|
on Central Banking |
| By: | Andrew Hughes Hallett; Jan Libich; Petr Stehlik |
| Abstract: | The paper attempts to assess to what extent the central bank or the government should respond to developments that cause ?financial instability, such as housing or asset bubbles, overextended fi?scal policies, or excessive public or household debt. To analyze this question we set up a simple reduced-form model in which mone- tary and fi?scal policy interact, and consider several scenarios with both benevolent and idiosyncratic policymakers. The analysis shows that the answer depends on certain characteristics of the economy, as well as on the degree of ambition and con- servatism of the two policymakers. Speci?fically, we identify circumstances under which fi?nancial instability prevention is best carried out by: (i) both monetary and ?fiscal policy ("sharing"), (ii) only one of the policies ("specialization"), and (iii) nei- ther policy ("indifference"). In the former two cases there are circumstances under which either policy should be more pro-active than the other, and also circum- stances under which fi?scal policy should be ultra-active: ie care about nothing but the prevention of ?financial instability. These results are important in the context of the current crisis. We also show that neither the government nor the central bank should be allowed to freely select the degree of their activism in regard to fi?nancial instability threats. This is because of a moral hazard problem: both policymakers have an incentive to be insufficiently pro-active, and shift the responsibility to the other policy. Such behaviour has strong implications for the optimal design of the delegation process. |
| JEL: | E42 E61 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2009-14&r=cba |
| By: | Claudio Borio; Claudio Mathias Drehmann |
| Abstract: | Over the last decade or so, addressing financial instability has become a policy priority. Despite the efforts made, policymakers are still a long way from developing a satisfactory operational framework. A major challenge complicating this task is the "fuzziness" with which financial (in)stability can be measured. We review the available measurement methodologies and point out several weaknesses. In particular, we caution against heavy reliance on the current generation of macro stress tests, arguing that they can lull policymakers into a false sense of security. Nonetheless, we argue that the "fuzziness" in measurement does not prevent further progress towards an operational framework, as long as it is appropriately accounted for. Crucial features of that framework include: strengthening the macroprudential orientation of financial regulation and supervision; addressing more systematically the procyclicality of the financial system; relying as far as possible on automatic stabilisers rather than discretion, thereby lessening the burden on the real-time measurement of financial stability risks; and setting up institutional arrangements that leverage the comparative expertise of the various authorities involved in safeguarding financial stability, not least financial supervisors and central banks. |
| Keywords: | financial (in)stability, risk measurement, macroprudential, procyclicality |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:284&r=cba |
| By: | Erdenebat Bataa; Denise R. Osborn; Marianne Sensier; Dick van Dijk |
| Abstract: | To shed light on changes in international inflation, this paper proposes an iterative procedure to discriminate between structural breaks in the coefficients and the disturbance covariance matrix of a system of equations, allowing these components to change at different dates. Conditional on these, recursive procedures are proposed to analyze the nature of change, including tests to identify individual coefficient shifts and to discriminate between volatility and correlation breaks. Using these procedures, structural breaks in monthly cross-country inflation relationships are examined for major G-7 countries (US, Euro area, UK and Canada) and within the Euro area (France, Germany and Italy). Overall, we find few dynamic spillovers between countries, although the Euro area leads inflation in North America, while Germany leads France. Contemporaneous inflation correlations are generally low in the 1970s and early 1980s, but inter-continental correlations increase from the end of the 1990s, while Euro area countries move from essentially idiosyncratic inflation to co-movement in the mid-1980s. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:119&r=cba |
| By: | Gino Cateau; Oleksiy Kryvtsov; Malik Shukayev; Alexander Ueberfeldt |
| Abstract: | Using the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the policy-maker will revert to inflation-targeting next period. As this probability decreases and imperfect credibility abates, inflation expectations in the economy become consistent with price-level targeting. The paper finds a large welfare gain when imperfect credibility is short-lived. The gain becomes smaller with persisting imperfect credibility, turning to a loss if it lasts more than 13 years. |
| Keywords: | Monetary policy framework; Monetary policy implementation |
