nep-cba New Economics Papers
on Central Banking
Issue of 2009‒02‒22
forty-two papers chosen by
Alexander Mihailov
University of Reading

  1. The Credit Crisis: Conjectures about Causes and Remedies By Douglas W. Diamond; Raghuram Rajan
  2. Implementing the New Fiscal Policy Activism By Alan J. Auerbach
  3. Financial Crises: Past lessons and Policy Implications By Davide Furceri; Annabelle Mourougane
  4. The sub-prime crisis, the credit squeeze, Northern Rock and beyond: The lessons to be learnt By Maximilian J. B. Hall
  5. BANK BAILOUT MARK "II" : WILL IT WORK? By Maximilian J. B. Hall
  6. The Propagation of Financial Extremes By Chollete, Lorán
  7. A Sticky-Information General-Equilibrium Model for Policy Analysis By Ricardo Reis
  8. Bretton Woods II Still Defines the International Monetary System By Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
  9. The Econometrics of DSGE Models By Jesús Fernández-Villaverde
  10. International Portfolio Allocation under Model Uncertainty By Pierpaolo Benigno; Salvatore Nisticò
  11. Identification-Robust Minimum Distance Estimation of the New Keynesian Phillips Curve By Leandro M. Magnusson; Sophocles Mavroeidis
  12. Financial Integration and Aggregate Stability By Yunfang Hu; Kazuo Mino
  13. TI-games I: An exploration of Type Indeterminacy in strategic decision-making By Jerry Busemeyer; Ariane Lambert-Mogiliansky
  14. Liquidity and Asset Prices : How Strong Are the Linkages? By Christian Dreger; Jürgen Wolters
  15. Common and Spatial Drivers in Regional Business Cycles By Michael Artis; Christian Dreger; Konstantin A. Kholodilin
  16. Wage Rigidity, Institutions, and Inflation By Holden , Steinar; Wulfsberg, Fredrik
  17. Forecasting inflation with gradual regime shifts and exogenous information By Andrés González; Kirstin Hubrich; Timo Teräsvirta
  18. Labor market institutions and macroeconomic volatility in a panel of OECD countries. By Fabio Rumler; Johann Scharler
  19. The vanishing role of money in the macroeconomy: An Empirical investigation based on spectral and wavelet analysis By D.M. Nachane; Amlendu Kumar Dubey
  20. The Euro and Fiscal Policy By Antonio Fatas; Ilian Mihov
  21. The Macroeconomic Effects of Fiscal Policy in Portugal: a Bayesian SVAR Analysis By Ricardo M. Sousa; António Afonso
  22. The Structure of inflation, information and labour markets: Implications for monetary policy By Ashima Goyal
  23. Bootstrap Panel Granger-Causality Between Government Budget and External Deficits for the EU By António Afonso; Christophe Rault
  24. Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm By Lilia Maliar; Fernando Valli; Serguei Maliar
  25. Do Forecasters Inform or Reassure? : Evaluation of the German Real-Time Data By Konstantin A. Kholodilin; Boriss Siliverstovs
  26. Consistent Estimation of Global VAR Models By Mutl, Jan
  27. Short-Term Forecasts of Latvia's Real Gross Domestic Product Growth Using Monthly Indicators By Konstantins Benkovskis
  28. The Adverse Effects of Government Spending on Private Consumption in New Keynesian Models By Kühn Stefan; Muysken Joan; Veen Tom van
  29. A Local Examination for Persistence in Exclusions-from-Core Measures of Inflation Using Real-Time Data By Tierney, Heather L.R.
  30. The Credit Channel Transmission of Monetary Policy in the European Union By Cândida Ferreira
  31. European Integration and the Credit Channel Transmission of Monetary Policy By Cândida Ferreira
  32. Wealth Effects in Emerging Market Economies By Tuomas A. Peltonen; Ricardo M. Sousa; Isabel S. Vansteenkiste
  33. Sequential bargaining in a new-Keynesian model with frictional unemployment and staggered ware negotiation. By Gregory de Walque; Olivier Pierrard; Henri Sneessens; Raf Wouters
  34. Euro Area Enlargement and Euro Adoption Strategies By Zsolt Darvas; Gyorgy Szapary
  35. Full employment abandoned: shifting sands and policy failures By Mitchell William; Muysken Joan
  36. Oil Prices and Real Exchange Rates in Oil-Exporting Countries: A Bounds Testing Approach By Jahan-Parvar, Mohammad R.; Mohammadi, Hassan
  37. Further evidence on the Real Interest Rate Parity hypothesis in Central and Eastern European Countries: unit roots and nonlinearities By Juan Carlos Cuestas; Barry Harrison
  38. The Natural interest rate in emerging markets By Ashima Goyal
  39. Is there a Bank Lending Channel of Monetary Policy in Latvia? Evidence from Bank Level Data By Konstantins Benkovskis
  40. Characterising the inflation targeting regime in South Korea. By Marcelo Sánchez
  41. Inflation persistence and asymmetries: evidence for African countries By Juan Carlos Cuestas; Estefanía Mourelle
  42. A DYNAMIC FACTOR MODEL FOR THE COLOMBIAN INFLATION By Eliana González; Luis F. Melo; Viviana Monroy; Brayan Rojas

  1. By: Douglas W. Diamond; Raghuram Rajan
    Abstract: What caused the financial crisis that is sweeping across the world? What keeps asset prices and lending depressed? What can be done to remedy matters? While it is too early to arrive at definite answers to these questions, it is certainly time to offer informed conjectures, and these are the focus of this paper.
