|
on Central Banking |
| By: | Harald Uhlig |
| Abstract: | This paper compares monetary policy in the US and EMU during the last decade, employing an estimated hybrid New Keynesian cash-in-advance model, driven by five shocks. It appears that the difference between the two monetary policies between 1998 and 2006 is due to both surprises in productivity as well as surprises in wage demands, moving interest rates in opposite directions in Europe and the US, but not due to a more sluggish response in Europe to the same shocks or to different monetary policy surprises. |
| JEL: | E32 E50 E52 E58 E63 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14996&r=cba |
| By: | Fabian Eser; Campbell Leith; Simon Wren-Lewis |
| Abstract: | We consider optimal monetary and fiscal policies in a New Keynesian model of a small open economy with sticky prices and wages. In this benchmark setting monetary policy is all we need - analytical results demonstrate that variations in government spending should play no role in the stabilization of shocks. In extensions we show, firstly, that this is even when true when allowing for inflation inertia through backward-looking rule-of-thumb price and wage-setting, as long as there is no discrepancy between the private and social evaluation of the marginal rate of substitution between consumption and leisure. Secondly, the optimal neutrality of government spending is robust to the issuance of public debt. In the presence of debt government spending will deviate from the optimal steady-state but only to the extent required to cover the deficit, not to provide any additional macroeconomic stabilization. However, unlike government spending variations in tax rates can play a complementary role to monetary policy, as they change relative prices rather than demand. |
| Keywords: | Monetary Policy, Fiscal Policy, Macroeconomic Stabilization, Dynamic General Equilibrium, Sticky Prices, Sticky wages, Rule-of-Thumb Behaviour, Debt, Countercyclical Policy |
| JEL: | E5 E6 C62 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_18&r=cba |
| By: | Fabian Eser; Campbell Leith; Simon Wren-Lewis |
| Abstract: | We consider optimal monetary and fiscal policies in a New Keynesian model of a small open economy with sticky prices and wages. In this benchmark setting monetary policy is all we need - analytical results demonstrate that variations in government spending should play no role in the stabilization of shocks. In extensions we show, firstly, that this is even true when allowing for inflation inertia through backward-looking rule-of-thumb price and wage-setting, as long as there in no discrepancy between the private and social evaluation of the marginal rate of substitution between consumption and leisure. Secondly, the optimal neutrality of government spending is robust to the issuance of public debt. In the presence of debt government spending will deviate from the optimal steady-state but only to the extent required to cover the deficit, not to provide any additional macroeconomic stabilization. However, unlike government spending variations in tax rates can play a complementary role to monetary policy, as they change relative prices rather than demand. |
| Keywords: | Monetary policy, Fiscal policy, Macroeconomic stabilization, Dynamic general equilibrium, Sticky prices, Sticky wages, Rule-of-thumb behaviour, Debt, Countercyclical policy |
| JEL: | E5 E6 C62 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:430&r=cba |
| By: | Charles Freedman; Douglas Laxton |
| Abstract: | This is the second chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." We begin by discussing the costs of inflation, including their role in generating boom-bust cycles. Following a general discussion of the need for a nominal anchor, we describe a specific type of monetary anchor, the inflation-targeting regime, and its two key intellectual roots-the absence of long-run trade-offs and the time-inconsistency problem. We conclude by providing a brief introduction to the way in which inflation targeting works. |
| Keywords: | Inflation targeting , Monetary policy , Inflation , Economic models , |
| Date: | 2009–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/86&r=cba |
| By: | Charles Freedman; Douglas Laxton |
| Abstract: | This is the third chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." It examines a number of elements in the design of an inflation-targeting framework. These include the definition of the target variable, the relevance of core measures of inflation, and the advantages and disadvantages of point targets, point targets with a band, and range targets. It then discusses the choice of a long-term inflation rate, the target horizon, and the policy horizon. |
| Keywords: | Information technology , Inflation targeting , Monetary policy , Inflation , Inflation rates , Central banks , Data collection , Data analysis , |
| Date: | 2009–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/87&r=cba |
| By: | George-Marios Angeletos; Jennifer La'O |
| Abstract: | This paper investigates a real-business-cycle economy that features dispersed information about the underlying aggregate productivity shocks, taste shocks, and, potentially, shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative short-run response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of trade linkages in the economy, not the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions or providing the agents with more information, no policy intervention can improve upon the equilibrium allocations. |
