|
on Central Banking |
| By: | Martin S. Feldstein |
| Abstract: | As recently as two years ago there was a widespread consensus among economists that fiscal policy is not useful as a countercyclical instrument. Now governments in Washington and around the world are developing massive fiscal stimulus packages, supported by a wide range of economists in universities, governments, and businesses. Why has this change occurred? What are the principles for designing a potentially useful fiscal stimulus? And what will happen if the current fiscal stimulus fails? |
| JEL: | E6 E62 H3 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14684&r=cba |
| By: | Martin S. Feldstein |
| Abstract: | This paper was prepared for a session of the 2009 American Economic Association meeting devoted to examining the views of American economists about the euro and the European Economic and Monetary Union on the tenth anniversary of the euro. I had written an article in 1992 in the Economist and subsequent articles in the Journal of Economic Perspecties and in Foreign Affairs. I begin by reviewing the arguments that I offered at that time about the claimed advantages of a single currency and about what I regarded as the disadvantages. I then discuss my claims that the primary motivation for the creation of the euro was political, not economic and that the creation of the euro could lead to increased conflict within Europe and with the United States. I conclude with a discussion of the implications for the EMU of the current recession and the likely future economic conditions in Europe. |
| JEL: | F02 F4 F5 F51 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14696&r=cba |
| By: | Frederic S. Mishkin |
| Abstract: | This short paper argues that the view that monetary policy is ineffective during financial crises is not only wrong, but may promote policy inaction in the face of a severe contractionary shock. To the contrary, monetary policy is more potent during financial crises because aggressive monetary policy easing can make adverse feedback loops less likely. The fact that monetary policy is more potent than during normal times provides a rationale for a risk-management approach to counter the contractionary effects from financial crises, in which monetary policy is far less inertial than would otherwise be typical – not only by moving decisively through conventional or nonconventional means to reduce downside risks from the financial disruption, but also in being prepared to quickly take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks. |
| JEL: | E52 G1 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14678&r=cba |
| By: | Sudipto Bhattacharya; Willem Buiter; Sergei Guriev |
| Abstract: | The paper draws lessons from the experience of the past year for the conduct of central banks in the pursuit of macroeconomic and financial stability. Macroeconomic stability is defined as either price stability or as price stability and sustainable output or employment growth. Financial stability refers to (1) the absence of asset price bubbles, (2) the prevention or mitigation of systemically significant funding illiquidity and market illiquidity and (3) the prevention of insolvency of systemically important financial institutions. The performance of the Fed, the ECB and the Bank of England is evaluated in terms of these criteria. The Fed is judged to have done worst both as regards macroeconomic stability and as regards one of the two time dimensions of financial stability: minimizing the likelihood and severity of future financial crises. As regards ‘putting out fires’ (dealing with the immediate crisis), the Bank of England gets the wooden spoon for its early failure to perform the lender of last resort and market maker of last resort roles. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp619&r=cba |
| By: | Sushil Wadhwani |
| Abstract: | We argue that central banks can improve macroeconomic performance by reacting to asset price misalignments over and above their reaction to fixed horizon inflation forecasts. This is because such countercyclical monetary policy tends to offset the impact on output and inflation of such bubbles. In addition, if it were know ex ante that monetary policy would LATW in this way, it might reduce the probability of bubbles arising at all. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp180&r=cba |
| By: | Reinhart, Carmen; Felton, Andrew |
| Abstract: | Global financial markets are showing strains on a scale and scope not witnessed in the past three-quarters of a century. What started with elevated losses on U.S.-subprime mortgages has spread beyond the borders of the United States and the confines of the mortgage market. Many risk spreads have ballooned, liquidity in some market segments has dried up, and large complex financial institutions have admitted significant losses. Bank runs are no longer the subject exclusively of history.These events have challenged policymakers, and the responses have varied across region. The European Central Bank has injected reserves in unprecedented volumes. The Bank of England participated in the bail-out and, ultimately, the nationalization of a depository, Northern Rock. The U.S. Federal Reserve has introduced a variety of new facilities and extended its support beyond the depository sector. These events have also challenged economists to explain why the crisis developed, how it is unfolding, and what can be done. This volume compiles contributions by leading economists in VoxEU over the past year that attempt to answer these questions. We have grouped these contributions into three sections corresponding to those three critical questions. |
| Keywords: | sub-prime; financial crises; monertary policy; real estate prices;default |
| JEL: | E4 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11862&r=cba |
| By: | Reinhart, Carmen; Reinhart, Vincent |
| Abstract: | Why are investors rushing to purchase US government securities when the US is the epicentre of the financial crisis? This column attributes the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they handle the crisis. |
| Keywords: | financial crisis; exchange rates; reserves;government |
| JEL: | F2 F3 E6 |
| Date: | 2008–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12976&r=cba |
| By: | Maurice Obstfeld |
| Abstract: | Despite an abundance of cross-section, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries. The econometric difficulties are similar to those that bedevil the literature on trade openness and growth, though if anything, they are more severe in the context of finance. There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries have moved over time in the direction of further financial openness. A plausible explanation is that financial development is a concomitant of economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross-border financial flows. This survey discusses the policy framework in which financial globalization is most likely to prove beneficial. The reforms developing countries need to institute to make their economies safe for international asset trade are the same ones they need so as to curtail the power of entrenched economic interests and liberate the economy’s productive potential. |
| JEL: | F36 F43 G15 O24 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14691&r=cba |
| By: | Richard Dennis (Federal Reserve Bank of San Francisco) |
| Abstract: | In this paper I show that discretionary policymaking can be superior to timeless perspective policymaking and identify model features that make this outcome more likely. Developing a measure of conditional loss that treats the auxiliary state variables that characterize the timeless perspective equilibrium appropriately, I use a New Keynesian DSGE model to show that discretion can dominate timeless perspective policymaking when the Phillips curve is relatively flat, due, perhaps, to firm-specific capital (or labor) and/or Kimball (1995) aggregation in combination with nominal price rigidity. These results suggest that studies applying the timeless perspective might also usefully compare its performance to discretion, paying careful attention to how policy performance is evaluated. |
| Keywords: | Discretion, timeless perspective, policy evaluation. |
| JEL: | C61 E52 E58 |
| Date: | 2009–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2009_38&r=cba |
| By: | Tobias Adrian; Hyun Song Shin |
