|
on Central Banking |
| By: | Marvin Goodfriend; Robert G. King |
| Abstract: | A standard statistical perspective on the U.S. Great Inflation is that it involves an increase in the stochastic trend rate of inflation, defined as the long-term forecast of inflation at each point in time. That perspective receives support from two sources: the behavior of long-term interest rates which are generally supposed to contain private sector forecasts, and statistical studies of U.S. inflation dynamics. We show that a textbook macroeconomic model delivers such a stochastic inflation trend, when there are shifts in the growth rate of capacity output, under two behavioral hypotheses about the central bank: (i) that it seeks to maintain output at capacity; and (ii) that it seeks to maintain continuity of the short-term interest rate. The theory then identifies major upswings in trend inflation with unexpectedly slow growth of capacity output. We interpret the rise of inflation in the U.S. from the perspective of this simple macroeconomic framework. |
| JEL: | E3 E43 E52 E58 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14862&r=cba |
| By: | Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerron-Quintana (Department of Economics, North Carolina State University); Juan F. Rubio-Ramírez (Department of Economics, Duke University); Martin Uribe (Department of Economics, Columbia University) |
| Abstract: | This paper shows how changes in the volatility of the real interest rate at which small open emerging economies borrow have a quantitatively important effect on real variables like output, consumption, investment, and hours worked. To motivate our investigation, we document the strong evidence of time-varying volatility in the real interest rates faced by a sample of four emerging small open economies: Argentina, Ecuador, Venezuela, and Brazil. We postulate a stochastic volatility process for real interest rates using T-bill rates and country spreads and estimate it with the help of the Particle filter and Bayesian methods. Then, we feed the estimated stochastic volatility process for real interest rates in an otherwise standard small open economy business cycle model. We calibrate eight versions of our model to match basic aggregate observations, two versions for each of the four countries in our sample. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, and hours worked, and a notable change in the current account of the economy. |
| Keywords: | Small Open Economy, DSGE Models, Stochastic Volatility |
| JEL: | C32 C63 F32 F41 |
| Date: | 2009–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:09-013&r=cba |
| By: | Jesús Fernández-Villaverde; Pablo A. Guerrón-Quintana; Juan Rubio-RamÃrez; MartÃn Uribe |
| Abstract: | This paper shows how changes in the volatility of the real interest rate at which small open emerging economies borrow have a quantitatively important effect on real variables like output, consumption, investment, and hours worked. To motivate our investigation, we document the strong evidence of time-varying volatility in the real interest rates faced by a sample of four emerging small open economies: Argentina, Ecuador, Venezuela, and Brazil. We postulate a stochastic volatility process for real interest rates using T-bill rates and country spreads and estimate it with the help of the Particle filter and Bayesian methods. Then, we feed the estimated stochastic volatility process for real interest rates in an otherwise standard small open economy business cycle model. We calibrate eight versions of our model to match basic aggregate observations, two versions for each of the four countries in our sample. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, and hours worked, and a notable change in the current account of the economy. |
| JEL: | C32 C63 F32 F41 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14875&r=cba |
| By: | Simon Gilchrist; Vladimir Yankov; Egon Zakrajsek |
| Abstract: | To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our "ground-up'' approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform---especially at longer horizons---standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30~percent of the forecast error variance in economic activity at the two- to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to U.S.\ economic fluctuations during the 1990--2008 period. |
| JEL: | E32 E44 G12 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14863&r=cba |
| By: | Oleksiy Kryvtsov |
| Abstract: | Models with imperfect information that generate persistent monetary nonneutrality predominantly rely on assumptions leading to substantial heterogeneity of information across price-setters. This paper develops a quantitative general equilibrium model in which the degree of heterogeneity of information is determined endogenously. In the model, firms use two technologies to acquire information: costly updating to full information and costless learning from publicly observed market signals. Price changes of firms that update information infrequently are synchronized with market signals. This leads to an externality whereby less frequent updating increases the information conveyed by prices and quantities. When the model is calibrated to moments from a panel of BLS commodity sectors, it is found that the private value of costly updating to full information is close to zero, market signals are informative, and the real effects of monetary shocks are small. |
| Keywords: | Business fluctuations and cycles; Inflation and prices; Transmission of monetary policy |
