|
on Central Banking |
| By: | Obstfeld, Maurice |
| Abstract: | The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last-resort lender that channels central bank liquidity where it is needed. The IMF’s effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time. |
| Keywords: | central banking; financial crisis; International Monetary Fund; international monetary system; Lender of last resort |
| JEL: | E58 F33 F36 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7355&r=cba |
| By: | Rose, Andrew K; Spiegel, Mark |
| Abstract: | This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 107 countries; we focus on national causes and consequences of the crisis, ignoring cross-country "contagion" effects. Our model of the incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly-cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of "early warning" systems of potential crises, which must also predict their timing. |
| Keywords: | country;; credit;; cross-section; data; empirical; international;; MIMIC.; model;; stock; |
| JEL: | E65 F30 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7354&r=cba |
| By: | Troy Davig; Eric M. Leeper |
| Abstract: | Increases in government spending trigger substitution effects—both inter- and intra-temporal—and a wealth effect. The ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes create a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between active and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model's predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act's implied path for government spending under alternative monetary-fiscal policy combinations. |
| JEL: | E31 E52 E6 E62 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15133&r=cba |
| By: | Eric M. Leeper; Todd B. Walker; Shu-Chun Susan Yang |
| Abstract: | This paper contributes to the debate about fiscal multipliers by studying the impacts of government investment in conventional neoclassical growth models. The analysis focuses on two dimensions of fiscal policy that are critical for understanding the effects of government investment: implementation delays associated with building public capital projects and expected future fiscal adjustments to debt-financed spending. Implementation delays can produce small or even negative labor and output responses in the short run; anticipated fiscal financing adjustments matter both quantitatively and qualitatively for long-run growth effects. Taken together, these two dimensions have important implications for the short-run and long-run impacts of fiscal stimulus in the form of higher government infrastructure investment. The analysis is conducted in several models with features relevant for studying government spending, including utility-yielding government consumption, time-to-build for private investment, and government production. |
| JEL: | E6 E62 H54 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15153&r=cba |
| By: | W. Max Corden (Department of Economics, The University of Melbourne) |
| Abstract: | Conservative critics of Keynesian fiscal stimulus policies usually criticise such policies because of the increase in public debt that results. Hence a burden on future taxpayers would be imposed. But there are qualifications. Firstly, if there is an initial output gap that cannot be eliminated with monetary policy, fiscal expansion will increase current output, and this will lead not only to higher current consumption but also to higher savings. These savings will yield a benefit for the future. Secondly, if at least some of the stimulus finances public investment, for example in infrastructure, there are also likely to be benefits for the future. The paper also discusses moneyfinancing of the deficit, the automatic stabilisers, and exchange rate effects of a fiscal stimulus. Finally, it underlines the need for a unified policy that produces both fiscal surpluses in a boom and deficits in a slump. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2009n15&r=cba |
| By: | Buiter, Willem H |
| Abstract: | The paper considers three methods for eliminating the zero lower bound on nominal interest rates and thus for restoring symmetry to domain over which the central bank can vary its policy rate. They are: (1) abolishing currency (which would also be a useful crime-fighting measure); (2) paying negative interest on currency by taxing currency; and (3) decoupling the numéraire from the currency/medium of exchange/means of payment and introducing an exchange rate between the numéraire and the currency which can be set to achieve a forward discount (expected depreciation) of the currency vis-a-vis the numéraire when the nominal interest rate in terms of the numéraire is set at a negative level for monetary policy purposes. |
| Keywords: | Eisler; Gesell; liquidity trap; Monetary policy; quantitative easing; zero interest rate policy |
| JEL: | B1 B2 B3 E1 E3 E4 E5 F3 F4 G1 H2 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7346&r=cba |
| By: | Daron Acemoglu; Melissa Dell |
| Abstract: | We document substantial within-country (cross-municipality) differences in incomes for a large number of countries in the Americas. A significant fraction of the within-country differences cannot be explained by observed human capital. We conjecture that the sources of within-country and between-country differences are related. As a first step towards a united framework, we propose a simple model incorporating both differences in technological know-how across countries and differences in productive efficiency within countries. |
