|
on Central Banking |
| By: | David A. Dodge |
| Keywords: | monetary policy, inflation targeting |
| JEL: | E52 E58 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdh:benlec:2008&r=cba |
| By: | Ahrend, Rudiger |
| Abstract: | This paper addresses the question of whether and how easy monetary policy may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and financial imbalances -- the (partial) unwinding of which helped trigger the 2007/08 financial market turmoil. |
| Keywords: | Interest rates, monetary policy, housing, sub-prime crisis, financial markets, macro-prudential, regulation Taylor rule, house prices |
| JEL: | E44 E5 F3 G15 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7465&r=cba |
| By: | Sinclair, Peter J. N. |
| Abstract: | This paper endeavours to illustrate the consequences of a credit squeeze by inserting a standard model of retail banks into some familiar macroeconomic models. Some possible policy conclusions are drawn about the benefits of incentives to increase lending at these times, and to reduce it in much better times. |
| Keywords: | Credit famine, credit crunch |
| JEL: | D53 D86 G32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7461&r=cba |
| By: | Tatom, John |
| Abstract: | In late 2008 and early 2009, there has been a serious deterioration in the economic outlook of political leaders, the media and many economic analysts. Comparisons of recent performance and the outlook have degenerated into comparisons with the Great Depression of the 1930s, suggesting that the current recession is the worst since the 1930s. This recession should be called the superlative recession because discussions invariably refer to the most dismal performance since the Great Depression. These superlative comparisons are far off base. But more importantly, the superlatives seem to have succeeded in reversing 70 years of history on economic policy and economic thought. With the benefit of time, depression era policies had been seen as complete failures that extended and worsened the depression. A long delayed monetary policy easing has offered new possibilities for an end to the deepening recession, but its continuation remains in doubt because it is the result of a shift in policy procedures more than of a shift in policy. More troublesome is that massive fiscal policy programs have become central to the policy debate, despite three large failed fiscal responses over the past year and a strong consensus in the policy community that such efforts are not likely to be effective. A change of leadership has focused efforts on increasing federal spending in ways and to an extent not seen in many years, comparable with the fall 2008 explosion in money growth and putting fiscal policy in the same superlative response category as the recession itself. |
| Keywords: | recession; monetary policy; fiscal policy |
| JEL: | E32 E52 E63 A10 |
| Date: | 2009–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13115&r=cba |
| By: | Gabriel Jiménez (Banco de España); Steven Ongena (Center–Tilburg University); José Luis Peydró (European Central Bank); Jesús Saurina (Banco de España) |
| Abstract: | We identify the impact of short-term interest rates on credit risk-taking by analyzing a comprehensive credit register from Spain, a country where for the last twenty years monetary policy was mostly decided abroad. Discrete choice, within borrower comparison and duration analyses show that lower overnight rates prior to loan origination lead banks to lend more to borrowers with a worse credit history and to grant more loans with a higher per period probability of default. Lower overnight rates during the life of the loan reduce this probability. Bank, borrower and market characteristics determine the impact of overnight rates on credit risk-taking. |
| Keywords: | monetary policy, low interest rates, financial stability, lending standards, credit risk-taking, credit composition, business cycle, liquidity risk |
| JEL: | E44 E5 G21 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0833&r=cba |
| By: | Troy Davig; Taeyoung Doh |
| Abstract: | This paper reports the results of estimating a Markov-Switching New Keynesian (MSNK) model using Bayesian methods. The broadest and best fitting MSNK model is a four-regime model allowing independent changes in the regimes governing monetary policy and the volatility of the shocks. We use the estimates to investigate the mechanisms that lead to a decline in the persistence of inflation. We show that the population moment describing the serial correlation of inflation is a weighted average of the autocorrelation parameters of the exogenous shocks. Changes in the monetary or shock volatility regimes shift weight over these serial correlation parameters and affect the serial correlation properties of inflation. Estimation results indicate that a shift to a monetary regime that reacts more aggressively to inflation reduces the weight on the more persistent shocks, so lowers inflation persistence. Similarly, a shift to the low-volatility regime reduces the weight on the more persistent shocks and also contributes to reducing inflation persistence. Estimates of model-implied inflation persistence indicate that it began rising in the late 1960s and peaked around the Volcker disinflation. The subsequent decline in persistence is due to both a more aggressive monetary policy regime and less volatile shocks. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-16&r=cba |