| JEL: | C7 D6 D8 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14982&r=cba |
| By: | Kai Christoffel (European Central Bank); James Costain (División de Investigación, Servicio de Estudios, Banco de España); Gregory de Walque (Research Department, National Bank of Belgium); Keith Kuester (Research Department, Federal Reserve Bank of Philadelphia); Tobias Linzert (European Central Bank); Stephen Millard (Bank of England); Olivier Pierrard (Banque Centrale du Luxembourg) |
| Abstract: | This paper reviews recent approaches to modeling the labour market, and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behavior. In a search and matching environment, we consider the following modeling setups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates |
| Keywords: | Inflation Dynamics, Labour Market, Business Cycle, Real Rigidities |
| JEL: | E E E J |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200905-19&r=cba |
| By: | Kollmann, Robert |
| Abstract: | Kocherlakota and Pistaferri (EJ, 2007) [KP] develop a model of a world economy with private-information Pareto optimal (PIPO) risk sharing; in that model, the real exchange rate tracks relative domestic/foreign cross-sectional distributions of consumption. KP claim that the PIPO model fits the UK/US real exchange rate well. This paper shows that the PIPO model is inconsistent with the UK/US data. Minor specification changes overturn KP’s regression results. I also document that the relevant (relative) cross-sectional consumption moment is orders of magnitude more volatile than the real exchange rate, and less persistent. The link between the real exchange rage and consumption (heterogeneity) remains a puzzle. |
| Keywords: | heterogeneity; International risk sharing; real exchange rate |
| JEL: | F36 F41 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7301&r=cba |
| By: | Turgut Kisinbay; Ondra Kamenik; Ali Alichi; Charles Freedman; M. Johnson; Kevin Clinton; Huigang Chen; Douglas Laxton |
| Abstract: | This paper presents a model for Inflation Targeting under imperfect policy credibility. It modifies the conventional model in three ways: an endogenous policy credibility process, by which monetary policy can gain or lose credibility over time; non-linearities in the inflation equation and in the credibility generating process; and an explicit loss function. The model highlights problems associated with the practice of setting a series of rigid near-term inflation targets. Also, unfavorable supply shocks pose a difficult problem: an appropriate response involves an interest rate increase, some loss of output, and a period of increased inflation. A delayed response can result in a prolonged period of stagflation. |
| Keywords: | Inflation targeting , Emerging markets , Monetary policy , Disinflation , Demand , Price increases , Economic models , |
| Date: | 2009–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/94&r=cba |
| By: | Eckhard Platen (School of Finance and Economics, University of Technology, Sydney); Willi Semmler (Department of Economics, New School, New York and Center for Empirical Macroeconomics, Bielefeld University) |
| Abstract: | Monetary policy has pursued the concept of inflation targeting. This has been implemented in many countries. Here interest rates are supposed to respond to an inflation gap and output gap. Despite long term continuing growth of the world financial assets, recently, monetary policy, in particular in the U.S. after the subprime credit crisis, was challenged by severe disruptions and a meltdown of the financial market. Subsequently, academics have been in search of a type of monetary policy that does allow to in°uence in an appropriate manner the investor's behavior and, thus, the dynamics of the economy and its financial market. The paper suggests a dynamic portfolio approach. It allows one to study the interaction between investors` strategic behavior and monetary policy. The article derives rules that explain how monetary authorities should set the short term interest rate in interaction with inflation rate, economic growth, asset prices, risk aversion, asset price volatility, and consumption rates. Interesting is that the inflation rate needs to have a certain minimal level to allow the interest rate to be a viable control instrument. A particular target interest rate has been identified for the desirable optimal regime. If the proposed monetary policy rule is applied properly, then the consumption rate will remain stable and the inflation rate can be kept close to a minimal possible level. Empirical evidence is provided to support this view. Additionally, in the case of an economic crisis the proposed relationships indicate in which direction to act to bring the economy back on track. |
| Keywords: | risk aversion; interest rate; dynamic portfolio; consumption rate; inflation; monetary policy; benchmark approach |
| JEL: | G10 G13 |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:247&r=cba |
| By: | Corsetti, Giancarlo; Meier, André; Müller, Gernot J. |
