|
on Central Banking |
| By: | Michael D. Bordo |
| Abstract: | This paper provides an historical perspective on the crisis of 2007-2008. The crisis is part of a perennial pattern. It has echoes in earlier big international financial crises which were triggered by events in the U.S. financial system. Examples include the crises of 1857, 1893 1907 and 1929-33. This crisis has many similarities to those of the past but also some important modern twists. |
| JEL: | N10 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14569&r=cba |
| By: | Michael D. Bordo; Barry Eichengreen |
| Abstract: | In this paper we show that the acceleration of inflation in the United States after 1965 reflected a shift in perceived responsibility for managing the country's international financial position. Prior to 1965 this responsibility was lodged primarily with the Fed, whose policies resembled those of a central bank playing by the gold standard rules of the game. Over time, however, this responsibility was increasingly assumed by the Treasury, while the Federal Reserve acquired increasing room for maneuver as a result of the adoption of the Interest Equalization Tax and other policies with effects analogous to capital controls. Once the external constraint shaped policy less powerfully, the Fed pursued other goals more aggressively, resulting in more inflationary pressure. We document these points with a quantitative and qualitative analysis of the minutes of the Federal Open Market Committee. |
| JEL: | N1 N2 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14532&r=cba |
| By: | Alan S. Blinder; Jeremy B. Rudd |
| Abstract: | U.S. inflation data exhibit two notable spikes into the double-digit range in 1973-1974 and again in 1978-1980. The well-known "supply-shock" explanation attributes both spikes to large food and energy shocks plus, in the case of 1973-1974, the removal of price controls. Yet critics of this explanation have (a) attributed the surges in inflation to monetary policy and (b) pointed to the far smaller impacts of more recent oil shocks as evidence against the supply-shock explanation. This paper reexamines the impacts of the supply shocks of the 1970s in the light of the new data, new events, new theories, and new econometric studies that have accumulated over the past quarter century. We find that the classic supply-shock explanation holds up very well; in particular, neither data revisions nor updated econometric estimates substantially change the evaluations of the 1972-1983 period that were made 25 years (or more) ago. We also rebut several variants of the claim that monetary policy, rather than supply shocks, was really to blame for the inflation spikes. Finally, we examine several changes in the economy that may explain why the impacts of oil shocks are so much smaller now than they were in the 1970s. |
| JEL: | E3 N1 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14563&r=cba |
| By: | Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas |
| Abstract: | In this paper we argue that the persistent global imbalances, the subprime crisis, and the volatile oil and asset prices that followed it, are tightly interconnected. They all stem from a global environment where sound and liquid financial assets are in scarce supply. |
| JEL: | F3 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14521&r=cba |
| By: | Bennett T. McCallum |
| Abstract: | Cochrane (2007) has strongly questioned the basic economic logic of current mainstream monetary policy analysis, arguing that the standard notion --that "determinacy" of a rational expectations (RE) equilibrium suffices to imply that stable inflation behavior will be generated -- is incorrect. This is because New Keynesian (NK) models are typically consistent with the existence of RE paths with explosive inflation rates (in addition to one or more stable paths) that normally do not imply explosions in real variables relevant for transversality conditions. Consequently, the usual logic does not imply the absence of explosive inflation. That result does not, however, justify negative conclusions about NK analysis. For there is a different criterion that is logically satisfactory for the purpose at hand. This is the requirement that, to be plausible, a RE solution must satisfy the property of least-squares learnability. Adoption of this criterion, which should be attractive to analysts concerned with actual monetary policy, serves to justify in principle the bulk of current mainstream analysis. |
| JEL: | E4 E5 E52 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14534&r=cba |
| By: | Sosunov, Kirill; Khramov, Vadim |
| Abstract: | In recent papers it is shown that in the presence of price stickiness, investment and capital accumulation activity, active monetary policy (MP) rules can lead to indeterminacy under various assumptions about the structure of the model. We analyze the conditions for real indeterminacy to occur in the model with capital accumulation. The key assumption is that we add response to output to the monetary policy rule. In our paper we show that adding Current or Expected Output to MP rule substantially changes the conditions for real indeterminacy to occur. In contrast to some existing research we show that under current-looking with respect to output MP rules indeterminacy is almost impossible; under forward-looking with respect to output MP rules indeterminacy is almost impossible under active MP rules and very likely to occur under passive MP rules. We also show that stability conditions are almost not sensitive to changes in capital share in output and aggregate markup. We provide the nominal determinacy analysis and show that active and forward-looking MP rules with respect to output give |
| Keywords: | Macroeconomics; Monetary Econimics; Indeterminacy |
| JEL: | E0 E32 E31 E30 E5 E4 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11996&r=cba |
| By: | Domenico Giannone; Michele Lenza; Lucrezia Reichlin |
| Abstract: | This paper shows that the EMU has not affected historical characteristics of member countries’ business cycles and their cross-correlations. Member countries which had similar levels of GDP percapita in the seventies have also experienced similar business cycles since then and no significant change associated with the EMU can be detected. For the other countries, volatility has been historically higher and this has not changed in the last ten years. We also find that the aggregate euro area per-capita GDP growth since 1999 has been lower than what could have been predicted on the basis of historical experience and US observed developments. The gap between US and euro area GDP per capita level has been 30% on average since 1970 and there is no sign of catching up or of further widening. |
| Keywords: | Euro area, International Business Cycle, European monetary union, European integration |
| JEL: | E32 C5 F2 F43 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2008_040&r=cba |
| By: | Domenico Giannone; Michele Lenza; Lucrezia Reichlin |
| Abstract: | This paper shows that the EMU has not affected historical characteristics of member countries' business cycles and their cross-correlations. Member countries which had similar levels of GDP per-capita in the seventies have also experienced similar business cycles since then and no significant change associated with the EMU can be detected. For the other countries, volatility has been historically higher and this has not changed in the last ten years. We also find that the aggregate euro area per-capita GDP growth since 1999 has been lower than what could have been predicted on the basis of historical experience and US observed developments. The gap between US and euro area GDP per capita level has been 30% on average since 1970 and there is no sign of catching up or of further widening. |
| JEL: | C5 E32 F2 F43 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14529&r=cba |
| By: | Hubert Kempf (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Banque de France - Direction de la Recherche); Leopold Von Thadden (European Central Bank - ECB) |
| Abstract: | This paper offers a framework to study commitment and cooperation issues in games with multiple policymakers. To reconcile some puzzles in the recent literature on the nature of policy interactions among nations, we prove that games characterized by different commitment and cooperation schemes can admit the same equilibrium outcome if certain spillover effects vanish at the common solution of these games. We provide a detailed discussion of these spillovers, showing that, in general, commitment and cooperation are non-trivial issues. Yet, in linear-quadratic models with multiple policymakers commitment and cooperation schemes are shown to become irrelevant under certain assumptions. The framework is sufficiently general to cover a broad range of results from the recent literature on policy interactions as special cases, both within monetary unions and among fully sovereign nations. |
| Keywords: | Credibility, commitment, monetary policy, fiscal policy, policy mix. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00344773_v1&r=cba |
| By: | Russell Cooper (University of Texas - Department of Economics); Hubert Kempf (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, Banque de France - Direction de la Recherche); Dan Peled (University of Haifa - Department of Economics) |
