nep-cba New Economics Papers
on Central Banking
Issue of 2008‒11‒25
thirty-two papers chosen by
Alexander Mihailov
University of Reading

  1. Stabilization Theory and Policy: 50 Years after the Phillips Curve By Stephen J. Turnovsky
  2. Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model By Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
  3. Can Exchange Rates Forecast Commodity Prices? By Yu-chin Chen; Kenneth Rogoff; Barbara Rossi
  4. Monetary Policy Design under Imperfect Knowledge: An Open Economy Analysis By Yu-chin Chen; Pisut Kulthanavit
  5. On Financial Markets Incompleteness, Price Stickiness, and Welfare in a Monetary Union ? By Stéphane Auray; Aurélien Eyquem
  6. Do Nominal Rigidities Matter for the Transmission of Technology Shocks? By Zheng Liu; Louis Phaneuf
  7. Price adjustments in a general model of state-dependent pricing By James Costain; Antón Nákov
  8. The Calibration of Probabilistic Economic Forecasts By John Galbraith; Simon van Norden
  10. Is the Great Moderation Ending? UK and US Evidence. By Giorgio Canarella; WenShwo Fang; Stephen M. Miller; Stephen K. Pollard
  11. The End of the Great Moderation: “We told you so.” By Barnett, William A.; Chauvet, Marcelle
  12. Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach By Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
  13. What Broke the Bubble? By William Barnett
  14. New Keynesian Endogenous Stabilization in a Panel of Countries By David Kiefer
  15. Comparing the New Keynesian Phillips Curve with Time Series Models to Forecast Inflation By Fabio Rumler; Maria Teresa Valderrama
  16. Openness, imported commodities and the Phillips Curve By Andrew Pickering; Hector Valle
  17. Budgetary and External Imbalances Relationship : a Panel Data Diagnostic By António Afonso; Christophe Rault
  18. Money and distribution: can the theory explain recent empirical trends? By Domenica Tropeano
  19. Nowcasting, Business Cycle Dating and the Interpretation of New Information when Real Time Data are Available By Nilss Olekalns; Kalvinder Shields
  20. Does Real Exchange Rate Volatility Affect Sectoral Trade Flows?. By Mustafa Caglayan; Jing Di
  21. Exchange rate policy and income distribution in an open developing economy By Elisabetta Michetti,; Domenica Tropeano,
  22. What Drives the NAIRU? Evidence from a Panel of OECD Countries By Christian Gianella; Isabell Koske; Elena Rusticelli; Olivier Chatal
  23. Monetary Policy and European Unemployment By Ronald Schettkat; Rongrong Sun
  24. The Changing Relation Between the Canadian and U.S. Yield Curves By Kathlyn Lucia; Stephanie Price; Edwin Wong; Richard Startz
  25. The ECB and IMF indicators for the macro-prudential analysis of the banking sector: a comparison of the two approaches By Anna Maria Agresti; Patrizia Baudino; Paolo Poloni
  26. Domestic debt structures in emerging markets : new empirical evidence. By Arnaud Mehl; Julien Reynaud
  27. Prices and output co-movements : an empirical investigation for the CEECs. By Iuliana Matei
  28. On the Real Exchange Rate Effects of Higher Electricity Prices in South Africa By Jan van Heerden; James Blignaut; Andre Jordaan
  29. Assessing Spill-Over Effects of U.S. Monetary Policy and Macroeconomic Announcements on Financial Markets in Argentina By Bernd Hayo; Matthias Neuenkirch
  30. Inflation persistence in the Franc Zone: evidence from disaggregated prices By Simeon Coleman
  31. On The Road to Monetary Union – Do Arab Gulf Cooperation Council Economies React in the same way to United States' Monetary Policy Shocks? By Louis, Rosmy; Osman, Mohammad; Balli, FAruk
  32. Monetary Union Among Arab Gulf Cooperation Council (AGCC) Countries: Does the symmetry of shocks extend to the non-oil sector? By Louis, Rosmy; Balli, Faruk; Osman, Mohammad

  1. By: Stephen J. Turnovsky
    Date: 2008–05
  2. By: Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
    Abstract: This paper studies the transmission of shocks and the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank's empirical dynamic stochastic general equilibrium (DSGE) model of a small open economy. The main results are, first, that the transmission of shocks depends substantially on the conduct of monetary policy, and second, that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.