| JEL: | D83 E31 E32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-11&r=cba |
| By: | Michael Reiter (Institute for Advanced Studies, Vienna); Tommy Sveen (Norges Bank (Central Bank of Norway)); Lutz Weinke (Duke University and Institute for Advanced Studies, Vienna) |
| Abstract: | The lumpy nature of plant-level investment is generally not taken into account in the context of monetary theory (see, e.g., Christiano et al. 2005 and Woodford 2005). We formulate a generalized (S,s) pricing and investment model which is empirically more plausible along that dimension. Surprisingly, our main result shows that the presence of lumpy investment casts doubt on the ability of sticky prices to imply a quantitatively relevant monetary transmission mechanism. |
| Keywords: | Lumpy Investment, Sticky Prices |
| JEL: | E22 E31 E32 |
| Date: | 2009–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_05&r=cba |
| By: | Ricardo Gimeno (Banco de España); José Manuel Marqués (Banco de España) |
| Abstract: | In this paper we propose an affine model that uses as observed factors the Nelson and Siegel (NS) components summarising the term structure of interest rates. By doing so, we are able to reformulate the Diebold and Li (2006) approach to forecast the yield curve in a way that allows us to incorporate a non-arbitrage opportunities condition and risk aversion into the model. These conditions seem to improve the forecasting ability of the term structure components and provide us with an estimation of the risk premia. Our approach is somewhat equivalent to the recent contribution of Christiensen, Diebold and Rudebusch (2008). However, not only does it seem to be more intuitive and far easier to estimate, it also improves that model in terms of fitting and forecasting properties. Moreover, with this framework it is possible to incorporate directly the inflation rate as an additional factor without reducing the forecasting ability of the model. The augmented model produces an estimation of market expectations about inflation free of liquidity, counterparty and term premia. We provide a comparison of the properties of this indicator with others usually employed to proxy the inflation expectations, such as the break-even rate, inflation swaps and professional surveys. |
| Keywords: | Interest Rate Forecast, Inflation Expectations, Affine Model, Diebold and Li |
| JEL: | G12 E43 E44 C53 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0906&r=cba |
| By: | S. Boragan Aruoba; Frank Schorfheide |
| Abstract: | We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. The model is estimated and evaluated based on postwar U.S. data. We document its money demand properties and determine the optimal long-run inflation rate that trades off the New Keynesian distortion against the distortion caused by taxing money and hence transactions in the decentralized market. Target rates of -1% or less maximize the social welfare function we consider, which contrasts with results derived from a cashless New Keynesian model. |
| JEL: | C5 E4 E5 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14870&r=cba |
| By: | Frank Schorfheide; Keith Sill; Maxym Kryshko |
| Abstract: | This paper develops and illustrates a simple method to generate a DSGE model-based forecast for variables that do not explicitly appear in the model (non-core variables). We use auxiliary regressions that resemble measurement equations in a dynamic factor model to link the non-core variables to the state variables of the DSGE model. Predictions for the non-core variables are obtained by applying their measurement equations to DSGE model-generated forecasts of the state variables. Using a medium-scale New Keynesian DSGE model, we apply our approach to generate and evaluate recursive forecasts for PCE inflation, core PCE inflation, the unemployment rate, and housing starts along with predictions for the seven variables that have been used to estimate the DSGE model. |
| JEL: | C11 C32 C53 E27 E47 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14872&r=cba |
| By: | Jim Malley; Ulrich Woitek |
| Abstract: | This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of technology shocks in explaining aggregate fluctuations. To this end we estimate the model’s posterior density using Markov-Chain Monte-Carlo (MCMC) methods. Within this framework we extend Ireland’s (2001, 2004) hybrid estimation approach to allow for a vector autoregressive moving average (VARMA) process to describe the movements and co-movements of the model’s errors not explained by the basic RBC model. The results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model’s fit relative to the VAR and AR alternatives. Moreover, despite setting the RBC model a more difficult task under the VARMA specification, our analysis, based on forecast error and spectral decompositions, suggests that the RBC model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post-war U.S. economy. |
| Keywords: | Real Business Cycle, Bayesian estimation, VARMA errors |
| JEL: | C11 C52 E32 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:408&r=cba |
| By: | Alesina, Alberto (Harvard University); Giuliano, Paola (University of California, Los Angeles) |
| Abstract: | This paper discusses what determines the preferences of individuals for redistribution. We review the theoretical literature and provide a framework to incorporate various effects previously studied separately in the literature. We then examine empirical evidence for the US, using the General Social Survey, and for a large set of countries, using the World Values Survey. The paper reviews previously found results and provides several new ones. We emphasize, in particular, the role of historical experiences, cultural factors and personal history as determinants of preferences for equality or tolerance for inequality. |
