nep-cba New Economics Papers
on Central Banking
Issue of 2009‒07‒28
43 papers chosen by
Alexander Mihailov
University of Reading

  1. Policy Responses to Exchange-Rate Movements By Laurence M. Ball
  2. Empirical estimates of changing inflation dynamics By Jeff Fuhrer; Giovanni Olivei; Geoffrey M. B. Tootell
  3. Insulation Impossible: Fiscal Spillovers in a Monetary Union By Russell Cooper; Hubert Kempf; Dan Peled
  4. Dynamics of Fiscal Financing in the United States By Eric M. Leeper; Michael Plante; Nora Traum
  5. Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts By John B. Donaldson; Natalia Gershun; Marc P. Giannoni
  6. Financial and World Economic Crisis: What did Economists Contribute? By Gebhard Kirchgässner; Friedrich Schneider
  7. The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds By Nuno Cassola; Ali Hortacsu; Jakub Kastl
  8. A systemic approach to financial regulation: a European perspective By Michel Aglietta; Laurence Scialom
  9. Global Financial Architecture: Past and Present Arguments, Advice, Action By Ashima Goyal
  10. ARE EU BUDGET DEFICITS STATIONARY? By Mark J. Holmes; Jesús Otero; Theodore Panagiotidis
  11. Prospect Theory and Inflation Perceptions - An Empirical Assessment By Lena Vogel; Jan-Oliver Menz; Ulrich Fritsche
  12. The optimal level of deposit insurance coverage By Michael Manz
  13. Monetary Policy Activism and Price Responsiveness to Aggregate Shocks under Rational Inattention By Paciello, Luigi
  14. Housing Finance and Monetary Policy. By Alessandro Calza; Tommaso Monacelli; Livio Stracca
  15. Zero Nominal Interest Rates, Unemployment, Excess Reserves and Deflation in a Liquidity Trap By Ryu-ichiro Murota; Yoshiyasu Ono
  16. Wages are flexible, aren’t they? Evidence from monthly micro wage data. By Patrick Lünnemann; Ladislav Wintr
  17. Monetary Policy Committees: meetings and outcomes. By Jan Marc Berk; Beata K. Bierut
  18. An investigation of customer order flow in the foreign exchange market By Mario Cerrato; Nicholas Sarantis; Alex Saunders
  19. Oil and the Euro Area Economy By G. PEERSMAN; I. VAN ROBAYS
  20. How Important are Common Factors in Driving Non-Fuel Commodity Prices? A Dynamic Factor Analysis. By Isabel Vansteenkiste
  21. Pitfalls in estimating asymmetric effects of energy price shocks By Lutz Kilian; Robert Vigfusson
  22. Modelling oil price expectations: evidence from survey data By Georges Prat; Remzi Uctum
  23. The Design of a ‘Two-Pillar’ Monetary Policy Strategy By Dai, Meixing
  24. Do Prices in the EMU Converge (Non-linearly)? By Ulrich Fritsche; Sarah Lein; Sebastian Weber
  25. Estimation of DSGE Models When the Data are Persistent By Yuriy Gorodnichenko; Serena Ng
  26. Evaluating German Business Cycle Forecasts Under an Asymmetric Loss Function By Joerg Doepke; Ulrich Fritsche; Boriss Siliverstovs
  27. Forecasting Volatility under Fractality, Regime-Switching, Long Memory and Student-t Innovations By Thomas Lux; Leonardo Morales-Arias
  28. A Note on Updating Forecasts When New Information Arrives between Two Periods By Chen, Pu
  29. General Pattern Formation in Recursive Dynamical Systems Models in Economics By Anastasios Xepapadeas; William Brock
  30. Is a common currency area feasible for East Asia? A multivariate structural VAR approach By Hsiufen Hsu
  31. Has Economic Models’ Forecasting Performance for US Output Growth and Inflation Changed Over Time, and When? By Tatevik Sekhposyan; Barbara Rossi
  32. Forecasting Inflation Using Dynamic Model Averaging By Gary Koop; Dimitris Korobilis
  33. On Money as an Institution By Nikolay Nenovsky
  34. Lucas, Keynes, and the Crisis By David Laidler
  35. A New Theory of Economic Systems and Its Application to Economic Policy Studies By Kleiner, George B.
  36. Monetary and Exchange Rate Regimes Changes: The Cases of Poland, Czech Republic, Slovakia and Republic of Serbia By Jean-Pierre Allegret; Kosta Josifidis; Emilija Beker Pucar
  37. Convergenta Nominala By Iancu, Aurel
  38. "Financial crisis, monetary policy reform and the monetary transmission mechanism in Turkey" By James Butkiewicz
