nep-cba New Economics Papers
on Central Banking
Issue of 2009‒03‒07
thirty-one papers chosen by
Alexander Mihailov
University of Reading

  1. A Note on Regime Switching, Monetary Policy, and Multiple Equilibria By Jess Benhabib
  2. A Model of Near-Rational Exuberance By James Bullard; George Evans; Seppo Honkapohja
  3. Quantitative Macroeconomics with Heterogeneous Households By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  4. Economic Dynamics Under Heterogeneous Learning: Necessary and Sufficient Conditions for Stability By Dmitri Kolyuzhnov
  5. Optimal Policy under Commitment and Price Level Stationarity By Gino Cateau
  6. Cycles, Contagion and Crises By Nikolaj Schmidt; Ashley Taylor; Charles Goodhart; Amil Dasgupta
  7. Expectations, learning and policy rule By Michele Berardi
  8. International Evidence on Stochastic and Deterministic Monetary Neutrality. By Antonio E. Noriega; Luis M. Soria; Ramón Velázquez
  9. Private information, stock markets, and exchange rates By Jacob Gyntelberg; Mico Loretan; Tientip Subhanij; Eric Chan
  10. Lasting Bang for the Stimulus Buck: Priorities for the 2009 Federal Budget By William B.P. Robson; Alexandre Laurin; Finn Poschmann
  11. The first global financial crisis of the 21st century,Part II: Introduction By Reinhart, Carmen; Felton, Andrew
  12. What Institutional Structure for the Lender of Last Resort? By Itai Agur
  13. Out on a Limb: Assessing the Fiscal Sustainability and Effectiveness of the 2009 Federal Budget By Alexandre Laurin; Colin Busby; Benjamin Dachis
  14. Fiscal Shocks and The Real Exchange Rate By Agustín S. Bénétrix and Philip R. Lane
  15. Optimal Endowment Destruction under Campbell-Cochrane Habit Formation By Lars Ljungqvist; Harald Uhlig
  16. Fixed and variable-rate mortgages, business cycles and monetary policy By Margarita Rubio
  17. The comovement between household loans and real activity By Wouter den Haan; Vincent Sterk
  18. Inventories and Real Rigidities in New Keynesian Business Cycle Models By Oleksiy Kryvtsov; Virgiliu Midrigan
  19. Taylor Rules and the Euro By Tanya Molodtsova; Alex Nikolsko-Rzhevskyy; David H. Papell
  20. Business Cycle Evidence on Firm Entry By V. LEWIS
  21. The anti-Phillips curve By Kitov, Ivan
  22. Asset prices and exchange rates: a time dependent approach By Giulia PICCILLO
  23. Asset prices and exchange rates: a time dependent approach By Giulia PICCILLO
  24. Sticky information vs. Backward-looking indexation: Inflation inertia in the U.S. By Carrillo Julio A.
  25. Econometric reduction theory and philosophy By Genaro Sucarrat
  26. Pooling versus model selection for nowcasting with many predictors: An application to German GDP By Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
  27. Interest Margins Determinants of Czech Banks By Roman Horváth
  28. Further evidence on the PPP analysis of the Australian dollar: non-linearities, fractional integration and structural changes By Juan Carlos Cuestas; Luís A. Gil-Alana
  29. The Yield Curve and its Relation with Economic Activity: The Mexican Case. By Mario Reyna Cerecero; Diana Salazar Cavazos; Héctor Salgado Banda
  30. A Macroeconomic Model of the Term Structure of Interest Rates in Mexico. By Josué Fernando Cortés Espada; Manuel Ramos Francia
  31. QMM. A Quarterly Macroeconomic Model of the Icelandic Economy By Ásgeir Daníelsson; Magnús F. Gudmundsson; Svava J. Haraldsdóttir; Thorvardur T. Ólafsson; Ásgerdur Ó. Pétursdóttir; Thórarinn G. Pétursson; Rósa Sveinsdóttir

  1. By: Jess Benhabib
    Abstract: When monetary policy is subject to regime switches conditions for determinacy become more complex. Davig and Leeper (2007) and Farmer, Waggoner and Zha (2009a) have studied such conditons. Using some new results from stochastic processes, we characterize the moments of the stationary distribution of inflation under regime switiching to obtain conditions for indeterminacy that can be easily checked and interpreted in terms of expected values of Taylor coefficients. In the last section, we outline methods to compute the moments of stationary distributions in regime switching models of higher dimensions.