| Abstract: | This paper studies the inflationary implications of interest bearing regional debt in a monetary union. Is this debt simply backed by future taxation with non inflationary consequences ? Or will the circulation of region debt induce monetization by a central bank ? We argue here that both outcomes can arise in equilibrium. In the model economy, there are multiple equilibria which reflect the perceptions of agents regarding the manner in which the debt obligations will be met. In one equilibrium, termed Ricardian, the future obligations are met with taxation by a regional government while in the other, termed Monetization, the central bank is induced to print money to finance the region's obligations. The multiplicity of equilibria reflects a commitment problem of the central bank. A key indicator of the selected equilibrium is the distribution of the holdings of the regional debt. We show that regional governments, anticipating central bank financing of their debt obligations, have an incentive to create excessively large deficits. We use the model to assess the impact of policy measures within a monetary union. |
| Keywords: | Monetary union ; inflation tax ; seigniorage ; public debt |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00344475_v1&r=cba |
| By: | Joshua Aizenman; Menzie D. Chinn; Hiro Ito |
| Abstract: | We develop a methodology that allows us to characterize in an intuitive manner the choices countries have made with respect to the trilemma during the post Bretton-Woods period. The first part of the paper deals with positive aspects of the trilemma, outlining new metrics for measuring the degree of exchange rate flexibility, monetary independence, and capital account openness. The evolution of our "trilemma indexes" illustrates that after the early 1990s, industrialized countries accelerated financial openness, but reduced the extent of monetary independence while sharply increasing exchange rate stability. This process culminated at the end of the 1990s with the introduction of the euro. In contrast, the group of developing countries pursued exchange rate stability as their key priority up to 1990, although many countries moved toward greater exchange rate flexibility from the early 1970s onward. Since 2000, measures of the three trilemma variables have converged towards intermediate levels characterizing managed flexibility, using sizable international reserves as a buffer, thus retaining some degree of monetary autonomy. Using these indexes, we also test the linearity of the three aspects of the trilemma: monetary independence, exchange rate stability, and financial openness. We confirm that the weighted sum of the three trilemma policy variables adds up to a constant, validating the notion that a rise in one trilemma variable should be traded-off with a drop of the weighted sum of the other two. The second part of the paper deals with normative aspects of the trilemma, relating the policy choices to macroeconomic outcomes such as the volatility of output growth and inflation, and medium term inflation rates. Some key findings for developing countries include: (i) greater exchange rate stability implies greater output volatility, which can only be slightly mitigated by reserve accumulation; (ii) somewhat counter to previous findings, greater exchange rate stability is also associated with greater inflation volatility, and (iii) greater monetary autonomy is associated with a higher level of inflation. We believe these results differ from those identified in previous studies due to the comprehensive nature of our analysis, which encompasses more than 100 countries and 37 years, as well as the inclusion of a number of additional structural and policy variables in the regressions. |
| JEL: | F15 F21 F31 F36 F41 O24 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14533&r=cba |
| By: | Joshua Aizenman; Michael Hutchison; Ilan Noy |
| Abstract: | We examine the inflation targeting (IT) experiences of emerging market economies, focusing especially on the roles of the real exchange rate and the distinction between commodity and non-commodity exporting nations. In the context of a simple empirical model, estimated with panel data for 17 emerging markets using both IT and non-IT observations, we find a significant and stable response running from inflation to policy interest rates in emerging markets that are following publically announced IT policies. By contrast, central banks respond much less to inflation in non-IT regimes. IT emerging markets follow a “mixed IT strategy†whereby both inflation and real exchange rates are important determinants of policy interest rates. The response to real exchange rates is much stronger in non-IT countries, however, suggesting that policymakers are more constrained in the IT regime—they are attempting to simultaneously target both inflation and real exchange rates and these objectives are not always consistent. We also find that the response to real exchange rates is strongest in those countries following IT policies that are relatively intensive in exporting basic commodities. We present a simple model that explains this empirical result. |
| JEL: | E52 E58 F15 F3 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14561&r=cba |
| By: | Döpke, J.; Funke, M.; Holly, S.; Weber, S. |
| Abstract: | In a standard dynamic stochastic general equilibrium framework, with sticky prices, the cross sectional distribution of output and inflation across a population of firms is studied. The only form of heterogeneity is confined to the probability that the ith firm changes its prices in response to a shock. In this Calvo setup the moments of the cross sectional distribution of output and inflation depend crucially on the proportion of firms that are allowed to change their prices. We test this model empirically using German balance sheet data on a very large population of firms. We find a significant counter-cyclical correlation between the skewness of output responses and the aggregate economy. Further analysis of sectoral data for the US suggests that there is a positive relationship between the skewness of inflation and aggregates, but the relation with output skewness is less sure. Our results can be interpreted as indirect evidence of the importance of price stickiness in macroeconomic adjustment. |
| JEL: | D12 E52 E43 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0853&r=cba |
| By: | Weshah Razzak; Rabie Nasser |
| Abstract: | We use a variety of nonparametric test statistics to evaluate the inflation- targeting regimes of Australia, Canada, New Zealand, Sweden and the UK. We argue that a sensible approach of evaluation must rely on a variety of methods, among them parametric and nonparametric econometric methods, for robustness and completeness. Our evaluation strategy is based on examining two possible policy implications of inflation targeting: First, a welfare implication and second, a real variability implication. The welfare implication involves evaluating a utility function, and tested by testing whether (1) the distributions of the levels and the growth rates of private consumption and leisure per capita remained unchanged under inflation targeting, i.e., first-order stochastic dominance; and (2) testing a linear combination of consumption and leisure per capita, where the parameter describing the utility of leisure or the relative preference of leisure is calibrated. Then we introduce nonparametric univariate and multivariate statistical methods to test whether the first and second moments of a variety of real variables, such as the real exchange rate depreciation rate, real GDP per capita growth rate in addition to private consumption per capita and leisure per capita growth rates, remained unchanged under inflation targeting, decreased or increased significantly. There seems to be some evidence of increased welfare under inflation-targeting regimes, but no concrete evidence is found that inflation targeting policy, in general, reduces real variability. Some cross country differences are also found. |
| Keywords: | Nonparametric, First-order stochastic dominance, sudden shift in the distribution, inflation targeting. |
| JEL: | C02 C12 C14 E31 |
| Date: | 2008–11–18 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2008_18&r=cba |
| By: | Rodney W. Strachan (The University of Queensland, Australia); Herman K. van Dijk (Erasmus University Rotterdam, the Netherlands) |
| Abstract: | A Bayesian model averaging procedure is presented that makes use of a finite mixture of many model structures within the class of vector autoregressive (VAR) processes. It is applied to two empirical issues. First, stability of the Great Ratios in U.S. macro-economic time series is investigated, together with the effect of permanent shocks on business cycles. Second, the linear VAR model is extended to include a smooth transition function in a (monetary) equation and stochastic volatility in the disturbances. The risk of a liquidity trap in the U.S.A. and Japan is evaluated. Although this risk found to be reasonably high, we find only mild evidence that the monetary policy transmission mechanism is different and that central banks consider the expected cost of a liquidity trap in policy setting. Posterior probabilities of different models are evaluated using Markov chain Monte Carlo techniques. |
| Keywords: | Posterior probability; Grassman manifold; Orthogonal group; Cointegration; Model averaging; Stochastic trend; Impulse response;Vector autoregressive model; Great Ratios; Liquidity trap |
| JEL: | C11 C32 C52 |
| Date: | 2008–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080096&r=cba |
