nep-cba New Economics Papers
on Central Banking
Issue of 2008‒10‒28
forty papers chosen by
Alexander Mihailov
University of Reading

  1. Real Exchange Rate Movements and the Relative Price of Non-traded Goods By Caroline M. Betts; Timothy J. Kehoe
  2. Information, Liquidity and Asset Prices By Benjamin Lester; Andrew Postlewaite; Randall Wright
  3. A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment? By Menzie D. Chinn; Shang-Jin Wei
  4. Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory? By V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
  5. Empirical assessment of bifurcation regions within new Keynesian models By Barnett, William A.; Duzhak, Evgeniya A.
  6. Phillips Curve and the Equilibrium Rate of Unemployment By G. C. Lim; R. Dixon; Sarantis Tsiaplias
  7. The Impact of Monetary Policy on Unemployment Hysteresis By Engelbert Stockhammer; Simon Sturn
  8. An Anatomy of Credit Booms: Evidence From Macro Aggregates and Micro Data By Marco Terrones; Enrique G. Mendoza
  9. Rapid Current Account Adjustments: Are Microstates Different? By Patrick A. Imam
  10. Monetary Transmission Mechanism in a Small Open Economy: A Bayesian Structural VAR Approach By Rokon Bhuiyan
  11. Can we explain inflation persistence in a way that is consistent with the micro-evidence on nominal rigidity? By Dixon, Huw; Kara, Engin
  12. Forecasting Exchange Rates with a Large Bayesian VAR By Andrea Carriero; George Kapetanios; Massimiliano Marcellino
  13. Contingent Liabilities: Issues and Practice By Aliona Cebotari
  14. A Theory of International Crisis Lending and IMF Conditionality By Olivier Jeanne; Jonathan David Ostry; Jeromin Zettelmeyer
  15. Do Menu Costs Make Prices Sticky? By Thomas A. Eife
  16. Analysing CPI inflation by the fractionally integrated ARFIMA-STVGARCH model By Mustapha Belkhouja; Imene Mootamri; Mohamed Boutahar
  17. Is the consumption-income ratio stationary? Evidence from a nonlinear panel unit root test for OECD and non-OECD countries By Mario Cerrato; Christian de Peretti; Chris Stewart
  18. Inflation Targeting and Communication: It Pays Off to Read Inflation Reports By Katerina Smídková; Viktor Kotlán; David Navrátil; Ales Bulir
  19. Unifying time-to-build theory By Mauro Bambi
  20. Monetary Unions and External Shocks By Etienne Farvaque; Norimichi Matsueda
  21. Globalisation and Wage Differentials: A Spatial Analysis By Baddeley, M.; Fingleton, B.
  22. How does monetary policy respond to exchange rate movements? New international evidence By Hilde C. Bjørnland; Jørn I. Halvorsen
  23. Macroeconomic Effects of EU Transfers in New Member States By Céline Allard; Nada Choueiri; Susan Schadler; Rachel van Elkan
  24. Wage-Price Setting in New EU Member States By Manuela Goretti
  25. Exchange rate pass-through in new Member States and candidate countries of the EU By Ramón María-Dolores
  26. How Are Shocks to Trend and Cycle Correlated? A Simple Methodology for Unidentified Unobserved Components Models By Daisuke Nagakura
  27. Monetary policy and commodity price shocks By Silke Tober; Tobias Zimmermann
  28. "Do the Innovations in a Monetary VAR Have Finite Variances?" By Greg Hannsgen
  30. Combining Multivariate Density Forecasts using Predictive Criteria By Hugo Gerard; Kristoffer Nimark
  31. Le choix d’un régime de change dans les pays émergents et en développement peut-il être optimal en dehors des solutions bi-polaires ? By Jean-Pierre Allégret; Mohamed Ayadi; Leila Haouaoui Khouni
  32. Can a Lender of Last Resort Stabilize Financial Markets? Lessons from the Founding of the Fed By Asaf Bernstein; Eric Hughson; Marc D. Weidenmier
  33. Domestic Debt Structures in Emerging Markets : New Empirical Evidence By Arnaud Mehl; Julien Reynaud
  34. Inflation Expectation Formation of German Consumers: Rational or Adaptive? By Henry Sabrowski
  35. Belastet die Inflation verschiedene Haushaltstypen in Deutschland unterschiedlich stark? By Silke Tober
  36. The US-China Trade Conflict: A Game Theoretical Analysis By Hebatallah Ghoneim; Yasmine Reda
  37. Trade Elasticities in the Middle East and Central Asia: What is the Role of Oil? By Andreas Billmeier; Dalia Hakura
  38. International Competitiveness of the Mediterranean Quartet:A Heterogeneous-Product Approach By Herman Z. Bennett; Ziga Zarnic
  39. The growing evidence of Keynes's methodology advantage and its consequences within the four macro-markets framework By Angel Asensio
  40. The single monetary policy and domestic macro-fundamentals: Evidence from Spain By Arghyrou, Michael G; Gadea, Maria Dolores

  1. By: Caroline M. Betts; Timothy J. Kehoe
    Abstract: We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980-2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange rate. The relation between the two variables is stronger when there is an intense trade relationship between two countries and when the variance of the real exchange rate between them is small. The relation does not change for rich/poor country bilateral pairs or for high inflation/low inflation country pairs. We identify an anomaly: The relation between the real exchange rate and relative price of non-traded goods for US/EU bilateral trade partners is unusually weak.