| JEL: | E31 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-17&r=cba |
| By: | Ivan Petrella (University of Cambridge); Emiliano Santoro (Department of Economics, University of Copenhagen) |
| Abstract: | This paper deals with the implications of factor demand linkages for monetary policy design. We develop a dynamic general equilibrium model with two sectors that produce durable and non-durable goods, respectively. Part of the output produced in each sector is used as an intermediate input of production in both sectors, according to an input-output matrix calibrated on the US economy. As shown in a number of recent contributions, this roundabout technology allows us to reconcile standard two-sector New Keynesian models with the empirical evidence showing co-movement between durable and non-durable spending in response to a monetary policy shock. A main result of our monetary policy analysis is that strategic complementarities generated by factor demand linkages amplify social welfare loss. As the degree of interconnection between sectors increases, the cost of misperceiving the correct production technology of each sector can rise substantially. In addition, the transmission of different sources of exogenous perturbation is altered, compared to what is commonly observed in standard two-sector models without factor demand linkages. In this respect, the role of the relative price of non-durable goods is crucial, as this does not only influence the user cost of durables through the conventional demand channel, but also affects in opposite directions the real marginal cost of production in either sector through the intermediate input channel. |
| Keywords: | input-output interactions, durable goods, optimal monetary policy |
| JEL: | E23 E32 E52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:09-04&r=cba |
| By: | Jean-Marie Dufour; Lynda Khalaf; Maral Kichian |
| Abstract: | Weak identification is likely to be prevalent in multi-equation macroeconomic models such as in dynamic stochastic general equilibrium setups. Identification difficulties cause the breakdown of standard asymptotic procedures, making inference unreliable. While the extensive econometric literature now includes a number of identification-robust methods that are valid regardless of the identification status of models, these are mostly limited-information-based approaches, and applications have accordingly been made on single-equation models such as the New Keynesian Phillips Curve. <br><br> In this paper, we develop a set of identification-robust econometric tools that, regardless of the model's identification status, are useful for estimating and assessing the fit of a system of structural equations. In particular, we propose a vector auto-regression (VAR) based estimation and testing procedure that relies on inverting identification-robust multivariate statistics. The procedure is valid in the presence of endogeneity, structural constraints, identification difficulties, or any combination of these, and also provides summary measures of fit. Furthermore, it has the additional desirable features that it is robust to missing instruments, errors-in-variables, the specification of the data generating process, and the presence of contemporaneous correlation in the disturbances. <br><br> We apply our methodology, using U.S. data, to the standard New Keynesian model such as the one studied in Clarida, Gali, and Gertler (1999). We find that, despite the presence of identification difficulties, our proposed method is able to shed some light on the fit of the considered model and, particularly, on the nature of the NKPC. Notably our results show that (i) confidence intervals obtained using our system-based approach are generally tighter than their single-equation counterparts, and thus are more informative, (ii) most model coefficients are significant at conventional levels, and (iii) the NKPC is preponderantly forward-looking, though not purely so. |
| Keywords: | Inflation and prices; Econometric and statistical methods |
| JEL: | C52 C53 E37 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-19&r=cba |
| By: | Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian |
| Abstract: | This paper discusses pooling versus model selection for now- and forecasting in the presence of model uncertainty with large, unbalanced datasets. Empirically, unbalanced data is pervasive in economics and typically due to di¤erent sampling frequencies and publication delays. Two model classes suited in this context are factor models based on large datasets and mixed-data sampling (MIDAS) regressions with few predictors. The specification of these models requires several choices related to, amongst others, the factor estimation method and the number of factors, lag length and indicator selection. Thus, there are many sources of mis-specification when selecting a particular model, and an alternative could be pooling over a large set of models with different specifications. We evaluate the relative performance of pooling and model selection for now- and forecasting quarterly German GDP, a key macroeconomic indicator for the largest country in the euro area, with a large set of about one hundred monthly indicators. Our empirical findings provide strong support for pooling over many specifications rather than selecting a specific model. |
