nep-cba New Economics Papers
on Central Banking
Issue of 2009‒06‒03
fifty-one papers chosen by
Alexander Mihailov
University of Reading

  1. Economic Projections and Rules-of-Thumb for Monetary Policy By Athanasios Orphanides; Volker Wieland
  2. Financial Structure and the Impact of Monetary Policy on Asset Prices By Katrin Assenmacher-Wesche; Stefan Gerlach
  3. Fiscal policy and the global financial crisis By Torben M. Andersen
  4. Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis By Didier SORNETTE; Ryan WOODARD
  5. Central Bank Misperceptions and the Role of Money in Interest Rate Rules By Volker Wieland; Günter W. Beck
  6. Learning, Endogenous Indexation and Disinflation in the New-Keynesian Model By Volker Wieland
  7. Trend inflation, Taylor principle and indeterminacy By Guido Ascari; Tiziano Ropele
  8. Price Adjustment to News with Uncertain Precision By Nikolas Hautsch; Dieter Hess; Christoph Müller
  9. To Combine Forecasts or to Combine Information? By Huiyu Huang; Tae-Hwy Lee
  10. Monetary Policy, Stock Price Misalignments and Macroeconomic Instability By Bask, Mikael
  11. Revealing monetary policy preferences By Christie Smith
  12. Policy announcements and welfare By Christian A. Stoltenberg; Vadym Lepetyuk
  13. Are the Fed’s Inflation Forecasts Still Superior to the Private Sector’s? By Edward N. Gamber; Julie K. Smith
  14. The Effects of Monetary Policy on Unemployment Dynamics Under Model Uncertainty. Evidence from the US and the Euro Area By Carlo Altavilla; Matteo Ciccarelli
  15. Composite indicators for monetary analysis By Andrea Nobili
  16. Expectations, Learning, and the Changing Relationship between Oil Prices and the Macroeconomy By Fabio Milani
  17. Current Account Imbalances and Structural Adjustment in the Euro Area : How to Rebalance Competitiveness By Holger Zemanek; Ansgar Belke; Gunther Schnabl
  18. Do institutional changes affect business cycles? Evidence from Europe By Fabio Canova; Matteo Ciccarelli; Eva Ortega
  19. Multivariate Forecast Errors and the Taylor Rule By Edward N. Gamber; Tara M. Sinclair; H.O. Stekler; Elizabeth Reid
  20. International Evidence On Sticky Consumption Growth By Christopher D. Carroll; Jirka Slacalek; Martin Sommer
  21. Does Trade Integration Alter Monetary Policy Transmission? By Tobias J. Cwik; Gernot J. Müller; Maik Wolters
  22. Accountability and Transparency about Central Bank Preferences for Model Robustness. By Meixing Dai; Eleftherios Spyromitros
  23. Nominal Convergence By Iancu, Aurel
  24. Interest rate convergence in the EMS prior to European Monetary Union By Michael Frömmel; Robinson Kruse
  25. Analyzing Interest Rate Risk: Stochastic Volatility in the Term Structure of Government Bond Yields By Nikolaus Hautsch; Yangguoyi Ou
  26. Interest Rate Convergence in the Euro-Candidate Countries: Volatility Dynamics of Sovereign Bond Yields By Gabrisch, Hurbert; Orlowski, Lucjan
  27. A Dynamic Approach to Interest Rate Convergence in Selected Euro-candidate Countries By Hubert Gabrisch; Lucjan T. Orlowski
  28. Gradualism, transparency and the improved operational framework: a look at the overnight volatility transmission By Silvio Colarossi; Andrea Zaghini
  29. Employment and Exchange rates: the Role of Openness and Technology By Fernando Alexandre; Pedro Bação; João Cerejeira; Miguel Portela
  30. Employment and Exchange Rates: The Role of Openness and Technology By Alexandre, Fernando; Bação, Pedro; Cerejeira, João; Portela, Miguel
  31. Monetary policy and exchange rate overshooting: Dornbusch was right after all By Hilde C. Bjørnland
  32. Banks' intraday liquidity management during operational outages: theory and evidence from the UK payment system By Merrouche, Ouarda; Schanz, Jochen
  33. Comment to "Weak Instruments Robust tests in GMM and the New Keynesian Phillips curve" by Frank Kleibergen and Sophocles Mavroeidis By Fabio Canova
  34. Inflation Targeting Evaluation: Short-run Costs and Long-run Irrelevance By WenShwo Fang; Stephen M. Miller; ChunShen Lee
  35. The Impact of Inflation Targeting on Unemployment in Developing and Emerging Economies By Jose Angelo Divino
  36. Forecasting the Spanish economy with an Augmented VAR-DSGE model By Gonzalo Fernández-de-Córdoba; José L. Torres
  37. Is the Washington Consensus Dead? By Degol Hailu
  38. Opting out of the Great Inflation: German Monetary Policy after the Break Down of Bretton Woods By Andreas Beyer; Vítor Gaspar; Christina Gerberding; Otmar Issing
  39. The Estimation of the New Keynesian Phillips Curve in Japan and Its Implication for the Inflation Response to a Monetary Policy Shock By Masahiko Shibamoto
  40. Bayesian Analysis of Time-Varying Parameter Vector Autoregressive Model for the Japanese Economy and Monetary Policy By Jouchi Nakajima; Munehisa Kasuya; Toshiaki Watanabe
  41. Analysing wage and price dynamics in New Zealand By Ashley Dunstan; Troy Matheson; Hamish Pepper
  42. Forecasting national activity using lots of international predictors: an application to New Zealand By Sandra Eickmeier; Tim Ng
  43. Using wavelets to measure core inflation: the case in New Zealand By David Baqaee
  44. Order flow and exchange rate changes: A look at the NZD/USD and AUD/USD By Nick Smyth
  45. Real-time conditional forecasts with Bayesian VARs: An application to New Zealand By Chris Bloor; Troy Matheson
  46. Isolating a measure of inflation expectations for the South African financial market using forward interest rates By Monique Reid
  47. Measures of Trend Inflation in Hong Kong By Frank Leung; Kevin Chow; Simon Chan
  48. Aggregate and sector-specific exchange rate indexes for the Portuguese economy By Fernando Alexandre; Pedro Bação; João Cerejeira; Miguel Portela
  49. A joint macroeconomic-yield curve model for Hungary By Zoltán Reppa
  50. Convenção e Rigidez na Política Monetária: Uma Estimativa da Função de Reação do BCB – 2000-2007 By André de Melo Modenesi
  51. A Note on Studies of Monetary Policy and Implementation in Vietnam By Tran Tri Dung; Quan-Hoang Vuong

  1. By: Athanasios Orphanides (Central Bank of Cyprus and CFS); Volker Wieland (Goethe University Frankfurt and CFS)
    Abstract: Monetary policy analysts often rely on rules-of-thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules-of-thumb should draw on policymakers' forecasts of key variables such as inflation and unemployment or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor rule that relies on outcomes may be due to systematic responses to information captured in policymakers' own projections. We investigate this proposition in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC's own projections rather than observed outcomes. Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections.
