nep-cba New Economics Papers
on Central Banking
Issue of 2009‒05‒02
47 papers chosen by
Alexander Mihailov
University of Reading

  1. Three Epochs of Oil By Eyal Dvir; Kenneth S. Rogoff
  2. The Three Epochs of Oil By Eyal Dvir; Ken Rogoff
  3. Altruistic Dynamic Pricing with Customer Regret By Julio J. Rotemberg
  4. Global Imbalances: The Role of Non-TradableTotal Factor Productivity in Advanced Economies By Nicoletta Batini; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
  5. Developing a Structured Forecasting and Policy Analysis System to Support Inflation-Forecast Targeting (IFT) By Douglas Laxton; David Rose; Alasdair Scott
  6. Business Cycles in the Euro Area Defined with Coincident Economic Indicators and Predicted with Leading Economic Indicators By Ataman Ozyildirim; Brian Schaitkin; Victor Zarnowitz
  7. Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules By Ulrich Gunter; Harald Fadinger; Stefan Berger
  8. Fiscal and Monetary Policy During Downturns: Evidence from the G7 By Daniel Leigh; Sven Jari Stehn
  9. The Bank Lending Channel: a FAVAR Analysis By Chetan Dave; Scott J. Dressler; Lei Zhang
  10. Estimating the Border Effect: Some New Evidence By Gita Gopinath; Pierre-Olivier Gourinchas; Chang-Tai Hsieh; Nicholas Li
  11. Pitfalls in Estimating Asymmetric Effects of Energy Price Shocks By Kilian, Lutz; Vigfusson, Robert J.
  12. Estimating the Border Effect: Some New Evidence By Gopinath, Gita; Gourinchas, Pierre-Olivier; Hsieh, Chang-Tai; Li, Nicholas
  13. Capital Inflows: Macroeconomic Implications and Policy Responses By M. Ayhan Kose; Selim Elekdag; Roberto Cardarelli
  14. Price flexibility and full employment: a common misconception By Roy H Grieve
  15. Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis By Erlend Nier
  16. Fiscal Policy under Imperfect Competition: A Survey By Luís F. Costa and Huw Dixon
  17. On the role of money growth targeting under inflation targeting regime. By Meixing DAI
  18. The Implementation of SNB Monetary Policy By Thomas Jordan; Angelo Ranaldo; Paul Soderlind
  19. Forces Driving Inflation in the New EU10 Members By Emil Stavrev
  20. Five Years After: European Union Membership and Macro-Financial Stability in the New Member States By Martin Cihák; Wim Fonteyne
  21. The Second Transition: Eastern Europe in Perspective By Ashoka Mody; Daniel Leigh; Stefania Fabrizio
  22. The real exchange rate in sticky-price models: does investment matter? By Martinez-Garcia, Enrique; Sondergaard, Jens
  23. The role of house prices in the monetary policy transmission mechanism in small open economies By Hilde C. Bjørnland; Dag Henning Jacobsen
  25. Assessing Long-Term Fiscal Developments: a New Approach By António Afonso, Luca Agnello, Davide Furceri and Ricardo M. Sousa
  26. Fiscal Behaviour in the European Union: Rules, Fiscal Decentralization and Government Indebtedness By António Afonso and Sebastian Hauptmeier
  27. The Role of Media for Inflation Forecast Disagreement of Households and Professionals By Thomas Maag; Michael J. Lamla
  28. Variety of economic judgment and monetary policy-making by committee By Sheila Dow; Matthias Klaes; Alberto Montagnoli
  29. A Primer on Fiscal Analysis in Oil-Producing Countries By Daria Zakharova; Paulo A. Medas
  30. Common determinants of currency crises: role of external balance sheet variables By Licchetta, Mirko
  31. Central Bank Preferences, Distribution Forecasts and Economic Stability in a Small Open-economy By Alessandro Flamini
  32. Household’s Preferences and Monetary Policy Inertia By Alessandro Flamini; Andrea Fracasso
  33. Fiscal Taylor Rules in the Postwar United States By Christopher Reicher
  34. Inflation Differentials in the Euro Area and Their Determinants - An Empirical View By Václav Zdárek; Juan Ignacio Aldasoro
  35. Decision under uncertainty : the classical models. By Alain Chateauneuf; Michèle Cohen; Jean-Yves Jaffray
  36. A Behavioural Perspective on Keynesian Decision Theory By Martin Jones
  37. Modeling Algorithms for Dynamical Systems By Crescenzio Gallo
  38. Commodity Price Volatility, Cyclical Fluctuations, and Convergence: What is Ahead for Inflation in Emerging Europe? By Edda Zoli
  39. Monetary Policy Challenges for Emerging Market Economies By Hammond, Gill; Kanbur, Ravi; Prasad, Eswar
  40. The two sides of a ghost: Twenty years without the wall By Migheli, Matteo
  41. The Macroeconomic Effects of Fiscal Policy in Portugal: a Bayesian SVAR Analysis By António Afonso and Ricardo M. Sousa
  42. Behavioral and Permanent Zloty/Euro Equilibrium By Joanna Beza-Bojanowska
  43. Is Nigeria Ready for Inflation Targeting? By Aliyu, Shehu Usman Rano; Englama, Abwaku
  44. Monetary and Fiscal Policy Options for Dealing with External Shocks: Insights from the GIMF for Colombia By Daniel Leigh; Enrique Flores; Benedict J. Clements
  45. Assessing Inflationary Pressures in Colombia By Hernando Vargas; Andrés González; Eliana González; Jose Vicente Romero
  46. A New Keynesian Model of the Armenian Economy By Ara Stepanyan; Ashot Mkrtchyan; Era Dabla-Norris
  47. In Search of a Dramatic Equilibrium: Was the Armenian Dram Overvalued? By Nienke Oomes; Gohan Minasyan; Ara Stepanyan

  1. By: Eyal Dvir; Kenneth S. Rogoff
    Abstract: We test for changes in price behavior in the longest crude oil price series available (1861-2008). We find strong evidence for changes in persistence and in volatility of price across three well defined periods. We argue that historically, the real price of oil has tended to be highly persistent and volatile whenever rapid industrialization in a major world economy coincided with uncertainty regarding access to supply. We present a modified commodity storage model that fully incorporates demand, and further can accommodate both transitory and permanent shocks. We show that the role of storage when demand is subject to persistent growth shocks is speculative, instead of its classic mitigating role. This result helps to account for the increased volatility of oil price we observe in these periods.