    JEL: E52 F33 G21
    Date: 2009–02
  2. By: Alan J. Auerbach
    Abstract: To many observers, the current recession provides compelling circumstances for renewed fiscal policy activism. But the strong support for fiscal policy intervention reflects a renewed belief in policy activism that had already appeared before the present crisis. However, the recent debate about possible fiscal policy interventions suggests that we are still relying on the approaches to discretionary policy used in past periods of policy activism. It is not surprising that there have been few advances in discretionary policy design, given the lack of favor such policy suffered over many years. But if we are going to practice fiscal discretionary policy on a large scale, then more attention to policy design is sorely needed.
    JEL: E62
    Date: 2009–02
  3. By: Davide Furceri; Annabelle Mourougane
    Abstract: This overview paper examines the financial crisis in light of past country experience and economic theory and sets out some preliminary policy recommendations. A number of facets of the crisis are detailed, including its origins and spreading factors as well as crisis resolution policies and their associated gross and net fiscal costs. The implications of the crisis on key macro-economic variables are subsequently presented. Finally, policy recommendations for both addressing the economic downturn and enhancing the resilience of the economies over the medium to long-term are discussed.<P>Crises financières : leçons du passé et implications de politiques économiques<BR>Cet article donne une vue d'ensemble de la crise financière à la lumière des expériences passées et de la théorie économique et tire des recommandations préliminaires de politiques économiques. De nombreuses facettes de la crise sont détaillées, notamment ses origines et ses facteurs de propagation, de même que les politiques de résolution de crises et leur coût budgétaire (brut et net). Les répercussions de la crise sur les variables macro-économiques clefs sont ensuite présentées. Au final, des recommandations de politiques économiques sont discutées pour à la fois répondre au retournement économique et accroître la résilience des économies sur le moyen et le long terme.
    Keywords: macroeconomic policies, politique macro-économique, financial crisis, crise financière, fiscal costs, coûts budgétaires
    JEL: E44 E6 G1
    Date: 2009–02–17
  4. By: Maximilian J. B. Hall (Dept of Economics, Loughborough University)
    Abstract: On 14 September 2007, after failing to find a 'White Knight' to take over its business, Northern Rock bank turned to the Bank of England ('the Bank') for a liquidity lifeline. This was duly provided but failed to quell the financial panic, which manifested itself in the first fully-blown nationwide deposit run on a UK bank for 140 years. Subsequent provision of a blanket deposit guarantee duly led to the (eventual) disappearance of the depositor queues from outside the bank's branches but only served to heighten the sense of panic in policymaking circles. Following the Government's failed attempt to find an appropriate private sector buyer, the bank was then nationalised in February 2008. Inevitably, post mortems ensued, the most transparent of which was that conducted by the all-party House of Commons' Treasury Select Committee. And a variety of reform proposals are currently being deliberated at fora around the globe with a view to patching up the global financial system to prevent a recurrence of the events which precipitated the bank's illiquidity and the wider financial instability which set in towards the end of 2008. This article briefly explains the background to these extraordinary events before setting out, in some detail, the tensions and flaws in UK arrangements which allowed the Northern Rock spectacle to occur. None of the interested parties – the Bank, the Financial Services Authority (FSA) and the Treasury – emerges with their reputation intact, and the policy areas requiring immediate attention, at both the domestic and international level, are highlighted. A review and assessment of both the House of Commons Treasury Committee's Report on Northern Rock and the Tripartite Authorities' proposals for reform are also provided before analysis of the subsequent measures taken to stabilise the UK financial sector – involving further nationalisation of banks, the brokering of takeover rescues of banks and building societies, a £400 billion bailout of the deposit-taking sector and a subsequent bank bailout scheme – is undertaken. Accordingly, this paper represents an update, covering developments until end-January 2009, of my earlier paper on the Northern Rock affair (Working Paper No. WP 2008-09), which was published in September 2008. Specifically, it covers the latest domestic (i.e. UK) developments on a number of fronts. The text, for example, provides updates on the reform proposals of the Tripartite Authorities, amendments to deposit protection arrangements, and the emergency funding initiatives adopted by the Bank of England. Table 2 (where, along with Table 1, most of the new material is located), meanwhile, provides updates and analysis of the following: the latest developments in the UK housing market; the latest developments in the real economy; the latest financial statements of the major banks; the latest nationalisation moves;* the latest inflation figures and interest rate decisions of the MPC; the latest government bailout plans for deposit-takers; the latest official support packages introduced for the housing market, mortgage borrowers and small businesses; the latest fiscal stimulus plans (e.g. as contained in the Pre-Budget Report of November 2008); and the latest domestic financial and regulatory developments. Meanwhile, Table 1 provides up-to-date information on: emergency funding initiatives undertaken by the Fed, the ECB and other major central banks; financial institution takeovers/bailouts in the US and Europe; interest rate developments in the major economies; financial and regulatory developments in the US and Europe; developments in the real economies of the US and Europe; the financial statements of banks in the USA and Europe; the evolution of official bailout plans in the US ('TARP') and Europe; deposit protection developments in the US and Europe; fiscal stimulus packages adopted in the US, Europe and the wider international community; G7/EU plans to tackle the worsening financial crisis; IMF 'bailouts' of beleaguered countries; and the Basel Committee's proposals for revamping Basel II in the light of the crisis. *A more detailed discussion of these developments is provided in Hall (2008).