    JEL: E31 E43 E52
    Date: 2009–03
  2. By: James Bullard; George Evans; Seppo Honkapohja
    Abstract: We study how the use of judgement or “add-factors” in forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in a standard self-referential environment. Local indeterminacy is not a requirement for existence. We construct a simple asset pricing example and find that exuberance equilibria, when they exist, can be extremely volatile relative to fundamental equilibria. learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation.
    Keywords: Learning, expectations, excess volatility, bounded rationality.
    JEL: E52 E61
    Date: 2009–02
  3. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynamics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household heterogeneity, with a special emphasis on the "standard" incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals' key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk?
    JEL: E2 J22
    Date: 2009–03
  4. By: Dmitri Kolyuzhnov
    Abstract: I provide sufficient conditions and necessary conditions for stability of a structurally heterogeneous economy under heterogeneous learning of agents. These conditions are written in terms of the structural heterogeneity independent of heterogeneity in learning. I have found an easily interpretable unifying condition which is sufficient for convergence of an economy under mixed RLS/SG learning with different degrees of inertia towards a rational expectations equilibrium for a broad class of economic models and a criterion for such a convergence in the univariate case. The conditions are formulated using the concept of a subeconomy and a suitably defined aggregate economy. I demonstrate and provide interpretation of the derived conditions and the criterion on univariate and multivariate examples, including two specifications of the overlapping generations model and the model of simultaneous markets with structural heterogeneity.
    Keywords: Adaptive learning, stability of equilibrium, heterogeneous agents.
    JEL: C62 D83 E10
    Date: 2008–12
  5. By: Gino Cateau
    Abstract: This paper proposes a simple analytical method to determine the stationarity of an unnormalized variable from the solution to a normalized model i.e. a model whose variables must be expressed in relative terms or must be differenced for a solution to exist. The paper then applies the method to answer a question of interest to policy-makers: does optimal policy under commitment lead to stationarity in the price level? Unlike Gaspar, Smets, and Vestin (2007), the paper finds that optimal policy under commitment does not lead to price level stationarity in the Smets and Wouters (2003) model.
    Keywords: Monetary policy framework
    JEL: E52 E58
    Date: 2009
  6. By: Nikolaj Schmidt; Ashley Taylor; Charles Goodhart; Amil Dasgupta
    Abstract: On 28-29 June 2007, the Financial Markets Group organised a conference covering topics under all three themes of its title, 'Cycles, Contagion and Crises', from the perspective of both developed and emerging economies.
    Date: 2008–11
  7. By: Michele Berardi
    Abstract: The optimal discretionary policy rule in the New Keynesian forwardlooking model under the hypothesis of rational expectations responds only to fundamental shocks. This leads to indeterminacy of equilibria and E-unstability of the MSV REE. The outcome can be improved by responding to private expectations. This requires the Central Bank to be able to observe those expectations, or to precisely estimate them. It has also been shown in the literature that when the private sector doesn’t have RE and instead is trying to learn the structure of the economy from data, the policymaker should implement a more aggressive policy. In light of these considerations, we ask how a policymaker that responds only to fundamental shocks should change its response when private expectations depart from rationality. In addition, we show that a policy rule that adeguately takes into account the learning process of agents while responding only to fundamentals can obtain the same results as an expectations based policy rule.
    Date: 2009
  8. By: Antonio E. Noriega; Luis M. Soria; Ramón Velázquez
    Abstract: We analyze the issue of the impact of multiple breaks on monetary neutrality results, using a long annual international data set. We empirically verify whether neutrality propositions remain addressable (and if so, whether they hold or not), when unit root tests are carried out allowing for multiple structural breaks in the long-run trend function of the variables. It is found that conclusions on neutrality are sensitive to the number and location of breaks. In order to interpret the evidence for structural breaks, we introduce a notion of deterministic monetary neutrality, which naturally arises in the absence of permanent stochastic shocks to the variables.