    JEL: E0 L7 N5 Q4
    Date: 2009–04
  2. By: Eyal Dvir (Boston College); Ken Rogoff (Harvard University)
    Abstract: We test for changes in price behavior in the longest crude oil price series available (1861-2008). We find strong evidence for changes in persistence and in volatility of price across three well defined periods. We argue that historically, the real price of oil has tended to be highly persistent and volatile whenever rapid industrialization in a major world economy coincided with uncertainty regarding access to supply. We present a modified commodity storage model that fully incorporates demand, and further can accommodate both transitory and permanent shocks. We show that the role of storage when demand is subject to persistent growth shocks is speculative, instead of its classic mitigating role. This result helps to account for the increased volatility of oil price we observe in these periods.
    Keywords: Oil Price, Oil Shocks, Storage, Structural Change
    JEL: E0 Q4 L7 N5
    Date: 2009–04–23
  3. By: Julio J. Rotemberg
    Abstract: A model is considered where firms internalize the regret costs that consumers experience when they see an unexpected price change. Regret costs are assumed to be increasing in the size of price changes and this can explain why the size of price increases is less sensitive to inflation than in models with fixed costs of changing prices. The latter predict unrealistically large responses of price changes to inflation for firms that do not frequently reduce their prices. Adjustment costs that depend on the size of price changes also raise the variability on the size of price increases. Lastly, it is argued that the common practice of announcing price increases in advance is much easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity.
    JEL: D11 E31 L11
    Date: 2009–04
  4. By: Nicoletta Batini; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
    Abstract: This paper investigates the role played by total factor productivity (TFP) in the tradable and nontradable sectors of the United States, the euro area, and Japan in the emergence and evolution of today's global trade imbalances. Simulation results based on a dynamic general equilibrium model of the world economy, and using the EU KLEMS database, indicate that TFP developments in these economies can account for a significant fraction of the total deterioration in the U.S. trade balance since 1999, as well as account for some the surpluses in the euro area and Japan. Differences in TFP developments across sectors can also partially explain the evolution of the real effective value of the U.S. dollar during this period.
    Keywords: Payments imbalances , United States , European Union , Japan , Developed countries , Productivity , Balance of trade , Economic models , Time series , Cross country analysis ,
    Date: 2009–03–24
  5. By: Douglas Laxton; David Rose; Alasdair Scott
    Abstract: This paper presents a basic plan for developing a Forecast and Policy Analysis System designed to support an inflation-forecast targeting regime at a central bank. It includes discussion of the development of data management and reporting processes; the creation of a forecast team and the development of human capital; the implementation of a simple model, plus possible extensions; and the management of regular economic projections. We emphasize that it is better to implement simple models earlier and use them well, rather than wait in an attempt to develop an all-encompassing model.
    Keywords: Inflation , Forecasting models , Data analysis , Databases , Monetary policy , Central banks , Human capital ,
    Date: 2009–03–24
  6. By: Ataman Ozyildirim (The Conference Board); Brian Schaitkin (The Conference Board); Victor Zarnowitz (The Conference Board)
    Abstract: Clusters of cyclical turning points in the coincident indicators help us identify and date Euro Area recessions and recoveries in the past several decades. In the U.S. and some other countries, composite indexes of coincident indicators (CEI) are used to date classical business cycle turning points; also indexes of leading indicators (LEI) are used to help in the difficult task of predicting these turning points. This paper reviews a selection of the available data for monthly and quarterly Euro Area coincident and leading indicators. From these data, we develop composite indexes using methods analogous to those tested in the U.S. CEI and LEI published by The Conference Board. We compare the resulting business cycle chronology with the existing alternatives and evaluate our selection of leading indicators in the context of how well they predict current economic activity and its major fluctuations for the Euro Area.
    Keywords: Business Cycle; Indicators; Leading Index; Times Series; Forecasting
    JEL: E32 C52 C53 C22
    Date: 2008–11
  7. By: Ulrich Gunter; Harald Fadinger; Stefan Berger
    Abstract: The present article extends a variant of the Obstfeld/Rogoff (2001) two-country DSGE model by introducing Calvo (1983) pricing. It is possible to collapse the model into a canonical log-linear representation consisting of two dynamic IS and two New Keynesian Phillips curves. Re°ecting the di®ering statutes of the ECB and the Fed, two diverging interest-rate rules are introduced. For a sensible calibration of the model we can derive a locally unique rational expectations equilibrium. Furthermore, we ¯nd that aggregate productivity shocks, which are assumed to be positively correlated across countries, have a negative impact on domestic and foreign output, a phenomenon already described for the closed economy by Gal¶³ (2002). Cost-push as well as contractionary monetary policy shocks, which are assumed to be country-speci¯c, also have a negative impact on domestic and foreign output since the economies are interdependent due to terms-of-trade externalities. Contrary to Corsetti/Pesenti (2001), expansionary monetary policy shocks always have a "prosper thyself" and "beggar thy neighbor" e®ect since they in°uence the terms of trade bene¯cially for the respective country's resident households. Finally, if the ECB implemented the interest-rate rule proposed in the present article, it would encounter lower °uctuations in European producer price in°ation compared to an interest-rate rule as proposed for the Fed. This is consistent with the ECB's paramount objective of price stability. However, this advantage only holds at the expense of relatively high °uctuations in the European output gap.