| By: | John Y. Campbell; Adi Sunderam; Luis M. Viceira |
| Abstract: | The covariance between US Treasury bond returns and stock returns has moved considerably over time. While it was slightly positive on average in the period 1953-2005, it was particularly high in the early 1980's and negative in the early 2000's. This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by five state variables: the real interest rate, risk aversion, temporary and permanent components of expected inflation, and the covariance between nominal variables and the real economy. The last of these state variables enables the model to fit the changing covariance of bond and stock returns. Log nominal bond yields and term premia are quadratic in these state variables, with term premia determined mainly by the product of risk aversion and the nominal-real covariance. The concavity of the yield curve -- the level of intermediate-term bond yields, relative to the average of short- and long-term bond yields -- is a good proxy for the level of term premia. The nominal-real covariance has declined since the early 1980's, driving down term premia. |
| JEL: | G0 G10 G11 G12 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14701&r=cba |
| By: | Zheng Liu; Daniel F. Waggoner; Tao Zha |
| Abstract: | We study the sources of the Great Moderation by estimating a variety of medium-scale DSGE models that incorporate regime switches in shock variances and in the inflation target. The best-fit model, the one with two regimes in shock variances, gives quantitatively different dynamics in comparison with the benchmark constant-parameter model. Our estimates show that three kinds of shocks accounted for most of the Great Moderation and business-cycle fluctuations: capital depreciation shocks, neutral technology shocks, and wage markup shocks. In contrast to the existing literature, we find that changes in the inflation target or shocks in the investment-specific technology played little role in macroeconomic volatility. Moreover, our estimates indicate much less nominal rigidities than those suggested in the literature. |
| Keywords: | Econometric models ; Business cycles |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2009-01&r=cba |
| By: | Jorda, Oscar (U of California, Davis); Marcellino, Massimiliano (Universita Bocconi) |
| 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 Scheffe'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. |
| JEL: | C32 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ucdeco:08-5&r=cba |
| By: | Hilde C. Bjørnland (Norwegian School of Management (BI) and Norges Bank (Central Bank of Norway)); Karsten Gerdrup (Norges Bank (Central Bank of Norway)); Anne Sofie Jore (Norges Bank (Central Bank of Norway)); Christie Smith (Norges Bank (Central Bank of Norway)); Leif Anders Thorsrud (Norges Bank (Central Bank of Norway)) |
| Abstract: | We develop a system that provides model-based forecasts for inflation in Norway. Forecasts are recursively evaluated from 1999 to 2008. The performance of the models over this period is then used to derive weights that are used to combine the forecasts. Our results indicate that model combination improves upon the point forecasts from individual models. Furthermore, when comparing the whole forecasting period; model combination outperforms Norges Banks own point forecast for inflation at the forecast horizon up to a year. By using a suite of models we allow for a greater range of modelling techniques and data to be used in the forecasting process. |
| Keywords: | Forecasting, forecast combination |
| JEL: | E52 E37 E47 |
| Date: | 2009–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_01&r=cba |
| By: | Seth Pruitt |
| Abstract: | An economic agent who is uncertain of her model updates her beliefs in response to the data. The updating is sensitive to measurement error which, in many cases of macroeconomic interest, is apparent from the process of data revision. I make this point through simple illustrations and then analyze a recent model of the Federal Reserve's role in U.S. inflation. The existing model succeeds at fitting inflation to optimal policy, but fails to link inflation to the economic trade-off at the heart of the story. I modify the model to account for data uncertainty and find that doing so ameliorates the existing problems. This suggests that the Fed's model uncertainty is largely overestimated by ignoring data uncertainty. Consequently, now there is an explanation for the rise and fall in inflation: the concurrent rise and fall in the perceived Philips curve trade-off. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:962&r=cba |
