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on Central Banking |
| By: | Federico Ravenna; Carl E. Walsh |
| Abstract: | In this paper, we derive a linear-quadratic model for monetary policy analysis that is consistent with sticky prices and search and matching frictions in the labor market. We show that the second-order approximation to the welfare of the representative agent depends on inflation and "gaps" that involve current and lagged unemployment. Our approximation makes explicit how the costs of fluctuations are generated by the presence of search frictions. These costs are distinct from the costs associated with relative price dispersion and fluctuations in consumption that appear in standard new Keynesian models. We use the model to analyze optimal monetary policy under commitment and discretion and to show that the structural characteristics of the labor market have important implications for optimal policy. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2009-15&r=cba |
| By: | Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stéphane Moyen (Deutsche Bundesbank, Taunusanlage 5, D-60329 Frankfurt am Main, Germany.) |
| Abstract: | This paper quantifies the deterioration of achievable stabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale DSGE model, we introduce through a simple signal extraction problem, an imperfect knowledge configuration where price and wage setters wrongly doubt about the determination of the central bank to leave unchanged its long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. Given such illustrative calibrations, we find that the costs of maintaining a given inflation volatility under weak credibility could amount to 0.25 pp of output gap standard deviation. JEL Classification: E4, E5, F4. |
| Keywords: | Monetary policy; Imperfect credibility; Signal extraction. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901065&r=cba |
| By: | Jane M. Binner; Peter Tino; Jonathan Tepper; Richard G. Anderson; Barry Jones; Graham Kendall |
| Abstract: | This paper provides the most fully comprehensive evidence to date on whether or not monetary aggregates are valuable for forecasting US inflation in the early to mid 2000s. We explore a wide range of different definitions of money, including different methods of aggregation and different collections of included monetary assets. In our forecasting experiment we use two non-linear techniques, namely, recurrent neural networks and kernel recursive least squares regression - techniques that are new to macroeconomics. Recurrent neural networks operate with potentially unbounded input memory, while the kernel regression technique is a finite memory predictor. The two methodologies compete to find the best fitting US inflation forecasting models and are then compared to forecasts from a naive random walk model. The best models were non-linear autoregressive models based on kernel methods. Our findings do not provide much support for the usefulness of monetary aggregates in forecasting inflation. |
| Keywords: | Forecasting ; Inflation (Finance) ; Monetary theory |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-30&r=cba |
| By: | Francesco Turino (Universidad de Alicante) |
| Abstract: | In the last decade, the analytical progress achieved in the New Keynesian literature has been remarkable. Many of the early assumptions have been relaxed, leading to medium-scale macroeconomic models that are now able to capture many features of real-world data. Nevertheless, modern-day New Keynesian models still assume, as did their early counterparts, that firms compete in the market with no tools other than their relative prices. In particular, this literature has so far neglected the consequences of extending competition between firms to the non-price dimension. This paper tries to fill this gap by enriching the canonical New Keynesian framework to include both price and non-price competition. This has important consequences for the analysis of inflation dynamics, modifying in particular the inflation-marginal cost relationship. As a general result, we show that any activity by firms that boosts demand for their products, without directly affecting their prices, dampens the overall degree of real rigidities in price-setting. |
| Keywords: | Non-price competition, inflation dynamics, real rigidity |
| JEL: | E31 L11 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-17&r=cba |
| By: | Darné, O.; Ferrara, L. |