| Keywords: | casting, forecast combination, forecast pooling, model selection, mixed - frequency data, factor models, MIDAS |
| JEL: | C53 E37 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7572&r=cba |
| By: | Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian |
| Abstract: | This paper compares the mixed-data sampling (MIDAS) and mixed-frequency VAR (MF-VAR) approaches to model speci cation in the presence of mixed-frequency data, e.g., monthly and quarterly series. MIDAS leads to parsimonious models based on exponential lag polynomials for the coe¢ cients, whereas MF-VAR does not restrict the dynamics and therefore can su¤er from the curse of dimensionality. But if the restrictions imposed by MIDAS are too stringent, the MF-VAR can perform better. Hence, it is di¢ cult to rank MIDAS and MF-VAR a priori, and their relative ranking is better evaluated empirically. In this paper, we compare their performance in a relevant case for policy making, i.e., nowcasting and forecasting quarterly GDP growth in the euro area, on a monthly basis and using a set of 20 monthly indicators. It turns out that the two approaches are more complementary than substitutes, since MF-VAR tends to perform better for longer horizons, whereas MIDAS for shorter horizons. |
| Keywords: | nowcasting, mixed-frequency data, mixed-frequency VAR, MIDAS |
| JEL: | C53 E37 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7576&r=cba |
| By: | Yao, Fang |
| Abstract: | This paper explores what can be lost when assuming price adjustment is a time - independent (memoryless) process.I derive a generalized NKPC in an optinizing model with the non- constant hazard function and trend inflation. Memory emerges in the resulting Phillips curve through the presence of lagged inflation and lagged expectations. It nests the Calvo NKPC as a limitting case in the sense that the effect of both terms are canceled out by one another under the constant-hazard assumption. Furthermore, I find lagged inflation always has negative coefficients, thereby making it impossible to interpret inflation persistence as intrinsic to the model. The numerical evaluation shows that introducing trend inflation strengthens the effects of the increasing hazard function on the inflation dynamics . The model can jointly account for persistent dynamics of inflation and output, hump-shaped impulse responses of inflation to monetary shocks, and the fact that high trend inflation leads to more persistence in inflation but not for real variables. |
| Keywords: | Intrinsic inflation persistance, Hazard function, New Keynesian Phillips Curve |
| JEL: | E12 E31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7577&r=cba |
| By: | Hajime Tomura |
| Abstract: | This paper introduces heterogeneous beliefs among households in a small open economy model for the Canadian economy. The model suggests that simultaneous boom-bust cycles in house prices, output, investment, consumption and hours worked emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. With sticky prices and a standard monetary policy rule, the model shows that the nominal policy interest rate and the CPI inflation rate decline during housing booms and rise as house prices fall. These results replicate the stylized features of housing-market boom-bust cycles in industrialized countries. Policy experiments demonstrate that stronger policy responses to inflation amplify housing-market boom-bust cycles. Also, higher loan-to-value ratios amplify housing-market boom-bust cycles by encouraging speculative housing investments by mortgage borrowers during housing booms and increasing liquidation of housing collateral during housing busts. |
| Keywords: | Credit and credit aggregates; Financial stability; Inflation targets |
| JEL: | E44 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-15&r=cba |
| By: | James Morley (Washington University in St. Louis); Jeremy Piger (University of Oregon); Pao-Lin Tien (Department of Economics, Wesleyan University) |
| Abstract: | In this paper, we consider the ability of time-series models to generate simulated data that display the same business cycle features found in U.S. real GDP. Our analysis of a range of popular time-series models allows us to investigate the extent to which multivariate information can account for the apparent univariate evidence of nonlinear dynamics in GDP. We find that certain nonlinear specifications yield an improvement over linear models in reproducing business cycle features, even when multivariate information inherent in the unemployment rate, inflation, interest rates, and the components of GDP is taken into account. |
| JEL: | E30 C52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2009-003&r=cba |
| By: | Césaire Meh; Vincenzo Quadrini; Yaz Terajima |