| By: | Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan Angel García (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The yield spread between nominal and inflation-linked bonds (or break-even inflation rates, BEIR) is a fundamental indicator of inflation expectations (and associated premia). This paper investigates which macroeconomic and financial variables explain BEIRs. We evaluate a large number of potential explanatory variables through Bayesian model selection techniques and document their explanatory power at different horizons. At short horizons, actual inflation dynamics is the main determinant of BEIRs. At long horizons, financial variables (i.e. term spread, bond market volatility) become increasingly relevant, but confidence and cyclical indicators remain important. JEL Classification: C11, C52, E31. |
| Keywords: | Break-even inflation rates, inflation risk premia, business cycle indicators, Bayesian model selection. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20090996&r=cba |
| By: | Wohltmann, Hans-Werner; Winkler, Roland |
| Abstract: | This paper compares the welfare effects of anticipated and unanticipated cost-push shocks in the canonical New Keynesian model with optimal monetary policy. We find that, for empirically plausible degrees of nominal rigidity, the anticipation of a future cost-push shock leads to a higher welfare loss than an unanticipated shock. A welfare gain from the anticipation of a future cost shock may only occur if prices are sufficiently flexible. We analytically show that this surprising result holds although unanticipated shocks lead to higher negative impact effects on welfare than anticipated shocks. |
| Keywords: | Anticipated Shocks, Optimal Monetary Policy, Sticky Prices, Welfare Analysis |
| JEL: | E31 E32 E52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:7469&r=cba |
| By: | Totzek, Alexander |
| Abstract: | Currently, private trust in commercial banks declines as a consequence of today´s financial crisis. As past crises, e.g. the Asian crisis, show, the loss of confidence in the financial sector typically causes private agents to withdraw their capital from financial institutions. Thus, the purpose of this paper is to implement the feature of early deposit withdrawal in a New Keynesian framework with commercial banks in order to analyze the implications of a loss of confidence. In addition, we present the optimal monetary policy to ensure a stabilized system. |
| Keywords: | banks, financial crises, deposit withdrawal, optimal monetary policy |
| JEL: | E44 E50 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:7468&r=cba |
| By: | Roger E.A. Farmer; Tao Zha; Daniel F. Waggoner |
| Abstract: | We develop a set of necessary and sufficient conditions for equilibria to be determinate in a class of forward-looking Markov-switching rational expectations models and we develop an algorithm to check these conditions in practice. We use three examples, based on the new-Keynesian model of monetary policy, to illustrate our technique. Our work connects applied econometric models of Markov-switching with forward looking rational expectations models and allows an applied researcher to construct the likelihood function for models in this class over a parameter space that includes a determinate region and an indeterminate region. |
| JEL: | C02 C1 E0 E4 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14710&r=cba |
| By: | Steinar Holden (University of Oslo, Norges Bank (Central Bank of Norway)and CESifo Department of Economics, University of Oslo); Fredrik Wulfsberg (Norges Bank (Central Bank of Norway)) |
| Abstract: | A number of recent studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries. However, DNWR for individual workers may induce downward rigidity or "a floor" for the aggregate wage growth at positive or negative levels. Aggregate wage growth may be below zero because of compositional effects, for example that old, high-wage workers are replaced by young low-wage workers. DNWR may also lead to a positive growth in aggregate wages because of changes in relative wages. We explore industry data for 19 OECD countries, over the period 1971-2006. We find evidence for floors on nominal wage growth at 6 percent and lower in the 1970s and 1980s, at one percent in the 1990s, and at 0.5 percent in the 2000s. Furthermore, we find that DNWR is stronger in country-years with strict employment protection legislation, high union density, centralised wage setting and high inflation. |
| Keywords: | Wage inflation, downward nominal wage rigidity, OECD, wage setting |
| JEL: | J3 C14 C15 E31 |
| Date: | 2009–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_02&r=cba |
| By: | Tambakis, D.N. |