    JEL: F31 F41
    Date: 2008–10
  2. By: Benjamin Lester (Department of Economics, University of Western Ontario); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Pennsylvania)
    Abstract: We study economies with multiple assets that are valued both for their return and liquidity. Exchange occurs in decentralized markets with frictions making a medium of exchange essential. Some assets are better suited for this role because they are more liquid - more likely to be accepted in trade - even if they have a lower return. The reason assets are more or less likely to be accepted is modeled using informational frictions, or recognizability. While everyone understands e.g. what currency is and what it is worth, some might be less sure about other claims. In our model, agents who do not recognize assets do not accept them in trade. Recognizability is endogenized by letting agents invest in information, potentially generating multiple equilibria with different liquidity. We discuss implications for asset pricing and for monetary policy. In particular, we show explicitly that what may look like a cash-in-advance constraint is not invariant to policy interventions or other changes in the economic environment
    Keywords: Money, Asset Pricing, Liquidity
    JEL: G12 E4
    Date: 2008–10–15
  3. By: Menzie D. Chinn; Shang-Jin Wei
    Abstract: The assertion that a flexible exchange rate regime would facilitate current account adjustment is often repeated in policy circles. In this paper, we compile a data set encompassing data for over 170 countries are included, over the 1971-2005 period, and examine whether the rate of current account reversion depends upon the de facto degree of exchange rate fixity, as measured by two popular indices. We find that there is no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development, the degree of trade and capital account openness. We also find that the endogenous selection of exchange rate regimes does not explain the observed lack of correlation.
    JEL: F3
    Date: 2008–10
  4. By: V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
    Abstract: The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in hours. Researchers have used this finding to argue that real business cycle models are unpromising. We subject this SVAR specification to a natural economic test by showing that when applied to data generated from a multiple-shock business cycle model, the procedure incorrectly concludes that the model could not have generated the data as long as demand shocks play a nontrivial role. We also test another popular specification, which uses the level of hours, and show that with nontrivial demand shocks, it cannot distinguish between real business cycle models and sticky price models. The crux of the problem for both SVAR specifications is that available data necessitate a VAR with a small number of lags and, when demand shocks play a nontrivial role, such a VAR is a poor approximation to the model's infinite order VAR.
    JEL: C32 C51 E13 E2 E3 E32 E37
    Date: 2008–10
  5. By: Barnett, William A.; Duzhak, Evgeniya A.
    Abstract: As is well known in systems theory, the parameter space of most dynamic models is stratified into subsets, each of which supports a different kind of dynamic solution. Since we do not know the parameters with certainty, knowledge of the location of the bifurcation boundaries is of fundamental importance. Without knowledge of the location of such boundaries, there is no way to know whether the confidence region about the parameters’ point estimates might be crossed by one or more such boundaries. If there are intersections between bifurcation boundaries and a confidence region, the resulting stratification of the confidence region damages inference robustness about dynamics, when such dynamical inferences are produced by the usual simulations at the point estimates only. Recently, interest in policy in some circles has moved to New Keynesian models, which have become common in monetary policy formulations. As a result, we explore bifurcations within the class of New Keynesian models. We study different specifications of monetary policy rules within the New Keynesian functional structure. In initial research in this area, Barnett and Duzhak (2008) found a New Keynesian Hopf bifurcation boundary, with the setting of the policy parameters influencing the existence and location of the bifurcation boundary. Hopf bifurcation is the most commonly encountered type of bifurcation boundary found among economic models, since the existence of a Hopf bifurcation boundary is accompanied by regular oscillations within a neighborhood of the bifurcation boundary. Now, following a more extensive and systematic search of the parameter space, we also find the existence of Period Doubling (flip) bifurcation boundaries in the class of models. Central results in this research are our theorems on the existence and location of Hopf bifurcation boundaries in each of the considered cases. We also solve numerically for the location and properties of the Period Doubling bifurcation boundaries and their dependence upon policy-rule parameter settings.
    Keywords: Bifurcation; dynamic general equilibrium; Hopf bifurcation; flip bifurcation; period doubling bifurcation; robustness; New Keynesian macroeconometrics; Taylor rule; inflation targeting.
