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on Central Banking |
| By: | Michael B. Devereux; Alan Sutherland |
| Abstract: | This paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models. The method is widely applicable, simple to implement, and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset. It can be used in models with any number of assets, whether markets are complete or incomplete, and can be applied to stochastic dynamic general equilibrium models of any dimension, so long as the model is amenable to a solution using standard approximation methods. We first illustrate the approach using a simple two-asset endowment economy model, and then show how the results extend to the case of any number of assets and general economic structure. |
| JEL: | F3 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14372&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. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2008-20&r=cba |
| By: | Andrew Atkeson; Patrick J. Kehoe |
| Abstract: | We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect, and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central bank?s policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk that threaten to push inflation off target. This model, while an improvement over standard models, is considered just a starting point for their revision. |
| Keywords: | Asset pricing ; Risk ; Taylor's rule |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:412&r=cba |
| By: | Sebastian Edwards |
| Abstract: | I use a large cross country data set and panel probit analysis to investigate the way in which the interaction between trade and financial openness affect the probability of external crises. This analysis is related to debate on the adequate sequencing of reform. I also investigate the role played by current account and fiscal imbalances, contagion, international reserves holdings, and the exchange rate regime as possible determinants of external crises. The results indicate that relaxing capital controls increases the likelihood of a country experiencing a sudden stop. Moreover, the results suggest that “financial liberalization first†strategies increase the degree of vulnerability to external crises. This is particularly the case if this strategy is pursued with pegged exchange rates and if it results in large current account imbalances. |
| JEL: | F30 F31 F32 F4 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14384&r=cba |
| By: | Mario J. Crucini; M. Ayhan Kose; Christopher Otrok |
| Abstract: | We examine the driving forces of G-7 business cycles. We decompose national business cycles into common and nation-specific components using a dynamic factor model. We also do this for driving variables found in business cycle models: productivity; measures of fiscal and monetary policy; the terms of trade and oil prices. We find a large common factor in oil prices, productivity, and the terms of trade. Productivity is the main driving force, with other drivers isolated to particular nations or sub-periods. Along these lines, we document shifts in the correlation of the G-7 component of each driver with the overall G-7 cycle. |
| JEL: | E3 E32 F4 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14380&r=cba |
| By: | Stefano Battilossi; James Foreman-Peck; Gerhard Kling |
| Abstract: | In the first age of rapid economic growth after 1945, fluctuations of western European output and employment were so mild that the very notion of a cycle was transformed or even seemed obsolete. A second period of much slower average economic growth was marked by large and frequent oscillations, associated with the oil shocks and the Great Inflation of the 1970s and early 1980s. The last phase, characterized by smooth and ampie swings in output and inflation, has been dubbed the Great Moderation , reflecting the gradual reduction of inflationary trends. Different reasons have been proposed for these changing patterns but a common factor is that the conduct of economic policy was critical. In this paper we survey the evolution of basic features of cycles in Europe, such as volatility and synchronization; explain why changes in economic policy-making were a fundamental driver of changing patterns; and provide analytical narratives of the responses of national governments and central bankers to cyclical fluctuations. Finally we briefly look at the historical and recent experience of Eastern Europe, assessing the área s reintegration from 1989 after the long economic decoupling from the rest of the continent in 1945. |
| Keywords: | Business cycle, Inflation, Great moderation, Fiscal and monetary policies |
| JEL: | E32 E63 N14 N36 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:whrepe:wp08-13&r=cba |
| By: | Cédric Tille; Eric van Wincoop |
| Abstract: | We develop a new theory of international capital flows based on dispersed information across individual investors. There is extensive evidence of information heterogeneity within and across countries, which has proven critical to understanding asset price behavior. We introduce information dispersion into an open economy dynamic general equilibrium portfolio choice model, and emphasize two implications for capital flows that are specific to the presence of dispersed information. First, gross and net capital flows become partially disconnected from publicly observed fundamentals. Second, capital flows (particularly gross flows) contain information about future fundamentals, even after controlling for current fundamentals. We find that these implications are quantitatively significant and consistent with data for industrialized countries. |