| JEL: | O18 O40 R11 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15155&r=cba |
| By: | Mark Bils; Peter J. Klenow; Benjamin A. Malin |
| Abstract: | A standard state-dependent pricing model implies very limited scope for using active monetary policy to stabilize real activity. Two modeling strategies which expand the role of monetary policy are time-dependent pricing and strategic complementarities between price-setting firms. These mechanisms have telltale implications for the persistence and volatility of "reset price inflation." Reset price inflation is the rate of change of all desired prices (including for goods that have not changed price in the current period). Using the micro data underpinning the CPI, we construct an empirical measure of reset price inflation and use this measure to assess the validity of the modeling approaches. We find that time-dependent models imply unrealistically high persistence and stability of reset price inflation. This discrepancy is exacerbated by adding strategic complementarities, even under state-dependent pricing. A state-dependent model with no strategic complementarities aligns most closely with the CPI data. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-16&r=cba |
| By: | Tara M. Sinclair (Department of Economics The George Washington University); Fred Joutz (Department of Economics The George Washington University); Herman O. Stekler (Department of Economics The George Washington University) |
| Abstract: | Recent research has documented that the Federal Reserve produces systematic errors in forecasting inflation, real GDP growth, and the unemployment rate, even though these forecasts are unbiased. We show that these systematic errors reveal that the Fed is “surprised” by real and inflationary cycles. Using a modified Mincer-Zarnowitz regression, we show that the Fed knows the state of the economy for the current quarter, but cannot predict it one quarter ahead. |
| Keywords: | Forecast Evaluation; Federal Reserve; Systematic Errors; Recessions |
| JEL: | C53 E37 E52 E58 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:gwc:wpaper:2009-001&r=cba |
| By: | Michael T. Kiley |
| Abstract: | Inflation expectations play a central role in models of the Phillips curve. At long time horizons inflation expectations may reflect the credibility of a monetary authority's commitment to price stability. These observations highlight the importance of inflation expectations for monetary policy. These comments touch on three issues regarding inflation expectations: The evolving treatment of inflation expectations in empirical Phillips curve models; three recent models of information imperfections and inflation expectations; and potential policy implications of different models. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-15&r=cba |
| By: | Felix Geiger; Oliver Sauter |
| Abstract: | We expand a standard New-Keynesian model by allowing for a special role of money in the inflation and expectations building process. Motivated by the two-pillar Phillips curve, we introduce heterogeneous expectations. Thereby a fraction of agents forms inflation expectations by observing trend money growth. We show that in the presence of these monetary believers, contractive shocks to the economy produce smoother dynamics for inflation and output. We also find that monetary policy should follow a conventional Taylor rule with contemporaneous inflation and output data, if it is uncertain about the fraction of monetary believers. |
| Keywords: | New-Keynesian model, monetary policy, two-pillar Phillips curve, heterogeneous expectations, monetary believes |
| JEL: | E31 E41 E47 E52 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:hoh:hohdip:312&r=cba |
| By: | Karanassou, Marika (University of London); Sala, Hector (Universitat Autònoma de Barcelona) |
| Abstract: | This paper addresses the various methodological issues surrounding vector autoregressions, simultaneous equations, and chain reactions, and provides new evidence on the long-run inflation-unemployment tradeoff in the US. It is argued that money growth is a superior indicator of the monetary environment than the federal funds rate and, thus, the focus is on the inflation/unemployment responses to money growth shocks. SVAR (structural vector autoregression) and GMM (generalised method of moments) estimations confirm earlier findings in Karanassou, Sala and Snower (2005, 2008b) obtained from chain reaction structural models: the slope of the US Phillips curve is far from vertical, even in the long-run, which implies that the nominal and real sides of the economy are symbiotic. In the light of the significant and robust long-run inflation-unemployment tradeoffs, policy makers should reconsider the classical dichotomy thesis. |
| Keywords: | inflation, unemployment, money growth, SVAR, GMM, structural modelling, chain reactions |
| JEL: | E24 E31 E51 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4252&r=cba |
| By: | Jakob de Haan; David-Jan Jansen |
| Abstract: | Since its inception, the European Central Bank (ECB) has regarded communication as anintegral part of its monetary policy. This paper describes and evaluates ECB communications during the first decade of its operation.We conclude that, overall, ECB communication has contributed to the effectiveness of its monetary policy. Our review of the literature shows that ECB communications affect the level and volatility of financial prices - suggesting that private sector expectations reacted to ECB communication. In addition, there is evidence that communication has improved the predictability of interest rate decisions. |