| By: | Òscar Jordà; Massimiliano Marcellino |
| Abstract: | A path forecast refers to the sequence of forecasts 1 to H periods into the future. A summary of the range of possible paths the predicted variable may follow for a given confidence level requires construction of simultaneous confidence regions that adjust for any covariance between the elements of the path forecast. This paper shows how to construct such regions with the joint predictive density and Scheffé’s (1953) S-method. In addition, the joint predictive density can be used to construct simple statistics to evaluate the local internal consistency of a forecasting exercise of a system of variables. Monte Carlo simulations demonstrate that these simultaneous confidence regions provide approximately correct coverage in situations where traditional error bands, based on the collection of marginal predictive densities for each horizon, are vastly off mark. The paper showcases these methods with an application to the most recent monetary episode of interest rate hikes in the U.S. macroeconomy. |
| Keywords: | path forecast, simultaneous confidence region, error bands |
| JEL: | C32 C52 C53 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/34&r=cba |
| By: | Chadha, J.S.; Corrado, L.; Holly, S. |
| Abstract: | We re-connect money to in.ation using Goodfriend and McCallum's (2007) model where banks supply loans to cash-in-advance constrained consumers on the basis of the value of collateral provided and the monitoring skills of banks. We show that when shocks to monitoring and collateral dominate those to goods productivity and the velocity of money demand, money and the external finance premium become closely linked. This is because increases in asset prices allow banks to raise the supply of loans leading to an expansion in aggregate demand, via a compression of financial interest rates spreads, which in turn tends to be inflationary. Thus money and financial spreads are negatively correlated when banking sector shocks dominate. We suggest a simple augmented stabilising monetary policy rule that exploits the joint information from money and the external finance premium. |
| Keywords: | money, DSGE, policy rules, external finance premium. |
| JEL: | E31 E40 E51 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0852&r=cba |
| By: | David R.F. Love (Department of Economics, Brock University) |
| Abstract: | We show that the deterministic Extended-Path (EP) method of Fair and Taylor (1983) solves standard dynamic stochastic general equilibrium models with similar accuracy to the best results reported in the literature for alternative methods. The EP method demands more computer time than other methods but has offsetting benefits in terms of simplicity and generality that make it an attractive choice. |
| Keywords: | Dynamic stochastic equilibrium, computational methods, non-linear solutions |
| JEL: | E10 E30 E37 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:brk:wpaper:0801&r=cba |
| By: | Joseph G. Haubrich; George Pennacchi; Peter Ritchken |
| Abstract: | This paper develops and estimates an equilibrium model of the term structures of nominal and real interest rates. The term structures are driven by state variables that include the short term real interest rate, expected inflation, a factor that models the changing level to which inflation is expected to revert, as well as four volatility factors that follow GARCH processes. We derive analytical solutions for the prices of nominal bonds, inflation-indexed bonds that have an indexation lag, the term structure of expected inflation, and inflation swap rates. The model parameters are estimated using data on nominal Treasury yields, survey forecasts of inflation, and inflation swap rates. We find that allowing for GARCH effects is particularly important for real interest rate and expected inflation processes, but that long–horizon real and inflation risk premia are relatively stable. Comparing our model prices of inflation-indexed bonds to those of Treasury Inflation Proected Securities (TIPS) suggests that TIPS were underpriced prior to 2004 but subsequently were valued fairly. We find that unexpected increases in both short run and longer run inflation implied by our model have a negative impact on stock market returns. |
| Keywords: | Interest rates ; Inflation (Finance) ; Asset pricing |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0810&r=cba |
| By: | Todd E. Clark; Troy Davig |
| Abstract: | This paper uses a detailed literature review and an empirical analysis of three models to assess the links among inflation and survey measures of long- and short-term expectations. In the first approach, we jointly estimate a model of inflation, survey expectations and monetary policy, where each is a function of a common time-varying inflation trend. In the estimates, long-term expectations track closely the unobserved trend that is an important factor in inflation dynamics, implying that changes in long-run expectations can lead to persistent movements in inflation. In the second approach, we estimate a time-varying parameter VAR with stochastic volatility. This model relaxes the cross-equation and constant parameter restrictions from the first model. Impulse response analysis shows a relatively stable relationship between inflation and survey measures of inflation, although with some modest changes consistent with improved anchoring of long-term expectations. Finally, we rely on a conventional VAR framework incorporating several macroeconomic variables, including both short- and long-term measures of expected inflation. In these estimates, shocks to either measure of expectations lead to a rise in the other measure and some limited pass-through to inflation. Shocks to inflation cause both short- and long-term expectations to rise. Other factors such as monetary policy, economic activity, and food price inflation also affect expectations and inflation. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-05&r=cba |
| By: | Hasan , Iftekhar (Rensselaer Polytechnic Institute and Bank of Finland); Mester, Loretta (Federal Reserve Bank of Philadelphia and University of Pennsylvania) |
| Abstract: | Over the last decade, the legal and institutional frameworks governing central banks and financial market regulatory authorities throughout the world have undergone significant changes. This has created new interest in better understanding the roles played by organizational structures, accountability and transparency in increasing the efficiency and effectiveness of central banks in achieving their objectives and ultimately yielding better economic outcomes. Although much has been written pointing out the potential role institutional form can play in central bank performance, little empirical work has been done to investigate the hypothesis that institutional form is related to performance. This paper attempts to help fill this void. |
| Keywords: | central banking; institutional structure; accountability; transparency; performance |
| JEL: | E52 E58 |
| Date: | 2008–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2008_029&r=cba |
| By: | Andrew Mountford; Harald Uhlig |
| Abstract: | We propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions. Specifically, we use sign restrictions to identify a government revenue shock as well as a government spending shock, while controlling for a generic business cycle shock and a monetary policy shock. We explicitly allow for the possibility of announcement effects, i.e., that a current fiscal policy shock changes fiscal policy variables in the future, but not at present. We construct the impulse responses to three linear combinations of these fiscal shocks, corresponding to the three scenarios of deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion. We apply the method to US quarterly data from 1955-2000. We find that deficit-financed tax cuts work best among these three scenarios to improve GDP, with a maximal present value multiplier of five dollars of total additional GDP per each dollar of the total cut in government revenue five years after the shock. |
| JEL: | C32 E60 E62 H20 H50 H60 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14551&r=cba |
| By: | Jim Dolmas |
| Abstract: | Tax rates on labor income, capital income and consumption-and the redistributive transfers those taxes finance-differ widely across developed countries. Can majority-voting methods, applied to a calibrated growth model, explain that variation? The answer I fund is yes, and then some. In this paper, I examine a simple growth model, calibrated roughly to U.S. data, in which the political decision is over constant paths of taxes on factor income and consumption, used to finance a lump-sum transfer. I first look at outcomes under probabilistic voting, and find that equilibria are extremely sensitive to the specification of uncertainty. I then consider other ways to restrict the range of majority-rule outcomes, looking at the model's implications for the shape of the Pareto set and the uncovered set, and the existence or non-existence of a Condorcet winner. Solving the model on discrete grid of policy choices, I find that no Condorcet winner exists and that the Pareto and uncovered sets, while small relativeto the entire issue space, are large relative to the range of tax policies we see in data for a collection of 20 OECD countries. Taking that data as the issue space, I find that none of the 20 can be ruled out on effciency grounds, and that 10 of the 20 are in the uncovered set. Those 10 encompass policies as diverse as those of the US, Norway and Austria. One can construct a Condorcet cycle including all 10 countries' tax vectors. ; The key features of the model here, as compared to other models on the endogenous determination of taxes and redistribution, is that the issue space is multidimensional and, at the same time, no one voter type is suffciently numerous to be decisive. I conclude that the sharp predictions of papers in this literature may not survive an expansion of their issue spaces or the allowance for a slightly less homogeneous electorate. |