| JEL: | F32 F36 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14390&r=cba |
| By: | Juergen Huber (University of Innsbruck); Martin Shubik (Cowles Foundation, Yale University); Shyam Sunder (Yale University) |
| Abstract: | Why people accept intrinsically worthless fiat money in exchange for real goods and services has been a longstanding puzzle in economics. Attempts to explain the broad acceptance of fiat money have relied on either assuming that someone will exchange the fiat money for real consumption at the end of the horizon, or on pushing the puzzle of fiat money into infinite future in overlapping generations settings. We examine an alternative route that can explain the value of fiat money through a debt instrument which allows consumption to be moved backward in time. In this paper, we present empirical evidence that the theoretical predictions about the behavior of such economies work reasonably well in a laboratory experiment. The invention of fiat money and related debt instruments allow society to replace expensive commodities by costless paper and cut the dead weight loss associated with the former. |
| Keywords: | Experimental Gaming, Bank, Fiat money |
| JEL: | C73 C91 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1675&r=cba |
| By: | Nathan S. Balke; Stephen P. A. Brown; Mine K. Yücel |
| Abstract: | The effect of oil price shocks on U.S. economic activity seems to have changed since the mid-1990s. A variety of explanations have been offered for the seeming change?including better luck, the reduced energy intensity of the U.S. economy, a more flexible economy, more experience with oil price shocks and better monetary policy. These explanations point to a weakening of the relationship between oil prices shocks and economic activity rather than the fundamentally different response that may be evident since the mid-1990s. Using a dynamic stochastic general equilibrium model of world economic activity, we employ Bayesian methods to assess how economic activity responds to oil price shocks arising from supply shocks and demand shocks originating in the United States or elsewhere in the world. We find that both oil supply and oil demand shocks have contributed significantly to oil price fluctuations and that U.S. output fluctuations are derived largely from domestic shocks. |
| Keywords: | Petroleum industry and trade ; Petroleum products - Prices ; International trade ; Economic conditions - United States |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:20&r=cba |
| By: | Etienne Farvaque (Equippe - Universités de Lille, Faculté des Sciences Economiques et Sociales, Université de Lille 1, France); Norimichi Matsueda (School of Economics, Kwansei Gakuin University, Japan); Pierre-Guillaume Méon (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.) |
| Abstract: | This paper relates the volatility of interest rates to the collective nature of monetary policymaking in monetary unions. Several decision rules are modelled, including hegemonic and democratic procedures, and also committees headed by a chairman. A ranking of decision rules in terms of the volatility of policy rates is obtained, showing that the presence of a chairman has a cooling effect. However, members of a monetary union are better off under symmetric rules (voting, averaging, bargaining), unless they themselves chair the union. The results are robust to the inclusion of heterogeneities among members of the monetary union. |
| Keywords: | Monetary Policy Committees, Decision Procedures, Interest-rate, Monetary Union |
| JEL: | D70 E43 E58 F33 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:08-026&r=cba |
| By: | Sandeep Mazumder |
| Abstract: | Several authors have argued that if the labor share of income is used as the proxy for real marginal cost, then the sticky-price version of the New Keynesian Phillips Curve does a good job of approximating US inflation dynamics. However, this paper argues that the labor share is an inappropriate measure of real marginal cost for two reasons: it is countercyclical whereas theory predicts marginal cost should be procyclical, and it employs a counterfactual assumption about the behavior of labor over the business cycle. Relaxing this assumption to a more realistic one leads to a measure of marginal cost that is markedly procyclical. Testing this improved measure of marginal cost then produces results that are contradictory to the entire underlying model of the NKPC. Thus I conclude that the NKPC fails to give a sound explanation of inflation dynamics.. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:545&r=cba |
| By: | David Cook; Woon Gyu Choi |
| Abstract: | Using the theory of optimal local currency pricing, this paper constructs a structural equation to estimate the rate at which foreign producer prices pass through the local currency prices of imported goods in the U.S. This can be viewed as measuring exchange rate pass-through, in line with price stickiness in the New Keynesian Phillips curve literature. We estimate the structural equation using the generalized methods of moments for consistent estimates of exchange rate pass-through. We find that a model with a mix of local currency pricing and producer currency pricing fits the data best. The estimate of price stickiness in import prices is comparable to existing estimates of domestic price stickiness. |
