variation in the relationship between inflation and a real cost-based measure of activity through a Markov-switching vector autoregressive model. We then impose the cross-equation restrictions of a Calvo pricing-based NKPC under non-zero steady-state inflation and estimate the structural parameters by minimising for each inflation state the distance between the restricted and unrestricted vector autoregressive parameters. The structural estimation results indicate that for all the economies there is evidence for a structurally invariant NKPC, albeit with a significant backward-looking component.
    Keywords: New Keynesian Phillips Curve; trend inflation; Markov-switching VAR; minimum distance estimation.
    Date: 2008–05
  5. By: Kai Christoffel (DG-Research, European Central Bank, Kaiserstraße 29, 60311 Frankfurt am Main, Germany); Keith Kuester (Monetary Policy Strategy Division, European Central Bank, Kaiserstraße 29, 60311 Frankfurt am Main, Germany.)
    Abstract: All else equal, higher wages translate into higher inflation. More rigid wages imply a weaker response of inflation to shocks. This view of the wage channel is deeply entrenched in central banks’ views and models of their economies. In this paper, we present a model with equilibrium unemployment which has three distinctive properties. First, using a search and matching model with right-to-manage wage bargaining, a proper wage channel obtains. Second, accounting for fixed costs associated with maintaining an existing job greatly magnifies profit fluctuations for any given degree of wage fluctuations, which allows the model to reproduce the fluctuations of unemployment over the business cycle. And third, the model implies a reasonable elasticity of steady state unemployment with respect to changes in benefits. The calibration of the model implies low profits, but does not require a small gap between the value of working and the value of unemployment for the worker. JEL Classification: E31, E32, E24, J64.
    Keywords: Bargaining, Unemployment, Business Cycle, Real Rigidities.
    Date: 2008–08
  6. By: Mewael F. Tesfaselassie
    Abstract: We analyze optimal monetary policy when a central bank has to learn about an unknown coefficient that determines the effect of surprise inflation on aggregate demand. We derive the optimal policy under active learning and compare it to two limiting cases---certainty equivalence policy and cautionary policy, in which learning takes place passively. Our novel result is that the two passive learning policies represent an upper and lower bound for the active learning policy, irrespective of the state of the economy
    Keywords: parameter uncertainty; learning; monetary policy
    JEL: C02 E52
    Date: 2008–08
  7. By: David Meenagh; Patrick Minford; Michael Wickens
    Abstract: We use the method of indirect inference, using the bootstrap, to test the Smets and Wouters model of the EU against a VAR auxiliary equation describing their data; the test is based on the Wald statistic. We find that their model generates excessive variance compared with the data. But their model passes the Wald test easily if the errors have the properties assumed by SW but scaled down. We compare a New Classical version of the model which also passes the test easily if error properties are chosen using New Classical priors (notably excluding shocks to preferences). Both versions have (different) difficulties fitting the data if the actual error properties are used.
    Date: 2008–09
  8. By: Paola Donati (DG-Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Francesco Donati (Politecnico of Torino, Department of Control and Computer Engineering, Corso Duca degli Abruzzi 24, I-10129 Torino, Italy.)
    Abstract: This paper proposes a procedure to investigate the nature and persistence of the forces governing the yield curve and to use the extracted information for forecasting purposes. The latent factors of a model of the Nelson-Siegel type are directly linked to the maturity of the yields through the explicit description of the cross-sectional dynamics of the interest rates. The intertemporal dynamics of the factors is then modeled as driven by long-run forces giving rise to enduring effects, and by medium- and short-run forces producing transitory effects. These forces are reconstructed in real time with a dynamic filter whose embedded feedback control recursively corrects for model uncertainty, including additive and parameter uncertainty and possible equation misspecifications and approximations. This correction sensibly enhances the robustness of the estimates and the accuracy of the out-of-sample forecasts, both at short and long forecast horizons. JEL Classification: G1, E4, C5.
    Keywords: Yield curve, Model uncertainty, Frequency decomposition, Monetary policy.