| Abstract: | The impact of fiscal stimulus depends not only on short-term tax and spending policies, but also on expectations about offsetting measures in the future. This paper analyzes the effects of an increase in government spending under a plausible debt-stabilizing policy that systematically reduces spending below trend over time, in response to rising public liabilities. Accounting for such spending reversals brings an otherwise standard new Keynesian model in line with the stylized facts of fiscal transmission, including the crowding-in of consumption and the `puzzle' of real exchange rate depreciation. Time series evidence for the U.S. supports the empirical relevance of endogenous spending reversals. |
| Keywords: | consumption; Fiscal policy transmission; monetary policy; real exchange rate; real interest rates; sticky prices |
| JEL: | E62 E63 F41 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7302&r=cba |
| By: | Michael Kumhof; Douglas Laxton |
| Abstract: | This paper analyzes the scope for systematic rules-based fiscal activism in open economies. Relative to a balanced budget rule, automatic stabilizers significantly improve welfare. But they minimize fiscal instrument volatility rather than business cycle volatility. A more aggressively countercyclical tax revenue gap rule increases welfare gains by around 50 percent, with only modest increases in fiscal instrument volatility. For raw materials revenue gaps the government should let automatic stabilizers work. The best fiscal instruments are targeted transfers, consumption taxes and labor taxes, or, if it enters private utility, government spending. The welfare gains are significantly lower for more open economies. |
| Keywords: | Fiscal policy , Business cycles , Revenues , Monetary policy , External shocks , Commodity prices , Copper , Manufacturing , Economic stabilization , Economic models , |
| Date: | 2009–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/76&r=cba |
| By: | Marc Robinson |
| Abstract: | Can an accrual budgeting system-a system in which budgetary spending authorizations to line ministries are formulated in accrual terms-serve the needs of good fiscal policy? If so, how must such a system be designed? What are the practical challenges which may arise in implementing sound fiscal policy under a budgeting system which is significantly more complex than traditional cash budgeting? These are the primary questions addressed in this paper. Because any budgeting system must support the control of key fiscal policy aggregates, the paper also considers the case for reformulating fiscal policy in terms of accrual rather than cash aggregates. The primary focus is on the potential fiscal policy role of net lending and net financial debt. However, the paper also considers whether net worth is an aggregate with major fiscal policy relevance. |
| Keywords: | Accounting , Budgeting , Fiscal policy , Fiscal sustainability , Fiscal stability , Government expenditures , Asset management , |
| Date: | 2009–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/84&r=cba |
| By: | Karin Mayr; Johann Scharler |
| Abstract: | This paper studies the implications of asymmetric fiscal stabilization policy for the budget deficit. In our model, the government is more concerned about downturns than upturns in economic activity and therefore conducts fiscal stabilization policy in a precautionary way. We show that this type of behavior results in a deficit which on average exceeds its target levelt. We test our hypothesis empirically and find that asymmetric preferences for output stabilization are consistent with how fiscal policy was conducted in a sample of OECD countries during 1987-2005. According to our estimates, the upward bias due to precautionary behavior accounted for roughly 13 percent of the average deficit. |
| JEL: | H62 E60 E32 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:0908&r=cba |
| By: | Carlo Altavilla; Matteo Ciccarelli (-; -) |
| Abstract: | This paper explores the role that model uncertainty plays in determining the effect of monetary policy shocks on unemployment dynamics in the euro area and the US. We specify a range of BVARs that differ in terms of variables, lag structure, and the way the inflation process is modelled. For each model the central bank sets the interest rate minimizing a loss function. Given this solution, we quantify the impact of a monetary policy shock on unemployment for each model, and measure the degree of uncertainty as represented by the dispersion of both the policy rule parameters and the impulse response functions between models. The comparative evidence from the US and the euro area data indicates that model uncertainty is indeed an important feature, and that a model combination strategy might be a valuable advise to policymakers. |
| Keywords: | Inflation models, Unemployment, Model uncertainty, Taylor rule, Impulse response analysis |
| JEL: | C53 E24 E37 |
| Date: | 2008–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:prt:dpaper:8_2008&r=cba |
| By: | Rabah Arezki; Fuad Hasanov |
| Abstract: | Oil exporters have run large current account surpluses. We explore oil exporters' role in our understanding and the resolution of global imbalances. Current account dynamics are estimated for oil-exporting countries and the rest of the world. We find that fiscal policy has a much stronger effect on current account of oil exporters than on current account of other countries. The current account adjustment of oil-exporting countries is also faster than that of other countries. We conclude that a change in fiscal policy of oil exporters can have significant and speedy impact on global imbalances. |
