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on Central Banking |
| By: | Taylor, John B.; Wieland, Volker |
| Abstract: | In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new data base of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy responses to other sources of economic fluctuations are widely different in the different models. We show that simple optimal policy rules that respond to the growth rate of output and smooth the interest rate are not robust. In contrast, policy rules with no interest rate smoothing and no response to the growth rate, as distinct from the level, of output are more robust. Robustness can be improved further by optimizing rules with respect to the average loss across the three models. |
| Keywords: | Macroeconomic models; Model comparison; Monetary policy rules; Monetary policy shocks; Optimal policy; Robustness and model uncertainty |
| JEL: | C52 E30 E52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7294&r=cba |
| By: | Lucia Alessi (Directorate General Statistics, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Carsten Detken (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We test the performance of a host of real and financial variables as early warning indicators for costly aggregate asset price boom/bust cycles, using data for 18 OECD countries between 1970 and 2007. A signalling approach is used to predict asset price booms that have relatively serious real economy consequences. We use a loss function to rank the tested indicators given policy makers’ relative preferences with respect to missed crises and false alarms. The paper analyzes the suitability of various indicators as well as the relative performance of financial versus real, global versus domestic and money versus credit based liquidity indicators. We find that global measures of liquidity are among the best performing indicators and display forecasting records,, which provide useful information for policy makers interested in timely reactions to growing financial imbalances, as long as aversion against type I and type II errors is not too unbalanced. Furthermore, we explore out-of-sample whether the most recent wave of asset price booms (2005-2007) would be predicted to be followed by a serious economic downturn. JEL Classification: E37, E44, E51. |
| Keywords: | Early Warning Indicators, Signalling Approach, Leaning Against the Wind, Asset Price Booms and Busts, Global Liquidity. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901039&r=cba |
| By: | Fiorella De Fiore (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oreste Tristani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We consider a simple extension of the basic new-Keynesian setup in which we relax the assumption of frictionless financial markets. In our economy, asymmetric information and default risk lead banks to optimally charge a lending rate above the risk-free rate. Our contribution is threefold. First, we derive analytically the loglinearised equations which characterise aggregate dynamics in our model and show that they nest those of the new- Keynesian model. A key difference is that marginal costs increase not only with the output gap, but also with the credit spread and the nominal interest rate. Second, we find that financial market imperfections imply that exogenous disturbances, including technology shocks, generate a trade-off between output and inflation stabilisation. Third, we show that, in our model, an aggressive easing of policy is optimal in response to adverse financial market shocks. JEL Classification: E52, E44. |
| Keywords: | optimal monetary policy, financial markets, asymmetric information. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901043&r=cba |
| By: | Beetsma, Roel; Giuliodori, Massimo; Wierts, Peter |
| Abstract: | Using real-time data from Europe's Stability and Convergence Programs, we explore how fiscal plans and their implementation in the EU are determined. We find that (1) implemented budgetary adjustment falls systematically short of planned adjustment and this shortfall increases with the projection horizon, (2) variability in the eventual fiscal outcomes is dominated by the implementation errors, (3) there is a limited role for "traditional" political variables, (4) stock-flow adjustments are more important when plans are more ambitious, and (5), most importantly, both the ambition in fiscal plans and their implementation benefit from stronger national fiscal institutions. We emphasise also the importance of credible plans for the eventual fiscal outcomes. |
| Keywords: | EU; Fiscal policy; fiscal rules; implementation; medium-term budgetary framework; planning; real-time data |
| JEL: | E62 H60 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7285&r=cba |
| By: | Luca Agnello (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ricardo M. Sousa (University of Minho, Department of Economics and Economic Policies Research Unit (NIPE), Campus of Gualtar, 4710-057 - Braga, Portugal.) |
| Abstract: | This paper empirically analyzes the political, institutional and economic sources of public deficit volatility. Using the system-GMM estimator for linear dynamic panel data models and a sample of 125 countries analyzed from 1980 to 2006, we show that higher public deficit volatility is typically associated with higher levels of political instability and less democracy. In addition, public deficit volatility tends to be magnified for small countries, in the outcome of hyper-inflation episodes and for countries with a high degree of openness. JEL Classification: E31, E63. |
