nep-cba New Economics Papers
on Central Banking
Issue of 2008‒12‒01
thirty-one papers chosen by
Alexander Mihailov
University of Reading

  1. Making Monetary Policy by Committee By Alan S. Blinder
  2. Talking about Monetary Policy: The Virtues (and Vices?) of Central Bank Communication By Alan S. Blinder
  3. Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence By Alan S. Blinder; Michael Ehrmann; Marcel Fratzscher; Jakob De Haan; David-Jan Jansen
  4. Writing Clearly: ECB’s Monetary Policy Communication By Martin Cihák; Katerina Smídková; Ales Bulir
  5. On implications of micro price data for macro models. By Bartosz Maćkowiak; Frank Smets
  6. Does Global Slack Matter More than Domestic Slack in Determining U.S. Inflation? By Fabio Milani
  7. National Time Accounting: The Currency of Life By Alan B. Krueger; Daniel Kahneman; David Schkade; Norbert Schwarz; Arthur A. Stone
  8. Optimal monetary policy and the transmission of oil-supply shocks to the euro area under rational expectations. By Stéphane Adjemian; Matthieu Darracq Pariès
  9. Optimal monetary policy in a new Keynesian model with habits in consumption By Campbell Leith; Ioana Moldovan; Raffaele Rossi
  10. McCallum rule and Chinese monetary policy By Mehrotra, Aaron; Koivu, Tuuli; Nuutilainen, Riikka
  11. The NAICU and the Phillips curve – An Approach Based on Micro Data By Eva Köberl; Sarah M. Lein
  12. Large Bayesian VARs. By Marta Bańbura; Domenico Giannone; Lucrezia Reichlin
  13. Optimizing Time-series Forecasts for Inflation and Interest Rates Using Simulation and Model Averaging By Jumah, Adusei; Kunst, Robert M.
  14. "Macroeconomic Implications of Term Structures of Interest Rates under Stochastic Differential Utility with Non-Unitary IES" By Hisasi Nakamura; Wataru Nozawa; Akihiko Takahashi
  15. Régimes de politique monétaire et effet de variété By Stéphane Auray; Aurélien Eyquem; Jean-Christophe Poutineau
  16. Globalization and Business Cycle Transmission By Michael Artis; Toshihiro Okubo
  17. Public and private sector wages - co-movement and causality. By Ana Lamo; Javier J. Pérez; Ludger Schuknecht
  18. Trade Effects of Currency Unions: Do Economic Dissimilarities Matter? By Giorgia Albertin
  19. The political economy under monetary union - has the euro made a difference? By Marcel Fratzscher; Livio Stracca
  20. Modelling and measuring volatility By Ole E. Barndorff-Nielsen; Neil Shephard
  21. Budgetary and external imbalances relationship - a panel data diagnostic. By António Afonso; Christophe Rault
  22. Money Illusion and Nominal Inertia in Experimental Asset Markets By Charles N. Noussair; Gregers Richter; Jean-Robert Tyran
  23. Fiscal Federalism in the UK By Bell, David
  24. Economic Integration and Macroeconomic Convergence in the Euro Area By Dino Martellato
  25. The Resource Boom: Impacts on Provincial Purchasing Power By Macdonald, Ryan
  26. Interest Rate Elasticity of Residential Housing Prices By Martin Cihák; Plamen Iossifov; Amar Shanghavi
  27. Fiscal Policy and Economic Cycles in Oil-Exporting Countries By Kamilya Tazhibayeva; Anna Ter-Martirosyan; Aasim M. Husain
  28. Oil exporters - in search of an external anchor. By Maurizio Michael Habib; Jan Stráský
  29. Strain and Inflation-Unemployment Relationship in Transitional Economies: A theoretical and empirical investigation By Albu, Lucian Liviu
  30. Policy Responses to Sudden Stops in Capital Flows: The Case of Chile in 1998 By Rodrigo O. Valdes
  31. Perspectives on High Real Interest Rates in Turkey By Prakash Kannan

  1. By: Alan S. Blinder (Princeton University)
    Abstract: I was Vice Chairman of the Federal Reserve Board while I was preparing my Marshall Lectures for delivery at Cambridge in 1995. So I asked the Board staff to research what had been written about making monetary policy by committees—as opposed to by individuals. Although they were (and remain) a knowledgeable and thorough bunch, they unearthed almost nothing. So when I delivered the Robbins Lectures at the London School of Economics the following year,1 this is what I concluded on the subject: My own hunch is that, on balance, the additional monetary policy inertia imparted by group decisionmaking provides a net benefit to society… But my main point is simpler: My experience as a member of the FOMC left me with a strong feeling that the theoretical fiction that monetary policy is made by a single individual maximizing a