|
on Central Banking |
| By: | Olivier J. Blanchard; Jean-Paul L'Huillier; Guido Lorenzoni |
| Abstract: | We explore empirically models of aggregate fluctuations with two basic ingredients: agents form anticipations about the future based on noisy sources of information; these anticipations affect spending and output in the short run. Our objective is to separate fluctuations due to actual changes in fundamentals (news) from those due to temporary errors in the private sector's estimates of these fundamentals (noise). Using a simple model where the consumption random walk hypothesis holds exactly, we address some basic methodological issues and take a first pass at the data. First, we show that if the econometrician has no informational advantage over the agents in the model, structural VARs cannot be used to identify news and noise shocks. Next, we develop a structural Maximum Likelihood approach which allows us to identify the model's parameters and to evaluate the role of news and noise shocks. Applied to postwar U.S. data, this approach suggests that noise shocks play an important role in short-run fluctuations. |
| JEL: | C32 D83 E32 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15015&r=cba |
| By: | George-Marios Angeletos; Jennifer La'O |
| Abstract: | This paper investigates who incomplete information impacts the response of prices to nominal shocks. Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise. In this model, the response of prices is pinned down by three parameters: the precision of available information about the nominal shock; the frequency of price adjustment; and the degree of strategic complementarity in pricing decisions. This result synthesizes the broader lessons of the pertinent literature. We next highlight that his synthesis provides only a partial view of the role or incomplete information. In general, the precision of information does not pin down the response of higher-order beliefs. Therefore, once cannot quantify the degree of price inertia without additional information about the dynamics of higher-order beliefs, or the agents’ forecasts of inflation. We highlight the distinct role of higher-order beliefs with three extensions of our baseline model, all of which break the tight connection between the precision of information and higher-order beliefs featured in previous work. |
| JEL: | D8 E1 E3 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15003&r=cba |
| By: | John Y. Campbell; Robert J. Shiller; Luis M. Viceira |
| Abstract: | This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation- indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade. |
| JEL: | E43 E44 G12 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15014&r=cba |
| By: | John Y. Campbell (Dept. of Economics, Harvard University); Robert J. Shiller (Cowles Foundation, Yale University); Luis M. Viceira (Harvard Business School) |
| Abstract: | This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation-indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade. |
| Keywords: | Expectations hypothesis, Liquidity, Term premia, TIPS |
| JEL: | E43 E44 G12 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1696&r=cba |
| By: | James D. Hamilton |
| Abstract: | This paper explores similarities and differences between the run-up of oil prices in 2007-08 and earlier oil price shocks, looking at what caused the price increase and what effects it had on the economy. Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the U.S. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution. |
| JEL: | E32 Q43 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15002&r=cba |
| By: | Roger E. A. Farmer |
| Abstract: | This paper uses a model with a continuum of equilibrium unemployment rates to explore the effectiveness of fiscal policy. The existence of multiple steady state unemployment rates is explained by the absence of markets for the inputs to a search technology for matching unemployed workers with vacant jobs. I explain the current financial crisis as a shift to a high unemployment equilibrium, induced by the self-fulfilling beliefs of market participants about asset prices. Using this model, I ask two questions. 1) Can fiscal policy help us out of the crisis? 2) Is there an alternative to fiscal policy that is less costly and more effective? The answer to both questions is yes. |
| JEL: | E2 E24 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15021&r=cba |
| By: | Philippe Bacchetta; Eric van Wincoop |
| Abstract: | It is well known from anecdotal, survey and econometric evidence that the relationship between the exchange rate and macro fundamentals is highly unstable. This could be explained when structural parameters are known and very volatile, neither of which seems plausible. Instead we argue that large and frequent variations in the relationship between the exchange rate and macro fundamentals naturally develop when structural parameters in the economy are unknown and change very slowly. We show that the reduced form relationship between exchange rates and fundamentals is driven not by the structural parameters themselves, but rather by expectations of these parameters. These expectations can be highly unstable as a result of perfectly rational “scapegoat†effects. This happens when parameters can potentially change much more in the long run than the short run. This generates substantial uncertainty about the level of parameters, even though monthly or annual changes are small. This mechanism can also be relevant in other contexts of forward looking variables and could explain the widespread evidence of parameter instability found in macroeconomic and financial data. Finally, we show that parameter instability has remarkably little effect on the volatility of exchange rates, the in-sample explanatory power of macro fundamentals and the ability to forecast out of sample. |