    Keywords: Monetary Policy, Forecasts, FOMC, Policy Rules
    JEL: E52
    Date: 2008–01–02
  2. By: Katrin Assenmacher-Wesche (Swiss National Bank); Stefan Gerlach (IMFS, Goethe University Frankfurt, and CFS)
    Abstract: We study the responses of residential property and equity prices, inflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006, using single-country VARs and panel VARs in which we distinguish between groups of countries depending on their financial systems. The effect of monetary policy on property prices is about three times as large as its impact on GDP. Using monetary policy to guard against financial instability by offsetting asset-price movements thus has sizable effects on economic activity. While the financial structure influences the impact of policy on asset prices, its importance appears limited
    Keywords: Asset Prices, Monetary Policy, Panel VARComplementarity, Exchange Rate Pass-Through
    JEL: C23 E52
    Date: 2008–09–10
  3. By: Torben M. Andersen (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: The financial crisis raises demands for fiscal policy interventions. While a fall in aggregate demand is an important consequence of the crisis, it also reflects more underlying structural problems and changes. Hence, appropriate policy designs have to take account of the nature of the crisis and the underlying need for structural changes. While fiscal policy should mainly rely on automatic stabilizers in normal situations, a more active fiscal policy strategy is called for in the present situation. The effectiveness of various types of fiscal instruments and conceivable tensions between short and long-run objectives are discussed. Past experience shows that deep recessions become persistent due to marginalization of unemployed, and therefore labour market policies have to be considered as an integral part of policy packages. Finally the question of international policy coordination is addressed.
    Keywords: automatic stabilizers, discretionary policy, structural changes, labour market policy
    JEL: E3 E6 H2 H5
    Date: 2009–06–03
  4. By: Didier SORNETTE (ETH Zurich and Swiss Finance Institute); Ryan WOODARD (ETH Zurich)
    Abstract: The financial crisis of 2008, which started with an initially well-defined epicenter focused on mortgage backed securities (MBS), has been cascading into a global economic recession, whose increasing severity and uncertain duration has led and is continuing to lead to massive losses and damage for billions of people. Heavy central bank interventions and government spending programs have been launched worldwide and especially in the USA and Europe, with the hope to unfreeze credit and boltster consumption. Here, we present evidence and articulate a general framework that allows one to diagnose the fundamental cause of the unfolding financial and economic crisis: the accumulation of several bubbles and their interplay andmutual reinforcement has led to an illusion of a “perpetual money machine” allowing financial institutions to extract wealth from an unsustainable artificial process. Taking stock of this diagnostic, we conclude that many of the interventions to address the so-called liquidity crisis and to encourage more consumption are ill-advised and even dangerous, given that precautionary reserves were not accumulated in the “good times” but that huge liabilities were. The most “interesting” present times constitute unique opportunities but also great challenges, for which we offer a few recommendations.
    Keywords: Financial crisis, bubbles, real estate, derivatives, out-of-equilibrium, super-exponential growth, crashes, complex systems
    JEL: O16
  5. By: Volker Wieland (Goethe University Frankfurt, CEPR, CFS and SCID); Günter W. Beck (Goethe University Frankfurt and CFS)
    Abstract: Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.
    Keywords: Taylor Rules, Money, Quantity Theory, Output Gap Uncertainty, Monetary Policy Under Uncertainty
    JEL: E32 E41 E43 E52 E58
    Date: 2008–01–08
  6. By: Volker Wieland (Goethe University Frankfurt and CFS)
    Abstract: This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode price-setting firms’ expect inflation to be highly persistent and opt for backward-looking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation is found to influence the likelihood that firms switch from backward-looking indexation to the central bank’s targets. As firms abandon backward-looking indexation the costs of disinflation decline further. We show that an inflation targeting strategy that employs temporary targets can benefit from lower disinflation costs due to the reduction in backward-looking indexation.
    Keywords: Learning, Monetary Policy, New-Keynesian Model, Indexation, Inflation Targeting, Disinflation, Recursive Least Squares
    JEL: E32 E41 E43 E52 E58
    Date: 2008–10–03
  7. By: Guido Ascari (University of Pavia); Tiziano Ropele (Bank of Italy, Economic Research Unit, Genova Branch)
    Abstract: Even low levels of trend inflation substantially affect the dynamics of a basic new Keynesian DSGE model when monetary policy is conducted by a contemporaneous Taylor rule. Positive trend inflation shrinks the determinacy region. Neither the Taylor principle, which requires the inflation coefficient to be greater than one, nor the generalized Taylor principle, which requires that in the long run the nominal interest rate should be raised by more than the increase in inflation, is a sufficient condition for local determinacy of equilibrium. This finding holds for different types of Taylor rules, inertial policy rules and price indexation schemes. Therefore, regardless of the theoretical set up, the monetary literature on Taylor rules cannot disregard average inflation in both theoretical and empirical analysis.
    Keywords: sticky prices, Taylor rules, trend inflation
    JEL: E31 E52
    Date: 2009–05
  8. By: Nikolas Hautsch (School of Business and Economics as well as CASE – Center for Applied Statistics and Economics, Humboldt-Universit¨at zu Berlin); Dieter Hess (University of Cologne); Christoph Müller (University of Cologne)
    Abstract: Bayesian learning provides the core concept of processing noisy information. In standard Bayesian frameworks, assessing the price impact of information requires perfect knowledge of news’ precision. In practice, however, precision is rarely dis- closed. Therefore, we extend standard Bayesian learning, suggesting traders infer news’ precision from magnitudes of surprises and from external sources. We show that interactions of the different precision signals may result in highly nonlinear price responses. Empirical tests based on intra-day T-bond futures price reactions to employment releases confirm the model’s predictions and show that the effects are statistically and economically significant.