    JEL: E52 E58 F33 F41
    Date: 2008–11
  3. By: Yu-chin Chen (University of Washington); Kenneth Rogoff (Harvard University); Barbara Rossi (Duke University)
    Abstract: This paper demonstrates that “commodity currency” exchange rates have remarkably robust power in predicting future global commodity prices, both in-sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause exchange rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting exchange rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that exchange rates will be better predictors of exogenous commodity prices than vice-versa, because the exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking. J.E.L. Codes: C52, C53, F31, F47. Key words: Exchange rates, forecasting, commodity prices, random walk. Acknowledgements. We would like to thank C. Burnside, C. Engel, M. McCracken, R. Startz, V. Stavreklava, A. Tarozzi, M. Yogo and seminar participants at the University of Washington for comments. We are also grateful to various staff members of the Reserve Bank of Australia, the Bank of Canada, the Reserve Bank of New Zealand, and the IMF for helpful discussions and for providing some of the data used in this paper.
    Date: 2008–02
  4. By: Yu-chin Chen (University of Washington); Pisut Kulthanavit (University of Washington)
    Abstract: This paper incorporates adaptive learning into a standard New-Keynesian open economy dynamic stochastic general equilibrium (DSGE) model and analyze under what conditions policymakers should target domestic producer price inflation (DI) versus consumer price inflation (CI). Our goal is to examine how monetary policy rules should adjust when agents’ information sets deviate from those assumed under the rational expectation paradigm. When agents form expectations using an adaptive learning mechanism, even though the central bank has no informational advantage, monetary policy can nonetheless facilitate the learning process and thus mitigate distortions associated with imperfect knowledge. We assume the policy-maker follows a forwardlooking Taylor rule and focus on analyzing the interplay between the source of the dominant shock and the extent of knowledge imperfection. We find that when agents have very limited knowledge and have to learn the dynamics governing both the relevant economic indicators and the underlying structural shocks, a DI targeting rule introduces fewer forecast errors and is better at stabilizing the economy. However, when agents can observe contemporaneous shocks and need only learn how key economic variables evolve (a situation akin to a post-structural-shift economy), targeting away from the dominant shocks helps anchor expectations and improve welfare. A CI target can then become the preferred policy rule when the economy is subject to large domestic shocks.
    Date: 2008–05
  5. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France)
    Abstract: The paper builds a two-country model of a monetary union with home bias and price stickiness. Incompleteness of financial asset markets is allowed. In this environment, we derive the solution for optimal behavior by the monetary policymaker and show that welfare can be higher under incomplete markets than under complete markets. The argument is a second- best one. In a monetary union with equal nominal rigidity across countries, optimal monetary policy stabilizes aggregate, union-wide inflation, but cannot fully stabilize the country-level inflation rates. Market incompleteness results in less volatility of the terms of trade (because part of the adjustment goes through the current account), and hence less volatile national inflation rates. Through this channel, welfare ends up being higher under incomplete markets. These results are also robust when nominal rigidity differs across countries and when the form of the monetary policy is modified.
    Keywords: monetary union, asymmetric shocks, financial market incompleteness, price stickiness, welfare
    JEL: E51 E58 F36 F41
    Date: 2008
  6. By: Zheng Liu; Louis Phaneuf
    Abstract: A commonly held view is that nominal rigidities are important for the transmission of monetary policy shocks. We argue that they are also important for understanding the dynamic effects of technology shocks, especially on labor hours, wages, and prices. Based on a dynamic general equilibrium framework, our closed-form solutions reveal that a pure sticky-price model predicts correctly that hours decline following a positive technology shock, but fails to generate the observed gradual rise in the real wage and the near-constance of the nominal wage; a pure sticky-wage model does well in generating slow adjustments in the nominal wage, but it does not generate plausible dynamics of hours and the real wage. A model with both types of nominal rigidities is more successful in replicating the empirical evidence about hours, wages and prices. This finding is robust for a wide range of parameter values, including a relatively small Frisch elasticity of hours and a relatively high frequency of price reoptimization that are consistent with microeconomic evidence.
    Keywords: Technology shock, nominal rigidities, monetary policy
    JEL: E31 E32
    Date: 2008
  7. By: James Costain (Banco de España); Antón Nákov (Banco de España)
    Abstract: In this paper, we show that a simple model of smoothly state-dependent pricing generates a distribution of price adjustments similar to that observed in microeconomic data, both for low and high inflation. Our setup is based on one fundamental assumption: price adjustment is more likely when it is more valuable. The constant probability model (Calvo 1983) and the fixed and stochastic menu cost models (Golosov and Lucas 2007; Dotsey, King and Wolman 1999) are nested as special cases of our framework. All parameterizations of our model can be ranked according to a measure of state dependence. The fixed menu cost model has the highest possible degree of state dependence; the parameterization which best fits US microdata has low state dependence. The fixed menu cost model is inconsistent with the evidence both because it never generates small price adjustments, and because it implies a large fall in the standard deviation of price adjustments as trend inflation increases. Even though the state dependence of our preferred parameterization is almost as low as that of the Calvo model, it is well-behaved when we change the steady state inflation rate, matching the data at least as well as Golosov and Lucas' model.