| Abstract: | We study a model with repeated moral hazard where financial contracts are not fully indexed to inflation because nominal prices are observed with delay as in Jovanovic & Ueda (1997). More constrained firms sign contracts that are less indexed to the nominal price and, as a result, their investment is more sensitive to nominal price shocks. We also find that the overall degree of nominal indexation increases with the uncertainty of the price level. An implication of this is that economies with higher price-level uncertainty are less vulnerable to a price shock of a given magnitude, that is, aggregate investment and output respond to a lesser degree. |
| Keywords: | Economic models; Monetary policy framework; Financial markets; Transmission of monetary policy |
| JEL: | E21 E31 E44 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-16&r=cba |
| By: | Fischer, Christoph |
| Abstract: | The establishment of European monetary union (EMU) was widely expected to cause price convergence among member states. In an investigation of this claim, the present study avoids problems of comparability and representativeness by using an extremely detailed and comprehensive scanner database on washing machine prices and sales volumes for 17 European countries. A hedonic regression yields country-specific time series for quality-adjusted price differentials. Statistically and economically significant deviations from the LOP emerge. Log t tests firmly reject price convergence among EMU countries. Small convergence clusters can be identified but they are unrelated to EMU membership. |
| Keywords: | price convergence, LOP, euro introduction, log t test, hedonic price regression, scanner data |
| JEL: | C23 E31 F31 F36 L68 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7575&r=cba |
| By: | Yongsung Chang (University of Rochester); Sun-Bin Kim (Department of Economics, Korea University); Jaewoo Lee (International Monetary Fund) |
| Abstract: | We undertake a quantitative analysis of the dispersion of current accounts in an open economy version of incomplete insurance model, incorporating important market frictions in trade and financial flows. Calibrated with conventional parameter values, the stochastic stationary equilibrium of the model with limited borrowing can account for about two-thirds of the global dispersion of current accounts. The easing of financial frictions can explain nearly all changes in the current account dispersion in the past four decades whereas the easing of trade frictions has almost no impact on the current account dispersion. |
| Keywords: | Distribution of Current Account, Incomplete Markets, Frictions. |
| JEL: | F3 F4 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:548&r=cba |
| By: | WenShwo Fang (Department of Economics, Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Chih-Chuan Yeh (Department of Finance, The Overseas Chinese Institute of Technology) |
| Abstract: | Using quantile regressions and cross-sectional data from 152 countries, we examine the relationship between inflation and its variability. We consider two measures of inflation – the mean and median – and three different measures of inflation variability – the standard deviation, relative variation, and median deviation. All results from the mean and standard deviation, the mean and relative variation, or the median and the median deviation support both the hypothesis that higher inflation creates more inflation variability and that inflation variability raises inflation across quantiles. Moreover, higher quantiles in both cases lead to larger marginal effects of inflation (inflation variability) on inflation variability (inflation). We particularly consider whether thresholds for inflation rate or inflation variability exist before finding such positive correlations. We find evidence of thresholds for inflation rates below 3 percent, but mixed results for thresholds for inflation variability. Finally, a series of robustness checks, including a set of additional explanatory variables as well as controlling for potential endogeneity with instrumental variables, leaves our findings generally unchanged. |
| Keywords: | inflation, inflation variability, inflation targeting, threshold effects, quantile regression |
| JEL: | C21 E31 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0921&r=cba |
| By: | WenShwo Fang (Department of Economics, Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); ChunShen Lee (Department of Economics, 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 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0920&r=cba |
| By: | Nicholas Apergis (Department of Financial & Banking Management, University of Piraeus); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | This paper investigates how explicit structural shocks that characterize the endogenous character of oil price changes affect stock-market returns in a sample of eight countries – Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. For each country, the analysis proceeds in two steps. First, modifying the procedure of Kilian (2008a), we employ a vector error-correction or vector autoregressive model to decompose oil-price changes into three components: oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks. The last component relates to specific idiosyncratic features of the oil market, such as changes in the precautionary demand concerning the uncertainty about the availability of future oil supplies. Second, recovering the oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks from the first analysis, we then employ a vector autoregressive model to determine the effects of these structural shocks on the stock market returns in our sample of eight countries. We find that international stock market returns do not respond in a large way to oil market shocks. That is, the significant effects that exist prove small in magnitude. |