    JEL: C10 E32 C52 C30 E37 E60
    Date: 2008–10–23
  6. By: G. C. Lim (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); R. Dixon (Department of Economics, The University of Melbourne); Sarantis Tsiaplias (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: A time-varying Phillips curve was estimated as a means to examine the changing nature of the negative relationship between wage inflation and the unemployment rate in Australia. The implied equilibrium unemployment rate was generated and the analysis showed the important role played by variations in the slope of the Phillips curve (and thus in real wage rigidity) in changing the equilibrium unemployment rate. The deviations of actuals from the estimated equilibrium unemployment rates also performed well as measures of inflationary pressures.
    Date: 2008–10
  7. By: Engelbert Stockhammer (Vienna University of Economics and Business Administration); Simon Sturn (IMK at the Hans Boeckler Foundation)
    Abstract: This paper investigates the hypothesis that the extent to which hysteresis occurs in the aftermath of recessions depends on monetary policy reactions. The degree of hysteresis is explained econometrically by the extent of monetary easing during a recession and by standard variables for labour market institutions in a pooled cross-country analysis using quarterly data. The sample includes 40 recessions in 19 OECD countries for which the required data is available. The time period lasts from 1980 to 2007. The paper builds on Ball (1999) and extends the sample of countries, the time period under investigation and the set of control variables.
    Keywords: monetary policy, NAIRU, structual unemployment, hysteresis, endogenous NAIRU
    JEL: E24 E39 E50
    Date: 2008
  8. By: Marco Terrones; Enrique G. Mendoza
    Abstract: We study the characteristics of credit booms in emerging and industrial economies. Macro data show a systematic relationship between credit booms and economic expansions, rising asset prices, real appreciations and widening external deficits. Micro data show a strong association between credit booms and leverage ratios, firm values, and banking fragility. We also find that credit booms are larger in emerging economies, particularly in the nontradables sector; most emerging markets crises are associated with credit booms; and credit booms in emerging economies are often preceded by large capital inflows but not by financial reforms or productivity gains.
    Keywords: Credit expansion , Business cycles , Emerging markets , Asset prices , Current account deficits , Productivity ,
    Date: 2008–09–30
  9. By: Patrick A. Imam
    Abstract: We describe unique aspects of microstates-they are less diversified, suffer from lumpiness of investment, they are geographically at the periphery and prone to natural disasters, and have less access to capital markets-that may make the current account more vulnerable, penalizing exports and making imports dearer. After reviewing the "old" and "new" view on current account deficits, we attempt to identify policies to help reduce the current account. Probit regressions suggest that microstates are more likely to have large current account adjustments if (i) they are already running large current account deficits; (ii) they run budget surpluses; (iii) the terms of trade improve; (iv) they are less open; and (v) GDP growth declines. Monetary policy, financial development, per capita GDP, and the de jure exchange rate classification matter less. However, changes in the real effective exchange rate do not help drive reductions in the current account deficit in microstates. We explore reasons for this and provide policy implications.
    Keywords: Current account , Current account deficits , Investment , Capital markets , Exports , Imports , External shocks , Monetary policy , Development , Gross domestic product , Real effective exchange rates , Economic models ,
    Date: 2008–10–03
  10. By: Rokon Bhuiyan (Queen's University)
    Abstract: This paper develops an open-economy Bayesian structural VAR model for Canada in order to estimate the effects of monetary policy shocks, using the overnight target rate as the policy instrument. I allow the policy variable and the financial variables of the model to interact simultaneously with each other and with a number of other home and foreign variables. When I estimate this over-identified VAR model, I find that the policy shock transmits to real output through both the interest rate and exchange rate channels, and the shock does not induce a departure from uncovered interest rate parity. I also find that the impulse response of the monetary aggregate, M1, does not exactly follow the impulse response of the target rate. Finally, I find that Canadian variables significantly responds to the US federal funds rate shock, and external shocks are an important source of Canadian output fluctuations.
    Keywords: Monetary policy, structural VAR, block exogeneity, impulse response
    JEL: C32 E52 F37
    Date: 2008–10
  11. By: Dixon, Huw (Cardiff Business School); Kara, Engin
    Abstract: This paper adopts the Impulse-Response methodology to understand inflation persistence. It has often been argued that existing models of pricing fail to explain the persistence that we observe. We adopt a common general framework which allows for an explicit modelling of the distribution of contract lengths and for different types of price setting. We also evaluate how far the theories are consistent with recent evidence on price and wage rigidity. We find that allowing for a distribution of durations can take us a long way to solving the puzzle of inflation persistence, but not all the way yet.
