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on Central Banking |
| By: | Harald Uhlig |
| Abstract: | The 2008 financial crisis is reminiscent of a bank run, but not quite. In particular, it is financial institutions withdrawing deposits from some core financial institutions, rather than depositors running on their local bank. These core financial institutions have invested the funds in asset-backed securities rather than committed to long-term projects. These securities can potentially be sold to a large pool of outside investors. The question arises, why these investors require steep discounts to do so. I therefore set out to provide a model of a systemic bank run delivering six stylized key features of this crisis. I consider two different motives for outside investors and their interaction with banks trading asset-backed securities: uncertainty aversion versus adverse selection. I shall argue that the version with uncertainty averse investors is more consistent with the stylized facts than the adverse selection perspective: in the former, the crisis deepens, the larger the market share of distressed core banks, while a run becomes less likely instead as a result in the adverse selection version. I conclude from that that the variant with uncertainty averse investors is more suitable to analyze policy implications. This paper therefore provides a model, in which the outright purchase of troubled assets by the government at prices above current market prices may both alleviate the financial crises as well as provide tax payers with returns above those for safe securities. |
| JEL: | E44 G21 G28 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15072&r=cba |
| By: | N. Gregory Mankiw; Matthew Weinzierl; Danny Yagan |
| Abstract: | We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around. |
| JEL: | H21 H24 H25 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15071&r=cba |
| By: | Richard Dennis |
| Abstract: | Model uncertainty has the potential to change importantly how monetary policy should be conducted, making it an issue that central banks cannot ignore. In this paper, I use a standard new Keynesian business cycle model to analyze the behavior of a central bank that conducts policy with discretion while fearing that its model is misspeci?fied. My main results are as follows. First, policy performance can be improved if the discretionary central bank implements a robust policy. This important result is obtained because the central bank's desire for robustness directs it to assertively stabilize inflation, thereby mit- igating the stabilization bias associated with discretionary policymaking. In effect, a fear of model uncertainty can act similarly to a commitment mechanism. Second, exploiting the connection between robust control and uncertainty aversion, I show that the central bank's fear of model misspeci?cation leads it to forecast future outcomes under the be- lief that inflation (in particular) will be persistent and have large unconditional variance, raising the probability of extreme outcomes. Private agents, however, anticipating the policy response, make decisions under the belief that in?ation will be more closely sta- bilized, that is, more tightly distributed, than under rational expectations. Third, as a technical contribution, I show how to solve an important class of linear-quadratic robust Markov-perfect Stackelberg problems. |
| JEL: | E52 E62 C61 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2009-04&r=cba |
| By: | Philippe Bacchetta; Eric van Wincoop |
| Abstract: | It is well known from anecdotal, survey and econometric evidence that the relationship between the exchange rate and macro fundamentals is highly unstable. This could be explained when structural parameters are known and very volatile, neither of which seems plausible. Instead we argue that large and frequent variations in the relationship between the exchange rate and macro fundamentals naturally develop when structural parameters in the economy are unknown and change very slowly. We show that the reduced form relationship between exchange rates and fundamentals is driven not by the structural parameters themselves, but rather by expectations of these parameters. These expectations can be highly unstable as a result of perfectly rational "scapegoat" effects. This happens when parameters can potentially change much more in the long run than the short run. This generates substantial uncertainty about the level of parameters, even though monthly or annual changes are small. This mechanism can also be relevant in other contexts of forward looking variables and could explain the widespread evidence of parameter instability found in macroeconomic and financial data. Finally, we show that parameter instability has remarkably little effect on the volatility of exchange rates, the in-sample explanatory power of macro fundamentals and the ability to forecast out of sample. |
| Keywords: | exchange rate and time-varying coefficients |
| JEL: | F31 F37 F41 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:09.07&r=cba |
| By: | Rochelle M. Edge; Michael T. Kiley; Jean-Philippe Laforte |
| Abstract: | This paper considers the “real-time” forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model – the Federal Reserve Board’s new Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 through 2005 – thereby examining over 70 forecasts presented to the Federal Open Market Committee (FOMC). Our analysis builds on previous real-time forecasting ex- ercises along two dimensions. First, we consider time-series models, a structural DSGE model that has been employed to answer policy questions quite different from forecast- ing, and the forecasts produced by the staff at the Federal Reserve Board. In addition, we examine forecasting performance of our DSGE model at a relatively detailed level by separately considering the forecasts for various components of consumer expenditures and private investment. The results provide significant support to the notion that richly specified DSGE models belong in the forecasting toolbox of a central bank. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2009-03&r=cba |