    Date: 2008–08
  9. By: Nikolaus Hautsch (Humboldt-Universität zu Berlin); Dieter Hess (University of Cologne); Christoph Müller (University of Cologne)
    Abstract: Bayesian learning provides the core concept of processing noisy information. In standard Bayesian frameworks, assessing the price impact of information requires perfect knowledge of news’ precision. In practice, however, precision is rarely disclosed. Therefore, we extend standard Bayesian learning, suggesting traders infer news’ precision from magnitudes of surprises and from external sources. We show that interactions of the different precision signals may result in highly nonlinear price responses. Empirical tests based on intra-day T-bond futures price reactions to employment releases confirm the model’s predictions and show that the effects are statistically and economically significant.
    Keywords: prediction Bayesian learning; macroeconomic announcements; information quality; precision signals
    JEL: E44 G14
    Date: 2008–06
  10. By: Franke, Reiner; Flaschel, Peter
    Abstract: The paper is concerned with determinacy in a version of the New-Keynesian model that integrates imperfect competition and nominal price and wage setting on goods and labour markets. The model is reformulated with an explicit period of arbitrary length and shown to remain well-defined as the period shrinks to zero. The 4×4 constituent matrix of the model’s continuous-time counterpart is mathematically tractable and its determinacy results carry over to the period model at least if the period is sufficiently short. This being understood, it is proved that determinacy is (essentially) ensured if an extended Taylor principle requirement is met.
    Keywords: Determinacy, New-Keynesian wage and price Phillips curves, variable period length, continuous-time limit, Taylor principle
    JEL: E31 E32 E52
    Date: 2008
  11. By: Giuseppe Ferrero (Bank of Italy, Economics and International Relations); Andrea Nobili (Bank of Italy, Economics and International Relations)
    Abstract: The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns - the difference between futures rates and the realized rates - are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are correlated with the business cycle (negatively) only in the United States.
    Keywords: futures rates, monetary policy, risk-premium
    JEL: E43 E44 E52
    Date: 2008–06
  12. By: Michele Berardi
    Abstract: In a simple, forward looking univariate model of price determination we investigate the evolution of endogenous predictor choice dynamics in presence of two types of agents: fundamentalists an chartists. We find that heterogeneous equilibria in which fundamentalists and chartists coexist are possible, even when the fraction of agents is endogenized. We then combine evolutionary selection among heterogeneous classes of models with adaptive learning in the form of parameter updating within each class of rules and find that equilibria in which chartists constantly outperform fundamentalists seem never to be learnable. Simulations also show that, in general, interactions between learning and predictor choice dynamics do not prevent convergence of both processes towards their equilibrium values when the equilibrium is E-stable.
    Date: 2008
  13. By: Castelnuovo , Efrem (University of Padua and Bank of Finland Research); Greco , Luciano (University of Padua); Raggi, Davide (University of Bologna)
    Abstract: This paper estimates regime-switching monetary policy rules featuring trend inflation using post-WWII US data. We find evidence in favour of regime shifts and time-variation of the inflation target. We also find a drop in the inflation gap persistence when entering the Great Moderation sample. Estimated Taylor rule parameters and regimes are robust across different monetary policy models. We propose an ‘internal consistency’ test to discriminate among our estimated rules. Such a test relies upon a feedback mechanism running from the monetary policy stance to the inflation gap. Our results support the stochastic autoregressive process as the most consistent model for trend inflation, above all when conditioning to the post-1985 subsample.
    Keywords: active and passive Taylor rules; trend inflation; inflation gap persistence; Markov-switching models
    JEL: E52 E61 E62
    Date: 2008–09–10
  14. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for political institutions, trade, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.
    JEL: E32 F32
    Date: 2008–09
  15. By: Blake, Andrew P (Bank of England); Markovic, Bojan (Bank of England)
    Abstract: The purpose of this paper is to examine how important an improvement in global monetary policy might be for the macroeconomic performance of a small open economy such as the United Kingdom. Our paper contributes to the literature by proposing a new methodology to treat indeterminate solutions (the most-robust solution), and by analysing a policy improvement within a three-country framework. Both contributions yield a rich set of theoretical and policy implications. We find that the performance of the domestic macroeconomy depends crucially on domestic monetary policy, but there remains significant potential for monetary policy abroad to improve the stability of inflation and output in a small open economy. Importantly, how much of this potential spillover from policy abroad crystallises is still endogenous to the conduct of domestic policy. We also show that an improvement in policy abroad may not reduce domestic volatility when domestic policy is the only poor policy globally. In such a case domestic volatility can even become worse. Our paper also yields interesting results related to the impact of a policy improvement abroad on inflation persistence in the domestic economy and her exposure to foreign shocks.