    JEL: E12 E52 E58 F41 F42 F47
    Date: 2009–04
  8. By: Daniel Leigh; Sven Jari Stehn
    Abstract: This paper analyzes how fiscal and monetary policy typically respond during downturns in G7 countries. It evaluates whether discretionary fiscal responses to downturns are timely and temporary, and compares the response of fiscal policy to that of monetary policy. The results suggest that while responding more weakly and less quickly than monetary policy, discretionary fiscal policy is more timely than conventional wisdom would suggest, particularly in “Anglo-Saxon†countries, but the response differs substantially across fiscal instruments. Both fiscal and monetary policy are found to be subject to an easing bias, with more easing during downturns than tightening during upturns; and liable to easing in response to erroneously perceived downturns, many of which are subsequently revised to expansions.
    Keywords: Fiscal policy , Group of seven , Monetary policy , Government expenditures , Revenues , Economic stabilization , Economic models , Cross country analysis ,
    Date: 2009–03–19
  9. By: Chetan Dave (School of Economic, Political and Policy Sciences at the University of Texas at Dallas); Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University); Lei Zhang (School of Economic, Political and Policy Sciences at the University of Texas at Dallas)
    Abstract: We examine the role of commercial banks in monetary transmission in a factor-augmented vector autoregression (FAVAR). A FAVAR exploits a large number of macroeconomic indicators to identify monetary policy shocks, and we add commonly used lending aggregates and lending data at the bank level. While our results suggest that the bank lending channel (BLC) is stronger than previously thought, this feature is not robust. In addition, our results indicate a diffuse response to monetary innovations when individual banks are grouped according to asset sizes and loan components. This suggests that other bank characteristics could improve the identification of the BLC.
    Keywords: Bank Lending Channel, FAVAR, Monetary Policy
    JEL: E51 E52 C32
    Date: 2009–04
  10. By: Gita Gopinath; Pierre-Olivier Gourinchas; Chang-Tai Hsieh; Nicholas Li
    Abstract: To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question we use a dataset with product level retail prices and wholesale costs for a large grocery chain with stores in the U.S. and Canada. We develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. We report three main facts: 1) The median absolute retail price and whole-sale cost discontinuity between adjacent stores on either side of the U.S.-Canada border is as high as 21%. In contrast, within-country border discontinuity is close to 0%; 2) The variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups; 3) The border gap in prices and costs co-move almost one to one with changes in the U.S.-Canada nominal exchange rate. We show these facts suggest that the price gaps we estimate provide only a lower bound on border costs.
    JEL: F3 F4
    Date: 2009–04
  11. By: Kilian, Lutz; Vigfusson, Robert J.
    Abstract: A common view in the literature is that the effect of energy price shocks on macroeconomic aggregates is asymmetric in energy price increases and decreases. We show that widely used asymmetric vector autoregressive models of the transmission of energy price shocks are misspecified, resulting in inconsistent parameter estimates, and that the implied impulse responses have been routinely computed incorrectly. As a result, the quantitative importance of unanticipated energy price increases for the U.S. economy has been exaggerated. In response to this problem, we develop alternative regression models and methods of computing responses to energy price shocks that yield consistent estimates regardless of the degree of asymmetry. We also introduce improved tests of the null hypothesis of symmetry in the responses to energy price increases and decreases. An empirical study reveals little evidence against the null hypothesis of symmetry in the responses to energy price shocks. Our analysis also has direct implications for the theoretical literature on the transmission of energy price shocks and for the debate about policy responses to energy price shocks.
    Keywords: Asymmetry; Energy price; Impulse response; Net increase; Oil price; Propagation; Shock; Transmission; Vector autoregression
    JEL: C32 E37 Q43
    Date: 2009–04
  12. By: Gopinath, Gita; Gourinchas, Pierre-Olivier; Hsieh, Chang-Tai; Li, Nicholas
    Abstract: To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question we use a dataset with product level retail prices and wholesale costs for a large grocery chain with stores in the U.S. and Canada. We develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. We report three main facts: 1) The median absolute retail price and whole-sale cost discontinuity between adjacent stores on either side of the U.S.-Canada border is as high as 21%. In contrast, within-country border discontinuity is close to 0%; 2) The variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups; 3) The border gap in prices and costs co-move almost one to one with changes in the U.S.-Canada nominal exchange rate. We show these facts suggest that the price gaps we estimate provide only a lower bound on border costs.
    Keywords: barcode data; border effect; law of one price; market segmentation
    JEL: F40 F41
    Date: 2009–04
  13. By: M. Ayhan Kose; Selim Elekdag; Roberto Cardarelli
    Abstract: This paper examines the macroeconomic implications of, and policy responses to surges in private capital inflows across a large group of emerging and advanced economies. In particular, we identify 109 episodes of large net private capital inflows to 52 countries over 1987-2007. Episodes of large capital inflows are often associated with real exchange rate appreciations and deteriorating current account balances. More importantly, such episodes tend to be accompanied by an acceleration of GDP growth, but afterwards growth has often dropped significantly. A comprehensive assessment of various policy responses to the large inflow episodes leads to three major conclusions. First, keeping public expenditure growth steady during episodes can help limit real currency appreciation and foster better growth outcomes in their aftermath. Second, resisting nominal exchange rate appreciation through sterilized intervention is likely to be ineffective when the influx of capital is persistent. Third, tightening capital controls has not in general been associated with better outcomes.