| Keywords: | Payments imbalances , Oil exporting countries , Oil prices , Oil revenues , Current account , Current account surpluses , Fiscal policy , |
| Date: | 2009–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/89&r=cba |
| By: | Selim Elekdag; Roberto Cardarelli; Subir Lall |
| Abstract: | This paper examines why some financial stress episodes lead to economic downturns. The paper identifies episodes of financial turmoil using a financial stress index (FSI), and proposes an analytical framework to assess the impact of financial stress-in particular banking distress-on the real economy. It concludes that financial turmoil characterized by banking distress is more likely to be associated with severe and protracted downturns than stress mainly in securities or foreign exchange markets. Economies with more arms-length financial systems appear to be particularly vulnerable to sharp contractions, due to the greater procyclicality of leverage in their banking systems. |
| Keywords: | Financial crisis , Financial systems , Banking sector , Exchange markets , Securities markets , Banking crisis , Economic recession , Economic recovery , Business cycles , Cross country analysis , |
| Date: | 2009–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/100&r=cba |
| By: | Juan-Angel Jimenez-Martin (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense); Michael McAleer; Teodosio Pérez-Amaral (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense) |
| Abstract: | The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing sensibly from a variety of risk models, discuss the selection of optimal risk models, consider combining alternative risk models, discuss the choice between a conservative and aggressive risk management strategy, and evaluate the effects of the Basel II Accord on risk management. We also examine how risk management strategies performed during the 2008-09 financial crisis, evaluate how the financial crisis affected risk management practices, forecasting VaR and daily capital charges, and discuss alternative policy recommendations, especially in light of the financial crisis. These issues are illustrated using Standard and Poor’s 500 Index, with an emphasis on how risk management practices were monitored and encouraged by the Basel II Accord regulations during the financial crisis. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:0918&r=cba |
| By: | Bernd Hayo (Faculty of Business Administration and Economics, Philipps-University Marburg); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps-University Marburg) |
| Abstract: | We explain changes in the federal funds target rate using macroeconomic variables and Federal Open Market Committee (FOMC) communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 75 target rate decisions between 1998 and 2006. We find, first, that FOMC communication is forward-looking, with a horizon that goes beyond the next meeting. Second, our communication indicators significantly explain target rate changes and improve explanatory power in and out of sample. Third, speeches by members of the Board of Governors and regional presidents have a statistically significant and equal-sized effect, whereas the less-frequent monetary policy reports and testimonies are insignificant. Fourth, our findings are robust to variations in the specification, including changes in the communication strategy as well as a measure of unambiguous communication. Finally, our communication indicator based on FOMC speeches performs better in explaining rate changes than do newswire reports of Fed communications. |
| Keywords: | Central Bank Communication, Federal Reserve Bank, Interest Rate Decision, Monetary Policy, Federal Funds Target Rate, Taylor Rule |
| JEL: | E43 E52 E58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200925&r=cba |
| By: | Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Ali M. Kutan (Southern Illinois University Edwardsville and the William Davidson Institute, Michigan); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps Universitaet Marburg) |
| Abstract: | Using a GARCH model, we study the effects of Federal Funds target rate changes and FOMC communication on emerging equity market returns and volatility over the period 1998–2006. First, both types of news have a significant impact on market returns. Second, target rate changes are more important than informal communication. Third, the occurrence of monetary policy reports lowers price volatility. Finally, American emerging markets react more to U.S. news than non-American markets. |
| Keywords: | Central Bank Communication, Emerging Markets, Federal Reserve Bank, U.S. Monetary Policy |
| JEL: | E52 G14 G15 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200923&r=cba |
| By: | Peter L. Rousseau |