    Keywords: DSGE models; inflation; persistence; price-setting
    JEL: E17 E3
    Date: 2008–09
  12. By: Andrea Carriero (Queen Mary, University of London); George Kapetanios (Queen Mary, University of London); Massimiliano Marcellino (European University Institute and Bocconi University)
    Abstract: Models based on economic theory have serious problems at forecasting exchange rates better than simple univariate driftless random walk models, especially at short horizons. Multivariate time series models suffer from the same problem. In this paper, we propose to forecast exchange rates with a large Bayesian VAR (BVAR), using a panel of 33 exchange rates vis-a-vis the US Dollar. Since exchange rates tend to co-move, the use of a large set of them can contain useful information for forecasting. In addition, we adopt a driftless random walk prior, so that cross-dynamics matter for forecasting only if there is strong evidence of them in the data. We produce forecasts for all the 33 exchange rates in the panel, and show that our model produces systematically better forecasts than a random walk for most of the countries, and at any forecast horizon, including at 1-step ahead.
    Keywords: Exchange rates, Forecasting, Bayesian VAR
    JEL: C53 C11 F31
    Date: 2008–10
  13. By: Aliona Cebotari
    Abstract: Contingent liabilities have gained prominence in the analysis of public finance. Indeed, history is full of episodes in which the financial position of the public sector is substantially altered-or its true nature uncovered-as a result of government bailouts of financial or nonfinancial entities, in both the private and the public sector. The paper discusses theoretical and practical issues raised by contingent liabilities, including the rationale for taking them on, how to safeguard against the fiscal risks associated with them, how to account and budget for them, and how to disclose them. Country experiences are used to illustrate ways these issues are addressed in practice and challenges faced. The paper also points to good practices related to the mitigation, management and disclosure of risks from contingent liabilities.
    Date: 2008–10–11
  14. By: Olivier Jeanne; Jonathan David Ostry; Jeromin Zettelmeyer
    Abstract: We present a framework that clarifies the financial role of the IMF, the rationale for conditionality, and the conditions under which IMF-induced moral hazard can arise. In the model, traditional conditionality commits country authorities to undertake crisis resolution efforts, facilitating the return of private capital, and ensuring repayment to the IMF. Nonetheless, moral hazard can arise if there are crisis externalities across countries (contagion) or if country authorities discount crisis costs too much relative to the national social optimum, or both. Moral hazard can be avoided by making IMF lending conditional on crisis prevention efforts-"ex ante" conditionality.
    Date: 2008–10–07
  15. By: Thomas A. Eife (University of Heidelberg, Department of Economics)
    Abstract: This paper studies whether menu costs are large enough to explain why firms are so reluctant to change their prices. Without actually estimating menu costs, we can infer their relevance for firms' price setting decisions from observed pricing behavior around a currency changeover. At a currency changeover, firms have to reprint their price tags (menus) independently of whether or not they want to change prices. And if this is costly, firms' price setting behavior is altered in the months around the changeover. Using data from the Euro-changeover, the paper estimates that menu costs can explain a stickiness of around 30 days which is considerably less than the 7 to 24-month stickiness we observe in retailing and in the service sector. The reluctance of firms to adjust prices more frequently appears to be caused by factors other than menu costs.
    Keywords: menu costs, price stickiness
    JEL: E30
    Date: 2008–10
  16. By: Mustapha Belkhouja (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Imene Mootamri (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Mohamed Boutahar (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: The aim of this paper is to study the dynamic evolution of inflation rate. The model is constructed by extending the ARFIMA-GARCH to ARFIMA with a time varying GARCH model where the transition from one regime to another is evolving smoothly over time. We show by Monte Carlo experiments that the constancy parameter tests perform well. We apply then this new model on eight countries from Europe, Japan and Canada and find that this model is appropriate for six among these countries.
    Keywords: ARFIMA model, Generalised autoregressive conditional heteroscedasticity model, Inflation rate, Long memory process, Nonlinear time series, Time-varying parameter mode
    Date: 2008–10–20
  17. By: Mario Cerrato; Christian de Peretti; Chris Stewart
    Abstract: This paper applies recently developed time series and heterogeneous panel nonlinear unit root tests to 24 OECD and 33 non-OECD countries’ consumption-income ratios over the period 1951–2003. This extends evidence provided in the recent literature to consider nonlinear adjustment in time series and panel unit root tests, and substantially expands both time series and cross sectional dimensions of data analysed. We find that there is nonlinear reversion to a mean or trend for just over half of OECD countries and just under half of non-OECD countries.
    Keywords: consumption-income ratio, heterogeneous panel nonlinear unit root test
    JEL: C12 C33 D12
    Date: 2008–10
  18. By: Katerina Smídková; Viktor Kotlán; David Navrátil; Ales Bulir
    Abstract: Inflation-targeting central banks have a respectable track record at explaining their policy actions and corresponding inflation outturns. Using a simple forward-looking policy rule and an assessment of inflation reports, we provide a new methodology for the empirical evaluation of consistency in central bank communication. We find that the three communication tools-inflation targets, inflation forecasts, and verbal assessments of inflation factors contained in quarterly inflation reports-provided a consistent message in five out of six observations in our 2000-05 sample of Chile, the Czech Republic, Hungary, Poland, Thailand, and Sweden.