| Keywords: | Taxation ; Consumption (Economics) ; Income tax ; Fiscal policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0814&r=cba |
| By: | Basso, Henrique S (Department of Economics) |
| Abstract: | This paper analyzes the effectiveness of delegation in solving the time inconsistency problem of monetary policy using a microfounded general equilibrium model where delegation and reappointment are explicitly included into the government's strategy. The method of Chari and Kehoe (1990) is applied to characterize the entire set of sustainable outcomes. Countering McCallum's (1995) second fallacy, delegation is able to eliminate the time inconsistency problem, with the commitment policy being sustained under discretion for any intertemporal discount rate. |
| Keywords: | Central Bank; Monetary Policy; Institutional Design |
| JEL: | E52 E58 E61 |
| Date: | 2008–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2008_015&r=cba |
| By: | Jeffrey A. Frankel |
| Abstract: | Andy Rose (2000), followed by many others, has used the gravity model of bilateral trade on a large data set to estimate the trade effects of monetary unions among small countries. The finding has been large estimates: Trade among members seems to double or triple, that is, to increase by 100-200%. After the advent of EMU in 1999, Micco, Ordoñez and Stein and others used the gravity model on a much smaller data set to estimate the effects of the euro on trade among its members. The estimates tend to be statistically significant, but far smaller in magnitude: on the order of 10-20% during the first four years. What explains the discrepancy? This paper seeks to address two questions. First, do the effects on intra-euroland trade that were estimated in the euro's first four years hold up in the second four years? The answer is yes. Second, and more complicated, what is the reason for the big discrepancy vis-à -vis other currency unions? We investigate three prominent possible explanations for the gap between 15% and 200%. First, lags. The euro is still very young. Second, size. The European countries are much bigger on average than most of those who had formed currency unions in the past. Third, endogeneity of the decision to adopt an institutional currency link. Perhaps the high correlations estimated in earlier studies were spurious, an artifact of reverse causality. Contrary to expectations, we find no evidence that any of these factors explains a substantial share of the gap, let alone all of it. |
| JEL: | F01 F33 F4 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14542&r=cba |
| By: | Acharya, Ram N.; Gentle, Paul F.; Mishra, Ashok K.; Paudel, Krishna P. |
| Abstract: | This paper analyzes historical movements in the commodity futures market and the relationship to inflation. Specifically, the relationship between the Commodity Research Bureau (CRB) Index and United States inflation is investigated. It is said that the relationship between the CRB index and the U.S. inflation rate was greater in the some periods than in another period. Then in recent times the CRB Index has proven to be a reliable early indicator of inflation. As the composition of the United States economy changes, the Commodity Research Bureau must make adjustments in order to provide a viable service. |
| Keywords: | CRB index, Commodities Research Bureau, inflation, Vector Autoregression, Marketing, Public Economics, E00, E30, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:saeaed:6760&r=cba |
| By: | Cecilia Frale; Massimiliano Marcellino; Gian Luigi Mazzi; Tommaso Proietti |
| Abstract: | A continuous monitoring of the evolution of the economy is fundamental for the decisions of public and private decision makers. This paper proposes a new monthly indicator of the euro area real Gross Domestic Product (GDP), with several original features. First, it considers both the output side (six branches of the NACE classification) and the expenditure side (the main GDP components) and combines the two estimates with optimal weights reflecting their relative precision. Second, the indicator is based on information at both the monthly and quarterly level, modelled with a dynamic factor specification cast in state-space form. Third, since estimation of the multivariate dynamic factor model can be numerically complex, computational efficiency is achieved by implementing univariate filtering and smoothing procedures. Finally, special attention is paid to chain-linking and its implications, via a multistep procedure that exploits the additivity of the volume measures expressed at the prices of the previous year. |
| Keywords: | Temporal Disaggregation, Multivariate State Space Models, Dynamic factor Models, Kalman filter and smoother, Chain-linking |
| JEL: | E32 E37 C53 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/32&r=cba |
| By: | Laurent Ferrara (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Banque de France - Business Conditions and Macroeconomic Forecasting Directorate); Dominique Guegan (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); Patrick Rakotomarolahy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | This papier formalizes the process of forecasting unbalanced monthly data sets in order to obtain robust nowcasts and forecasts of quarterly GDP growth rate through a semi-parametric modelling. This innovative approach lies on the use on non-parametric methods, based on nearest neighbors and on radial basis function approaches, ti forecast the monthly variables involved in the parametric modelling of GDP using bridge equations. A real-time experience is carried out on Euro area vintage data in order to anticipate, with an advance ranging from six to one months, the GDP flash estimate for the whole zone. |
| Keywords: | Euro area GDP, real-time nowcasting, forecasting, non-parametric models. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00344839_v1&r=cba |
| By: | Jean-François Goux (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| Abstract: | The taking into account of a period of break (thick break) makes it possible to correctly analyze the time series of the euro-dollar exchange rate. By retaining the posterior period with the Louvre agreements, but by eliminating the first years from existence of the euro, and until today, one can affirm that this rate is stationary and after trend stationary and thus that there is a mechanism of return towards a level (a trend) of equilibrium. This point is shown using a new procedure of test based on the elimination of thick breaks. That makes it possible to propose a forecast based on this deterministic trend |
| Keywords: | euro-dollar exchange rate, stationarity, breaks, outliers |
| JEL: | C F F32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0826&r=cba |
| By: | Matthieu Lemoine (Observatoire Français des Conjonctures Économiques); Gian Luigi Mazzi (Eurostat); Paola Monperrus-Veroni (Observatoire Français des Conjonctures Économiques); Frédéric Reynes (Observatoire Français des Conjonctures Économiques) |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:0834&r=cba |
| By: | Maria Demertzis; Massimiliano Marcellino; Nicola Viegi |
| Abstract: | Our objective is to identify a way of checking empirically the extent to which expectations are de-coupled from inflation, how well they might be anchored in the long run, and at what level. This methodology allows us then to identify a measure for the degree of anchorness, and as anchored expectations are associated with credibility, this will serve as a proxy for credibility. We apply this methodology to the US history of inflation since 1963 and examine how well our measure tracks the periods for which credibility is known to be either low or high. Of particular interest to the validity of the measure is the start of the Great Moderation. Following the narrative of a number of well documented incidents in this period, we check how well our measure captures both the evolution of credibility in US monetary policy, as well as reactions to inflation scares. |
| Keywords: | Great Inflation, Great Moderation, Anchors for Expectations |
| JEL: | E52 E58 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/38&r=cba |
| By: | Benk, Szilárd; Gillman, Max (Cardiff Business School); Kejak, Michal |
| Abstract: | The post-1983 moderation coincided with an ahistorical divergence in the money aggregate growth and velocity volatilities away from the downward trending GDP and inflation volatilities. Using an endogenous growth monetary DSGE model, with micro-based banking production, enables a contrasting characterization of the two great volatility cycles over the historical period of 1919-2004, and enables this puzzle to be addressed more easily. The volatility divergence is explained by the upswing in the credit volatility that kept money supply variability from translating into inflation and GDP volatility. |
| Keywords: | Volatility; money and credit shocks; growth; inflation |