| Abstract: | This paper shows that convexity of the short-run Phillips curve is a source of positive inflation bias even when policymakers target the natural unemployment rate, that is when they operate with prudent discretion, and their loss function is symmetric. Optimal monetary policy also induces positive co-movement between average inflation, average unemployment and inflation variability–suggesting a new motive for inflation stabilization policy–and positively skewed unemployment distributions. The reduced form model is applied to the post-disinflation period (1986-2006) in developed countries and its properties are illustrated numerically for the United States. |
| Keywords: | Monetary policy, inflation bias, inflation variability, prudent discretion. |
| JEL: | E24 E31 E52 E58 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0859&r=cba |
| By: | Farvaque, Etienne; Héricourt, Jérôme; Lagadec, Gaël |
| Abstract: | We contrast the influence of demography and central bank independence on inflation. The recent demographic trends in developed countries are shown to weight more on inflation than central bank independence, while the contrary stands for the period from 1960 to 1979. |
| Keywords: | Demography ; Central Bank Independence ; Inflation |
| JEL: | E58 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13076&r=cba |
| By: | Pfajfar, D.; Zakelj, B. (Tilburg University, Center for Economic Research) |
| Abstract: | Using laboratory experiments, we establish a number of stylized facts about the process of inflation expectation formation. Within a New Keynesian sticky price framework, we ask subjects to provide forecasts of inflation and their corresponding confidence bounds. We study individual responses and properties of the aggregate empirical distribution. Many subjects do not rely on a single model of expectation formation, but are rather switching between di¤erent models. About 40% of the subjects predominately use a rational rule when forecasting inflation and about 35% of agents simply extrapolate trend. Around 5% of subjects behave in an adaptive manner, while the remaining 20% behaves in accordance to adaptive learning and sticky information models. Furthermore, we find that subjects in only 60% of cases correctly perceive the underlying uncertainty in the economy when reporting confidence intervals. However, empirical analysis does not support a significant countercyclical behavior of individuals' confidence intervals. |
| Keywords: | Inflation Expectations;Experiments;New Keynesian Model;Adaptive Learning |
| JEL: | E37 C90 D80 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200907&r=cba |
| By: | Willem Van Zandweghe |
| Abstract: | Models of the monetary transmission mechanism often generate empirically implausible business fluctuations. This paper analyzes the role of on-the-job search in the propagation of monetary shocks in a sticky price model with labor market search frictions. Such frictions induce long-term employment relationships, such that the real marginal cost is determined by real wages and the cost of an employment relationship. On-the-job search opens up an extra channel of employment growth that dampens the response of these two components. Because real marginal cost rigidity induces small price adjustments, on-the-job search gives rise to a strong propagation of monetary shocks that increases output persistence. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-03&r=cba |
| By: | Tierney, Heather L.R. |
| Abstract: | Using parametric and nonparametric methods, inflation persistence is examined through the relationship between exclusions-from-core inflation and total inflation for two sample periods and in five in-sample forecast horizons ranging from one quarter to three years over fifty vintages of real-time data in two measures of inflation: personal consumption expenditure and the consumer price index. Unbiasedness is examined at the aggregate and local levels. A local nonparametric hypothesis test for unbiasedness is developed and proposed for testing the local conditional nonparametric regression estimates, which can be vastly different from the aggregated nonparametric model. This paper finds that the nonparametric model outperforms the parametric model for both data samples and for all five in-sample forecast horizons. |
| Keywords: | Real-Time Data; Local Estimation; Nonparametrics; Inflation Persistence; Monetary Policy |
| JEL: | C14 E52 E40 |
| Date: | 2009–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13089&r=cba |
| By: | Amanor-Boadu, Vincent; Zereyesus, Yacob |
| Abstract: | Recent increases in commodity prices have led to calls for the regulation of speculators. These calls have come from many reputable quarters including leading agricultural and food policy institutions such as International Food Policy Research Institute as well as different members of the U.S. Congress. They are based on an assumption that speculative activities are a primary or major source of the volatility in the markets and that controlling these activities through regulations would bring more stability to the market. The paper tests this hypothesis and assesses the contribution of speculative activities in the commodity markets over the past decade to price inflation. The paper argues that government regulatory policies to control speculation in commodity markets is a second best solution that would probably yield neutral or negative benefits to the very people the policy aims to protect. |