| JEL: | F31 F37 F41 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15008&r=cba |
| By: | Bacchetta, Philippe; van Wincoop, Eric |
| Abstract: | It is well known from anecdotal, survey and econometric evidence that the relationship between the exchange rate and macro fundamentals is highly unstable. This could be explained when structural parameters are known and very volatile, neither of which seems plausible. Instead we argue that large and frequent variations in the relationship between the exchange rate and macro fundamentals naturally develop when structural parameters in the economy are unknown and change very slowly. We show that the reduced form relationship between exchange rates and fundamentals is driven not by the structural parameters themselves, but rather by expectations of these parameters. These expectations can be highly unstable as a result of perfectly rational "scapegoat" effects. This happens when parameters can potentially change much more in the long run than the short run. This generates substantial uncertainty about the level of parameters, even though monthly or annual changes are small. This mechanism can also be relevant in other contexts of forward looking variables and could explain the widespread evidence of parameter instability found in macroeconomic and financial data. Finally, we show that parameter instability has remarkably little effect on the volatility of exchange rates, the in-sample explanatory power of macro fundamentals and the ability to forecast out of sample. |
| Keywords: | Exchange rate; Time-varying coefficients |
| JEL: | F31 F37 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7309&r=cba |
| By: | Yuko Hashimoto; Takatoshi Ito |
| Abstract: | Market impacts of Japanese macroeconomic announcements within minutes on the dollar/yen foreign exchange are analyzed. High-frequency data collected from the actual trading platform, EBS, are used. First, impacts on returns are analyzed. Macroeconomic statistics releases that consistently had significant effects on exchange rate returns include Tankan survey (a short-term business survey conducted by Bank of Japan), GDP, industrial production (preliminary), PPI, CPI (Tokyo area), the unemployment rate and Balance of Payment statistics. Macroeconomic statistics releases that did not have impacts on returns include Trade Balance, Retail Sales and Housing start indicators. Second, for most of macroeconomic news items whose surprise components have return impacts also have impacts on deals and volatility. The announcement itself, in addition to the magnitude of surprise, is found to increase the deals and price volatility in the immediately after the announcement. In addition, some other items have no return impacts but deals and volatility impacts. These facts are consistent with a view that market participants have heterogeneous information, so that even without any price change, trades take place. Price discovery process may require some transactions with price fluctuations around new price level consistent with statistical announcement |
| JEL: | E44 F31 F41 G15 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15020&r=cba |
| By: | Thierry Warin |
| Date: | 2009–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirbur:2009rb-05&r=cba |
| By: | Antonio Forte (Dipartimento di Economia e Metodi Matematici, Università di Bari); Giovanni Pesce (Dipartimento di Economia e Metodi Matematici, Università di Bari) |
| Abstract: | The advent of the international financial crisis, and of its effects on the economy, all the world now face the question how to manage the crisis and what measures to implement to restore a normal condition. In this paper we present and discuss the results and implications of an international expert survey. Our target is to understand the perception with regards to several aspects of the international financial crisis and some possible future implications for policy makers’ authorities. |
| Keywords: | international financial crisis, subprime, expert survey |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bai:series:wp0024&r=cba |
| By: | Dr Bimal Jalan |
| Abstract: | Dr. Bimal Jalan, Governor gave a welcome remark to Prof. Charles Goodhart on his 11th C. D. Deshmukh Memorial Lecture on 'Whither Central Banking ?' This paper revolves around Dr. Jalan's summary and Prof.Goodhart's lecture on central banking. [RBI CD Deshmukh] |
| Keywords: | RBI; inflation; C. D. Deshmukh; Norman Sosnow Professor of Banking and Finance; monetary policy; delegate; Choice ; Trade off; open economy; asset price; regulation; supervision; domestic inflation |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:1971&r=cba |
| By: | Jörg Döpke; Michael Funke; Sean Holly; Sebastian Weber |
| Abstract: | In a standard dynamic stochastic general equilibrium framework, with sticky prices, the cross sectional distribution of output and inflation across a population of firms is studied. The only form of heterogeneity is confined to the probability that the ith changes its prices in response to a shock. In this Calvo setup the moments of the cross sectional distribution of output and inflation depend crucially on the proportion of firms that are allowed to change their prices. We test this model empirically using German balance sheet data on a very large population of firms. We find a significant counter-cyclical correlation between the skewness of inflation and aggregates, but the relation with output is less sure. Our results can be interpreted as indirect evidence of the importance of price stickiness in macroeconomic adjustments. |
