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on Central Banking |
| By: | William A. Brock; Steven N. Durlauf; Giacomo Rondina |
| Abstract: | This paper characterizes the frequency domain properties of feedback control rules in linear systems in order to better understand how different rules affect outcomes frequency by frequency. We are especially concerned in understanding how reductions of variance at some frequencies induce increases in variance at others. Tradeoffs of this type are known in the control literature as design limits. Design limits are important in understanding the full range of effects of stabilization policies. We extend existing results to account for discrete time bivariate systems with rational expectations. Application is made to the evaluation of monetary policy rules. |
| JEL: | C6 E52 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14357&r=cba |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper analyzes how the formation of expectations constrains monetary and fiscal policy design. Economic agents have imperfect knowledge about the economic environment and the policy regime in place. Households and firms learn about the policy regime using historical data. Regime uncertainty substantially narrows, relative to a rational expectations analysis of the model, the menu of policies consistent with expectations stabilization. When agents are learning about the policy regime, there is greater need for policy coordination: the specific choice of monetary policy limits the set of fiscal policies consistent with macroeconomic stability - and simple Taylor-type rules frequently lead to expectations-driven instability. In contrast, non-Ricardian fiscal policies combined with an interest rate peg promote stability. Resolving uncertainty about the prevailing monetary policy regime improves stabilization policy, enlarging the menu of policy options consistent with stability. However, there are limitsto the benefits of communicating the monetary policy regime: the more heavily indebted the economy, the greater is the likelihood of expectations-driven instability. More generally, regardless of agents' knowledge of the policy regime, when expectations are anchored in the long term, short-term dynamics display greater volatility than under rational expectations. |
| Keywords: | Fiscal policy ; Monetary policy ; Rational expectations (Economic theory) ; Taylor's rule ; Economic stabilization ; Financial stability |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:343&r=cba |
| By: | Stéphane Adjemian (Université du Maine, GAINS & CEPREMAP. Contact address: Facultéde Droit et de Sciences Économiques, 72085 LE MANS Cedex 9, France.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stéphane Moyen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Advances in the development of Dynamic Stochastic General Equilibrium (DSGE) models towards medium-scale structural frameworks with satisfying data coherence have considerably enhanced the range of analytical tools well-suited for monetary policy evaluation. The present paper intends to make a step forward in this direction: using US data over the Volker-Greenspan sample, we perform a DGSE-VAR estimation of a medium-scale DSGE model very close to Smets and Wouters [2007] specification, where monetary policy is set according to a Ramsey-planner decision problem. Those results are then contrasted with the DSGE-VAR estimation of the same model featuring a Taylortype interest rate rule. Our results show in particular that the restrictions imposed by the welfare-maximizing Ramsey policy deteriorates the empirical performance with respect to a Taylor rule specification. However, it turns out that, along selected conditional dimensions, and notably for productivity shocks, the Ramsey policy and the estimated Taylor rule deliver similar economic propagation. JEL Classification: E4, E5, F4. |
| Keywords: | DSGE models, Optimal monetary policy, Bayesian estimation. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080942&r=cba |
| By: | Césaire A. Meh; José-Victor Rios-Rull; Yaz Terajima |
| Abstract: | Since the work of Doepke and Schneider (2006a) and Meh and Terajima (2008), we know that inflation causes major redistribution of wealth - between households and the government, between nationals and foreigners, and between households within the same country. Two types of monetary policy, inflation targeting (IT) and price level targeting (PT), have very different implications for the price level path subsequent to a price-level shock, and consequently, have different redistributional properties which is what we explore in this paper. For Canada, we show that the magnitude of redistributions of an unexpected 1% price-level increase under IT is about three times larger than under PT. Households' and foreigners' wealth losses from a price level increase is matched by the gains of the government. Even though this redistribution is zero-sum, we observe positive effects on GDP due to the wealth loss, the lower value of the debt and its associated fiscal adjustment, and the non-linear effects on work effort of the redistribution of wealth across households. Finally, the direction of the change in the weighted welfare of households depends on the fiscal policy. |
| Keywords: | Economic models; Monetary policy framework; Sectoral balance sheet; Inflation: costs and benefits; Inflation targets; Inflation and prices |
| JEL: | D31 E21 E31 E44 E52 E63 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-31&r=cba |
| By: | Kevin X.D. Huang; Zheng Liu; Tao Zha |