    Keywords: Sub-prime crisis; credit crunch; banking regulation and supervision; failure resolution; central banking; deposit protection.
    JEL: E53 E58 G21 G28
    Date: 2009–01
  5. By: Maximilian J. B. Hall (Dept of Economics, Loughborough University)
    Abstract: On 19 January 2009, the UK Government unveiled a second comprehensive bank bailout plan. This followed the failure of its October bailout package to stimulate domestic lending, as intended. The various components of the new "rescue package" are duly explained and analysed in this article, which also addresses the likely future course of policy should the Government fail in its latest ambitions to stimulate lending and thereby revive the flagging economy.
    Keywords: UK banks; banking regulation and supervision; central banking; failure resolution.
    JEL: E53 E58 G21 G28
    Date: 2009–01
  6. By: Chollete, Lorán (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: What drives extreme economic events? Motivated by recent theory, and events in US subprime markets, we begin to open the black box of extremes. Specifically, we extend standard economic analysis of extreme risk, allowing for dynamics and endogeneity. We explain how endogenous extremes may arise in an economy of individuals who engage in resource transfers. Our model suggests that susceptibility to extremes depends on differences in marginal substitution rates. Using over a century of daily stock price data, we construct empirical probabilities of extremes, and document interesting dynamic behavior. We find evidence that extremes are endogenous. This latter finding raises the possibility that control of extremes is a public good, and that extreme events may be an important market failure for regulators and central banks to correct.
    Keywords: Extreme Event; Subprime Market; Dynamics; Endogeneity; Public Good; Central Bank Policy
    JEL: C10 D62 E44 E51 G18 H23 H41
    Date: 2009–02–10
  7. By: Ricardo Reis
    Abstract: This paper presents a dynamic stochastic general-equilibrium model with a single friction in all markets: sticky information. In this economy, agents are inattentive because of costs of acquiring, absorbing and processing information, so that the actions of consumers, workers and firms are slow to incorporate news. This paper presents the details of how an economy with pervasive inattentiveness functions, and develops a set of algorithms that solve the model quickly. It then applies these to estimate the model using data for the United States post-1986 and for the Euro-area post-1993, and to conduct counterfactual policy experiments. The end result is a laboratory that is rich enough to account for the dynamics of at least five macroeconomic series (inflation, output, hours, interest rates, and wages), and which can be used to inform applied monetary policy.
    JEL: E10 E30 E5
    Date: 2009–02
  8. By: Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
    Abstract: In this paper we argue that net capital inflows to the United States did not cause the financial crisis that now engulfs the world economy. A crisis caused by such flows has been widely predicted but that crisis has not occurred. Indeed, the international monetary system still operates in the way described by the Bretton Woods II framework and is likely to continue to do so. Failure to properly identify the causes of the current crisis risks a rise in protectionism that could intensify and prolong the decline in economic activity around the world.
    JEL: F02 F32 F33
    Date: 2009–02
  9. By: Jesús Fernández-Villaverde (Department of Economics, University of Pennsylvania)
    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.
    Keywords: DSGE Models, Likelihood Estimation, Bayesian Methods
    JEL: C11 C13 E30
    Date: 2009–01–19
  10. By: Pierpaolo Benigno; Salvatore Nisticò
    Abstract: In a rational-expectation model of international portfolio and consumption decisions, international home bias in equities depends on the correlation between non-diversifiable labor income risk and the cross-country equity returns, when agents have log utility in consumption. We show that there is weak empirical evidence for this channel. Moreover standard preferences fail to account for other empirical evidence on international asset prices. We propose an alternative environment with model uncertainty populated by the sophisticated agents of the robust-control theory of Hansen and Sargent (2005). Maintaining the assumption of unitary intertemporal elasticity of substitution, we show that home bias in equity can also depend on the correlation between equity returns and the real exchange rate and its weight depends on a measure of the distrust that the agent has with respect to the objective probability distribution. This hedging component, which mainly refers to long-run risk in real exchange rate, is more relevant from an empirical point of view. The proposed model is successful along other dimensions, where instead the standard rational-expectation model fails.