    Keywords: Capital inflows , Emerging markets , Current account deficits , Exchange rate policy , Fiscal policy , Capital controls , Cross country analysis ,
    Date: 2009–03–17
  14. By: Roy H Grieve (Department of Economics, University of Strathclyde)
    Abstract: This paper highlights and builds upon Michio Morishima’s sadly neglected thesis that multi-market economies should be envisaged, and modelled, as over-determined systems, in that the number of conditions to be satisfied for equilibrium exceeds the number of unknowns (equilibrium prices and quantities) to be discovered. This understanding undermines the comfortable supposition (underpinning both New Keynesian and New Classical theoretical approaches) that, even when the economy is not in a position of full employment, a potential equilibrium solution does exist which - if not instantly, at least eventually – will be achieved by market forces. In other words, contrary to the conventional view, observed price and wage stickiness should be considered as contributing to macroeconomic stability rather than inhibiting adjustment to full employment equilibrium. A further casualty of the Morishima perspective is the common textbook rationalisation that the Keynes theory applies only in the short run (with sticky prices) while the classical analysis comes into its own (with flexible prices) in the longer term.
    Keywords: Price flexibility; General equilibrium (macro) models; Walras' Law and Say's Law; Over-determined systems
    JEL: E11
    Date: 2009–04
  15. By: Erlend Nier
    Abstract: This paper sets out general principles for the design of financial stability frameworks, starting from an analysis of the objectives and tools of financial regulation. The paper then offers a comprehensive analysis of the costs and benefits of the two main models that have emerged for modern financial systems: the integrated model, with a single supervisor outside of the central bank, and the twin-peaks model, with a systemic risk regulator (central bank) on the one hand and a conduct of business regulator on the other. The paper concludes that the twin-peaks model may become more attractive when regulatory structures are geared more explicitly towards the mitigation of systemic risk-including through the introduction of new macroprudential tools that could be used alongside monetary policy to contain macro-systemic risks; through enhanced regulation and special resolution regimes for systemically important institutions; and a more holistic approach to the oversight of clearing and settlement systems. Since the optimal solution may well be path-dependent and specific to the development of financial markets in any given country, a number of hybrid models are also discussed.
    Keywords: Central banks , Financial crisis , Monetary policy , Financial stability , Financial systems , Financial sector , Bank supervision , Bank regulations , Bank resolution , Credit risk , Risk management ,
    Date: 2009–04–10
  16. By: Luís F. Costa and Huw Dixon
    Abstract: This paper surveys the link between imperfect competition and the e¤ects of fiscal policy on output, employment and welfare. We examine static and dynamic models, with and without entry under a variety of assumptions using a common analytical framework. We find that in general there is a robust relationship between the fiscal multiplier and welfare, the tantalizing possibility of Pareto improving fiscal policy is much more elusive. In general, the mechanisms are supply side, and so welfare improving policy, whilst possible, is not a general result. Key words: Fiscal Policy; Imperfect Competition.
    JEL: E62
    Date: 2009–03
  17. By: Meixing DAI
    Abstract: The mainstream inflation-targeting literature makes the strong assumption that the central bank can exactly target the interest rate which affects investment and consumption decisions and hence the money supply plays no role in the monetary policy strategy. This assumption is equivalent to admitting the perfect credibility of inflation target announced by the central bank, the perfect functioning of money and financial markets and that the central bank is willing to inject as much liquidity as the economic agents demand. Neither of these assumptions corresponds to the reality. In effect, the inflation expectations can not be easily anchored by the cheap talk of central bankers. On the other hand, the central bank may have many difficulties to target, in a context of financial instability, the interest rates which affect the real and financial decisions of private agents. We suggest that under inflation-targeting regime, money and credit markets vehicle the inflation expectations that can be anchored with a well-specified feedback money growth rule. The latter, in contrast to the Friedman’s k percent money growth rule, can help managing the inflation expectations in a manner to guarantee the dynamic stability of the economy. Furthermore, the model can be easily used to discuss the implications of the zero interest rate policy and the quantitative easing policy.
    Keywords: Interest rate rule, imperfect money and credit markets, inflation targeting, monetary targeting, inflation expectations, Friedman’s k percent money growth rule, feedback money growth rule, macroeconomic stability, zero interest rate policy, quantitative easing policy.
    JEL: E43 E44 E51 E52 E58
    Date: 2009
  18. By: Thomas Jordan; Angelo Ranaldo; Paul Soderlind
    Abstract: We use a regime switching approach to model the implementation of the SNB monetary policy. The regime switching technique is crucial to assess the flexibility inherent in the SNB's monetary policy concept. The empirical findings support the idea that repo operations are instrumental in smoothing the implementation of monetary policy in normal times while changes in the official operational target accompanied by the accommodating use of repo operations produce the aimed effects in distressed periods. A significant contribution also came from some new measures designed to improve liquidity in the Swiss franc money market during the financial crisis in 2007- 8.
    Keywords: implementation of monetary policy, Libor, repo, Swiss franc money market, regime switching model
    JEL: E5 G15
    Date: 2009–04
  19. By: Emil Stavrev
    Abstract: The paper analyzes the forces driving inflation in the new EU10 member countries. A significant part of headline inflation in these countries is due to common factors, such as price level convergence and EU integration. However, idiosyncratic factors have also played a role in the inflation process. These factors are related to the country-specific financial conditions, pass-through from foreign prices, and demand-supply situation in each country, although administered price adjustments and increases of indirect taxes associated with EU accession are also likely to have played a role.
    Keywords: Inflation , European Union , Economic integration , Economic models , Cross country analysis ,
    Date: 2009–03–19
  20. By: Martin Cihák; Wim Fonteyne
    Abstract: The proximity of the European Union, the prospect of membership, and actual entry by the New Member States (NMS) increased economic and financial integration in the region, leading to fast economic growth based on sizeable capital inflows. EU membership helped in developing sound macroeconomic and financial stability frameworks in the NMS. However, these frameworks remain work in progress and as such could not safeguard against private sector exuberance or risky policies, especially in the face of an unprecedented global financial crisis. Hence, more prudent policies and further strengthening of policy frameworks, especially with respect to financial stability, seem warranted.