well-defined preference function misses something important. In my view, monetary theorists should start paying some attention to the nature of decisionmaking by committee, which is rarely mentioned in the academic literature. (Blinder (1998), p. 22) I made reference in that lecture to only one paper on the subject, Faust’s (1996) clever model of the seemingly-odd construction of the FOMC, though I should have cited Waller’s (1992) earlier work as well. (Mea culpa.) My point is that, up to then, there had been hardly any research on committee decisionmaking. Fortunately, that is no longer the case. By the time of my three Okun lectures at Yale in 2002 (Blinder (2004)), the subject merited a whole lecture, including references to about ten papers on the subject—and I missed some. (Mea culpa again.) The literature has continued to grow since then, including seven papers at a Netherlands Central Bank conference in 2005 and eleven papers at a Bank of Norway conference last year. The study of central banking by committee thus appears to be a growth industry, albeit a small one.
    Date: 2008–06
  2. By: Alan S. Blinder (Princeton University)
    Abstract: Central banks, which used to be so secretive, are communicating more and more these days about their monetary policy. This development has proceeded hand in glove with a burgeoning new scholarly literature on the subject. The empirical evidence, reviewed selectively here, suggests that communication can move financial markets, enhance the predictability of monetary policy decisions, and perhaps even help central banks achieve their goals. A number of theoretical drawbacks to greater communication are also reviewed here. None seems very important in practice. That said, no consensus has yet emerged regarding what constitutes “optimal” communication strategy—either in quantity or nature.
    Date: 2008–05
  3. By: Alan S. Blinder (Princeton University); Michael Ehrmann (European Central Bank); Marcel Fratzscher (European Central Bank); Jakob De Haan (University of Groningen and CESifo); David-Jan Jansen (De Nederlandsche Bank)
    Abstract: Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication—mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank’s toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks’ macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy.
    Date: 2008–03
  4. By: Martin Cihák; Katerina Smídková; Ales Bulir
    Abstract: The paper presents a methodology for measuring the clarity of central bank communication, illustrating it with the case of the European Central Bank (ECB) in 1999-2007. The analysis identifies the ECB's written communication as clear about 95 percent of instances, which is comparable to, or even better than, other central banks for which a similar analysis is available. We also find that the additional information contained in the ECB's Monthly Bulletins helps to improve communication clarity compared to ECB's press releases. In particular, the Bulletins contain useful clarifying information on individual inflation factors and the overall forecast risk; in contrast, the bulletin's communication on monetary shocks has a negative, albeit small, impact on clarity.
    Keywords: European Central Bank , Monetary policy , Central bank policy , External shocks ,
    Date: 2008–10–28
  5. By: Bartosz Maćkowiak (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We review the recent literature that studies new, detailed micro data on prices. We discuss implications of the new micro data for macro models. We argue that the new micro data are helpful for macro models, but not decisive. There is no simple mapping from the frequency of price changes in micro data to impulse responses of prices and quantities to shocks. We discuss ideas that promise to deliver macro models matching the impulse responses seen in macro data while being broadly in line with micro data. JEL Classification: E3, E5.
    Keywords: sticky prices, micro price data, models of price setting, real effects of nominal shocks.
    Date: 2008–11
  6. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper employs a structural model to estimate whether global output gap has become an important determinant of U.S. inflation dynamics. The results provide support for the relevance of global slack as a determinant of U.S. inflation after 1985. The role of domestic output gap, instead, seems to have diminished over time.