| JEL: | E13 E32 E44 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2008/28&r=cba |
| By: | Gomes, Fábio Augusto Reis; Issler, João Victor |
| Abstract: | Consumption is an important macroeconomic aggregate, being about 70% of GNP. Finding sub-optimal behavior in consumption decisions casts a serious doubt on whether optimizing behavior is applicable on an economy-wide scale, which, in turn, challenge whether it is applicable at all. This paper has several contributions to the literature on consumption optimality. First, we provide a new result on the basic rule-of-thumb regression, showing that it is observational equivalent to the one obtained in a well known optimizing real-business-cycle model. Second, for rule-of-thumb tests based on the Asset-Pricing Equation, we show that the omission of the higher-order term in the log-linear approximation yields inconsistent estimates when lagged observables are used as instruments. However, these are exactly the instruments that have been traditionally used in this literature. Third, we show that nonlinear estimation of a system of N Asset-Pricing Equations can be done efficiently even if the number of asset returns (N) is high vis-a-vis the number of time-series observations (T). We argue that efficiency can be restored by aggregating returns into a single measure that fully captures intertemporal substitution. Indeed, we show that there is no reason why return aggregation cannot be performed in the nonlinear setting of the Pricing Equation, since the latter is a linear function of individual returns. This forms the basis of a new test of rule-of-thumb behavior, which can be viewed as testing for the importance of rule-of-thumb consumers when the optimizing agent holds an equally-weighted portfolio or a weighted portfolio of traded assets. Using our setup, we find no signs of either rule-of-thumb behavior for U.S. consumers or of habit-formation in consumption decisions in econometric tests. Indeed, we show that the simple representative agent model with a CRRA utility is able to explain the time series data on consumption and aggregate returns. There, the intertemporal discount factor is significant and ranges from 0:956 to 0:969 while the relative risk-aversion coe¢ cient is precisely estimated ranging from 0:829 to 1:126. There is no evidence of rejection in over-identifying-restriction tests. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:682&r=cba |
| By: | Michel Aglietta; Laurence Scialom |
| Abstract: | In the first part of this paperer, we emphasize the adaptability and continuity of the lender-of-last-resort doctrine beyond the diversity of financial structures from the 19th century to the present day. The second part deals with the global credit crisis and the analysis of the central banks’ innovative practices during the 2007-2008 financial crisis. We highlight that the lender of last resort’s role is not confined to providing emergency liquidity. It aims to provide orderly deleveraging in the financial system in order to preserve the financial intermediation process. Our conclusion underlines that the crisis management has become global and strategic. It opens the way to a major regulatory and supervisory reform. |
| Keywords: | lender of last resort, central banking, liquidity crisis |
| JEL: | E58 G12 G18 G21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2008-21&r=cba |
| By: | Milne , Alistair (Cass Business School); Wood, Geoffrey (Cass Business School) |
| Abstract: | In autumn of 2007 Britain experienced its first bank run of any significance since the reign of Queen Victoria. The run was on a bank called Northern Rock. This was extraordinary, for Britain had been free of such episodes because by early in the third quarter of the 19th century the Bank of England had developed techniques to prevent them. A second extraordinary aspect of the affair was that it was the decision to provide support for the troubled institution that triggered the run. And thirdly, unlike most runs in banking history, it was a run only on that one institution. This paper considers why the traditional techniques for the maintenance of banking stability failed – if they did fail – and then considers how these techniques may need to be changed or supplemented to prevent such problems in the future. The paper starts with a narrative of the events, then turns to banking policy before the event and to the policy responses after it. We suggest both why the decision to provide support triggered the run and why the run was confined to a single institution. That prepares the way for our consideration of what should be done to help prevent the recurrence of such episodes in the future. |
| Keywords: | bank failure; lender of last resort; money markets; bank regulation |
| JEL: | E42 E58 N24 |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2008_030&r=cba |
| By: | Tijmen R. Daniels (Technische Universität Berlin); Henk Jager (University of Amsterdam); Franc Klaassen (University of Amsterdam) |
| Abstract: | While virtually all modern models of exchange rate crises recognise that the decision to abandon an exchange rate peg depends on how harshly policy makers are willing to defend the regime, they virtually never model how the exchange rate is defended. In this paper we incorporate both the mechanics of speculation and a defence policy against speculation in the well-known currency crisis model of Morris and Shin (American Economic Review 88 (1998) 587-97). After adding these natural elements, our model outperforms standard currency crisis models at explaining stylised features of speculative attacks. Moreover, our model connects the theoretical currency crisis literature to an empirical literature on exchange market pressure, by bringing together its building blocks: exchange rate changes plus counter-acting defence policies. We use this connection to confirm our model's predictions empirically. |
| Keywords: | Exchange Market Pressure; Currency Crisis; Global Game |
| JEL: | E58 F31 F33 G15 |
| Date: | 2008–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080090&r=cba |
| By: | Gianluca, MORETTI; Giulio, NICOLETTI |
| Abstract: | Recent literature clams that key variables such as aggregate productivity and inflation display long memory dynamics. We study the impllications of this high degree of persistence on the estimation of Dynamic Stochastic General Equilibrium (DGSE) models. We show that long memory data produce substantial bias in the deep parameter estimates when a standard Kalman Filter-MLE procedure is used. We propose a modification of the Kalman Filter procedure, we mainly augment the state space, which deals with this problem. By the means of the augmented state space we can consistently estimate the model parameters as well as produce more accurate out-of-sample forecasts compared to the standard Kalman filter. |
| Date: | 2008–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2008037&r=cba |
| By: | Frank A.G. den Butter (VU University Amsterdam); Pieter W. Jansen (Aegon Investment Management) |
| Abstract: | This paper assesses the performance of a number of long-term interest rate forecast approaches, namely time series models, structural economic models, expert forecasts and combinations thereof. The predictive performance of these approaches is compared using out of sample forecast errors, where a random walk forecast acts as benchmark. It is found that for five major OECD countries, namely United States, Germany, United Kingdom, The Netherlands and Japan, the other forecasting approaches do not outperform the random walk, or a somewhat more sophisticated time series model, on a 3 month forecast horizon. On a 12 month forecast horizon the random walk model can be outperformed by a model that combines economic data and expert forecasts. Here several methods of combination are considered: equal weights, optimized weights and weights based on forecast error. It appears that the additional information contents of the structural models and expert knowledge is only relevant for forecasting 12 months ahead. |
| Keywords: | interest rate forecasting; expert knowledge; combining forecasts; optimizing forecast errors |
| JEL: | C53 E27 E43 E47 |
| Date: | 2008–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080102&r=cba |
| By: | Carlos Felipe Lopez Suarez; Jose Antonio Rodriguez Lopez (Department of Economics, University of California-Irvine) |
| Abstract: | We study whether the nonlinear behavior of the real exchange rate can help us account for the lack of predictability of the nominal exchange rate. We construct a smooth nonlinear error-correction model that allows us to test the hypotheses of nonlinear predictability of the nominal exchange rate and nonlinear behavior on the real exchange rate in the context of a fully specified cointegrated system. Using a panel of 19 countries and three numeraires, we find strong evidence of nonlinear predictability of the nominal exchange rate and of nonlinear mean reversion of the real exchange rate. Out-of-sample Theil's U-statistics show a higher forecast precision of the nonlinear model than the one obtained with a random walk specification. The statistical significance of the out-of-sample results is higher for short-run horizons, specially for one-quarter-ahead forecasts. |
| Keywords: | Exchange rates; Predictability; Nonlinearities; Purchasing power parity |
| JEL: | C53 F31 F47 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:080911&r=cba |