    Keywords: Financial stability , European Union , Eastern Europe , Economic integration , Economic growth , Exchange rates , Price stabilization , Payments imbalances , Financial crisis , Crisis prevention , Cross country analysis ,
    Date: 2009–03–27
  21. By: Ashoka Mody; Daniel Leigh; Stefania Fabrizio
    Abstract: The countries of Eastern Europe achieved two remarkable transitions in the short period of the last two decades: from plan to market and, then, in the run-up to and entry into the European Union, they rode a wave of global trade and financial market integration. Focusing on the second transition, this paper reaches three conclusions. First, by several metrics, East European and East Asian growth performances were about on par from the mid-1990s; both regions far surpassed Latin American growth. Second, the mechanisms of growth in East Europe and East Asia were, however, very different. East Europe relied on a distinctive-often discredited-model, embracing financial integration with structural change to compensate for appreciating real exchange rates. In contrast, East Asia contained further financial integration and maintained steady or depreciating real exchange rates. Third, the ongoing financial turbulence has, thus far, not had an obviously differential impact on emerging market regions: rather, the hot spots in each region reflect individual country vulnerabilities. If the East European growth model is distinctive, is it sustainable and replicable? The paper speculates on the possibilities.
    Keywords: Transition economies , Eastern Europe , Emerging markets , Economic growth , International trade , Economic integration , European Union , Cross country analysis ,
    Date: 2009–03–17
  22. By: Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas); Sondergaard, Jens (Bank of England)
    Abstract: This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing to market to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats earlier work that has shown how real shocks in a sticky-price model without capital can replicate the observed real exchange rate dynamics. Finally, we find that so-called persistence anomaly remains robust to several alternative capital specifications including set-ups with variable capital utilisation and investment adjustment costs. In summary, the PPP puzzle is still very much alive and well.
    Keywords: Real exchange rates; capital accumulation; Taylor rules.
    JEL: F11 F42 F43
    Date: 2009–04–27
  23. By: Hilde C. Bjørnland (Norwegian School of Management and Norges Bank (Central Bank of Norway)); Dag Henning Jacobsen (Norges Bank (Central Bank of Norway))
    Abstract: We analyse the role of house prices in the monetary policy transmission mechanism in Norway, Sweden and the UK using structural VARs. A solution is proposed to the endogeneity problem of identifying shocks to interest rates and house prices by using a combination of short-run and long-run (neutrality) restrictions. By allowing the interest rate and house prices to react simultaneously to news, we find the role of house prices in the monetary transmission mechanism to increase considerably. In particular, house prices react immediately and strongly to a monetary policy shock. Furthermore, the fall in house prices seem to enhance the negative response in output and consumer price inflation that has traditionally been found in the conventional literature. Moreover, we find that the interest rate respond systematically to a change in house prices.
    Keywords: VAR, monetary policy, house prices, identification
    JEL: C32 E52 F31 F41
    Date: 2009–04–27
  24. By: Andrés González Gómez; Lavan Mahadeva; Diego Rodríguez; Luis Eduardo Rojas
    Abstract: If theory-consistent models can ever hope to forecast well and to be useful for policy, they have to relate to data which though rich in information is uncertain, unbalanced and sometimes forecasts from external sources about the future path of other variables. One example from many is financial market data, which can help but only after smoothing out irrelevant short-term volatility. In this paper we propose combining different types of useful but awkward data set with a linearised forward-looking DSGE model through a Kalman Filter fixed-interval smoother to improve the utility of these models as policy tools. We apply this scheme to a model for Colombia.
    Date: 2009–04–21
  25. By: António Afonso, Luca Agnello, Davide Furceri and Ricardo M. Sousa
    Abstract: We use a new approach to assess long-term fiscal developments. By analyzing the timevarying behaviour of the two components of government spending and revenue – responsiveness and persistence – we are able to infer about the sources of fiscal behaviour. Drawing on quarterly data we estimate recursively these components within a system of government revenue and spending equations using a Three-Stage Least Square method. In this way we track fiscal developments, i.e. possible fiscal deteriorations and/or improvements for eight European Union countries plus the US. Results suggest that positions have not significantly changed for Finland, France, Germany, Spain, the United Kingdom and the US, whilst they have improved for Belgium, Italy, and the Netherlands.. KEY Words: Fiscal Deterioration, Fiscal Sustainability
    JEL: E62 H50
    Date: 2009–03
  26. By: António Afonso and Sebastian Hauptmeier
    Abstract: We assess the fiscal behaviour in the European Union countries for the period 1990- 2005 via the responsiveness of budget balances to several determinants. The results show that the existence of effective fiscal rules, the degree of public spending decentralization, and the electoral cycle can impinge on the country’s fiscal position. Furthermore, the results also support the responsiveness of primary balances to government indebtedness. Key words: fiscal regimes, fiscal rules, fiscal decentralization, European Union, panel data
    JEL: C23 E62 H62
    Date: 2009–03
  27. By: Thomas Maag (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper investigates the effects of media coverage and macroeconomic con- ditions on inflation forecast disagreement of German households and professional forecasters. We adopt a Bayesian learning model in which media coverage of infla- tion affects forecast disagreement by influencing information sets as well as predictor choice. Our empirical results show that disagreement of households depends on the content of news stories (tone) but is unaffected by reporting intensity (volume) and by the heterogeneity of story content (information entropy). Disagreement of pro- fessionals does not depend on media coverage. With respect to the influence of macroeconomic variables we provide evidence that disagreement of households and professionals primarily depends on the current rate of inflation.