| Keywords: | communication; European Central Bank; transparency; monetary policy |
| JEL: | E44 E52 E58 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:212&r=cba |
| By: | Xavier Freixas; Antoine Martin; David Skeie |
| Abstract: | A major lesson of the recent financial crisis is that the ability of banks to withstand liquidity shocks and to provide lending to one another is crucial for financial stability. This paper studies the functioning of the interbank lending market and the optimal policy of a central bank in response to both idiosyncratic and aggregate shocks. In particular, we consider how the interbank market affects a bank's choice between holding liquid assets ex ante and acquiring such assets in the market ex post. We show that a central bank should use different tools to manage different types of shocks. Specifically, it should respond to idiosyncratic shocks by lowering the interest rate in the interbank market and address aggregate shocks by injecting liquid assets into the banking system. We also show that failure to adopt the optimal policy can lead to financial fragility. |
| Keywords: | Interbank market ; Banks and banking, Central ; Bank liquidity ; Interest rates |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:371&r=cba |
| By: | Jens H. E. Christensen; Jose A. Lopez; Glenn D. Rudebusch |
| Abstract: | In response to the global financial crisis that started in August 2007, central banks provided extraordinary amounts of liquidity to the financial system. To investigate the effect of central bank liquidity facilities on term interbank lending rates, we estimate a six-factor arbitrage-free model of U.S. Treasury yields, financial corporate bond yields, and term interbank rates. This model can account for fluctuations in the term structure of credit risk and liquidity risk. A significant shift in model estimates after the announcement of the liquidity facilities suggests that these central bank actions did help lower the liquidity premium in term interbank rates. |
| Keywords: | Banks and banking, Central ; Bank liquidity |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2009-13&r=cba |
| By: | Federico Ravenna; Carl E. Walsh |
| Abstract: | We explore the distortions in business cycle models arising from inefficiencies in price setting and in the search process matching firms to unemployed workers, and the implications of these distortions for monetary policy. To this end, we characterize the tax instruments that would implement the first best equilibrium allocations and then examine the trade-offs faced by monetary policy when these tax instruments are unavailable. Our findings are that the welfare cost of search inefficiency can be large, but the incentive for policy to deviate from the inefficient flexible-price allocation is in general small. Sizable welfare gains are available if the steady state of the economy is inefficient, and these gains do not depend on the existence of an inefficient dispersion of wages. Finally, the gains from deviating from price stability are larger in economies with more volatile labor flows, as in the U.S. |
| Keywords: | Labor market |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2009-12&r=cba |
| By: | Paola Boel; Gabriele Camera |
| Abstract: | The welfare cost of anticipated inflation is quantified in a calibrated model of the U.S. economy that exhibits tractable equilibrium dispersion in wealth and earnings. Inflation does not generate large losses in societal welfare, yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy. If money is the only asset, then inflation hurts mostly the wealthier and more productive agents, while those poorer and less productive may even benefit from inflation. The converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money. |
| Keywords: | money, heterogeneity, friedman rule, trade frictions, calibration |
| JEL: | E4 E5 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1222&r=cba |
| By: | Consolo, Agostino; Favero, Carlo A |
| Abstract: | Empirical estimates of monetary policy reaction functions feature a very high estimated degree of monetary policy inertia. This evidence is very hard to reconcile with the alternative evidence of low predictability of monetary policy rates. In this paper we examine the potential relevance of the problem of weak instruments to correctly identify the degree of monetary policy inertia in forward looking monetary policy reaction function of the type originally proposed by Taylor (1993). After appropriately diagnosing and taking care of the weak instruments problem, we find an estimated degree of policy inertia which is significantly lower than the common value in the empirical literature on monetary policy rules. |
| Keywords: | Monetary Policy Rulkes; Weak Identification |
| JEL: | E52 E58 G12 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7341&r=cba |
| By: | Espen Henriksen; Finn E. Kydland; Roman Sustek |
| Abstract: | We document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are substantially more synchronized across countries than fluctuations in real output. To the extent that domestic nominal variables are determined by domestic monetary policy, and central banks generally attempt to keep the domestic nominal environment stable, this might seem surprising. We ask if a parsimonious international business cycle model can account for this aspect of cross-country aggregate fluctuations. It can. Due to spillovers of technology shocks across countries, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce cross-country correlations such as those in the data. |