    JEL: F3 G11 G15
    Date: 2009–02
  11. By: Leandro M. Magnusson (Department of Economics, Tulane University); Sophocles Mavroeidis (Department of Economics, Brown University)
    Abstract: Limited-information identification-robust methods on the indexation and price rigidity parameters of the new Keynesian Phillips curve yield very wide confidence intervals. Full-information methods impose more restrictions on the reduced-form dynamics, and thus make more efficient use of the information in the data. We propose identification-robust minimum distance methods for exploiting these additional restrictions and show that they yield considerably smaller confidence intervals for the coefficients of the model compared to their limited-information GMM counterparts. In contrast to previous studies that used GMM, we find evidence of partial but not full indexation, and we obtain sharper inference on the degree of price stickiness.
    Keywords: weak identification, minimum distance, GMM, Phillips curve
    JEL: C22 E31
    Date: 2009–02
  12. By: Yunfang Hu (Graduate School of International Cultural Studies, Tohoku University); Kazuo Mino (Graduate School of Economics, Osaka University)
    Abstract: This paper explores a two-country model of capital accumulation with country-specific production externalities. The main concern of our discussion is to investigate equilibrium determinacy (aggregate stability) conditions in a financially integrated world economy. We show that the well-established equilibrium determinacy conditions for the case of small-open economy are still valid if heterogeneity between two countries is small enough. As the technological difference between the countries increases, the equilibrium determinacy conditions may diverge from those for the small country setting.
    Keywords: financial integration, two-country model, equilibrium determinacy, social constant returns
    JEL: F43 O41
    Date: 2009–01
  13. By: Jerry Busemeyer; Ariane Lambert-Mogiliansky
    Abstract: The Type Indeterminacy model is a theoretical framework that formalizes the constructive preference perspective suggested by Kahneman and Tversky. In this paper we explore an extention of the TI-model from simple to strategic decision-making. A 2X2 game is investigated. We first show that in a one-shot simultaneaous move setting the TI-model is equivalent to a standard incomplete information model. We then let the game be preceded by a cheap-talk promise exchange game. We show in an example that in the TI-model the promise stage can have impact on next following behavior when the standard classical model predicts no impact whatsoever. The TI approach differs from other behavioral approaches in identifying the source of the effect of cheap-talk promises in the intrinsic indeterminacy of the players' type.
    Date: 2009
  14. By: Christian Dreger; Jürgen Wolters
    Abstract: The appropriate design of monetary policy in integrated financial markets is one of the most challenging areas for central banks. One hot topic is whether the rise in liquidity in recent years has contributed to the formation of price bubbles in asset markets. If strong linkages exist, the inclusion of asset prices in the monetary policy rule can eventually limit speculative runs and negative effects on the real economy in the future. We explore the impacts of liquidity shocks on real share and house prices and the influence of wealth prices on liquidity. VAR models are specified for the US and the euro area. To control for international spillovers, global VARs are also considered. Differences in the results can provide a measure on the impact of financial market integration. The specifications point to some impact of liquidity shocks on house prices, while asset prices are not affected.
    Keywords: Liquidity shocks, asset prices, GVAR analysis, monetary policy
    JEL: E44 G10 C32 C52
    Date: 2009
  15. By: Michael Artis; Christian Dreger; Konstantin A. Kholodilin
    Abstract: We examine real business cycle convergence for 41 euro area regions and 48 US states. Results obtained by a panel model with spatial correlation indicate that the relevance of common business cycle factors is rather stable over the past two decades in the euro area and the US. Ongoing business cycle convergence often detected in a country data is not confirmed at the regional level. The degree of synchronization across the euro area is similar to that to be found for the US states. Thus, the lack of convergence does not seem to be an impediment to a common monetary policy.
    Keywords: Business cycle convergence, spatial correlation, spatial panel model
    JEL: E32 C51 E37
    Date: 2009
  16. By: Holden , Steinar (Dept. of Economics, University of Oslo); Wulfsberg, Fredrik (Norges Bank)
    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: OECD; wage setting
    JEL: C14 C15 E31 J30 J50
    Date: 2009–01–22
  17. By: Andrés González (Banco de la República, Bogotá and CREATES, University of Aarhus, Denmark); Kirstin Hubrich (European Central Bank, Frankfurt am Main and CREATES, University of Aarhus, Denmark); Timo Teräsvirta (CREATES, University of Aarhus, Denmark)
    Abstract: In this work, we make use of the shifting-mean autoregressive model which is a flexible univariate nonstationary model. It is suitable for describing characteristic features in inflation series as well as for medium-term forecasting. With this model we decompose the inflation process into a slowly moving nonstationary component and dynamic short-run fluctuations around it. We fit the model to the monthly euro area, UK and US inflation series. An important feature of our model is that it provides a way of combining the information in the sample and the a priori information about the quantity to be forecast to form a single inflation forecast. We show, both theoretically and by simulations, how this is done by using the penalised likelihood in the estimation of model parameters. In forecasting inflation, the central bank inflation target, if it exists, is a natural example of such prior information. We further illustrate the application of our method by an ex post forecasting experiment for euro area and UK inflation. We find that that taking the exogenous information into account does im- prove the forecast accuracy compared to that of a linear autoregressive benchmark model.