  39. Küreselleşme ve Enflasyon:Küresel Çıktı Açığı Hipotezi-Türkiye Örneği By Ercan Eren; Serkan Çiçek
  40. The impact of monetary policy on the yield curve in the Brazilian economy By Aranha, Marcel Z.; Moura, Marcelo L.
  41. The Bank Lending Channel of Monetary Transmission in Brazil: A VECM Approach By Luiz de Mello; Mauro Pisu
  42. The sensitivity of South African inflation expectations to surprises By Monique Reid
  43. Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: Evidence from Panel Data By Yinusa, D. Olalekan

  1. By: Laurence M. Ball
    Abstract: This paper examines policy responses to exchange-rate movements in a simple model of an open economy. The optimal response of monetary policy to an exchange-rate change depends on the source of the change: on whether the underlying shock is a shift in capital flows, manufactured exports, or commodity prices. The paper compares the model’s prescriptions to the policies of an actual central bank, the Bank of Canada. Finally, the paper considers the role of fiscal policy in an open economy. Coordinated fiscal and monetary responses to exchange-rate movements stabilize output at the sectoral as well as aggregate level.
    JEL: E52 F41
    Date: 2009–07
  2. By: Jeff Fuhrer; Giovanni Olivei; Geoffrey M. B. Tootell
    Abstract: This paper provides an array of empirical evidence bearing on potentially important changes in the dynamics of U.S. inflation. We examine the overall performance of Phillips curves relative to some well-known benchmarks, the efficiency with which the Federal Reserve's Greenbook forecasts of inflation use real activity information, and shifts in the key determinants of the reduced-form "triangle model" of inflation. We develop a structural model-based interpretation of observed reduced-form shifts and conduct a reduced-form assessment of the relationship between core and headline measures of inflation, centering on the persistent "pass-through" of relative price changes into core and headline inflation measures, and a parallel exercise that examines the pass-through of key relative price changes into wage and compensation measures.
    Keywords: Inflation (Finance)
    Date: 2009
  3. By: Russell Cooper; Hubert Kempf; Dan Peled
    Abstract: This paper studies the effects of monetary policy rules in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will influence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The magnitude and direction of these spillovers, in particular the presence of a crowding out effect, can be influenced by the choice of monetary policy rules. We find that there does not exist a monetary policy rule which completely insulates agents in one region from fiscal policy in another. Some familiar policy rules, such as pegging an interest rate, can provide partial insulation.
    JEL: E61 E63 F15 H77
    Date: 2009–07
  4. By: Eric M. Leeper; Michael Plante; Nora Traum
    Abstract: Dynamic stochastic general equilibrium models that include policy rules for government spending, lump-sum transfers, and distortionary taxation on labor and capital income and on consumption expenditures are fit to U.S. data under a variety of specifications of fiscal policy rules. We obtain several results. First, the best fitting model allows a rich set of fiscal instruments to respond to stabilize debt. Second, responses of aggregate variables to fiscal policy shocks under rich fiscal rules can vary considerably from responses that allow only non-distortionary fiscal instruments to finance debt. Third, based on estimated policy rules, transfers, capital tax rates, and government spending have historically responded strongly to government debt, while labor taxes have responded more weakly. Fourth, all components of the intertemporal condition linking debt to expected discounted surpluses---transfers, spending, tax revenues, and discount factors---display instances where their expected movements are important in establishing equilibrium. Fifth, debt-financed fiscal shocks trigger long lasting dynamics so that short-run multipliers can differ markedly from long-run multipliers, even in their signs.
    JEL: C11 E32 E62
    Date: 2009–07
  5. By: John B. Donaldson; Natalia Gershun; Marc P. Giannoni
    Abstract: We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. Delegation gives rise to a generic conflict of interest mediated by a convex (option-like) compensation contract which is able to align the interests of managers and their shareholders. With such a compensation contract, a given increase in the firm's output generated by an additional unit of physical investment results in a more than proportional increase in the manager's income. We find that incentive contracts of this form can easily result in an indeterminate general equilibrium, with business cycles driven by self-fulfilling fluctuations in the manager's expectations. These expectations are unrelated to fundamentals. Arbitrarily large fluctuations in macroeconomic variables may possibly result.
    JEL: E32 J33
    Date: 2009–07
  6. By: Gebhard Kirchgässner; Friedrich Schneider
    Abstract: In this paper we deal with two questions, (i) what are the origins of the current financial crisis, and (ii) what did economists contribute, or why did economists fail to provide a convincing answer for the origins of the crisis, and possible solutions to overcome it? Apparently, the economics profession was unaware of the looming worldwide financial and economic crisis, and significantly underestimated its global dimensions and consequences. A first and prelimi-nary analysis is undertaken to explore reasons for these failures. We conclude by pointing to some consequences for economics as well as for economic policy.
    Keywords: Financial Crisis, Crisis Management, Failure of Economics, Failure of Economic Researchers, Origin of the Crisis.