    Keywords: Indeterminacy; stochastic volatility; Taylor rule; international spillovers; Great Inflation.
    JEL: C62 D84 E30 E58 E61 F41 F42
    Date: 2008–08
  16. By: Olivier Coibion; Yuriy Gorodnichenko
    Abstract: We consider a DSGE model in which firms follow one of four price-setting regimes: sticky prices, sticky-information, rule-of-thumb, or full-information flexible prices. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. We find that sticky-price firms and sticky-information firms jointly account for over 95% of firms in the model, with the two receiving approximately equal shares. We compare the performance of our hybrid model to pure sticky-price and sticky-information models along various dimensions, including monetary policy implications.
    JEL: E3 E5
    Date: 2008–09
  17. By: Hafedh Bouakez; Emanuela Cardia; Francisco J. Ruge-Murcia
    Abstract: Barsky, House and Kimball (2007) show that introducing durable goods into a sticky-price model leads to negative sectoral comovement of production following a monetary policy shock and, under certain conditions, to aggregate neutrality. These results appear to undermine sticky-price models. In this paper, we show that these results are not robust to two prominent and realistic features of the data, namely input-output interactions and limited mobility of productive inputs. When extended to allow for both features, the sticky-price model with durable goods delivers implications in line with VAR evidence on the effects of monetary policy shocks.
    Keywords: Durability, input-output interactions, roundabout production, sectoral comovement, monetary policy
    JEL: E21 E23 E31 E52
    Date: 2008
  18. By: Tan, Kang Yong (University of Oxford); Tanaka, Misa (Bank of England)
    Abstract: This paper examines the welfare implications of international monetary co-operation using a stylised two-country New Keynesian general equilibrium model of imperfect information. We show that setting a self-oriented monetary policy rule generally leads to welfare gains relative to passive monetary policy even when central banks do not have perfect information about the foreign economy. However, information sharing between central banks in this set-up, by itself, has ambiguous welfare implications. Gains from monetary co-ordination are largest when productivity shocks are negatively correlated across countries.
    Keywords: Policy co-ordination; imperfect information; monetary policy; new open economy macroeconomics.
    JEL: F41 F42
    Date: 2008–03
  19. By: Emanuele Millemaci (Faculty of Economics, University of Rome "Tor Vergata"); Robert J. Waldmann (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper focuses on two main issues. First, we find that, on average, households’ discount rates decline. This implies dynamically inconsistent preferences. Second, we calculate an indicator of the degree of dynamic inconsistency that may help us to understand how households overcome their self-control problems. We use a micro dataset containing households’ reports on the compensation for receiving hypothetical rewards with delays. We find that individuals with more severely dynamicly inconsistent preferences on average hold a statistically significantly lower share of their total wealth in checking accounts. A possible interpretation is that subjects use precommitment strategies to limit their temptation to consume immediately.
    Keywords: Behavioral Economics, Intertemporal choice, Hyperbolic Discounting, Dynamic Inconsistency, Precommitment
    JEL: D11 D12 D90
    Date: 2008–09–09
  20. By: Jerome Creel (Observatoire Français des Conjonctures Économiques); Paul Hubert (Observatoire Français des Conjonctures Économiques)
    Abstract: Since 1990, a growing number of countries have adopted inflation targeting (IT) around the world. Empirical evidence on its advantages has been mixed so far, and most assessments have been based on a control group methodology. In this paper, using a MSVAR technique, we assess the adoption of IT in three industrialised countries over time; in addition, we compare their outcomes with a non-IT country, the US. Results are manifold. First, an inflation targeting regime exists, although it does not constitute a change in monetary policy reaction. Second, this conclusion is robust on a subsample excluding the periods of high inflation and early sharp disinflation. Third, the sacrifice ratio of higher output volatility generally attributed to inflation stabilisation policies is not sensitive to the adoption of inflation targeting. Fourth, this framework is shown to be conducive to higher monetary policy leeway.