    Keywords: Bayesian Learning, Macroeconomic Announcements, Information Quality, Precision Signals
    JEL: E44 G14
    Date: 2008–06–01
  9. By: Huiyu Huang (PanAgora Asset Management); Tae-Hwy Lee (Department of Economics, University of California Riverside)
    Abstract: When the objective is to forecast a variable of interest but with many explanatory variables available, one could possibly improve the forecast by carefully integrating them. There are generally two directions one could proceed: combination of forecasts (CF) or combination of information (CI). CF combines forecasts generated from simple models each incorporating a part of the whole information set, while CI brings the entire information set into one super model to generate an ultimate forecast. Through linear regression analysis and simulation, we show the relative merits of each, particularly the circumstances where forecast by CF can be superior to forecast by CI, when CI model is correctly specified and when it is misspecified, and shed some light on the success of equally weighted CF. In our empirical application on prediction of monthly, quarterly, and annual equity premium, we compare the CF forecasts (with various weighting schemes) to CI forecasts (with principal component approach mitigating the problem of parameter proliferation). We find that CF with (close to) equal weights is generally the best and dominates all CI schemes, while also performing substantially better than the historical mean.
    Keywords: Equally weighted combination of forecasts, Equity premium, Factor models, Fore- cast combination, Forecast combination puzzle, Information sets, Many predictors, Principal components, Shrinkage
    JEL: C3 C5 G0
    Date: 2006–03
  10. By: Bask, Mikael (Hanken School of Economics)
    Abstract: We augment the standard New Keynesian model for  monetary policy design with stock prices in the  economy and stock traders wh use a mix of fundamental  and technical analyses. The central question in  this paper is whether macroeconomic stability can  be achieved by an appropriate policy by the central  ank? In contrast with most of previous literature,  we argue that the central bank should augment the  interest rate rule with a term for stock price  misalignments since a determiate and stable rational  expectations equilibrium in the economy is then easier  to achieve. This equilibrium is stable under least  squares learning as well. Another interesting finding is  that inertia in monetary policy does not promote macroeconomic  stability when technical analysis plays a major role  in stock trading. Even worse, if the central bank in its  policy only indirectly responds to stock price misalignments  via its effect on the inflation rate, a combination of strong  inertia in monetary policy and a significant role for  technical analysis in stock trading will lead to macroeconomic instability.  
    Keywords: Bubble Policy;  Fundamental Analysis;  Interest Rate Rule;  Least Squares Learning;  Macroeconomic Stability;  Stock Price Bubble;  Taylor Rule;  Technical Analysis
    Date: 2009–06–05
  11. By: Christie Smith (Reserve Bank of New Zealand)
    Abstract: This paper uses multiple criteria decision making, also termed conjoint analysis,to reveal the preferences of central bank policy-makers at the Reserve Bank of New Zealand. Guided by the Policy Targets Agreement between the Governor of the Reserve Bank and the Minister of Finance, we identify policy-makers’ willingness to trade off inflation outcomes for reductions in volatility in GDP, the exchange rate, and interest rates. Using 1000Minds software, policy-makers are presented with a sequence of pairwise choices that ultimately quantify which macroeconomic attributes are most important to them. The paper also distinguishes between the preferences of senior management, and a broader cross-section of economists and other staff.
    JEL: E52 E58 D78
    Date: 2009–04
  12. By: Christian A. Stoltenberg (University of Amsterdam); Vadym Lepetyuk (Universidad de Alicante)
    Abstract: In the presence of idiosyncratic risk, the public revelation of information about uncertain aggregate outcomes such as policy choices can be detrimental to social welfare. By announcing informative signals on non-insurable aggregate risk, the policy maker distorts agents¿ insurance incentives and increases the riskiness of the optimal allocation that is feasible in self-enforceable arrangements. As an application, we consider a monetary authority that may reveal changes in the inflation target, and document that the negative effect of distorted insurance incentives can very well dominate conventional effects in favor for the release of better information.
    Keywords: social value of information, policy announcements, monetary policy, transparency
    JEL: D81 D86 E21 E52 E65
    Date: 2009–01
  13. By: Edward N. Gamber (Department of Economics and Business, Lafayette College); Julie K. Smith (Department of Economics and Business,Lafayette College)
    Abstract: We examine the relative improvement in forecasting accuracy of the Federal Reserve (Greenbook forecasts) and private-sector forecasts (the Survey of Professional Forecasters and Blue Chip Economic Indicators) for inflation. Previous research by Romer and Romer (2000), and Sims (2002) shows that the Fed is more accurate than the private sector at forecasting inflation. In a separate line of research, Atkeson and Ohanian (2001) and Stock and Watson (2007) document changes in the forecastability of inflation since the Great Moderation. These works suggest that the reduced inflation variability associated with Great Moderation was mostly due to a decline in the variability of the predictable component inflation. We hypothesize that the decline in the variability of the predictable component of inflation has evened the playing field between the Fed and private sector and therefore led to a narrowing, if not disappearance, of the Fed’s relative forecasting advantage. We find that the Fed’s forecast errors remain significantly smaller than the private sector’s but the gap has narrowed considerable since the mid-1980s, especially after 1994.
    Keywords: forecasting inflation, Survey of Professional Forecasters, Blue Chip forecasts,Greenbook forecasts, naïve forecasts
    JEL: E37
    Date: 2007–11
  14. By: Carlo Altavilla (University of Naples Parthenope and CSEF); Matteo Ciccarelli (European Central Bank)
    Abstract: This paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule-based monetary policy on unemployment dynamics in the euro area and the US. We employ a Bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy. We find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions. Moreover, monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism. Finally, we show that a policy maker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism, but also about the differences between the euro area and the US, which are on average essentially small.