    Keywords: Deterministic and Stochastic Neutrality and Superneutrality of Money, Unit Roots, Structural Breaks, Resampling Methods
    JEL: C15 C32 E51 E52
    Date: 2008–04
  9. By: Jacob Gyntelberg; Mico Loretan; Tientip Subhanij; Eric Chan
    Abstract: Explaining exchange rates has long been an important but vexing issue in international economics and finance. In recent years, a number of studies have shown that investors' private information plays a central role in determining exchange rates. We demonstrate in this paper that the private information of investors relevant for exchange rates is largely connected to the stock market, and that this information is conveyed to foreign exchange (FX) markets by order flow that is induced by investors' transactions in the stock market. We establish these results by analyzing several novel unused datasets on nearly two years' worth of daily-frequency capital flows of nonresident investors in the foreign exchange, stock, and bond markets of Thailand. We present compelling evidence that FX order flow that is induced by nonresident investors transactions in the Stock Exchange of Thailand - which we show are driven largely by private information - has far greater explanatory power for the exchange rate than other order flow has, both in the short run and the long run. In contrast, FX order flow of nonresident investors that is related to their transactions in Thai government bonds - which we find are not driven appreciably by private information - does not have a statistically significant effect on the exchange rate.
    Keywords: Exchange rate models, market microstructure approach, asymmetric information, Thailand, generated regressors, impulse response functions, I(1) measurement error
    Date: 2009–02
  10. By: William B.P. Robson (C.D. Howe Institute); Alexandre Laurin (C.D. Howe Institute); Finn Poschmann (C.D. Howe Institute)
    Abstract: Unusual economic and political circumstances surround the framing of the 2009 federal budget. A period of global spending outrunning productive capacity has ended with financial crisis and recession in much of the world, Canada included. The sudden slump has prompted demand for, and expectations of, fiscal action.
    Keywords: fiscal policy, Canadian government budget
    JEL: E62 E61 E66
    Date: 2009–01
  11. By: Reinhart, Carmen; Felton, Andrew
    Abstract: Sadly, our previous compilation of VoxEU columns, ‘The First Global Financial Crisis of the 21st Century,’ was not the last word on the subject. Since the publication of that volume in June 2008, the global crisis has both deepened and widened. The industrial world has seen the largest bank failures in its history, and many governments have intervened in the financial system in a manner that would once have been unthinkable. Wall Street and the City of London, along with most other financial centers, have been changed forever. Many storied financial firms have failed or been merged away, and others are left with significant ownership positions of national governments. The economy of Iceland has suffered a collapse just as sizable as any of Latin America or East Asia during the last few decades. Vox authors have kept up their prolific pace of commenting on unfolding events. In keeping with the mission of Vox, columnists both applied existing economic research to understand events and pointed the way to new avenues for research. These articles, it has to be understood, were written ‘in the moment’ over the past six months and so incorporate to a varying extend the history we have lived through. To help place individual contributions within this historical sequence, an appendix updates the timeline of events from our June publication through December.
    Keywords: financial crisis monetary policy bank failures contagion
    JEL: F3 E5 E6
    Date: 2009–02–22
  12. By: Itai Agur
    Abstract: This paper develops a game theory model to analyze the optimal structure of the Lender of Last Resort in Europe. When depositors are imperfectly informed, the indifference to international transmission displayed by national authorities has value. A centralized authority, because it internalizes externalities, faces a pooling equilibrium. It cannot effectively signal the motivation behind its interventions. This leads to unnecessary depositor scares. The first-best is achieved by delegation: the central authority decides when to retain control and when to delegate to the national authorities. Central coordination dominates pure centralization. 
    Keywords: Lender of Last Resort; Bailout; Delegation; Contagion; Centralization
    JEL: D82 G21
    Date: 2009–02
  13. By: Alexandre Laurin (C.D. Howe Institute); Colin Busby (C.D. Howe Institute); Benjamin Dachis (C.D. Howe Institute)
    Abstract: The 2009 federal budget proposed a $40 billion economic stimulus package spanning two years and projecting a return to balanced budgets within five. The projected quick recovery of federal finances relies primarily on aggressive assumptions about future interest rates, growth of program expenditures and effectiveness of the economic stimulus plan.
    Keywords: fiscal policy, Canadian Federal budget
    JEL: E62 E63
    Date: 2009–01
  14. By: Agustín S. Bénétrix and Philip R. Lane
    Abstract: We estimate the impact of shocks to government spending on the real exchange rate for a panel of EMU member countries. Our key finding is that the impact differs across different types of government spending, with shocks to public investment generating a larger and more persistent impact on the real exchange rate than shocks to government consumption. Within the latter category, we also show that the impact of shocks to the wage component of government consumption is larger than for shocks to the non-wage component.