| Keywords: | preferences for redistribution |
| JEL: | H1 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4056&r=cba |
| By: | Sarah Bryant (Shippensburg University of Pennsylvania); Jonathan Kohn (Shippensburg University of Pennsylvania) |
| Abstract: | The US and UK economies have experienced excessive demand for housing for over a decade, causing housing booms in both countries. Consumers have been on a spending spree, based on higher and higher real and perceived home equity values, as well as equity market increases. In the US and UK markets, "bigger is better," or "as much as one can afford," has become the mentality of home buyers, as well as "buy now to take advantage of future higher prices" at which to sell one's house. In the US, interest rates have been mostly held at historic lows since about 1990. The Federal Reserve was praised for a long time for helping the financial markets sustain their roles in the housing markets. Since the housing market crash, beginning about 2006, the Federal Reserve has been blamed for the housing crisis. In the UK, interest rates have been held at more moderate levels, but they still experienced a boom and now a slowing of their housing market. This research will compare the two housing market booms to determine what differences and factors-in-common led to these simultaneous economic situations. This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, in Lisbon, Portugal, May 22, 2008. |
| Date: | 2008–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:bep:itfapp:1118&r=cba |
| By: | Christopher M. Gunn; Alok Johri |
| Abstract: | We explore the ability of a model with knowledge capital to generate expectations-driven business cycles. Knowledge capital is an input in production which is endogenously produced through a learning-by-doing process. We show that a standard real business cycle model augmented with only a learning-by-doing technology can exhibit an expectations-driven business cycle in response to news about a future change in total factor productivity. News about future productivity immediately increases the value of knowledge. This induces agents to accumulate knowledge now by working harder. The ensuing expansion of output is sufficient that both current consumption and investment can increase above steady state levels despite the absence of any contemporaneous productivity shock. Moreover, if knowledge capital is accumulated by firms the boom in real variables is accompanied by an appreciation in the price of equity shares, a feature that has empirical support. |
| Keywords: | Expectations-driven business cycle; Pigou cycle: News shock; Learning-by-doing; Asset pricing |
| JEL: | E3 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2009-02&r=cba |
| By: | De Walque, Gregory (National Bank of Belgium); Pierrard, Olivier (Catholic University of Louvain); Sneessens, Henri (Catholic University of Louvain); Wouters, Raf (National Bank of 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. |
| Keywords: | DSGE, search and matching, nominal wage rigidity, monetary policy |
| JEL: | E31 E32 E52 J64 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4059&r=cba |
| By: | Fougère, Denis (CREST-INSEE); Gautier, Erwan (Bank of France); Le Bihan, Hervé (Bank of France) |
| Abstract: | We examine the effect of the minimum wage on restaurant prices. We contribute to both the study of economic impact of the minimum wage and to the micro patterns of price stickiness. For that purpose, we use a unique dataset of individual price quotes collected to calculate the Consumer Price Index in France and we estimate a price rigidity model based on a flexible (S; s) rule. We find a positive and significant impact of the minimum wage on prices. The effect of the minimum wage on prices is however very protracted. The aggregate impact estimated with our model takes more than a year to fully pass through to retail prices. |
| Keywords: | price stickiness, minimum wage, inflation, restaurant prices |
| JEL: | E31 D43 L11 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4070&r=cba |
| By: | Congregado, Emilio (University of Huelva); Golpe, Antonio A. (University of Huelva); Parker, Simon C. (University of Western Ontario) |
| Abstract: | This paper estimates an unobserved components model to explore the macro dynamics of entrepreneurship in Spain and the US. We ask whether entrepreneurship exhibits hysteresis, defined as a macro dynamic structure in which cyclical fluctuations have persistent effects on the natural rate of entrepreneurship. We find evidence of hysteresis in Spain, but not the US, while in both countries business cycle output variations significantly affect future rates of entrepreneurship. The article discusses implications of the findings for the design of entrepreneurship policies. |
| Keywords: | hysteresis, unobserved components model, time series models, business cycles, self-employment, entrepreneurship |
| JEL: | C32 E32 J24 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4093&r=cba |
| By: | Lukas Vogel; Elena Rusticelli; Pete Richardson; Stéphanie Guichard; Christian Gianella |