| Keywords: | Public deficit, volatility, political instability, institutions. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901042&r=cba |
| By: | Stefan Niemann |
| Abstract: | The present paper reassesses the role of monetary conservatism in a setting with nominal government debt and endogenous fiscal policy. We assume that macroeconomic policies are chosen by monetary and fiscal policy makers who interact repeatedly but cannot commit to future actions. The real level of public liabilities is an endogenous state variable, and policies are chosen in a non-cooperative fashion. We focus on Markovperfect equilibria and investigate the role of fiscal impatience and monetary conservatism as determinants of the economy’s steady state and the associated welfare implications. Fiscal impatience creates a tendency of accumulating debt, and monetary conservatism actually exacerbates such excessive debt accumulation. Increased conservatism implies that any given level of real liabilities can be sustained at a lower rate of inflation. However, since this is internalized by the fiscal authority, the Markov-perfect equilibrium generates a steady state with higher indebtedness. As a result, increased monetary conservatism has adverse welfare implications. |
| Date: | 2009–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:667&r=cba |
| By: | Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Francesco Marchionne (Universita Politecnica delle Marche) |
| Abstract: | The ultimate point of origin of the great financial crisis of 2007-2009 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses. Accounting data fail to reveal the full extent of the financial maelstrom. Ironically, according to these data, US banks appear to be still adequately capitalized. Yet, bank undercapitalization is the biggest stumbling block to a resolution of the financial crisis. |
| Keywords: | accounting, banks, credit, crisis, fair values, risk aversion, undercapitalization |
| JEL: | G21 N20 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2009-02&r=cba |
| By: | Jean-Baptiste Gossé (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | The model presented in this paper has two objectives. First, it models global imbalances in a simple way while conserving real and - nancial approaches. This double approach is necessary because Global Imbalances are due to the conjunction of nancial and real phenomena: the increase in the price of commodities, the accumulation of foreign reserves by the Asian central banks, the limited absorption capacity of the OPEC countries, the insucient development of the Asian nancial system and the perception of better returns in the US. The second objective is to model the global saving glut hypothesis and to show its implications. In order to avoid the recession linked to the increase of their propensity to import, the United States increase their propensity to spend. This adjustment has a cost. The Global Imbalances grow quickly with an increase of current account imbalances and NFA in both the US and Asia. The euro area supports an appreciation of its exchange rate wich put it in a long depression. |
| Keywords: | International Macroeconomics, Global Imbalances, Balance of Payments, International Finance , Simulation and Forecast |
| Date: | 2009–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00380417_v1&r=cba |
| By: | Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | I study how the pattern of segmentation in the Euro area money market has been affected by the recent turmoil in financial markets. I use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. Quantile measures of comovements in volatility report evidence of an increase in contagion within the longer end of the money market curve. |
| Keywords: | Money market; high-frequency data; time-series methods |
| JEL: | C22 E58 |
| Date: | 2009–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2009_0011&r=cba |
| By: | Gabriel Fagan (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Julián Messina (Universitat de Girona, Plaça Sant Domènec, 3, IT-17071 Girona, Italy; IZA and FEDEA.) |
| Abstract: | This paper examines the impact of downward wage rigidity (nominal and real) on optimal steady-state inflation. For this purpose, we extend the workhorse model of Erceg, Henderson and Levin (2000) by introducing asymmetric menu costs for wage setting. We estimate the key parameters by simulated method of moments, matching key features of the cross-sectional distribution of individual wage changes observed in the data. We look at five countries (the US, Germany, Portugal, Belgium and Finland). The calibrated heterogeneous agent models are then solved for different steady state rates of inflation to derive welfare implications. We find that, across the European countries considered, the optimal steady-state rate of inflation varies between zero and 2%. For the US, the results depend on the dataset used, with estimates of optimal inflation varying between 2% and 5%. JEL Classification: E31, E52, J4. |
| Keywords: | Downward wage rigidity, DSGE models, optimal inflation. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901048&r=cba |
| By: | Alexandre Janiak; Paulo Santos Monteiro |