| JEL: | E31 E32 E43 F42 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15123&r=cba |
| By: | Camacho, Maximo; Pérez-Quirós, Gabriel |
| Abstract: | We set out a model to compute short-term forecasts of the euro area GDP growth in real-time. To allow for forecast evaluation, we construct a real-time data set that changes for each vintage date and includes the exact information that was available at the time of each forecast. With this data set, we show that our simple factor model algorithm, which uses a clear, easy-to-replicate methodology, is able to forecast the euro area GDP growth as well as professional forecasters who can combine the best forecasting tools with the possibility of incorporating their own judgement. In this context, we provide examples showing how data revisions and data availability affect point forecasts and forecast uncertainty. |
| Keywords: | Business cycle; Forecasting; Time Series |
| JEL: | C22 E27 E32 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7343&r=cba |
| By: | Glenn Otto (University of New South Wales, Australia); Graham Voss (University of Victoria, Canada, Hong Kong Institute for Monetary Research) |
| Abstract: | We examine whether standard theoretical models of inflation forecast targeting are consistent with the observed behaviour of the central banks of Australia, Canada, and the United States. The target criteria from these models restrict the conditionally expected paths of variables targeted by the central bank, in particular inflation and the output gap. We estimate various moment conditions, providing a description of monetary policy for each central bank under different maintained hypotheses. We then test whether these estimated conditions satisfy the predictions of models of optimal monetary policy. The overall objective is to examine the extent to which and the manner in which these central banks successfully balance inflation and output objectives over the near term. For all three countries, we obtain reasonable estimates for both the strict and flexible inflation forecast targeting models, though with some qualifications. Most notably, for Australia and the United States there are predictable deviations from forecasted targets, which is not consistent with models of inflation targeting. In contrast, the results for Canada lend considerable support to simple models of flexible inflation forecast targeting. |
| JEL: | E31 E58 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:202009&r=cba |
| By: | Lee , Jim (Texas A&M University- Corpus Christi); Crowley, Patrick M (Texas A&M University - Corpus Christi) |
| Abstract: | This paper investigates the extent to which euro area monetary policy has responded to evolving economic conditions in individual member states as opposed to the euro area as a whole. Based on a forward-looking Taylor rule-type policy reaction function, we conduct counterfactual exercises that compare the monetary policy behaviour of the ECB under alternative hypothetical scenarios: (1) the euro member states make individual policy decisions, and (2) the ECB responds to the economic conditions of individual members. Stress measures are then constructed to evaluate the degree of divergence of member state economies under these two hypothetical scenarios. The results we obtain reflect the extent of heterogeneity among the national economies in the monetary union, indicating that euro area policy rates have been particularly close to the ‘counterfactual’ interest rates of the largest euro members and countries with similar economic conditions, namely Germany, Austria, Belgium and France. |
| Keywords: | European Central Bank; monetary policy reaction; Taylor rule; counterfactual analysis |
| JEL: | C53 E52 |
| Date: | 2009–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_011&r=cba |
| By: | Fernando Alexandre (University of Minho and NIPE); Pedro Bação (University of Coimbra and GEMF); João Cerejeira (University of Minho and NIPE); Miguel Portela (University of Minho, NIPE and IZA) |
| Abstract: | 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: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2009-08&r=cba |
| By: | Mackowiak, Bartosz Adam; Moench, Emanuel; Wiederholt, Mirko |
| Abstract: | We estimate impulse responses of sectoral price indexes to aggregate shocks and to sector-specific shocks. In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The standard Calvo model and the standard sticky-information model can match this finding only under extreme assumptions concerning the profit-maximizing price. The rational-inattention model of Ma´ckowiak and Wiederholt (2009a) can match this finding without an extreme assumption concerning the profit-maximizing price. Furthermore, there is little variation across sectors in the speed of response of sectoral price indexes to sector-specific shocks. The rational-inattention model matches this finding, while the Calvo model predicts too much cross-sectional variation. |
| Keywords: | Bayesian dynamic factor model; Calvo model; menu cost; rational inattention; sticky information |
| JEL: | C11 D21 D83 E31 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7339&r=cba |