| Keywords: | speculators, inflation, prices, ARIMA, Agricultural and Food Policy, Agricultural Finance, |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ags:saeana:46841&r=cba |
| By: | Arghyrou, Michael G (Cardiff Business School); Gregoriou, Andros; Pourpourides, Panayiotis M. (Cardiff Business School) |
| Abstract: | Market imperfections are the main explanation offered by the existing literature for violations of the Law of One Price and Purchasing Power Parity (PPP) among industrialised countries. We argue that even in perfectly frictionless markets risk aversion driven by exchange rate uncertainty causes a wedge between the domestic and foreign price of a totally homogeneous good. We test this hypothesis on a unique data set from a real-world market with minimum imperfections; and aggregate data for bilateral US dollar exchange rates in the G7 area. The empirical findings validate our hypothesis, thus providing a new, additional to market-imperfections, solution to the PPP puzzles. |
| Keywords: | Law of one price; purchasing power parity; risk aversion; exchange rate uncertainty |
| JEL: | F31 F41 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2009/2&r=cba |
| By: | Daniel L. Thornton |
| Abstract: | An unresolved puzzle in the empirical foreign exchange literature is that tests of forward rate unbiasedness using the forward rate and forward premium equations yield markedly different conclusions about the unbiasedness of the forward exchange rate. This puzzle is resolved by showing that because of the persistence in exchange rates, estimates of the slope coefficient from the forward premium equation are extremely sensitive to small violations of the null hypothesis of the type and magnitude that are likely to exist in the real world. Moreover, contrary to suggestions in the literature and common practice, the forward premium equation does not necessarily provide a better test of unbiasedness than the forward rate equation. |
| Keywords: | Foreign exchange |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-02&r=cba |
| By: | Fair, Ray C. (Yale U) |
| Abstract: | This paper begins with the expectations theory of the term structure of interest rates with constant term premia and then postulates how expectations of future short term interest rates are formed. Expectations depend in part on predictions from a set of VAR equations and in part on the current and two lagged values of the short term interest rate. The results suggest that there is relevant independent information in both the VAR equations' predictions and the current and two lagged values of the short rate. The model fits the long term interest rate data well, including the 2004-2006 period, which some have found a puzzle. The properties of the model are consistent with the response of the long term U.S. Treasury bond rate to surprise price and employment announcements. The overall results suggest that long term rates can be fairly well explained by modeling expectation formation of future short term rates. |
| JEL: | E43 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:yaleco:32&r=cba |
| By: | Jian Wang; Jason J. Wu |
| Abstract: | This paper attacks the Meese-Rogoff (exchange rate disconnect) puzzle from a different perspective: out-of-sample interval forecasting. Most studies in the literature focus on point forecasts. In this paper, we apply Robust Semi-parametric (RS) interval forecasting to a group of Taylor rule models. Forecast intervals for twelve OECD exchange rates are generated and modified tests of Giacomini and White (2006) are conducted to compare the performance of Taylor rule models and the random walk. Our contribution is twofold. First, we find that in general, Taylor rule models generate tighter forecast intervals than the random walk, given that their intervals cover out-of-sample exchange rate realizations equally well. This result is more pronounced at longer horizons. Our results suggest a connection between exchange rates and economic fundamentals: economic variables contain information useful in forecasting the distributions of exchange rates. The benchmark Taylor rule model is also found to perform better than the monetary and PPP models. Second, the inference framework proposed in this paper for forecast-interval evaluation, can be applied in a broader context, such as inflation forecasting, not just to the models and interval forecasting methods used in this paper. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:963&r=cba |
| By: | V. Filipe Martins-da-Rocha (Graduate School of Economics, Getulio Vargas Foundation, Rio de Janeiro); Frank Riedel (Institute of Mathematical Economics, Bielefeld University) |
| Abstract: | We combine general equilibrium theory and théorie générale of stochastic processes to derive structural results about equilibrium state prices. |