| Abstract: | We analyze the welfare cost of inflation in a model with cash-in-advance constraints and an endogenous distribution of establishments' productivities. Inflation distorts aggregate productivity through firm entry dynamics. The model is calibrated to the United States economy and the long-run equilibrium properties are compared at low and high inflation. We find that increasing the annual inflation rate by 10 percentage points above the average rate in the U.S. would result in a fall in average productivity of roughly 1.3 percent. This decrease in productivity is not innocuous: it is responsible for about one half of the welfare cost of inflation. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:261&r=cba |
| By: | Orlando Gomes (Instituto Politécnico de Lisboa - Escola Superior de Comunicação Social and UNIDE-ERC); Vivaldo M. Mendes (ISCTE - Department of Economics and UNIDE-ERC); Diana A. Mendes (ISCTE - Department of Quantitative Methods and UNIDE-StatMath) |
| Abstract: | We explore the dynamic behavior of a New Keynesian monetary policy problem with expectations formed, partially, under adaptive learning. We consider two alternative cases: on the first setting, the private economy has the ability to predict rationally real economic conditions (the output gap) but it needs to learn about the future values of the nominal variable (the inflation rate); on the second setup, private agents are fully aware of future inflation rates, however they lack the ability to predict instantly the correct values of the output gap (learning is attached to this variable). In both cases, we find a simple condition indicating the required learning quality that is needed to guarantee local stability. To achieve convergence to the steady-state, the economy does not need to attain full learning efficiency; it just has to secure a minimum learning quality in order to attain the desired long run result. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:isc:wpaper:ercwp2208&r=cba |
| By: | Markus Knell (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria.); Alfred Stiglbauer (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria.) |
| Abstract: | In this paper we present an extension of the Taylor model with staggered wages in which wage-setting is also influenced by reference norms (i.e. by benchmark wages). We show that reference norms can considerably increase the persistence of inflation and the extent of real wage rigidity but that these effects depend on the definition of reference norms (e.g. how backward-looking they are) and on whether the importance of norms differs between sectors. Using data on collectively bargained wages in Austria from 1980 to 2006 we show that wage-setting is strongly influenced by reference norms, that the wages of other sectors seem to matter more than own past wages and that there is a clear indication for the existence of wage leadership (i.e. asymmetries in reference norms). JEL Classification: E31, E32, E24, J51. |
| Keywords: | Inflation Persistence, Real Wage Rigidity, Staggered Contracts, Wage Leadership. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901047&r=cba |
| By: | Michele Modugno (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Kleopatra Nikolaou (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates whether information from foreign yield curves helps forecast domestic yield curves out-of-sample. A nested methodology to forecast yield curves in domestic and international settings is applied on three major countries (the US, Germany and the UK). This novel methodology is based on dynamic factor models, the EM algorithm and the Kalman lter. The domestic model is compared vis-á-vis an international one, where information from foreign yield curves is allowed to enrich the information set of the domestic yield curve. The results have interesting and original implications. They reveal clear international dependency patterns, strong enough to improve forecasts of Germany and to a lesser extent UK. The US yield curve exhibits a more independent behaviour. In this way, the paper also generalizes anecdotal evidence on international interest rate linkages to the whole yield curve. JEL Classification: F31. |
| Keywords: | Yield curve forecast, Dynamic factor model, EM algorithm, International linkages. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901044&r=cba |
| By: | Tuomas A. Peltonen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Michael Sager (Wellington Management, 75 State Street, Boston, MA 02109, USA.) |
| Abstract: | We reappraise the relationship between productivity and equilibrium real exchange rates using a panel estimation framework that incorporates a large number of countries and importantly, a dataset that allows explicit consideration of the role of non-traded, as well as traded, sector productivity shocks in exchange rate determination. We find evidence of significant correlation between real exchange rates and productivity differentials in both sectors. But our finding of a significant role for the non-traded sector in exchange rate determination, and of a relatively larger correlation between exchange rates and productivity shocks of a given size emanating from this sector, represent clear contradictions of the widely cited Balassa-Samuelson hypothesis. Our findings remain valid in the face of a number of robustness tests, including the exchange rate regime and numéraire currency. JEL Classification: F31, O47, C23. |
| Keywords: | Exchange rate, productivity, Balassa-Samuelson, panel data, emerging market economies. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901046&r=cba |