| By: | Hammad Qureshi (Department of Economics, Ohio State University) |
| Abstract: | The idea that expectations about future economic fundamentals can drive business cycles dates back to the early twentieth century. However, the standard real business cycle (RBC) model fails to generate positive comovement in output, consumption, labor-hours and investment in response to news shocks. This paper proposes a simple and intuitive solution to this puzzling feature of the RBC model, based on a mechanism that has strong empirical support: learning-by-doing (LBD). First, we show that the one-sector RBC model augmented by LBD can generate aggregate comovement in response to news shock about technology. Second, we show that in the two-sector RBC model, LBD along with an intratemporal adjustment cost can generate sectoral comovement in response to news about three types of shocks: i) neutral technology shock, ii) consumption technology shock, and iii) investment technology shock. We show that these results hold for contemporaneous technology shocks and for different specifications of LBD. |
| Keywords: | News Shocks, Learning-by-Doing, Pigou Cycles |
| JEL: | E3 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:osu:osuewp:09-06&r=cba |
| By: | Engin Kara (National Bank of Belgium, Research Department) |
| Abstract: | This paper considers the monetary policy implications of a model that features input-output connections between stages of production, so that a distinction between CPI inflation and PPI inflation arises. More specifically, this paper addresses the policy conclusion by K. Huang and Z. Liu [2005, "Inflation targeting: What inflation rate to target", Journal of Monetary Economics 52], which states that central banks should use an optimal inflation index that gives substantial weight to stabilising both CPI and PPI. This paper argues that these authors' findings rely on the assumption that producer prices are as sticky as consumer prices and it also shows that, once empirically relevant frequencies of price adjustment are used to calibrate the model, CPI inflation receives substantial weight in the optimal inflation index. Moreover, this rule is remarkably robust to uncertainty regarding the model parameters, whereas the policy rule proposed by Huang and Liu can result in heavy welfare losses |
| Keywords: | Inflation targeting, Optimal Monetary Policy |
| JEL: | E32 E52 E58 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200906-25&r=cba |
| By: | Durringer Fabien |
| Abstract: | This research provides further insight of trilemma phenomenon which is defined as the impossibility for a country to achieve at the same time the triple desirable goals of stability of its exchange rate, independence of its monetary policy and freedom of its capital flows. Using three indices measuring these three variables, we prove that the trilemma relationship exists provided some extra explanatory variables are added in the econometric fixed-effect modelfs equation. Conditionality is therefore attached to the existence of the trilemma. Once these results are established we provide some additional analyses of the trilemma phenomenon. First, by introducing the concept of gperformanceh we show that certain countries are coping better than others facing the trilemma constraint. Second, by using a triangle graph representing the trilemma goals at the vertices, we analyze the tradeoff that countries have adopted over years when dealing with this problem. We manage to show graphically that, rather than positioning themselves to the vertices of this triangle, countries usually adopt positions close to one side of it. These results can therefore be understood as the choice between three gdilemmash represented by the trianglefs sides. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd09-69&r=cba |
| By: | Hau, Harald |
| Abstract: | This paper documents how currency speculators trade when international capital flows generate predictable exchange rate movements. The redefinition of the MSCI world equity index in December 2000 provides an ideal natural experiment identifying exogenous capital flows of index tracking equity funds. Currency speculators are shown to front-run international capital flows. Furthermore, they actively manage the portfolio risk of their speculative positions through hedging positions in correlated currencies. The exchange rate effect of separate risk hedging is economically significant and amounts to a return difference of 3.6 percent over a 5 day event window between currencies with high and low risk hedging value. The results of the classical event study analysis are confirmed by a new and more powerful spectral inference isolating the high frequency cospectrum of currency pairs. The evidence supports the idea that international currency arbitrage is limited by the speculators' risk aversion. |
| Keywords: | Cospectrum; Limited Arbitrage; Multi-Currency Risk Hedging; Spectral Inference; Speculative Trading |
| JEL: | F31 G11 G14 G15 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7348&r=cba |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Marius Jurgilas (Financial Stability Directorate, Bank of England); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg); Stephen M. Miller (College of Business, University of Las Vegas, Nevada) |