    Keywords: Inflation targeting; MSVAR; Counterfactuals.
    JEL: E52 E58
    Date: 2008
  21. By: Knüppel, Malte; Schultefrankenfeld, Guido
    Abstract: Macroeconomic risk assessments play an important role in the forecasts of many institutions. However, to the best of our knowledge their performance has not been investigated yet. In this work, we study the Bank of England’s risk forecasts for inflation. We find that these forecasts do not contain the intended information. Rather, they either have no information content, or even an adverse information content. Our results imply that under mean squared error loss, it is better to use the Bank of England’s mode forecasts than the Bank of England’s mean forecasts.
    Keywords: Forecast evaluation, risk forecasts, Bank of England inflation forecasts
    JEL: C12 C53 E37
    Date: 2008
  22. By: Campa, Jose Manuel (IESE Business School); Gonzalez Minguez, Jose M (Banco de Espana); Sebastia Barriel, Maria (Bank of England)
    Abstract: This paper focuses on the non-linear adjustment of import prices in national currency to shocks in exchange rates and foreign prices measured in the exporters' currency of products originating outside the euro area and imported into European Union countries (EU-15). The paper looks at three different types of non-linearities: (a) non-proportional adjustment (the size of the adjustment grows more than proportionally with the size of the misalignments), (b) asymmetric adjustment to cost-increasing and cost-decreasing shocks, and (c) the existence of thresholds in the size of misalignments below which no adjustment takes place. There is evidence of more than proportional adjustment towards long-run equilibrium in manufacturing industries. In these industries, the adjustment is faster the further away current import prices are from their implied long-run equilibrium. In contrast, a proportional linear adjustment cannot be rejected for some other imports (especially within agricultural and commodity imports). There is also strong evidence of asymmetry in the adjustment to long-run equilibrium. Deviations from long-run equilibrium due to exchange rate appreciations of the home currency result in a faster adjustment than those caused by a home currency depreciation. Finally, we also find that adjustment takes place in the industries in our sample only when deviations are above certain thresholds, and that these thresholds tend to be somewhat smaller for manufacturing industries than for commodities.
    Keywords: Exchange rate adjustment; European Union; monetary union.
    JEL: F31 F36 F42
    Date: 2008–04
  23. By: Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg)
    Abstract: This paper compares the forecasting ability of five alternative models in predicting four key macroeconomic variables, namely, per capita growth rate, the Consumer Price Index (CPI) inflation, the money market rate, and the growth rate of the nominal effective exchange rate for the South African economy. Unlike the theoretical Small Open Economy New Keynesian Dynamic Stochastic General Equilibrium (SOENKDSGE), the unrestricted VAR, and the small-scale Bayesian Vector Autoregressive (BVAR) models, which are estimated based on four variables, the Dynamic Factor Model (DFM) and the large-scale BVAR models use information from a data-rich environment containing 266 macroeconomic time series observed over the period of 1983:01 to 2002:04. The results, based on Root Mean Square Errors (RMSEs), for one- to four-quarters-ahead out-of-sample forecasts over the horizon of 2003:01 to 2006:04, show that, except for the one-quarter-ahead forecast of the growth rate of the of nominal effective exchange rate, large-scale BVARs outperform the other four models consistently and, generally, significantly.
    Keywords: Small Open Economy New Keynesian Dynamic Stochastic Model, Dynamic Factor Model, VAR, BVAR, Forecast Accuracy
    JEL: C11 C13 C33 C53
    Date: 2008–09
  24. By: Amedeo Argentiero (Faculty of Economics, University of Rome "Tor Vergata"); Michele Bagella (Faculty of Economics, University of Rome "Tor Vergata"); Francesco Busato (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper implements a methodology that exploits firms and households’ optimality conditions to measure money laundering for the Italian economy. This approach, first implemented by Ingram, Kocherlakota, and Savin (1997) to the household production sector, and by Busato, Chiarini and Di Maro (2006) for measuring the underground economy, allows to generate high frequency series for the money laundering using a theoretical two-sector dynamic general equilibrium model calibrated over the sample 1981:01-2001:04. The analysis of the generated series suggests two main results. First, money laundering accounts for approximately 12 percent of aggregate GDP; second, money laundering is more volatile than aggregate GDP, and it is negatively correlated with it.