| Abstract: | This study explores the macroeconomic implications of adaptive expectations in a standard real business cycle model. When rational expectations are replaced by adaptive expectations, we show that the self-confirming equilibrium is the same as the steady state rational expectations equilibrium for all admissible parameters, but that dynamics around the steady state are substantially different between the two equilibria. The differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect, not by the escapes emphasized by Williams (2003). As a result, adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labor market dynamics. |
| Keywords: | Macroeconomics |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-18&r=cba |
| By: | Carmen Martinez-Carrascal (Servicio de Estudios, Banco de España, Alcalá, 50, 28014 Madrid, Spain.); Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyses the impact that firms' financial position has on investment decisions using panel data from a large sample of non-financial corporations (around 120,000 firms)in six euro area countries (Belgium, Germany, France, Italy, the Netherlands and Spain). The results indicate that financial position is important to explain capital expenditures, as financial pressure appears relevant in explaining investment dynamics when it is proxied by cash flow, indebtedness and debt burden. The results also show differences in the sensitivity of investment rates to changes in financial pressure across countries, which appears to be especially large in the Netherlands and Italy and relatively small in Germany. JEL Classification: C33, E22, G32, J23. |
| Keywords: | Financial pressure, fixed investment, balance sheet channel, panel data. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080943&r=cba |
| By: | Melecky, Martin; Rodrıguez Palenzuela, Diego; Soderstrom, Ulf |
| Abstract: | We quantify the effects of monetary policy transparency and credibility on macroeconomic volatility in an estimated model of the euro area economy. In our model, private agents are unable to distinguish between temporary shocks to the central bank’s monetary policy rule and persistent shifts in the inflation target, and therefore use optimal filtering techniques to construct estimates of the future monetary policy stance. We find that the macroeconomic benefits of credibly announcing the current level of the time-varying inflation target are reasonably small as long as private agents correctly understand the stochastic processes governing the inflation target and the temporary policy shock. If, on the other hand, private agents overestimate the volatility of the inflation target, the overall gains of announcing the target can be substantial. We also show that the central bank to some extent can help private agents in their learning process by responding more aggressively to deviations of inflation from the target. |
| Keywords: | Credibility; Transparency; Inflation targeting; Imperfect information; Private sector learning. |
| JEL: | E32 E58 E52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10545&r=cba |
| By: | Anthony Garratt; Gary Koop; Emi Mise; Shaun Vahey (Reserve Bank of New Zealand) |
| Abstract: | A popular account for the demise of the UK’s monetary targeting regime in the 1980s blames the fluctuating predictive relationships between broad money and inflation and real output growth. Yet ex post policy analysis based on heavily-revised data suggests no fluctuations in the predictive content of money. In this paper, we investigate the predictive relationships for inflation and output growth using both real-time and heavily-revised data. We consider a large set of recursively estimated Vector Autoregressive (VAR) and Vector Error Correction models (VECM). These models differ in terms of lag length and the number of cointegrating relationships. We use Bayesian model averaging (BMA) to demonstrate that real-time monetary policymakers faced considerable model uncertainty. The in-sample predictive content of money fluctuated during the 1980s as a result of data revisions in the presence of model uncertainty. This feature is only apparent with real-time data as heavily-revised data obscure these fluctuations. Out of sample predictive evaluations rarely suggest that money matters for either inflation or real output. We conclude that both data revisions and model uncertainty contributed to the demise of the UK’s monetary targeting regime. Classification-C11, C32, C53, E51, E52 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2008/13&r=cba |
| By: | Carlos Capistrán; Allan Timmermann (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | Disagreement in inflation expectations observed from survey data varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters’ costs of over- and under-predicting inflation. Our model implies (i) biased forecasts; (ii) positive serial correlation in forecast errors; (iii) a cross-sectional dispersion that rises with the level and the variance of the inflation rate; and (iv) predictability of forecast errors at different horizons by means of the spread between the short- and long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters. A constant bias component, not explained by asymmetric loss and rational expectations, is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982. |
| Keywords: | asymmetric loss, real-time data, survey expectations |
| JEL: | C53 C82 E31 E37 |
| Date: | 2008–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2008-56&r=cba |
| By: | Sinigaglia, Daniel |