    Keywords: Price stickiness, state-dependent pricing, stochastic menu costs, generalized (S,s), bounded rationality
    JEL: E31 D81
    Date: 2008–11
  8. By: John Galbraith; Simon van Norden
    Abstract: A probabilistic forecast is the estimated probability with which a future event will satisfy a specified criterion. One interesting feature of such forecasts is their calibration, or the match between predicted probabilities and actual outcome probabilities. Calibration has been evaluated in the past by grouping probability forecasts into discrete categories. Here we show that we can do so without discrete groupings; the kernel estimators that we use produce efficiency gains and smooth estimated curves relating predicted and actual probabilities. We use such estimates to evaluate the empirical evidence on calibration error in a number of economic applications including recession and inflation prediction, using both forecasts made and stored in real time and pseudoforecasts made using the data vintage available at the forecast date. We evaluate outcomes using both first-release outcome measures as well as later, thoroughly-revised data. We find strong evidence of incorrect calibration in professional forecasts of recessions and inflation. We also present evidence of asymmetries in the performance of inflation forecasts based on real-time output gaps. <P>Une prévision probabiliste représente la probabilité qu’un événement futur satisfasse une condition donnée. Un des aspects intéressants de ces prévisions est leur calibration, c’est-à-dire l’appariement entre les probabilités prédites et les probabilités réalisées. Dans le passé, la calibration a été évaluée en regroupant des probabilités de prévisions en catégories distinctes. Nous proposons d’utiliser des estimateurs à noyaux, qui sont plus efficaces et qui estiment une relation lisse entre les probabilités prédites et réalisées. Nous nous servons de ces estimations pour évaluer l’importance empirique des erreurs de calibration dans plusieurs pratiques économiques, telles que la prévision de récessions et de l’inflation. Pour ce faire, nous utilisons des prévisions historiques, ainsi que des pseudoprévisions effectuées à l’aide de données telles qu’elles étaient au moment de la prévision. Nous analysons les résultats en utilisant autant des estimations préliminaires que des estimations tardives, ces dernières incorporant parfois des révisions importantes. Nous trouvons une forte évidence empirique d’une calibration erronée des prévisions professionnelles de récession et d’inflation. Nous présentons aussi une évidence d’asymétries dans la performance des prévisions d’inflation basées sur des estimations des écarts de la production en temps réel.
    Keywords: calibration, probability forecast, real-time data, inflation, recession, calibration, probabilités de prévisions, données « en temps réel », inflation, récession
    Date: 2008–11–01
  9. By: Happe, Kathrin; Balmann, Alfons
    Abstract: For models to have an impact on policy-making, they need to be used. Exploring the relationships between policy models, model uptake and policy dynamics is the core of this article. What particular role can policy models play in the analysis and design of policies? Which factors facilitate (inhibit) the uptake of models by policy-makers? What are possible pathways to further develop modelling approaches to better meet the challenges facing agriculture today? In this paper, we address these issues from three different points of view, each of which should shed some light on the subject. The first point of view discusses models in the framework of complex adaptive systems and uncertainty. The second point of view looks at the dynamic interplay between policies and models using the example of modelling in agricultural economics. The third point of view addresses conditions for a successful application of models in policy analysis.
    Keywords: modelling, complexity, participatory modelling, policy analysis, model use, Agricultural and Food Policy, Research Methods/ Statistical Methods,
    Date: 2008
  10. By: Giorgio Canarella (Department of Economics, University of Nevada, Las Vegas); WenShwo Fang (Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Stephen K. Pollard (Department of Economics, California State University, Los Angeles)
    Abstract: The Great Moderation, the significant decline in the variability of economic activity, provides a most remarkable feature of the macroeconomic landscape in the last twenty years. A number of papers document the beginning of the Great Moderation in the US and the UK. In this paper, we use the Markov regime-switching models of Hamilton (1989) and Hamilton and Susmel (1994) to document the end of the Great Moderation. The Great Moderation in the US and the UK begin at different point in time. The explanations for the Great Moderation fall into generally three different categories: good monetary policy, improved inventory management, or good luck. Summers (2005) argues that a combination of good monetary policy and better inventory management led to the Great Moderation. The end of the Great Moderation, however, occurs at approximately the same time in both the US and the UK. It seems unlikely that good monetary policy would turn into bad policy or that better inventory management would turn into worse management. Rather, the likely explanation comes from bad luck. Two likely culprits exist: energy-price and housing-price shocks.