    JEL: A11 B40 D72 D73 D8 K2
    Date: 2009–07
  7. By: Nuno Cassola; Ali Hortacsu; Jakub Kastl
    Abstract: In this paper we study European banks’ demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank’s auctions for one-week loans, their main channel of monetary policy implementation. Through a model of bidding, we show that banks’ behavior reflects their cost of obtaining short-term funds elsewhere (i.e., in the interbank market) as well as a strategic response to other bidders. We find considerable heterogeneity across banks in their willingness to pay for short-term funds supplied in these auctions. Accounting for the strategic component is important: while a naive interpretation of the raw bidding data may suggest that virtually all banks suffered a dramatic increase in the cost of obtaining funds in the interbank market, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. Using a complementary data set, we also find that banks’ pre-turmoil liquidity costs, as estimated by our model, are predictive of their post-turmoil liquidity costs, and that there is considerable heterogeneity in these costs with respect to the country-of-origin. Finally, among the publicly traded banks, the willingness to pay for short-term funds in the second half of 2007 are predictive of stock prices in late 2008.
    JEL: D44 D53 E5
    Date: 2009–07
  8. By: Michel Aglietta; Laurence Scialom
    Abstract: The global financial crisis has pinpointed the relevance and the virulence of systemic risk in modern innovative finance. It is grounded in the propensity of credit markets to drift to extremes in close correlation with asset price spikes and slumps. In turn, such a propensity is nurtured by the heuristic behaviour of market participants under severe uncertainty. While plagued by disaster myopia, market participants spread systemic risk. Such adverse conditions have been magnified by financial innovations that have made finance predatory and capable of capturing regulators to annihilate prudential policies. Malfunctioning in finance is so deep and disorders are so widespread that sweeping reforms are the order of the day, if financial stability is viewed as a primary public concern. In this paper we argue that macro prudential policy should be the linchpin of relevant reforms. Being a top-down approach, it impinges both upon monetary policy and micro prudential policy. Central banks should pursue a dual objective of price and financial stability. Bank supervisors should broaden their oversight on a much larger perimeter, encompassing all systematically important institutions. Counter cyclical capital provisions should be required and linked to the control of aggregate credit supply. Leveraged institutions without deposit base should be subject to incentives for a much stricter liquidity management. To stem regulatory capture, prompt corrective action should be enlarged in its scope and adapted to mark-to-market financial intermediaries. Implementing macro prudential policy entails institutional changes. Central banks, bank supervisors and other financial regulators need to work much closer than beforehand, because the spread of systemic risk is not deterred by institutional and geographical frontiers. The changes to make are particularly stringent in Europe, where national parochialism makes the resolution of orderly cross-border bank crisis all but impossible.
    Date: 2009
  9. By: Ashima Goyal
    Abstract: In the context of the formation of G-20, the paper points out the absence of reform in the global financial architecture (GFA) after the East Asian crisis, and assesses factors that can improve the chances of real reform this time. A factual assessment of various causes advanced for the global crisis, puts the main responsibility on lax regulation. The paper summarizes the Chimerica debate and the blocks that have stalled progress in resolving the issue. It argues that symmetric and balanced reform, at individual country and international level, is required to remove the blocks. [WP-2009-004].
    Keywords: east Asian, regulation, emerging markets, markets, Global Financial architecture, Crisis, G-20, Imbalances, Over-saving,
    Date: 2009
  10. By: Mark J. Holmes (Waikato University Management School, New Zealand); Jesús Otero (Universidad del Rosario, Colombia); Theodore Panagiotidis (University of Macedonia, Greece and The Rimini Center for Economic Analysis, Italy)
    Abstract: In this paper, we test for the stationarity of European Union budget deficits over the period 1971 to 2006, using a panel of thirteen member countries. Our testing strategy addresses two key concerns with regard to unit root panel data testing, namely (i) the presence of cross-sectional dependence among the countries in the panel and (ii) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ an AR-based bootstrap approach that allows us to test the null hypothesis of joint stationarity with endogenously determined structural breaks. In contrast to the existing literature, we find that the EU countries considered are characterised by fiscal stationarity over the full sample period irrespective of us allowing for structural breaks. This conclusion also holds when analysing sub-periods based on before and after the Maastricht treaty.
    Keywords: Heterogeneous dynamic panels, fiscal sustainability, mean reversion, panel stationarity test.
    JEL: C33 F32 F41
    Date: 2009–01
  11. By: Lena Vogel (Department for Economics and Politics, University of Hamburg); Jan-Oliver Menz (Department for Economics and Politics, University of Hamburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg)
    Abstract: Building on the hypotheses of loss aversion with respect to price increases and availability of frequently bought goods, Brachinger (2006,2008) constructs an alternative index of perceived inflation (IPI), which can reproduce the jump in the measure for perceived inflation after the Euro introduction in Germany that was not observable in standard HICP inflation. We test the hypotheses of Prospect Theory with regard to households’ inflation perceptions underlying Brachinger’s IPI in a panel estimation for 12 European countries. There is evidence that perceptions react more strongly to ‘losses’ in inflation than to ‘gains’ before the Euro cash changeover, but not afterwards. Moreover, we find empirical support for the availability hypothesis, stating that frequently bought goods have a stronger influence on inflation perceptions than the overall price index.