    Keywords: Monetary policy, Model uncertainty, Bayesian model averaging, Unemployment gap, Taylor rule
    JEL: C11 E24 E52 E58
    Date: 2009–06–07
  15. By: Andrea Nobili (Bank of Italy)
    Abstract: The prominent role assigned to money by the ECB has been the subject of an intense debate because of the declining predictive power of the monetary aggregate M3 for inflation in recent years. This paper reassesses the information content of monetary analysis for future inflation using dynamic factors extracted from a new and richer cross-section of data including the monetary aggregate M3, its components and counterparts, and a detailed breakdown of deposits and loans at sectoral level. Weighting monetary and credit variables according to their signal to noise ratio allows us to downplay those that in recent times contributed significantly to the deterioration of the information content of the M3. Factor-model based inflation forecasts turn out to be more accurate than those produced by traditional competitor models at the relevant policy horizon of six-quarters ahead. All in all, our results support the view that an analysis based on a large set of monetary and credit variables is a more useful tool for assessing risks to price stability than one that simply focuses on the dynamic of the overall monetary aggregate M3.
    Keywords: monetary analysis, factor models, forecasting
    JEL: C22 E37 E50
    Date: 2009–05
  16. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper estimates a structural general equilibrium model to investigate the changing relationship between the oil price and macroeconomic variables. The oil price, through the role of oil in production and consumption, affects aggregate demand and supply in the model. The assumption of rational expectations is relaxed in favor of learning. Oil prices, therefore, affect the economy through an additional channel, i.e. through their effect on the formation of agents' beliefs. The estimated learning dynamics indicates that economic agents' perceptions about the effects of oil prices on the economy have changed over time: oil prices were perceived to have large effects on output and inflation in the 1970s, but only milder effects after the mid-1980s. Since expectations play a large role in the determination of output and inflation, the effects of oil price increases on expectations can magnify the response of macroeconomic variables to oil price shocks. In the estimated model, in fact, the implied responses of output and inflation to oil price shocks were much more pronounced in the 1970s than in 2008. Therefore, through the time variation in the impact of oil prices on beliefs, the paper can successfully explain the observed weakening of the effects of oil price shocks on real activity and inflation.
    Keywords: Oil price; Inflation expectations; Learning; Monetary policy, Effect of energy shocks; Bayesian estimation
    JEL: E31 E52 E58 F43
    Date: 2009–06
  17. By: Holger Zemanek; Ansgar Belke; Gunther Schnabl
    Abstract: Low international competitiveness of a set of euro area countries, which have become evident by large current account deficits and rising risk premiums on government bonds, is one of the most challenging economic policy issues for Europe. We analyse the role of private restructuring and public structural reforms for the urgently needed readjustment of intra-euro area imbalances. A panel regression reveals a significant impact of private restructuring and public structural reforms on intra-euro area competitiveness. This implies that private restructuring and public reforms are rather than public transfers the best way to preserve long-term economic stability in Europe.
    Keywords: Structural reforms, competitiveness, current account imbalances, euro area, European Monetary Union, dynamic panel estimation, interaction term
    JEL: E24 F15 F16 F32 F33
    Date: 2009
  18. By: Fabio Canova; Matteo Ciccarelli; Eva Ortega
    Abstract: We study the effects that the Maastricht treaty, the creation of the ECB, and the Euro changeover had on the dynamics of European business cycles using a panel VAR and data from ten European countries - seven from the Euro area and three outside of it. There are slow changes in the features of business cycles and in the transmission of shocks. Time variations appear to be unrelated to the three events of interest and instead linked to a process of European convergence and synchronization.
    Keywords: Business cycles, EuropeanMonetary Union, Panel VAR, Structural changes
    JEL: C15 C33 E32 E42
    Date: 2009–03
  19. By: Edward N. Gamber (Department of Economics and Business, Lafayette College); Tara M. Sinclair (Department of Economics, George Washington University); H.O. Stekler (Department of Economics, George Washington University); Elizabeth Reid (Department of Economics, George Washington University)
    Abstract: This paper presents a new methodology to evaluate the impact of forecast errors on policy. We apply this methodology to the Federal Reserve forecasts of U.S. real output growth and the inflation rate using the Taylor (1993) monetary policy rule. Our results suggest it is possible to calculate policy forecast errors using joint predictions for a number of variables. These policy forecast errors have a direct interpretation for the impact of forecasts on policy. In the case of the Federal Reserve, we find that, on average, Fed policy based on the Taylor rule was approximately a full percentage point away from the intended target because of errors in forecasting growth and inflation.
    Keywords: Forecast Evaluation, Federal Reserve Forecasts, Monetary Policy
    JEL: C53 E37 E52 E58
    Date: 2008–04
  20. By: Christopher D. Carroll (Johns Hopkins University); Jirka Slacalek (European Central Bank); Martin Sommer (International Monetary Fund)
    Abstract: We estimate the degree of ‘stickiness’ in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption-growth and Campbell-Mankiw models work about equally well.
    Keywords: Sticky Expectations, Consumption Dynamics, Habit Formation.
    JEL: E21 F41
    Date: 2008–03–03
  21. By: Tobias J. Cwik (Goethe Uniyversity Frankfurt); Gernot J. Müller (Goethe University Frankfurt); Maik Wolters (Goethe University Frankfurt)
    Abstract: This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation. Although the strength of this effect increases with economic openness, it also requires that import prices respond to exchange rate changes. In this case domestic producers find it optimal to adjust their prices to exchange rate changes which alter the domestic currency price of their foreign competitors. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on U.S. time series relative to an aggregate of industrialized countries. While we find evidence for strong complementarities, exchange rate pass-through is limited. Openness has therefore little bearing on monetary transmission in the estimated model.
    Keywords: Monetary Policy Transmission, Open Economy, Trade Integration, Exchange Rate Channel, Strategic Complementarity, Exchange Rate Pass-Through
    JEL: F41 F42 E32
    Date: 2008–08–18
  22. By: Meixing Dai; Eleftherios Spyromitros
    Abstract: Using a New Keynesian model subject to misspecifications, we examine the accountability issue in a framework of delegation where government and private agents are uncertain about the central bank’s preference for model robustness. We show that, in the benchmark case of full transparency, the optimal inflation targeting weight (or penalty) is decreasing with the preference for robustness. Departing from the benchmark equilibrium, the central bank has then incentive to be less transparent in order to reduce the optimal inflation targeting weight and thus to become more independent vis-à-vis the government. We also find that greater opacity will increase the sensibility of inflation and model misspecification to the inflation shock but will decrease that of output-gap. Since macroeconomic volatility could be increased or decreased under more opacity, there could exist in some cases a trade-off between the level and the variability of inflation (and output gap). Persistent inflation shocks could be associated with a higher inflation targeting weight as well as a higher sensibility of inflation and output gap to the inflation shock but a lower sensibility of model misspecification.