| Abstract: | In addition to quantitative assessment of economic growth using econometric models, business cycle analyses have been proved to be helpful to practitioners in order to assess current economic conditions or to anticipate upcoming fluctuations. In this paper, we focus on the acceleration cycle in the euro area, namely the peaks and troughs of the growth rate which delimitate the slowdown and acceleration phases of the economy. Our aim is twofold: First, we put forward a reference turning point chronology of this cycle on a monthly basis, based on gross domestic product and industrial production index. We consider both euro area aggregate level and country specific cycles for the six main countries of the zone. Second, we come up with a new turning point indicator, based on business surveys carefully watched by central banks and short-term analysts, in order to follow in real-time the fluctuations of the acceleration cycle. Classification-JEL : C22, C52, E32. |
| Keywords: | Acceleration cycle, Euro area, Dating chronology, Turning point indicator, Business surveys. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:239&r=cba |
| By: | Stephanie Kremer; Alexander Bick; Dieter Nautz |
| Abstract: | We introduce a dynamic panel threshold model to shed new light on the impact of inflation on long-term economic growth. The empirical analysis is based on a large panel-data set including 124 countries during the period from 1950 to 2004. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation hampers growth if it exceeds 17%. Below this threshold, however, the impact of inflation on growth remains insignificant. Therefore, our results do not support growth-enhancing effects of inflation in developing countries. |
| Keywords: | Inflation Thresholds, Inflation and Growth, Dynamic Panel Threshold Model |
| JEL: | E31 C23 O40 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-036&r=cba |
| By: | Ruth Judson; Elizabeth Klee |
| Abstract: | This paper provides new estimates of banks' demand for excess reserve balances on a period average basis. Consistent with theoretical work, we find that the demand for excess depends critically on uncertainty of flows in and out of reserve accounts. We also document the variability of demand for excess reserve balances by institution size, evaluate different models for forecasting demand for excess on a period average basis, and report the forecasting performance of each of these models. Finally, we present analysis of the period of financial turmoil seen over the year since August, 2007. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-22&r=cba |
| By: | Ruth Judson; Elizabeth Klee |
| Abstract: | Previous research indicated that the daily liquidity effect, or the change in the federal funds rate associated with an exogenous change in Fed balances, varies with several factors including the day of the maintenance period. In this paper, we examine the data over the recent period of increased Federal Reserve transparency and find that the liquidity effect stabilized across days of the maintenance period. Rather, the liquidity effect may be a function of the uncertainty about banks' end-of-day balances. Moreover, we find that increased transparency led to a larger liquidity effect on the days prior to an FOMC meeting. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-25&r=cba |
| By: | Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority); Hans Genberg (Research Department, Hong Kong Monetary Authority); Tsz-Kin Chung (Research Department, Hong Kong Monetary Authority) |
| Abstract: | Given the deleveraging process in the banking sector, banks were reluctant to lend funds in the interbank market because of uncertainty about their own future need for funds during the financial crisis of 2007 - 2009. Aggregate liquidity then declined. This paper investigates the impact of the market-wide liquidity risk and carry-trade incentives on exchange rate movements. The results suggest that liquidity risk measured by the spread between LIBOR and the overnight index swap rate was a significant factor affecting the exchange-rate movements of the euro, British pound and Swiss franc, while carry trades were important for the Japanese yen, Australian dollar and New Zealand dollar. |
| Keywords: | Sub-prime crisis; carry trades; liquidity; leverage |
| JEL: | F31 F32 F33 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0911&r=cba |
| By: | Dieter Gerdesmeier (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Barbara Roffia (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Hans-Eggert Reimers (Hochschule Wismar, Postfach 1210, D-23952 Wismar, Germany.) |
| Abstract: | This paper contributes to the literature on the properties of money and credit indicators for detecting asset price misalignments. After a review of the evidence in the literature on this issue, the paper discusses the approaches that can be considered to detect asset price busts. Considering a sample of 17 OECD industrialised countries and the euro area over the period 1969 Q1 – 2008 Q3, we construct an asset price composite indicator which incorporates developments in both the stock price and house price markets and propose a criterion to identify the periods characterised by asset price busts, which has been applied in the currency crisis literature. The empirical analysis is based on a pooled probit-type approach with several macroeconomic monetary, financial and real variables. According to statistical tests, credit aggregates (either in terms of annual changes or growth gap), changes in nominal long-term interest rates and investment-to-GDP ratio combined with either house prices or stock prices dynamics turn out to be the best indicators which help to forecast asset price busts up to 8 quarters ahead. JEL Classification: E37, E44, E51. |