| By: | Hainz , Christa (University of Munich); Weill , Laurent (Université Robert Schuman, Strasbourg); Godlewski, Christophe (University of Strasbourg) |
| Abstract: | We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking for collateral. We show that presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We estimate logit models where the presence of collateral is regressed on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the use of collateral. These findings survive several robustness checks. |
| Keywords: | collateral; bank competition; asymmetric information |
| JEL: | D43 D82 G21 |
| Date: | 2008–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2008_027&r=cba |
| By: | Jean Jacod; Mark Podolskij; Mathias Vetter (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | This paper presents some limit theorems for certain functionals of moving averages of semimartingales plus noise, which are observed at high frequency. Our method generalizes the pre-averaging approach (see [13],[11]) and provides consistent estimates for various characteristics of general semimartingales. Furthermore, we prove the associated multidimensional (stable) central limit theorems. As expected, we find central limit theorems with a convergence rate n1=4, if n is the number of observations. |
| Keywords: | central limit theorem, high frequency observations, microstructure noise, quadratic variation, semimartingale, stable convergence. |
| JEL: | C10 C13 C14 |
| Date: | 2008–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2008-61&r=cba |
| By: | Newby, E. |
| Abstract: | This paper models the gold standard as a state contingent commitment rule that is only feasible during peace. It shows that monetary policy during war, when the gold convertibility rule is suspended, can still be credible, if the policy maker's plan is to resume the gold standard at the old par value in the future. The DGE model developed in this paper suggests that the resumption of the gold standard was a sustainable plan, which replaced the gold standard as a commitment rule and made monetrary policy time consistent. The equilibrium is supported by trigger strategies, where private agents retaliate if a policy maker defaults its policy plan to resume the gold standard rule. |
| Keywords: | Gold standard, Time consistency, Monetary policy, Monetary regimes. |
| JEL: | C61 E31 E4 E5 N13 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0856&r=cba |
| By: | Philip Du Caju (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Erwan Gautier (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Daphne Momferatou (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Melanie Ward-Warmedinger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper presents information on wage bargaining institutions, collected using a standardised questionnaire. Our data provide information from 1995 and 2006, for four sectors of activity and the aggregate economy, considering 23 European countries, plus the US and Japan. Main findings include a high degree of regulation in wage setting in most countries. Although union membership is low in many countries, union coverage is high and almost all countries also have some form of national minimum wage. Most countries negotiate wages on several levels, the sectoral level still being the most dominant, with an increasingly important role for bargaining at the firm level. The average length of collective bargaining agreements is found to lie between one and three years. Most agreements are strongly driven by developments in prices and eleven countries have some form of indexation mechanism which affects wages. Cluster analysis identifies three country groupings of wage-setting institutions. JEL Classification: J31, J38, J51, J58. |
| Keywords: | wage bargaining, institutions, indexation, trade union membership, cluster analysis. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080974&r=cba |
| By: | Dietrich Franz (METEOR) |
| Abstract: | If a group is modelled as a single Bayesian agent, what should its beliefs be? I propose an axiomatic model that connects group beliefs to beliefs of group members, who are themselves modelled as Bayesian agents, possibly with different priors and different information. Group beliefs are proven to take a simple multiplicative form if people''s information is independent, and a more complex form if information overlaps arbitrarily. This shows that group beliefs can incorporate all information spread over the individuals without the individuals having to communicate their (possibly complex and hard-to-describe) private information; communicating prior and posterior beliefs suffices. |
| Keywords: | mathematical economics; |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2008046&r=cba |
| By: | David, DE LA CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | This note derives the Golden Rule of capital accumulation in a Chakraborty-type economy, i.e. a two-period OLG economy where longevity is endogenous. It is shown that the capital per worker maximizing steady-state consumption per head is inferior to the Golden Rule capital level prevailing under exogenous longevity. We characterize also the lifetime Golden Rule, that is, the capital per worker maximizing steady-state expected lifetime consumption per head, and show that this tends to exceed the standard Golden Rule capital level. |
| Keywords: | Golden Rule, longevity, OLG models |
| JEL: | E13 E21 E22 I12 |
| Date: | 2008–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2008032&r=cba |
| By: | Federico S. Mandelman; Andrei Zlate |
| Abstract: | We analyze the dynamics of labor migration and the insurance role of remittances in a two-country, real business cycle framework. Emigration increases with the expected stream of future wage gains but is dampened by the sunk cost reflecting border enforcement. During booms in the destination economy, the scarcity of established immigrants lessens capital accumulation, labor productivity, and the native wage. The welfare gain from the inflow of unskilled labor increases with the complementarity between skilled and unskilled labor and the share of the skilled among native labor. The model matches the cyclical dynamics of the unskilled immigration from Mexico. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2008-25&r=cba |
| By: | Marek Jarociński (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper compares impulse responses to monetary policy shocks in the euro area countries before the EMU and in the New Member States (NMS) from central-eastern Europe. We mitigate the small sample problem, which is especially acute for the NMS, by using a Bayesian estimation that combines information across countries. The impulse responses in the NMS are broadly similar to those in the euro area countries. There is some evidence that in the NMS, which have had higher and more volatile inflation, the Phillips curve is steeper than in the euro area countries. This finding is consistent with economic theory. JEL Classification: C11, C32, C33, E40, E52. |
| Keywords: | monetary policy transmission, Structural VAR, Bayesian estimation, exchangeable prior. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080970&r=cba |
| By: | Essahbi Essaadi (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France); Zied Ftiti (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| Abstract: | In this paper, we study the inflation dynamics in an industrial inflation-targeting country (New Zealand). Our objective is to check if the inflation targeting policy has a transition period or not. Loosely speaking, we try to give some response to the famous debate: if the inflation targeting is a framework or a simple monetary rule. For this purpose, we use a frequency approach: Evolutionary Spectral Analysis, as defined by Priestley (1965-1996). Then, we detect endogenously a structural break point in inflation series, by applying a non-parametric test. This is the first time that this method is used in the case of inflation-targeting countries. Our main finding is that the adoption of the inflation-targeting policy in New Zealand was characterized by a transition period before the adoption of this framework. This period was characterized by many radical reforms, which caused a structural break in the New Zealand inflation series. These reforms were made to lead back the inflation close to the initial target. In addition, these reforms increased the transparency and the credibility of the monetary policy. We conclude from our frequency analysis that the inflation series becomes stable in long-term after the adoption of the inflation targeting. This can be a justification of the effectiveness of this policy to ensure the price stability. |
| Keywords: | New Zealand, Inflation Targeting, Spectral Analysis and Structural Change |
| JEL: | C16 E52 E63 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0830&r=cba |
| By: | Joshua Aizenman; Reuven Glick |