    Keywords: forecast disagreement, inflation expectations, media coverage, Bayesian learning
    JEL: E31 E37 D83
    Date: 2009–04
  28. By: Sheila Dow (University of Stirling); Matthias Klaes (Keele University); Alberto Montagnoli (University of Stirling)
    Abstract: With the increasing attention to how monetary policy is communicated has come a focus on the scope for diverse messages to arise from the committee making the decisions. While the existing literature sees the source of such diversity in relation to a 'correct' decision based on one 'true' model, we explore the implications of diversity as being instead the norm within a pluralist approach to knowledge. By considering judgment as the core of decision-making and uncertainty as conditioning judgment, we develop a theory of decision-making by committee under uncertainty. our case study is the Monetary Policy Committee of the Bank of England. We conclude with a hypothesis about the tendency to policy inaction in different circumstances, notably where there are confident but conflicting judgments within the committee, on the one hand, and where there is agreement that a high level of uncertainty clouds judgment, on the other. This contrasts with the conventional association of diversity of MPC opinion with uncertainty (both as cause and effect).
    Keywords: uncertainty, judgement, ambiguity, central bank communication, monetary policy
    JEL: B41 B50 E58
    Date: 2008–12
  29. By: Daria Zakharova; Paulo A. Medas
    Abstract: This paper proposes an integrated approach to fiscal policy analysis in oil producing countries (OPCs) geared towards addressing their unique and complex policy challenges. First, an accurate assessment of the fiscal stance in OPCs can be obscured by large and volatile oil revenue flows. Second, uncertain and volatile oil revenue flows can complicate the management of macroeconomic policies in these countries. Third, given the exhaustibility of oil reserves, OPCs need to address longer-term sustainability and intergenerational equity issues. The use of non-oil fiscal indicators, stress tests, medium-term frameworks, and permanent oil income models can greatly aid in addressing these challenges.
    Keywords: Fiscal policy , Oil producing countries , Oil revenues , Commodity price fluctuations , Nonoil sector , Revenue sources , Cross country analysis ,
    Date: 2009–03–19
  30. By: Licchetta, Mirko (Bank of England)
    Abstract: This paper investigates the role of external balance sheet variables as determinants of currency crises in emerging market (EME) and advanced economies. A random effect probit model is used in a panel of 40 countries with monthly data over the January 1980-December 2004 period. The main results of the paper are as follows. First, size and, particularly, the composition of a country's external balance sheet are found to play an important role in the onset of crises. Second, EMEs seem to be more sensitive to external balance sheet variables than developed countries, and so too do economies with fixed or quasi-fixed exchange rate regimes. Third, further support is provided to standard theoretical explanations of currency crises. The likelihood of a crisis is found to increase with: the extent to which the real exchange rate rises above its trend; faster growth in broad money (relative to the level of international reserves); larger current account and budget balance deficits; lower GDP growth; and, if a neighbouring country already has a crisis. Economic fundamentals are also found to be a more important explanation of the onset of currency crises during the 1980s than during the 1990s, suggesting that more recent crises are less 'fundamentally' driven.
    Keywords: Currency crises; early warnings system; emerging markets
    JEL: F31 F33 F37
    Date: 2009–04–27
  31. By: Alessandro Flamini (Department of Economics, The University of Sheffield)
    Abstract: This paper relates the central bank's preferences on the inflation index and on the degree of smoothness of the interest rate to the quality of its forecasts and the expected perturbing impact of several shocks. The framework is a Markov jump-linear-quadratic system for optimal policy with model uncertainty in a timeless perspective. Comparing CPI and domestic inflation targeting, the latter implies considerably less variability in the distribution forecast of the economic dynamics. Furthermore, domestic inflation targeting stands out for much less sensitiveness to interest rate smoothing, and for resulting in more expected economic stability. Importantly, domestic inflation targeting allows significantly improving the prediction accuracy of the interest rate behaviour.
    Keywords: Inflation targeting; additive and multiplicative uncertainty; Markov jump linear quadratic systems; small open-economy; optimal monetary policy; central bank preferences
    JEL: E52 E58 F41
    Date: 2009–03
  32. By: Alessandro Flamini (Department of Economics, The University of Sheffield); Andrea Fracasso
    Abstract: The estimation of monetary policy rules suggests that the interest rates set by central banks move with a certain inertia. Although a number of hypotheses have been suggested to explain this phenomenon, its ultimate origin is unclear, thus delineating this issue as a modern "puzzle" in monetary economics. We show that household's preferences can play an important role in determining optimal interest rate inertia. Importantly, this can occur even when the central bank has negligible preferences for smoothing the interest rate.
    Keywords: Optimal monetary policy; interest rate smoothing; household's preferences
    JEL: E52 E58
    Date: 2009–02
  33. By: Christopher Reicher
    Abstract: Recent research and events have brought fiscal policy back into the spotlight. Fiscal Taylor rules and error correction models have represented two different ways of quantifying the feedbacks from fiscal and economic conditions to fiscal policy decisions. This paper synthesizes these two ideas, estimating a fiscal Taylor rule as a special case of an error correction model. Using quarterly postwar U.S. data, estimates of a fiscal Taylor rule find that the government sector has sought to stabilize its debt through adjustments to purchases and taxes, in that order, with very little stabilization coming through adjustments to transfer payments. Since 1981, the debt-stabilization motive has almost vanished, while the cyclical behavior of fiscal variables has not changed. This provides indirect evidence that fiscal policy may have become “non-Ricardian” in the US during recent decades
    Keywords: Taxation, government spending, transfer payments, fiscal policy, deficits, fiscal Taylor, Rule
    JEL: E62 E63 H62 H63
    Date: 2009–04
  34. By: Václav Zdárek; Juan Ignacio Aldasoro
    Abstract: In this paper, we present evidence on the statistical features of observed dispersion in HICP inflation rates in the Euro area. Our descriptive exercise shows that there is still a remarkable dispersion of HICP inflation rates across the member countries. We find that most of dispersion originates in the non-traded categories of the HICP. This suggests that the main source of dispersion in countries’ headline inflation rates is in those components of the HICP where non-traded goods (services, (public) goods with regulated and administered prices) are more intensely represented. We then examine the determinants of inflation differentials in a panel of the states of the Euro area in 1999–2007 using alternative classifications of this group and three different datasets. The evidence presented shows that output gaps and a proxy for price level convergence were statistically significant. On the other hand, some determinants that were found significant in previous studies (for example Honohan and Lane 2003, 2004; ECB, 2003) has no impact on inflation in our expanded time span (e.g. exchange rate movements) The dispersion of HICP inflation is expected to increase in the coming years as the new EU member states will join the Euro area. There are some risks for these countries connected with the common monetary policy, which is adjusted more to the conditions of stabilized advanced economies forming the core of the Euro area. This creates potential problems for the EU common monetary policy (ECB), in particular negative (positive) interest rates, their repercussions on investment processes, consumption and the possibility of creating asset bubbles.