| Abstract: | In a market-based financial system, banking and capital market developments are inseparable, and funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Offering a window on liquidity, the balance sheet growth of broker-dealers provides a sense of the availability of credit. Contractions of broker-dealer balance sheets have tended to precede declines in real economic growth, even before the current turmoil. For this reason, balance sheet quantities of market-based financial intermediaries are important macroeconomic state variables for the conduct of monetary policy. |
| Keywords: | Intermediation (Finance) ; Liquidity (Economics) ; Brokers ; Economic indicators ; Financial institutions |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:360&r=cba |
| By: | Guillaume Rocheteau |
| Abstract: | This paper offers a monetary theory of asset liquidity—one that emphasizes the role of assets in payment arrangements—and it explores the implications of the theory for the relationship between assets’ intrinsic characteristics and liquidity, and the effects of monetary policy on asset prices and welfare. The environment is a random-matching economy where fiat money coexists with a real asset, and norestrictions are imposed on payment arrangements. The liquidity of the real asset is endogenized by introducing an informational asymmetry in regard to its fundamental value. |
| Keywords: | Money ; Payment systems ; Liquidity (Economics) |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0901&r=cba |
| By: | Craig S. Hakkio |
| Abstract: | This paper examines the dynamics of various measures of national, regional, and global inflation. The paper calculates the first two common factors for four measures of industrial country inflation rates: total CPI, core CPI, cyclical total CPI, and cyclical core CPI. The paper then demonstrates that the first common factor is sometimes helpful in forecasting national inflation rates. It also shows that the second common factor and the first common factor for cyclical inflation is sometimes helpful in forecasting national CPI inflation rates. Finally, the paper suggests that the commonality of industrial inflation rates reflects the commonality of the determinants of inflation. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-01&r=cba |
| By: | Ricardo J. Caballero; Arvind Krishnamurthy |
| Abstract: | The U.S. is currently engulfed in the most severe financial crisis since the Great Depression. A key structural factor behind this crisis is the large demand for riskless assets from the rest of the world. In this paper we present a model to show how such demand not only triggered a sharp rise in U.S. asset prices, but also exposed the U.S. financial sector to a downturn by concentrating risk onto its balance sheet. In addition to highlighting the role of capital flows in facilitating the securitization boom, our analysis speaks to the broader issue of global imbalances. While in emerging markets the concern with capital flows is in their speculative nature, in the U.S. the risk in capital inflows derives from the opposite concern: capital flows into the U.S. are mostly non-speculative and in search of safety. As a result, the U.S. sells riskless assets to foreigners, and in so doing, it raises the effective leverage of its financial institutions. In other words, as global imbalances rise, the U.S. increasingly specializes in holding its "toxic waste." |
| JEL: | E44 F32 F37 G12 G15 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14688&r=cba |
| By: | Hubert Kempf (Paris School of Economics - Centre d'Economie de la Sorbonne); Leopold von Thadden (European Central Bank) |
| 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. |
| JEL: | E52 E63 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:v08071&r=cba |
| By: | Eric M. Leeper; Todd B. Walker; Shu-Chun Susan Yang |
| Abstract: | Fiscal foresight -- the phenomenon that legislative and implementation lags ensure that private agents receive clear signals about the tax rates they face in the future -- is intrinsic to the tax policy process. This paper develops an analytical framework to study the econometric implications of fiscal foresight. Simple theoretical examples show that foresight produces equilibrium time series with nonfundamental representations, which misalign the agents' and the econometrician's information sets. Economically meaningful shocks to taxes, therefore, cannot generally be extracted from statistical innovations in conventional ways. Econometric analyses that fail to align agents' and the econometrician's information sets can produce distorted inferences about the effects of tax policies. The paper documents the sensitivity of econometric inferences of tax effects to details about how tax information flows into the economy. We show that alternative assumptions about the information flows that give rise to fiscal foresight can reconcile the diverse empirical findings in the literature on anticipated tax changes. |
| JEL: | E3 E6 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14630&r=cba |
| By: | Giancarlo Corsetti (Department of Economics, European University Institute); Panagiotis Th. Konstantinou (Department of Economics, University of Macedonia) |
| Abstract: | The joint dynamics of US net output, consumption, and (valuation-adjusted) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson [2004], is shown to be strikingly consistent with current account theory. While US consumption is virtually insulated from transitory shocks, these contribute considerably to the variation in net output and, even more so, in gross foreign positions, arguably smoothing temporary variations in returns. A single permanent shock – naturally interpreted as a productivity shock – raises consumption swiftly while causing net output to adjust only gradually. This leads to persistent, procyclical external deficits but, interestingly, moves gross assets and liabilities in the same direction. |
| Keywords: | Current Account; Net ForeignWealth; Consumption Smoothing; Intertemporal Approach to the Current Account; International Adjustment Mechanism; Permanent-Transitory Decomposition. |
| JEL: | C32 E21 F32 F41 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2009_03&r=cba |
| By: | Menzie Chinn (University of Wisconsin); Jeffrey Frankel (Harvard University) |
| Abstract: | The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2015. |
| Keywords: | Foreign exchange market, Euro, Dollar, Reserve currency |
| JEL: | E42 F0 F02 F31 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200831&r=cba |
| By: | Charbel BASSIL Frédérique BEC (Université de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise, CREST-INSEE, F- 92245 Malakoff Cedex) |
| Abstract: | This paper investigates the stationarity of the Federal Funds Rate. It contributes to the existing empirical literature in two ways. First, it explores both the presence of unit root and structural changes in the federal funds rate monthly data, by allowing for interaction between these two assumptions as suggested by the recent work of Lee and Strazicich. The second contribution consists in testing formally for the number of breaks. Using monthly data from January 1960 to April 2008, we find strong evidence in favor of a stationary process with two breaks. The two breaks identified correspond respectively to the first oil shock and to the change in the Fed operating procedure in the early eighties. |
| Keywords: | Federal Funds Rate; Unit root test; Structural change; Endogenous break dates. |
| JEL: | C12 C13 C22 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2008-35&r=cba |
| By: | Arthur J. Robson; Larry Samuelson |
| Date: | 2009–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:814577000000000087&r=cba |
| By: | Naci Canpolat (Hacettepe University); Hüseyin Özel (Hacettepe University) |
| Abstract: | The expansion of markets –globalization– was reversed during early 20th century and unfettered markets gave in to the welfare state and central planning. But the markets have been striking back since the early 1980s. Governments are withdrawn from economic activities, and many structural market reforms are implemented. Now the question is: Can the forces that market expansion create again reverse this expansion? This paper seeks an answer to this question by constructing an evolutionary game theoretical framework in which market and “egalitarian” societies appear as evolutionarily stable states and shows that catastrophic events such as the Great Depression can indeed cause switch over between evolutionarily stable states. |
| Keywords: | globalization, evolutionary game theory, evolutionarily stable states, behavioural strategies |