    Keywords: Great Moderation, Regime switching, SWARCH
    JEL: C32 E32 O40
    Date: 2009–11
  11. By: Barnett, William A.; Chauvet, Marcelle
    Abstract: The current financial crisis followed the “great moderation,” according to which the world’s central banks had gotten so good at countercyclical policy that the business cycle no longer existed. As more and more economists and media people became convinced that the risk of recessions had moderated or ended, lenders and investors became willing to increase their leverage and risk-taking activities. Mortgage lenders, insurance companies, investment banking firms, and home buyers increasingly engaged in activities that would have been considered unreasonably risky, prior to the great moderation that was viewed as having lowered systemic risk. It is the position of this paper that the great moderation did not reflect improved monetary policy, and the perceptions that systemic risk had decreased and that the business cycle had ended were false. Contributing to those misperception was low quality data provided by central banks. Since monetary assets began yielding interest, the simple sum monetary aggregates have had no foundations in economic theory and have sequentially produced one source of misunderstanding after another. The bad data produced by simple sum aggregation have contaminated research in monetary economics, have resulted in needless “paradoxes,” have produced decades of misunderstandings in economic research and policy, and contributed to the widely held views about decreased systemic risk. While better data, based correctly on index number theory and aggregation theory, now exist, the usual official central bank data are not based on that better approach. While aggregation-theoretic monetary aggregates exist for internal use at the European Central Bank, the Bank of Japan, and many other central banks throughout the world, the only central banks that currently make aggregation-theoretic monetary aggregates available to the public are the Bank of England and the St. Louis Federal Reserve Bank. Dual to the aggregation-theoretic monetary aggregates are the aggregation-theoretic user cost and interest rate aggregates, which similarly are not in official use by central banks. No other area of economics has been so seriously damaged by data unrelated to valid index-number and aggregation theory. Many commentators have been quick to blame insolvent financial firms for their “greed” and their presumed self-destructive, reckless risk taking. Perhaps some of those commentators should look more carefully at their own role in propagating the misperceptions of the great moderation that induced those firms to be willing to take such risks.
    Keywords: Measurement error; monetary aggregation; Divisia index; aggregation; monetary policy; index number theory; financial crisis; great moderation; Federal Reserve.
    JEL: C43 E32 E58 E52 E40
    Date: 2008–11–14
  12. By: Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
    Abstract: This paper compares the different dynamics of the simple sum monetary aggregates and the Divisia monetary aggregate indexes over time, over the business cycle, and across high and low inflation and interest rate phases. Although traditional comparisons of the series sometimes suggest that simple sum and Divisia monetary aggregates share similar dynamics, there are important differences during certain periods, such as around turning points. These differences cannot be evaluated by their average behavior. We use a factor model with regime switching. The model separates out the common movements underlying the monetary aggregate indexes, summarized in the dynamic factor, from individual variations in each individual series, captured by the idiosyncratic terms. The idiosyncratic terms and the measurement errors reveal where the monetary indexes differ. We find several new results. In general, the idiosyncratic terms for both the simple sum aggregates and the Divisia indexes display a business cycle pattern, especially since 1980. They generally rise around the end of high interest rate phases – a couple of quarters before the beginning of recessions – and fall during recessions to subsequently converge to their average in the beginning of expansions. We find that the major differences between the simple sum aggregates and Divisia indexes occur around the beginnings and ends of economic recessions, and during some high interest rate phases. We note the inferences’ policy relevance, which is particularly dramatic at the broadest (M3) level of aggregation. Indeed, as Belongia (1996) has observed in this regard, “measurement matters.”
    Keywords: Measurement Error, Divisia Index, Aggregation, State Space, Markov Switching, Monetary Policy
    JEL: E51 C30 E4
    Date: 2008–08–06
  13. By: William Barnett (Department of Economics, The University of Kansas)
    Abstract: This paper is the basis for the Guest Columnist article in the Tuesday, November 11, 2008 issue of the Kansas City Star Business Weekly. Because of space limitations, the published newspaper column had to be shortened from the original and unfortunately did not include either of the two supporting figures. This is the unedited source article. The position taken by this opinion editorial is that the declining trend of total reserves during the recent period of financial crisis was counterproductive, and the declining level of the federal funds rate during that period was an inadequate indicator of Federal Reserve policy stance. But the recent startling surge in reserves potentially offsets the problem, although for reasons not motivated by the issues raised by this article. In fact, the reason for the surge is associated with the declining stock of Treasury bonds available to the Federal Reserve for sterilization of the effects of the new lending initiatives on bank reserves.
    Keywords: bubbles, bailouts, monetary policy, reserves, TAFs, sterilization, financial crisis.