| Keywords: | Asset prices, house prices, stock prices, financial crisis, asset price busts, probit models, monetary aggregates, credit aggregates. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901068&r=cba |
| By: | Naohiko Baba; Frank Packer |
| Abstract: | This paper investigates dislocations in the foreign exchange (FX) swap market between the US dollar and three major European currencies. After the failure of Lehman Brothers in September 2008, deviations from covered interest parity (CIP) were negatively associated with the creditworthiness of US financial institutions (as well as that of European institutions), consistent with the deepening of a dollar liquidity problem into a global phenomenon. US dollar term funding auctions by the ECB, SNB, and BoE, as well as the US Federal Reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the FX swap market dislocations. |
| Keywords: | FX swap, Covered interest parity, Financial market turmoil, Counterparty risk, US dollar swap lines, Term auction facility, Central bank cooperation, Lehman bankruptcy |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:285&r=cba |
| By: | Fang Cai; Hyunsoo Joo; Zhiwei Zhang |
| Abstract: | This paper utilizes a unique high-frequency database to measure how exchange rates in nine emerging markets react to macroeconomic news in the U.S. and domestic economies from 2000 to 2006. We find that major U.S. macroeconomic news have a strong impact on the returns and volatilities of emerging market exchange rates, but many domestic news do not. Emerging market currencies have become more sensitive to U.S. news in recent years. We also find that market sentiment could sway the impact of news on these currencies systematically, as good (bad) news seems to matter more when optimism (pessimism) prevails. Market uncertainty also interacts with macroeconomic news in a statistically significant way, but its role varies across currencies and news. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:973&r=cba |
| By: | Adjemian, S.; Cahn, C.; Devulder, A.; Maggiar, N. |
| Abstract: | In this paper, we try to illustrate the interest of the Bayesian approach for the evaluation of economic policies, often realised by analysing the response of the economy to a standard shock. We present a Stochastic Dynamic General Equilibrium model for the euro area. The Bayesian estimation gives a measure of the uncertainty on the parameters, from which we can derive the uncertainty of the responses to standard shocks. As an illustration, we simulate the effects of a fiscal shock (announced VAT increase). |
| Keywords: | DSGE, Euro zone, Nominal rigidities, Bayesian estimation. |
| JEL: | E4 E5 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:236&r=cba |
| By: | Pengfei Wang; Yi Wen |
| Abstract: | Why are asset prices so much more volatile and so often detached from their fundamentals? Why does the burst of financial bubbles depress the real economy? This paper addresses these questions by constructing an infinite-horizon heterogeneous-agent general-equilibrium model with speculative bubbles. We show that agents are willing to invest in asset bubbles even though they have positive probability to burst. We prove that any storable goods, regardless of their intrinsic values, may give birth to bubbles with market prices far exceeding their fundamental values. We also show that perceived changes in the bubbles probability to bust can generate boom-bust cycles and produce asset price movements that are many times more volatile than the economy's fundamentals, as in the data. |
| Keywords: | Financial crises ; Speculation ; Asset pricing |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-29&r=cba |
| By: | Cooper, R.; Kempf, H.; Peled, D. |
| Abstract: | This paper studies the effects of monetary policy rules in a fiscal federation, such as the European Union. The focus of the analysis is the interaction between the fiscal policy of member countries (regions) and the monetary authority. Each of the countries structures its fiscal policy (spending and taxes) with the interests of its citizens in mind. Ricardian equivalence does not hold due to the presence of monetary frictions, modelled here as reserve requirements. When capital markets are integrated, the fiscal policy of one country influences equilibrium wages and interest rates. Under certain rules, monetary policy may respond to the price variations induced by regional fiscal policies. Depending on the type of rule it adopts, interventions by the monetary authority affect the magnitude and nature of the spillover from regional fiscal policy. |