| By: | Roger Farmer; Carine Nourry; Alain Venditti |
| Abstract: | We introduce a solution technique for the study of discrete time stochastic models populated by long-lived agents. We introduce aggregate uncertainty and complete markets into a 'perpetual-youth' model of a kind first studied by Olivier Blanchard and we show that the pure-trade version of the model behaves much like the two-period overlapping generations model. Our methods are easily generalized to economies with production and they should prove useful to researchers who seek a tractable stochastic model in which fiscal policy has real effects on aggregate allocations. |
| JEL: | C10 E0 E6 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15025&r=cba |
| By: | Jan Libich; Petr Stehlik |
| Abstract: | The paper examines whether central banks should be committed to achieving price stability (a low-inflation target), and how strong (explicit) their long-term monetary commitment should be. For that purpose we propose a game theoretic framework that enables us to model various degrees of commitment, as well as its endogenous deter- mination. Our main policy contribution consists in showing that the socially optimal degree of long-term monetary commitment depends on: (i) the potential short-term cost in terms of reduced stabilization flexibility, (ii) the potential benefi?t in terms of better anchored expectations, (iii) the structure of the economy, (iv) agents' expectations for- mation, and (v) the degrees of the central bank's conservatism (strictness) and ambition. The latter point implies substitutability between explicit inflation targeting and central bank goal-independence, and offers a possible explanation for the fact that countries with originally low degrees of central bank goal-independence have tended to commit more explicitly to price stability (legislate a unitary or hierarchical mandate rather than a dual mandate). |
| JEL: | E52 C72 E61 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2009-01&r=cba |
| By: | Reitz, Stefan; Stadtmann, Georg; Taylor, Mark P. |
| Abstract: | This paper investigates the determinants of forecast heterogeneity in the Yen-US dollar market using a panel data set from Consensus Economics. Regardless of the particular model specification and consideration of control variables we find that exchange rate misalignments increase forecast dispersion, while foreign exchange intervention of the Japanese Ministry of Finance dampens expectation heterogeneity. |
| Keywords: | Exchange rates; forecast heterogeneity; survey data |
| JEL: | D84 F31 |
| Date: | 2009–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15603&r=cba |
| By: | Peter Howells (UWE, Bristol) |
| Abstract: | In little more than twenty years, it has become widely accepted that the optimal design of monetary policy should include provision for a central bank that is independent of government influence. This is a remarkably short period of time for any idea in economics to become so widely-accepted. But there are problems. In this paper we show that there are many confusions and even some contradictions associated with central bank independence. To begin with, it is not entirely clear what it is exactly that central banks need to be independent of. Furthermore, there is confusion over the mechanisms whereby independence is supposed to deliver its benefits. The literature which is commonly said to provide the rationale for independence is often misunderstood and the evidence that independence does in fact enhance policy outcomes is extremely weak. |
| Keywords: | independent central banks |
| JEL: | E52 E58 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:0908&r=cba |
| By: | Philip Arestis |
| Abstract: | This paper is concerned with the New Consensus Macroeconomics (NCM) in the case of an open economy. It outlines and explains briefly the main elements of and way of thinking about the macroeconomy from the standpoint of both its theoretical and its policy dimensions. There are a few problems with this particular theoretical framework. We focus here on two important aspects closely related to NCM: the absence of banks and monetary aggregates from this theoretical framework, and the way the notion of the “equilibrium real rate of interest” is utilized by the same framework. The analysis is critical of NCM from a Keynesian perspective. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_564&r=cba |
| By: | Bianca De Paoli |
| Abstract: | Can the structure of asset markets change the way monetary policy should be conducted?Following a linear-quadratic approach, the present paper addresses this question in a NewKeynesian small open economy framework. Our results reveal that the configuration of assetmarkets significantly affects optimal monetary policy and the performance of standard policyrules. In particular, when comparing complete and incomplete markets, the ranking of policyrules is entirely reversed, and so are the policy prescriptions regarding the optimal level ofexchange rate volatility. |
| Keywords: | Welfare, Optimal Monetary Policy, Asset Markets, Small Open Economy |
| JEL: | F41 G15 E52 E61 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0923&r=cba |
| By: | Belaid AOUNI; Cinzia COLAPINTO; Davide LA TORRE |