| Abstract: | What measure of inflation a Central Bank should respond to? This paper characterizes the optimal targeting index in a multisectorial economy with Calvo-pricing, defined as a composition of sectorial inflations that maximizes a selected welfare criterion. This is a purely quadratic approximation to the representative agent's utility in an environment of distorted steady state and sectorial heterogeneity of price stickiness. The Central Bank is modeled as following a historical Taylor Rule. For most parameter values, weights of sectorial inflations are increasing functions of the degrees of nominal rigidity and productivity volatility and decreasing functions of sectorial wage markup volatilities, resembling most of the conclusions from related literature. Bayesian estimation for the structural model using sectorial quantum and price indexes for Personal Consumption Expenditure (PCE) provides the parameter values that allow constructing the optimal index for the US economy. The result points out towards a price index with similar properties than the PCE, with more weight on services and less weight of inflation from durable goods. I find no evidence that a core index based on the exclusion of food and energy goods is welfare improving. |
| Keywords: | Inflation Targeting; Heterogeneity of price stickiness; Optimal inflation measure |
| JEL: | E52 |
| Date: | 2008–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10569&r=cba |
| By: | Jörg Döpke (University of Applied Sciences, Department Economics, Geusaer Strasse, 06217 Merseburg, Germany.); Jonas Dovern (Kiel Institute for the World Economy (IfW Kiel), Düsternbrooker Weg 120, 24105 Kiel, Germany.); Ulrich Fritsche (University Hamburg, Department of Economics and Politics and DIW Berlin, Von-Melle-Park 9, 20146 Hamburg, Germany.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We estimate the sticky information Phillips curve model of Mankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months. JEL Classification: D84, E31. |
| Keywords: | Inflation expectations, sticky information, Phillips curve, inflation persistence. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080930&r=cba |
| By: | William Poole; Robert H. Rasche; David C. Wheelock |
| Abstract: | The Shadow Open Market Committee was formed in 1973 in response to rising inflation and the apparent unwillingness of U.S. policymakers to implement policies necessary to maintain price stability. This paper describes how the Committee's policy views differed from those of most Federal Reserve officials and many academic economists at the time. The Shadow argued that price stability should be the primary goal of monetary policy, and favored gradual adjustment of monetary growth to a rate consistent with price stability. The paper evaluates the Shadow's policy rule in the context of the New Keynesian macroeconomic model of Clarida, Gali and Gertler (1999). Simulations of the model suggest that the gradual stabilization of monetary growth favored by the Shadow would have lowered inflation with less impact on output growth, and with less variability in output and inflation, than a one-time reduction in monetary growth. We conclude that the Shadow articulated a sensible policy that would have outperformed the policies actually implemented by the Federal Reserve during the Great Inflation era. |
| Keywords: | Inflation (Finance) ; Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-032&r=cba |
| By: | Harashima, Taiji |
| Abstract: | Recently, it has been argued that trend inflation may be the solution to the puzzle of inflation persistence in the New Keynesian Phillips curve (NKPC). However, incorporating trend inflation into the NKPC raises another serious problem—it lacks a microfoundation. The paper presents a microfoundation for trend inflation, which indicates that trend inflation is a natural consequence of simultaneous optimization by the government and households. A purely forward-looking model is constructed based on the microfoundation presented. The model enables a unified explanation for various types of inflation. It also indicates that, if inflation is assumed to follow an autoregressive process without considering trend inflation, many measures of inflation persistence will spuriously indicate that inflation is intrinsically substantially persistent and has a backward-looking property. |
| Keywords: | Inflation persistence; The New Keynesian Phillips curve; Central bank independence; Trend inflation; The fiscal theory of the price level |
| JEL: | E58 E31 E63 |
| Date: | 2008–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10668&r=cba |
| By: | Stefano Eusepi |
| Abstract: | Central bank communication plays an important role in shaping market participants' expectations. This paper studies a simple nonlinear model of monetary policy in which agents have incomplete information about the economic environment. It shows that agents' learning and the dynamics of the economy are heavily affected by central bank transparency about its policy rule. A central bank that does not communicate its rule can induce "learning equilibria" in which the economy alternates between periods of deflation coupled with low output and periods of high economic activity with excessive inflation. More generally, initial beliefs that are arbitrarily close to the inflation target equilibrium can result in complex economic dynamics, resulting in welfare-reducing fluctuations. On the contrary, central bank communication of policy rules helps stabilize expectations around the inflation target equilibrium. |
| Keywords: | Banks and banking, Central ; Monetary policy ; Inflation (Finance) ; Inflation targeting ; Disclosure of information |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:342&r=cba |
| By: | Carlos De Resende; Nooman Rebei |