| Keywords: | Monetary Union ; Inflation tax ; Seigniorage ; monetary rules ; public debt. |
| JEL: | E31 E42 E58 E62 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:233&r=cba |
| By: | Aaron Nicholas; Ranjan Ray; Rebecca Valenzuela |
| Abstract: | This paper investigates the distributional implication of inflation in Australia. It proposes and applies a method of evaluating the nature and size of the inequality bias of price movements. In the process, the study introduces a new demographic demand model that yields sensible and well determined estimates of the general equivalence scale and the size economies of scale. The study finds that inflation in Australia during the 1990s had an inequality increasing bias and that this bias increased in the late 1990s and the first part of the new millennium. The study also provides evidence on the decomposition of overall inequality between demographic groups and compares the decomposition between the nominal and real expenditure inequalities. |
| Keywords: | Price scaling, demographic demand, real expenditure inequality, inequality aversion. |
| JEL: | C13 D12 D31 D63 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2008-33&r=cba |
| By: | Gregory E. Givens |
| Abstract: | This paper explains US macroeconomic outcomes with an empirical new-Keynesian model in which monetary policy minimizes the central bank's loss function. The presence of expectations in the model forms a well-known distinction between two modes of optimization, termed commitment and discretion. I estimate the model separately under each policy using maximum likelihood over the Volcker-Greenspan-Bernanke period. Comparisons of fit reveal that the data favor the specification with discretionary policy. Estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model. |
| Keywords: | Optimal Monetary Policy, Commitment, Discretion, Policy Preferences |
| JEL: | E52 E58 E61 C32 C61 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:mts:wpaper:200905&r=cba |
| By: | Sigridur Benediktsdottir; Chiara Scotti |
| Abstract: | Exchange rate movements are difficult to predict but there appear to be discernible patterns in how currencies jointly appreciate or depreciate against the dollar. In this paper, we study the dependence structure of a number of exchange rate pairs against the dollar. We employ a conditional copula approach to recover the joint distributions for pairs of exchange rates and study both the correlation and the upper and lower tail dependence of these distributions. We analyze changes in dependence measures over time, and we investigate whether these measures are affected by the business cycle or interest rate differentials. Our results show that dependencies are indeed time-varying. We find that foreign and U.S. recessions affect the joint dependence structure and that currencies with higher interest rate differentials tend to move less closely together, not only on average (correlation), but also when extreme events occur (tails). |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:969&r=cba |
| By: | David Berger; Jon Faust; John H. Rogers; Kai Steverson |
| Abstract: | We analyze retail prices and at-the-dock (import) prices of specific items in the Bureau of Labor Statistics' (BLS) CPI and IPP databases, using both databases simultaneously to identify items that are identical in description at the dock and when sold at retail. This identification allows us to measure the distribution wedge associated with bringing traded goods from the point of entry into the United States to their retail outlet. We find that overall U.S. distribution wedges are 50-70%, around 10 to 20 percentage points higher than that reported in the literature. We discuss the implications of this for measuring the size of the "pure" tradeables sector, exchange rate pass-through, and real exchange rate determination. We find that distribution wedges are very stable over time but there is considerable variation across items. There is some variation across the country of origin for the imported item, for our major trading partners, but not as much as the cross-item variation. We also investigate the determinants of distribution wedges, finding that wedges do not vary systematically with exchange rates, but are related to other features of the micro data. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:972&r=cba |
| By: | Strulik, Holger; Trimborn, Timo |