| Abstract: | This paper uses a variety of empirical methods to examine the apparent differences in monetary policy stances as between the United States and other G7 economies, notably those in the euro area, during the period of sharp increases in oil and other commodity prices in the first half of 2008. In particular it asks the question whether observed differences in policy stances could be attributed to differences in economic structures and the vulnerability of different regions to inflationary shocks coming from import prices as opposed to differences in monetary policy objectives. The main conclusion is that although there are a number of differences in the estimated impact and dynamics of commodities, import prices and exchange rates on domestic inflation, which may have contributed to differences in policy stances during the boom in commodity prices, they cannot explain them all.<P>Réponse de l’inflation aux chocs récents : Les pays du G7 diffèrent-ils les uns des autres ?<BR>Ce papier utilise plusieurs méthodes empiriques distinctes pour examiner les différences apparentes dans l’orientation des politiques monétaires aux États-Unis et d'autres économies du G7, notamment de la zone euro, pendant la période de fortes hausses des cours du pétrole et des matières premières au premier semestre de 2008. En particulier il pose la question de l’origine des différences observées dans l’orientation des politiques : peuvent-elles être attribuées aux différences de structures économiques et à la vulnérabilité de différentes régions aux chocs inflationnistes venant des prix à l'importation ou aux différences dans les objectifs de politique monétaire. La conclusion principale est que bien qu'il y ait un certain nombre de différences dans l'impact estimé des prix à l'importation des produits de base et des taux de change sur l'inflation domestique et dans leurs dynamiques, lesquels ont pu contribuer aux différences d’orientation des politiques monétaires durant la phase de boom des cours des matières premières, ces différences ne peuvent pas tout expliquer. |
| Keywords: | Phillips curve, courbe de Phillips, inflation, DSGE model, modèle DSGE, coût de transition, commodity prices, prix des matières premières, import prices, prix des importations, error-correction model, modèles à correction d’erreurs |
| JEL: | E31 E52 J30 |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:689-en&r=cba |
| By: | Bigio, Saki (Department of Economics, New York University) |
| Abstract: | Cross-country evidence suggests that during recent years a large fraction of developing countries seem to began to overcome fear of oating, i.e., a lower relative volatility of exchange rates to monetary policy instruments. To explain this trend, we build a model that describes the behavior of Central Banks in developing countries under uncertainty and fear of misspecication about the eects of exchange rate depreciations. The Central Bank is uncertain about two sub-models which dier in that exchange rate depreciations can cause output either to expand (textbook eect) or contract (balance sheet eect). Optimal policy within the second sub-model is consistent with fear of floating. A feature of fear of oating is that, by preventing sizeable exchange rate swings, Central Banks could loose valuable information useful to distinguish among models. We describe how the Central Bank's the evolution of the prior depends on the optimal policy and viceversa. We conclude that the trend towards less fear of floating may not be explained by Bayesian or robust policies because it would have been too quick to explain the data. However, if there was a parameter change affecting many countries during the early 2000's, the model generates the observed pattern. |
| Keywords: | Balance Sheet Effect, Fear of Floating, Model Uncertainty, Learning, Monetary Policy, Policy Experimentation, Robustness |
| JEL: | C11 E44 E58 F31 F33 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2009-004&r=cba |
| By: | Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University) |
| Abstract: | This paper examines an environment where money is essential and agents exchange in perfectly-competitive, Walrasian markets. Agents consume and produce a homogeneous good, but hold money to purchase consumption in the event of a relatively low productivity shock. A Walrasian market delivers a non-degenerate distribution of money holdings across agents and avoids some of the computational difficulties associated with the market and pricing assumptions of bilateral matching and bargaining common to search-theoretic environments. The model is calibrated to long-run US velocity, and the welfare costs of inflation are assessed for variable buyer-seller ratios and persistent states of buying and selling. |
| Keywords: | Monetary Policy, Inflation, Welfare, Walrasian Markets |
| JEL: | E40 E50 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:2&r=cba |
| By: | Vasco J. Gabriel (Department of Economics, University of Surrey and Universidade do Minho - NIPE); Pataaree Sangduan (Bureau of the Budget, Thailand) |
| Abstract: | We propose a Markov switching cointegration approach to assess long run fiscal sustainability. This method allow us to simultaneously: 1) test for cointegration in the presence of significant fiscal policy changes; 2) assess the type of fiscal regime (whether 'strongly'/'weakly' sustainable or unsustainable) that a country experienced at a given period and 3) analyse the timing of the transition between the estimated regime types. Given its flexibility, our approach enable us to uncover a richer and more complex dynamics in the analysis of fiscal sustainability, which standard linear cointegration methods fail to capture. |
| JEL: | C22 E62 H60 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:09/2009&r=cba |
| By: | Kamil Yilmaz (Koc University) |