    Date: 2009–03–03
  15. By: Lars Ljungqvist; Harald Uhlig
    Abstract: Campbell and Cochrane (1999) formulate a model that successfully explains a wide variety of asset pricing puzzles, by augmenting the standard power utility function with a time-varying subsistence level, or "external habit", that adapts nonlinearly to current and past average consumption in the economy. This paper demonstrates, that this comes at the "price" of several unusual implications. For example, we calculate that a society of agents with the preferences and endowment process of Campbell and Cochrane (1999) would experience a welfare gain equivalent to a permanent increase of nearly 16% in consumption, if the government enforced one month of fasting per year, reducing consumption by 10 percent then. We examine and explain these features of the preferences in detail. We numerically characterize the solution to the social planning problem. We conclude that Campbell-Cochrance preferences will provide for interesting macroeconomic modeling challenges, when endogenizing aggregate consumption choices and government policy.
    JEL: C61 E21 E44 G12
    Date: 2009–03
  16. By: Margarita Rubio (Banco de España)
    Abstract: The aim of this paper is twofold. First, I study how the proportion of fixed and variable-rate mortgages in an economy can affect the way shocks are propagated. Second, I analyze optimal implementable simple monetary policy rules and the welfare implications of this proportion. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given proportion of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. The model predicts that in an economy with mostly variable-rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed-rate economy. Aggregate effects are also larger for the variable-rate economy. For plausible parametrizations, differences are muted by wealth effects on labor supply and by the presence of savers. More persistent shocks, such as inflation target and technology shocks, cause larger aggregate differences. From a normative perspective I find that, in the presence of collateral constraints, the optimal Taylor rule is less aggressive against inflation than in the standard sticky-price model. Furthermore, for given monetary policy, a high proportion of fixed-rate mortgages is welfare enhancing.
    Keywords: Fixed/Variable-rate mortgages, monetary policy, housing market, collateral constraint
    JEL: E32 E44 E52
    Date: 2009–02
  17. By: Wouter den Haan; Vincent Sterk
    Abstract: In this paper, we analyze the business cycle behavior of home mortgages and consumer credit and investigate whether the observed changes. and in particular observed changes in the comovement between the loan variables and real activity. are likely to be caused by changes in financial markets. We find that there may have been such a role for changes in markets for consumer credit, but even before the financial crisis hit, the data do not support the hypothesis that changes in mortgage markets reduced the impact of economic shocks on real activity.
    JEL: C10 E44 F15 F36 F37
    Date: 2009–02
  18. By: Oleksiy Kryvtsov; Virgiliu Midrigan
    Abstract: Kryvtsov and Midrigan (2008) study the behavior of inventories in an economy with menu costs, fixed ordering costs and the possibility of stock-outs. This paper extends their analysis to a richer setting that is capable of more closely accounting for the dynamics of the US business cycle. We find that the original conclusion survives in this setting: namely, the model requires an elasticity of real marginal cost to output approximately equal to the inverse intertemporal elasticity of substitution in consumption in order to account for the countercyclicality of the aggregate inventory-to-sales ratio in the data.
    Keywords: Business fluctuations and cycles; Transmission of monetary policy
    JEL: E31 F12
    Date: 2009
  19. By: Tanya Molodtsova; Alex Nikolsko-Rzhevskyy; David H. Papell
    Abstract: This paper uses real-time data to show that inflation and either the output gap or unemployment, the variables which normally enter central banks’ Taylor rules for interest-rate-setting, can provide evidence of out-of-sample predictability and forecasting ability for the United States Dollar/Euro exchange rate from the inception of the Euro in 1999 to the end of 2007. We also present less formal evidence that, with real-time data, the Taylor rule provides a better description of ECB than of Fed policy during this period. The strongest evidence is found for specifications that neither incorporate interest rate smoothing nor include the real exchange rate in the forecasting regression, and the results are robust to whether or not the coefficients on inflation and the real economic activity measure are constrained to be the same for the U.S. and the Euro Area. The evidence is stronger with inflation forecasts than with inflation rates and with real-time data than with revised data. Bad news about inflation and good news about real economic activity both lead to out-of-sample predictability and forecasting ability through forecasted exchange rate appreciation.
    Date: 2009–02
  20. By: V. LEWIS
    Abstract: Business cycle models with sticky prices and endogenous firm entry make novel predictions on the transmission of shocks through the extensive margin of investment. I test some of these predictions using a vector autoregression with model-based sign restrictions. I find a positive and significant response of firm entry to expansionary shocks to productivity, aggregate spending, monetary policy and entry costs. The estimated response to a monetary expansion does not support the monetary policy transmission mechanism proposed by the model. Insofar as firm startups require labour services, wage stickiness is needed to make the signs of the model responses consistent with the estimated ones. The shapes of the empirical responses suggest that congestion effects in entry make it harder for new .firms to survive when the number of startups rises.