    Keywords: Inflation targeting , Central banks , Economic forecasting , Monetary policy , Transparency , Emerging markets , Chile , Czech Republic , Hungary , Poland , Thailand , Sweden ,
    Date: 2008–10–02
  19. By: Mauro Bambi (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: Several contributions have recently reconsidered the role of the time to build assumption in explaining some relevant stylized facts. In this paper, the similarities and differences which may emerge when the time to build structure of capital is introduced in a continuous or discrete time framework are studied and enlightened. The most striking difference lies in the dimensionality of the two frameworks, which is always finite in discrete but infinite in continuous time. Then, the deterministic version of the traditional time to build model developed by Kydland and Prescott is presented, and it is shown how the typical time to build model setup in continuous time can be obtained. Moreover, the richest dynamics in continuous time is investigated and, more importantly, it is shown that the predictions in terms of capital, output, and consumption behavior are not signi¯cantly di®erent from its discrete version once the economy is calibrated properly.
    Keywords: Discrete and continuous time, time-to-build, mixed functional differential equa- tions.
    JEL: E00 E30 O40
    Date: 2008–10
  20. By: Etienne Farvaque (University of Lille 1); Norimichi Matsueda (Kwansei Gakuin University)
    Abstract: According to Bordo and James [2008, “A long term perspective on the Euro, ” NBER Working Paper, No. 13815], history shows that multinational monetary unions have dissolved mainly under the consequences of external shocks. This paper provides a theoretical model demonstrating their point.
    Keywords: Monetary Union, Optimum Currency Areas, External Shocks.
    JEL: E58 E61 F33
    Date: 2008–10
  21. By: Baddeley, M.; Fingleton, B.
    Abstract: In this paper, we assess the Fujita, Krugman and Venables (FKV) nonlinear model of wage differentials. Using a spatial econometric model incorporating a spatial autoregressive error process, we estimate a quadratic form using cross-sectional data for 98 countries from 1970 to 2000. The evidence suggests no necessary tendency for all countries to converge towards the stable upper root. Polarization is possible. This polarization may be permanent - generating persistent international wage differentials. Our findings suggest that moderating the transmission of shocks across countries should be a key element of international macroeconomic policy co-ordination.
    Keywords: Globalisation, convergence, wage differentials, spatial error models
    JEL: R12 R15
    Date: 2008–09
  22. By: Hilde C. Bjørnland (Department of Economics, Norwegian School of Management (BI); Jørn I. Halvorsen (Norwegian School of Economics and Business Administration)
    Abstract: This paper analyzes how monetary policy responds to exchange rate movements in open economies, paying particular attention to the two-way interaction between monetary policy and exchange rate movements. We address this issue using a structural VAR model that is identified using a combination of sign and short-term (zero) restrictions. Our suggested identification scheme allows for a imultaneous reaction between the variables that are observed to respond intraday to news (the interest rate and the exchange rate), but maintains the recursive order for the traditional macroeconomic variables (GDP and inflation). Doing so, we find strong interaction between monetary policy and exchange rate variation. Our results suggest more theory consistency in the monetary policy responses than what has previously been reported in the literature.
    Keywords: Exchange rate, monetary policy, SVAR, Bayesian estimation, sign restrictions
    JEL: C32 E52 F31 F41
    Date: 2008–10–22
  23. By: Céline Allard; Nada Choueiri; Susan Schadler; Rachel van Elkan
    Abstract: Large inflows from the European Union to the New Member States are likely to significantlyimpact macroeconomic outcomes. In this paper, we use the IMF's Global Integrated Monetaryand Fiscal model (GIMF) to analyze the impact of the transfers and show the conditionsunder which they would help speed up convergence. We find that the EU funds need to bedirected predominantly to investment rather than to income support and that to bestaccompany the EU fund inflows, the policy-mix would need to combine counter-cyclicalpolicy with a strong commitment to the existing monetary regime.
    Keywords: European Economic and Monetary Union , Capital flows , Monetary policy , Investment policy , Capital inflows , Economic integration , Exchange rate regimes , Working Paper ,
    Date: 2008–09–18
  24. By: Manuela Goretti
    Abstract: This paper analyzes wage- and price-setting relations in new EU member countries. Panel estimates indicate a strong and significant relationship between real wages and labor productivity, as well as evidence of wage pass-through to inflation. Terms of trade shocks do not feed through to real wages. Country-specific wage developments, beyond differences in labor productivity growth, are mostly explained by real wage catch-up from different initial levels and different labor market conditions. Qualitative evidence also suggests that public sector wage demonstration effects and institutional factors may play a role in wage determination.