| Abstract: | We apply Diebold-Yilmaz spillover index methodology to monthly industrial production indices to study business cycle interdependence among G-6 industrialized countries since 1958. The business cycle spillover index fluctuates substantially over time, increasing especially after the 1973-75, 1981-82 and 2001 U.S. recessions. The band within which the spillover index fluctuates has widened since the start of the globalization process in the early 1990s. Our most important result, however, concerns the current state of the world economy: In a matter of four months from September to December 2008, the business cycle spillover index recorded the sharpest increase ever, reaching a record level as of December 2008 (See http://data.economicresearchforum.org/erf/bcspill.aspx?lang=en for updates of the spillover plot). Focusing on directional spillover measures, we show that in the current episode the shocks are mostly originating from the United States and spreading to other industrialized countries. We also show that, throughout the period of analysis, the U.S. (1980s and 2000s) and Japan (1970s and 2000s) have been the major transmitters of shocks among the industrialized countries. |
| Keywords: | Business Cycles, Spillovers, Industrial Production, Vector Autoregression, Variance Decomposition, Unit Roots, Cointegration |
| JEL: | E32 F41 C32 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:0903&r=cba |
| By: | Vasco Gabriel (University of Surrey); Pataaree Sangduan (Bureau of the Budget, Thailand) |
| Abstract: | We propose a Markov switching cointegration approach to assess long run fi?scal sustainability. This method allows us to simultaneously: 1) test for cointegration in the presence of signifi?cant ?fiscal policy changes; 2) assess the type of fi?scal regime (whether strongly/weakly sustainable or unsustainable) that a country experienced at a given period and 3) analyse the timing of the transition between the estimated regime types. Given its flexibility, our approach enables us to uncover a richer and more complex dynamics in the analysis of fi?scal sustainability, which standard linear cointegration methods fail to capture. |
| JEL: | C22 E62 H60 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0309&r=cba |
| By: | Benedetto Molinari (Universidad Pablo de Olavide); Francesco Turino (Universidad de Alicante) |
| Abstract: | This paper provides new empirical evidence for quarterly U.S. aggregate advertisingexpenditures, showing that advertising has a well defined pattern over the BusinessCycle. To understand this pattern we develop a general equilibrium model wheretargeted advertising increases the marginal utility of the advertised good. Advertisingintensity is endogenously determined by profit maximizing firms. We embed thisassumption into an otherwise standard model of the business cycle withmonopolistic competition. We find that advertising affects the aggregate dynamics ina relevant way, and it exacerbates the welfare costs of fluctuations for the consumer.Finally, we provide estimates of our setup using Bayesian techniques. |
| Keywords: | Advertising, DSGE model, Business Cycle fluctuations, Bayesian |
| JEL: | D11 E32 J22 M37 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-09&r=cba |
| By: | Mohitosh Kejriwal |
| Abstract: | Recent empirical studies find little evidence of a change in euro area inflation persistence over the post-1970 period. Their methodology is primarily based on standard unit root and structural break tests on the persistence parameter in an autoregressive specification for the inflation process. These procedures are, however, not designed to detect a change in persistence when a sub-sample of the data has a unit root, i.e., when the process shifts from stationarity to non-stationarity or vice-versa. In this paper, we use four classes of tests for a change in persistence that allow for such shifts to argue that euro area inflation shifted from a unit root process to a stationary one at some point in the sample. Statistical methods to select the break date identify the change in the second quarter of 1993, around the time of the Maastricht Treaty which established the groundwork for the European Monetary Union, with an explicit mandate for price stability as the primary objective of monetary policy. Bootstrap estimates of the persistence parameter, half-life estimates and confidence intervals for the largest autoregressive root all suggest a marked decline in persistence after the break. We also illustrate that the hypothesis of stationarity with a mean shift but a stable persistence parameter is not compatible with the data. The evidence presented is therefore consistent with the view that the degree of inflation persistence varies with the transparency and credibility of the monetary regime. |
| Keywords: | persistence, price stability, unit root, monetary policy |
| JEL: | C22 E3 E5 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1218&r=cba |
| By: | Susana Salvado (FEUNL, GEE) |
| Abstract: | The issue of fiscal coordination in a Monetary Union is recurrent as monetary policy can no longer be used as a national stabilization policy instrument. We measure the increase in welfare due to the coordination of fiscal policies in the typical Neo-Keynesian environment, where monetary policy would have significantive and persistent real effects. We propose a decomposition of coordination gains into a deterministic and a stochastic parcel. We show that the deterministic fiscal coordination gain is high but that the stochastic gain, often called stabilization gain, is very small generating, for our calibration, an increase of 0.0161 percentage points, measured in consumption equivalents. |