| JEL: | B52 C73 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:tek:wpaper:2008/16&r=cba |
| By: | Brandon Davies |
| Abstract: | During the past year financial institutions around the world have faced severe liquidity problems as a result of the crisis in the shadow banking sector brought on by the rapid development of structured products plus a potent mixture of high leverage and over the counter (OTC) financial derivatives. This paper explores a number of issues relating to this crisis, but in particular it examines lessons relating to the proper governance and supervision of the UK banking industry. Importantly for every issue I raise I have tried to offer some proposed solution which I believe will at least improve the current situation. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp182&r=cba |
| By: | Russell Cooper (University of Texas - Department of Economics); Hubert Kempf (Paris School of Economics - Centre d'Economie de la Sorbonne); 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. |
| JEL: | E31 E42 E58 E62 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:v08070&r=cba |
| By: | Jesús Fernández-Villaverde |
| Abstract: | In this paper, I review the literature on the formulation and estimation of dynamic stochastic general equilibrium (DSGE) models with a special emphasis on Bayesian methods. First, I discuss the evolution of DSGE models over the last couple of decades. Second, I explain why the profession has decided to estimate these models using Bayesian methods. Third, I briefly introduce some of the techniques required to compute and estimate these models. Fourth, I illustrate the techniques under consideration by estimating a benchmark DSGE model with real and nominal rigidities. I conclude by offering some pointers for future research. |
| JEL: | C11 C13 E10 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14677&r=cba |
| By: | Bermingham, Colin (Central Bank and Financial Services Authority of Ireland) |
| Abstract: | The substantial increase in oil prices over the past six or seven years has provoked considerable comment within the international media. While this increase has not had quite the same impact as that experienced in the 1970's, the magnitude of the price increases still has significant implications from a macroeconomic perspective. This is particularly the case in terms of inflation. The re-emergence of the oil price issue necessitates a re-examination of econometric estimates of the influence of oil prices on inflation. We examine this issue in the case of a small open economy - that of Ireland. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:8/rt/08&r=cba |
| By: | Naohisa Hirakata (Associate Director, Financial Systems and Bank Examination Department, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp)); Nao Sudo (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp)) |
| Abstract: | Recent empirical studies reveal that the oil price-output relationship is weakening in the US. Oil price-output correlation is less negative, and output reduction in response to oil price rise is more moderate after mid 1980s. In contrast to the conventional view that there have been changes in the economic structures that have made output less responsive to oil price shocks, we show that what have changed are the sources of oil price variation. We develop a DSGE model where oil price and US output are endogenously determined by the exogenous movements of US TFP and the oil supply. Having no changes in economic structure, our model yields dynamics of the oil price and output that show a weakening in the oil price-output relationship. There are changes in the way that the exogenous variables evolve. Two changes are important. First, oil supply variation has become moderate in recent years. Second, oil supply shortage is no longer followed by a large decline in TFP. We show that less volatile oil supply variation results in less negative oil price- output correlations, and a smaller TFP decline during oil supply shortfall implies a smaller output decline during oil price increases. |
| Keywords: | Oil Price Accounting, DSGE Model, Total Factor Productivity (TFP) |
| JEL: | E32 E37 Q41 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-01&r=cba |
| By: | Michael B. Devereux (University of British Columbia, CEPR, and NBER); Gregor W. Smith (Queen's University); James Yetman (Bank for International Settlements) |
| Abstract: | Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations across countries. The striking lack of evidence for this link — the consumption/real exchange-rate anomaly or Backus-Smith puzzle — has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of ‘hand-to-mouth’ consumers may help to explain the evidence. |
| Keywords: | international risk-sharing, Backus-Smith puzzle |
| JEL: | F41 F47 F37 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1195&r=cba |
| By: | Fabio Canova; Filippo Ferroni |
| Abstract: | We propose a method to estimate time invariant cyclical DSGE models using the information provided by a variety of filtering approaches. We treat data filtered with alternative procedures as contaminated proxy of the relevant model-based quantities and estimate structural and nonstructural parameters jointly using an unobservable component structure. We employ simulated data to illustrate the properties of the procedure and compare our estimates with those obtained when just one filter is used. We revisit the role of money in the transmission of monetary business cycles. |
| Keywords: | DSGE models, Filters, Structural estimation, Business cycles |
| JEL: | E32 C32 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1135&r=cba |
| By: | Jonathan A. Parker; Annette Vissing-Jorgensen |
| Abstract: | The consumption of high-consumption households is more exposed to fluctuations in aggregate consumption and income than that of low-consumption households in the Consumer Expenditure (CEX) Survey. The exposure to aggregate consumption growth of households in the top 10 percent of the consumption distribution in the CEX is about five times that of households in the bottom 80 percent. Given real aggregate per capita consumption growth about 3 percentage points less than its historical mean during the past year, these figures predict that the ratio of consumption of the top 10 percent to the bottom 80 percent has fallen by about 15 percentage points (relative to trend). Using income data from Piketty and Saez (2003), we show that the income (especially the wage income) of rich households is more exposed to aggregate fluctuations, so their higher income exposure is a likely contributor to their higher consumption exposure. Finally, we find a striking change in the exposure of the incomes of high-income households: prior to the early 1980's, the incomes of high-income households were not more exposed to aggregate fluctuations. Thus, while high-income households currently bear an inordinately large share of aggregate fluctuations, this is a recent occurrence. |
| JEL: | E21 E32 G1 J31 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14665&r=cba |
| By: | Laurent Ferrara (Centre d'Economie de la Sorbonne et Banque de France); Dominique Guegan (Paris School of Economics - Centre d'Economie de la Sorbonne); Patrick Rakotomarolahy (Centre d'Economie de la Sorbonne) |
| 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, forescasting, non-parametric methods. |
| JEL: | C22 C53 E32 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b08082&r=cba |
| By: | Andersson, Magnus (European Central Bank); D'Agostino, Antonello (Central Bank and Financial Services Authority of Ireland) |
| Abstract: | This paper evaluates how well sectoral stock prices forecast future economic activity compared to traditional predictors such as the term spread, dividend yield, exchange rates and money growth. The study is applied to euro area financial asset prices and real economic growth, covering the period 1973 to 2006. The paper finds that the term spread is the best predictor of future growth in the period leading up to the introduction of Monetary Union. After 1999, however, sectoral stock prices in general provide more accurate forecasts than traditional asset price measures across all forecast horizons. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:2/rt/08&r=cba |
| By: | James R. Hines, Jr.; Lawrence H. Summers |