    Keywords: Central bank accountability, model uncertainty, monetary policy transparency.
    JEL: E42 E52 E58
    Date: 2009
  23. By: Iancu, Aurel
    Abstract: After presenting the institutional construction during the pre-accession and post-accession to the Economic and Monetary Union (EMU), the exchange rate mechanisms (ERM) in several countries and the convergence criteria, we go on with a brief analysis of the way the CEE countries cope with the convergence criteria in accordance with the Maastricht Treaty. Then, the study deals with a topic often discussed in the scientific literature and included on the agenda of decision-makers at various levels, in order to clarify the following major issues: a shorter transition to the euro, the exchange rate equilibrium versus the inflation rate diminution and the Balassa-Samuelson effect, the exchange rates and the exchange rate deviation index, evidences concerning the real exchange rate equilibrium and the appreciation of the exchange rate in the CEE countries.
    Keywords: Convergence criteria, exchange rate, exchange rate mechanisms, Euro Area, Balassa-Samuelson effect, tradable goods, non-tradable goods, exchange rate deviation index, purchasing power parity
    JEL: F31 F33 O43 O47
    Date: 2009–06
  24. By: Michael Frömmel (Ghent University); Robinson Kruse (Aarhus University and CREATES)
    Abstract: In this paper we analyze the convergence of interest rates in the European Monetary System (EMS) in a framework of changing persistence. This allows us to estimate the exact date of full convergence from the data. A change in persistence means that a time series switches from stationarity to non-stationarity, or vice versa. It is often argued that due to the specific historical situation in the EMS the interest rate differential was non-stationary before the full convergence of interest rates was achieved and stationary afterwards. Our empirical results suggest that the convergence date has been very different for Belgium, France, the Netherlands and Italy and are in line with the conclusions one would draw from a narrative approach. We compare three different estimators for the convergence date and find that the results are quite robust. Our results therefore stress the importance of credibility for monetary policy.
    Keywords: Interest rates, convergence, changing persistence, EMS, EMU
    JEL: C22 F33 F36
    Date: 2009–06–02
  25. By: Nikolaus Hautsch (Humboldt-Universität zu Berlin); Yangguoyi Ou (Humboldt-Universität zu Berlin)
    Abstract: We propose a Nelson-Siegel type interest rate term structure model where the underlying yield factors follow autoregressive processes with stochastic volatility. The factor volatilities parsimoniously capture risk inherent to the term structure and are associated with the time-varying uncertainty of the yield curve’s level, slope and curvature. Estimating the model based on U.S. government bond yields applying Markov chain Monte Carlo techniques we find that the factor volatilities follow highly persistent processes. We show that slope and curvature risk have explanatory power for bond excess returns and illustrate that the yield and volatility factors are closely related to industrial capacity utilization, inflation, monetary policy and employment growth.
    Keywords: Term Structure Modelling, Yield Curve Risk, Stochastic Volatility, Factor Models, Macroeconomic Fundamentals
    JEL: C5 E4 G1
    Date: 2009–01–03
  26. By: Gabrisch, Hurbert (Halle Institute for Economic Research); Orlowski, Lucjan (John F. Welch College of Business, Sacred Heart University)
    Abstract: We advocate a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, we test empirically volatility dynamics of the ten-year sovereign bond yields of the 2004 EU accession countries in relation to the eurozone yields during the January 2, 2001- January 22, 2009 sample period. Our results show a varied degree of bond yield co-movements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, we find some divergence of relative bond yields. We argue that a ‘static’ specification of the Maastricht criterion for long-term bond yields is not fully conducive for advancing stability of financial systems in the euro-candidate countries.
    Keywords: interest rate convergence, common currency area, new EU Member States, interest rate risk, GARCH
    JEL: E44 F36
    Date: 2009–04
  27. By: Hubert Gabrisch; Lucjan T. Orlowski
    Abstract: We advocate a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, we empirically test volatility dynamics of the ten-year sovereign bond yields of the 2004 EU accession countries in relation to the eurozone yields during the January 2, 2001 untill January 22, 2009 sample period. Our results show a varied degree of bond yield co-movements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, we find some divergence of relative bond yields. We argue that a ‘static’ specification of the Maastricht criterion for long-term bond yields is not fully conducive for advancing stability of financial systems in the euro-candidate countries.
    Date: 2009–05
  28. By: Silvio Colarossi (Bank of Italy); Andrea Zaghini (Bank of Italy)
    Abstract: This paper proposes a possible way of assessing the effect on interest rate dynamics of changes in the decision-making approach, in the communication strategy and in the operational framework of a central bank. Through a GARCH specification we show that the US and the euro area displayed a limited but significant spillover of volatility from money market to longer-term rates. We then checked the stability of this phenomenon in the most recent period of improved policy-making and found empirical evidence to show that the transmission of overnight volatility along the yield curve had entirely vanished.
    Keywords: monetary policy, yield curve, GARCH
    JEL: E4 E5 G1
    Date: 2009–05
  29. By: Fernando Alexandre (Escola de Economia e Gestão and NIPE, University of Minho); Pedro Bação (University of Coimbra and GEMF); João Cerejeira (Escola de Economia e Gestão and NIPE, University of Minho); Miguel Portela (Escola de Economia e Gestão and NIPE, University of Minho and IZA)
    Abstract: Real exchange rate movements are important drivers of the reallocation of resources between sectors of the economy. Economic theory suggests that the impact of exchange rates should vary with the degree of exposure to international competition and with the technology level. This paper contributes by bringing together these two views, both theoretically and empirically. We show that both the degree of openness and the technology level mediate the impact of exchange rate movements on labour market developments. According to our estimations, whereas employment in high-technology sectors seems to be relatively immune to changes in real exchange rates, these appear to have sizable and significant effects on highly open low-technology sectors. The analysis of job flows suggests that the impact of exchange rates on these sectors occurs through employment destruction.
    Keywords: Exchange Rates, International Trade, Job Flows.