| Abstract: | In this essay I propose that the adoption of the U.S. dollar as a common currency shortly after the ratification of the Federal Constitution and the accompanying transition from a fiat to specie standard was a pivotal moment in the nation’s early history and marked an improvement over the monetary systems of colonial America and under the Articles of Confederation. This is because the dollar and all that came with it monetized the modern sector of the U.S. economy and tied the supply of money more closely to the capital market and the provision of credit―feats that were not possible in an era when colonial legislatures were unable to credibly commit to controlling paper money emissions. The switch to a specie standard was at the time necessary to promote domestic and international confidence in the nascent financial system, and paved the way for the long transition to the point when the standard was no longer required. |
| JEL: | E42 E44 N11 N21 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14993&r=cba |
| By: | Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | I study a general-equilibrium model of the term structure where bond prices are an integral part of the monetary transmission mechanism. The model is estimated on quarterly Euro area data. I show that, besides shocks to the inflation target, also exogenous variations in money demand and bond supply can explain movements in long-term interest rates. I also find that taking into account the impact of bond yields on the macroeconomy generates superior in-sample and out-of-sample forecasts for output, inflation and for bond yields. |
| Keywords: | Monetary policy; yield curve; monetary transmission mechanism |
| JEL: | E43 E44 E52 |
| Date: | 2009–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2009_0012&r=cba |
| By: | Alessandra Del Boca; Michele Fratianni; Franco Spinelli; Carmine Trecroci |
| Abstract: | Was there a textbook-like Phillips curve in post-WWII Italy? We estimate a consensus model of the relationship between inflation and the level of economic activity over 1949-1998, finding no evidence of a significant and positive feedback from output to prices. We also estimate similar models for the UK and the US. We discuss the role of wage coordination and indexation mechanisms in generating what amounts to a significant departure of Italian data from what holds true for the US and UK. Likely, the rigid indexation mechanism that aimed at protecting wages from inflation ended up contributing to the persistent inflation bias that Italy experienced almost until its entry into EMU. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:0901&r=cba |
| By: | Richard T. Baille; Claudio Morana |
| Abstract: | Previous models of monthly CPI inflation time series have focused on possible regime shifts, non-linearities and the feature of long memory. This paper proposes a new time series model, named Adaptive ARFIMA; which appears well suited to describe inflation and potentially other economic time series data. The Adaptive ARFIMA model includes a time dependent intercept term which follows a Flexible Fourier Form. The model appears to be capable of succesfully dealing with various forms of breaks and discontinities in the conditional mean of a time series. Simulation evidence justifies estimation by approximate MLE and model specfication through robust inference based on QMLE. The Adaptive ARFIMA model when supplemented with conditional variance models is found to provide a good representation of the G7 monthly CPI inflation series. |
| Keywords: | ARFIMA; FIGARCH, long memory, structural change, inflation, G7. |
| JEL: | C15 C22 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpmath:06-2009&r=cba |
| By: | Shaun K. Roache; Alexander P. Attie |
| Abstract: | Long-term investors face a common problem-how to maintain the purchasing power of their assets over time and achieve a level of real returns consistent with their investment objectives. While inflation-linked bonds and derivatives have been developed to hedge the effects of inflation, their limited supply and liquidity lead many investors to continue to rely on the indirect hedging properties of traditional asset classes. In this paper, we assess these properties over different time horizons, in the context of a diversified portfolio. Using a vector error correction model, we find that effective short-run hedges, such as commodities, may not work over longer horizons and that tactical asset allocation could enhance investment returns following inflation surprises. |
| Keywords: | Inflation , Capital markets , Private investment , Financial instruments , Hedge funds , Commodities , Asset prices , Economic models , |
| Date: | 2009–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/90&r=cba |
| By: | Michael Dotsey; Andreas Hornstein |
| Keywords: | Monetary policy ; Interest rates |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:09-06&r=cba |
| By: | Reiter, Michael (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Sveen, Tommy (Monetary Policy Department, Norges Bank, Oslo, Norway); Weinke, Lutz (Department of Economics, Duke University, Durham, NC, USA and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria) |
| Abstract: | The lumpy nature of plant-level investment is generally not taken into account in the context of monetary theory (see, e.g., Christiano et al. 2005 and Woodford 2005). We formulate a generalized (S,s) pricing and investment model which is empirically more plausible along that dimension. Surprisingly, our main result shows that the presence of lumpy investment casts doubt on the ability of sticky prices to imply a quantitatively relevant monetary transmission mechanism. |