| Abstract: | The economic changes associated with globalization tighten financial pressures on governments of high-income countries by increasing the demand for government spending while making it more costly to raise tax revenue. Greater international mobility of economic activity, and associated responsiveness of the tax base to tax rates, increases the economic distortions created by taxation. Countries with small open economies have relatively mobile tax bases; as a result, they rely much less heavily on corporate and personal income taxes than do other countries. The evidence indicates that a ten percent smaller population in 1999 is associated with a one percent smaller ratio of personal and corporate income tax collections to total tax revenues. Governments of small countries instead rely on consumption-type taxes, including taxes on sales of goods and services and import tariffs, much more heavily than do larger countries. Since the rapid pace of globalization implies that all countries are becoming small open economies, this evidence suggests that the use of expenditure taxes is likely to increase, posing challenges to governments concerned about recent changes in income distribution. |
| JEL: | H20 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14664&r=cba |
| By: | Jean-Paul Guichard (Universit 0064e Nice Sophia Antipolis, France) |
| Abstract: | In time of crisis, surprising developments: changes in currency rates can be observed; the large countries which are suffering the most see their respective currencies appreciate while at the same time the gold price decreases. There is an explanation for these paradoxes! |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200846&r=cba |
| By: | Berlemann, Michael (Helmut Schmidt University, Hamburg); Hielscher, Kai (Helmut Schmidt University, Hamburg) |
| Abstract: | According to the game-theoretic model of monetary policy, inflation is the consequence of time-inconsistent behavior of the monetary authority. The inflation bias can be eased by handing over the responsibility for monetary policy to an independent central bank and appointing a weight-conservative central banker. Countries around the world chose different combinations of central bank independence and conservatism. Most of the existing empirical studies concentrate on measuring legal or factual central bank independence thereby neglecting the degree of conservatism of the monetary authorities. In this paper we show how a joint empirical measure of central bank independence and conservatism can be derived from factual central bank behavior. Based on a panel logit approach we estimate measures of effective monetary policy conservatism for a sample of 11 OECD countries. |
| Keywords: | Central Banking; Conservatism; Central Bank Independence; Inflation |
| JEL: | E31 E58 |
| Date: | 2009–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:vhsuwp:2009_089&r=cba |
| By: | Cornel Oros (Universit 0064e Poitiers, CRIEF,France) |
| Abstract: | Given a monetary Union which is heterogeneous at the level of labour market flexibility, this paper investigates the effects in terms of macroeconomic stabilization of the different degrees of fiscal coordination between governments. We use a static Keynesian model within a closed monetary Union and we introduce an intermediate level of coordination between the national governments, which is the variable geometry coordination between economic clubs consisting of structurally close countries. The distinction between the wide Unions welfare and each country members individual welfare proves that the effectiveness of a variable geometry fiscal coordination mainly depends on the type of the economic shocks affecting the Union members, the nature of the fiscal spillovers, and the extent of the Unions structural heterogeneity. While this type of game is effective in neutralizing the demand shocks, it doesnt manage to improve the national protection of all the country members against the supply shocks. |
| Keywords: | Economic policy, Macroeconomic stabilization, Fiscal coordination, Economic shocks, Structural heterogeneity |
| JEL: | E52 E58 E61 E62 E63 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200834&r=cba |
| By: | Kapteyn, A.; Kleinjans, K.; Soest, A.H.O. van (Tilburg University, Center for Economic Research) |
| Abstract: | Euler equation estimation of intertemporal consumption models requires many, often unverifiable assumptions. These include assumptions on expectations and preferences. We aim at reducing some of these requirements by using direct subjective information on respondents’ preferences and expectations. The results suggest that individually measured welfare functions and expectations have predictive power for the variation in consumption across households. Furthermore, estimates of the intertemporal elasticity of substitution based on the estimated welfare functions are plausible and of a similar order of magnitude as other estimates found in the literature. The model favored by the data only requires cross-section data for estimation. |
| Keywords: | Expectations;Consumption;Euler equations |
| JEL: | D91 D84 D12 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200885&r=cba |
| By: | Glen Weyl |
| Date: | 2009–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:814577000000000067&r=cba |
| By: | Kleijnen, J.P.C. (Tilburg University, Center for Economic Research) |
| Abstract: | Design Of Experiments (DOE) is needed for experiments with real-life systems, and with either deterministic or random simulation models. This contribution discusses the different types of DOE for these three domains, but focusses on random simulation. DOE may have two goals: sensitivity analysis including factor screening and optimization. This contribution starts with classic DOE including 2k-p and Central Composite designs. Next, it discusses factor screening through Sequential Bifurcation. Then it discusses Kriging including Latin Hyper cube Sampling and sequential designs. It ends with optimization through Generalized Response Surface Methodology and Kriging combined with Mathematical Programming, including Taguchian robust optimization. |
| Keywords: | simulation;sensitivity analysis;optimization;factor screening;Kriging;RSM;Taguchi |
| JEL: | C0 C1 C9 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200870&r=cba |
| By: | Dellino, G.; Kleijnen, J.P.C.; Meloni, C. (Tilburg University, Center for Economic Research) |
| Abstract: | Optimization of simulated systems is tackled by many methods, but most methods assume known environments. This article, however, develops a 'robust' methodology for uncertain environments. This methodology uses Taguchi's view of the uncertain world, but replaces his statistical techniques by Response Surface Methodology (RSM). George Box originated RSM, and Douglas Montgomery recently extended RSM to robust optimization of real (non-simulated) systems. We combine Taguchi's view with RSM for simulated systems, and apply the resulting methodology to classic Economic Order Quantity (EOQ) inventory models. Our results demonstrate that in general robust optimization requires order quantities that differ from the classic EOQ. |
| Keywords: | Pareto frontier;bootstrap;Latin hypercube sampling |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200869&r=cba |
| By: | Marc Fleurbaey; Koichi Tadenuma |
| Abstract: | We propose the concept of a universal social ordering, defined on the set of pairs of an allocation and a preference profile of any finite population. It is meant to unify evaluations and comparisons of social states with populations of possibly different sizes with various characteristics. The universal social ordering not only evaluates policy options for a given population but also compares social welfare across populations, as in international or intertemporal comparisons of living standards. It also makes it possible to evaluate policy options which affect the size of the population or the preferences of its members. We study how to extend the theory of social choice in order to select such orderings on a rigorous axiomatic basis. Key ingredients in this analysis are attitudes with respect to population size and the bases of interpersonal comparisons. |
| Keywords: | social choice, universal social orderings, maximin principle, interpersonal comparisons |
| JEL: | D63 D71 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd08-024&r=cba |
| By: | Kleijnen, J.P.C.; Beers, W.C.M. van; Nieuwenhuyse, I. van (Tilburg University, Center for Economic Research) |