| Keywords: | real stock returns; structural oil-price shocks; variance decomposition |
| JEL: | G12 Q43 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0917&r=cba |
| By: | Nicholas Apergis (Department of Financial & Banking Management, University of Piraeus); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | This paper investigates how explicit structural shocks that characterize the endogenous character of oil price changes affect stock-market returns in a sample of eight countries – Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. For each country, the analysis proceeds in two steps. First, modifying the procedure of Kilian (2008a), we employ a vector error-correction or vector autoregressive model to decompose oil-price changes into three components: oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks. The last component relates to specific idiosyncratic features of the oil market, such as changes in the precautionary demand concerning the uncertainty about the availability of future oil supplies. Second, recovering the oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks from the first analysis, we then employ a vector autoregressive model to determine the effects of these structural shocks on the stock market returns in our sample of eight countries. We find that international stock market returns do not respond in a large way to oil market shocks. That is, the significant effects that exist prove small in magnitude. |
| Keywords: | real stock returns; structural oil-price shocks; variance decomposition |
| JEL: | G12 Q43 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0919&r=cba |
| By: | Balassone, Fabrizio; Cunha, Jorge Correia da; Langenus, Geert; Manzke, Bernhard; Pavot, Jeanne; Prammer, Doris; Tommasino, Pietro |
| Abstract: | In this paper we examine the sustainability of euro area public finances against the backdrop of population ageing. We critically assess the widely used projections of the Working Group on Ageing Populations (AWG) of the EU's Economic Policy Committee and argue that ageing costs may be higher than projected in the AWG reference scenario. Taking into account adjusted headline estimates for ageing costs, largely based upon the sensitivity analysis carried out by the AWG, we consider alternative indicators to quantify sustainability gaps for euro area countries. With respect to the policy implications, we assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon the lifetime contribution to the government's primary balance of different generations suggests that an important degree of pre-funding of the ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate way to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised stability and growth pact would ideally need to be revised upwards to significant surpluses. |
| Keywords: | population ageing, fiscal sustainability, generational accounting, medium-term objectives for fiscal policy |
| JEL: | H55 H60 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7573&r=cba |
| By: | Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | This paper studies the forecasting performance of the general equilibrium model of bond yields of Marzo, Söderström and Zagaglia (2008), where long-term interest rates are an integral part of the monetary transmission mechanism. The model is estimated with Bayesian methods on Euro area data. I investigate the out-of-sample predictive performance across different model specifications, including that of De Graeve, Emiris and Wouters (2009). The accuracy of point forecasts is evaluated through both univariate and multivariate accuracy measures. I show that taking into account the impact of the term structure of interest rates on the macroeconomy generates superior out-of-sample forecasts for both real variables, such as output, and inflation, and for bond yields. |
| Keywords: | Monetary policy; yield curve; general equilibrium; bayesian estimation |
| JEL: | E43 E44 E52 |
| Date: | 2009–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2009_0014&r=cba |
| By: | Kohlscheen, E (Economics Department, University of Warwick.) |
| Abstract: | In spite of early skepticism on the merits of floating exchange rate regimes in emerging markets, 8 of the 25 largest countries in this group have now had a floating exchange rate regime for more than a decade. Using parsimonious VAR specifications covering the period of floating exchange rates, this study computes the dynamics of exchange rate pass-throughs to consumer price indices. We find that pass-throughs have typically been moderate even though emerging floaters have seen considerable nominal and real exchange rate volatilities. Previous studies that set out to estimate exchange rate pass-throughs ignored changes in policy regimes, making them vulnerable to the Lucas critique. We find that, within the group of emerging floaters, estimated pass-throughs are higher for countries with greater nominal exchange rate volatilities and that trade more homogeneous goods. These findings are consistent with the pass-through model of Floden and Wilander (2006) and earlier findings by Campa and Goldberg (2005), respectively. Furthermore, we find that the Indonesian Rupiah, the Thai Baht and possibly the Mexican Peso are commodity currencies, in the sense that their real exchange rates are cointegrated with international commodity prices. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:905&r=cba |