| Abstract: | The aim of this paper is to present an approach for solving the Stochastic Multi-Objective Programming (SMOP) through the Goal Programming (GP) model. We introduce a deterministic equivalent formulation and we show how GP can provide solutions to SMOP. The proposed method will be illustrated through a numerical example from the Tunisian stock exchange market. |
| Keywords: | Stochastic Multi-Objective Programming, Goal Programming |
| Date: | 2008–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:mil:wpdepa:2008-18&r=cba |
| By: | Giuseppe Fontana |
| Abstract: | In the face of the dramatic economic events of recent months and the inability of academics and policymakers to prevent them, the New Consensus Macroeconomics (NCM) model has been the subject of several criticisms. This paper considers one of the main criticisms lodged against the NCM model, namely, the absence of any essential role for the government and fiscal policy. Given the size of the public sector and the increasing role of fiscal policy in modern economies, this simplifying assumption of the NCM model is difficult to defend. This paper maintains that conventional arguments used to support this controversial assumption--including historical reasons, theoretical propositions, and practical issues--do not have solid foundations. There is, in fact, nothing inherently monetary in the stabilization policies found in the model. Thus, fiscal policy could play a role at least as important as monetary policy in the NCM model. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_563&r=cba |
| By: | Christopher Martin (University of Bath (UK)); Costas Milas (Keele University (UK); Rimini Centre for Economic Analysis, Rimini, Italy); |
| Abstract: | We present empirical evidence that the marked rise in liquidity in 2001-2007 was due to large and persistent current account deficits and loose monetary policy. If this increase in liquidity was a pre-condition for the financial crisis that began in July 2007, we can conclude that loose monetary and the deterioration in current account balances were causes of the financial crisis. |
| Keywords: | financial crisis, liquidity, monetary policy, global imbalances |
| JEL: | E44 E52 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:10-09&r=cba |
| By: | Jan Kregel |
| Abstract: | The Federal Reserve's response to the current financial crisis has been praised because it introduced a zero interest rate policy more rapidly than the Bank of Japan (during the Japanese crisis of the 1990s) and embraced massive "quantitative easing." However, despite vast capital injections, the banking system is not lending in support of the private sector. Senior Scholar Jan Kregel compares the current situation with the Great Depression, and finds an absence of New Deal measures and institutions in the current rescue packages. The lessons of the Great Depression suggest that any successful policy requires fundamental structural reform, an understanding of how the financial system failed, and the introduction of a new financial structure (in a short space of time) that is designed to correct these failures. The current crisis could have been avoided if increased household consumption had been financed through wage increases, says Kregel, and if financial institutions had used their earnings to augment bank capital rather than bonuses. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levppb:ppb_100&r=cba |
| By: | Landais, Bernard |
| Abstract: | This paper presents the interrelations between the economic and financial crisis and monetary policy. Its emphasizes three dimensions of the problem. First, monetary policy is partialy responsible of the financial and economics events of these last years. Second, strong monetary actions are needed and implemented with some success for curing the consequences of the crisis. Third, after the crisis, monetary policy may be never like before... |
| Keywords: | Politique monétaire ; crise financière ; récession ; déflation ; mesures non-orthodoxes |
| JEL: | E52 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15652&r=cba |
| By: | Balu, Elena Mariana (Universitatea Spiru Haret, Facultatea de Finante si Banci); Mladen, Luise (Universitatea Spiru Haret, Facultatea de Finante si Banci) |
| Abstract: | Financial crisis has an impact on the real economy, especially through the game central banks have tried to restrict loans to finance production, thus contributing to the fall production. The report request â offer, economy tries to play through adjust prices on competitive markets. If banks try to adjust production to demand effective application that can be supported by salaries or other income, comes into contradiction with the offer. A difficult economic balance will lead to rising unemployment with increased inflation if we reverse the connection between unemployment and inflation fear employees against the phenomenon of unemployment is more pronounced not only in Romania but also in EU countries. |
| Keywords: | economic growth; international crisis; the current account deficit; inflation; labor productivity; labor supply and demand |
| JEL: | C10 |
| Date: | 2009–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:sphedp:2009_005&r=cba |
| By: | Yi Wen |
| Abstract: | How do movements in the distribution of income affect the macroeconomy? Krusell and Smith (1998) analyzed this question in a neoclassical growth model, and their results show that the representative-agent assumption provides a good approximation for aggregate behaviors of heterogeneous agents. This paper extends their analysis to a cash-in-advance model with heterogeneous money demand. It is shown that movements in the distribution of monetary income can have significant impact on the macroeconomy. For example, the dynamic responses of aggregate output to monetary shocks behave very differently from those of a representative agent; the welfare costs of moderate inflation are much higher than previously thought, up to 20% of consumption when the inequality of cash distribution is sufficiently large. This is in sharp contrast to the findings of Cooley and Hansen (1989) and Lucas (2000) based on representative-agent models. |