    JEL: E3 E4 E5 E6 G1 G2
    Date: 2008–11
  14. By: David Kiefer
    Abstract: In the new Keynesian model of endogenous stabilization governments have objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. We develop an econometric characterization of the political-economic equilibrium using the Kalman filter to model the unobserved natural rate. Applying this methodology to a panel of North Atlantic countries, we find it consistent with history with a few qualifications. For one, governments are more likely to target growth rates, than output gaps. And, inflation expectations are more likely adaptive, than rational. Also, the error restrictions implied by the standard inflation-productivity shocks formulation needs to be relaxed.
    Keywords: endogenous stabilization, objectives, expectations, Kalman filtering
    JEL: E61 E63
    Date: 2008
  15. By: Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,); Maria Teresa Valderrama (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,)
    Abstract: The New Keynesian Phillips Curve, as a structural model of inflation dynamics, has mostly been used to explain past inflation developments, but has hardly been used for forecasting purposes. We propose a method of forecasting inflation based on the present-value formulation of the hybrid New Keynesian Phillips Curve. To evaluate the forecasting performance of this model we compare it with forecasts generated from time series models at different forecast horizons. As state-of-the-art time series models used in inflation forecasting we employ a Bayesian VAR, a traditional VAR and a simple autoregressive model. We find that the New Keynesian Phillips Curve delivers relatively more accurate forecasts compared to the other models for longer forecast horizons (more than 3 months) while they are outperformed by the time series models only for the very short forecast horizon. This is consistent with the finding in the literature that structural models are able to outperform time series models only for longer horizons.
    Keywords: New Keynesian Phillips Curve, Inflation Forecasting, Forecast Evaluation, Bayesian VAR
    JEL: E31 C32 C53
    Date: 2008–09–30
  16. By: Andrew Pickering; Hector Valle
    Abstract: This paper derives a Phillips curve with imported commodities as an additional input in the production process. Given greater reliance on exogenously priced imported commodities in production then changes in output lead to a reduced impact on marginal costs and prices. The Phillips curve becomes flatter relative to the bench-mark New Keynesian case. Empirical evidence supports the hypothesis that greater imported commodity intensity in production increases the sacrifice ratio. Econometrically controlling for imported commodity intensity also doubles the explanatory power of openness in determining the sacrifice ratio, as conjectured by Romer (1993).
    Keywords: openness, imported commodities, sacrifice ratio
    JEL: E31 E32 F41
    Date: 2008–10
  17. By: António Afonso; Christophe Rault
    Abstract: We assess the cointegration relationship between current account and budget balances, and effective real exchange rates, using recent bootstrap panel cointegration techniques and SUR methods. We investigate the magnitude of the relationship between the two imbalances for each country for the period 1970-2007, and for different EU and OECD country groupings. The panel cointegration tests used allow for within and between correlation, while the SUR results show both positive and negative effects of budget balances on current account balances for several countries. The magnitude of the effects varies across countries, and there is no evidence pointing to a direct and close relationship between budgetary and current account balances.
    Keywords: budget balance; external balance; EU; panel cointegration.
    JEL: C23 E62 F32 H62
    Date: 2008–10
  18. By: Domenica Tropeano (University of Macerata)
    Abstract: <div style="line-height: normal"><span style="color: #231f20"><div style="line-height: normal"><span style="color: #231f20">The paper examines some trends in the distribution of income that have prevailed in thelast two decades, in particular the opposite tendencies to a fall in the wage share and an increase in the profit and rent share. Moreover both profit rates and real interest rates have increased in OECD countries. Some theoretical models are examined to see whether they may explain those tendencies. The focus is on models in the Keynesian-Kaleckian tradition. In those models it is possible, for some combinations of parameters, that an increase in real interest rates may lead to an increase in profit rates. Unfortunately, however, those values of parameters which would be required and which correspond to assumptions on the   behaviour of agents, do not reflect historical values. Thus, though Kaleckian-Keynesian models may offer an explanation of these trends, this explanation does not seem to apply   to the recent history of OECD countries. Another strand of literature is also examined which goes back to Sraffa and the monetary theory of distribution. The two approaches are compared. The paper also looks for the possibility of a synthesis.</span></div></span></div>
    Keywords: rate of profit,Distribution theory,Monetary theory
    JEL: O1 O11
    Date: 2006–10
  19. By: Nilss Olekalns; Kalvinder Shields
    Abstract: A canonical model is described which reflects the real time informational context of decision-making. Comparisons are drawn with ‘conventional’ models that incorrectly omit market-informed insights on future macroeconomic conditions and inappropriately incorporate information that was not available at the time. It is argued that conventional models are misspecified and misinterpret news. However, neither diagnostic tests applied to the conventional models nor typical impulse response analysis will be able to expose these deficiencies clearly. This is demonstrated through an analysis of quarterly US data 1968q4-2006q1. However, estimated real time models considerably improve out-of-sample forecasting performance, provide more accurate ‘nowcasts’ of the current state of the macroeconomy and provide more timely indicators of the business cycle. The point is illustrated through an analysis of the US recessions of 1990q3—1991q2 and 2001q1—2001q4
    Keywords: Structural Modelling; Real Time Data; Nowcasting; Business Cycles
    JEL: E52 E58
    Date: 2008
  20. By: Mustafa Caglayan; Jing Di (Department of Economics, The University of Sheffield)
    Abstract: This paper investigates empirically the effect of real exchange rate volatility on sectoral bilateral trade flows between the US and her top thirteen trading countries. Our investigation also considers those effects on trade flows which may arise through changes in income volatility and the interaction between income and exchange rate volatilities. We provide evidence that exchange rate volatility mainly affects sectoral trade flows of developing but not that of developed countries. We also find that the effect of the interaction term on trade flows is opposite that of exchange rate volatility yet there is little impact arising from income volatility.