| Abstract: | Our paper considers the channel whereby monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model that incorporates 143 monthly macroeconomic variables over the period of 1986:01 to 2003:12, including 21 variables relating to the housing sector at the national and four census regions. We find at the national level that housing starts, housing permits, and housing sales fall in response to the tightening of monetary policy. Housing sales reacts more quickly and sharply than starts and permits and exhibits more duration. Housing prices show the weakest response to the monetary policy shock. At the regional level, we conclude that the housing sector in the South drives the national data. The responses in the West differ the most from the other regions, especially for the impulse responses of housing starts and permits. |
| Keywords: | Monetary policy, Housing sector dynamics, Large-Scale BVAR models |
| JEL: | C32 R31 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200913&r=cba |
| By: | Rakesh Mohan |
| Abstract: | The paper attempts to analyse the emerging contours of regulation of financial institutions with an emphasis on the emerging challenges and dynamics. [Paper prepared for Financial Stability Review of Bank of France]. |
| Keywords: | financial, stability, institutions, challenges, dynamics, Evolution of Crisis, macroeconomic, monetary policy, US, liquidity, inflation, commodity prices, India, goods, services, imports, china, government securities, mortgage entities, interest rates, advanced economies, |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2107&r=cba |
| By: | Troy Davig; Eric Leeper |
| Abstract: | Farmer, Waggoner, and Zha (2009) show that a new Keynesian model with a regime-switching monetary policy rule can support multiple solutions that depend only on the fundamental shocks in the model. Their note appears to find solutions in regions of the parameter space where there should be no bounded solutions, according to conditions in Davig and Leeper (2007). This puzzling finding is straightforward to explain: Farmer, Waggoner, and Zha (FWZ) derive solutions using a model that differs from the one to which the Davig and Leeper (DL) conditions apply. In addition, FWZ impose cross-equation restrictions between behavioral relations and the exogenous driving process. This rather special assumption undermines the traditional sharp distinction in micro-founded general equilibrium models between 'deep' parameters and the parameters governing the exogenous processes. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-09&r=cba |
| By: | Jouchi Nakajima; Munehisa Kasuya; Toshiaki Watanabe |
| 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 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd09-072&r=cba |
| By: | Todd E. Clark |
| Abstract: | Central banks and other forecasters have become increasingly interested in various aspects of density forecasts. However, recent sharp changes in macroeconomic volatility such as the Great Moderation and the more recent sharp rise in volatility associated with greater variation in energy prices and the deep global recession pose significant challenges to density forecasting. Accordingly, this paper examines, with real-time data, density forecasts of U.S. GDP growth, unemployment, inflation, and the federal funds rate from VAR models with stochastic volatility. The model of interest extends the steady state prior BVAR of Villani (2009) to include stochastic volatility, because, as found in some prior work and this paper, incorporating informative priors on the steady states of the model variables often improves the accuracy of point forecasts. The evidence presented in the paper shows that adding stochastic volatility to the BVAR with a steady state prior materially improves the real-time accuracy of point and density forecasts. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-08&r=cba |
| By: | Dimitris Korobilis (Department of Economics, University of Strathclyde) |
| Abstract: | The evolution of monetary policy in the U.S. is examined based on structural dynamic factor models. I extend the current literature which questions the stability of the monetary transmission mechanism, by proposing and studying time-varying parameters factor-augmented vector autoregressions (TVP-FAVAR), which allow for fast and efficient inference based on hundreds of explanatory variables. Different specifcations are compared where the factor loadings, VAR coefficients and error covariances, or combinations of those, may change gradually in every period or be subject to small breaks. The model is applied to 157 post-World War II U.S. quarterly macroeconomic variables. The results clearly suggest that the propagation of the monetary and non-monetary (exogenous) shocks has altered its behavior, and speciffically in a fashion which supports smooth evolution rather than abrupt change. The most notable changes were in the responses of real activity measures, prices and monetary aggregates, while other key indicators of the economy remained relatively unaffected. |
| Keywords: | Structural FAVAR, time varying parameter model, monetary policy |
| JEL: | C11 C32 E52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:str:wpaper:0914&r=cba |
| By: | Gunnar Bardsen; Helmut Luetkepohl |
| Abstract: | Sometimes forecasts of the original variable are of interest although a variable appears in logarithms (logs) in a system of time series. In that case converting the forecast for the log of the variable to a naive forecast of the original variable by simply applying the exponential transformation is not optimal theoretically. A simple expression for the optimal forecast under normality assumptions is derived. Despite its theoretical advantages the optimal forecast is shown to be inferior to the naive forecast if specification and estimation uncertainty are taken into account. Hence, in practice using the exponential of the log forecast is preferable to using the optimal forecast. |