| Keywords: | Liquidity (Economics) ; Money theory |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-24&r=cba |
| By: | Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); James Costain (Banco de España, Alcalá 50, E-28014 Madrid, Spain.); Gregory de Walque (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Keith Kuester (Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106-1574, USA.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stephen Millard (Bank of England, Threadneedle Street, London EC2R 8AH, UK.); Olivier Pierrard (Banque Centrale du Luxembourg, 2 boulevard Royal, L-2983 Luxembourg, Luxembourg.) |
| Abstract: | This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modeling setups - right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates. JEL Classification: E31, E32, E24, J64. |
| Keywords: | Inflation Dynamics, Labour Market, Business Cycle, Real Rigidities. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901053&r=cba |
| By: | Lise Patureau (Université de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise) |
| Abstract: | The paper investigates the determinants of international business cycle comovement in a two-country Dynamic Stochastic General Equilibrium (DSGE) model featured by monopolistic competition and nominal price rigidity, following so the New Open Economy Macroeconomy (NOEM) literature. Within this framework, we assess the role of labor market search and matching frictions in the international propagation of supply and monetary shocks. Our results show that labor market frictions improve the ability of the New Open Economy Macroeconomy framework to account for international business cycles comovement. In particular, the NOEM model with labor market search is consistent with the international propagation mechanism of monetary shocks identified in the data. Through their impact on labor market dynamics, labor market institutions affect the magnitude of international comovement. Business cycle synchronization is thus found to increase with the generosity of the unemployment benefits system, whereas it decreases with the strictness of employment protection. |
| Keywords: | International business cycles, Search, Labor market institutions, Wage bargaining, International transmission of shocks |
| JEL: | E24 E32 F41 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2009-05&r=cba |
| By: | Fang Yao |
| Abstract: | This paper explores implications of nominal rigidity characterized by a non-constant hazard function for aggregate dynamics. I derive the NKPC under an arbitrary hazard function and parameterize it with the Weibull duration model. The resulting Phillips curve involves lagged inflation and lagged expectations. It nests the Calvo NKPC as a limiting case in the sense that the effects of both terms are canceled out under the constant-hazard assumption. Furthermore, I find lagged inflation always has negative coefficients, thereby making it impossible to interpret inflation persistence as intrinsic. The numerical evaluation shows that the increasing hazard function leads to hump-shaped impulse responses of ination to monetary shocks, and output leads inflation. |
| Keywords: | Hazard function, Weibull distribution, New Keynesian Phillips Curve |
| JEL: | E12 E31 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-030&r=cba |
| By: | Povoledo, Laura |
| Abstract: | This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a "New Open Economy" model having prices sticky in the producer's currency can reproduce the observed fluctuations qualitatively. The answer is positive: both in the model and in the data the standard deviations of tradeable inflation, output and employment are significantly higher than the standard deviations of the corresponding nontradeable sector variables. A key role in generating this result is played by the greater responsiveness of tradeable sector variables to monetary shocks. |
| Keywords: | New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles. |
| JEL: | F41 E32 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14852&r=cba |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Existing work on wage bargaining (as exemplified by Cukierman and Lippi, 2001) typically predicts more aggressive wage setting under monetary union. This insight has not been confirmed by the EMU experience, which has been characterised by wage moderation, thereby eliciting criticism from Posen and Gould (2006). The present paper formulates a model where, realistically, trade unions set wages with national prices in mind, deviating from Cukierman and Lippi (2001) who postulate that wages are set having area-wide prices in mind. For reasonable ranges of parameter values (and macroeconomic shocks), simulations show that a monetary union is found to elicit real wages that are broadly comparable to those obtained under monetary autonomy. The confidence bounds around these results are rather wide, in particular including scenarios of wage restraint. The paper also performs welfare comparisons concerning macroeconomic stabilisation in light of structural factors such as country size, the preference for price stability, aggregate demand slopes, labour substitutability across unions, the number of wage-setting institutions and the cross-country distribution of technology and demand shocks. JEL Classification: E50, E58, J50, J51. |