    Keywords: inflation differentials, price convergence, exchange rate, panel data
    JEL: C23 E31 F15 F41
    Date: 2009–03
  35. By: Alain Chateauneuf (Paris School of Economics - Centre d'Economie de la Sorbonne); Michèle Cohen (Paris School of Economics - Centre d'Economie de la Sorbonne); Jean-Yves Jaffray (Laboratoire d'Informatique de Paris VI)
    Abstract: This chapiter of a collective book is dedicated to classical decision models under uncertainty, i.e. under situations where events do not have "objective" probabilities with which the Decision Marker agrees. We present successively the two main theories, their axiomatic, the interpretation and the justification of their axioms and their main properties : first, the general model of Subjective Expected Utility due to Savage (Savage, 1954), second, the Anscombe-Aumann (1963) theory, in a different framework. Both theories enforce the universal use of a probabilistic representation. We then discuss this issue in connection with the experimental result known as the Ellsberg paradox.
    Keywords: Uncertainty, subjective probability, subjective Expected Utility, savage, Anscombe and Aumann, Ellsberg paradox.
    JEL: D81
    Date: 2008–12
  36. By: Martin Jones (University of Dundee)
    Abstract: Keynes's theory of probability has been studied intensively in the past few years with much discussion of its relevance to modern economics. This paper examines Keynes's ideas in light of criticisms made by other authors and comes to the conclusion that Keynes's views on rationality are critically flawed. However, it is asserted that this actually allows more freedom for investigation when it is combined with insights from behavioural economics and gives examples where this could be fruitful. One of the side-effects of this is that there is a narrowing of the gap between Keynesian and mainstream behavioural views on decision-making.
    Keywords: uncertainty, Keynes, behavioral economics
    JEL: B41
  37. By: Crescenzio Gallo
    Abstract: Technological development and explosion of computing tools allow today to make best use of modeling methodologies that in the past were not able to perform the calculations necessary for the mathematical representation of a complex system. This paper illustrates some directions in literature about the modeling of Dynamical Systems, targeting the algorithmic search of numerical methods with an exact or limited error approximation.
    Keywords: modeling; dynamical systems; algorithm.
    Date: 2009–02
  38. By: Edda Zoli
    Abstract: This paper assesses the role of international commodity prices, cyclical fluctuations, and convergence in driving inflation in 18 European emerging economies. Country specific VARs and panel estimates indicate that international commodity price shocks have a significant impact on domestic inflation, but the inflation response is asymmetric for positive and negative shocks. Cyclical fluctuations explain a relative small share of inflation variability, and the inflation response is asymmetric during upturns and downturns. Price convergence is estimated to add nearly 3 percentage points to headline inflation, for the average country whose price level is about 50 percent relative to the EU-15 average.
    Keywords: Commodity prices , Emerging markets , Commodity price fluctuations , Inflation , Economic models , Time series , Cross country analysis ,
    Date: 2009–03–17
  39. By: Hammond, Gill; Kanbur, Ravi; Prasad, Eswar
    Abstract: This paper introduces a significant new collection of papers on monetary policy in emerging market economies, written by leading analysts and policy makers. Does existing economic theory provide lessons that are pertinent for designing effective monetary policy frameworks in emerging markets? What can be learned from cross-country studies and from experiences of individual countries that have adopted different approaches? While country-specific circumstances and initial conditions matter a great deal in formulating suitable frameworks, are there clear general principles that can serve as a guide in this process? These are among the issues addressed in the dialogue between academics and policy makers represented in this volume. In this paper, we provide an overview of the main issues, linking them to broader debates in the academic literature as well as an assessment of how individual countries have chosen to respond to specific policy challenges and what the consequences have been. We discuss many controversies where there are still sharp differences in views between and amongst theorists and practitioners. We also delineate a few key analytical issues where there is still a yawning gap between theory and practice. In the process, we set out a broad agenda for further research in this area.
    Keywords: Emerging Markets, Monetary Policy, Economies, International Development, International Relations/Trade, Political Economy, Public Economics,
    Date: 2009–02
  40. By: Migheli, Matteo
    Abstract: This paper compares individual preferences for a market economy in Western and Eastern Europe over more than one decade, since the fall of Berlin Wall. The aim is to understand whether preferences in the two blocks have converged towards the current orientation of the EU's economic policy: a market economy, where the Government decides the rules, but does not enter the game directly. This is important as in a democratic system the approved guidelines need the support of the population to be fully effective and not reversed by a change of the government. In the EU the integration process is still going on, especially since the entrance of several Eastern countries. This paper shows that Eastern and Western Europeans have different preferences: the first would like a larger direct intervention of the public hand in the economy, while the second prefer a more private-oriented market than their Eastern peers. In addition for the citizens of ex-soviet countries, the concept of "competition" seems to represent more the new ideology that defeated the communism rather than a real market mechanism. Nevertheless some convergence emerges from data, especially during the last years, i.e. after the negative impact of transition over Eastern economies left the place to a beneficial recovery.