| Abstract: | This paper presents a novel heuristic for constrained optimization of random computer simulation models, in which one of the simulation outputs is selected as the objective to be minimized while the other outputs need to satisfy prespeci¯ed target values. Besides the simulation outputs, the simulation inputs must meet prespeci¯ed constraints including the constraint that the inputs be integer. The proposed heuristic combines (i) experimental design to specify the simulation input combinations, (ii) Kriging (also called spatial correlation mod- eling) to analyze the global simulation input/output data that result from this experimental design, and (iii) integer nonlinear programming to estimate the optimal solution from the Krig- ing metamodels. The heuristic is applied to an (s, S) inventory system and a realistic call-center simulation model, and compared with the popular commercial heuristic OptQuest embedded in the ARENA versions 11 and 12. These two applications show that the novel heuristic outper- forms OptQuest in terms of search speed (it moves faster towards high-quality solutions) and consistency of the solution quality. |
| JEL: | C0 C1 C9 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200895&r=cba |
| By: | Martin Lettau; Jessica A. Wachter |
| Abstract: | This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks convey information about how the representative investor values cash flows of different maturities. We model how the representative investor perceives risks of these cash flows by specifying a parsimonious stochastic discount factor for the economy. Shocks to dividend growth, the real interest rate, and expected inflation are priced, but shocks to the price of risk are not. Given reasonable assumptions for dividends and inflation, we show that the model can simultaneously account for the behavior of aggregate stock returns, an upward-sloping yield curve, the failure of the expectations hypothesis and the poor performance of the capital asset pricing model. |
| JEL: | G12 G13 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14698&r=cba |
| By: | Serra Garcia, M.; Damme, E.E.C. van; Potters, J.J.M. (Tilburg University, Center for Economic Research) |
| Abstract: | We examine communication in a 2-player sequential public good game in which the leader has private information about the return from contributing to it. The leader decides first and the follower observes the leader's contribution, before de- ciding whether or not to contribute. Without communication, the unique equilib- rium is fully efficient. We study whether the introduction of communication about returns can destroy efficiency. Communication can be precise (about the exact re- turn), or vague. If leaders would communicate precisely and truthfully, they would reveal that followers would do best to free ride, thereby distorting both players' incentives to invest and destroying efficiency. We show that leaders lie in order to avoid these negative consequences. If vague messages are allowed, the extent of lying drops and vague messages are used instead. Overall, followers contribute when the leader does, and the introduction of communication neither increases nor decreases contributions to the public good. |
| Keywords: | Communication; Efficiency; Lying; Public Goods. |
| JEL: | C72 C92 D83 H41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2008107&r=cba |
| By: | Ettore Andreani (University of Rostock); Kathrin Dummann (University of Rostock); Doris Neuberger (University of Rostock) |
| Abstract: | This paper examines the composition of supervisory boards of German banks for a sample of 41 large banks in the period 1999-2006. We find that the supervisory board structure reflects both outside control by shareholders and inside control by stakeholders. Most of the non-employee board members are representatives of other banks and industrial companies. The high presence of former executives and German board members indicates inside control. In banks controlled by other banks or insurance companies it is less likely that the chairperson of the supervisory board is a former executive of the same bank. Over time, inside networking through the supervisory board decreased. |
| Keywords: | corporate governance, dual board system, principal agent theory, stakeholder theory, banks |
| JEL: | G21 G34 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ros:wpaper:103&r=cba |
| By: | Wilko Bolt; Sujit Chakravorti |
| Abstract: | In this article, we survey the recent theoretical literature on payment cards and study their implications for public policy. Payment card networks have faced regulatory scrutiny in several countries regarding the setting of various fees including interchange fees fees paid by the merchant's financial institution to the cardholder's financial institution. In addition, other common payment practices such as no-surcharge rules have also been challenged in several jurisdictions. Unlike other types of markets, card payment services are network goods where two distinct end-users (i.e. consumers and merchants) must participate for the good to be consumed. |
| Keywords: | retail financial services; payment card networks; pricing; competition |
| JEL: | L11 G21 D53 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:193&r=cba |
| By: | Wilko Bolt; David Humphrey |
| Abstract: | There are numerous ways to indicate the degree of banking competition across countries. Antitrust authorities rely on the structure-conduct-performance paradigm while academics prefer price mark-ups (Lerner index) or correlations of input costs with output prices (H-statistic). These measures are not always strongly correlated when contrasted across countries or positively correlated within countries over time. Frontier efficiency analysis is used to devise an alternative indicator of competition and rank European countries by their dispersion from a \competition frontier". The frontier is determined by how well payment and other costs explain variations in loan-deposit rate spread and non-interestactivity revenues. |
| Keywords: | Banking competition; frontier analysis; European banks |
| JEL: | C31 F21 F23 F43 O47 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:194&r=cba |
| By: | Daniel C. L. Hardy |
| Abstract: | The EU is deliberating the introduction of an explicit "European mandate" for financial sector supervisors to supplement national mandates. Suggestions are made on (i) the formulation of a European mandate; (ii) the policy areas to which it should apply; (iii) which institutions should be given a European mandate; (iv) the legal basis for the mandate; (v) how to implement the mandate in practice; and (vi) how to achieve accountability for fulfilling a European mandate. Decisions on these issues are needed if the introduction of a European mandate is to have a substantive positive effect. |
| Date: | 2009–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/5&r=cba |
| By: | Miguel A. Segoviano Basurto; C. A. E. Goodhart |
| Abstract: | This paper defines a set of banking stability measures which take account of distress dependence among the banks in a system, thereby providing a set of tools to analyze stability from complementary perspectives by allowing the measurement of (i) common distress of the banks in a system, (ii) distress between specific banks, and (iii) distress in the system associated with a specific bank. Our approach defines the banking system as a portfolio of banks and infers the system's multivariate density (BSMD) from which the proposed measures are estimated. The BSMD embeds the banks' default inter-dependence structure that captures linear and non-linear distress dependencies among the banks in the system, and its changes at different times of the economic cycle. The BSMD is recovered using the CIMDO-approach, a new approach that in the presence of restricted data, improves density specification without explicitly imposing parametric forms that, under restricted data sets, are difficult to model. Thus, the proposed measures can be constructed from a very limited set of publicly available data and can be provided for a wide range of both developing and developed countries. |
| Keywords: | Financial stability , Financial risk , Banking systems , Data analysis , Economic models , |
| Date: | 2009–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/4&r=cba |
| By: | Charles Goodhart |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp181&r=cba |
| By: | Massimo Cingolani (European Investment Bank) |