    Keywords: Globalization; Global Slack; Inflation Dynamics; Phillips Curve; Bayesian Estimation
    JEL: E31 E50 E52 E58 F41
    Date: 2008–11
  7. By: Alan B. Krueger (Princeton University and NBER); Daniel Kahneman (Princeton University); David Schkade (University of California, San Diego); Norbert Schwarz (University of Michigan); Arthur A. Stone (Stony Brook University)
    Abstract: This monograph proposes a new approach for measuring features of society’s subjective well-being, based on time allocation and affective experience. We call this approach National Time Accounting (NTA). National Time Accounting is a set of methods for measuring, comparing and analyzing how people spend and experience their time -- across countries, over historical time, or between groups of people within a country at a given time. The approach is based on evaluated time use, or the flow of emotional experience during daily activities. After reviewing evidence on the validity of subjective well-being measures, we present and evaluate diary-based survey techniques designed to measure individuals’ emotional experiences and time use. We illustrate NTA with: (1) a new cross-sectional survey on time use and emotional experience for a representative sample of 4,000 Americans; (2) historical data on the amount of time devoted to various activities in the United States since 1965; and (3) a comparison of time use and wellbeing in the United States and France. In our applications, we focus mainly on the Uindex, a measure of the percentage of time that people spend in an unpleasant state, defined as an instance in which the most intense emotion is a negative one. The U-index helps to overcome some of the limitations of interpersonal comparisons of subjective well-being. National Time Accounting strikes us as a fertile area for future research because of advances in subjective measurement and because time use data are now regularly collected in many countries.
    Date: 2008–03
  8. By: Stéphane Adjemian (Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper presents first the estimation of a two-country DSGE model for the euro area and the rest-of-the-world including relevant oil-price channels. We then investigate the optimal resolution of the policy tradeoffs emanating from oil-price disturbances. Our simulations show that the inflationary forces related to the use of oil as an intermediate good seem to require specific policy actions in the optimal allocation. However, the direct effects of oil prices should be allowed to exert their mechanical influence on CPI inflation and wage dynamics through the indexation schemes. We also illustrate that any fine-tuning strategy which tries to counteract the direct effects of oil-price changes in headline inflation would prove counter-productive both in terms to stabilization of underlying inflation and by causing unnecessary volatility in the macroeconomic landscape. Finally, it appears that perfect foresight on future oil price developments allows a more rapid absorption of the steady state decline in purchasing power and real national income in the optimal allocation. Through the various expectation channels, economic agents facilitate the necessary adjustments and optimal monetary policy can still tolerate the direct effects of oil price changes on CPI inflation as well as some degree of underlying inflationary pressures in the view of easing partly the burden of downward real wage shifts. Our monetary policy prescriptions have been derived in a modeling framework where oil-price fluctuations are essentially exogenous to policy actions and where expectations are formed under the rational expectations paradigm. Notably, the extension of such conclusions to imperfect knowledge and weak central bank credibility configurations remain challenging fields for further research. JEL Classification: E4, E5, F4.
    Keywords: Oil prices, Optimal monetary policy, New open economy macroeconomics, Bayesian estimation.
    Date: 2008–11
  9. By: Campbell Leith; Ioana Moldovan; Raffaele Rossi
    Abstract: While consumption habits have been utilised as a means of generating a humpshaped output response to monetary policy shocks in sticky-price New Keynesian economies, there is relatively little analysis of the impact of habits (particularly, external habits) on optimal policy. In this paper we consider the implications of external habits for optimal monetary policy, when those habits either exist at the level of the aggregate basket of consumption goods (‘superficial’ habits) or at the level of individual goods (‘deep’ habits: see Ravn, Schmitt-Grohe, and Uribe (2006)). External habits generate an additional distortion in the economy, which implies that the flex-price equilibrium will no longer be efficient and that policy faces interesting new trade-offs and potential stabilisation biases. Furthermore, the endogenous mark-up behaviour, which emerges when habits are deep, can also significantly affect the optimal policy response to shocks, as well as dramatically affecting the stabilising properties of standard simple rules.