| By: | Kohlscheen, E (Economics Department, University of Warwick.) |
| Abstract: | This paper analyzes the incidence of domestic and external debt crises for a sample of 53 emerging economies between 1980 and 2005. Even though there is substantial time variation in the default rates during the period, sovereign default rates for domestic debts are typically lower than those for external debts. The incidence of both types of defaults is explained by means of the estimation of independent and simultaneous limited-dependent variable models. The results show that while there is considerable evidence that external defaults trigger domestic defaults, evidence for the reverse link disappears when default propensities are estimated in a simultaneous equation model. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:904&r=cba |
| By: | Antonio Ribba |
| Abstract: | Following the lead of Fama [American Economic Review 65 (1975) 269-282] and of other influential papers, such as Mishkin [Journal of Monetary Economics 30 (1992) 195-215], it has become standard to interpret the Fisher effect as the ability of short-term interest rate to predict future inflation. However, in this paper we demonstrate that by restricting to zero the instantaneous response of expected inflation to an interest rate shock, one can identify a disturbance that economic agents, according to the Fisherian framework, should evaluate as transitory. An important implication of this result is that short-term nominal interest rates cannot be interpreted as predictors, at least not long-run predictors, of inflation. We illustrate this result with an empirical application to US postwar data. |
| Keywords: | Fisher Effect; Identification; Structural Cointegrated VARs |
| JEL: | E40 C32 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:033&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. |
| Keywords: | Purchasing power parity, unit root test, structural change, Balassa-Samuelson effect, real exchange rate. Classification JEL: C22, F31, F40, N70 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:564&r=cba |
| By: | Habib Ahmed (Institute of Middle Eastern and Islamic Studies, Durham University); C. Paul Hallwood (Department of Economics, University of Connecticut); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | We show that expansionary monetary policy causes exchange rate overshooting due to the secondary repercussion comes through the reaction of firms to changed asset prices and the firms’ decisions to invest in real capital. This overshooting effect adds to any overshooting that occurs through the traditional Dornbusch (1976) channel, since our model with its market clearing in the short run excludes any Dornbusch overshooting. The model sheds further light on the volatility of real and nominal exchange rates. It suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities, and it offers an additional reason for ‘fear of floating’. |
| Keywords: | exchange rates, open economy macroeconomics, monetary policy, exchange rate overshooting |
| JEL: | F31 F32 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0918&r=cba |
| By: | Breitung, Jörg; Eickmeier, Sandra |
| Abstract: | From time to time, economies undergo far-reaching structural changes. In this paper we investigate the consequences of structural breaks in the factor loadings for the specification and estimation of factor models based on principal components and suggest test procedures for structural breaks. It is shown that structural breaks severely inflate the number of factors identified by the usual information criteria. Based on the strict factor model the hypothesis of a structural break is tested by using Likelihood-Ratio, Lagrange-Multiplier and Wald statistics. The LM test which is shown to perform best in our Monte Carlo simulations, is generalized to factor models where the common factors and idiosyncratic components are serially correlated. We also apply the suggested test procedure to a US dataset used in Stock and Watson (2005) and a euro-area dataset described in Altissimo et al. (2007). We find evidence that the beginning of the so-called Great Moderation in the US as well as the Maastricht treaty and the handover of monetary policy from the European national central banks to the ECB coincide with structural breaks in the factor loadings. Ignoring these breaks may yield misleading results if the empirical analysis focuses on the interpretation of common factors or on the transmission of common shocks to the variables of interest. |
| Keywords: | Dynamic factor models, structural breaks, number of factors, Great Moderation, EMU |