| Abstract: | In two recent contributions Alain Parguez and Jean-Gabriel Bliek argued in favour of assigning a full employment objective to European economic policies and their coordination (Bliek and Parguez (2007) and Parguez (2007b)). Their argument is based on the approach of the monetary circuit, whose treatment of full employment is the object of this article. The approach is presented here as emblematic of out of equilibrium models, i.e. models where the equilibrium conditions of pure competition are not fulfilled. A forthcoming contribution will show how the description of economic reality suggested by the circuit can help interpreting recent macroeconomic developments in the US, Canada, Japan and the EU and will discuss some empirical studies confirming its relevance for policy analysis. |
| Keywords: | Unemployment, Capacity Utilisation, Circuit, Disequilibrium, Investment, Savings, Price Equation |
| JEL: | D5 E12 H5 H6 E4 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200814&r=cba |
| By: | Joseph H. Davis; Christopher Hanes; Paul W. Rhode |
| Abstract: | Most major American industrial business cycles from around 1880 to the First World War were caused by fluctuations in the size of the cotton harvest due to economically exogenous factors such as weather. Wheat and corn harvests did not affect industrial production; nor did the cotton harvest before the late 1870s. The unique effect of the cotton harvest in this period can be explained as an essentially monetary phenomenon, the result of interactions between harvests, international gold flows and high-powered money demand under America’s gold-standard regime of 1879-1914. |
| JEL: | E32 N11 N51 N61 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14686&r=cba |
| By: | Diewert, Erwin; Huwiler, Marco; Kohli, Ulrich |
| Abstract: | The consumer price index (CPI) is usually computed as a fixed-weighted Laspeyres price index, with the weights updated at discrete intervals only. It is well known that the Laspeyres functional form entails a substitution bias. One way to reduce it would be to use chained indices, and superlative ones if possible. Unfortunately, the necessary data are often missing. This paper proposes a simple method to retroactively compute the CPI once updated weights become available. The proposed index has the Fisher form. This makes it possible to assess the size of the substitution bias. An application to Swiss data is provided. |
| Keywords: | price index, inflation, superlative indices, substitution bias |
| JEL: | C43 E31 |
| Date: | 2009–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:bricol:erwin_diewert-2009-4&r=cba |
| By: | Michael G. Palumbo; Jonathan A. Parker |
| Abstract: | The initial implementation of the System of National Accounts (1993) for the United States by the Bureau of Economic Analysis and the Federal Reserve Board has two significant advantages for economists. First, the SNA are organized according to sectors of the economy defined by economic agents: firms, financial institutions, consumers, governments and the rest of the world. Second, the accounts integrate real and financial information, so that one can track not only production of, income from, and use of output, but also net lending, net borrowing, and net worth by sector. We exploit these two features in the SNA accounts to examine US economic history leading up to the financial crisis of 2007 and recession of 2008. First, the SNA data show recent increases in leverage in the household sector. We track the household shift to a net lending position through the capital and current accounts of the household sector and then the other SNA sectors. Second, in the financial businesses sector, the accounts largely miss the rise in exposure to the US housing market as well as the critical factors that significantly spread and amplified the housing-market related changes throughout the financial system and the real economy. Finally we present three ways in which SNA-type accounts could be improved to presage a similar future crisis. |
| JEL: | E01 E21 E32 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14663&r=cba |
| By: | Damba Lkhagvasuren (Concordia University); Ragchaasuren Galindev (Queens University Belfast) |
| Abstract: | The finite state Markov-Chain approximation method developed by Tauchen (1986) and Tauchen and Hussey (1991) is widely used in economics, finance and econometrics in solving for functional equations where state variables follow an autoregressive process. For highly persistent processes, the method requires a large number of discrete values for the state variables to produce close approximations which leads to an undesirable reduction in computational speed, especially in multidimensional case. This paper proposes an alternative method of discretizing vector autoregressions. The method works well as an approximation and its numerical efficiency applies to a wide range of the parameter space. |
| Keywords: | Finite State Markov-Chain Approximation, Transition Matrix, Numerical Methods, VAR, |
| JEL: | C15 C63 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:08012&r=cba |
| By: | Tatiana Cesaroni (MEF-Treasury Ministry of Economy); Louis Maccini (John Hopkins University); Marco Malgarini (ISAE - Institute for Studies and Economic Analyses) |
| Abstract: | In recent years a number of studies have investigated stylised facts concerning the most important US macroeconomic time series(Stock and Watson, 2002; McConnell and Perez-Quiros, 2000; Blanchard and Simon, 2001; Arias, Hansen, and Ohanian, 2006); One of the main results of the analysis concerns a marked volatility reduction emerging from the data since the early eighties. In this respect, the aim of this paper is twofold. Firstly, it analyzes the Euro Area business cycle stylised facts in order to gain better understanding of the European economy as compared with that of the US. Secondly, it explores the technological innovation hypothesis as an explanation of the ‘Great Moderation’, focusing on the advances in inventory management techniques due to computerisation. |
| Keywords: | Business cycle stylized facts, European survey data, Inventory behaviour. |
| JEL: | C32 E32 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:isa:wpaper:108&r=cba |
| By: | Melissa Dell; Benjamin F. Jones; Benjamin A. Olken |
| Abstract: | This paper presents novel evidence and analysis of the relationship between temperature and income. First, using sub-national data from 12 countries in the Americas, we provide new evidence that the negative cross-country relationship between temperature and income also exists within countries and even within states. Second, we provide a theoretical framework for reconciling the substantial, negative association between temperature and income in the cross-section with the even stronger short-run effects of temperature estimated by panel models. The theoretical framework suggests that half of the negative short-term effects of temperature may be offset in the long run through adaptation. |
| JEL: | O47 Q54 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14680&r=cba |
| By: | Diewert, Erwin; Hill, Robert J. |
| Abstract: | Van Veelen and van der Weide (2008) in a recent paper provided some interesting new perspectives on the index number problem. However, the present paper argues that their definitions of a true index and an exact index are different from the standard definitions in the literature. The differences between the various approaches is explained in the present paper. |
| Keywords: | Exact index numbers, true index numbers, multilateral indexes, the Fisher ideal index, cost of living indexes, the measurement of welfare change, dual |
| JEL: | C43 D11 D12 |
| Date: | 2009–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:bricol:erwin_diewert-2009-5&r=cba |
| By: | John J. Seater (North Carolina State University, USA) |
| Abstract: | A transactions model of the demand for multiple media of exchange is developed. Some results are expected, and others are both new and surprising. There are both extensive and intensive margins to currency substitution, and inflation may affect the two margins differently, leading to subtle incentives to adopt or abandon a substitute currency. Variables not previously considered in the literature affect currency substitution in complex and somewhat unexpected ways. In particular, the level of income and the composition of consumption expenditures are important, and they interact with the other variables in the model. Independent empirical work provides support for the theory. |
| Keywords: | Currency substitution, Dollarization |
| JEL: | E41 E42 E31 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200841&r=cba |
| By: | Edwin Le Heron (Sciences Po, Bordeaux, France) |