| Keywords: | general equilibrium, continuous time finance, théorie générale of stochastic processes, asset pricing, state prices |
| JEL: | D51 D91 G10 G12 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:397&r=cba |
| By: | Pietro Bonaldi; Andrés González; Juan David Prada; Diego A. Rodríguez |
| Abstract: | En este artículo se propone un método numérico para la calibración de un modelo de equilibrio general dinámico y estocástico (DSGE). Esencialmente, éste consiste en utilizar un algoritmo híbrido de optimización, primero para encontrar un estado estacionario del modelo, y luego para minimizar una función objetivo que se define según cuál sea el propósito del investigador con el proceso de calibración. El algoritmo propuesto consiste en una aplicación del Simulated Annealing seguida de métodos tradicionales de optimización. Las bondades del algoritmo se analizan mediante simulaciones de Monte Carlo usando un modelo de economía cerrada cuyo estado estacionario no tiene solución analítica. Los resultados de este ejercicio muestran que el algoritmo propuesto genera resultados más precisos utilizando menos recursos computacionales que alternativas tradicionales. Por último se presentan los resultados de la calibración de un modelo para la economía colombiana que consta de 179 ecuaciones y que se ajusta a 50 razones con 50 parámetros. La máxima desviación porcentual entre las razones del modelo y los valores correspondientes de la economía colombiana es de 7;9% y en 29 de los 50 casos, esta desviación es menor o igual al 1%. |
| Date: | 2009–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005265&r=cba |
| By: | Alexander Chudik (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); M. Hashem Pesaran (University of Cambridge, CIMF and USC; Faculty of Economics, Austin Robinson Building, Sidgwick Avenue, Cambridge, CB3 9DD, United Kingdom.) |
| Abstract: | This paper introduces a novel approach for dealing with the 'curse of dimensionality' in the case of large linear dynamic systems. Restrictions on the coefficients of an unrestricted VAR are proposed that are binding only in a limit as the number of endogenous variables tends to infinity. It is shown that under such restrictions, an infinite-dimensional VAR (or IVAR) can be arbitrarily well characterized by a large number of finite-dimensional models in the spirit of the global VAR model proposed in Pesaran et al. (JBES, 2004). The paper also considers IVAR models with dominant individual units and shows that this will lead to a dynamic factor model with the dominant unit acting as the factor. The problems of estimation and inference in a stationary IVAR with unknown number of unobserved common factors are also investigated. A cross section augmented least squares estimator is proposed and its asymptotic distribution is derived. Satisfactory small sample properties are documented by Monte Carlo experiments. JEL Classification: C10, C33, C51. |
| Keywords: | Large N and T Panels, Weak and Strong Cross Section Dependence, VAR, Global VAR, Factor Models. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20090998&r=cba |
| By: | Ida Wolden Bache (Norges Bank (Central Bank of Norway)); Kjersti Næss (Norges Bank (Central Bank of Norway)); Kjersti Næss (Norges Bank (Central Bank of Norway)); Tommy Sveen (Norges Bank (Central Bank of Norway)) |
| Abstract: | In an influential paper Engel (1999. Accounting for U.S. Real Exchange Rate Changes, Journal of Political Economy 107, 507-538) argues that essentially all the flctuations in the real exchange rate can be attributed to fluctuations in the relative price of traded goods, and that only a small part of the fluctuations can be attributed to changes in the relative price of non-tradables. We instead decompose the real exchange rate into three components: the relative price of traded goods at-the-dock, the difference in the relative price of non-traded to traded goods and the difference in the wedge between retail prices of traded goods and the prices of traded goods at-the-dock. Using data on US bilateral real exchange rates we find that the fluctuations in the relative wedge between retail prices and traded goods prices at-the-dock account for on average between 30 and 70 percent of the movements in the real exchange rate. These findings suggest that the relationship between traded goods prices at-the-dock and retail prices of traded goods is key to understanding real exchange rate fluctuations. |
| Keywords: | Real exchange rates |
| JEL: | F31 F41 |
| Date: | 2009–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_03&r=cba |
| By: | Fair, Ray C. (Yale U) |
