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on Central Banking |
| By: | John Galbraith; Simon van Norden |
| Abstract: | A probabilistic forecast is the estimated probability with which a future event will satisfy a particular criterion. One interesting feature of such forecasts is their calibration, or the match between predicted probabilities and actual outcome probabilities. Calibration has been evaluated in the past by gropuing probability forecasts into discrete categories. Here we show that we can do so without discrete groupings; the kernel estimators that we use produce efficiency gains and smooth estimated curves relating predicted and actual probabilities. We use such estimates to evaluate the empirical evidence on calibration error in a number of economic applications including recession and inflation prediction, using both forecasts made and stored in real time and pseudo-forecasts made using the data vintage available at the forecast date. We evaluate outcomes using both first-release outcome measures as well as later, thoroughly revised data. We find strong evidence of incorrect calibration in professional forecasts of recessions and inflation. We also present evidence of asymmetries in the performace of inflation forecasts based on real-time output gaps. |
| URL: | http://d.repec.org/n?u=RePEc:mcl:mclwop:2008-05&r=cba |
| By: | Paul Beaudry; Bernd Lucke |
| Abstract: | There are several candidate explanations for macro-fluctuations. Two of the most common discussed sources are surprise changes in disembodied technology and monetary innovations. Another popular explanation is found under the heading of a preference or more generally a demand shock. More recently two other explanations have been advocated: surprise changes in investment specific technology and news about future technology growth. The aim of this paper is to provide a quantitative assessment of the relative merits of all these explanations by adopting a framework which allows them to compete. In particular, we propose a co-integrated SVAR approach that encompasses all 5 shocks and thereby offers a coherent evaluation of the dynamics they induce as well as their contribution to macro volatility. Our main finding is that surprise changes in technology, whether it be of the disembodied or embodied nature, account for very little of fluctuations. In contrast, expected changes in technology appear to be an important force, with preference/demand shocks and monetary shocks also playing non-negligible roles. |
| JEL: | E32 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14950&r=cba |
| By: | Douglas James Hodgson |
| Abstract: | We propose a general non-linear simultaneous equations framework for the econometric analysis of models of intervention in foreign exchange markets by central banks in response to deviations of exchange rates from target levels. We consider the instrumental variables estimation of possibly non-linear response functions and tests of intervention when the functional form may be non-linear, asymmetric, and may contain unknown shape parameters. The methodology applies techniques developed for testing in the presence of nuisance parameters unidentified under a null hypothesis to a nonlinear simultaneous equations model. We report the results of an empirical analysis of activity of the Bank of Canada, for the period from 1953-2006, with regard to the Canada-U.S. exchange rate, with changes in foreign reserves proxying for intervention activity. <P>Nous proposons un cadre de référence général pour les équations non-linéaires simultanées s’appliquant à l’analyse économétrique de modèles d’intervention des banques centrales dans les marchés des devises étrangères, en réponse aux écarts des taux de change par rapport aux niveaux cibles. Nous prenons en considération l’estimation des variables instrumentales liées aux fonctions de réponses possiblement non-linéaires et aux tests en matière d’interventions lorsque la forme fonctionnelle peut être non linéaire, asymétrique et lorsqu’elle peut contenir des paramètres de forme inconnue. La méthodologie applique, à un modèle à équations simultanées non linéaires, des techniques élaborées pour effectuer des tests en présence de paramètres de nuisance non identifiés sous une hypothèse nulle. Nous présentons les résultats d’une analyse empirique des activités de la Banque du Canada, durant la période de 1953-2006, relativement au taux de change Canada-É.-U., les variations des réserves étrangères permettant les activités d’intervention. |
| Keywords: | unidentified nuisance parameter, nonlinear simultaneous equations, foreign exchange reserves, policy reaction functions, paramètre de nuisance non identifié, équations simultanées non linéaires, réserves de change, fonctions de réaction de la politique |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2009s-14&r=cba |
| By: | Peter Howells (UWE, Bristol) |