| Abstract: | Following the New Classical Macroeconomics and the New Keynesian Macroeconomics, the independence of central banks significantly increased after 1990, which could preclude the coordination between the fiscal and the monetary policies. The purpose of this paper is to consider the stabilizing effects of fiscal policy within the framework of the new monetary policies implemented by independent central banks.Firstly, we build a Post Keynesian stock-flow consistent (SFC) model with a private banks sector introducing more realistic features. New Keynesian Macroeconomics replaces the three equations of the Keynesian synthesis (IS-LM-Phillips Curve) by three new equations of the new consensus: an IS relation, a Taylor Rule and a New Keynesian Phillips Curve (IS-TR-NKPC). Our Post Keynesian SFC model replaces the IS relation. Secondly, we make simulations by imposing supply shocks (cost push) corresponding to an inflationary shock. The consequences are examined for two kinds of policy mix, for two countries: (i) For country (1), monetary policy is determined by a standard Taylor rule that corresponds to a dual mandate: output gap and inflation gap. Fiscal policy has a countercyclical effect. Broadly speaking, country (1) describes the United States. (ii) For country (2), monetary policy is determined by a ‘truncated’ Taylor rule that corresponds to a unique mandate: inflation gap only. Fiscal policy is neutralized, because we assume that the ratio of the current deficit of the Government (GD) on the GDP is constant and equal to zero, as imposed by the Maastricht Treaty. Broadly speaking, country (2) describes the European Union. |
| Keywords: | Monetary policy, fiscal policy, stock- flow consistent model, post-keynesian macroeconomics |
| JEL: | C15 E12 E31 E4 E52 E61 E62 G11 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2009-01&r=cba |
| By: | Bettina Becker; Stephen G. Hall |
| Abstract: | We propose a common factor approach to analyse convergence, which we implement using principal components analysis. This technique has not been used to analyse convergence of time series but is shown to provide a useful new tool. We show how it is in many ways a more natural way of approaching the convergence debate. We apply these ideas to a dataset of bilateral Euro and US-Dollar exchange rates of the new member countries of the European Union. Our empirical application gives sensible results about the convergence process of the new member countries’ exchange rates to the Euro. |
| Keywords: | Convergence; exchange rates; transition economies; principal components analysis |
| JEL: | F31 C22 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:09/2&r=cba |
| By: | Bettina Becker; Stephen G. Hall |
| Abstract: | We present a common factor framework of convergence which we implement using principal components analysis. We apply this technique to a dataset of monthly inflation rates of EMU and the Eastern European New Member Countries (NMC) over 1996-2007. In the earlier years, the NMC rates moved independently from an average of the three best performing countries over the past twelve months, while they moved somewhat closer in line with them in the later years. Looking at the sample of the EMU and NMC countries as a whole, there is evidence of a formation of convergence clubs across the two groups. |
| Keywords: | Convergence; inflation rates; European Monetary Union; principal components analysis |
| JEL: | C22 F31 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:09/1&r=cba |
| By: | Dubravko Mihaljek; Marc Klau |
| Abstract: | This paper estimates the Balassa-Samuelson effects for 11 countries in central and eastern Europe on a disaggregated set of quarterly data covering the period from the mid-1990s to the first quarter of 2008. The Balassa-Samuelson effects are clearly present and explain around 24% of inflation differentials vis-à-vis the euro area (about 1.2 percentage points on average); and around 84% of domestic relative price differentials between non-tradables and tradables; or about 16% of total domestic inflation (about 1.1 percentage points on average). The paper presents mixed evidence on whether the Balassa-Samuelson effects have declined since 2001 compared with the second half of the 1990s. |
| Keywords: | Balassa-Samuelson effect, productivity, inflation, transition, convergence, European monetary union, Maastricht criteria |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:270&r=cba |
| By: | Yin-Wong Cheung; Menzie D. Chinn; Eiji Fujii |
| Abstract: | We examine whether the Chinese exchange rate is misaligned and how Chinese trade flows respond to the exchange rate and to economic activity. We find, first, that the Chinese currency, the renminbi (RMB), is substantially below the value predicted by estimates based upon a cross-country sample, when using the 2006 vintage of the World Development Indicators. The economic magnitude of the mis-alignment is substantial -- on the order of 50 percent in log terms. However, the misalignment is typically not statistically significant, in the sense of being more than two standard errors away from the conditional mean. However, this finding disappears completely when using the most recent 2008 vintage of data; then the estimated undervaluation is on the order of 10 percent. Second, we find that Chinese multilateral trade flows respond to relative prices -- as represented by a trade weighted exchange rate -- but the relationship is not always precisely estimated. In addition, the direction of the effects is sometimes different from what is expected a priori. For instance, Chinese ordinary imports actually rise in response to a RMB depreciation; however, Chinese exports appear to respond to RMB depreciation in the expected manner, as long as a supply variable is included. In that sense, Chinese trade is not exceptional. Furthermore, Chinese trade with the United States appears to behave in a standard manner -- especially after the expansion in the Chinese manufacturing capital stock is accounted for. Thus, the China-US trade balance should respond to real exchange rate and relative income movements in the anticipated manner. However, in neither the case of multilateral nor bilateral trade flows should one expect quantitatively large effects arising from exchange rate changes. And, of course, these results are not informative with regard to the question of how a change in the RMB/USD exchange rate would affect the overall US trade deficit. Finally, we stress the fact that considerable uncertainty surrounds both our estimates of RMB misalignment and the responsiveness of trade flows to movements in exchange rates and output levels. In particular, the results for trade elasticities are sensitive to econometric specification, accounting for supply effects, and for the inclusion of time trends. |
| JEL: | F3 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14673&r=cba |
| By: | Kazuko Shirono |
| Abstract: | This paper examines the role of Japan against that of China in the exchange rate regime in East Asia in light of growing interest in forming a currency union in the region. The analysis suggests that currency unions with China tend to generate higher average welfare gains for East Asian countries than currency unions with Japan or the United States. Overall, Japan does not appear to be a dominant player in forming a currency union in East Asia, and this trend is likely to continue if China's relative presence continues to rise in the regional trade. |
| Keywords: | Exchange rate regimes , East Asia , Japan , China, People's Republic of , Currencies , Monetary unions , Trade , Economic cooperation , Economic models , Trade models , Data analysis , |
| Date: | 2009–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/3&r=cba |
| By: | Bianca Clausen |
| JEL: | B00 B30 B40 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:kln:iwpdip:dp02/08&r=cba |
| By: | Tang, Hsiao Chink (Asian Development Bank) |