    Keywords: Nonlinear forecast, nonlinear model, nonlinear trend, penalised likelihood, structural shift, time-varying parameter
    JEL: C22 C52 C53 E31 E47
    Date: 2009–01–28
  18. By: Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, A-1011 Vienna, Austria.); Johann Scharler (Department of Economics, University of Linz, Altenbergerstrasse 69, A-4040 Linz, Austria.)
    Abstract: In this paper we analyze empirically how labor market institutions influence business cycle volatility in a sample of 20 OECD countries. Our results suggest that countries characterized by high union density tend to experience more volatile movements in output, whereas the degree of coordination of the wage bargaining system and strictness of employment protection legislation appear to play a limited role for output volatility. We also find some evidence suggesting that highly coordinated wage bargaining systems have a dampening impact on inflation volatility. JEL Classification: E31, E32.
    Keywords: Business Cycles, Inflation, Labor Market Institutions.
    Date: 2009–02
  19. By: D.M. Nachane (Indira Gandhi Institute of Development Research); Amlendu Kumar Dubey (Indira Gandhi Institute of Development Research)
    Abstract: The recent de-emphasizing of the role of "money" in both theoretical macroeconomics as well as in the practical conduct of monetary policy sits uneasily with the idea that inflation is a monetary phenomenon. Empirical evidence has, however, been accumulating, pointing to an important leading indicator role for money and credit aggregates with respect to long term inflationary trends. Such a role could arise from monetary aggregates furnishing a nominal anchor for inflationary expectations, from their influence on the term structure of interest rates and from their affecting transactions costs in markets. Our paper attempts to assess the informational content role of money in the Indian economy by a separation of these effects across time scales and frequency bands, using the techniques of wavelet analysis and band spectral analysis respectively. Our results indicate variability of causal relations across frequency ranges and time scales, as also occasional causal reversals.
    Keywords: money, inflation, cointegration, causality, decomposition, band spectra, wavelets
    JEL: C32 E51 E52
    Date: 2008–10
  20. By: Antonio Fatas; Ilian Mihov
    Abstract: The paper provides and empirical characterization of fiscal policy in the euro area and in a group of twenty-two OECD economies over the period from 1970 until 2007. Using the cyclically-adjusted fiscal balance we document that policy in the euro area has been mildly pro-cyclical. The adoption of the common currency and the constraints imposed by the Stability and Growth Pact have not had a large impact on the cyclical behavior of the structural balance. In contrast, over the past ten years US fiscal policy has become highly countercyclical, which was due predominantly to discretionary changes in tax policies. However, the component of the budget due to automatic stabilizers reacts stronger in the euro-area countries than in the US. We also document the primary balance in the OECD economies is more sensitive to output growth rather than to the output gap, which calls into question the common practice of adjusting structural balances by using elasticities with respect to the output gap.
    JEL: E62 E65
    Date: 2009–02
  21. By: Ricardo M. Sousa (Universidade do Minho - NIPE); António Afonso (European Central Bank, Directorate General Economics)
    Abstract: In the last twenty years Portugal struggled to keep public finances under control, notably in containing primary spending. We use a new quarterly dataset covering 1979:1-2007:4, and estimate a Bayesian Structural Autoregression model to analyze the macroeconomic effects of fiscal policy. The results show that positive government spending shocks, in general, have a negative effect on real GDP; lead to important "crowding-out" effects, by impacting negatively on private consumption and investment; and have a persistent and positive effect on the price level and the average cost of financing government debt. Positive government revenue shocks tend to have a negative impact on GDP; and lead to a fall in the price level. The evidence also shows the importance of explicitly considering the government debt dynamics in the model. Finally, a VAR counter-factual exercise confirms that unexpected positive government spending shocks lead to important "crowding-out" effects.
    Keywords: B-SVAR, fiscal policy, debt dynamics, Portugal.
    JEL: E37 E62 H62 G10
    Date: 2009
  22. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: The paper gives a simplified version of a typical dynamic stochastic open economy general equilibrium models used to analyze optimal monetary policy. Then it outlines the chief modifications when dualism in labour and in consumption is introduced to adapt the model to a small open emerging market such as India. The implications of specific labour markets, and the structure of Indian inflation and its measurement are examined. Simulations give the welfare effects of different types of inflation targeting. Flexible CPI inflation targeting (CIT) without lags works best, especially if the economy is more open. But volatile terms of trade make the supply curve even steeper than in a small open economy despite specific labour markets and higher labour supply elasticity. Exchange rate intervention limits the volatility of the terms of trade and improves outcomes, making the supply curve flatter. As long as such intervention is required, domestic inflation targeting (DIT) continues to be more robust and effective. The welfare losses from the lags in CPI, which prevent the implementation of CIT, are low as long as the dualistic structure dominates. As the economy becomes more open, however, the loss from not being able to use CIT rises. The lags in CPI therefore need to be reduced, making its future use possible.