| By: | Orlando Gomes (Instituto Politécnico de Lisboa - Escola Superior de Comunicação Social and UNIDE-ERC) |
| Abstract: | A local stability condition for the standard neo-classical Ramsey growth model is derived. The proposed setting is deterministic, defined in discrete time and expectations are formed through adaptive learning. |
| Keywords: | Neo-classical Growth, Adaptive Learning, Stability Analysis, Monetary Policy. |
| JEL: | O41 C62 D83 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:isc:wpaper:ercwp1108&r=cba |
| By: | Wolfgang Lemke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Thomas Werner (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We estimate time-varying expected excess returns on the US stock market from 1983 to 2008 using a model that jointly captures the arbitrage-free dynamics of stock returns and nominal bond yields. The model nests the class of affine term structure (of interest rates) models. Stock returns and bond yields as well as risk premia are affine functions of the state variables: the dividend yield, two factors driving the one-period real interest rate and the rate of inflation. The model provides for each month the `term structure of equity premia', i.e. expected excess stock returns over various investment horizons. Model-implied equity premia decrease during the `dot-com' boom period, show an upward correction thereafter, and reach highest levels during the financial turmoil that started with the 2007 subprime crisis. Equity premia for longer-term investment horizons are less volatile than their short-term counterparts. JEL Classification: E43, G12. |
| Keywords: | Equity premium, affine term structure models, asset pricing. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901045&r=cba |
| By: | Kalemli-Ozcan, Sebnem; Papaioannou, Elias; Peydró-Alcalde, José Luis |
| Abstract: | Standard theory predicts that financial integration leads to a lower degree of business cycle synchronization. Surprisingly, cross-country studies find the opposite. Our contribution is to document the theoretically predicted negative effect of financial integration on business cycle synchronization as a robust regularity. We use a confidential dataset on banks' international bilateral exposure over the past three decades in a panel of twenty developed countries. The rich panel structure allows us to control for time-invariant country-pair factors and global trends that affect both financial integration and business cycle patterns. In contrast to previous empirical work we find that a higher degree of financial integration is associated with less synchronized output cycles. We also employ two distinct instrumental variable approaches to identify the one-way effect of integration on synchronization. These specifications reveal that the component of banking integration predicted by legislative-regulatory harmonization policies and the nature of the bilateral exchange rate regime has a negative effect on output synchronization. |
| Keywords: | Banks; Business Cycles; Co-movement; Financial Integration; Financial Regulation |
| JEL: | E32 F15 F36 G21 O16 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7292&r=cba |
| By: | Zsolt Darvas |
| Abstract: | This paper studies the transmission of monetary policy to macroeconomic variables in three new EU Member States in comparison with that in the euro area with structural time-varying coefficient vector autoregressions. In line with the Lucas Critique reduced-form models like standard VARs are not invariant to changes in policy regimes. The countries we study have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that in the euro area the impact on output of a monetary shock have decreased in time while in the new member states of the EU both decreases and increases can be observed. At the last observation of our sample, the second quarter of 2008, monetary policy was the most powerful in Poland and comparable in strength to that in the euro area, the least powerful responses were observed in Hungary while the Czech Republic lied in between. We explain these results by the credibility of monetary policy, openness and the share of foreign currency loans. |
| Keywords: | monetary transmission; time-varying coefficient vector autoregressions; Kalmanfilter |
| JEL: | C32 E50 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:208&r=cba |
| By: | Mukherjee, Deepraj; Kemme, David |
| Abstract: | Countries in which inflation targeting has been adopted require high quality inflation forecasts. The Polish National Bank adopted a variant of implicit inflation targeting and therefore the ability to forecast inflation is critically important to policy makers. Since the domestic price formation process is still evolving, medium term inflation forecasting is often difficult. Using quarterly data from 1995-2007, we estimate and evaluate three types of models for inflation forecasting: (1) output gap models, (2) models involving money, and (3) models which bring the foreign sector into the price formation process. We find that openness is significant in the price formation process and inflation targeting is associated with lower inflation. Traditional measures of forecast accuracy indicate that the simple price gap version of the P* model and the money demand model perform best of this group for medium term forecasting. |
| Keywords: | Monetary policy; inflation; forecasting; models. |
| JEL: | E0 E31 E52 E37 |
| Date: | 2008–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14952&r=cba |