    Keywords: Wage policy , Pricing policy , European Union , Europe , Public sector wages , Labor markets , Labor productivity , External shocks , Inflation ,
    Date: 2008–10–07
  25. By: Ramón María-Dolores (Banco de España)
    Abstract: This paper studies the pass-through of exchange rate changes into the prices of imports that originated inside the euro area made by some New Member States (NMSs) of the European Union and one candidate country (Turkey). I use data on import unit values for nine different product categories and bilateral imports from the euro area for each country and I estimate industry-specific rates of pass-through across and within countries using two different methodological approaches. The first one is based on Campa and González-Mínguez (2006) which estimates the short- and long-run pass through elasticities, where long-run elasticities are defined as the sum of the pass-through coefficients for the contemporaneous exchange rate and its first four lags. The second one is employed by de Bandt, Banerjee and Kozluk (2007) which suggests a long-run Engle and Granger (1987) cointegrating relationship and the possibility of structural breaks to restore the long-run in the estimation. I did not find evidence either in favour of the hypothesis of Local Currency Pricing (zero pass-through) or the hypothesis of Producer Currency Pricing (complete pass-through) for all the countries except Slovenia and Cyprus in the latter. The exchange rate pass-through ranged from 0.090 to 2.916 in the short-run and from 0.102 to 2.242 in the long-run. With reference to the results by industry the lowest values for exchange rate pass-through are in Manufacturing sectors. However, I did observe a exchange rate pass-through decline through the pricing chain and a large dependence of their economies on imported inputs.
    Keywords: exchange rates, pass-through, monetary union, panel cointegration
    JEL: F31 F36 F42 C23
    Date: 2008–10
  26. By: Daisuke Nagakura (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In this paper, we propose a simple methodology for investigating how shocks to trend and cycle are correlated in unidentified unobserved components models, in which the correlation is not identified. The proposed methodology is applied to U.S. and U.K. real GDP data. We find that the correlation parameters are negative for both countries. We also investigate how changing the identification restriction results in different trend and cycle estimates. It is found that estimates of the trend and cycle can vary substantially depending on the identification restrictions imposed.
    Keywords: Business Cycle Analysis, Trend, Cycle, Permanent Component, Transitory Component, Unobserved Components Model
    JEL: C01 E32
    Date: 2008–10
  27. By: Silke Tober (IMK at the Hans Boeckler Foundation); Tobias Zimmermann (Rhine-Westphalia Insitut for Economic Research (RWI))
    Abstract: This paper analyses the effects of commodity price shocks in a new Keynesian model. The focus is on the central bank's choice of inflation target and the degree of real wage rigidity. It turns out that using core inflation rather than headline inflation is the superior strategy. Targeting expected headline inflation, as practiced by most central banks, is a viable practical alternative to the core inflation target. Simulations illustrate these points. The introduction of real wage rigidity into the model does not change these conclusions. Real wage rigidity does, however, imply second-round effects, making the monetary policy response, the inflation peak and the output drop more pronounced. Although in practice many of the assumptions of the model, such as full information, do not hold, lessons can be drawn for monetary policy. In case of a commodity supply shock, central banks would do well to focus on some measure of core inflation rather than headline inflation so as to reduce the volatility of both inflation and output. A communication strategy that places greater emphasis on underlying and expected inflation could serve to anchor inflation expectations.
    Date: 2008
  28. By: Greg Hannsgen
    Abstract: Since Christopher Sims's "Macroeconomics and Reality" (1980), macroeconomists have used structural VARs, or vector autoregressions, for policy analysis. Constructing the impulse-response functions and variance decompositions that are central to this literature requires factoring the variance-covariance matrix of innovations from the VAR. This paper presents evidence consistent with the hypothesis that at least some elements of this matrix are infinite for one monetary VAR, as the innovations have stable, non-Gaussian distributions, with characteristic exponents ranging from 1.5504 to 1.7734 according to ML estimates. Hence, Cholesky and other factorizations that would normally be used to identify structural residuals from the VAR are impossible.
    Date: 2008–10
  29. By: Melisso Boschi; Alessandro Girardi
    Abstract: This paper quantifies the relative contribution of domestic, regional and international factors to the fluctuation of domestic output in six key Latin American (LA) countries: Argentina, Bolivia, Brazil, Chile, Mexico and Peru. Using quarterly data over the period 1980:1-2003:4, a multi-variate, multicountry time series model was estimated to study the economic interdependence among LA countries and, in addition, between each of them and the three world largest industrial economies: the US, the Euro Area and Japan. Falsifying a common suspicion, it is shown that the proportion of LA countries’ domestic output variability explained by industrial countries’ factors is modest. By contrast, domestic and regional factors account for the main share of output variability at all simulation horizons. The implications for the choice of the exchange rate regime are also discussed.