    Keywords: consumption habits, nominal inertia, optimal monetary policy
    JEL: E30 E61
    Date: 2008–11
  10. By: Mehrotra, Aaron (BOFIT); Koivu, Tuuli (BOFIT); Nuutilainen, Riikka (BOFIT)
    Abstract: This paper evaluates the usefulness of a McCallum monetary policy rule based on money supply for maintaining price stability in mainland China. We examine whether excess money relative to rulebased values provides information that improves the forecasting of price developments. The results suggest that our monetary variable helps in predicting both consumer and corporate goods price inflation, but the results for consumer prices depend on the forecasting period. Nevertheless, growth of the Chinese monetary base has tracked the McCallum rule quite closely. Moreover, results using a structural vector autoregression suggest that our measure of excess money supply could be used to identify monetary policy shocks in the Chinese economy.
    Keywords: McCallum rule; monetary policy; China
    JEL: E31 E52
    Date: 2008–11–21
  11. By: Eva Köberl (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sarah M. Lein (Swiss National Bank, Zurich, Switzerland)
    Abstract: In this paper we propose a straightforward method to derive a non-accelerating inflation capacity utilisation rate (NAICU) based on micro data. We condition the current capacity utilisation of firms on their current and planned price adjustments. The non-accelerating inflation capacity utilisation rate is then defined as the rate where a firm feels no price adjustment pressure. One of the main advantages is that this methodology uses structural aspects and does not make it necessary to operate with –often rather arbitrary– statistical filters. We show that our aggregate NAICU performs remarkably well as an indicator of inflationary pressure in a Phillips curve estimation.
    Keywords: prices, capacity utilisation, NAICU, Phillips curve
    JEL: E31 E32 E52
    Date: 2008–11
  12. By: Marta Bańbura (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Domenico Giannone (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (London Business School, Regents Park, London NW1 4SA, United Kingdom.)
    Abstract: This paper shows that Vector Autoregression with Bayesian shrinkage is an appropriate tool for large dynamic models. We build on the results by De Mol, Giannone, and Reichlin (2008) and show that, when the degree of shrinkage is set in relation to the cross-sectional dimension, the forecasting performance of small monetary VARs can be improved by adding additional macroeconomic variables and sectoral information. In addition, we show that large VARs with shrinkage produce credible impulse responses and are suitable for structural analysis. JEL Classification: C11, C13, C33, C53.
    Keywords: Bayesian VAR, Forecasting, Monetary VAR, large cross-sections.
    Date: 2008–11
  13. By: Jumah, Adusei (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria); Kunst, Robert M. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria)
    Abstract: Motivated by economic-theory concepts—the Fisher hypothesis and the theory of the term structure—we consider a small set of simple bivariate closed-loop time-series models for the prediction of price inflation and of long- and short-term interest rates. The set includes vector autoregressions (VAR) in levels and in differences, a cointegrated VAR, and a non-linear VAR with threshold cointegration based on data from Germany, Japan, UK, and the U.S. Following a traditional comparative evaluation of predictive accuracy, we subject all structures to a mutual validation using parametric bootstrapping. Ultimately, we utilize the recently developed technique of Mallows model averaging to explore the potential of improving upon the predictions through combinations. While the simulations confirm the traded wisdom that VARs in differences optimize one-step prediction and that error correction helps at larger horizons, the model-averaging experiments point at problems in allotting an adequate penalty for the complexity of candidate models.
    Keywords: Threshold cointegration, Parametric bootstrap, Model averaging
    JEL: C32 C52 E43 E47
    Date: 2008–11
  14. By: Hisasi Nakamura (Faculty of Economics, University of Tokyo); Wataru Nozawa (Graduate School of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: This paper proposes a continuous-time term-structure model under stochastic differential utility with non-unitary intertemporal elasticity of substitution (IES, henceforth) in a representative-agent endowment economy with mean-reverting expectations on real output growth and ination. Using this model, we make clear structural relationships among a term structure of real and nominal interest rates, utility form and underlying economic factors, in particular, ination expectation. Specifically, we show that, if (1) the IES is less than one, (2) the agent is comparatively more risk-averse relative to time-separable utility, (3) short-term interest rates are pro-cyclical, and (4) the rate of expected ination is negatively correlated with the rate of real output growth and its expected rate, then a nominal yield curve can have a low instantaneous riskless rate and an upward slope.