| Keywords: | Lumpy investment, Sticky prices |
| JEL: | E22 E31 E32 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:239&r=cba |
| By: | Ulrike Busch; Dieter Nautz |
| Abstract: | Controllability of longer-term interest rates requires that the persistence of their deviations from the central bank's policy rate (i.e. the policy spreads) remains suciently low. This paper applies fractional integration techniques to assess the persistence of policy spreads of euro area money market rates along the yield curve. Independently from anticipated policy rate changes, there is strong evidence for all maturities that policy spreads exhibit long memory. We show that recent changes in the operational framework and the communication strategy of the European Central Bank have significantly decreased the persistence of euro area policy spreads and, thus, have enhanced the central bank's influence on longer-term money market rates. |
| Keywords: | Long memory and fractional integration, controllability and persistence of interest rates, new operational framework of the ECB |
| JEL: | C22 E43 E52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-029&r=cba |
| By: | George Bagdatoglou; Alexandros Kontonikas |
| Abstract: | We test the real interest rate parity hypothesis using data for the G7 countries over the period 1970-2008. Our contribution is two-fold. First, we utilize the ARDL bounds approach of Pesaran et al. (2001) which allows us to overcome uncertainty about the order of integration of real interest rates. Second, we test for structural breaks in the underlying relationship using the multiple structural breaks test of Bai and Perron (1998, 2003). Our results indicate significant parameter instability and suggest that, despite the advances in economic and financial integration, real interest rate parity has not fully recovered from a breakdown in the 1980s. |
| Keywords: | real interest rates parity, bounds test, structural breaks |
| JEL: | F21 F32 C15 C22 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_17&r=cba |
| By: | Dekle, Robert; Fukao, Kyoji |
| Abstract: | In this paper, we focus on the movements of the yen on Japanese industries, and on the sectoral reallocation of Japanese employment. We show that the appreciation episodes of 1985 and 1995 have significantly hurt the ability of Japanese industries to compete with U.S. industries, by raising the relative production costs of Japanese industries. This relative cost gap with U.S. industries narrowed from 1995, owing to faster wage growth in the U.S., and especially to higher productivity growth in some Japanese industries. In fact, in these high productivity Japanese manufacturing industries such as chemicals and transport equipment, relative production costs were essentially back to pre-1985, pre-Plaza Accord levels by 2004. In contrast, the relative production costs of Japanese low productivity manufacturing industries such as textiles and wood products have remained high. Clearly, in the aggregate, the appreciation of the yen was not matched by an increase in Japanese productivity. What then is the appreciation of the aggregate real exchange rate consistent with these Japan-U.S. differences in industrial productivities? To answer this question, we build a three-sector (high productivity manufacturing, low productivity manufacturing, and services) equilibrium macroeconomic-trade model of Japan and the U.S. We find that while the yen was "undervalued" before 1985, it was significantly "overvalued" after 1985, and especially since 1995. In our model simulations, the Balassa-Samuelson effect is observed: the equilibrium real exchange rate is appreciating over time, owing to strong relative growth in the Japanese high productivity manufacturing sector, but very poor relative productivity growth in the Japanese services sector. Interestingly, the continued appreciation of the equilibrium real exchange rate meant that the actual real exchange rate was near its equilibrium value by 2003-2004, when the nominal yen dollar rate was about 120 yen to the dollar. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2008-25&r=cba |
| By: | Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) |
| Abstract: | This paper has three objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authorities of 12 new EU members. Using estimation of an augmented Taylor rule, we find that this setting was not always consistent with the official monetary policy. Second, we seek to shed light on the inflation process of these countries. To this end, we carry out an estimation of an open economy Philips curve (PC). Our main finding is that inflation rates were not only driven by backward persistency but also held a forward-looking component. Finally, we assess the viability of existing monetary arrangements for price stability. The analysis of the conditional inflation variance obtained from GARCH estimation of PC is used for this purpose. We conclude that inflation targeting is preferable to an exchange rate peg because it allowed decreasing the inflation rate and anchored its volatility. |
| Keywords: | open emerging economies, monetary policy rules, open economy Phillips curve, conditional inflation variance |
| JEL: | E31 E52 E58 P24 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea0903&r=cba |