    Keywords: exchange rates, volatility, trade flows.
    JEL: F17 F31 C22
    Date: 2008–09
  21. By: Elisabetta Michetti, (University of Macerata); Domenica Tropeano, (University of Macerata)
    Abstract: <div style="line-height: normal"><span style="font-size: 9.5pt"><div style="line-height: normal"><span style="font-size: 9.5pt">In this work we are going to deal with the issue of the distribution of income in an</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">open economy within a simplified macroeconomic model with constant prices. This type</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">of model could apply to middle-income developing countries, which have succeeded in</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">fighting inflation through a policy of high interest rates. It will be assumed that the</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">implicit target of monetary policy now becomes the exchange rate and interest rates are</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">set at a high level to lower the exchange rate (defined as the price of the foreign currency</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">in terms of the domestic one). Even if this strategy may work it may produce negative</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">effects on output growth and the distribution of income. The lowering of the exchange</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">rate target would have the following effects on distribution. It would cause a reduction</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">in the growth of output, it would lower the wage rate. Domestically-produced income</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">distributed abroad should increase instead. The domestic interest rate would rise only for</span></div><div style="line-height: normal"><span style="font-size: 9.5pt">suitable small values of the parameter, which links imports to income. The effect on the</span></div><div><span style="font-size: 9.5pt; line-height: 115%">profit share is indeed uncertain.</span></div></span></div>
    Keywords: Exchange rate target,Administrative incentive pricing,Income distribution
    JEL: O1 O11
    Date: 2008–10
  22. By: Christian Gianella; Isabell Koske; Elena Rusticelli; Olivier Chatal
    Abstract: This paper analyses the determinants of structural unemployment rates in a two-stage approach. First, time-varying NAIRUs are estimated for a panel of OECD economies on the basis of Phillips curve equations using Kalman filter techniques. In a second stage, the estimated NAIRUs are regressed on selected policy and institutional variables. As predicted by theoretical wage-setting/price-setting models, the level of the tax wedge and the user cost of capital are found to be important drivers of structural unemployment. Consistent with earlier studies, the level of product market regulation, union density and the unemployment benefit replacement rate also play an important role in explaining changes in the NAIRU although there is considerable variation in estimates across countries. Nonetheless, the set of structural variables provides a reasonable explanation of NAIRU dynamics over the period 1978-2003, even though recent decreases are better explained than the earlier surge. <P>Quels déterminants du NAIRU ? Évidence empirique à partir d’un panel de pays de l’OCDE <BR>Cette étude analyse les déterminants du taux de chômage structurel par une approche en deux étapes. Premièrement, des taux de chômage non inflationnistes (NAIRU) variables au cours du temps sont estimés sur la base de courbes de Phillips en utilisant les techniques de type filtre de Kalman. Dans une seconde étape, les NAIRUs estimés sont régressés sur une sélection de variables institutionnelles et de politique économique. Conformément aux prédictions théoriques de modèles de type WS PS «wage-setting/pricesetting », le niveau du coin fiscal et le coût d’usage du capital et apparaissent comme des déterminants-clés du chômage structurel. Conformément aux études précédentes, le niveau de réglementation sur le marché de biens, l’implantation syndicale et le taux de remplacement des allocations chômage jouent également un rôle important dans l’explication des variations du NAIRU bien qu'il y ait des différences considérables d’un pays à l’autre dans les résultats. Néanmoins, cet ensemble de variables structurelles s’avèrent avoir une capacité prédictive de la dynamique du NAIRU relativement élevée sur la période 1978-2003, même si la phase récente de reflux est mieux expliquée que la hausse préalable.