    JEL: J23 F16 F41
    Date: 2009–05
  30. By: Alexandre, Fernando (University of Minho); Bação, Pedro (University of Coimbra); Cerejeira, João (University of Minho); Portela, Miguel (University of Minho)
    Abstract: Real exchange rate movements are important drivers of the reallocation of resources between sectors of the economy. Economic theory suggests that the impact of exchange rates should vary with the degree of exposure to international competition and with the technology level. This paper contributes by bringing together these two views, both theoretically and empirically. We show that both the degree of openness and the technology level mediate the impact of exchange rate movements on labour market developments. According to our estimations, whereas employment in high-technology sectors seems to be relatively immune to changes in real exchange rates, these appear to have sizable and significant effects on highly open low-technology sectors. The analysis of job flows suggests that the impact of exchange rates on these sectors occurs through employment destruction.
    Keywords: exchange rates, international trade, job flows
    JEL: J23 F16 F41
    Date: 2009–05
  31. By: Hilde C. Bjørnland (Norwegian School of Management (BI), Norges Bank (Central Bank of Norway) and UC Berkeley)
    Abstract: Dornbusch's exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has been viewed by some researchers as a "stylized fact" to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restrictions on them. In contrast, we achieve identification by imposing a long-run neutrality restriction on the real exchange rate, thereby allowing for contemporaneous interaction between the interest rate and the exchange rate. In a study of four open economies, we find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate, which appreciates on impact. The maximum effect occurs within 1-2 quarters, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.
    Keywords: Exchange rate, uncovered interest parity (UIP), Dornbusch overshooting, monetary policy, Structural VAR.
    JEL: E32 E52 F31 F41
    Date: 2009–06–05
  32. By: Merrouche, Ouarda (Bank of England); Schanz, Jochen (Bank of England)
    Abstract: We investigate how settlement banks in CHAPS, the United Kingdom's large-value payment system, deal with operational risk. In particular, we are interested in payments behaviour towards a bank that is, for operational reasons, unable to make but able to receive payments. If other banks did not sufficiently monitor their outgoing payments, operational shocks could impact the entire payment system because the affected bank may absorb liquidity from the system. We first build a game-theoretic model in which a bank's decision to make payments depends both on whether another bank experiences operational problems, and on the time of day at which the outage occurs. We then investigate these reactions empirically using a non-parametric method. Our theory predicts that banks stop paying to a bank which has been unable to make payments early in the day, when they are uncertain about the payment instructions they might have to execute. When this uncertainty has been resolved (later in the day), healthy banks make payments even to a bank experiencing the operational problem. Both predictions are supported by the data. We show that this behaviour effectively contains the disruption caused by the operational outage: payment flows between healthy banks are largely unaffected.
    Keywords: Payment system; operational outages; liquidity sink
    JEL: E50 G20
    Date: 2009–06–08
  33. By: Fabio Canova
    Abstract: I discuss the identifiability of a structural New Keynesian Phillips curve when it is embedded in a small scale dynamic stochastic general equilibrium model. Identification problems emerge because not all the structural parameters are recoverable from the semi-structural ones and because the objective functions I consider are poorly behaved. The solution and the moment mappings are responsible for the problems.
    Keywords: Identification, DSGE models, New Keynesian Phillips curve, Identification robust estimation methods
    JEL: C10 C52 E32 E50
    Date: 2009–01
  34. By: WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada, las Vegas); ChunShen Lee (Feng Chia University)
    Abstract: Recent studies evaluate the effectiveness of inflation targeting through the average treatment effect and generally conclude the window-dressing view of the monetary policy for industrial countries. This paper argues that the evidence of irrelevance emerges because of a time-varying relationship (treatment effect) between the monetary policy and its effects on economic performance over time. Targeters achieve lower inflation immediately following the adoption of the policy as well as temporarily slower output growth and higher inflation and output growth variability. But these short-run effects will eventually disappear in the long run. This paper finds substantial empirical evidence for the existence of such intertemporal tradeoffs for eight industrial inflation-targeting countries. That is, targeting inflation significantly reduces inflation at the costs of a lower output growth and higher inflation and growth variability in the short-run, but no substantial effects in the medium to the long-run.
    Keywords: inflation targeting, time-varying treatment effects, short-run costs, long-run irrelevance
    JEL: C23 E52
    Date: 2009–06
  35. By: Jose Angelo Divino (Catholic University of Brasilia)
    Abstract: Several countries around the world have adopted the inflation targeting regime for monetary policy. Despite the growing literature on the issue, it is not clear whether developing and emerging countries can improve their economic performance by adopting inflation targeting. This working paper examines the extent to which macroeconomic policies anchored to inflation targeting affect unemployment, economic growth and the output gap. The results show that inflation targeting causes no harm to employment in developing and emerging countries. On the contrary, it might reduce average unemployment and narrow the output gap. Given that the change in regime must be accompanied by institutional and economic reforms to fiscal and exchange rate policies, targeters might be better off than non-targeters. Hence there is no apparent reason to condemn the adoption of the inflation targeting regime by developing and emerging countries. (...)
    Keywords: The Impact of Inflation Targeting on Unemployment in Developing and Emerging Economies
    Date: 2009–06
  36. By: Gonzalo Fernández-de-Córdoba (Universidad de Salamanca); José L. Torres (Universidad de Málaga)
    Abstract: During the past ten years Dynamic Stochastic General Equilibrium (DSGE) models have become an important tool in quantitative macroeconomics. However, DSGE models was not considered as a forecasting tool until very recently. The objective of this paper is twofold. First, we compare the forecasting ability of a canonical DSGE model for the Spanish economy with other standard econometric techniques. More precisely, we compare out-of-sample forecasts coming from different estimation methods of the DSGE model to the forecasts produced by a VAR and a Bayesian VAR. Second, we propose a new method for combining DSGE and VAR models (Augmented VAR-DSGE) through the expansion of the variable space where the VAR operates with artificial series obtained from a DSGE model. The results indicate that the out-of-sample forecasting performance of the proposed method outperforms all the considered alternatives.