| Abstract: | This paper studies the interdependence between fiscal and monetary policy in a DSGE model with sticky prices and non-zero trend inflation. We characterize the fiscal and monetary policies by a rule whereby a given fraction k of the government debt must be backed by the discounted value of current and future primary surpluses. The remaining fraction of debt is backed by seigniorage revenues. When k = 1, there is no fiscal dominance, since the fiscal authority backs all debt and accommodates (independent) monetary policy, by adjusting current or future primary surpluses to satisfy the government’s intertemporal budget constraint. If k = 0, all debt is backed by the monetary authority and there is complete fiscal dominance. A continuum of possibilities lies between these two polar cases. We numerically show that: 1) the degree of fiscal dominance, as measured by (1 - k), is positively related to trend inflation, and 2) when prices are sticky, k has significant effects on the business cycle dynamics. The model is estimated using Bayesian techniques. Estimates of k imply a high degree of fiscal dominance in both Mexico and South Korea, but almost no fiscal dominance in Canada and the U.S. The country-specific estimates of the structural parameters are used in a second-order approximation of the equilibrium around the deterministic steady-state to evaluate the welfare costs of fiscal dominance. Results suggest significant welfare losses for countries with high degrees of fiscal dominance. |
| Keywords: | Economic models; Fiscal policy; Inflation: costs and benefits; Monetary policy framework |
| JEL: | E31 E42 E50 E63 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-28&r=cba |
| By: | Christiane Nickel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyses the empirical relationship between fiscal policy and the current account of the balance of payments and considers how Ricardian equivalence changes this relationship. To do so, we estimate a dynamic panel threshold model for 22 industrialised countries in which the relationship between the current account and the government balance is allowed to alter according to the government debt to GDP ratio. The results show that for countries with debt to GDP ratios up to 90% the relationship between the government balance and the current account is positive, i.e. an increase in the fiscal deficit leads to a higher current account deficit. For very high debt countries this relationship however turns negative but insignificant, suggesting that a rise in the fiscal deficit does not result in a rise in the current account deficit. Implicitly this result suggests that households in very hight debt countries tend to become Ricardian. Estimating the same model for the 11 largest euro area countries shows that the reationship between the govnerment balance and the current account turns statistically insignificant when the debt to GDP ratio exceeds 80%. JEL Classification: F32, E62, F41. |
| Keywords: | Fiscal policy, current account, panel threshold model. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080935&r=cba |
| By: | Christian Dreger |
| Abstract: | The real interest partity (RIP) condition combines two cornerstones in international finance, uncovered interest parity (UIP) and ex ante purchasing power parity (PPP). The extent of deviation from RIP is therefore an indicator of the lack of product and financial market integration. This paper investigates whether the nominal exchange rate regime has an impact on RIP. The analysis is based on 15 annual real interest rates and covers a long time span, 1870-2006. Four subperiods are distinguished and linked to fixed and flexible exchange rate regimes: the Gold Standard, the interwar float, the Bretton Woods system and the current managed float. Panel integration techniques are used to increase the power of the tests. Cross section correlation is embedded via common factor structures. The results suggest that RIP holds as a long run condition irrespectively of the exchange rate regimes. Adjustment towards RIP is affected by the institutional framework and the historical episode. Half lives of shocks tend to be lower under fixed exchange rates and in the first part of the sample, probably due to higher price flexibility before WWII. Although barriers to foreign trade and capital controls were substantially removed after the collapse of the Bretton Woods system, they did not lead to lower half lives during the managed float. |
| Keywords: | Real interest parity, nominal exchange rate regime, panel unit roots, common factors |
| JEL: | C32 F21 F31 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp819&r=cba |
| By: | Andrew J. Patton; Allan Timmermann (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | We develop an unobserved components approach to study surveys of forecasts containing multiple forecast horizons. Under the assumption that forecasters optimally update their beliefs about past, current and future state variables as new information arrives, we use our model to extract information on the degree of predictability of the state variable and the importance of measurement errors on that variable. Empirical estimates of the model are obtained using survey forecasts of annual GDP growth and inflation in the US with forecast horizons ranging from 1 to 24 months. The model is found to closely match the joint realization of forecast errors at different horizons and is used to demonstrate how uncertainty about macroeconomic variables is resolved. |
| Keywords: | Fixed-event forecasts, multiple forecast horizons, Kalman filtering, survey data |
| Date: | 2008–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2008-54&r=cba |
| By: | S. Boragan Aruoba; Francis X. Diebold; Chiara Scotti |