    Date: 2008–11
  15. 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); Jean-Christophe Poutineau (CREM, UMR 6211, Université de Rennes 1 and Ecole Normale Supérieure de Cachan, France)
    Abstract: Cet article propose une extension du cadre de travail théorique proposée par Bilbiie, Ghironi et Melitz [2007] en économie ouverte afin d'étudier les effets de la politique monétaire sur marges intensives et extensives sur l'activité économique. Deux régimes de politique monétaire sont envisagés : un régime de politiques monétaires conduites de maniµere indépendante et un régime d'union monétaire. En cas de choc de productivité, on montre que le régime d'union monétaire amplifiée la création de nouvelles activités dans le pays ou la région qui bénéficie du choc et exerce un effet dépressif sur la création de nouvelles activités dans l'autre pays ou région, alors que les créations de nouvelles activités ne sont affectées ni dans le régime de politiques monétaires indépendantes, ni dans le cas où les prix sont flexibles. Par conséquent, le régime d'union monétaire est relativement ine±cace en comparaison du régime de politiques monétaires indépendantes lorsque les chocs sont asymétriques et les prix rigides.
    Keywords: union monétaire, règles de politique monétaire, marges intensive et extensives
    JEL: E51 E58 F36 F41
    Date: 2008
  16. By: Michael Artis (Institute for Political and Economic Governance, Manchester University); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: The paper uses long-run GDP data for developed countries drawn from Maddison (2003) to generate deviation cycles for the period from 1870 to 2001. The cyclical deviates are examined for their bilateral cross-correlation values in three separate periods, those of the first globalization wave (1870 to 1914), the period of the“bloc economyâ€(1915 to 1959) and for the period of the second globalization (1960-2001). Cluster analysis is applied and the McNemar test is used to test for the relative coherence of alternative groupings of countries in the three periods. The bloc economy period emerges as one that features some well-defined sub-global clusters, where the second globalization period does not, the first globalization period lying between the two in this respect. The second globalization period shows a generally higher level of cross correlations and a lower variance than the other two periods. The features uncovered suggest that the second globalization period is indeed one that comprises a more inclusive world economy than ever before.
    Keywords: Globalization, Bloc economy, Business cycle, Cluster analysis, McNemar test
    JEL: F02 F15 F41 N10 E32
    Date: 2008–10
  17. By: Ana Lamo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Javier J. Pérez (Banco de España, Alcalá 50, E-28014 Madrid, Spain.); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper looks at public and private sector wages interactions since the 1960s in the euro area, euro area countries and a number of other OECD countries. The paper reports, first, a strong positive annual contemporaneous correlation of public and private sector wages over the business cycle; this finding is robust across methods and measures of wages and quite general across countries. Second, we show evidence of long-run relationships between public and private sector wages in all countries. Finally, causality analysis suggests that feedback effects between private and public wages occur in a direct manner and, importantly also via prices. While influences from the private sector appear on the whole to be stronger, there are direct and indirect feedback effects from public wage setting in a number of countries as well. We show how country-specific institutional features of labour and product markets contain helpful information to explain the heterogeneity across countries of our results on public/private wage leadership. JEL Classification: C32, J30, J51, J52, E62, E63, H50.
    Keywords: government wages, private sector wages, causality, co-movement.
    Date: 2008–11
  18. By: Giorgia Albertin
    Abstract: This paper provides a general equilibrium analysis of the trade effects of the formation of a currency union, and of its subsequent enlargement to include an economically dissimilar country. Furthermore, it investigates how economic dissimilarities among countries affect the magnitude of the trade effects fostered by a common currency. We show that sharing a common currency enhances the volume of bilateral trade among countries. However, the more economically dissimilar is an accession country, compared to the original members of a currency union, the smaller are the gains in trade that would follow the enlargement of a currency union.