    Keywords: unemployment, chômage, NAIRU, Phillips curve, institutions, policy rules, courbe de Phillips, user cost, coût d'usage, réformes économiques
    JEL: C13 C22 E24 E31 J38 J58 J68
    Date: 2008–11–10
  23. By: Ronald Schettkat (Department of Economics University of Wuppertal); Rongrong Sun (Department of Economics University of Wuppertal)
    Abstract: In the long history of rising and persistent unemployment in Europe almost all institutions - employment protection legislation, unions, wages, wage structure, unemployment insurance, etc. - have been alleged and found guilty to have caused this tragic development at some point in time. Later, welfare state institutions in interaction with external shocks were identified as more plausible causes for rising equilibrium unemployment in Europe. Monetary policy has managed to be regarded as innocent. Based on the assertion of the neutrality of money in the medium and long run, the search for causes of European unemployment has shied away from the policy of central banks. But actually the institutional setup regarding monetary policy is very different between the FED and the Bundesbank (ECB). We argue that the interaction of negative external shocks and tight monetary policies may have been the major - although probably not the only - cause of unemployment in Europe remaining at ever higher levels after each recession. We identify the monetary policy of the Bundesbank as asymmetrical in the sense that the Bank did not actively fight against recessions, but that it dampened recovery periods. Less constraint on growth would have kept German unemployment at lower levels.
    Keywords: Production, Employment, Unemployment, Monetary Policy, Central Banks and Their Policies
    JEL: E23 E24 E42 E43 E52 E58
    Date: 2008–10
  24. By: Kathlyn Lucia; Stephanie Price; Edwin Wong; Richard Startz
    Abstract: The term structures of Canada and of the United States, two countries with historically close economic ties, have been closely linked. We investigate the link between Canadian and U.S. yield curves and show previously strong correlations between yield curve components dissipate after Canadian monetary policy reforms in the early 1990s. First, the effect is particularly evident in the diminished cross-country correlations of the short term bond yields. Secondly, cross-country yields are cointegrated before the reforms, but not afterwards. Lastly, the results on the term structure are shown using a vector autoregression with an endogenously determined break date for Canadian and U.S. estimates of the three-factor Nelson-Siegel (1987) yield curve model.
    Date: 2008–05
  25. By: Anna Maria Agresti (International Financial Corporation, World Bank Group, 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA.); Patrizia Baudino (Financial Stability Forum, Bank for International Settlements, Basel, Switzerland.); Paolo Poloni (European Central Bank, Directorate General Statistics, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In January 2007 the International Monetary Fund (IMF) published, on an ad hoc basis, a series of financial soundness indicators (FSIs) based on a common methodology (the IMF compilation Guide) for 62 countries, including all 27 European Union countries. The European Central Bank (ECB), jointly with the Banking Supervision Committee (BSC), has an interest in monitoring the development of this IMF initiative in the context of its own work on compiling macro-prudential indicators (MPIs). The aim of this paper is to identify the main similarities and differences between the FSIs and the MPIs for national banking sectors, as the overlap between MPIs and FSIs in this sub-set is greatest. As a result of the recently issued amendments to the IMF compilation Guide for FSIs, some key methodological differences between the two approaches have been eliminated and it is therefore expected that the figures published by the two institutions will soon converge. The paper concludes with an investigation of the few other areas where the remaining differences could potentially be narrowed. JEL Classification: C82, G20, G21, G28, G32
    Keywords: Macro-prudential indicators (MPIs), financial soundness indicators (FSIs), financial stability statistics
    Date: 2008–11
  26. By: Arnaud Mehl (European Central Bank); Julien Reynaud (European Central Bank et Centre d'Economie de la Sorbonne)
    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.
    JEL: F34 F41 G15
    Date: 2008–10
  27. By: Iuliana Matei (Centre d'Economie de la Sorbonne)
    Abstract: This article studies the features of co-movements of prices and production between six CEECs recently joined the EU and the euro zone. More precisely, based partially on the methodology suggested by Alesina, Barro and Tenreyro [2002], we evaluate the size and the persistence of prices and outputs shocks between each CEECs and euro zone. Results will contribute to the debate around the participation of the new members to the EMU.
    Keywords: European monetary integration, co-movements, AR models, CEECs.
    JEL: C22 E30 F33 F42 F47
    Date: 2008–10
  28. By: Jan van Heerden (Department of Economics, University of Pretoria); James Blignaut (Department of Economics and Econometrics, University of Johannesburg); Andre Jordaan (Department of Economics, University of Pretoria)
    Abstract: The paper uses a static Computable General Equilibrium (CGE) model of South Africa and simulates various shocks to the price of electricity. We attempt di¤erent closures to the model and compare their respective e¤ects on the Consumer Price Index. In a CGE model, this is measuring the real appreciation of the exchange rate, or international trade competitiveness. In general, we conclude that electricity prices per se does not signi?cantly in?uence the real exchange rate, regardless of which closure is used.