| Abstract: | The notion that the quantity of money in an economy might be endogenously determined has a long history. Even so, it has never been part of mainstream economic thinking which has remained dominated by the view that the policymaker somehow controls the stock of money and that interest rates are market-determined. However, the need to design and operate a monetary policy that works for modern economies as they are currently constructed, has led to the emergence of the so-called ‘new consensus macroeconomics’ in which it is recognised that the policymaker sets a short-term interest rate and the quantities of money and credit are demand-determined. This paper looks at the way in which this ‘new consensus’ is (at last) forcing a recognition, in the teaching of money, that the money supply is endogenously determined. It also shows how we can take this further by adding a banking sector to a model of the real economy in which the money supply is endogenously determined. The paper ends by showing how some of the issues currently emerging in the new consensus are very closely related to earlier debates amongst post Keynesian economists. |
| Keywords: | Money supply; macroeconomics |
| JEL: | E50 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:0904&r=cba |
| By: | G. Fiorentini; E. Iezzi; M. Lippi Bruni; C. Ugolini |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:660&r=cba |
| By: | M. Marzo; P. Zagaglia |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:659&r=cba |
| By: | Toshitaka Sekine |
| Abstract: | This paper highlights relative price adjustments taking place in the global economy as important sources of the lower levels of inflation rates observed in the recent decades. Using a markup model, it shows substantial effects from declines in wage costs and import prices relative to consumer prices. Out of the 5 percentage point decline in the inflation rates in eight OECD countries from 1970-1989 to 1990-2006, global shocks to two relative prices account for more than 1.5 percentage points, while a monetary policy shock accounts for another 1 percentage point. |
| Keywords: | markup model, open-economy New Keynesian Phillips curve, dynamic factor model, global disinflation |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:283&r=cba |
| By: | Hitoshi Inoue (Osaka School of International Public Policy (OSIPP),Osaka University) |
| Abstract: | This paper investigates an existence of the bank lending channel during the quantitative monetary easing policy (QMEP) period, using panel data of Japanese banks' balance sheets. We find that growth rates of lending of smaller banks and healthier banks responded well to the QMEP. We also find that the growth rate of lending of an average bank responded to the QMEP significantly. These results imply that the bank lending channel existed during the QMEP period. |
| Keywords: | Monetary policy, Bank of Japan, base money, system GMM |
| JEL: | E52 E58 G21 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:osp:wpaper:09j004&r=cba |
| By: | Kai Christoffel; Keith Kuester; Tobias Linzert |
| Abstract: | In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy |
| Keywords: | Labor Market, wage rigidity, bargaining, Bayesian estimation |
| JEL: | E32 E52 J64 C11 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1513&r=cba |
| By: | Christian Merkl; Tom Schmitz |
| Abstract: | This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. Real wage rigidities do not seem to play much of a role. This result is in line with our employed labor market model, but stands in stark contrast to the search and matching model. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility. Our estimations indicate that the latter is driven instead to a certain extent by differences in government spending volatility |
| Keywords: | Labor market institutions, macroeconomic volatility, monetary policy, firing costs, unemployment benefits, replacement rate |
| JEL: | E24 E32 J64 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1511&r=cba |
| By: | Masao Ogaki (Department of Economics, Ohio State University); Hyeongwoo Kim (Department of Economics, Auburn University) |
| Abstract: | In the Kehoe and Midrigan (2007) model, the persistence parameter of the real exchange rate is closely related to the measure of price stickiness in the Calvo-pricing model. When we employ this view, Rogo's (1996) 3 to 5 year consensus half-life implies that rms update their prices every 18 to 30 quarters on average. This is at odds with most estimates from U.S. aggregate data when single equation methods are applied to the New Keynesian Phillips Curve (NKPC), or when system methods are applied to Dynamic Stochastic General Equilibrium (DSGE) models that include the NKPC. It is well known, however, that there is a large degree of uncertainty around the consensus half-life of the real exchange rate. To obtain a more efficient estimator, this paper develops a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. We use a median unbiased estimator for the system method with nonparametric bootstrap confidence intervals, and compare the results with those from the single equation method typically used in the literature. Applying the method to the real exchange rates of 18 developed countries against the U.S. dollar, we nd that most of the half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals, most of which range from 3 quarters to 5 years. These median unbiased estimates and the lower bound of the confidence intervals for the half-lives of real exchange rates are consistent with most estimates of price stickiness using aggregate U.S. data for the NKPC and DSGE models. |