| Abstract: | Can a large-scale defcit spending program speed up recovery after recession? To answer that question we calibrate a standard neoclassical growth model with US data and assume that an exogenous shock has driven aggregate output far below steady-state level. We calibrate the model such that a permanent increase of government expenditure is effective in raising output. We then show that "fiscal stimulus", i.e. a temporary increase of government expenditure is not only ineffective but detrimental. Even before the spending program expires, aggregate output is lower than it could be without fiscal stimulus. We show the generality of this result w.r.t. size and persistence of the shock, size of the government spending multiplier, and the scale and duration of the stimulus program. Using a phase diagram we provide the economic intuition for our unpleasant finding and explain why, generally, private capital stock reaches its lowest level when a deficit spending program expires. We also show how an accompanying temporary cut of capital income taxes helps to prevent the negative repercussion of deficit spending on economic recovery. |
| Keywords: | deficit spending, government spending multiplier, economic recovery, economic growth |
| JEL: | E60 H30 H50 O40 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-421&r=cba |
| By: | Barbara Meller; Dieter Nautz |
| Abstract: | This paper uses the European Monetary Union (EMU) as a natural experiment to investigate whether more effective monetary policy reduces the persistence of inflation. Taking into account the fractional integration of inflation, we confirm that inflation dynamics differed considerably across Euro area countries before the start of EMU. Since 1999, however, results obtained from panel estimation indicate that the degree of long run inflation persistence has converged. In line with theoretical predictions, we find that the persistence of inflation has significantly decreased in the Euro area probably as a result of the more effective monetary policy of the ECB. |
| Keywords: | Monetary Policy Effectiveness and Inflation Persistence, Panel Test for Fractional Integration, Change in Inflation Persistence |
| JEL: | C22 C23 E31 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-037&r=cba |
| By: | Gennaro Zezza |
| Abstract: | This paper presents the main features of the macroeconomic model being used at The Levy Economics Institute of Bard College, which has proven to be a useful tool in tracking the current financial and economic crisis. We investigate the connections of the model to the "New Cambridge" approach, and discuss other recent approaches to the evolution of financial balances for all sectors of the economy. We will finally show the effects of fiscal policy in the model, and its implications for the proposed fiscal stimulus on the U.S. economy. We show that the New Cambridge hypothesis, which claimed that the private sector financial balance would be stable relative to income in the short run, does not hold for the short term in our model, but it does hold for the medium/long term. This implies that the major impact of the fiscal stimulus in the long run will be on the external imbalance, unless other measures are taken. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_569&r=cba |
| By: | Rita Duarte (Banco de Portugal, Research Department, 148 Rua do Comercio, P-1101 Lisbon Codex, Portugal.); Carlos Robalo Marques (Banco de Portugal, Research Department, 148 Rua do Comercio, P-1101 Lisbon Codex, Portugal.) |
| Abstract: | This paper investigates the dynamics of aggregate wages and prices in the United States (US) and the Euro Area (EA) with a special focus on persistence of real wages, wage and price inflation. The analysis is conducted within a structural vector error-correction model, where the structural shocks are identified using the long-run properties of the theoretical model, as well as the cointegrating properties of the estimated system. Overall, in the long run, wage and price inflation emerge as more persistent in the EA than in the US in the face of import price, unemployment, or permanent productivity shocks. This finding is robust to the changes in the sample period and in the models’ specifications entertained in the paper. JEL Classification: C32, C51, E31, J30. |
| Keywords: | structural error-correction model, impulse response function, persistence. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901067&r=cba |
| By: | Heng Chen; Dietrich K. Fausten; Wing-Keung Wong |
| Abstract: | One possible consequence of the establishment of the Euro is a challenge to the hegemony of the US dollar as the predominant international currency. No other currency has been able to rival the international role of the national currency of the US since World War II. The fact that the unipolar international monetary system can be unstable in the presence of large shocks opens a window of opportunity for the Euro to promote systemic stability. The present study pursues this conjecture by, first, exploring with cointegration and ECM techniques the interdependence between the dynamics of the Dollar/Euro exchange rate and economic fundamentals in the context of a monetary exchange rate model. Identification of the key determinants of the value of the Euro informs our analysis of the policy stance of the European Central Bank regarding the long-run global role of the Euro. Secondly, we explore whether the opportunity for a prominent systemic role of the Euro has been realized by examining the impact of the Euro on the global financial market. |