    Keywords: small open emerging market, optimal monetary policy, dualistic labour markets, inflation, measurement lags, specific labour markets
    JEL: E52 F41
    Date: 2008–05
  23. By: António Afonso; Christophe Rault
    Abstract: We investigate the existence of Granger-causality between current account and government budget balances over the period 1970-2007, for different EU and OECD country groupings. We use a panel-data approach based on SUR systems and Wald tests with country specific bootstrap critical values. Our results show a causal relation from budget deficits to current account deficits for several EU countries: Bulgaria, Czech Republic, Estonia, Finland, France, Italy, Hungary, Lithuania, Poland, and Slovakia, along the lines of the so-called twin-deficit relationship. Considering the effective real exchange rate in the SUR system does not substantially alter the results.
    Keywords: panel causality tests; budget deficit; external imbalance; real exchange rates; EU; OECD.
    JEL: C23 E62 F32 H62
    Date: 2009–01
  24. By: Lilia Maliar (Universidad de Alicante); Fernando Valli (Universidad de Alicante); Serguei Maliar (Universidad de Alicante)
    Abstract: This paper studies the properties of the solution to the heterogeneous agents model in Den Haan, Judd and Juillard (2008). To solve for the individual policy rules, we use an Euler-equation method iterating on a grid of prespecified points. To compute the aggregate law of motion, we use the stochastic-simulation approach of Krusell and Smith (1998). We also compare the stochastic- and non-stochastic-simulation versions of the Krusell-Smith algorithm, and we find that the two versions are similar in terms of their speed and accuracy.
    Date: 2009–01
  25. By: Konstantin A. Kholodilin; Boriss Siliverstovs
    Abstract: The paper evaluates the quality of the German national accounting data (GDP and its use-side components) as measured by the magnitude and dispersion of the forecast/ revision errors. It is demonstrated that government consumption series are the least reliable, whereas real GDP and real private consumption data are the most reliable. In addition, early forecasts of GDP, private consumption, and investment growth rates are shown to be systematically upward biased. Finally, early forecasts of all the variables seem to be no more accurate than naïve forecasts based on the historical mean of the final data.
    Keywords: Quality of statistical data, real-time data, signal-to-noise ratio, forecasts, revisions
    JEL: C53 C89
    Date: 2009
  26. By: Mutl, Jan (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: In this paper, I propose an instrumental variable (IV) estimation procedure to estimate global VAR (GVAR) models and show that it leads to consistent and asymptotically normal estimates of the parameters. I also provide computationally simple conditions that guarantee that the GVAR model is stable.
    Keywords: Global VAR, GVAR, Consistent estimation, Instrumental variables
    JEL: C31 C32 C33
    Date: 2009–02
  27. By: Konstantins Benkovskis
    Abstract: The conjunctural information from monthly indicators, e.g. industrial production, retail trade turnover, M3, confidence indicators, etc. could partly replace GDP data before the first official release is published. It is possible to incorporate monthly indicators into short-term forecasting models of GDP using quarterly bridge equations or state space models. In many cases monthly indicators are released with a lag, and GDP forecasts based on actual figures are available only shortly before the official release. To eliminate this drawback, missing observations of monthly indicators could be forecasted using simple univariate time-series models. To perform real-time analysis of the forecasting performance of bridge equations and state space models, a real-time database containing real GDP series with 28 vintages of quarterly real GDP was created. According to calculations, only bridge equations and state space models containing M3 monthly data perform better than the benchmark ARIMA model. Both model types using M3 provide valuable information forecast for the first and final releases of GDP. This does not mean, however, that other conjunctural indicators should not be used in forecasting, as the analysis does not take into account possible future changes in links between monthly indicators and quarterly GDP growth.
    Keywords: bridge equations, state space model, out-of-sample forecasting, real-time database, interpolation
    JEL: C22 C53 E37
    Date: 2008–09–15
  28. By: Kühn Stefan; Muysken Joan; Veen Tom van (METEOR)
    Abstract: Empirical evidence shows that government spending crowds in private consumption, a Keynesian phenomenon. The current state of the art, New Keynesian models based on optimising households and _rms, is not able to predict such a result. We show with a graphical framework as well as a formal model why the basic New Keynesian model fails at this. We also show the weaknesses of extensions aimed at generating crowding in like useful government spending or rule of thumb consumers. Finally, we argue that introducing productivity enhancing government spending could potentially lead to crowding in.