    JEL: D5 E3 H2
    Date: 2008–11
  29. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: We study the effects of U.S. monetary policy and macroeconomic announcements on Argentine money, stock and foreign exchange markets’ returns and volatility over the period 1998 to 2006 using a GARCH model. Firstly, we show that both types of news have a significant impact on all markets. Secondly, we conclude that the Argentine markets have become less dependent on U.S. news after the abandonment of the currency board. Thirdly, we find that U.S. dollar-denominated assets react less to news which suggests that the currency board was not completely credible. Fourthly, we discover that financial markets react stronger during the financial crisis. Fifthly, in the case of peso-denominated assets, U.S. central bank communication helps to reduce money market volatility during the financial crisis in Argentina.
    Keywords: Argentina, Financial Markets, U.S. Monetary Policy, Federal Reserve Bank, Central Bank Communication, Macroeconomic Announcements
    JEL: E52 F33 G14 G15
    Date: 2008
  30. By: Simeon Coleman
    Abstract: In sub-Saharan Africa, where inflation persistence is likely to have deleterious welfare consequences, little attempt has been made to study this phenomenon. Using data over 1989:11-2002:09, this paper investigates persistence in disaggre- gated (food and non-food) inflation for thirteen Communaute Financiere Africaine (CFA) member states using fractional integration (FI) methods. The results show that both inflation series are characterized by mean-reversion and finite variance, however it also exposes some asymmetry in inflation persistence across member states in both sectors. In Chad and Niger, the phenomenon is found to exist in both sectors. With uniform monetary policy across member states, implications for Monetary Policy, Nominal Convergence and Optimal Currency Area are then discussed.
    Keywords: Fractional integration, inflation persistence, Franc Zone
    JEL: C22 E31 E32
    Date: 2008–11
  31. By: Louis, Rosmy; Osman, Mohammad; Balli, FAruk
    Abstract: This paper empirically estimates the responses of inflation and non-oil output growth from Arab Gulf Cooperation Council (AGCC) Countries to monetary policy shocks from the United States (US) in order to determine whether there is evidence to support the US dollar as the anchor for the proposed unified currency. For this, a structural vector autoregression identified with short-run restrictions was employed for each country with fund rate as US monetary policy instrument, non-oil output growth, and inflation. The main results that are of interest to decision makers suggest that (i) with respect to inflation, AGCC countries show synchronized responses to monetary policy shocks from the US and these responses are similar to US own inflation; (ii) with respect to non-oil output growth, there is no clear indication that US monetary policy can do as good of a job for AGCC countries as it has done at home. Therefore, importing monetary policy from the United States via a dollar peg may guarantee stable inflation for AGCC countries but not necessarily stable non-oil output growth. To the extent that the non-oil output response is taken seriously and there are concerns over the dollar's ability to perform its role as a store of value, a basket peg with both the US dollar and the Euro may be a sound alternative as confirmed by the variance decomposition analysis of our augmented SVAR with a proxy for the European short-term interest rate.
    Keywords: AGCC Countries; US monetary policy shock; monetary union; currency peg; SVARs
    JEL: C32 F15 E52
    Date: 2007–12
  32. By: Louis, Rosmy; Balli, Faruk; Osman, Mohammad
    Abstract: AGCC countries' output is heavily dichotomized into oil and non-oil. The oil shocks have similar effects on all member countries but little is known about their responses to non-oil shocks. This paper sets out to determine whether (1) aggregate demand (AD) and non-oil supply shocks (AS) are symmetrical across these countries to justify their suitability for monetary union; and (2) whether there is any commonality of shocks with the United States and the three major European countries, namely France, Germany, and Italy, which can warrant the choice of either the US dollar or the Euro as the anchor for the expected common currency of the bloc. We use bivariate structural vector autoregression models identified with long-run restrictions a la Blanchard and Quah (1989) to extract the shocks. Our results show that (a) AD shocks are unequivocally symmetrical but non-oil AS shocks are weakly symmetrical across AGCC countries thereby giving a green light for monetary union; (b) neither AD nor AS shocks are symmetrical between AGCC countries and the selected European countries; (c) AGCC's AD shocks are symmetrical with the US but non-oil AS shock are not. We therefore surmise that the US dollar is a far better candidate for the new currency than the Euro since US monetary policy can at least help smooth demand shocks in AGCC countries. Our results hold even when we consider the AGCC countries as a bloc. This paper makes a valuable contribution to AGCC decision makers who have been wrestling with the dilemma of whether to revalue or to depeg their actual currencies.
    Keywords: AGCC; monetary union; shocks symmetry; currency anchor
    JEL: E32 F33 F36
    Date: 2008–07–04

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