| By: | Burriel, Pablo; Fernández-Villaverde, Jesús; Rubio-Ramirez, Juan Francisco |
| 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 EspañA). 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: | Bayesian Methods; DSGE Models; Likelihood Estimation |
| JEL: | C11 C13 E30 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7297&r=cba |
| By: | Pablo Burriel; Jesús Fernández-Villaverde; Juan F. Rubio-Ramírez |
| 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. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2009-17&r=cba |
| By: | OGAWA Eiji; YOSHIMI Taiyo |
| Abstract: | This paper focuses on recent events which include the RMB reform in China and the global financial crisis to investigate statistically recent diverging trends among East Asian currencies. For the purpose, their weighted average value (Asian Monetary Unit: AMU) and their deviations (AMU Deviation Indicators) from benchmark levels are used to analyze both β and σ convergences of East Asian currencies. Our analytical results show that the monetary authority of China has still kept stabilizing the exchange rate of the Chinese yuan against only the US dollar even though it announced its adoption of a managed floating exchange rate system with reference to a currency. Analytical results on β and σ convergences show that deviations among the East Asian currencies have been diverging in recent years, especially after 2005. The widening deviations reflect not the RMB reform but recent international capital flows and the global financial crisis. In addition, it is important as its background that the monetary authorities of the countries are adopting a variety of exchange rate systems. In other words, a coordination failure in adopting exchange rate systems among these monetary authorities increases volatility and misalignment of intra-regional exchange rates in East Asia. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:09018&r=cba |
| By: | Hanan Morsy; Magda E. Kandil |
| Abstract: | Inflationary pressures have heightened in the oil-rich Gulf Cooperation Council (GCC) since 2003. This paper studies determinants of inflation in GCC, using an empirical model that includes domestic and external factors. Inflation in major trading partners appears to be the most relevant foreign factor. In addition, oil revenues have reinforced inflationary pressures through growth of credit and aggregate spending. In the short-run, binding capacity constraints also explain higher inflation given increased government spending. Nonetheless, by targeting supply-side bottlenecks, the increase in government spending is easing capacity constraints and will ultimately help to moderate price inflation. |
| Keywords: | Inflation , Cooperation Council for the Arab States of the Gulf , External shocks , Domestic liquidity , Monetary policy , Currency pegs , Exchange rate depreciation , Economic models , Cross country analysis , |
| Date: | 2009–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/82&r=cba |
| By: | Fernando Alexandre (Universidade do Minho - NIPE); Pedro Bação (GEMF and Universidade de Coimbra); João Cerjeira (Universidade do Minho - NIPE); Miguel Portela (Universidade do Minho - NIPE and IZA) |
| Abstract: | Economic theory and empirical evidence suggest that fluctuation in exchange rates may have strong reallocation effects. Accession to the Exchange Rate Mechanism in 1992, and then to the European Monetary Union em 1999, implied a drastic change in the behavior of Portugal´s exchange rate indexes. The analysis of those indexes is therefore bound ti play an important role in the study of the evolution of the Portuguese economy in the last two decades. However, there are many alternative exchange rate indexes.In this paper, we compute and compare aggregate and sector-specific exchange rate indexes for the Portuguese economy. We find that alternative effective exchange rate indexes are very similar between them. We also find that sector-specific effective exchange rates are strongly correlated with aggregate indexes. Nevertheless, we show that sector-specific exchange rates are more informative than aggregate exchange rates in explaining changes in employment: whereas aggregate indexes are statistically in employment equations, regressions using sector-specific exchange rate indexes show a statistically significant and economically large effect of exchange rates on employment. |
| Keywords: | exchange rates; international trade; employment, EMU |
| JEL: | F15 F16 F41 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:13/2009&r=cba |
| By: | Kalina Dimitrova; Martin Ivanov; Ralitsa Simeonova-Ganeva |
| Abstract: | The paper constructs the first series of nominal and real effective exchange rates of the Bulgarian Lev from its establishment in 1879 until 1939. The dynamics of both indicators during the Classical Gold Standard fits the general picture of exchange rate development of other European countries while their movements in the Interwar years reflects the exchange rate policy of the monetary authority and the price effects of the Great Depression. The study also provides econometric estimation of the impact of the real effective exchange rates and foreign demand on Bulgaria’s real export performance allowing for some policy implications. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpicer:04-2009&r=cba |