    JEL: C32 E32 F31 F41
    Date: 2008–10
  30. By: Hugo Gerard; Kristoffer Nimark
    Abstract: This paper combines multivariate density forecasts of output growth, inflation and interest rates from a suite of models. An out-of-sample weighting scheme based on the predictive likelihood as proposed by Eklund and Karlsson (2005) and Andersson and Karlsson (2007) is used to combine the models. Three classes of models are considered: a Bayesian vector autoregression (BVAR), a factor-augmented vector autoregression (FAVAR) and a medium-scale dynamic stochastic general equilibrium (DSGE) model. Using Australian data, we find that, at short forecast horizons, the Bayesian VAR model is assigned the most weight, while at intermediate and longer horizons the factor model is preferred. The DSGE model is assigned little weight at all horizons, a result that can be attributed to the DSGE model producing density forecasts that are very wide when compared with the actual distribution of observations. While a density forecast evaluation exercise reveals little formal evidence that the optimally combined densities are superior to those from the best-performing individual model, or a simple equal-weighting scheme, this may be a result of the short sample available.
    Keywords: Density forecasts, combining forecasts, predictive criteria
    Date: 2008–08
  31. By: Jean-Pierre Allégret (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France); Mohamed Ayadi (Université de Tunis, Institut supérieur de gestion (ISG)); Leila Haouaoui Khouni (Université de Tunis, Institut supérieur de gestion (ISG))
    Abstract: This paper studies the choice of the exchange rate regime in emerging and developing countries. The literature on exchange rate regimes is often based either on theoretical models or on empirical analysis. Our paper presents a different perspective by developing a theoretical model which is tested empirically. We consider the main determinants of the exchange rate regime: the pass-through, the relative volatility of nominal and real shocks, the discretionary bias, the credit channel and the balance-sheet effect. The model is tested with a logit multinomial approach on a sample of 43 emerging and developing countries. We determine the probability of occurrence of a given exchange rate regime in taking into account the preceding determinants identified with the theoretical model. Overall, our results suggest that intermediate regimes are the regimes the best adapted to developing and emerging countries.
    Keywords: Exchange rate regimes; Emerging countries; Developing countries; Logit multinomial model
    JEL: F33 F41
    Date: 2008
  32. By: Asaf Bernstein; Eric Hughson; Marc D. Weidenmier
    Abstract: We use the founding of the Federal Reserve as a historical experiment to provide some insight into whether a lender of last resort can stabilize financial markets. Following the Panic of 1907, Congress passed two measures that established a lender of last resort in the United States: (1) the Aldrich-Vreeland Act of 1908 which authorized certain banks to issue emergency currency during a financial crisis and (2) the Federal Reserve Act of 1913 which established a central bank. We employ a new identification strategy to isolate the effects of the introduction of a lender of last resort from other macroeconomic shocks. We compare the standard deviation of stock returns and short-term interest rates over time across the months of September and October, the two months of the year when financial markets were most vulnerable to a crash because of financial stringency from the harvest season, with the rest of the year during the period 1870-1925. Stock volatility in the post-1907 period (June 1908-1925) was more than 40 percent lower in the months of September and October compared to the period (1870- May 1908). We also find that the volatility of the call loan rate declined nearly 70 percent in September and October following the monetary regime change.
    JEL: E4 G1 N11 N12
    Date: 2008–10
  33. By: Arnaud Mehl (European Central Bank - ECB); Julien Reynaud (European Central Bank - ECB, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper explains why public domestic debt composition in emerging economies can be risky, namely in foreign currency, with a short maturity or indexed. It analyses empirically the determinants of these risk sources separately, developing a new large dataset compiled from national sources for 33 emerging economies over 1994-2006. The paper finds that economic size, the breadth of the domestic investor base, inflation and fiscal soundness are all associated with risky public domestic debt compositions, yet to an extent that varies considerably in terms of magnitude and significance across sources of risk. Only inflation impacts all types of risky debt, underscoring the overarching importance of monetary credibility to make domestic debt compositions in emerging economies safer. Given local bond markets' rapid development, monitoring risky public domestic debt compositions in emerging economies becomes increasingly relevant to global financial stability.
    Keywords: Public domestic debt, composition, risk, emerging economies.
    Date: 2008–10
  34. By: Henry Sabrowski (Institute of Economics, Leuphana University of Lüneburg)
    Abstract: This paper analyzes the in ation expectation formation empirically for German consumers. The expectation formation process is analyzed for a representative consumer and for dierent demographic groups. The results indicate that German consumers are a relatively homogeneous group. There are nevertheless quantitative dierences among the groups: Inflation expectations and perceived inflation tend to fall with rising income and unemployed individuals are outliers. Rational inflation expectation is not present for any group. Consumer and expert expectations have short and long run relationships. Evidence for a positive constant gain in the adaptive learning algorithm is given for almost all groups.