| Keywords: | Euro, Exchange rate, Monetary model, Cointegration |
| JEL: | F15 G14 P34 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2006-14&r=cba |
| By: | Jardet, C.; Monfort, A.; Pegoraro, F. |
| Abstract: | We propose a new methodology for the analysis of impulse response functions in VAR or VARMA models. More precisely, we build our results on the non ambiguous notion of innovation of a stochastic process and we consider the impact of any kind of new information at a given date $t$ on the future values of the process. This methodology allows to take into account qualitative or quantitative information, either on the innovation or on the future responses, as well as informations on filters. We show, among other results, that our approach encompasses several standard methodologies found in the literature, such as the orthogonalization of shocks (Sims (1980)), the "structural" identification of shocks (Blanchard and Quah (1989)), the "generalized" impulse responses (Pesaran and Shin (1998)) or the impulse vectors (Uhlig (2005)). |
| Keywords: | Impulse response functions ; innovation ; new information. |
| JEL: | C10 C32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:235&r=cba |
| By: | Gautier, E.; Le Bihan, H. |
| Abstract: | . A recent strand of empirical work uses (S; s) models with time-varying stochastic bands to describe infrequent adjustments of prices and other variables. The present paper examines some properties of this model, which encompasses most micro-founded adjustment rules rationalizing infrequent changes. We illustrate that this model is also flexible enough to fit data characterized by infrequent adjustment and variable adjustment size. We show that, to the extent that there is variability in the size of adjustments (e.g. if both small and large price changes are observed), i) a large band parameter is needed to fit the data and ii) the average band of inaction underlying the model may differ strikingly from the typical observed size of adjustment. The paper thus provides a rationalization of a recurrent empirical result: very large estimated values for the parameters measuring the band of inaction. |
| Keywords: | (S; s) models ; adjustment costs ; menu costs. |
| JEL: | E31 D43 L11 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:231&r=cba |
| By: | Jardet, C.; Monfort, A.; Pegoraro, F. |
| Abstract: | Macroeconomic questions involving interest rates generally require a reliable joint dynamics of a large set of variables. More precisely, such a dynamic modelling must satisfy two important conditions. First, it must be able to propose reliable predictions of some key variables. Second, it must be able to propose a joint dynamics of some macroeconomic variables, of the whole curve of interest rates, of the whole set of term premia and, possibly, of various decompositions of the term premia. The first condition is required if we want to disentangle the respective impacts of, for instance, the expectation part of the term premium of a given long-term interest rate on some macroeconomic variable. The second condition is necessary if we want to analyze the interactions between macro-variables with some global features of the yield curve (short part, long part, level, slope and curvature) or with, for instance, term premia of various maturities. In the present paper we propose to satisfy both requirements by using a Near-Cointegrated modelling of basic observables variables, in order to meet the first condition, and the no-arbitrage theory, in order to meet the second one. Moreover, the dynamic interactions of this large set of variables is based on the statistical notion of New Information Response Function, recently introduced by Jardet, Monfort and Pegoraro (2009). This technical toolkit is then used to propose a new approach to two important issues: the "conundrum" episode and the puzzle of the relationship between the term premia on long-term yields and future economic activity. |
| Keywords: | Near-Cointegrated VAR(p) model ; Term structure of interest rates ; Term premia ; GDP growth ; No-arbitrage affine term structure model ; New Information Response Function. |
| JEL: | C51 E43 E44 E47 G12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:234&r=cba |
| By: | Robin A. Prager; Mark D. Manuszak; Elizabeth K. Kiser; Ron Borzekowski |