| Abstract: | This paper takes a somewhat different approach from the recent literature in estimating exchange rate equations. It assumes uncovered interest rate parity and models how expectations are formed. Agents are assumed to base their expectations of future interest rates and prices, which are needed in the determination of the exchange rate, on predictions from a ten equation VAR model. The overall model is estimated by FIML under model consistent expectations. The model generally does better than the random walk model, and its properties are consistent with observed effects on exchange rates from surprise interest rate and price announcements. Also, the focus on expectations is consistent with the large observed short run variability of exchange rates. |
| JEL: | F31 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:yaleco:33&r=cba |
| By: | Jeffrey A. Frankel |
| Abstract: | The paper updates the answer to the question: what precisely is the exchange rate regime that China has put into place since 2005, when it announced a move away from the dollar peg? Is it a basket anchor with the possibility of cumulatable daily appreciations, as was announced at the time? We apply to this question a new approach to estimating countries' de facto exchange rate regimes, a synthesis of two techniques. One is a technique that has been used in the past to estimate implicit de facto currency weights when the hypothesis is a basket peg with little flexibility. The second is a technique used to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the dollar or some other single major currency. Since the RMB and many other currencies today purportedly follow variants of Band-Basket-Crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. The synthesis adds a variable representing "exchange market pressure" to the currency basket equation, whereby the degree of flexibility is estimated at the same time as the currency weights. This approach reveals that by mid-2007, the RMB basket had switched a substantial part of the dollar's weight onto the euro. The implication is that the appreciation of the RMB against the dollar during this period was due to the appreciation of the euro against the dollar, not to any upward trend in the RMB relative to its basket. |
| JEL: | F31 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14700&r=cba |
| By: | Betty C. Daniel; Christos Shiamptanis |
| Abstract: | A country entering the EMU surrenders its monetary policy, and its debt becomes denominated in terms of a currency over which it has no direct control. A country's promise to uphold the fiscal limits in the Maastricht Treaty and the Stability and Growth Pact is implicitly a promise not to allow its fiscal stance to deteriorate to a position in which it places pressure on the central bank to forgo its price level target to finance fiscal deficits. Violation of these limits has raised questions about potential fiscal encroachment on the monetary authority's freedom to determine the price level. We specify a simple model of fiscal policy in which the fiscal authority faces an upper bound on the size of its primary surplus. Policy is determined by a fiscal rule, specified as an error correction model, in which the primary surplus responds to debt and a target variable. We show that for the monetary authority to have the freedom to control price, the primary surplus must respond strongly enough to lagged debt. Using panel techniques that allow for unit roots and for heterogeneity and cross-sectional dependence across countries, we estimate the coefficients of the error correction model for the primary surplus in a panel of ten EMU countries over the period 1970-2006. The group mean estimate for the coefficient on lagged debt is consistent with the hypothesis that the monetary authority can control the price level in the EMU, independent of fiscal influence. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:961&r=cba |
| By: | J. Christina Wang; Susanto Basu |
| Abstract: | This paper makes three points regarding the proper measurement of the output of financial intermediaries. Two of them concern the measurement of nominal financial output, especially banking output. First, we show that, to impute the nominal value of implicitly priced financial output, it is necessary to adjust each reference rate of interest (also called “the user cost of fundsâ€) for the risk inherent in that corresponding financial transaction. Otherwise, nominal financial output will be overstated, and the bias can be large (about 25 percent). Second, we argue that, according to finance theory, the required risk correction can be implemented practically at the level of industries (e.g., the banking sector as a whole). The third point concerns the construction of a financial services price index, and thus applies to the measurement of real output. We argue that the reference rates or the related rate spreads, which are used to impute the nominal output of financial institutions, are not the right implicit price deflators for deriving the real output of financial institutions |
| JEL: | E01 E44 G21 G32 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14614&r=cba |
| By: | Kai Christoffel; Keith Kuester; Tobias Linzert |
| Abstract: | In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions.> We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy. |