| Abstract: | We construct a framework for measuring economic activity at high frequency, potentially in real time. We use a variety of stock and flow data observed at mixed frequencies (including very high frequencies), and we use a dynamic factor model that permits exact filtering. We illustrate the framework in a prototype empirical example and a simulation study calibrated to the example. |
| JEL: | C01 C22 E32 E37 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14349&r=cba |
| By: | Stéphane Dées (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Matthias Burgert (University of Frankfurt, House of Finance, Grüneburgplatz 1, D-60323 Frankfurt am Main, Germany.); Nicolas Parent (Bank of Canada, 234 Wellington Street, Ottawa, Ontario K1A 0G9, Canada.) |
| Abstract: | This paper aims at showing heterogeneity in the degree of exchange rate pass-through to import prices in major advanced economies at three different levels: 1) across destination markets ; 2) across types of exporters (distinguishing developed economy from emerging economy exporters); and 3) over time. Based on monthly data over the period 1991-2007, the results show first that large destination markets exhibit the lowest degree of pass-through. The degree of pass-through for goods imported from emerging economies is also significantly lower than for those from developed economies. Regarding the evolution over time, no clear change in pricing behaviours can be identified and particular events, like large exchange rates depreciations during the Asian crisis, seem to influence the degree of pass-through related to imports from emerging economies. JEL Classification: E31, F3, F41. |
| Keywords: | Pricing to Market, Exchange rate pass-through, Import price modeling. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080933&r=cba |
| By: | Imed Drine (IHEC Sousse - IHEC); Christophe Rault (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans) |
| Abstract: | The aim of this paper is to apply recently developed panel cointegration techniques proposed by Pedroni (1999, 2004) and generalized by Banerjee and Carrion-i-Silvestre (2006) to examine the robustness of the PPP concept for a sample of 80 developed and developing countries. We find that strong PPP is verified for OECD countries and weak PPP for MENA countries. However in African, Asian, Latin American and Central and Eastern European countries, PPP does not seem relevant to characterize the long-run behavior of the real exchange rate. Further investigations indicate that the nature of the exchange rate regime doesn’t condition the validity of PPP which is more easily accepted in countries with high than low inflation. |
| Keywords: | Purchasing power parity, real exchange rate, developed country, developing country, panel unit-root and cointegration tests. |
| Date: | 2008–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00322105_v1&r=cba |
| By: | Filippo di Mauro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rasmus Rueffer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Irina Bunda (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In addition to its direct effects on the global trading and production structure, the ongoing process of globalisation may have important implications for the interaction of exchange rates and the overall economy. This paper presents evidence regarding possible changes in the role of exchange rates in a more globalised economy. First, it analyses the link between exchange rates and prices, showing that there is at most a moderate decline in exchange rate pass-through for the euro area. Next, it turns to the effect of exchange rate changes on trade flows. The findings indicate that the responsiveness of euro area exports to exchange rate changes may have declined somewhat as a result of globalisation, reflecting mainly shifts in the geographical and sectoral composition of trade flows. The paper also provides a firm-level analysis of the impact of exchange rate changes on corporate profits, which suggests that overall this relationship appears to be relatively stable over time, although there are important crosscountry differences. In addition, it studies the overall impact of exchange rates on GDP and the potential role of valuation effects as a transmission channel in the case of the euro area. JEL Classification: E3, F15, F31. |
| Keywords: | Globalisation, exchange rate, trade exchange rate pass-through, valuation effects. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080094&r=cba |
| By: | Juan David Prada Sarmiento |
| Abstract: | This paper analyses the role of a costly financial system in the transmission of monetary policy. The new-keynesian model for a small open economy is extended with a simple financial system based in Hamann and Oviedo (2006). The presence of the financial intermediation naturally allows the introduction of standard policy instruments: the repo interest rate and the compulsory requirement of reserves. The model is calibrated to match key steady-state ratios of Colombia and is used to evaluate the alternative policy instruments. The financial system plays an important role in the transmission mechanism of the monetary policy, and determines the final effects on aggregated demand and inflation rates of exogenous modifications of the policy instruments. The monetary policy conducted through the repo interest rate has the standard effects predicted by the new-keynesian framework. But changes in the compulsory reserve requirement rate may generate, under different scenarios, totally different reactions on economic activity, and little quantitative effects on inflation rates and aggregate demand. Therefore this last policy instrument appears to be uneffective and unreliable. |
| Date: | 2008–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005010&r=cba |