| By: | Charles Freedman; M. Johnson; Jorge Iván Canales Kriljenko; Roberto Garcia-Saltos; Douglas Laxton |
| Abstract: | This is the fourth of a series of papers that are being written as part of a larger project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit to which economists have access for studying both own-country and cross-country linkages. In this paper, we add Latin American economies to a previously estimated small quarterly projection model of the US, Euro Area, and Japanese economies. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties. |
| Keywords: | Economic models , Latin America , Monetary policy , Inflation targeting , Cross country analysis , |
| Date: | 2009–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/85&r=cba |
| By: | Michael Kumhof; Douglas Laxton |
| Abstract: | The paper analyzes Chile's structural balance fiscal rule in the face of copper price shocks originating in foreign copper demand. It uses a version of the IMF's Global Integrated Monetary and Fiscal Model (GIMF) that includes a copper sector. Two results are obtained. First, Chile's current fiscal rule performs well if the policymaker puts a small weight on output volatility (relative to inflation volatility) in his/her objective function. A more aggressive countercyclical fiscal rule can attain lower output volatility, but there is a trade-off with (somewhat) higher inflation volatility and (much) higher volatility of fiscal variables. Second, given its current stock of government assets, Chile's adoption of a 0.5% surplus target starting in 2008 is desirable from a business cycle perspective. This is because the earlier 1% target would have required significant further asset accumulation that could only have been accomplished at the expense of greater volatility in fiscal instruments and therefore in GDP. |
| Keywords: | Fiscal policy , Chile , Current account surpluses , Business cycles , Copper , Economic models , |
| Date: | 2009–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/88&r=cba |
| By: | Wendell A. Samuel; Mario Dehesa; Emilio Pineda |
| Abstract: | Recent turbulence in global and Caribbean regional financial markets underscore the importance of reassessing the adequacy of international reserves held by the Eastern Caribbean Central Bank (ECCB). Using the Jeanne (2007) optimization framework, this paper finds that international reserves held by the ECCB are generally adequate for a variety of external current account and capital account shocks. However, the ECCB would be challenged in the event of moderate to severe deposit outflows. |
| Keywords: | Reserves , Eastern Caribbean Currency Union , Emerging markets , Monetary unions , Capital flows , Economic models , |
| Date: | 2009–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/77&r=cba |
| By: | Emilio Pineda; Paul Cashin; Yan Sun |
| Abstract: | This paper uses three methods to assess movements of real exchange rates in the ECCU over time. First, the purchasing power parity hypothesis is tested and then used to provide a benchmark for equilibrium real exchange rates in the region. Second, a fundamentals-based equilibrium real exchange rate approach is used to explore sources of real exchange rate fluctuations in ECCU countries. And third, a macroeconomic balance approach is used to estimate equilibrium current account or current account "norms". The main finding of these analyses is that there is little evidence of overvaluation of the EC dollar. Furthermore, this paper contributes to the literature by analyzing the distinctive impact of tourism in determining real exchange rates through the wealth effect induced by tourism-driven increases in terms of trade and productivity. |
| Keywords: | Exchange rates , Eastern Caribbean Currency Union , Real effective exchange rates , Purchasing power parity , Tourism , Competition , Economic models , |
| Date: | 2009–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/78&r=cba |
| By: | Nir Klein; Alexander Kyei |
| Abstract: | In recent years, the decline in inflation in Angola has stalled and further steps may be needed to attain the authorities' medium term goal of meeting the Southern African Development Community (SADC) convergence criteria of a low single digit inflation rate. A Vector Error Correction (VEC) model, which analyzes the factors that affect the inflationary process in Angola, suggests that the inflation path has been largely affected by exchange rate movements. This implies that greater exchange rate flexibility that facilitates a gradual appreciation would be instrumental to moderate price growth through reducing the price of imports and limiting liquidity injection by the National Bank of Angola (BNA). Additionally, the analysis shows that excess liquidity, which is measured by positive deviations of M2 from its equilibrium level, adds to demand pressures, and contributes to inflation with a lag. This underlines the importance of closely monitoring the growth of monetary aggregates as well as improving liquidity management. |
| Keywords: | Inflation , Angola , Inflation rates , Monetary aggregates , Oil exports , Commodity price fluctuations , Exchange rates , Excess liquidity , Liquidity management , Economic models , Data analysis , |
| Date: | 2009–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/98&r=cba |