| Keywords: | Labor market - Europe ; European Union countries ; Monetary policy - Europe |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-1&r=cba |
| By: | Frankel, Jeffrey (Harvard U) |
| Abstract: | An advantage of monetary union is facilitating trade. After many critiques, Rose's basic finding is left standing: currency unions have greater trade effects than previously believed. Updated estimates also find an effect of the euro on trade among members that is significant (though mysteriously still only 15%). An argument for retaining monetary independence is asymmetric shocks, i.e., low cyclical correlation. Eastern European countries might want to wait before joining, because their trade patterns and cyclical correlations have been gradually shifting toward Western Europe anyway; thus the argument for the euro strengthens as time passes, while the argument against it weakens. |
| JEL: | F10 F33 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp08-059&r=cba |
| By: | Almira Buzaushina; Michael Brei |
| Abstract: | In the present paper, we develop a two-sector general equilibrium model of a small open economy to explore the transmission mechanisms of external financial shocks. In particular, we use a cash-in- advance model with limited participation augmented with a financial friction in the form of a fundamentals-related risk premium on external funds. The friction amplifies the effects of external financial shocks, especially when the economy is highly indebted in foreign currency. For a set of Latin American economies, the theoretical model is calibrated to match the empirical impulse responses of output, investment, trade balance, and domestic credits in response to an adverse shock to the country risk premium. In addition, we analyze the role of monetary policy during the financial crisis. |
| Keywords: | Emerging Markets, Financial Crises, International Capital Markets |
| JEL: | F34 F36 G21 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse2_2009&r=cba |
| By: | Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alexander Chudik (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alistair Dieppe (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper examines two competing approaches for calculating current account benchmarks, i.e. the external sustainability approach á la Lane and Milesi-Ferretti (LM) versus the structural current accounts literature (SCA) based on panel econometric techniques. The aim is to gauge the medium term adjustment in current account positions that may be required in some central and eastern European countries. As regards the LM approach, we show how the outcome is especially sensitive to (i) the normative choice for external indebtedness and (ii) the decision to exclude the foreign direct investment subcomponent from the NFA aggregate. Turning our search to the SCA approach, we assess its sensitivity to model and parameter uncertainty by setting different selection criteria to choose amongst the over 8000 possible combinations of fundamentals. Furthermore, to test the robustness of our findings we combine all models, attaching to each a probability (Bayesian Averaging of Classical Estimates). We show both the LM and SCA methodologies are not immune from severe drawbacks and conceptual difficulties. Nevertheless pulling together the results of both approaches point to the countries that may need a current account adjustment over a medium term horizon. JEL Classification: C11, C33, F15, F32, F34, F41, O52. |
| Keywords: | Current account, capital flows, financial integration, central and eastern Europe, panel data, model uncertainty, model combination. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20090995&r=cba |
| By: | Tuomas A. Peltonen (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ricardo M. Sousa (University of Minho, Department of Economics and Economic Policies Research Unit (NIPE), Campus of Gualtar, 4710-057 - Braga, Portugal; London School of Economics, Department of Economics and Financial Markets Group (FMG), Houghton Street, London WC2 2AE, United Kingdom; European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main.); Isabel S. Vansteenkiste (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We build a panel of 14 emerging economies to estimate the magnitude of housing, stock market, and money wealth effects on consumption. Using modern panel data econometric techniques and quarterly data for the period 1990/1-2008/2, we show that; (i) wealth effects are statistically significant and relatively large in magnitude; (ii) housing wealth effects tend to be smaller for Asian emerging markets while stock market wealth effects are, in general, smaller for Latin American countries; (iii) housing wealth effects have increased for Asian coutries in recent years; and (iv) consumption reacts stronger to negative than to positive shocks in housing and financial wealth. JEL Classification: E21, E44, D12. |
| Keywords: | Wealth effects, consumption, emerging markets. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901000&r=cba |