| By: | Alessia Campolmi (Central European University, Magyar Nemzeti Bank) |
| Abstract: | From the last quarter of 2001 to the third quarter of 2005 the real price of oil increased by 103%. Such an increase is comparable to the one experienced during the oil shock of 1973. At the same time, the behaviour of real GDP growth, Consumer Price inflation (CPI inflation), GDP Deflator inflation, real wages and wage inflation in the U.S. in the 1970s was very different from the one exhibited in the 2000s. What can explain such a difference? Within a two-country framework where oil is used in production, two kinds of shocks are analyzed: (a) a reduction in oil supply, (b) a persistent increase in foreign productivity (as proxy for the experience of China in the last years). It is shown that, while the 1970s are consistent with a supply shock, the shock to foreign productivity generates dynamics close to the one observed in the 2000s. |
| Keywords: | oil price, open economy, demand and supply shocks. |
| JEL: | E12 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2008/5&r=cba |
| By: | Gianluca Cafiso (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper assesses the Euro’s influence upon European trade by estimating two different indicators. The first is the so-called “Rose Effect”, while the second is the “Border Effect”. The former measures how much a country within a currency union trades more with its partners than with non-member countries, the latter measures the integration of a country with its trade partners. This study of the Euro’s influence by means of the Border Effect is a novelty in the literature, it reveals that the Euro’s influence upon trade is not so clear as papers focused only on the Rose Effect claim. This casts doubts about the consequences of the Euro introduction for the European Single Market. Both indicators are estimated by means of a gravity model for bilateral trade flows using a panel of manufacture exports among twenty-four OECD countries. JEL Classification: F10, F14, F15. |
| Keywords: | Euro, European Integration, Trade, Rose Effect, Border Effect. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080941&r=cba |
| By: | Javier J. Pérez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Diego J. Pedregal (Universidad de Castilla-la-Mancha, Real Casa de La Misericordia, Calle Altagracia, 50, 13003 Ciadad Real, Spain.) |
| Abstract: | We use a newly available dataset of euro area quarterly national accounts fiscal data and construct multivariate, state-space mixed-frequencies models for the government deficit, revenue and expenditure in order to assess its information content and its potential use for fiscal forecasting and monitoring purposes. The models are estimated with annual and quarterly national accounts fiscal data, but also incorporate monthly information taken from the cash accounts of the governments. The results show the usefulness of our approach for real-time fiscal policy surveillance in Europe, given the current policy framework in which the relevant official figures are expressed in annual terms. JEL Classification: C53, E6, H6. |
| Keywords: | Fiscal policies, Mixed frequency data, Forecasting, Unobserved Components Models, State Space, Kalman Filter. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080937&r=cba |
| By: | Alexander Kriwoluzky |
| Abstract: | This paper shows how to identify the structural shocks of a Vector Autore- gression (VAR) while at the same time estimating a dynamic stochastic general equilibrium (DSGE) model that is not assumed to replicate the data generating process. It proposes a framework to estimate the parameters of the VAR model and the DSGE model jointly: the VAR model is identified by sign restrictions derived from the DSGE model; the DSGE model is estimated by matching the corresponding impulse response functions. |
| Keywords: | Bayesian Model Estimation, Vector Autoregression, Identification. |
| JEL: | C51 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2008-060&r=cba |
| By: | Carlos Thomas (Banco de España); Francesco Zanetti (Bank of England) |
| Abstract: | This paper studies the effect of labor market reform, in the form of reductions in firing costs and unemployment benefits, on inflation volatility. With this purpose, we build a New Keynesian model with search and matching frictions in the labor market, and estimate it using Euro Area data. Qualitatively, changes in labor market policies alter the volatility of inflation in response to shocks, by affecting the volatility of the three components of real marginal costs (hiring costs, firing costs and wage costs). Quantitatively, we find however that neither policy is likely to have an important effect on inflation volatility, due to the small impact of changes in the volatility of the labor market on inflation dynamics. |
| Keywords: | Labor market policies, Search and matching frictions, New Keynesian model |
| JEL: | E31 E32 J64 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0818&r=cba |
| By: | Javier Huerga (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper uses index number theory to disentangle changes in aggregate retail interest rates due to changes in individual component rates (“interest rate effect”) from those caused by changes in the weights of each component (“weight effect”), on the basis of the “difference” index numbers recently revisited by Diewert (2005). The paper, first discusses the optimal calculation of a binary index using axiomatic index number theory; on that basis, chain and direct indices are established; finally, the selected decomposition and indices are applied to monthly data on euro area interest rates on loans and deposits (MIR) for the period January 2003 – January 2008. It is concluded that relevant weight effects at euro area level are limited to a few indicators and periods of MIR, and that that the indices on interest rates can be a suitable tool in the analysis of variations in aggregate interest rates. JEL Classification: C43 - Index Numbers and Aggregation, E43 - Determination of Interest Rates, Term Structure of Interest Rates. |