    Keywords: macroeconomics ;
    Date: 2009
  29. 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. By: Cândida Ferreira
    Abstract: This paper confirms the importance of the financial systems behaviour conditions to the credit channel of monetary policy in the entire European Union (EU). It uses panel fixedeffect estimations and quarterly data for 26 EU countries for the period from Q1 1999 to Q3 2006 in an adaptation of the Bernanke and Blinder (1988) model. The findings also reveal the high degree of foreign dependence and indebtedness of the EU banking institutions and their similar reactions to the macroeconomic and the monetary policy environments.
    Keywords: European integration; bank credit; monetary policy transmission; panel estimates.
    JEL: E4 E5 G2
    Date: 2009–01
  31. By: Cândida Ferreira
    Abstract: Using pooled panel OLS estimations and dynamic Arellano-Bond GMM estimations with quarterly data for 26 EU countries for the period from Q1 1999 to Q3 2006 this paper confirms the high degree of integration between the EU financial systems, as well as the importance of bank performance conditions to the credit-lending channel of monetary policy in the EU. Furthermore, it demonstrates not only the quite high degree of openness of the financial markets but also their indebtedness and the dependence of the EU banking institutions on the financial resources of other countries.
    Keywords: European integration; bank credit; monetary policy transmission; panel estimates.
    JEL: E4 E5 G2
    Date: 2009–01
  32. By: Tuomas A. Peltonen (European Central Bank); Ricardo M. Sousa (Universidade do Minho - NIPE); Isabel S. Vansteenkiste (European Central Bank)
    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 markets wealth effects are, in general, smaller for Latin American countries; (iii) housing wealth effects have increased for Asian countries in recent years; and (iv) consumption reacts stronger to negative than to positive shocks in housing and financial wealth.
    Keywords: wealth effects, consumption, emerging markets.
    JEL: E21 E44 D12
    Date: 2009
  33. By: Gregory de Walque (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Olivier Pierrard (Central Bank of Luxembourg, 2 boulevard Royal, L–2983 Luxembourg, Luxembourg.); Henri Sneessens (Central Bank of Luxembourg, Economics and Research Department, 2 boulevard Royal, L–2983 Luxembourg, Luxembourg.); Raf Wouters (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.)
    Abstract: We consider a model with frictional unemployment and staggered wage bargaining where hours worked are negotiated every period. The workers’ bargaining power in the hours negotiation affects both unemployment volatility and inflation persistence. The closer to zero this parameter, (i) the more firms adjust on the intensive margin, reducing employment volatility, (ii) the lower the effective workers’ bargaining power for wages and (iii) the more important the hourly wage in the marginal cost determination. This set-up produces realistic labor market statistics together with inflation persistence. Distinguishing the probability to bargain the wage of the existing and the new jobs, we show that the intensive margin helps reduce the new entrants wage rigidity required to match observed unemployment volatility. JEL Classification: E31, E32, E52, J64.
    Keywords: DSGE, Search and Matching, Nominal Wage Rigidity, Monetary Policy.
    Date: 2009–02
  34. By: Zsolt Darvas (Institute of Economics - Hungarian Academy of Sciences); Gyorgy Szapary (Central European University)
    Abstract: The paper discusses the risks and challenges faced by the new members on the road to the euro and the strategies for and timing of euro adoption. We investigate the real-nominal convergence nexus from the perspective of euro area entry. We argue that the initial level of economic development as measured by per capita income and the speed of real convergence have a bearing on the strategies to follow and on the timing of entry into euro area. This is because the lower is the per capita income, the larger is the price level gap to close and the greater is the danger of credit booms and overheating. We argue that inflation targeting with floating rates is better suited than hard pegs to manage the price level catching-up process. We suggest a modification in the Maastricht inflation criterion which as currently defined has lost its economic logic.
    Keywords: euro area, convergence, exchange rate, inflation
    JEL: E31 E52 E60 F30
    Date: 2008–11
  35. By: Mitchell William; Muysken Joan (METEOR)
    Abstract: This paper briefly analyses the shifts in economic theory that have moved policy makers from unambiguously pursuing full employment, to the current state where full employability is justified as being optimal. We also explore how these theoretical developments translated in practice, culminating in the 1994 OECD Jobs Study which eschewed a role for macroeconomic policy in reducing unemployment. The final sections of the paper outline an alternative view of macroeconomic theory and policy opportunities. We argue that a central plank in modern macroeconomic policy settings should be the introduction of employment guarantees, which we term the Job Guarantee (JG).
    Keywords: Economics (Jel: A)
    Date: 2009
  36. By: Jahan-Parvar, Mohammad R.; Mohammadi, Hassan
    Abstract: We test the validity of the Dutch disease hypothesis by examining the relationship between real oil prices and real exchange rates in a sample of fourteen oil exporting countries. Autoregressive distributed lag (ARDL) bounds tests of cointegration support the existence of a stable relationship between real exchange rates and real oil prices in all countries, suggesting a strong support for the Dutch disease hypothesis.
    Keywords: Oil Prices; Real Exchange Rates; Dutch Disease; Cointegration; Autoregressive Distributed Lags.