| Keywords: | New-Keynesian macroeconomics, DSGE, cross-sectional distribution, firm growth |
| JEL: | D12 E52 E43 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp896&r=cba |
| By: | Giovanni Caggiano (Department of Economics, University of Padua, Via del Santo 33, 35123 Padova, Italy.); George Kapetanios (Department of Economics, Queen Mary University of London, Mile End Road, London E1 4NS, United Kingdom.); Vincent Labhard (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Factor based forecasting has been at the forefront of developments in the macroeconometric forecasting literature in the recent past. Despite the flurry of activity in the area, a number of specification issues such as the choice of the number of factors in the forecasting regression, the benefits of combining factor-based forecasts and the choice of the dataset from which to extract the factors remain partly unaddressed. This paper provides a comprehensive empirical investigation of these issues using data for the euro area, the six largest euro area countries, and the UK. JEL Classification: C100,C150,C530. |
| Keywords: | Factors, Large Datasets, Forecast Combinations. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901051&r=cba |
| By: | Clinton R. Shiells; Joseph Francois (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | We offer a duality-based methodology for incorporating multi-sector effects of international trade into open economy macroeconomic models, developing the concepts of the dynamic factor price equalization set and the integrated intertemporal equilibrium. Under this approach, the aggregate production function depends on output prices and factor endowment stocks. It preserves all of the structure of a standard GDP function from the trade theory literature. In a two-country version of the model considered below, we examine the properties of the dynamic factor price equalization set. If the global economy is initially outside of this set, the equations of motion will pull the economy back into this set. Inside the dynamic FPE set, factor prices are equalized internationally, and with identical tastes and technology, the economy can be regarded as a fully integrated world equilibrium in a dynamic sense (the integrated intertemporal equilibrium). In this equilibrium, all of the standard properties of a closed economy one-sector neoclassical growth model hold, ruling out cycles and chaos, and allowing us to characterize the evolution of international inequality and the persistence of productivity and endowment shocks. Working from the integrated intertemporal equilibrium, we identify properties of persistence linked to inequality and real economic shocks. Cross-country differences in per capita incomes and wealth, and the factor content of trading patterns, may persist over time and even into the new steady state. This provides yet another reason why we might observe lack of income convergence internationally. In addition, real shocks in one country may be transmitted to the other country through factor markets and product prices, and may have persistent effects into the steady-state as well. The model can also generate an endogenous Balassa-Samuelson effect. |
| Keywords: | Neoclassical models of trade, economic growth of open economies, cross-country output convergence |
| JEL: | F41 O47 F11 F43 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:52&r=cba |
| By: | René Garcia; Richard Luger |
| Abstract: | We build and estimate an equilibrium model of the term structure of interest rates based on a recursive utility specification. We contrast it with an arbitrage-free model, where prices of risk are estimated freely without preference constraints. In both models, nominal bond yields are affine functions of macroeconomic state variables. The equilibrium model accounts for the tent-shaped pattern and magnitude of coefficients from predictive regressions of excess bond returns on forward rates and the hump-shaped pattern in the term structure of volatilities, while the reduced-form no-arbitrage model does not account for these important features of the yield curve. <P>Nous construisons et évaluons un modèle d’équilibre de la structure par terme des taux d’intérêt, fondé sur une caractéristique de la fonction d’utilité récursive. Nous le comparons à un modèle caractérisé par l’absence d’arbitrage, dans lequel les prix du risque sont estimés librement sans contrainte de préférence. Dans les deux modèles, les rendements des obligations nominales sont des fonctions affines des variables d’état macroéconomique. Le modèle d’équilibre prend en compte le profil en forme de tente (tent-shaped) et l’ampleur des coefficients de régression prédictive relatifs aux rendements des obligations excédant les taux d’intérêt à terme, de même que le profil en forme de bosse (hump-shaped) dans la structure par terme des volatilités, tandis que le modèle à forme réduite et caractérisé par l’absence d’arbitrage ne tient pas compte de ces caractéristiques importantes de la courbe de rendement. |
| Keywords: | Recursive utility, Yield curve, Affine macro-finance model, Bond risk premium, Expectations puzzle, Utilité récursive, courbe de rendement, modèle macrofinancier affine, prime de risque liée aux obligations, perplexité des attentes |
| JEL: | E43 E44 G12 |
| Date: | 2009–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2009s-20&r=cba |
| By: | Piergallini, Alessandro; Rodano, Giorgio |