| Keywords: | Coordination, Fiscal Policy, Gains, Nash. |
| JEL: | E61 E62 F41 F42 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0013&r=cba |
| By: | Susana Salvado (FEUNL, GEE) |
| Abstract: | In a Monetary Union where individual monetary instruments are lost, fiscal policy becomes more important as a national policy. The question addressed in this article is whether fiscal policy should be decided at the country level or by a central decision maker, being in any case the fiscal instruments specific to each country. To answer this question, the focus is on the quantitative effect, since there are costs of implementing a supranational decision maker. While discussing the methodologies used in literature, we hereby propose a different one for quantifying gains from cooperation. We conclude that gains from fiscal coordination are significative, but gains that result from policy changes as a reaction to shocks are, by nature, very small. We also show that, symmetric shocks lead to coordination gains of the same magnitude than asymmetric ones. |
| Keywords: | Coordination, Fiscal Policy, Gains, Nash. |
| JEL: | E61 E62 F41 F42 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0012&r=cba |
| By: | Martin Menner (Universidad de Alicante) |
| Abstract: | A search-theoretic monetary DSGE model with capital and in¬ventory investment is estimated, and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification. The search model can track inflation and output data better. It dominates the other models in the ability to predict the autocorrela¬tions of inflation, the contemporaneous correlation between output growth and inflation, and in the persistent (dis-)inflation process after a (technol¬ogy) monetary shock. It generates a hump-shaped but delayed output response to a monetary shock that matches the data better than the other models. |
| Keywords: | Inflation and Output Dynamics, Business Cycle, Search-Theory of Money, Bayesian Estimation, Model Comparison. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-06&r=cba |
| By: | Herbert Buscher; Hubert Gabrisch |
| Abstract: | Our study tries to find out whether wage dynamics between Euro member countries became more synchronized through the adoption of the common currency. We calculate bivarate correlation coefficients of wage and wage cost dynamics and run a model of endogenously induced changes of coefficients, which are explained by other variables being also endogenous: trade intensity, sectoral specialization, financial integration. We used a panel data structure to allow for cross-section weights for country-pair observations. We use instrumental variable regressions in order to disentangle exogenous from endogenous influences. We applied these techniques to real and nominal wage dynamics and to dynamics of unit labor costs. We found evidence for persistent asymmetries in nominal wage formation despite a single currency and monetary policy, responsible for diverging unit labor costs and for emerging trade imbalances among the EMU member countries. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:7-09&r=cba |
| By: | Kemal Turkcan (Department of Economics, Akdeniz University); Aysegul Ates (Department of Economics, Akdeniz University) |
| Abstract: | A distinctive feature of present globalization is the development of international production sharing activities, i.e. production fragmentation. The recent developments in transportation and communication technologies led to a surge in intermediate goods trade. However, intermediate goods trade is often neglected in the empirical studies of the exchange rate pass-through (ERPT). Using import unit values of 79 motor vehicle products and 245 auto-part, which are classified by the 10-digit level of Harmonized Tariff Schedule (HTS), this study examines the pass-through of exchange rate changes from 5 major trading partners for the period of 1998.01 to 2006.12 by using panel data cointegration techniques. Secondly, this study aims to compare the ERPT for the motor vehicle products (final goods) to the ERPT for the auto-parts (intermediate goods) in the U.S. The results suggest that import prices do not respond proportionately to the exchange rates and the degree of estimated pass through into import prices differs for motor vehicle products and auto parts.This paper was presented at the 18th International Conference of the International Trade and Finance Association, May 22, 2008, meeting at Universidade Nova de Lisboa, Lisbon, Portugal. |
| Date: | 2008–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:bep:itfapp:1132&r=cba |
| By: | Sergio Cesaratto |
| Abstract: | Endogenous growth literature emerged from dissatisfaction with one result of the neoclassical growth model: the independence of the growth rate from the saving ratio, which is seen as a variable subject to policy influence. There are at least three generations of EGT models: the old one of the sixties; the new one of the late eighties; and the most recent one, from the second half of the nineties. EGT models of any vintage fall into one of two fields: neo-Solowian (or semi-endogenous models) or fully endogenous models. Models from the sixties would generally fall into the first class and for good reasons. Indeed, most of the early generation of fully endogenous models from the late eighties fell under the ‘Jones critique’ (Jones 1995b), which pointed out some of the difficulties of these models. The most recent models have found various ways to avoid those problems. It is shown that these stratagems were anticipated by Marvin Frankel in the sixties and by Lucas in the eighties. One suspects that these devices arose in order to fix the theory rather than from, say, some ex-ante empirical observation (which is often provided ex post). More importantly, this paper indicates some problems common to all vintages of EGT models, beginning with the Cambridge capital theory critique, and suggests some alternative routes for growth analysis outside neoclassical theory. |