    Keywords: firm entry, business cycles, VAR
    Date: 2008–10
  21. By: Kitov, Ivan
    Abstract: There is no Phillips curve in the United States, i.e. unemployment does not drive inflation at any time horizon. There is a statistically robust anti-Phillips curve - inflation leads unemployment by 10 quarters. Apparently, the anti-Phillips curve would be the conventional one, if the time would flow in the opposite direction. Several tests for cointegration do not reject the hypothesis that there exist a long-term equilibrium relation between inflation and unemployment in the US. The cointegrating relation between inflation and unemployment is not the proof of causality, however, and both variables are driven by the same external force. Also presented are some statistical evidences that there exist conventional Phillips curves in Germany and France, but there is no causality link between unemployment and inflation as well.
    Keywords: the Phillips curve; inflation; unemployment; causality
    JEL: E24 E31 E58 E52
    Date: 2009–02–26
  22. By: Giulia PICCILLO
    Abstract: The paper studies the relationship between exchange rates and asset prices. It takes the approach of order ows to exchange rates. Specifically, it focuses on the effect of time-dependent risk aversion. The switch in the parameter causes the equilibrium of the system to alternate between two regimes: an optimistic and a pessimistic one. The paper is complete of a wide empirical section where the two equilibria are identified and specified for three of the main world markets. The regimes appear to be persistent and consistent with the existing literature on risk aversion. This also includes recent events of the financial crisis. The analysis uncovers a new development for exchange rate microstructure models. 3 of the 4 markets studied are consistent with both the order flow and the Markov switching models. The markets analyzed are the UK, Switzerland, Germany and Japan.
    Keywords: Exchange rates, Microstructure, Markov chains
    JEL: C2 F3 G1
    Date: 2008–12
  23. By: Giulia PICCILLO
    Abstract: This paper studies the relationship between exchange rates and asset prices. It takes the novel approach of modeling both the markets in a framework of heterogeneous agents. Investors maximize their profits from the international equity markets by solving a Mean-Variance problem. As a result, agents choose between different combinations of rules in the home and foreign equity market as well as in the foreign exchange market. Given the incomplete information setting, agents check the past profitability of their rules and switch behavior in the effort to maximize their profits. Due to the heuristics embedded within the model, this simple frame-work alone is able to create a complex, time-varying dynamics. This dynamics is analyzed for different parameters and conditions. Finally the model is brought to the data, to check the fitness of the predictions on the real world markets.
    Keywords: Behavioral finance, exchange rates, asset prices
    Date: 2009–01
  24. By: Carrillo Julio A. (METEOR)
    Abstract: This paper compares two approaches towards the empirical inertia of inflation and output. Two variants that produce persistence are added to a baseline DSGE model of sticky prices: 1) sticky information applied to firms, workers, and households; and 2) a backward-looking inflation indexation along with habit formation. The rival models are then estimated using U.S. data in order to determine their plausibility. It is shown that the sticky information model is better at predicting inflation, wage inflation, and the degree of price stickiness. Output dynamics, however, are better explained by habit persistence.
    Keywords: macroeconomics ;
    Date: 2009
  25. By: Genaro Sucarrat
    Abstract: Econometric reduction theory provides a comprehensive probabilistic framework for the analysis and classification of the reductions (simplifications) associated with empirical econometric models. However, the available approaches to econometric reduction theory are unable to satisfactory accommodate a commonplace theory of social reality, namely that the course of history is indeterministic, that history does not repeat itself and that the future depends on the past. Using concepts from philosophy this paper proposes a solution to these shortcomings, which in addition permits new reductions, interpretations and definitions.
    Keywords: Theory of reduction, DGP, Possible worlds, Econometrics and philosophy
    JEL: B40 C50
    Date: 2009–02
  26. By: Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
    Abstract: This paper discusses pooling versus model selection for now- and forecasting in the presence of model uncertainty with large, unbalanced datasets. Empirically, unbalanced data is pervasive in economics and typically due to different sampling frequencies and publication delays. Two model classes suited in this context are factor models based on large datasets and mixed-data sampling (MIDAS) regressions with few predictors. The specification of these models requires several choices related to, amongst others, the factor estimation method and the number of factors, lag length and indicator selection. Thus, there are many sources of mis-specification when selecting a particular model, and an alternative could be pooling over a large set of models with different specifications. We evaluate the relative performance of pooling and model selection for now- and forecasting quarterly German GDP, a key macroeconomic indicator for the largest country in the euro area, with a large set of about one hundred monthly indicators. Our empirical findings provide strong support for pooling over many specifications rather than selecting a specific model.