    Keywords: E26,E32,K40
    JEL: E26 E32 K40
    Date: 2008–09–09
  25. By: Basher, Syed A.; Westerlund, Joakim
    Abstract: This paper re-examines the validity of the monetary exchange rate model during the post-Bretton Woods era for 18 OECD countries. Our analysis simultaneously considers the presence of both cross-sectional dependence and multiple structural breaks, which have not received much attention in previous studies of the monetary model. The empirical results indicate that the monetary model emerges only when the presence of structural breaks and cross-country dependence has been taken into account. Evidence is also provided suggesting that the breaks in the monetary model can be derived from the underlying purchasing power parity relation.
    JEL: C32 F41 F31 C33
    Date: 2008–09–12
  26. By: David G. Blanchflower
    Abstract: National Time Accounting is a way of measuring society's well-being, based on time use. Its explicit form is the U-index, for "unpleasant" or "undesirable", which measures the proportion of time an individual spends in an unpleasant state. In this paper I review cross-country evidence on happiness and life satisfaction and consider whether these data will likely be replaced by the U-index. I find that first, that there are many similarities. According to both measures happiness is higher for the more educated, for married people, for those with higher income and for whites and lower for the unemployed; is U-shaped in age and un-trended over time in the USA although they are trended up in a number of EU countries and especially so in developing countries. Equivalent results are found using self-reported unhappiness data. Second, there is a large body of data on happiness that is unavailable on the U-index. For example, according to happiness research well-being across nations is lower the higher is the unemployment rate, the current inflation rate and the highest inflation rate in a person's adult life. Higher inequality also lowers happiness. Third, we know little about the predictive power of the U-index. Happiness and life satisfaction data seem able to forecast migration flows. Fourth, happy people are particularly optimistic about the future. Fifth, according to the happiness data the US ranks above France but the U-index suggests the reverse.
    JEL: I1 J0
    Date: 2008–09
  27. By: D.S.G. Pollock
    Abstract: A compendium is presented of the various approaches that may be taken in deriving the estimators of the simultaneous-equations econometric model according to the principle of maximum likelihood. The structural equations of the model have the character both of a regression equation and of an errors-in-variables equation. This partly accounts for way in which the various approaches that have been followed appear to differ widely. In the process of achieving a synthesis of the methods of estimation, some elements that have been missing from the theory are supplied.
    Date: 2008–09
  28. By: Jeffrey Liebman; Richard Zeckhauser
    Abstract: The behavioral revolution in economics has demonstrated that human beings often have difficulty making wise choices. The most widely chronicled difficulties arise for decisions made under conditions of uncertainty, those whose consequences unfold over significant amounts of time, and decisions made in complex environments. Unfortunately, these are precisely the elements involved when individuals choose a health insurance policy, or decide whether to consume health care services. In this paper, we argue that traditional economic models of insurance are woefully insufficient for analyzing the tradeoffs inherent when giving consumers responsibility for making health care choices. We show that behavioral economics provides a stronger normative justification for many features of our existing health care policy than do the models of traditional economics. We then demonstrate that policy analyses of the wide range of subsidies that permeate the health care system change substantially when viewed from the behavioral perspective. In closing, we discuss how recent policy trends can be fruitfully assessed using a behavioral lens.
    JEL: D80 H2 I11
    Date: 2008–09
  29. By: Keith Blackburn; Kyriakos C. Neanidis; M. Emranul Haque
    Abstract: This paper presents an analysis of the effect of bureaucratic corruption on economic growth through a public ?nance transmission channel. At the theoretical level, we develop a simple dynamic general equilibrium model in which fi?nancial intermediaries make portfolio decisions on behalf of agents, and bureaucrats collect tax revenues on behalf of the government. Corruption takes the form of the embezzlement of public funds, the effect of which is to increase the government's reliance on seigniorage ?nance. This leads to an increase in inflation which, in turn, reduces capital accumulation and growth. At the empirical level, we use data on 82 countries over a 20-year period to test the predictions of our model. Taking proper account of the government's budget constraint, we ?find strong evidence to support these predictions under different estimation strategies. Our results are robust to a wide range of sensitivity tests.