| JEL: | O3 O4 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:559&r=cba |
| By: | Elias Karakitsos |
| Abstract: | All of the various schemes that have been put forward to resolve the current credit crisis follow either the "business as usual" or the "good bank" model. The "business as usual" model takes different forms--insurance or guarantee of the assets or liabilities of the financial institutions, creation of a "bad bank" to buy toxic assets, temporary nationalization--and is the one favored by banks and pursued by government. It amounts to a bailout of the financial system using taxpayer money. Its drawback is that the cost may exceed by trillions the original estimate of $700 billion, and despite the mounting cost, it may not even prevent the bankruptcy of financial institutions. Moreover, it runs the risk of government insolvency, and turning an already severe recession into a depression worse than that in the 1930s. The "good bank" solution consists of creating a new banking system from the ashes of the old one by removing the healthy assets and liabilities from the balance sheet of the old banks. It has a relatively small cost and the major advantage that credit flows will resume. Its drawback is that it lets the old banks sink or swim. But if they sink, with huge losses, these might spill over into the personal sector, and the ultimate cost may be the same as in the business-as-usual model: a catastrophic depression. In this new Policy Note, author Elias Karakitsos of Guildhall Asset Management and the Centre for Economic and Public Policy, University of Cambridge, outlines a modified "good bank" approach, with the government either guaranteeing a large proportion of the personal sector's assets or assuming the first loss in case the old banks fail. It has the same advantages as the original good-bank model, but it makes sure that, in the eventuality that the old banks become insolvent, the economy is shielded from falling into depression, and recovery is ultimately ensured. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:09-3&r=cba |
| By: | Sebastián Nieto Parra |
| Abstract: | During the 1990s and the 2000s a variety of crises affected the stability of international capital markets: from the European Monetary System crisis in 1992-93 and the emerging market crises to today’s financial crisis have been present in the arenas of capital markets. These crises stimulated the theoretical and empirical literature on the economics of the crises in several ways, among other things on the determinants of a crisis, its impact on domestic output, and policy implications. In most of the recent crises public sector financing difficulties combined with currency problems dominated the collapse of these countries. Both unsustainable fiscal and monetary policies were important factors behind these crises (...) |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:oec:devaac:89-en&r=cba |
| By: | Massimiliano La Marca (United Nations Conference on Trade and Development) |
| Abstract: | The paper provides some evidence on the current pattern of current account imbalances, real exchange rate and growth in emerging market economies and offers an interpretation to the fact that fast-growing economies tend to run small current account deficits or surpluses while preserving a non overvalued real exchange rate. The evidence that some speculative capital flows induced by domestic monetary policies may bring the exchange rate on a path inconsistent with an improvement of the external position provides a basis for a reconsideration of monetary and exchange rate policies at the national and international level.This paper was presented May 22, 2008, at the 18th International Conference of the International Trade and Finance Association meeting at Universidade Nova de Lisboa, Lisbon, Portugal.Keywords: foreign exchange rate, capital flows, growth, carry trade.JEL Classification: F31, F32, G15 |
| Date: | 2008–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:bep:itfapp:1129&r=cba |
| By: | Arslan Razmi (University of Massachusetts Amherst) |
| Abstract: | Several studies have commented on the emergence of a new interna- tional monetary system in the post-Asian crisis years. The current inter- national financial crisis has, however, put the so-called Bretton Woods II under considerable strain. This paper analyzes the sustainability of the pre-Lehman Brothers international monetary system from an emerging country perspective. A simple framework in which agents have a choice between financial and real assets is constructed in order to explore possi- ble consequences of some of the shocks that emerging economies are cur- rently experiencing. Stock and flow implications are analyzed. Assuming that recent events would have reinforced monetary authorities' desire to maintain an adequate cushion of reserves while preventing exchange rate volatility, we find that the response to most shocks would involve running continuous current account surpluses, that is, a continuation of a crucial aspect of Bretton Woods II. Given political and economic constraints, is such a continuation feasible? A preliminary exploration raises serious doubts and skims alternatives. JEL Categories: F02, F32, F36, |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2009-02&r=cba |