| Date: | 2008–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/213&r=cba |
| By: | Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga |
| Abstract: | Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law-of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.-Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment. |
| JEL: | D40 E31 F31 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14381&r=cba |
| By: | Gustavo Adler |
| Abstract: | The paper develops a simple model of sovereign debt where default both through direct repudiation and through inflation are possible and give rise to (endogenous) constraints on the currency composition and the level of public debt. This set up allows to show that procyclicality of fiscal policy in EMEs can arise as a by-product of the "original sin" and both can be explained by the presence of weak monetary institutions which cannot commit to price stability. The paper suggests that, as monetary institutions in EMEs strengthen, the "original sin" would fade away and the cyclical properties of fiscal policy would improve. |
| Keywords: | Sovereign debt , Fiscal policy , Inflation , Price stabilization , Public debt , Political economy , Emerging markets , Developing countries , Economic models , Working Paper , |
| Date: | 2008–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/209&r=cba |
| By: | Giuseppe Marotta |
| Abstract: | We search for breaks in the short term business lending rate pass-through in euro countries, possibly associated with the introduction of the euro. One break is detected in six national retail rates among EMU countries; two breaks are found in other six cases, and in the UK as well. The last break occurs much earlier for France while several quarters later for other countries, suggesting a loose link if ever with the event. Pass-throughs decrease (except for France), becoming even more incomplete (except for Netherlands); though the adjustment to equilibrium is faster, cross-country heterogeneity remains fairly large. With the new harmonized interest rates database, available since 2003, pass-throughs are much closer to one, especially for larger loans. |
| Keywords: | Interest rates; Monetary policy; Economic and Monetary Union (EMU); Cointegration analysis; Structural breaks |
| JEL: | E43 E52 E58 F36 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:mod:depeco:549&r=cba |
| By: | Césaire Meh; Kevin Moran |
| Abstract: | Recent events in financial markets have underlined the importance of analyzing the link between the financial health of banks and real economic activity. This paper contributes to this analysis by constructing a dynamic general equilibrium model in which the balance sheet of banks affects the propagation of shocks. We use the model to conduct quantitative experiments on the economy's response to technology and monetary policy shocks, as well as to disturbances originating within the banking sector, which we interpret as episodes of distress in financial markets. We show that, following adverse shocks, economies whose banking sectors remain well-capitalized experience smaller reductions in bank lending and less pronounced downturns. Bank capital thus increases an economy's ability to absorb shocks and, in doing so, affects the conduct of monetary policy. The model is also used to shed light on the ongoing debate over bank capital regulation. |
| Keywords: | Transmission of monetary policy; Financial institutions; Financial system regulation and policies; Economic models |
| JEL: | E44 E52 G21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-36&r=cba |
| By: | John Pippenger (University of California, Santa Barbara) |
| Abstract: | The exchange rate literature contains two inconsistent strands. There is a large theoretical and empirical literature on overshooting. In that literature overshooting is an important explanation for exchange rate volatility. A separate literature says that exchange rates are martingales and that models do not beat a random walk. Both can not be true. I show that the evidence for overshooting is highly suspect while the evidence that flexible exchange rates are approximately martingales is rock solid. Given the strength of the evidence, models that imply overshooting probably should be rejected out of hand. |
| Keywords: | overshooting, exchange rates, volatility, martingales, |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsbec:01-08&r=cba |
| By: | Pierre-Richard Agénor; Karim El Aynaoui |
| Abstract: | This paper analyzes the implications of excess bank liquidity for the effectiveness of monetary policy in a simple model with credit market imperfections. Lending rates are set as a premium over the cost of borrowing from the central bank, with the premium itself depending on firms’ net worth. The demand for excess reserves is determined by precautionary factors and opportunity cost variables. The basic framework is used to examine the impact of a change in the refinance rate and the required reserve ratio. The analysis is then extended to account for the impact of excess liquidity on bank pricing rules and macroeconomic equilibrium. Symmetric and asymmetric rules are shown to provide new explanations of the “price puzzle” or “stagflationary” effect associated with contractionary monetary policy. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:105&r=cba |