    Keywords: DSGE models, forecasting, VAR, BVAR
    JEL: C53 E32 E37
    Date: 2009–05
  37. By: Degol Hailu (UNDP SURF)
    Abstract: The recent G20 meeting in London elevated the International Monetary Fund (IMF) to a new level. Its lending capacity was tripled to US$750 billion. In the aftermath of World War II, the IMF was established to deal with declining commodity prices and deteriorating international trade. During the oil price shocks of the 1970s the IMF became lender of last resort, mainly to countries with balance of payments problems. The debt crisis of the early 1980s in Latin America gave the Fund further impetus. By the mid 1980s the IMF and the World Bank had become policy architects in low-income countries. The 1998 Asian financial crisis brought the IMF to the forefront of crisis management. In 2009, we are again at another milestone?the Fund is back with even greater influence. (...)
    Keywords: Is the Washington Consensus Dead?
    Date: 2009–04
  38. By: Andreas Beyer (European Central Bank); Vítor Gaspar (Banco de Portugal); Christina Gerberding (Deutsche Bundesbank); Otmar Issing (Center for Financial Studies)
    Abstract: During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time.
    Keywords: Inflation, Price Stability, Monetary Policy, Monetary Targeting, Policy Rules
    JEL: E31 E32 E41 E52 E58
    Date: 2009–01–16
  39. By: Masahiko Shibamoto (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: The New Keynesian Phillips Curve (NKPC) is a key building block in many modern macroeconomic models. This study assesses the empirical fit of the NKPC in Japan by estimating a variety of its specifications. Some empirical results suggest that introducing nominal interest rates into the pure forward-looking NKPC, which implies the existence of a cost channel for monetary policy, helps improve their ability to explain Japanese inflation dynamics. In addition to the existence of the cost channel for monetary policy, these results show that the use of labor share (real unit labor costs) is an important factor in estimating the NKPC. As an implication of these findings, this study proposes that, in the context of the New Keynesian economics, both the existence of the cost channel for monetary policy and the sluggish adjustment of real unit labor costs can account for the fact that there is a long time lag between a monetary policy shock and its impact on inflation.
    Keywords: New Keynesian Phillips Curve, Cost Channel of Monetary Policy, Inflation Responses to a Monetary Policy Shock
    JEL: C3 E3 E5
    Date: 2009–01
  40. By: Jouchi Nakajima (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Munehisa Kasuya (Research and Statistics Department, Bank of Japan (E-mail:; Toshiaki Watanabe (Professor, Institute of Economic Research, Hitotsubashi University, and Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper analyzes the time-varying parameter vector autoregressive (TVP-VAR) model for the Japanese economy and monetary policy. The time-varying parameters are estimated via the Markov chain Monte Carlo method and the posterior estimates of parameters reveal the time-varying structure of the Japanese economy and monetary policy during the period from 1981 to 2008. The marginal likelihoods of the TVP-VAR model and other VAR models are also estimated. The estimated marginal likelihoods indicate that the TVP-VAR model best fits the Japanese economic data.
    Keywords: Bayesian inference, Markov chain Monte Carlo, Monetary policy, State space model, Structural vector autoregressive model, Stochastic volatility, Time-varying parameter
    JEL: C11 C15 E52
    Date: 2009–05
  41. By: Ashley Dunstan; Troy Matheson; Hamish Pepper (Reserve Bank of New Zealand)
    Abstract: This paper examines the relationship between wages and consumer prices in New Zealand over the last 15 years. Reflecting the open nature of the New Zealand economy, the headline CPI is disaggregated into non-tradable and tradable prices. We find that there is a joint causality between wages and disaggregate inflation. An increase in wage inflation forecasts an increase in non-tradable inflation. However, it is tradable inflation that drives wage inflation. While exogenous shocks to wages do not help to forecast inflation, the leading relationship from wages to non-tradable inflation implies that monitoring wages may prove useful for projecting the impact of other shocks on future inflation.
    JEL: C32 E24 E31
    Date: 2009–06
  42. By: Sandra Eickmeier; Tim Ng (Reserve Bank of New Zealand)
    Abstract: This paper examines the relationship between wages and consumer prices in New Zealand over the last 15 years. Reflecting the open nature of the New Zealand economy, the headline CPI is disaggregated into non-tradable and tradable prices. We find that there is a joint causality between wages and disaggregate inflation. An increase in wage inflation forecasts an increase in non-tradable inflation. However, it is tradable inflation that drives wage inflation. While exogenous shocks to wages do not help to forecast inflation, the leading relationship from wages to non-tradable inflation implies that monitoring wages may prove useful for projecting the impact of other shocks on future inflation.
    JEL: C53 F47 C33
    Date: 2009–05
  43. By: David Baqaee (Reserve Bank of New Zealand)
    Abstract: This paper uses wavelets to develop a core inflation measure for inflation targeting central banks. The analysis is applied to the case of New Zealand – the country with the longest history of explicit inflation targeting. We compare the performance of our proposed measure against some popular alternatives. Our measure does well at identifying a reliable medium-term trend in inflation. It also has comparable forecasting performance to standard benchmarks.
    JEL: C32 E31 E52 E58
    Date: 2009–05
  44. By: Nick Smyth (Reserve Bank of New Zealand)
    Abstract: In this paper, we apply a series of empirical microstructure tests to the NZD/USD and AUD/USD. In contrast to a more traditional macro approach to explaining exchange rate changes, microstructure studies focus on the role that transactions play in helping the market aggregate information on individual market participants expectations of economic fundamentals and risk preferences. Our data comes from the Reuters Spot Matching service, the main interbank trading platform in both currency pairs, and covers almost five and a half years of transactions from January 2001 to March 2006, a much longer and more representative time series than many empirical microstructure applications to date. We find that there is a strong contemporaneous relationship between net order flow (the net of buyerinitiated and seller-initiated transactions) and changes in the NZD/USD and AUD/USD at frequencies from one minute to one week, similar to studies on other currencies. We also find that cross-currency order flow has a positive association with changes in the other exchange rate (ie AUD/USD order flow has a positive contemporaneous relationship with changes in the NZD/USD). Finally, we examine a wide range of New Zealand, Australian and US data releases and central bank interest rate decisions and find that order flow plays an important role in communicating different interpretations of macroeconomic news.