    Keywords: factor models; forecast combination; forecast pooling; MIDAS; mixed-frequency data; model selection; nowcasting
    JEL: C53 E37
    Date: 2009–03
  27. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank)
    Abstract: We examine the determinants of interest rate margins of Czech banks employing bank-level dataset at the quarterly frequency in 2000-2006. Our main results are as follows. We find that more efficient banks exhibit lower margins and there is no evidence that the banks with lower margins would compensate themselves with higher fees. Price stability contributes to lower margins. There are some economies of scale, as larger banks tend to charge lower margins. Higher capital adequacy is associated with lower margins contributing to the banking stability. Overall, the results indicate that the determinants of interest rate margins of Czech banks are largely similar to those reported in other studies for developed countries.
    Keywords: commercial banks, interest rate margins, bank efficiency
    JEL: G21 D40 P27
    Date: 2009–02
  28. By: Juan Carlos Cuestas; Luís A. Gil-Alana
    Abstract: The aim of this paper is to analyse the empirical fulfilment of the Purchasing Power Parity (PPP) theory for the Australian dollar. In order to do so we have applied recently developed unit root tests that account for asymmetric adjustment towards the equilibrium (Kapetanios et al., 2003) and fractional integration in the context of structural changes (Robinson, 1994, and Gil-Alana, 2008). Although our results point to the rejection of the PPP hypothesis, we find that the degree of persistence of shocks to the Australian dollar decreases after the 1985 currency crisis.
    Keywords: PPP, Real Exchange Rate, Unit Roots, Non-linearities, Fractional integration
    JEL: C32 F15
    Date: 2009–02
  29. By: Mario Reyna Cerecero; Diana Salazar Cavazos; Héctor Salgado Banda
    Abstract: There are a significant number of papers that show that the slope of the yield curve has a certain ability to forecast real economic activity and inflation. However, in emerging economies this source of information has not been thoroughly used; Mexico is not an exception. The economic stability achieved in this country in recent years has allowed the government to issue, since 2001,long-term bonds. With more stable economic cycles, the information included in the long part of the yield curve could be a useful tool to estimate future economic activity. This document analyses the predictive power of the spread. Moreover, the spread is divided into two main components to analyse the origin of its predictive power. Next, the power of the spread to forecast economic cycles is tested. Last, out-of-sample tests of the spread are carried out. The findings show that the yield curve provides significant information about future economic activity.
    Keywords: Budgetary Institutions, Fiscal Outcomes, Transparency.
    JEL: C5 E44 E52 F37
    Date: 2008–12
  30. By: Josué Fernando Cortés Espada; Manuel Ramos Francia
    Abstract: This paper investigates how different macroeconomic shocks affect the term-structure of interest rates in Mexico. In particular, we develop a model that combines a no-arbitrage specification of the term structure with a macroeconomic model of a small open economy. We find that shocks that are perceived to have a persistent effect on inflation affect the level of the yield curve. The effect on medium and long-term yields results from the increase in expected future short rates and in risk premia. With respect to demand shocks, our results show that a positive shock leads to an upward flattening shift in the yield curve. The flattening of the curve is explained by both the monetary policy response and the time-varying term premia.
    Keywords: Term-Structure, No-Arbitrage, Macroeconomic Shocks.
    JEL: C13 E43 G12
    Date: 2008–07
  31. By: Ásgeir Daníelsson; Magnús F. Gudmundsson; Svava J. Haraldsdóttir; Thorvardur T. Ólafsson; Ásgerdur Ó. Pétursdóttir; Thórarinn G. Pétursson; Rósa Sveinsdóttir
    Abstract: This paper documents and describes Version 2.0 of the Quarterly Macroeconomic Model of the Central Bank of Iceland (QMM). QMM and the underlying quarterly database have been under construction since 2001 at the Research and Forecasting Division of the Economics Department at the Bank and was first implemented in the forecasting round for the Monetary Bulletin 2006.1 in March 2006. QMM is used by the Bank for forecasting and various policy simulations and therefore plays a key role as an organisational framework for viewing the medium-term future when formulating monetary policy at the Bank. This paper is mainly focused on the short and medium-term properties of QMM. Steady state properties of the model are documented in a paper by Daníelsson (2009).
    Date: 2009–02

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