| Keywords: | Index numbers, interest rates, Euro area. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080939&r=cba |
| By: | Ben R Craig; Valeriya Dinger |
| Abstract: | Despite extensive research interest in the last decade, the banking literature has not reached a consensus on the impact of bank mergers on deposit rates. In particular, results on the dynamics of deposit rates surrounding bank mergers vary substantially across studies. In this paper, we aim for a comprehensive empirical analysis of a bank merger’s impact on deposit rate dynamics. We base the analysis on a unique dataset comprising deposit rates of 624 U.S. banks with a monthly frequency for the time period 1997–2006. These data are matched with individual bank and local market characteristics and the complete list of bank mergers in the United States. The data allow us to track the dynamics of bank mergers while controlling for the rigidity of the deposit rates and for a range of merger, bank, and local market features. An innovation of our work is the introduction of an econometric approach for estimating the change of the deposit rates given their rigidity. |
| Keywords: | Bank mergers ; Bank deposits |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0806&r=cba |
| By: | James A. Kahn |
| Abstract: | This paper develops a growth model with land, housing services, and other goods that is capable of explaining a substantial portion of the movements in housing prices over the past forty years. Under certainty, the model exhibits a balanced aggregate growth, but with underlying sectoral change. The paper introduces a Markov regime-switching specification for productivity growth in the nonhousing sector and shows that such regime switches are a plausible candidate for explaining - both qualitatively and quantitatively - the large low-frequency changes in housing price trends. In particular, the model shows how housing prices can have a "bubbly" appearance in which housing wealth rises faster than income for an extended period, then collapses and experiences an extended decline. The paper also uses micro data to calibrate a key cross-elasticity parameter that governs the relationship between productivity growth and home price appreciation. Combined with a realistic model of learning about the productivityprocess, the model is able to capture the medium- and low-frequency fluctuations of both price and quantity from the residential sector. Finally, the model suggests that the current downturn in the housing sector was triggered by a productivity slowdown that may have begun in 2004, an event that could reasonably have been viewed as highly unlikely by investors and mortgage issuers in the early part of the decade. |
| Keywords: | Housing - Prices ; Productivity ; Econometric models ; Markov processes |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:345&r=cba |
| By: | Maximilian J. B. Hall (Dept of Economics, Loughborough University) |
| Abstract: | On 14 September 2007, after failing to find a 'White Knight' to take over its business, Northern Rock bank turned to the Bank of England ('the Bank') for a liquidity lifeline. This was duly provided but failed to quell the financial panic, which manifested itself in the first fully-blown nationwide deposit run on a UK bank for 140 years. Subsequent provision of a blanket deposit guarantee duly led to the (eventual) disappearance of the depositor queues from outside the bank's branches but only served to heighten the sense of panic in policymaking circles. Following the Government's failed attempt to find an appropriate private sector buyer, the bank was then nationalised in February 2008. Inevitably, post mortems ensued, the most transparent of which was that conducted by the all-party House of Commons' Treasury Select Committee. And a variety of reform proposals are currently being deliberated at fora around the globe with a view to patching up the global financial system to prevent a recurrence of the events which precipitated the bank's illiquidity. This article briefly explains the background to these extraordinary events before setting out, in some detail, the tensions and flaws in UK arrangements which allowed the Northern Rock spectacle to occur. None of the interested parties – the Bank, the Financial Services Authority (FSA) and the Treasury – emerges with their reputation intact, and the policy areas requiring immediate attention, at both the domestic and international level, are highlighted. Some reform recommendations are also provided for good measure, particularly in the area of formal deposit protection. |
| Keywords: | UK banks, banking regulation and supervision, central banking, deposit protection. |
| JEL: | E53 E58 G21 G28 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2008_09&r=cba |
| By: | Juan Carlos Cuestas; Barry Harrison |
| Abstract: | In this paper we provide an insight into the inflation dynamics in a panel of Central and Eastern European countries. These countries are selected because of their increasing importance in the EU and their likely increased future importance in monetary policy decisions inside the euro area. By means of unit root testing and allowing for the possibility of a smooth asymmetric adjustment to equilibrium, we show that inflation rates in more than half of the countries investigated are stationary processes. Our results imply evidence against the persistence hypothesis for them. |