    JEL: F31 G14
    Date: 2009–04
  45. By: Chris Bloor; Troy Matheson (Reserve Bank of New Zealand)
    Abstract: We develop a large Bayesian VAR (BVAR) model of the New Zealand economy that incorporates the conditional forecasting estimation techniques of Waggoner and Zha (1999). We examine the real-time forecasting performance as the size of the model increases using an unbalanced data panel. In a realtime out-of-sample forecasting exercise, we find that our BVAR methodology outperforms univariate and VAR benchmarks, and produces comparable forecast accuracy to the judgementally-adjusted forecasts produced internally at the Reserve Bank of New Zealand. We analyse forecast performance and find that, while there are trade offs across different variables, a 35 variable BVAR generally performs better than 8, 13, or 50 variable specifications for our dataset. Finally, we demonstrate techniques for imposing judgement and for forming a semi-structural interpretation of the BVAR forecasts.
    JEL: C11 C13 C53
    Date: 2009–04
  46. By: Monique Reid (Department of Economics, University of Stellenbosch)
    Abstract: The inflation expectations channel of the transmission mechanism is generally recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa and offers an additional method, which is market based. The methodologies of Nelson and Siegel (1987) and Svensson (1994) are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market’s inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight.
    Keywords: South Africa, Inflation expectations, Monetary policy transmission mechanism, Implied forward rates, Term structure of interest rates
    JEL: E43 E44 E52 E58
    Date: 2009
  47. By: Frank Leung (Research Department, Hong Kong Monetary Authority); Kevin Chow (Research Department, Hong Kong Monetary Authority); Simon Chan (Research Department, Hong Kong Monetary Authority)
    Abstract: The concept of trend inflation is crucial for macroeconomic analysis and policy formulation by central banks. In this paper, we compare measures of trend inflation in Hong Kong estimated by the exclusion and statistical methods. Our findings suggest that the trend inflation estimated by the exclusion method (by excluding basic food, energy and other volatile items) and the principal component technique have strong predictive power on future changes in headline CPI or PCE inflation. Evaluation results based on qualitative and quantitative criteria suggest that the two estimation methods have their own strengths and weaknesses, and none of the methods has clear absolute advantage over the other for measuring trend inflation.
    Keywords: Core inflation, trend inflation, co-integration
    JEL: E31 E37 C22
    Date: 2009–04
  48. By: Fernando Alexandre (Escola de Economia e Gestão and NIPE, University of Minho); Pedro Bação (University of Coimbra and GEMF); João Cerejeira (Escola de Economia e Gestão and NIPE, University of Minho); Miguel Portela (Escola de Economia e Gestão and NIPE, University of Minho 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
  49. By: Zoltán Reppa (Magyar Nemzeti Bank)
    Abstract: The main goal of this paper is to examine the relationship between macroeconomic shocks and yield curve movements in Hungary. To this end, we apply a Nelson-Siegel type dynamic yield curve model, where changes of the yield curve are driven by two latent factors and some key macro variables that follow a VAR(1) process. The structural macroeconomic shocks are identified by sign restrictions. According to the model, more than sixty percent of the variation of the yield curve factors can be explained by macro shocks. In particular, the monetary policy shock is the most important determinant of the level factor, while the slope factor is mainly driven by risk premium and demand shocks. As for the direction of the responses, monetary policy and supply shocks decrease long forward rates, while premium and demand shocks increase short forward rates. The effect of the premium and monetary policy shocks is strongest in the period when the shock occurs, while for the demand and supply shocks the responses reach their peak only after some delay.
    Keywords: yield curve, Nelson-Siegel, factor models, state space models, structural identification.
    JEL: C32 E43 E44 G12
    Date: 2009
  50. By: André de Melo Modenesi
    Abstract: A adoção da regra de Taylor é peça fundamental do Novo Consenso em Política Monetária, marcado pelo reconhecimento, realizado tardiamente pela ortodoxia, de que a base monetária é endógena. Com base na literatura resenhada, é estimada a função de reação do Banco Central do Brasil (BCB) para avaliar a condução da política monetária brasileira, após a adoção do regime de metas de inflação. A função de reação do BCB possui características que corroboram a tese de que a formação da taxa Selic é pautada por uma convenção pró-conservadorismo na condução da política monetária, como propõem Nakano e Erber. Os resultados apontam excessiva lentidão nos movimentos dos juros e um elevado patamar da taxa de equilíbrio, confirmando a tese de que o BCB: a) incorporou a convenção de que há um elevado piso para a Selic; e b) dá pouca atenção ao estado da economia (o desvio da inflação em relação à meta e o hiato do produto) imprimindo demasiado gradualismo na determinação da taxa básica. A principal conclusão é que, mantido o quadro atual, a taxa de juros dificilmente se reduzirá de forma satisfatória. Seria necessária uma drástica deflação para que a Selic caísse significativamente. Isso aponta para a necessidade de um debate sobre a adequação da atual estratégia de estabilização. The adoption of the Taylor rule is an essential element of the New Consensus on Monetary Policy, characterized by the recent acceptance, by the orthodoxy, of money stock endogeneity. In line with the reviewed literature, a reaction function of the Brazilian Central Bank (BCB) is estimated with a view to evaluating the conduction of monetary policy after the 1999 adoption of the inflation targeting regime in Brazil. The BCB’s reaction function has some features that corroborate the thesis under which the formation of the Selic rate is ruled by a pro-conservatism convention in the conduction of monetary policy, as affirmed by Nakano and Erber. Results show an excessive slowness in interest movement and a high level of the equilibrium rate, confirming the thesis that the BCB a) incorporated the convention according to which Selic must have a high floor; and b) is inattentive to the state of the economy (the inflation and output gaps), and expresses an excessive gradualism in determining the overnight rate. The main conclusion is that, if the present situation continues, the interest rate will hardly be reduced in a satisfactory way. This evidences the need for a debate on the adequation of the present stabilization strategy.
    Date: 2008–08
  51. By: Tran Tri Dung (Dan Houtte, Vuong & Partners, Hanoi, Vietnam.); Quan-Hoang Vuong (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels.)
    Abstract: In this short paper, we have gone through some key results of monetary policy research applied for the Vietnamese economy, over the past 20 years after Doi Moi, together with a few caveats when putting these results in use. We look at different research themes, and suggest that future research make better and more diverse choice of analytic framework, and also put macro and micro-setting connection at work, which appear to likely bring about better and more insightful results for the monetary economics literature in Vietnam.
    Keywords: Vietnam; market economy; monetary policy; exchange rate regime
    JEL: G10 G18 E22 E31 E44
    Date: 2009–06

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