| By: | Marc Gronwald; Michael Funke |
| Abstract: | On 21 July 2005 China adopted an undisclosed basket exchange rate regime. We formally assess and envisage the gradual evolution of the renminbi over time. We utilize nonlinear dependencies in the renminbi exchange rate and describe the smooth transition of the renminbi/U.S. dollar (RMB/USD) exchange rate using the family of time-varying autoregressive (TV-AR) models. Specifically, the nonlinear models allow for a smooth transition from one optimal level to another. Our estimation results imply that the RMB/USD exchange rate will likely be about 7.10 RMB/USD in summer/autumn 2009. |
| Keywords: | China, renminbi, de facto exchange rate regime, TV-AR model, TV-AR-GARCH model |
| JEL: | C22 F31 F37 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ham:qmwops:20804&r=cba |
| By: | Michael Funke; Sebastian Weber; Jörg Döpke; Sean Holly |
| Abstract: | In a standard dynamic stochastic general equilibrium framework, with sticky prices, the cross sectional distribution of output and inflation across a population of firms is studied. The only form of heterogeneity is confined to the probability that the ith firm changes its prices in response to a shock. In this Calvo setup the moments of the cross sectional distribution of output and inflation depend crucially on the proportion of firms that are allowed to change their prices. We test this model empirically using German balance sheet data on a very large population of firms. We find a significant counter-cyclical correlation between the skewness of output responses and the aggregate economy. Further analysis of sectoral data for the US suggests that there is a positive relationship between the skewness of inflation and aggregates, but the relation with output skewness is less sure. Our results can be interpreted as indirect evidence of the importance of price stickiness in macroeconomic adjustment. |
| JEL: | D12 E52 E43 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ham:qmwops:20809&r=cba |
| By: | Frank Schorfheide; Keith Sill; Maxym Kryshko |
| Abstract: | This paper develops and illustrates a simple method to generate a DSGE model-based forecast for variables that do not explicitly appear in the model (non-core variables). The authors use auxiliary regressions that resemble measurement equations in a dynamic factor model to link the non-core variables to the state variables of the DSGE model. Predictions for the non-core variables are obtained by applying their measurement equations to DSGE model- generated forecasts of the state variables. Using a medium-scale New Keynesian DSGE model, the authors apply their approach to generate and evaluate recursive forecasts for PCE inflation, core PCE inflation, and the unemployment rate along with predictions for the seven variables that have been used to estimate the DSGE model. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-17&r=cba |
| By: | Davide Debortoli; Ricardo Nunes |
| Abstract: | Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy objectives, the degree of commitment and the timing of external pressures. The possibility to adopt " more liberal" objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even " more conservative" in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt " more liberal" objectives may be aiming. We also discuss the opposite case, where objectives may become " more conservative" in the future, which may be the relevant case for countries considering the adoption of inflation targeting. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:944&r=cba |
| By: | Neil R. Ericsson; Steven B. Kamin |
| Abstract: | This paper assesses the empirical merits of PcGets and Autometrics--two recent algorithms for computer-automated model selection--using them to improve upon Kamin and Ericsson's (1993) model of Argentine broad money demand. The selected model is an economically sensible and statistically satisfactory error correction model, in which cointegration between money, inflation, the interest rate, and exchange rate depreciation depends on the inclusion of a "ratchet" variable that captures irreversible effects of inflation. Short-run dynamics differ markedly from the long run. Algorithmically based model selection complements opportunities for the researcher to contribute value added in the empirical analysis. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:943&r=cba |
| By: | Melecky, Ales; Melecky, Martin |
| Abstract: | This paper attempts to estimate possible losses in macroeconomic stabilization due to a move from inflation to exchange rate targeting on an example of the Czech Republic. The authors use an estimated New Keynesian policy model, general inflation and exchange rate targeting rules, and representative central bank loss functions to carry out such estimations. The authors find that for the Czech Republic moving from the historically applied inflation targeting to optimized exchange rate targeting should not involve any significant losses in macroeconomic stabilization. However, the Czech National Bank could improve its stabilization outcomes while remaining an inflation targeter. This requires the Czech National Bank to respond stronger to increasing expected future inflation and be less concerned about an opening output gap when adjusting its policy rate. Moving then from such optimized inflation targeting to optimized exchange rate targeting can result in significant losses in economic stabilization in the magnitude of 0.4 to 2 percentage points of GDP growth. |