| Abstract: | In many countries around the world, electronic card-based payments have been replacing older types of payments at a rapid rate. In the United States, use of both debit cards and credit cards has been rising rapidly, while check volumes have been declining. The increased use of electronic payment methods has generated a number of public policy debates. One prominent debate concerns interchange fees. This paper is intended to provide background for understanding the interchange fee debate. The paper describes the operation of a typical payment card system, presents a summary of the economic theory underlying interchange fees, and discusses various developments in the U.S. payment cards industry, as well as legal and regulatory developments abroad. The paper concludes with a discussion and critical evaluation of a number of potential policy interventions. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-23&r=cba |
| By: | Levintal, Oren; Zeira, Joseph |
| Abstract: | This paper tells the story of how paper money evolved as a result of lending by banks. While lending commodity money requires holding large reserves of commodity money to ensure liquidity, issuing convertible paper money reduces these costs significantly. The paper also examines the possibility of issuing inconvertible notes and shows that while they further reduce the cost of borrowing they also have adverse effects on the stability of the banking system. As a result, governments often intervened, either outlawing the issuance of such notes, or monopolizing them for themselves by issuing fiat money. The paper examines the process of creation of paper money, but also sheds light on more general issues, like the relation between money and financial intermediation. |
| Keywords: | Banks; Convertibility; Fiat Money; Financial Intermediation; Liquidity; Paper Money |
| JEL: | E4 E5 N1 N2 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7362&r=cba |
| By: | Zsolt Darvas (Bruegel, Institute of Economics of the Hungarian Academy of Sciences and Corvinus University of Budapest) |
| Abstract: | This paper studies the transmission of monetary policy to macroeconomic variables in three new EU Member States in comparison with that in the euro area with structural time-varying coefficient vector autoregressions. In line with the Lucas Critique reduced-form models like standard VARs are not invariant to changes in policy regimes. The countries we study have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that in the euro area the impact on output of a monetary shock have decreased in time while in the new member states of the EU both decreases and increases can be observed. At the last observation of our sample, the second quarter of 2008, monetary policy was the most powerful in Poland and comparable in strength to that in the euro area, the least powerful responses were observed in Hungary while the Czech Republic lied in between. We explain these results by the credibility of monetary policy, openness and the share of foreign currency loans. |
| Keywords: | monetary transmission, time-varying coefficient vector autoregressions, Kalman-filter |
| JEL: | C32 E50 |
| Date: | 2009–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:mkg:wpaper:0903&r=cba |
| By: | Juurikkala, Tuuli (BOFIT); Solanko, Laura (BOFIT); Karas, Alexei (BOFIT) |
| Abstract: | This paper focuses on the role of the banking sector in monetary policy transmission in an emerging economy with a rapidly developing financial system. Specifically, we exam whether the central bank's monetary policy stance affects banks' lending behaviour. Based on a comprehensive quarterly dataset on all Russian banks from 1Q1999 to 1Q2007, we find evidence for the existence of a bank lending channel in Russia. Contrary to several studies on developed economies, the level of a bank's capitalization matters for the transmission process. Better capitalized banks are less likely to adjust their lending practices following a change in the monetary policy stance. |
| Keywords: | monetary policy transmission; bank lending; Russia |
| JEL: | C23 E44 E52 G21 |
| Date: | 2009–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2009_008&r=cba |
| By: | Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR) |
| 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: | Special Drawing Right, international monetary system, international money, supernational bank money |
| JEL: | E42 E52 F33 F36 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:26&r=cba |
| By: | Paresh Kumar Narayan; Russell Smyth |
| Abstract: | This paper applies univariate and panel data unit root tests to annual panel data for 182 countries over the period 1979-2000 to examine the stationarity properties of per capita energy consumption. The univariate unit root test can only reject the unit root null for 29 per cent of the countries at the 10 per cent level or better without a trend and 37 per cent of the countries at the 10 per cent level or better with a trend. However, it is often argued that unit root tests have low power with short spans of data and therefore failure to reject the unit root null should be treated with caution. When we apply the panel data unit root test we find overwhelming evidence that energy consumption is stationary. We discuss the implications of these findings for econometric modeling and policy formulation. |