| Keywords: | Inflation persistence, Unit roots, Nonlinearities |
| JEL: | C22 E31 E32 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbs:wpaper:2008/13&r=cba |
| By: | Colin Rogers (School of Economics, University of Adelaide) |
| Abstract: | There has been no Keynesian Revolution in economic theory but there has been an unacknowledged Keynes's Revolution in economic policy. Keynes's theoretical revolution rested on the adoption of monetary analysis and the application of the principle of effective demand to demonstrate the existence of multiple long-period equilibria. Keynes's policies –creating a role for `Big Government' and the ‘Big Bank'- follow from his theory and have changed the structure of the laissez faire economy. Many Keynesians fail to acknowledge either of these issues and continue the classical tradition of real analysis and the assumption of unique long-period equilibrium. Real analysis, as a special case of Keynes's monetary analysis, provides a distorted perspective of the responsibilities of monetary policy which largely accounts for the increasing fragility and volatility exhibited by financial markets over the past two decades. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2008-05&r=cba |
| By: | Andrew Coleman; Özer Karagedikli (Reserve Bank of New Zealand) |
| Abstract: | This paper examines the relative size of the effects of New Zealand monetary policy and macroeconomic data surprises on the spot exchange rate, 2 and 5 year swap rate differentials, and the synthetic forward exchange rate schedule. We find that the spot exchange rate and 5 year swap rates respond by a similar magnitude to monetary surprises, implying there is little response of the forward exchange rate to this type of news. In contrast, the spot exchange rate responds by nearly three times as much as 5 year interest rates to CPI and GDP surprises, implying that forward rates appreciate to higher than expected CPI or GDP news. This is in contrast to standard theoretical models and US evidence. Lastly, we show that exchange rates but not interest rates respond to current account news. The implications of these results for monetary policy are considered. Classification-E50, J61, R21, R23 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2008/12&r=cba |
| By: | Juan Carlos Cuestas; Estefania Mourelle |
| Abstract: | In this paper we aim at modelling the long run behaviour of the Real Effective Exchange Rates (REER) for a pool of African countries. Not much attention has been paid to this group of countries, in particular, to the existence of nonlinearities in the long run path of such a variable. Controlling for two sources of nonlinearites, i.e. asymmetric adjustment to equilibrium and nonlinear deterministic trends allows us to gain some insight about the behaviour of the African REER. We find that these sources of nonlinearites help us to explain the apparent unit root behaviour found applying linear unit root tests for most of the countries. |
| Keywords: | PPP, Real Exchange Rates, Unit roots, Nonlinearities. |
| JEL: | C32 F15 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbs:wpaper:2008/8&r=cba |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria) |
| Abstract: | In this paper, using the Fisher and Seater (1993) long-horizon approach, we estimate the long-run equilibrium relationship between money balance as a ratio of income and the Treasury bill rate for South Africa over the period of 1965:02 to 2007:01, and, in turn, use the obtained estimates of the interest elasticity and the semi-elasticity to derive the welfare cost estimates of inflation, using both Bailey’s (1956) consumer surplus approach, as well, as Lucas’s (2000) compensating variation approach. When, the results are compared to welfare cost estimates obtained recently by Gupta and Uwilingiye (2008), using the same data set, but based on Johansen’s (1991, 1995) cointegration technique, the values are less by more than half in size than those obtained in the latter study, with the same being utmost ranging between 0.16 percent to 0.36 percent of GDP for the target-band of 3 percent to 6 percent of inflation. The paper, thus, highlights the fact that welfare cost estimates of inflation are sensitive to the methodology used to estimate the long-run equilibrium money demand relationships. |
| Keywords: | Long Horizon Regression, Money Demand, Welfare Cost of Inflation |
| JEL: | E31 E41 E52 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200809&r=cba |
| By: | Leong, Choi-Meng; Puah, Chin-Hong; Abu Mansor, Shazali; Evan, Lau |
| Abstract: | The capability of monetary aggregates to generate stable link with fundamental economic indicators verifies the effectiveness of monetary targeting. However, traditional monetary aggregates have become flawed when financial reforms take place. As official monetary aggregates fail to maintain stable link with crucial economic indicators in Malaysia, monetary targeting has been substituted by interest rate targeting. Therefore, Divisia monetary aggregates, which are considered more superior than the simple sum counterparts are used in the investigation for the case of Malaysia. The findings imply that Divisia M2 money demand is stable and is capable to generate appropriate coefficients with correct signs for the variables included. Thus, Divisia money has shed new light on the usefulness of monetary targeting in formulating monetary policy in Malaysia. |
| Keywords: | Divisia money; Money demand; Error-correction model |
| JEL: | C43 C22 E41 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10568&r=cba |