    Keywords: Inflation expectations; conversion method; survey data; rationality tests
    JEL: C42 D83 D84 E31
    Date: 2008–10–21
  35. By: Silke Tober (IMK at the Hans Boeckler Foundation)
    Abstract: When the prices of important goods such as energy and food greatly increase, the ques-tion arises whether the impact on the various income groups differs. An analysis of the structure of consumption expenditure of different household groups does not yield significant differences in the effect of the surge in energy and food prices: the household-specific inflation rates are quite similar. It does not follow, however, that households across income groups are affected by the price increase to the same degree: Low-income households are more affected in the sense that they may actually have to con-sume less given their high consumption ratio and lack of wealth.
    Date: 2008
  36. By: Hebatallah Ghoneim (Faculty of Management Technology, The German University in Cairo); Yasmine Reda (Faculty of Management Technology, The German University in Cairo)
    Abstract: Game Theory has been gaining great importance in Economics, encouraging research in many theoretical and applied fields. This paper relies on simple game theory tools to set up a major international trade dispute. Using the backward deduction approach, the strategies of the United States and China in their recent trade conflict are analyzed.
    Keywords: Trade Conflict, Exchange Rate Policy, Game Theory
    JEL: F51 C7
    Date: 2008–10
  37. By: Andreas Billmeier; Dalia Hakura
    Abstract: The analysis in this paper suggests that import and export volume elasticities are markedly lower in oil-exporting Middle East and Central Asian countries than in non-oil countries in the region. A key implication of this finding is that a real appreciation of the exchange rate in oil-exporting countries would achieve little in terms of expenditure switching: an appreciation does not boost imports and non-oil exports constitute only a small share of GDP and total trade in these countries. Therefore, while a real appreciation lowers the current account surplus of oil-exporting countries through valuation effects, the contribution to lowering global imbalances may be more limited.
    Keywords: Middle East and Central Asia , Trade policy , Imports , Exports , Oil exporting countries , Exchange rate appreciation , Current account surpluses , Economic integration , Real effective exchange rates , Economic models , Working Paper ,
    Date: 2008–09–15
  38. By: Herman Z. Bennett; Ziga Zarnic
    Abstract: The real effective exchange rate (REER) is the most commonly used measure for assessing international competitiveness. We develop a methodology to estimate the REER that incorporates two distinctive elements that are not considered in the current literature and apply it to the Mediterranean Quartet (MQ) of Greece, Italy, Portugal, and Spain, whose common pattern of real appreciation has created concern in policy and academic circles. The two elements that we add to the existing literature are (i) product heterogeneity when identifying each country's international competitors and their weights and (ii) a comprehensive treatment of services exports. Our refined measure suggests a modest reduction in the observed REER gap between the MQ countries and the other euro area countries. In particular, considering product heterogeneity and services exports implies a lower real appreciation from 1998 to 2006 on the order of 2-3 percent for all MQ countries. These are difference-in-difference estimates relative to the results obtained for the rest of the euro area countries using the same methodology.
    Keywords: Competition , Greece , Italy , Portugal , Spain , Real effective exchange rates , Exports , Euro Area , Services sector ,
    Date: 2008–10–07
  39. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Recent developments in econometrics and economic theory attest the growing evidence of strong uncertainty. The paper argues that these developments both question seriously the methodological foundations of the mainstream macroeconomics and support Keynes’s powerful concepts and theory. It emphasizes how replacing ‘risk’ with strong uncertainty suffices to transform the standard four-macro-markets system into a shifting demand-driven system, with the result that price rigidity is not to be considered the cause of the effective demand leadership (although, as Keynes pointed out, some rigidity is required to give us some stability in a monetary economy). As it is not based on a restrictive definition of uncertainty, Keynes’s theory is more realistic than the mainstream. It is also more general, for the equilibrium level of employment depends on the views about the future, instead of having a unique ‘natural’ anchor.
    Keywords: General equilibrium, Uncertainty, Post-Keynesian
    Date: 2008–06
  40. By: Arghyrou, Michael G (Cardiff Business School); Gadea, Maria Dolores
    Abstract: We model pre-euro Spanish monetary policy and use our findings to assess the compatibility of the interest rates set by the ECB since 1999 with Spanish macrofundamentals. We find that in the 1990s Spain implemented successfully a monetary strategy tailored to its own domestic fundamentals; and by abolishing it to join the euro she has paid a cost in the form of a sub-optimal monetary policy. Spain.s experience suggests a cautious approach with regards to the timing of further EMU enlargement.
    Keywords: Spain; ECB; monetary policy; domestic fundamentals; compatibility
    JEL: C51 C52 E43 E58 F37
    Date: 2008–10

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