    Keywords: Monetary unions , Trade integration , International trade , Trade models ,
    Date: 2008–10–28
  19. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Economic and Monetary Union (EMU) has transformed Europe and has created an integrated pan-European economy. Much research has focused on understanding this integration process and what benefits and costs it entails. This paper identifies a political economy channel of EMU as the monetary union implies that member states had to transfer or at least curtail their policy autonomy in several areas, such as monetary policy and fiscal policy. The paper shows that EMU has helped reduce the impact of political shocks on the domestic economy of member states but magnified the transmission of political shocks within the euro area. Equally importantly, economies with a weaker track record in terms of economic and institutional quality exhibited a significantly higher sensitivity to domestic political shocks before EMU, but not thereafter. While this may entail that EMU has brought benefits to countries with a weaker economic and institutional stability by insulating them from adverse political developments at home, a potential drawback is that it may provide weaker market discipline for domestic political stability. JEL Classification: F31; F33; G14.
    Keywords: EMU, political economy, political news, monetary policy, fiscal policy, stock markets, transmission.
    Date: 2008–11
  20. By: Ole E. Barndorff-Nielsen; Neil Shephard
    Keywords: Levy process, realised volatility, realised kernel, stochastic volatility
    JEL: C01 C14 C32
    Date: 2008
  21. By: António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christophe Rault (Université d’Orléans, LEO, CNRS, UMR 6221, Rue de Blois-B.P.6739, 45067 Orléans Cedex 2, France.)
    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. JEL Classification: C23, E62, F32, H62.
    Keywords: budget balance, external balance, EU, panel cointegration.
    Date: 2008–11
  22. By: Charles N. Noussair (Tilburg University); Gregers Richter (Sydbank, Schweiz); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: We test whether large but purely nominal shocks affect real asset market prices. We subject a laboratory asset market to an exogenous shock, which either inflates or deflates the nominal fundamental value of the asset, while holding the real fundamental value constant. After an inflationary shock, nominal prices adjust upward rapidly and we observe no real effects. However, after a deflationary shock, nominal prices display considerable inertia and real prices adjust only slowly and incompletely toward the levels that would prevail in the absence of a shock. Thus, an asymmetry is observed in the price response to inflationary and deflationary nominal shocks.
    Keywords: money illusion; nominal inertia; asset market bubble; nominal loss aversion; laboratory experiment
    JEL: C9 E40
    Date: 2008–11
  23. By: Bell, David
    Date: 2008–08
  24. By: Dino Martellato (University Of Venice Cà Foscari)
    Abstract: In this paper I discuss various notions and aspects of integration and macroeconomic convergence, namely economic and monetary integration; real and nominal convergence. The EU has offered a great deal of information about the relation between all these types of integration and macroeconomic convergence. The EU has assumed that monetary integration is a precondition of deep economic integration and it has also assumed that the criteria to be adopted to converge to its own brand of economic and monetary union (EMU) are basically the same needed within the monetary union itself. Judging from the evidence of the first ten years of EMU, the actual relationship between real growth and inflation has turned out to be far from clear; and the paper provides a comparison between statistical evidence and the diverging predictions offered by two standard macroeconomic models.
    Keywords: Inflation, stability, euro zone
    JEL: E12 E41 E52 E63
    Date: 2008
  25. By: Macdonald, Ryan
    Abstract: The present study illustrates the differential impact on regional economies of relative price changes stemming from commodity price movements, exchange rate changes and changes in international manufactured goods prices. It focuses on Canadian provinces, which are a large, geographically distributed federation of regional economies with widely differing economic bases. In this regard, the study illuminates an important method for examining regional economic performance that is particularly well suited to federations such as Russia or the European Monetary Union, or to large countries such as the United States.
    Keywords: International trade, Economic accounts, Gross domestic product
    Date: 2008–11–18
  26. By: Martin Cihák; Plamen Iossifov; Amar Shanghavi
    Abstract: We examine the interest rate elasticity of housing prices, advancingthe empirical literature in two directions. First, we take a commonly used cross-country panel dataset and evaluate the housing price equation using a consistent estimator in the presence of endogenous explanatory variables and a lagged dependent variable. Second, we carry-out a novel analysis of determinants of residential housing prices in a cross-section of countries. Our results show that the short-term interest rate, and hence monetary policy, has a sizable impact on residential housing prices.