| Abstract: | In the first-half of the global financial turmoil, rising inflation was a major concern for emerging East Asian central banks. Coupled with a slowing US economy, regional central banks faced an inevitable monetary policy choice of either addressing higher inflation or supporting moderate growth. Higher food and fuel prices were the major drivers of headline inflation. Their causes, however, were a confluence of factors--whether cyclical or structural, domestic or global, supply or demand--all reinforcing each other and contributing to widespread price escalations in all classes of commodities. In response, a raft of fiscal and administrative measures of questionable effectiveness was widely implemented. Understandably, different economies faced different balance of risks between price stability and growth, but to attribute the causes of inflation to supply shocks alone was misleading and probably explained why many central banks were reluctant and/or slow to raise interest rates. This was all the more puzzling given that inflation and inflation expectations were on the rise, and central bank credibility was not in abundance. Without much credibility, inflation expectations cannot be well-anchored. To gain credibility, a central bank must "walk-the-talk" and this is only possible if it has the autonomy to do so. |
| Keywords: | Commodity prices; inflation; monetary policy; emerging East Asia |
| JEL: | E31 E52 E58 |
| Date: | 2008–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0023&r=cba |
| By: | Luis Ignacio Jácome; Inci Ötker; Turgut Kisinbay; Francisco F. Vázquez; Alessandro Giustiniani; David Vávra; Kotaro Ishi; Karl Friedrich Habermeier |
| Abstract: | This paper analyzes the monetary policy response to rising inflation in emerging and developing countries associated with the food and oil price shocks in 2007 and the first half of 2008. It reviews inflation developments in a sample of countries covering all regions and a broad range of monetary and exchange rate policy regimes; discusses the underlying causes of inflation; provides a synthesis of policy responses taken against the background of the conflicting objectives and trade-offs, the uncertainties regarding the nature of the shocks, and the additional challenges brought on by the global financial turmoil; and presents considerations for policy. |
| Keywords: | Monetary policy , Inflation , Emerging markets , Developing countries , Exchange rate regimes , External shocks , Oil prices , Inflation targeting , Central banks , |
| Date: | 2009–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/1&r=cba |
| By: | Söderström, Ulf (Research Department, Central Bank of Sweden) |
| 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 in 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. |
| Keywords: | Monetary union; Open economy; Optimum Currency Area; DSGE model. |
| JEL: | E42 E58 F41 |
| Date: | 2008–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0227&r=cba |
| By: | Jean-Pierre Allegret (University of Lyon, France); Alain Sand-Zantman (University of Lyon, France) |
| Abstract: | This paper assesses the monetary consequences of the Latin-American integration process. Over the period 1991-2007, we analyze a sample of five Latin-American countries focusing on the feasibility of a monetary union between L.A. economies. To this end, we study the issue of business cycle synchronization with the occurrence of common shocks. First, we assess the international disturbances influence on the domestic business cycles. Second, we analyze the impact of the adoption of different exchange rate regimes on the countries responses to shocks. |
| Keywords: | Business cycles, OCA, Bayesian VAR, Latin American countries |
| JEL: | C32 E32 F42 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200832&r=cba |
| By: | Keeney, Mary J. (Central Bank and Financial Services Authority of Ireland) |
| Abstract: | In this paper we represent structural unemployment by relating observed unemployment to wage inflation. An estimated series for the non-accelerating wage rate of unemployment (NAWRU) shows that the unemployment gap between observed unemployment and the structural rate provides an intuitive account of prevailing aggregate demand conditions within the Irish economy over the period 1980 to 2005. This indicates that the estimated NAWRU series is a good measure of Irish structural unemployment over the period. The estimated NAWRU was at a high level throughout the 1980s and declined over time such that any excess labour slack was dissipated by the mid-1990s. Between 1994 and 2001, the observed unemployment rate was below the estimated NAWRU indicating that the substantial inflationary pressure on wages was justified for the period. Since then, the gap between the estimate of the structural rate and observed rates of unemployment was not that substantial and reflects a healthier situation vis-à-vis wage inflationary pressure. The situation may have been helped by significant inward migration and productivity increases becoming embedded in the Irish economy. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:7/rt/08&r=cba |
| By: | Selahattin Togay (Gazi University); Nezir Kose (Gazi University) |
| Abstract: | In this study, the endogenous money hypothesis is examined for the Argentinean economy employing exogeneity tests by using monthly data for the time period 1991-2001 within the frame of money and price relationship in a Currency Board-like system. Empirical results support the hypothesis which suggests that money supply is endogenous. |
| Keywords: | Currency Board, Argentina, Money Supply Endogeneity, Exogeneity Test |
| JEL: | C12 C22 E51 E58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:tek:wpaper:2009/1&r=cba |
| By: | Secil Topak; Alfredo Cuevas |
| Abstract: | When faced with a relative price shock, monetary authorities often aim to contain its second round effects on inflation while accepting first round effects. We analyze the experience of South Africa and other inflation targeters to explore whether and when this policy prescription implies changing the monetary policy stance. Inflation targeting central banks differ on how aggressively they typically react to relative price shocks, reflecting differences in resilience of underlying inflation to such shocks. An examination of individual policy decisions reveals the importance of the broader economic context in framing the responses to relative price shocks. |
| Keywords: | Monetary policy , South Africa , External shocks , Inflation targeting , Pricing policy , Central banks , Energy prices , Commodity prices , |
| Date: | 2009–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/289&r=cba |
| By: | Ruthira Naraidoo (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria) |
| Abstract: | A simple empirical nonlinear framework is used to analyse monetary policy between 1983 and 2007 in South Africa, focusing on the policy of in?ation targeting introduced in Feb 2000, more precisely when the South African Reserve Bank (SARB) announced that an inflation zone targeting regime of 3-6% would be in place. We find that a model specification embodying a simple inflation learning rule for the future inflation rate seems to provide a better understanding of the decision process made by the SARB in its interest rate setting policy. The main findings are that the adoption of inflation targeting led to significant changes in monetary policy, secondly, post-2000 monetary policy is asymmetric as policy-makers respond more to downward deviation of inflation away from the target, thirdly, post-2000 policy-makers may be attempting to keep inflation within the 4.5%-6.9% range rather than pursuing a target zone of 3-6% as generally pre- announced and fourthly, the response of monetary policy to in?ation is nonlinear as interest rates respond more when inflation is further from the target. |
| Keywords: | Monetary policy, inflation targeting, inflation learning rule, nonlinear smooth transition model |
| JEL: | C51 E52 E58 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200904&r=cba |
| By: | Balogun, Emmanuel Dele |
| Abstract: | This paper examines the determinants of inflation differentials in a panel of West African Monetary Zone (WAMZ) states vis-à-vis its set benchmark for macroeconomic convergence since 2000 to date. Using a stylized 5-country model of WAMZ area, the differences in national inflation is analyzed in light of country specific shocks or differences in the monetary transmission mechanisms. The main results show macroeconomic (price) stabilization around a desired target was not attained. Over the sample period, the un-weighted average regional inflation rates were most often above a single digit target and vary widely among the countries. The major monetary policy instruments determinants of inflationary divergence are the pursuit of distorted interest rates, exchange rates overvaluation and expansionary monetary policies, which penalized credit and accentuated output supply/demand gaps. |
| Keywords: | Inflation differentials; price convergence; exchange rate; WAMZ members; panel data |
| JEL: | E31 E52 |
| Date: | 2009–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13045&r=cba |