    Date: 2008
  30. By: Denis Larocque; Geneviève Lincourt; Michel Normandin
    Abstract: This paper estimates a structural vector autoregression model to assess the dynamic effects of terrorism on output and prices in Israel over the post-1985 period. Long-run restrictions are used to obtain an interpretation of the effects of terrorism in terms of aggregate demand and supply curves. The empirical responses of output and prices suggest that the immediate effects of terrorism are similar to those associated with a negative demand shock. Such leftward shift of the aggregate demand curve is consistent with the adverse effects of terrorism on most components of aggregate expenditure, which have been documented in previous studies. In contrast, the long-term consequences of terrorism are similar to those related to a negative supply shock. Such leftward shift of the long-run aggregate supply curve suggests the potential existence of adverse effects of terrorism on the determinants of potential output, which have not been considered so far.
    Keywords: Goods market, output, price, and terrorist indices, structural vector autoregressions, long-run identifying restrictions, dynamic responses and variance decompositions
    JEL: C32 E31 E32
    Date: 2008
  31. By: Luca Arciero (Bank of Italy); Claudia Biancotti (Bank of Italy); Leandro DÂ’Aurizio (Bank of Italy); Claudio Impenna (Bank of Italy)
    Keywords: agent-based modeling, payment systems, RTGS, liquidity, crisis simulation Abstract: This paper presents an exploratory agent-based model of a real time gross settlement (RTGS) payment system. Banks are represented as agents who exchange payment requests, which are settled according to a set of simple rules. The model features the main elements of a real-life system, including a central bank acting as liquidity provider, and a simplified money market. A simulation exercise using synthetic data of BI-REL (the Italian RTGS) predicts the macroscopic impact of a disruptive event on the flow of interbank payments. The main advantage of agent - based modeling is that we can dynamically see what happens to the major variables involved. In our reduced-scale system, three hypothetical distinct phases emerge after the disruptive event: 1) a liquidity sink effect is generated and the participants’ liquidity expectations turn out to be excessive; 2) an illusory thickening of the money market follows, along with increased payment delays; and, finally 3) defaulted obligations dramatically rise. The banks cannot staunch the losses accruing on defaults, even after they become fully aware of the critical event, and a scenario emerges in which it might be necessary for the central bank to step in as liquidity provider. The methodology presented differs from traditional payment systems simulations featuring deterministic streams of payments dealt with in a centralized manner with static behavior on the part of banks. The paper is within a recent stream of empirical research that attempts to model RTGS with agent – based techniques.
    JEL: C63 E47 G21
    Date: 2008–08
  32. By: Irwin, Gregor (Bank of England); Penalver, Adrian (Bank of England); Salmon, Chris (Bank of England); Taylor, Ashley (London School of Economics)
    Abstract: We develop a model in which countries can protect themselves against shocks by subscribing to a credit union that shares the key features of the International Monetary Fund, or by self-insuring through accumulating reserves. We assess the impact of the increasing heterogeneity of the Fund's membership on the political equilibrium Fund size and hence its effectiveness as a credit union. We find the Fund's existing lending framework is well suited to a world in which its members have homogeneous interests, but as the membership has become more heterogeneous the Fund is increasingly unlikely to provide financing on a sufficient scale to meet the demands of higher-risk members, leading them to rely more heavily on self-insurance. We conclude that the framework governing the Fund's lending operations may no longer be appropriate.
    JEL: F33 F34
    Date: 2008–05
  33. By: Colin Rogers (School of Economics, University of Adelaide)
    Abstract: In Interest and Prices Woodford employs a frictionless model to derive nominal interest rate rules that can be applied by central banks to achieve price level stability. But frictionless models are Walrasian general equilibrium models that preclude any role for money. Furthermore frictionless model have no role for nominal values or the price level and therefore no role for a central bank. Consequently, conceptual anomalies arise in Woodford's attempt to analyse questions of monetary theory and policy that are precluded by construction in frictionless models. In some states of the model money is converted into a ‘friction', contra economic theory.