    Keywords: Housing prices , Real estate prices , Interest rate policy , Economic models ,
    Date: 2008–10–21
  27. By: Kamilya Tazhibayeva; Anna Ter-Martirosyan; Aasim M. Husain
    Abstract: This paper empirically assesses the impact of oil price shocks on the underlying non-oil economic cycle in oil-exporting countries. Panel VAR analysis and the associated impulse responses indicate that in countries where the oil sector is large in relation to the economy, oil price changes affect the economic cycle only through their impact on fiscal policy. Once fiscal policy changes are removed, oil price shocks do not have a significant independent effect on the economic cycle.
    Keywords: Oil exporting countries , Fiscal policy , Business cycles , Oil prices , Nonoil sector , Economic growth , Economic models ,
    Date: 2008–11–07
  28. By: Maurizio Michael Habib (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jan Stráský (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper discusses the choice of an optimal external anchor for oil exporting economies, using optimum currency area criteria and simulations of a simple model of a small open economy pegging to a basket of two currencies. Oil exporting countries - in particular those of the Gulf Cooperation Council - satisfy a number of key optimum currency area criteria to adopt a peg. However, direction of trade and synchronisation of business cycle of oil exporters suggest that there is no single "ideal" external anchor among the major international currencies. Model simulations - parameterised for an oil exporting economy - indicate that a currency basket is generally preferable to a single currency peg, especially when some weight is placed by the policy maker on output stabilisation. Only when inflation becomes the only policy objective and external trade is mostly conducted in one currency that a peg to a single currency becomes optimal. JEL Classification: F31, C30, C51, C61, O24.
    Keywords: oil exporting countries, exchange rate regimes, basket, model simulation.
    Date: 2008–11
  29. By: Albu, Lucian Liviu
    Abstract: Standard economic theory tells that a command system, like the former eastern economies, allocates resources poorly due to the impossibility of accurate calculation. Therefore, once prices are freed and start to operate at quasi-equilibrium (market-clearing) levels, the hidden inefficiencies come into the open and a possible massive resource reallocation would have to take place. More precisely, the issue refers to the possible and probable intensity of resource reallocation in view of constraints like the balance between exit and entry in the labour market, the size of the budget deficit and the means for its non-inflationary financing, social and political stability, etc. This paper tries to conceptualise the fact that the dynamics of unemployment and inflation are correlated not in a classical sense but in a very complicated mode that suggests the occurrence of some attractors when certain slow parameters are evolving in the neighbourhood of special threshold-values. The start is made with simple models that are based on empirical data and can show to us the traces to discover the steps of transition in eastern economies on the inflation-unemployment relationship space. Then, using economic theory combined with non-linear modelling more refined information is extracted from the statistical standardised data for to evaluate other faces of the eastern transition.
    Keywords: natural rate of unemployment, potential function, Hurst exponent, pitchfork bifurcation, modified Phillips curve, Rössler attractor
    JEL: C61 C65 E24 E27 E32
    Date: 2008–11
  30. By: Rodrigo O. Valdes
    Abstract: This chapter revisits the sudden stop in capital flows episode experienced by Chile in 1998. It documents the macroeconomic environment, the macro framework in place, and the shocks that hit it. The chapter examines the policy reaction to the shocks, evaluating its most likely consequences and analyzing key policy constraints faced at the time. Finally, it describes how the economy adjusted and compares the Chilean episode with a few other recent sudden stop cases.
    Keywords: Sudden Stop, Chile, Capital Flows, Adjustment
    JEL: E58 E63 F32
    Date: 2008–11
  31. By: Prakash Kannan
    Abstract: The Turkish economy is typically characterized as having particularly high real interest rates. Fundamental considerations, such as high growth rates or high returns to capital, do not provide a satisfactory resolution of this puzzle. Instead, we find that two other factors- doubts about the sustainability of disinflation and the existence of a risk premium-have a significant impact on the level of real interest rates in Turkey. Importantly, fiscal policy variables are shown to affect both these factors, suggesting that a more credible and prudent fiscal policy can help reduce real interest rates in Turkey.
    Keywords: Interest rates , Turkey , Risk premium , Disinflation , Fiscal policy , Foreign exchange , Capital , Economic models ,
    Date: 2008–10–28

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