| JEL: | E32 E58 E52 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10844&r=cba |
| By: | Louis Be Duc (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.); Frank Mayerlen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Pierre Sola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This occasional paper describes the monetary presentation of the euro area balance of payments and its use. The monetary presentation is a tool for assessing the impact of balance of payments transactions involving non-bank residents on monetary developments. The paper explains in detail the principle underlying this approach, i.e. the link between the external counterpart of money, as reflected in the balance sheet of the banking sector, and the balance of payments. From a statistical perspective, it is shown that the monetary presentation of the balance of payments, which is based on international statistical standards, may be applied in any country or currency union. With regard to euro area statistics, the paper elaborates on the practical implementation of the monetary presentation, while also describing a few approximations and remaining statistical challenges. Finally, the paper assesses how the monetary presentation of the balance of payments has been used for analysing monetary developments in the euro area, and highlights the significant impact of balance of payments transactions on monetary dynamics in certain periods. JEL Classification: E51, F40 |
| Keywords: | Monetary analysis, capital flows, balance of payments |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080096&r=cba |
| By: | Pablo Druck; Mario Dehesa |
| Abstract: | The paper analyzes the challenges for the Eastern Caribbean Central Bank (ECCB) to be an effective lender of last resort (LOLR) as part of a modern banking crisis resolution framework. The main results from the theoretical model of the ECCB's institutional arrangement are that the majority of currency union members may veto emergency lending in the case of a member-specific shock, as such lending may endanger the stability of the currency board (by lowering the central bank's international reserves, thus raising devaluation risk). However, in the presence of contagion across countries, all currency union members have a vested interest in liquidity supply from the central bank. A key policy recommendation is that currency union members need a stronger fiscal position to continue to access international financial markets and sustain the exchange rate peg. |
| Date: | 2008–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/214&r=cba |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Kamila Koprnická (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank) |
| Abstract: | In this paper, we examine the determinants of inflation differentials in a panel of the new European Union member states vis-à-vis the euro area in 1997-2007. Our main results are as follows. Exchange rate appreciation and higher price level in the new EU members is associated with narrower inflation differential vis-à-vis the euro area, while fiscal deficit and positive output gap seem to contribute to higher inflation differential. Nevertheless, the effect of price convergence on inflation differentials is found to be dominating in these countries suggesting that a country with price level 20% below the euro area average is likely to exhibit inflation nearly one percentage point above the euro area. Overall, our results indicate that real convergence factors rather than cyclical variation are more important for inflation developments in the new EU members, as compared to the euro area. |
| Keywords: | inflation differentials, price convergence, exchange rate, New EU members, panel data |
| JEL: | E31 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_24&r=cba |
| By: | Olga Arratibel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Reiner Martin (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Davide Furceri (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyzes the relation between exchange rate volatility and several macroeconomic variables, namely real per capita output growth, the credit cycle, the stock of inward foreign direct investment (FDI) and the current account balance, in the Central and Eastern European EU Member States. Using panel estimations for the period between 1995 and 2006, we find that lower exchange rate volatility is associated with higher growth (for relatively less financially developed economies), higher stocks of FDI (for relatively more open economies), higher current account deficits, and a more volatile development of the credit to GDP ratio. JEL Classification: F3, F4, F5. |
| Keywords: | EU, Exchange Rate Volatility, Growth, FDI, Credit, Current Account, Catching-up, Convergence. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080929&r=cba |
| By: | David Büttner (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg) |