    Keywords: Frictionless models; time-0 auction; ‘monetary frictions'
    JEL: B E40 E42 E50
    Date: 2008–09
  34. By: Colin Rogers (School of Economics, University of Adelaide)
    Abstract: No. As well-specified Walrasian general equilibrium systems, frictionless models are isomorphic with the Arrow-Debreu (A-D) world. It is well known that the A-D world has no role for money, credit or banks. Grafting a role for money onto a frictionless model by appending a quantity equation or cash-in-advance constraint makes the error of converting money into a friction. Furthermore, as frictionless models have no use for money or nominal values it makes no sense to use them to adjudicate between theories of the price level or to claim that they provide the theoretical foundations for monetary policy.
    Keywords: Frictionless models; `monetary frictions'; nominal and numeraire prices; theories of the price level.
    JEL: B40 E40 E42 E50
    Date: 2008–09
  35. By: Colin Rogers (School of Economics, University of Adelaide)
    Date: 2008–09
  36. By: Kim, Soyoung (Korea University); Yang, Doo Yong (Korea Institute for International Economic Policy)
    Abstract: In recent years, emerging East Asian economies have experienced large capital inflows-especially a surge in portfolio inflows-and an appreciation of asset prices such as equities, land, and both nominal and real exchange rates. The paper reviews why a surge in capital inflows can increase asset prices, and then empirically investigates the effects by employing a panel vector autoregression (VAR) model. The empirical results suggest that capital inflows have indeed contributed to the asset price appreciation in this region, although capital inflow shocks explain a relatively small part of asset price fluctuations. How to manage these capital inflows is also discussed.
    Keywords: Capital inflows; portfolio inflows; asset prices
    JEL: F10 F31 F32 G15 G18
    Date: 2008–05–01
  37. By: Riccardo Bonci (Bank of Italy, Economic and Financial Statistics Department); Francesco Columba (Bank of Italy, Economic Outlook and Monetary Policy Department)
    Abstract: We obtain new evidence on the transmission of monetary policy to the economy by analyzing the effects of restrictive monetary policy shocks on Italian flows of funds over the period 1980-2002. Firms reduce their issuance of debt and their acquisitions of financial assets, so there is no evidence of strong financial frictions. Households increase short-term liabilities and diminish purchases of liquid assets and shares in the first quarter following a shock. The public sector increases net borrowing during the first two years. Financial corporations decrease their borrowing for three quarters, while the foreign sector increases borrowed funds. The results shed new light on the role played by the financial decisions of the various economic sectors in the transmission of monetary policy.
    Keywords: flow of funds, monetary policy, VAR
    JEL: E32 E52
    Date: 2008–06
  38. By: Augustine A. Boakye; Hassan Molana
    Abstract: This paper uses the principles of the monetary approach model of balance of payments and exchange market pressure to analyze the fluctuations in the international reserves of LDCs. The motivation for this analysis derives from the recent emphasis of the debt reduction policies that target the HIPCs. These policies stress the importance of non-monetary, and to some extent non-economic factors such as institutional improvements, good governance, infrastructural development and poverty reduction strategies. The argument is that once such reforms are implemented effectively, the economic forces will work in the right direction enabling the HIPCs to sustain a healthy balance of payments. We use panel data analysis to examine whether there is a significant difference between international reserves fluctuations in the HIPCs and in the rest of the LDCs. Evidence from data over the period 1983–2003 for 47 LDCs - of which 20 qualify as HIPCs by the IMF-World Bank criteria - suggests that there are significant differences in the way the reserve flows respond to their main determinants in the two sets of countries. This begs the question of whether the above mentioned policies can alleviate the causes of such differences.
    Keywords: monetary approach, exchange market pressure, international reserves, Heavily Indebted Poor Country (HIPC)
    JEL: F31 F33 F34 F35 H63 O11
    Date: 2007–09

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