| JEL: | C01 C12 C3 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7574&r=cba |
| By: | Ansgar Rannenberg |
| Abstract: | This paper examines the rise in European unemployment since the 1970s by introducing endogenous growth into an otherwise standard New Keynesian model with capital accumulation and unemployment. We subject the model to an uncorrelated cost push shock, in order to mimic a scenario akin to the one faced by central banks at the end of the 1970s. Monetary policy implements a disin?ation by following an interest feedback rule calibrated to an estimate of a Bundesbank reaction function. 40 quarters after the shock has vanished, unemployment is still about 1.8 percentage points above its steady state. Our model also broadly reproduces cross country differences in unemployment by drawing on cross country di¤erences in the size of cost push shock and the associated disinflation, the monetary policy reaction function and the wage setting structure. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0903&r=cba |
| By: | Renee A. Fry; Vance L. Martin; Nicholas Voukelatos |
| Abstract: | A 7 variate SVAR model is used to identify the presence and causes of overvaluation in real house prices in Australia from 2002 to 2008. An important feature of the model is the development of a housing sector where long-run restrictions are derived from economic theory to identify housing demand and supply shocks. The empirical results show that real house prices were overvalued during the period, reaching a peak of nearly 20% by the end of 2003. Important factors driving the observed overvaluation are housing demand shocks prior to 2006, and macroeconomic shocks in the goods market post 2006. Wealth effects from portfolio shocks in equity markets are also found to be an important driver. The results also suggest that monetary policy is not an important contributing factor in the overvaluation of house prices. |
| JEL: | E21 E44 C32 R21 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2009-10&r=cba |
| By: | Edvinsson, Rodney (Dept. of Economic History, Stockholm University) |
| Abstract: | This paper deals with foreign exchange rates in Sweden 1658-1803. Foreign currencies played a crucial role in Sweden. Most of the domestic currency units were, in fact, originally imported. In the 18th century, the exchange rates most quoted in Sweden were the ones on Amsterdam, Hamburg, London, Paris, Copenhagen, Gdansk and Swedish Pomerania. The primary data are bills of various durations. To estimate spot rates, an assumption must be made of an interest rate on these bills. In the period 1662-1669 the estimated median shadow interest rate on bills of exchange was as high as 12.5 percent, while it most likely decreased substantially in the 18th century. |
| Keywords: | monetary history; foreign exchange; reichstaler; guilder; pound; taler; zloty; florin; Sweden |
| JEL: | E42 N13 N23 |
| Date: | 2009–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:suekhi:0008&r=cba |
| By: | Edvinsson, Rodney (Dept. of Economic History, Stockholm University) |
| Abstract: | This paper classifies the monetary standards in Sweden from the Middle Ages to the present, and gives an overview of the various currencies that were in use. During most of Sweden’s history, a commodity standard was in place, while the fiat standard is a rather late innovation. The classification into monetary standards is also related to the issue of debasement under the commodity standard and the mechanisms behind the rise of multiple currencies. |
| Keywords: | monetary history; monetary standard; Sweden |
| JEL: | E42 N13 N14 N23 N24 |
| Date: | 2009–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:suekhi:0006&r=cba |
| By: | Edvinsson, Rodney (Dept. of Economic History, Stockholm University) |
| Abstract: | This paper deals with the exchange rates between the domestic currencies of Sweden-Finland in 1534-1803. In 1534, the first silver daler coins were minted in Sweden, which existed alongside the main silver coins at a fluctuating exchange rate. In 1624, a copper standard was introduced. However, the silver standard continued to exist alongside the copper standard. A distinctive feature of the multi-currency standard in Sweden-Finland during the 17th and 18th centuries, was that there was not only a fluctuating market exchange rate between the copper and silver currencies, but also between various silver currencies. At least five or six currency units were used, three based on silver, one or two based on copper and one based on gold. In 1776 a mono-currency, silver standard was reintroduced, with the riksdaler as the main unit. However, montery stability was not long-lasting. In 1789-1803 two different currencies existed, one fiat currency based on riksdaler riksgälds notes and one based on the riksdaler banco that continued to be convertible into silver coins by the Riksbank. In 1803 the relation 1 riksdaler banco = 1.5 riksdaler riksgälds was fixed, which basically ended the period of multiple currencies. |
| Keywords: | monetary history; bimetallism; debasement; copper standard; Sweden |
| JEL: | E42 N13 N23 |
| Date: | 2009–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:suekhi:0007&r=cba |