| Abstract: | We analyse the impact of news on five financial markets in the Czech Republic, Hungary and Poland using a newly-constructed data set in a GARCH framework. Macroeconomic shocks (on GDP, inflation rate, current account and trade balance) are constructed as deviations from expected values. EMU-related political and fiscal news is captured as news dummies. Macroeconomic shocks significantly affect short-term interest rates and - to a lesser extent - other financial variables. Political and fiscal news has an impact on long-term bond yields and exchange rates. News displayed prominently in our media sources has a larger impact on financial markets than other news, in addition the sources of news themselves matter. We also discover asymmetric effects of news within markets. Finally, using a pooled GARCH model we find that macroeconomic shocks have the strongest impact on financial markets in Hungary, while political news has the largest influence in Poland. |
| Keywords: | Financial markets, Czech Republic, Hungary, Poland, political news, macroeconomic shocks, European Monetary Union |
| JEL: | G12 G15 F30 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200815&r=cba |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Marek Rusnák (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | In this paper, we provide evidence on the nature and the relative importance of domestic and foreign shocks in Slovak economy based on block-restriction vector autoregression model in 1999-2007. We document well-functioning monetary transmission mechanism in Slovakia. Subject to various sensitivity checks, we find that contractionary monetary policy shock has a temporary negative effect on the degree of economic activity and price level. We find that using output gap instead of GDP alleviates the price puzzle. In general, prices are driven mainly by foreign factors and the European Central Bank monetary policy shock on Slovak prices is more powerful than that of the National Bank of Slovakia. Slovak central bank interest rate policy seems to follow the ECB’s interest rates. On the other hand, spectacular Slovak economic growth is primarily driven by domestic factors suggesting the positive role of recently undertaken Slovak economic reforms. |
| Keywords: | small open economy, foreign shocks, monetary policy, Slovakia, euro area |
| JEL: | E58 F41 F42 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_21&r=cba |
| By: | Denise Côté; Carlos de Resende |
| Abstract: | In this paper, we develop a theoretical model which identifies four channels-import prices, competition with domestic suppliers and workers, and commodity prices-through which priceand wage-setting conditions in country j may affect inflation in country i. We estimate a dynamic inflation equation derived from the theoretical model using a quarterly dataset of eighteen OECD countries over the 1984-2006 period. Although our methodology can be applied to any pair of countries, we focus on the effect of China on the inflation rate of other countries. Our results suggest that while China's negative effect on global inflation has been quantitatively modest, it has increased in absolute terms since the early 2000s. We also find evidence that, for most countries examined, competition with domestic suppliers has been the most important channel. |
| Keywords: | International topics |
| JEL: | E22 E32 E44 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-35&r=cba |
| By: | Andrew Hodge (Reserve Bank of Australia); Tim Robinson (Reserve Bank of Australia); Robyn Stuart (Reserve Bank of Australia) |
| Abstract: | This paper estimates a small structural model of the Australian economy, designed principally for forecasting the key macroeconomic variables of output growth, underlying inflation and the cash rate. In contrast to models with purely statistical foundations, which are often used for forecasting, the Bayesian Vector Autoregressive Dynamic Stochastic General Equilibrium (BVAR-DSGE) model uses the theoretical information of a DSGE model to offset in-sample over-fitting. We follow the method of Del Negro and Schorfheide (2004) and use a variant of the small open economy DSGE model of Lubik and Schorfheide (2007) to provide prior information for the VAR. The forecasting performance of the model is competitive with benchmark models such as a Minnesota VAR and an independently estimated DSGE model. |
| Keywords: | BVAR-DSGE; forecasting |
| JEL: | C11 C53 E37 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2008-04&r=cba |
| By: | Sahminan Sahminan |
| Abstract: | In this paper we investigate the effectiveness of Bank Indonesia's and Bank of Thailand's monetary policy communication. We focus on two channels of communication: monetary policy statements, and inter-meeting statements. Although the structure of Bank Indonesia's and Bank of Thailand's monetary policy statements have some differences, most of the statements contain policy inclination. In addition, during inter-meeting periods, members of their board of governors often convey statements that contain policy inclination. Our empirical results show that to some extent Bank Indonesia's and Bank of Thailand's monetary policy statements and inter-meeting statements move short-term interest rates effectively. We find that there is asymmetry in the effects of the statements, that is, the statements with loose policy inclination tend to be more effective relative to the statements with tight policy inclination. |
| Keywords: | communication, effectiveness, monetary policy, Bank Indonesia, Bank of Thailand |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:262&r=cba |
| By: | Bedri Kamil Onur Tas; Selahattin Togay |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:tob:wpaper:0813&r=cba |