| Keywords: | Inflation, Trade Unions, Monetary Union, Strategic Monetary Policy, Unemployment, Wage Moderation. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901058&r=cba |
| By: | Tarek A. Hassan (Harvard University, Department of Economics; Postal Address: Littauer Center G4, 1875 Cambridge Street, Cambridge MA 02138, USA,) |
| Abstract: | The fact that economies differ in size has important implications for international asset returns. I solve for the spread on international bonds and stocks in an endowment economy with complete asset markets and non-traded goods. The model predicts that larger countries have lower real interest rates because their bonds provide insurance against shocks that affect a larger fraction of the world economy. Larger countries' bonds must therefore pay lower excess returns in equilibrium and uncovered interest parity fails. By a similar logic, stocks in the non-traded sector of larger countries also tend to pay lower excess returns. If asset markets are segmented, the introduction of a currency union lowers real interest rates and expected returns on stocks in the non-traded sector of participating countries. I test the predictions of the model for a panel of OECD countries and show that they are strongly supported by the data: Investors earn lower excess returns on bonds and stocks in the non-traded sector of larger countries. Similarly, excess returns on EMU member countries'bonds and stocks in the non-traded sector fell after European monetary integration. |
| Keywords: | International return differentials, country size, currency unions, uncovered interest parity, market segmentation. |
| JEL: | F3 G0 |
| Date: | 2009–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:154&r=cba |
| By: | Escaith, Hubert; Gonguet, Fabien |
| Abstract: | The article analyses the role of international supply chains as transmission channels of a financial shock. Because individual firms are interdependent and rely on each other, either as supplier of intermediate goods or client for their own production, an exogenous financial shock affecting a single firm, such as the termination of a line of credit, reverberates through the productive chain. The transmission of the initial financial shock through real channels is tracked by modelling input-output interactions. The paper indicates that when banks operate at the limit of their institutional capacity, defined by the capital adequacy ratio, and if assets are priced to market, then a resonance effect amplifies the back and forth transmission between real and monetary circuits. The paper illustrates the proposed methodology by computing a supply-driven indicator (IRSIC) and indirect demand-driven impacts on five interconnected economies of different characteristics: China, Japan, Malaysia, Thailand and the United States. |
| Keywords: | international supply chains; monetary circuit; real linkages; transmission channels of financial shock; Asian International Input-Output Tables |
| JEL: | G1 L16 F23 C67 F36 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15558&r=cba |
| By: | Thimann, Christian; Just, Christian; Ritter, Raymond |
| Abstract: | After having been at the helm of the international monetary system for decades, the International Monetary Fund was sidelined in policy debates in the past few years. One reason for the IMF not having taken a more central role in addressing key global policy issues in recent years relates to its internal governance. This paper focuses specifically on the structure and functioning of the Executive Board. The paper argues that Executive Board, although uniquely placed to provide authoritative guidance to IMF member countries, exert peer pressure and give economic policy advice, is overwhelmed by its tasks and responsibilities and too large to be an effective forum for true international economic dialogue. The paper makes the point that the highly diverse tasks of the IMF require different governance structures in order to be implemented effectively. We believe that the optimal number of governing bodies for the ongoing IMF work is not one, but that it is two, duly distinguishing between multilateral matters from country-related matters. Specifically, we propose to split the tasks that are predominantly systemic in nature from those that are predominantly country-focused and technical and believe that this can be done. Two different Boards would be dealing with these issues: a Systemic Issues Board and a Country Issues Board. The paper also discusses how such a dual board structure could be implemented in practice. |
| Keywords: | IMF; Governance |
| JEL: | F02 F33 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15656&r=cba |
| By: | Pavel Luengas (Office of Evaluation and Oversight at the Interamerican Development Bank.); Inder J. Ruprah (Office of Evaluation and Oversight at the Interamerican Development Bank.) |