| Keywords: | Vector autoregressive model, cointegration, forecast root mean square error |
| JEL: | C32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/24&r=cba |
| By: | Pietro Alessandrini (Universita Politecnica delle Marche); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) |
| Abstract: | The current international monetary system (IMS) is fragile because the dollar standard is rapidly deteriorating. The dual role the dollar as the dominant international money and national money cannot be easily reconciled because the US monetary authorities face a conflict between pursuing domestic objectives of employment and inflation and maintaining the international public good of a stable money. To strengthen the IMS, China has advocated the revitalization of the Special Drawing Rights (SDRs). But SDRs are neither money nor a claim on any international institution; are issued exogenously without any consideration to countries’ financing needs; and can activate international monies only though bilateral transactions. The historical record of SDRs as international reserves is altogether unimpressive. We propose instead the creation of a supernational bank money (SBM) within the institutional setting of a clearing union. This union would be a full-fledged agreement by participating central banks on specific rules of the game, such as size and duration of overdrafts, designation of countries that would have to bear the burden of external adjustment, and coordination of monetary policies objectives and at expense of the maintenance of the international public good. We also discuss structural changes that would make SDRs converge to SBMs. |
| Keywords: | international money, international monetary system, Special Drawing Right, supernational bank money |
| JEL: | E42 E52 F33 F36 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2009-03&r=cba |
| By: | Adam Ashcraft; James McAndrews; David Skeie |
| Abstract: | Liquidity hoarding by banks and extreme volatility of the fed funds rate have been widely seen as severely disrupting the interbank market and the broader financial system during the 2007-08 financial crisis. Using data on intraday account balances held by banks at the Federal Reserve and Fedwire interbank transactions to estimate all overnight fed funds trades, we present empirical evidence on banks' precautionary hoarding of reserves, their reluctance to lend, and extreme fed funds rate volatility. We develop a model with credit and liquidity frictions in the interbank market consistent with the empirical results. Our theoretical results show that banks rationally hold excess reserves intraday and overnight as a precautionary measure against liquidity shocks. Moreover, the intraday fed funds rate can spike above the discount rate and crash to near zero. Apparent anomalies during the financial crisis may be seen as stark but natural outcomes of our model of the interbank market. The model also provides a unified explanation for several stylized facts and makes new predictions for the interbank market. |
| Keywords: | Bank reserves ; Federal funds rate ; Interbank market ; Liquidity (Economics) |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:370&r=cba |
| By: | Vivien Lewis (National Bank of Belgium, Research Department; Ghent University, Department of Financial Economics); Agnieszka Markiewicz (Erasmus University Rotterdam, Department of Economics) |
| Abstract: | Rational expectations models fail to explain the disconnect between the exchange rate and macroeconomic fundamentals. In line with survey evidence on the behaviour of foreign exchange traders, we introduce model misspecification and learning into a standard monetary model. Agents use simple forecasting rules based on a restricted information set. They learn about the parameters and performance of different models and can switch between forecasting rules. We compute the implied post-Bretton Woods US dollar-pound sterling exchange rate and show that the excess volatility of the exchange rate return can be reproduced with low values of the learning gain. Both assumptions, misspecification and learning, are necessary to generate this result. However, the implied correlations with the fundamentals are higher than in the data. Including more lags in the model tends to tip the balance of our findings slightly towards rational expectations and away from the learning hypothesis |
| Keywords: | exchange rate, disconnect, misspecification, learning |
| JEL: | F31 E37 E44 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200907-01&r=cba |
| By: | Ljungwall, Christer (China Economic Research Center); Xiong, Yi (Peking University National School of Development, China Center for Economic Research); Zou, Yutong (Peking University National School of Development, China Center for Economic Research) |