    Keywords: transition, Eastern Europe, Western Europe, people's support, market economy
    JEL: D40 O57 P36
    Date: 2009–04
  41. By: António Afonso and Ricardo M. Sousa
    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: 2009–03
  42. By: Joanna Beza-Bojanowska (National Bank of Poland)
    Abstract: Poland is expected to enter the Exchange Rate Mechanism II (ERM II). The European Central Bank recommends that the ERM II central rate should reflect the best possible assessment of the equilibrium exchange rate. Since the equilibrium rate is changing in time, it is important to identify the pushing and pulling forces of the exchange rate. This knowledge will let the authorities to defend only the exchange rate that is in equilibrium and to assess outcomes of their actions. We use the VEC approach of Johansen to estimate the behavioral equilibrium exchange rate and to identify the pushing forces of the Polish zloty/euro rate. We apply the Gonzalo-Granger decomposition to calculate the permanent equilibrium exchange rate and to identify the pulling forces of the zloty exchange rate. We demonstrate that this approach may be useful for Polish authorities while entering the ERM II as well as within that mechanism.
    Keywords: equilibrium exchange rate, cointegration analysis, Gonzalo- Granger decomposition, ERM II
    JEL: C32 C51 F31
    Date: 2009–02–25
  43. By: Aliyu, Shehu Usman Rano; Englama, Abwaku
    Abstract: This paper evaluates whether Nigeria is ready to adopt inflation targeting (IT), a monetary policy framework that several emerging markets have adopted over the last one decade. The paper reviewed literature on selected conditions for successful implementation of IT and then focused on whether one specific precondition of an empirically stable monetary transmission mechanism is tenable. Vector autoregressive (VAR) model was applied using select monetary policy and other macroeconomic variables to explore the various channels using the Granger causality tests, impulse responses, and variance decompositions. Results showed that inflation in Nigeria is impassive to monetary transmission variables in the model. Specifically, weak link between prices and credit and interest rate channels were established. However, evidence of strong inverse link between exchange rate and prices was found in the model. This suggests exchange rate pass-through on the level of prices in the economy. The paper, therefore, recommends the pursuance of IT lite in Nigeria.
    Keywords: Inflation targeting; vector autoregressive model; Granger causality test; monetary transmission mechanism; exchange rate pass-through.
    JEL: E31 E37
    Date: 2009–01–03
  44. By: Daniel Leigh; Enrique Flores; Benedict J. Clements
    Abstract: This paper utilizes an open-economy New Keynesian overlapping generations model, the Global Integrated Monetary and Fiscal Model (GIMF), to assess the macroeconomic effects of external shocks and the impact of various monetary and fiscal policy responses. The simulations assess the effect of shocks to trade, world income, and risk premia for public debt. The results suggest that under Colombia’s inflation targeting regime, which incorporates exchange rate flexibility and a highly responsive monetary policy, the economy is well poised to adjust to different external shocks. They also suggest that the potential role of fiscal policy in responding to shocks depends critically on financing conditions.
    Keywords: Monetary policy , Fiscal policy , External shocks , Colombia , Inflation targeting , Flexible exchange rates , Economic models ,
    Date: 2009–03–19
  45. By: Hernando Vargas; Andrés González; Eliana González; Jose Vicente Romero
    Abstract: The assessment of inflationary pressures in Colombia has faced two important challenges in the present decade. The …rst one occurred in 2006 and consisted of detecting an overheating economy in the midst of fast growing investment and increasing measured productivity. The second challenge took place in 2007-2008, when the economy was hit by a number of "supply" shocks and core inflation indicators sent diverging signals about the transmission of those shocks to macroeconomic in‡ation. An evaluation of the …rst episode shows that traditional indicators of productivity and unit labor costs were not su¢ cient to identify "supply" and "demand" movements. Thus, policymakers had to rely on a wider array of variables to gauge the state of the economy. Regarding the second episode, an evaluation of core in‡ation indicators according to stan- dard criteria suggests that no particular measure seems to be clearly superior to the others. Hence, the assessment of inflationary pressures should not rely only on one or few core in‡ation indicators, since some signals could be picked by some measures and not by others. Moreover, this result suggests that the analysis of core in‡ation measures must be complemented with a careful examination of the persistence of the shocks and a close monitoring of their impact on inflation expectations. It is found that the latter are formed on the basis of past inflaation, but that the inflation target also plays a role. In addition, in‡ation expectations partially move with "supply" shocks, an outcome that re‡ects a degree of credibility of monetary policy.
    Date: 2009–04–21
  46. By: Ara Stepanyan; Ashot Mkrtchyan; Era Dabla-Norris
    Abstract: This paper develops a small open economy dynamic stochastic general equilibrium (DSGE) model of the Armenian economy. The structure of the model is largely motivated by recent developments in DSGE modeling, with key extensions to incorporate specific structural characteristics of the Armenian economy. The resultant model can be used to simulate monetary policy paths and help analyze the robustness of policy conclusions. The paper tests the model’s properties on Armenian data, demonstrating that the main stylized features relevant for monetary policy making are well captured by the model.
    Keywords: Monetary policy , Armenia , Inflation targeting , Business cycles , Inward remittances , Transfers of foreigners income , Exchange rate appreciation , Economic models ,
    Date: 2009–03–30
  47. By: Nienke Oomes; Gohan Minasyan; Ara Stepanyan
    Abstract: This papers estimates the equilibrium exchange rate for Armenia using three different approaches: the purchasing power parity (PPP) approach, the behavioral equilibrium exchange rate (BEER) approach, and the external sustainability (ES) approach. All three approaches suggest that the dram was overvalued by about 20–30 percent prior to the devaluation of the dram in March 2009.
    Keywords: Exchange rate appreciation , Armenia , Armenian dram , Purchasing power parity , Fiscal sustainability , Economic models ,
    Date: 2009–03–19

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