| Abstract: | Since Leeper's (1991, Journal of Monetary Economics 27, 129-147) seminal paper, an extensive literature has argued that if fiscal policy is passive, that is, guarantees public debt stabilization irrespectively of the inflation path, monetary policy can independently be committed to inflation targeting. This can be pursued by following the Taylor principle, i.e., responding to upward perturbations in inflation with a more than one-for-one increase in the nominal interest rate. This paper considers an optimizing framework in which the government can only finance public expenditures by levying distortionary taxes. It is shown that households' participation constraints and Laffer-type effects may render passive fiscal policies unfeasible. For any given target inflation rate, there exists a threshold level of public debt beyond which monetary policy independence is no longer possible. In such circumstances, the dynamics of public debt can be controlled only by means of higher inflation tax revenues: inflation dynamics in line with the fiscal theory of the price level must take place in order for macroeconomic stability to be guaranteed. Otherwise, to preserve inflation control around the steady state by following the Taylor principle, monetary policy must target a higher inflation rate. |
| Keywords: | Public Debt; Distortionary Taxation; Monetary and Fiscal Policy Rules. |
| JEL: | H31 E63 H63 |
| Date: | 2009–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15348&r=cba |
| By: | Francesco Furlanetto (Norges Bank (Central Bank of Norway)) |
| Abstract: | In this paper we study the impact of an expansion in public spending in a credit constrained economy with sticky wages. The flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages. The introduction of sticky wages, besides being a realistic addition, solves these problems and preserves the expansionary effects on output and consumption. Moreover, once we introduce segmentation in the labor market, sticky wages are even essential to obtain expansionary effects. |
| Keywords: | Sticky wages, rule-of-thumb consumers, fiscal shocks, financial frictions. |
| JEL: | E32 E62 |
| Date: | 2009–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_08&r=cba |
| By: | Ricardo M. Sousa (Economic Policies Research Unit (NIPE) and Department of Economics, University of Minho, Campus of Gualtar, 4710-057 Braga, Portugal.) |
| Abstract: | This paper estimates the wealth effects on consumption in the euro area as a whole. I show that: (i) financial wealth effects are relatively large and statistically significant; (ii) housing wealth effects are virtually nil and not significant; (iii) consumption growth exhibits strong persistence and responds sluggishly to shocks; and (iv) the immediate response of consumption to wealth is substantially different from the long- run wealth effects. By disaggregating financial wealth into its major components, the estimates suggest that wealth effects are particularly large for currency and deposits, and shares and mutual funds. In addition, consumption seems to be very responsive to financial liabilities and mortgage loans. JEL Classification: E21, E44, D12. |
| Keywords: | consumption, housing wealth, financial wealth. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901050&r=cba |
| By: | Bruche, Max; Suarez, Javier |
| Abstract: | This paper develops a tractable general equilibrium model in which money markets provide structural funding to some banks. When bank default risk becomes significant, retail deposit insurance creates an asymmetry between banks that operate in savings-rich regions, which can remain financed at cheap risk-free rates, and in savings-poor regions, which have to pay either large spreads in money markets or high rates for the scarce regional savings. We show that this asymmetry can cause a severe distortion of the aggregate allocation of credit. When interdependencies across borrowers are large (e.g., via demand externalities), output and welfare losses are also large and can be dramatically reduced by an aggressive subsidization of money market borrowing. The analysis offers some insights on the rationale for responding to a money markets freeze with full-allotment fixed-rate lending policies by central banks or the extension of government guarantees on non-deposit liabilities. |
| Keywords: | deposit insurance; financial crisis; money markets; spreads |
| JEL: | E44 G15 G21 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7304&r=cba |
| By: | Hevia, Constantino; Nicolini, Juan Pablo |
| Abstract: | According to the conventional wisdom, when an economy enters a recession and nominal prices adjust slowly, the monetary authority should devalue the domestic currency to make the recession less severe. The reason is that a devaluation of the currency lowers the relative price of non-tradable goods, and this reduces the necessary adjustment in output relative to the case in which the exchange rate remains constant. This paper uses a simple small open economy model with sticky prices to characterize optimal fiscal and monetary policy in response to productivity and terms of trade shocks. Contrary to the conventional wisdom, in this framework optimal exchange rate policy cannot be characterized just by the cyclical properties of output. The source of the shock matters: while recessions induced by a drop in the price of exportable goods call for a devaluation of the currency, those induced by a drop in productivity in the non-tradable sector require a revaluation. |
| Keywords: | Economic Theory&Research,Debt Markets,Emerging Markets,Currencies and Exchange Rates,Economic Stabilization |
| Date: | 2009–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4926&r=cba |
| By: | jair Ojeda Joya |