| By: | Ronald Schettkat (Department of Economics University of Wuppertal); Rongrong Sun (Department of Economics University of Wuppertal) |
| Abstract: | Almost all institutions - employment protection legislation, unions, wages, wage structure, unemployment insurance, etc. - have been alleged and found guilty to have caused this tragic development at some point in the long history of rising and persistent unemployment in Europe. US labor market institutions, assumed to leave markets unfettered, became the benchmark for Europe. Based on the assertion of neutrality of monetary policy in the medium and long run, the search for causes of European unemployment has shielded away from the policy of central banks. Actually, however, the institutional setup regarding monetary policy is very different between the FED and the Bundesbank (ECB). We argue that the interaction of negative external shocks and tight monetary policies may have been the major - although probably not the only - cause of unemployment in Europe remaining at ever higher levels each recession. We identify the monetary policy of the Bundesbank as asymmetrical in the sense that the Bank did not actively fight recessions, but that it dampened recovery periods. |
| Keywords: | Production; Employment; Unemployment; Monetary Policy; Central Banks and Their Policies |
| JEL: | E23 E24 E42 E43 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:bwu:schdps:sdp09003&r=cba |
| By: | Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw); Anna Iara (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | The main question addressed in this study is the performance of the labour markets in the Western Balkans. The aim is to find out whether they can deliver growth of employment and decline of unemployment in the medium run and whether they can withstand short-term shocks due to changes in demand or supply. These questions are particularly pressing in view of the monetary policy based on fixed exchange rates which is followed by the majority of the countries in this region. In terms of the theory of optimal currency areas, if the exchange rate is fixed, labour markets have to be flexible if there are adverse shocks. Otherwise, adjustment would work through a fall in employment levels and an increase in unemployment. The alternative of flexible exchange rates has been abandoned by most monetary authorities in the region for fears of risk of an exchange rate crisis. |
| Keywords: | Western Balkans, optimum currency area, labour market flexibility, external disequilibria, wage-setting |
| JEL: | E24 F15 F16 F41 F42 J3 J4 D57 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:wii:rpaper:rr:352&r=cba |
| By: | K. Azim Ozdemir; Serkan Yigit |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0901&r=cba |
| By: | André Minella; Nelson F. Souza-Sobrinho |
| Abstract: | We develop and estimate a medium-size, semi-structural model for Brazil's economy during the inflation targeting period. The model captures key features of the economy, and allows us to investigate the transmission mechanisms of monetary policy. We decompose the monetary channels into household interest rate, firm interest rate, and exchange rate channels. We find that the household interest rate channel plays the most important role in explaining output dynamics after a monetary policy shock. In the case of inflation, however, both the household interest rate and the exchange rate channels are the main transmission mechanisms. Furthermore, using a proxy for an expectation channel, we also find that this channel is key in the transmission of monetary policy to inflation. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:181&r=cba |
| By: | Lavan Mahadeva; Javier Gómez Pineda |
| Abstract: | The objective of this paper is to analyze how international cycles affect the real GDP cycle and so monetary policy decisions in Colombia. We estimate that cycles in world GDP, export prices and capital inflows are strongly associated with the Colombian business cycle both on impact and even during the first year. We find evidence that, because of inefficiencies in the domestic financial sector, external gains are channelled into nontradable spending through credit expansions. This creates large appreciations during booms. The reverse happens during world slowdowns. These swings in the Exchange rate restrict the scope for a countercyclical monetary policy. |
| Date: | 2009–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005406&r=cba |
| By: | Loic Batte; Agnes Benassy-Quere; Benjamin Carton; Gilles Dufrenot |
| Abstract: | We propose a two-country DSGE model of the Dutch disease in a monetary union, calibrated on Nigeria and WAEMU. Three monetary regimes are successively studied at the union level: a flexible exchange rate with constant money supply, a flexible exchange rate with an accommodating monetary policy, and a fixed exchange rate regime. We find that, in the face of oil shocks, the most stabilizing regime for Nigeria is a fixed money supply whereas it is a fixed exchange rate for WAEMU. However, the introduction of an oil stabilization fund can reduce the disagreement on the common policy rule. Furthermore, the two zones may agree on a fixed money-supply rule in the face of both oil and agricultural price shocks. |
| Keywords: | Dutch disease; DSGE; monetary union; optimal monetary policy |
| JEL: | E52 F41 Q33 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2009-07&r=cba |