| Keywords: | Energy consumption, Unit roots, Panel data |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2005-06&r=cba |
| By: | John Crow (Bank of Canada (formerly)) |
| Abstract: | The Bank of Canada must come to play a recognized, central leadership role in shaping policy if Canada is to better manage risks to financial sector stability. This can be accomplished by giving the Bank a clearly acknowledged oversight and investigative mandate regarding financial stability – which would not require statutory change – linked with the responsibility to report independently on the same. |
| Keywords: | financial services, Bank of Canada, financial sector stability |
| JEL: | E58 E62 E63 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:cdh:ebrief:82&r=cba |
| By: | Pami Dua (Department of Economics, Delhi School of Economics, Delhi, India); Upasna Gaur (Global Research Group, ICICI Bank Mumbai) |
| Abstract: | This paper investigates the determination of inflation in the framework of an open economy forward-looking as well as conventional backward-looking Phillips curve for eight Asian countries - Japan, Hong Kong, Korea, Singapore, Philippines, Thailand, China Mainland and India. Using quarterly data from the 1990s to 2005 and applying the instrumental variables estimation technique, we find that the output gap is significant in explaining the inflation rate in almost all the countries. Furthermore, at least one measure of international competitiveness has a statistically significant influence on inflation in all the countries. The differences in the developed and developing world are highlighted by the significance of agriculture related supply shocks in determining inflation in the case of developing countries. For all countries, the forward-looking Phillips curve provides a better fit compared to the backward looking variant. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:178&r=cba |
| By: | Jean-Marie Dufour; Lynda Khalaf; Maral Kichian |
| Abstract: | Real wage rigidities have recently been proposed as a way of building intrinsic persistence in inflation within the context of New Keynesian Phillips Curves. Using two recent illustrative structural models, we evaluate empirically the importance of real wage rigidities in the data and the extent to which such models provide useful information regarding price stickiness. Structural estimation and testing is carried out using Canadian data and identification-robust methods. <br><br> Results based on one of the models are relatively uninformative. Our tests reveal important identification difficulties and considerable estimate uncertainty, as can be seen from the wide projections for the estimates. However, we obtain economically reasonable ranges for estimates of average frequency of price changes and some evidence for rigidity in real wages (as measured by a rigidity index) based on the other model we examine. In addition, our specification for the latter model yields significant [at usual levels] and correctly-signed reduced-form coefficient estimates, showing a trade-off between unemployment and inflation in the New Keynesian Phillips curve. From a methodological perspective, these results derive from our treatment of the productivity term as observable although with error, which seems to capture vital information and improve overall identification. From a substantive perspective, our findings suggest that wage-rigidity based New Keynesian Phillips Curves hold promise empirically and provide interesting research directions. |
| Keywords: | Inflation and prices; Labour markets; Econometric and statistical methods |
| JEL: | C13 C52 E31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-21&r=cba |
| By: | Carlos Capistrán; Christian Constandse; Manuel Ramos Francia |
| Abstract: | Since the adoption of inflation targeting, the seasonal appears to be the component that explains the major part of inflation's total variation in Mexico. In this context, we study the performance of seasonal time series models to forecast short-run inflation. Using multi-horizon evaluation techniques, we examine the real-time forecasting performance of four well-known seasonal models using data on 16 indices of the Mexican Consumer Price Index (CPI), including headline and core inflation. These models consider both, deterministic and stochastic seasonality. After selecting the best forecasting model for each index, we apply and compare two methods that aggregate hierarchical time series, the bottom-up method and an optimal combination approach. The best forecasts are able to compete with those taken from surveys of experts. |
| Keywords: | Aggregated forecasts, bottom-up forecasting, forecast combination, hierarchical time series, inflation targeting, multi-horizon evaluation, seasonal unit roots. |
| JEL: | C22 C52 C53 E37 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2009-05&r=cba |