| Abstract: | This paper presents statistical analysis supporting stylized facts about sovereign wealth funds (SWFs). It discusses the forces leading to the growth of SWFs, including the role of fuel exports and ongoing current account surpluses, and large hoarding of international reserves. It analyzes the degree to which measures of SWF governance and transparency compare with national norms of behavior. We provide evidence that many countries with SWFs are characterized by effective governance, but weak democratic institutions, as compared to other nonindustrial countries. We also present a model with which we compare the optimal degree of diversification abroad by a central bank versus that of a sovereign wealth fund. We show that if the central bank manages its foreign assets with the objective of reducing the probability of sudden stops, it will place a high weight on the downside risk of holding risky assets abroad and will tend to hold primarily safe foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We discuss how the degree of a country's transparency may affect the size of the foreign asset base entrusted to a wealth fund's management, and show that, for relatively low levels of public foreign assets, assigning portfolio management independence to the central bank may be advantageous. However, for a large enough foreign asset base, the opportunity cost associated with the limited portfolio diversification of the central bank induces authorities to establish a wealth fund in pursuit of higher returns. |
| JEL: | E52 E58 F15 F3 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14562&r=cba |
| By: | Zhiguo He; Arvind Krishnamurthy |
| Abstract: | We present a model to study the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary. Intermediaries face a constraint on raising equity capital. When the constraint binds, so that intermediaries' equity capital is scarce, risk premia rise to reflect the capital scarcity. We calibrate the model and show that it does well in matching two aspects of crises: the nonlinearity of risk premia during crisis episodes; and, the speed of adjustment in risk premia from a crisis back to pre-crisis levels. We use the model to quantitatively evaluate the effectiveness of a variety of central bank policies, including reducing intermediaries' borrowing costs, infusing equity capital, and directly intervening in distressed asset markets. All of these policies are effective in aiding the recovery from a crisis. Infusing equity capital into intermediaries is particularly effective because it attacks the equity capital constraint that is at the root of the crisis in our model. |
| JEL: | G2 G28 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14517&r=cba |
| By: | Renato Faccini; Salvador Ortigueira |
| Abstract: | Shocks to investment-specific technology have been identified as a main source of U.S. aggregate output volatility. In this paper we assess the contribution of these shocks to the volatility of labor market variables, namely, unemployment, vacancies, tightness and the job-finding rate. Thus, our paper contributes to a recent body of literature assessing the ability of the search-and-matching model to account for the large volatility observed in labor market variables. To this aim, we solve a neoclassical economy with search and matching in the labor market, where neutral and investment-specific technologies are subject to shocks. The three key features of our model economy are: i) Firms are large, in the sense that they employ many workers. ii) Adjusting capital and labor is costly. iii) Wages are the outcome of an intra-firm Nash-bargaining problem between the firm and its workers. In our calibrated economy, we find that shocks to investment-specific technology explain 40 percent of the observed volatility in U.S. labor productivity. Moreover, these shocks generate relative volatilities in vacancies and the workers' job finding rate which match those observed in U.S. data. Relative volatilities in unemployment and labor market tightness are 55 and 75 percent of their empirical values, respectively. |
| Keywords: | Business Cycles; Labor Market Fluctuations; Investment-Specific Technical Change; Search and Matching; Adjustment Costs; Wage Bargaining. |
| JEL: | E22 E24 E32 J41 J64 O33 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/39&r=cba |
| By: | Ludovic A. Julien; Fabrice Tricou |
| Abstract: | This paper considers Stackelberg competition in a general equilibrium framework with production. The working of market power and the confi…gurations of strategic interactions are complexi…ed by the presence of an active leader. Two market price mechanisms are here studied: one is associated with the Stackelberg-Walras equilibrium, the other is linked to the Stackelberg-Cournot equilibrium. In the context of an exchange economy with a production sector, several results are obtained about equilibria mergings and about welfare comparisons. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2008-29&r=cba |
| By: | Joseph Burke (Department of Economics, Ave Maria University) |
| Abstract: | I present an overview of the teachings of the Roman Catholic Church on usury. In 1515, the Fifth Lateran Council defined “the real meaning of usury: when, from its use, a thing which produces nothing is applied to the acquiring of gain and profit without any work, any expense or any risk.” I argue that the economic conditions of the Middle Ages could not have justified any interest, but structural changes to the economy, including the abolition of slavery, inflation, and the emergence of markets for investment, justify interest on the basis of default risk, the costs of inflation, and opportunity costs. |
| Keywords: | usury, commutative justice, Catholicism |
| JEL: | B11 Z12 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:avm:wpaper:0801&r=cba |
| By: | Gene M. Grossman; Esteban Rossi-Hansberg |
| Abstract: | We propose a theory of task trade between countries that have similar relative factor endowments but may differ in size. Firms produce differentiated goods by performing a continuum of tasks, each of which generates local spillovers. Tasks can be performed at home or abroad, but offshoring entails costs that vary by task. In equilibrium, the tasks with the highest offshoring costs may not be traded. Among the remainder, those with the relatively higher offshoring costs are performed in the country that has the higher wage and higher aggregate output. We discuss the relationship between equilibrium wages, equilibrium outputs, and relative country size and examine how the pattern of specialization reflects the key parameters of the model. |
| JEL: | F12 F23 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14554&r=cba |
| By: | M. Ayhan Kose; Eswar S. Prasad; Marco E. Terrones |
| Abstract: | Economic theory has identified a number of channels through which openness to international financial flows could raise productivity growth. However, while there is a vast empirical literature analyzing the impact of financial openness on output growth, far less attention has been paid to its effects on productivity growth. We provide a comprehensive analysis of the relationship between financial openness and total factor productivity (TFP) growth using an extensive dataset that includes various measures of productivity and financial openness for a large sample of countries. We find that de jure capital account openness has a robust positive effect on TFP growth. The effect of de facto financial integration on TFP growth is less clear, but this masks an important and novel result. We find strong evidence that FDI and portfolio equity liabilities boost TFP growth while external debt is actually negatively correlated with TFP growth. The negative relationship between external debt liabilities and TFP growth is attenuated in economies with higher levels of financial development and better institutions. |
| JEL: | F36 F41 F43 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14558&r=cba |
| By: | R. Kraeussl (VU University Amsterdam); A. Lucas (VU University Amsterdam); D. Rijsbergen (VU University Amsterdam); P.J. van der Sluis (VU University Amsterdam); E. Vrugt (APG Investments) |
| Abstract: | This paper tests the policitcal dimensions of the presidential cycle effect in U.S. financial markets. The presidential cycle effect states that average stock market returns are significantly higher in the last two years compared to the first two years of a presidential term. We confirm the robust existence of this cycle in U.S. stock markets as well as bond markets. As most rational theories to explain the cycle were falsified by earlier empirical work, this paper sets out to test the presidential cycle election (PCE) theory as an alternative explanation. The PCE theory states that incumbent parties and presidents have an incentive to manipulate the economy (via budget expansions, taxes, etc.) to remain in power. We formulate seven different propositions relating to fiscal, monetary, tax, and political implications of PCE theory. We find no statistically significant evidence confirming the PCE theory as a plausible explanation for the presidential cycle effect. The existence of the presidential cycle effect in U.S. financial markets thus remains a puzzle that cannot be easily explained by politicians mis-using their economic influence to remain in power. |
| Keywords: | political economy; inefficient markets; market anomalies; calendar effects |
| JEL: | G14 P16 E32 |
| Date: | 2008–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080101&r=cba |
| By: | Michelle J. White |
| Abstract: | This paper discusses four bankruptcy-related policy issues. First, what is the economic rationale for having a bankruptcy procedure at all and what defines an economically efficient bankruptcy procedure? Second, why did the number of U.S. bankruptcy filings increase so dramatically between 1980 and 2005? Third, a major bankruptcy reform went into effect in the U.S. in 2005—what did it do and how did it affect credit and mortgage markets? Finally, the paper discusses the mortgage crisis, the high social cost of foreclosures, and the difficulty of avoiding foreclosure by voluntarily renegotiation of mortgage contracts, even when such renegotiations are in the joint interest of debtors and creditors. I also discuss the pros and cons of government programs to refinance mortgages and the possibility of giving bankruptcy judges new power to change the terms of mortgage contracts in bankruptcy. |