| Abstract: | This paper investigates the current monetary policy regime of China’s Central Bank, the People’s Bank of China (PBoC). This is done from the specific viewpoint of PBoC financial strength and the cost of its monetary policy instruments. The result shows that PBoC is constrained by the costs of its monetary policy instruments. PBoC tend to use less costly but market-distorting instruments such as deposit interest rate cap and reserve-ratio requirements, rather than more market-oriented but more costly instruments such as central bank note issuance. These costs remain under control today, but may rise in the future as PBoC accumulates more foreign assets. This, in turn, will jeopardize the Chinese monetary authority’s capability to maintain price stability. |
| Keywords: | Central banking; Monetary policy; China |
| JEL: | E51 E52 E58 E63 O53 |
| Date: | 2009–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hacerc:2009-008&r=cba |
| By: | Fan, Longzhen (School of Management, Fudan University); Johansson, Anders C. (China Economic Research Center) |
| Abstract: | This paper analyzes the joint dynamic processes of macroeconomic and monetary variables and bond yields in China. We show that macroeconomic variables as well as monetary policy variables have a significant impact on two factors that capture the variation in yields. An increase in the inflation rate and economic growth result in a rise in the yield curve. Similarly, an increase in the money supply causes a rise in the yield curve, albeit with a delayed effect. Finally, when official rates are raised, the long yield shows signs of a delayed decline. Overall, the long yield is more sensitive to most changes in macroeconomic and monetary variables. These results differ from an earlier study on bond yields by Ang and Piazzesi (2003), who show that the U.S. short-term rate is more sensitive to changes in macroeconomic variables. Possible explanations for the difference include certain unique structural features in the domestic financial system and the way monetary policy is conducted in China. |
| Keywords: | China; yield curve; macroeconomic factors; monetary policy |
| JEL: | E43 E44 E52 E58 G12 |
| Date: | 2009–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hacerc:2009-009&r=cba |
| By: | Yin-Wong Cheung (University of California, Santa Cruz); Menzie D. Chinn (University of Wisconsin, Madison, NBER); Eiji Fujii (University of Tsukuba) |
| Abstract: | We examine whether the Chinese exchange rate is misaligned and how Chinese trade flows respond to the exchange rate and to economic activity. We find, first, that the Chinese currency, the renminbi (RMB), is substantially below the value predicted by estimates based upon a cross-country sample, when using the 2006 vintage of the World Development Indicators. The economic magnitude of the misalignment is substantial ¡V on the order of 50 percent in log terms. However, the misalignment is typically not statistically significant, in the sense of being more than two standard errors away from the conditional mean. However, this finding disappears completely when using the most recent 2008 vintage of data; then the estimated undervaluation is on the order of 10 percent. Second, we find that Chinese multilateral trade flows respond to relative prices ¡V as represented by a trade weighted exchange rate ¡V but the relationship is not always precisely estimated. In addition, the direction of the effects is sometimes different from what is expected a priori. For instance, Chinese ordinary imports actually rise in response to a RMB depreciation; however, Chinese exports appear to respond to RMB depreciation in the expected manner, as long as a supply variable is included. In that sense, Chinese trade is not exceptional. Furthermore, Chinese trade with the United States appears to behave in a standard manner ¡V especially after the expansion in the Chinese manufacturing capital stock is accounted for. Thus, the China-US trade balance should respond to real exchange rate and relative income movements in the anticipated manner. However, in neither the case of multilateral nor bilateral trade flows should one expect quantitatively large effects arising from exchange rate changes. And, of course, these results are not informative with regard to the question of how a change in the RMB/USD exchange rate would affect the overall US trade deficit. Finally, we stress the fact that considerable uncertainty surrounds both our estimates of RMB misalignment and the responsiveness of trade flows to movements in exchange rates and output levels. In particular, the results for trade elasticities are sensitive to econometric specification, accounting for supply effects, and for the inclusion of time trends. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:142009&r=cba |
| By: | Micha³ Brzoza-Brzezina; Jacek Kot³owski (National Bank of Poland, Warsaw School of Economics) |
| Abstract: | This paper uses a restricted factor model to estimate the HICP index excluding relative prices changes. The index thus obtained, hereinafter referred to as pure inflation, demonstrates stronger relationship to the central bank instrument (short-term interest rate) than the HICP index and selected measures of core inflation. Pure inflation has also a forecasting performance for future HICP comparable or better than that of competing models. The estimated variable indicates a much weaker role of changes in relative prices in the recent period of rising inflation (2006-2008) than during previous inflation increases (1999-2000 and 2004-05). This may show that inflation was mainly driven by demand pressures in the years 2006-2008. |
| Keywords: | monetary policy, relative prices, factor model, core inflation |
| JEL: | C43 E31 E58 |
| Date: | 2009–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:wse:wpaper:37&r=cba |