| Keywords: | Purchasing Power Parity, Calvo Pricing, Taylor Rule, Half-Life of PPP Deviations, Median Unbiased Estimator, Grid-t Confidence Interval |
| JEL: | J31 J24 O15 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:osu:osuewp:09-03&r=cba |
| By: | Frédérique Bec; Mélika Ben Salem; Marine Carrasco |
| Abstract: | Recent studies on general equilibrium models with transaction costs show that the dynamics of the real exchange rate are necessarily nonlinear. Our contribution to the literature on nonlinear price adjustment mechanisms is treefold. First, we model the real exchange rate by a Multi-Regime Logistic Smooth Transition AutoRegression (MR-LSTAR), allowing for both ESTAR-type and SETAR-type dynmaics. This choice is motivated by the fact that even the theoretical models, which predict a smooth behavior for the real exchange rate, do not rule out the possibility of a discontinuous adjustment as a limit case. Second, we propose two classes of unit-root tests against this MR-LSTAR alternative, based respectively on the likelihood and on a auxiliary model. Their asymptotic distributions are derived analytically. Third, when applied to 28 bilateral real exchange rates, our tests reject the null hypothesis of a unit root for eleven series bringing evidence in favor of the purchasing power parity. <P>Des études récentes sur les modèles d’équilibre général prenant en considération les coûts des transactions démontrent que la dynamique du taux de change réel est nécessairement non linéaire. Notre contribution à la littérature portant sur les mécanismes d’ajustement non linéaire des prix comporte trois volets. Premièrement, nous modélisons le taux de change réel en recourant à une autorégression de type MR-LSTAR (Multi-Regime Logistic Smooth Transition AutoRegression), qui permet d’observer la dynamique des modèles ESTAR (Exponential Smooth TAR) et SETAR (Self-Exciting Treshold Autoregressive). Notre choix est motivé par le fait que même les modèles théoriques, qui prédisent un comportement lisse du taux de change réel, n’excluent pas la possibilité d’un ajustement discontinu à la limite. Deuxièmement, nous proposons deux catégories de tests de racine unitaire, dans le cadre de l’option MR-LSTAR, fondées respectivement sur la vraisemblance et sur un modèle auxiliaire. Leurs distributions asymptotiques résultent d’un processus analytique. Troisièmement, lorsque nos tests sont appliqués à 28 taux de change réels bilatéraux, ils rejettent l’hypothèse nulle d’une racine unitaire dans le cas de onze séries, faisant ainsi la preuve de la parité du pouvoir d’achat. |
| Keywords: | Half-life, purchasing power parity, mixing conditions, smooth transition autoregressive model, unit-root test, real exchange rate, Demi-vie, parité du pouvoir d’achat, conditions de mélange, modèle autorégressif à transition lisse, test d’unité racinaire, taux de change réel |
| JEL: | C12 C22 F31 |
| Date: | 2009–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2009s-18&r=cba |
| By: | Pablo Burriel (Monetary and Financial Studies Department, Bank of Spain); Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Juan F. Rubio-Ramirez (Department of Economics, Duke University) |
| Abstract: | In this paper, we provide a brief introduction to a new macroeconometric model of the Spanish economy named MEDEA (Modelo de Equilibrio Dinámico de la Economía EspañolA). MEDEA is a dynamic stochastic general equilibrium (DSGE) model that aims to describe the main features of the Spanish economy for policy analysis, counterfactual exercises, and forecasting. MEDEA is built in the tradition of New Keynesian models with real and nominal rigidities, but it also incorporates aspects such as a small open economy framework, an outside monetary authority such as the ECB, and population growth, factors that are important in accounting for aggregate fluctuations in Spain. The model is estimated with Bayesian techniques and data from the last two decades. Beyond describing the properties of the model, we perform different exercises to illustrate the potential of MEDEA, including historical decompositions, long-run and short-run simulations, and counterfactual experiments. |
| Keywords: | DSGE Models, Likelihood Estimation, Bayesian Methods |
| JEL: | C11 C13 E30 |
| Date: | 2009–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:09-017&r=cba |