| Abstract: | It has become common wisdom amongst monetary policy professionals that central banks in Latin America should adopt inflation targeting. Pure inflation targeting implicitly assumes a social loss welfare function dependent on only inflation. In this paper using subjective well-being survey data for Latin America we present evidence that both inflation and unemployment reduce wellbeing; where the cost of inflation in terms of unemployment, hence the relative size of the weights in a social well-being function, is about one to eight, almost double of that found for OECD countries. The weighted misery index differs in level (is higher) and change (an increase rather than a fall) from the commonly used unitary weighted index and from that of the pure inflation targeters for the period 1997 to 2006. In addition, the trade-off—and therefore the misery index—differs across subgroups, for example the young (aged 18-24 years) and left-leaning citizens are more concerned with unemployment than inflation. Thus advocates and practioners of inflation only targeting are, and increasingly so, divorced from the wellbeing of LAC citizens who are increasingly left leaning and with the youth, who given the population pyramid, are also increasing as a proportion of the population. The evidence presented in this paper, combined with the low frequency of happiness data, may not be sufficiently convincing for central banks to adopt happiness-targeting rule. However, happiness data would be useful to inform policy makers regarding the optimal disinflation policy or at least allow consciousness of the potential discontent of different sub-groups of the population of different disinflation strategies. |
| Keywords: | Happiness, Life Satisfaction, Inflation, Unemployment, and Misery Index |
| JEL: | I31 D60 D31 O54 C30 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:idb:ovewps:0209&r=cba |
| By: | Shin-ichi Fukuda (Faculty of Economics, University of Tokyo) |
| Abstract: | Under the financial turbulence, the Bank of Japan (BOJ) had launched a series of unprecedented monetary policies in the late 1990s and the early 2000s. The policies were not effective under liquidity trap from a view point of classical macroeconomics. However, they were powerful in providing ample liquidity to the short-term money market. In the first part, we investigate what role the BOJ played as the lender of last resort and as the lender of so-called Lombard lending facility. The BOJ had played an important role as the lender of last resort until the early 2000s but it lost its role under the quantitative easing policy. In the second part, we explore how effective the unprecedented monetary policies were in stabilizing intra-daily call market. Even under the zero interest rate policy, some overnight loans were transacted at the interest rates that were significantly higher than 0%. In contrast, risk premiums almost disappeared in the short-term financial market under the quantitative easing policy. This was particularly true when the BOJ intensified its quantitative easing policy. We show that the extreme monetary policy was useful in improving macroeconomic performance such as average stock prices. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:tky:jseres:2008cj205&r=cba |
| By: | Liew, Venus Khim-Sen |
| Abstract: | This study provides evidence of nonlinear long-run relationship between peso-yen exchange rate and its monetary determinants implied by the reduced-form flexible-price monetary model for the Philippines, using Breitung’s (2001) nonlinear cointegration testing procedures. The existence of such relationship is probably resulted from the strong and consistent bilateral trade relationship between the Philippines and Japan. Results from various monetary restrictions tests suggest that other forms of the related monetary model are not suitable in the determination of the peso-yen exchange rate. |
| Keywords: | Exchange Rate; Monetary Model; Nonlinear; Cointegration; the Philippines |
| JEL: | C32 F31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15550&r=cba |
| By: | Shirai, Sayuri |
| Abstract: | This paper takes an overview over the historical paths toward the Economic and Currency Union launched in EU in the post-WWII era. Namely, it covers Snakes, European Monetary System, and establishment of the Economic and Currency Union. Moreover, the paper analyzes the uniform monetary policy implemented in Euro Area by reviewing the growing tentions among mamber states (which had been revealed particularly when the global financial crisis erupted in late 2007), as well as the factors contributing to the difficulty in implementing a uniform monetary policy. Third, this paper focuses on the disciplinary process of the fiscal policy (set under the Maastricht Treaty and Stablity and Growth Pact). In particular, the theoretical rationals for introducing the region-wide fiscal disciplins, as well as actual peformance of mamber states will be covered. |
| Keywords: | Currency Union; Exchange Rate Mechanism; European Union |
| JEL: | F15 F31 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15713&r=cba |
| By: | Salvatore Capasso; Oreste Napolitano (Department of Economic Studies, Parthenope University of Naples) |
| Keywords: | Money demand, ARDL model, Kalman filter |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:prt:wpaper:2_2008&r=cba |
| By: | Eduardo Fernandez-Arias; Peter Montiel |
| Abstract: | This paper examines the countercyclical policy options available to Latin American countries in the face of the current global economic crisis, concluding that most of the major countries in the region appear to possess the fiscal space (as measured by credible fiscal sustainability and debt headroom) to run prudent countercyclical fiscal deficits. Those countries should undertake a constrained fiscal expansion focused on productive public spending and financed by “rainy day” funds—large stocks of foreign exchange reserves that they have accumulated during recent years—rather than by market borrowing. The recent surge in multilateral financial activity to alleviate market illiquidity, whether intended for reserve or budget support, strengthens the case for this policy prescription: with multilateral support, the appropriate policy response is more expansionary, and its financing is less reliant on market borrowing. |
| Keywords: | countercyclical policy, fiscal space, international reserves, multilateral financial support |
| JEL: | E62 E63 F34 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4628&r=cba |