| Abstract: | This paper provides evidence of long run purchasing power parity by performing a recently developed method to test for unit roots in the presence of structural breaks. Data consist of real exchange rate series for 20 countries including developed and developing economies. Structural breaks are detected in 18 countries and real exchange rates are found to be stationary in all countries except Japan. Estimated linear trends are the result of cross-country total factor productivity differentials between tradable and nontradable sectors. Estimated breaks correspond to large and permanent total factor productivity shocks associated with historical events like wars, structural reforms or deep economic recessions. An exercise with total factor productivity data shows that the Balassa-Samuelson effect explains the estimated long run trends in most countries. |
| Date: | 2009–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005521&r=cba |
| By: | Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Astrid Hirsch (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Liquidity provision through its repo auctions has been one of the main instruments of the European Central Bank (ECB) to address the recent tensions in financial markets since summer 2007. In this paper, we analyse banks’ bidding behaviour in the ECB’s main refinancing operations (MROs) during the ongoing turmoil in money and financial markets. We employ a unique data set comprising repo auctions from March 2004 to October 2008 with bidding data from 877 counterparties. We find that increased bid rates during the turmoil can be explained by, inter alia, the increased individual refinancing motive, the increased attractiveness of the ECB’s tender operations due to its collateral framework and banks’ bidding more aggressively, i.e. at higher rates to avoid being rationed at the marginal rate in times of increased liquidity uncertainty. JEL Classification: E52, D44, C33, C34. |
| Keywords: | Central Bank Auctions, Financial Market Turmoil, Panel Sample Selection Model, Bidding Behavior, Monetary Policy Instruments. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901052&r=cba |
| By: | António Afonso (Technical University of Lisbon, Department of Economics; UECE – Research Unit on Complexity and Economics, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal.); Sebastian Hauptmeier (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| 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. JEL Classification: C23, E62, H62. |
| Keywords: | fiscal regimes, fiscal rules, fiscal decentralization, European Union, panel Data. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901054&r=cba |
| By: | Fernando Alexandre (University of Minho and NIPE); Pedro Bação (University of Coimbra and GEMF); João Cerejeira (University of Minho and NIPE); Miguel Portela (University of Minho, NIPE and IZA) |
| Abstract: | Economic theory and empirical evidence suggest that fluctuations in exchange rates may have strong reallocation effects. Accession to the Exchange Rate Mechanism in 1992, and then to the European Monetary Union in 1999, implied a drastic change in the behaviour of Portugal's exchange rate indexes. The analysis of those indexes is therefore bound to 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 insignificant 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: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2009-05&r=cba |
| By: | Pami Dua |
| Abstract: | This paper investigates the determination of inflation in the framework of an open economy forward-looking as well as conventional backward-looking Phillips curve for eight Asian countries- Japan, Hong Kong, Korea, Singapore, Philippines, Thailand, China Mainland and India. Using Quarterly data and applying the instrumental variables estimation technique, it is found that the output gap is significant in explaining the inflation rate in almost all the countries. Furthermore, at least one measure of international competitiveness has a statistically significant influence on inflation in all the countries. The differences in the developed and developing world are highlighted by the significance of agriculture related supply shocks in determining inflation in the case of developing countries. For all countries, the forward-looking Phillips curve provides a better fit compared to the backward looking variant.[WP 178] |
| Keywords: | Inflation; Open Economy; Phillips Curve; Asian economies; inflation rate; supply shocks; monetary variables; demand factors; domestic factors; external factors; supply factors; devloping countries; developed countriesi |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:1973&r=cba |
| By: | Obinyeluaku, Moses; Viegi, Nicola |
| Abstract: | Fiscal policy can affect monetary policy either through debt monetisation or through a direct effect on price dynamics. The former is the conventional classical view rooted in the quantity theory of money while the latter is the modern view of the Fiscal Theory of Price Determination. Based on the dynamic response of inflation to different shocks, we test the relationship between fiscal balances and monetary stability in 10 SADC countries. Results show that five out of 10 countries considered here were characterised throughout the period 1980-2006 by fiscally dominant regimes, with weak or no response of primary surpluses to public liabilities. The remaining five countries exhibit a monetary dominant regime. The study also finds that changes in primary surpluses affect price variability via aggregate demand, suggesting that fiscal outcomes could be a direct source of inflation variability, hence, the need for policy coordination in the region. |
| Keywords: | African Economic Integration; Fiscal Monetary Policy Coordination; VAR Analysis. |
| JEL: | C22 E63 C01 |
| Date: | 2009–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15372&r=cba |