    JEL: C32 F37 C52 F31
    Date: 2008–12–28
  37. By: Juan Carlos Cuestas; Barry Harrison
    Abstract: This paper analyses the empirical fulfilment of the Real Interest Rate Parity (RIRP) theory for a pool of Central and Eastern European Countries. To do so, we apply the recently developed Ng and Perron (2001) unit root tests, that are corrected versions of existing unit root tests and the Kapetanios et al. (2003) unit root test which generalises the alternative hypothesis to the globally stationary smooth transition autoregression model. Our results point to the existence of evidence in favour of the empirical fulfilment of the RIRP, in particular, when taking into account the possibility of nonlinearities in the real interest rate differential.
    Keywords: Real Interest Rate parity, Unit Roots, nonlinearities, Central and East Europe.
    JEL: C32 F15
    Date: 2009–01
  38. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: An optimizing model of a small open emerging market economy (SOEME) with dualistic labour markets and two types of consumers, is used to derive the natural interest rate, terms of trade and potential output. Shocks are classified into generic types that affect the natural interest rates. Since parameters depend on features of the labour market and on consumption inequality, the natural rates and the impact of shocks differ from those in a mature small open economy. Subsistence consumption is found to have the largest effect on the natural rates. It reduces the interest rate, raises natural output and the terms of trade. Technology and infrastructure backwardness reduce natural output. The implications for monetary policy are derived. The effect of managed exchange rates combined with different types of inflation targeting is examined through simulations. Endogenous terms of trade make the supply curve steeper in a SOEME, so partial stickiness of the real exchange rate can be beneficial. In general, domestic inflation targeting, with some weight on the output gap, delivers lower volatility. Output response is higher and volatility lower with fixed terms of trade, demonstrating the flatter supply curve. CPI inflation targeting also does well when terms of trade are credibly fixed.
    Keywords: small open emerging market, optimal monetary policy, dualistic labour markets, natural interest rates, terms of trade, natural output
    JEL: E52 F41
    Date: 2008–06
  39. By: Konstantins Benkovskis
    Abstract: The goal of this paper is to explore the role of the banking sector in transmission of the Bank of Latvia's monetary policy and to check the existence of the bank lending channel in Latvia. For empirical investigation of the bank lending channel in Latvia, we use the approach that builds on the standard panel regression. The evidence on the bank lending channel is obtained by estimating a bank loan function that takes into account not only the monetary policy indicator and macroeconomic variables, but also bank-specific differences in the lending reaction to monetary policy actions. Empirical analysis shows that some banks in Latvia have statistically significant negative reaction to a domestic monetary shock; however, the weighted average reaction of the total lats loan growth is not statistically significant. A domestic monetary shock has only a distribution effect and affects banks that are small, domestically owned and have lower liquidity or capitalisation. The bank lending channel is limited only for the supply of lats loans, which dramatically reduces the importance of this channel.
    Keywords: monetary policy transmission, bank lending channel
    JEL: C23 E52 G21
    Date: 2008–04–09
  40. By: Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main.)
    Abstract: This paper attempts at characterising South Korean monetary policy in the period of explicit inflation targeting started in 1999. We explain Korean interest rates in relation to an estimated macro-model, assuming that monetary policy is set optimally. This allows us to obtain the central bank’s parameters in the policy objective function. During the IT regime, the data support that the Bank of Korea pursued optimal policy geared towards achieving price stability, with the degree of interest rate smoothing being estimated to be considerable. In addition, the central bank loss function is estimated to include negligible weights on output and exchange rate variability. JEL Classification: E52, E58, E61.
    Keywords: inflation targeting, optimal monetary policy, small open economies, South Korea.
    Date: 2009–02
  41. By: Juan Carlos Cuestas; Estefanía Mourelle
    Abstract: In this paper we aim at testing the inflation persistence hypothesis as well as modelling (using logistic smooth transition autoregressive, LSTAR, models) the long run behaviour of inflation rates in a pool of African countries. In order to do so, we rely on unit root tests applied to nonlinear models, i.e. Kapetanios et al. (2003). The results point to the non-persistence of inflation hypothesis for most of the countries. In addition, the estimated models are stable in the sense that the variable tends to remain in the regime (low inflation or high inflation) once reached and changes between regimes are only achieved after a shock.
    Keywords: Inflation, Persistence, Unit Roots, Nonlinearities.
    JEL: C32 E31 F15
    Date: 2009–02
  42. By: Eliana González; Luis F. Melo; Viviana Monroy; Brayan Rojas
    Abstract: ABSTRACT. We use a dynamic factor model proposed by Stock and Watson [1998, 1999, 2002a,b] to forecast Colombian inflation. The model includes 92 monthly series observed over the period 1999:01-2008:06. The results show that for short-run horizons, factor model forecasts significantly outperformed the auto-regressive benchmark model in terms of the root mean squared forecast error statistic.
    Date: 2009–02–09

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