| JEL: | E44 K35 R31 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14549&r=cba |
| By: | Stephen Gilmore; Fumio Hayashi |
| Abstract: | We discuss the foreign currency forward premium puzzle in the context of 20 internationally tradable emerging market currencies. We find that since the late 1990s the broad basket of emerging market currencies has provided significant equity-like excess returns against a number of major market currencies, but with low volatility. We also find that the forward premium, or carry, is significant in explaining that excess return but that excess returns would still have existed even in the absence of positive carry. Our calculation shows that transactions cost due to bid/offer spreads is substantially lower than commonly supposed in the academic literature. |
| JEL: | F31 G11 G15 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14528&r=cba |
| By: | James D. Adams; J. Roger Clemmons |
| Abstract: | This article is a guide to the NBER-Rensselaer Scientific Papers Database, which includes more than 2.5 million scientific publications and over 21 million citations to those papers. The data cover an important sample of 110 top U.S. universities and 200 top U.S.-based R&D-performing firms during the period 1981-1999. This article describes the file system which comprises the database, explains the variables included in the files, and discusses the functions of the various files. It includes numerous descriptive tables, as well as graphs of the data in the time series dimension. In addition, it discusses limitations and strengths of the data as well as some questions that the data might be used to address. |
| JEL: | D2 O3 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14575&r=cba |
| By: | Kenza Benhima |
| Abstract: | The paper shows that in a general equilibrium model with two countries, characterized by different levels of financial development, and two technologies, one more productive and more financially demanding than the other, the following stylized facts can be replicated: 1) the persistent US current account deficits since the beginning of the 90’s; 2) growth of output per worker in developing countries in relative terms with the US during the same period; 3) relative capital accumulation and 4) TFP growth in these countries, also relative to the US. The more productive technology takes more time to implement and is subject to liquidity shocks, while the less productive one, along with external bond assets, can be used as a hoard to finance those liquidity shocks. As a result, after financial globalization, if the emerging economy is capital scarce and if its financial market is sufficiently incomplete, it experiences an increase in net foreign assets that coincides with a fall in the less productive investment and a rise in the more productive one. Convergence towards the steady state implies then both a better allocation of capital that generates endogenous aggregate TFP gains and a rise in aggregate investment that translates into higher growth. |
| Keywords: | Growth, Capital flows, Credit constraints, financial globalization, technological change |
| JEL: | F36 F43 O16 O33 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2008-26&r=cba |
| By: | Mevlud Islami (University of Wuppertal/European Institute for International Economic Relations (EIIW)) |
| Abstract: | In this analysis the interdependence between foreign exchange markets and stock markets for selected accession and cohesion countries is discussed. This includes basic theoretical approaches. Monthly data for the nominal stock market indices and nominal exchange rates are used, where Ireland, Portugal, Spain, Greece, Poland, Czech Republic, Slovenia, and Hungary are included in the analysis. From the cointegration analysis and VAR analysis both long-term links and short-term links for Poland are identified. Conversely, for Slovenia, Hungary, Ireland, and Spain merely short-term links resulted. Surprisingly, the direction of causation is unambiguously from the stock market index to the exchange rate for all five countries considered. |
| Keywords: | Exchange Rate; Stock Markets; Cointegration; VAR; European Integration |
| JEL: | G15 F31 E44 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bwu:schdps:sdp08007&r=cba |
| By: | Bajpai, Siddharth; Mohanty, Samarendu |
| Abstract: | A structural time series approach utilizing the state space model is used to analyze the impact of exchange rate volatility on the bilateral U.S. cotton exports to major export destinations. An EGARCH (Exponential Generalized Autoregressive Conditional Heteroskedasticity) model with normal and non-normal errors is used to estimate the volatility of exchange rate. Monthly data from 1995 to 2006 is utilized for the analysis. The results indicate a negative relationship between exchange rate volatility and U.S. cotton exports for most countries. The stochastic process governing the U.S. cotton exports to different countries is found to be permanent as well as transitory. The results support the view that the impact of exchange rate volatility can be better understood by analyzing markets separately. |
| Keywords: | International Relations/Trade, Research Methods/ Statistical Methods, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:saeaed:6849&r=cba |
| By: | Sek, Siok Kun |
| Abstract: | This paper investigates empirically how the reaction of monetary policy to exchange rate has changed after the adoption of inflation targeting regime in three East Asian countries. Using a structural VAR and single equation methods, this study shows that the reactions of monetary policy to exchange rate shocks as well as CPI (demand shocks) and output (supply shocks) have declined under the inflation targeting environment. The policy function reacts weakly to the exchange rate movements before and after the financial crisis of 1997 in two out of the three countries. |
| Keywords: | exchange rate; inflation targeting; policy reaction function |
| JEL: | E58 E52 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12034&r=cba |
| By: | Carmen Broto (Banco de España) |
| Abstract: | During the last years, a number of countries have adopted formal inflation targeting (IT) monetary policy frameworks in a context of global inflation moderation. This paper studies inflation dynamics in eight Latin American countries, some of which have adopted formal targets. We analyze possible benefits associated with IT in terms of lower inflation, inflation volatility and volatility persistence. To describe inflation dynamics and evaluate its impact, we use an unobserved components model, where each component can follow a GARCH type process. In general, the main findings of the empirical exercise show that the adoption of IT has been useful to reduce the inflation level and volatility in these countries. |
| Keywords: | Inflation targets, inflation uncertainty, GARCH, structural time series models |
| JEL: | C22 C51 E52 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0826&r=cba |
| By: | Ulf Söderström |
| Abstract: | I revisit the potential costs and benefits for Sweden of joining the Economic and Monetary Union (EMU) of the European Union. I first show that the Swedish business cycle since the mid-1990s has been closely correlated with the Euro area economies, suggesting that common shocks have been an important driving force of business cycles in Europe. However, evidence from an estimated model of the Swedish economy instead suggests that country-specific shocks have been important for fluctuations in the Swedish economy since 1993, implying that EMU membership could be costly. The model also indicates that the exchange rate has to a large extent acted to destabilize, rather than stabilize, the Swedish economy, pointing to the costs of independent monetary policy with a flexible exchange rate. Finally, counterfactual simulations of the model suggest that Swedish inflation and GDP growth might have been slightly higher if Sweden had been a member of EMU since the launch in 1999, but also that GDP growth might have been more volatile. The evidence is therefore not conclusive about whether or not participation in the monetary union would be advantageous for Sweden. |
| JEL: | E42 E58 F41 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14519&r=cba |
| By: | Tweneboah , George; Adam, Anokye M. |
| Abstract: | We estimate a Vector Error Correction Model to explore the long run and short run linkages between the world crude oil price and economic activity in Ghana for the period 1970:1 to 2006:4. The results point out that there is a long run relationship between the variables under consideration. We find that an unexpected oil price increase is followed by an increase in price level and a decline in output in Ghana. We argue that monetary policy has in the past been with the intention of lessening negative growth consequences of oil price shocks, at the cost of higher inflation. |
| Keywords: | Oil price shock; cointegration; vector error correction; impulse response |
| JEL: | E31 E52 Q43 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11968&r=cba |