    Keywords: Inflation Perceptions, Prospect Theory, Dynamic Panel
    JEL: D81 D82 E52 C33
  12. By: Michael Manz
    Abstract: This paper develops a global game model that allows for a rigorous analysis of partial deposit insurance and provides the first comparative statics of the optimal level of deposit coverage. The optimal amount of coverage increases with lower bank liquidity requirements, with a higher precision of depositors' information, and with a lower relevance of large, uninsured creditors, and it should not be increased in anticipation of an economic downturn. Optimal insurance is higher if there is contagion and lower if banks can assume excessive risk, but interestingly, a high level of coverage may not be optimal even in the absence of moral hazard on the part of banks. The model supports the inauguration of coinsurance provisions and is applied to compare various policies addressing financial fragility. While an optimal lending of last resort policy can outperform deposit insurance, anticipated bailouts are inferior in terms of welfare. Capital requirements are not a substitute for insurance, but mitigate excessive risk taking.
    Keywords: Deposit insurance
    Date: 2009
  13. By: Paciello, Luigi
    Abstract: This paper presents a general equilibrium model that is consistent with recent empirical evidence showing that the U.S. price level and inflation are much more responsive to aggregate technology shocks than to monetary policy shocks. The model of this paper builds on recent work by Mackowiak and Wiederholt (2009), who show that models of endogenous attention allocation deliver prices to be more responsive to more volatile shocks as, everything else being equal, firms pay relatively more attention to more volatile shocks. In fact, according to the U.S. data, aggregate technology shocks are more volatile than monetary policy shocks inducing in this paper, firms to pay more attention to the former than to the latter. However, most important, this work adds to the literature by showing that the ability of the model of this paper to account for observed price dynamics crucially depends on monetary policy. In particular, this paper shows how interest rate feedback rules affect the incentives faced by firms in allocating attention. A policy rate responding more actively to expected inflation and output fluctuations induces firms to pay relatively more attention to more volatile shocks. This new mechanism of transmission of monetary policy helps rationalizing the observed behavior of prices in response to technology and monetary policy shocks, and implies novel predictions about the impact of changes in Taylor rules coefficients on economic fluctuations.
    Keywords: Rational inattention; monetary policy; technology shocks; prices
    JEL: E5 E3
    Date: 2009–07–18
  14. By: Alessandro Calza (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tommaso Monacelli (IGIER, Università Bocconi, Via Sarfatti, 25 Milano, Italy.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We study how the structure of housing finance affects the transmission of monetary policy shocks. We document three main facts: first, the features of residential mortgage markets differ markedly across industrialized countries; second, and according to a wide range of indicators, the transmission of monetary policy shocks to residential investment and house prices is significantly stronger in those countries with larger flexibility/development of mortgage markets; third, the transmission to consumption is stronger only in those countries where mortgage equity release is common and mortgage contracts are predominantly of the variable-rate type. We build a two-sector DSGE model with price stickiness and collateral constraints and analyze how the response of consumption and residential investment to monetary policy shocks is affected by alternative values of two institutional features: (i) down-payment rate; (ii) interest rate mortgage structure (variable vs. fixed rate). In line with our empirical evidence, the sensitivity of both variables to monetary policy shocks increases with lower values of the down-payment rate and is larger under a variable- rate mortgage structure. JEL Classification: E21, E44, E52.
    Keywords: Housing finance, mortgage markets, collateral constraint, monetary policy.
    Date: 2009–07
  15. By: Ryu-ichiro Murota; Yoshiyasu Ono
    Abstract: We present a dynamic and monetary model that consistently explains such various phenomena as unemployment, deflation, zero nominal interest rates and excess reserves held by commercial banks. These phenomena are commonly observed during the Great Depression in the United States, the recent long-run stagnation in Japan, and the worldwide financial crisis triggered by the US subprime loan problem of 2008. We show that an excessive liquidity preference leads to a liquidity trap and thereby generates the phenomena.
    Date: 2009–07
  16. By: Patrick Lünnemann (Banque centrale du Luxembourg; 2, boulevard Royal; L-2983 Luxembourg, Luxembourg.); Ladislav Wintr (Banque centrale du Luxembourg; 2, boulevard Royal; L-2983 Luxembourg, Luxembourg.)
    Abstract: This paper assesses the degree of wage flexibility in Luxembourg using an administrative data set on individual base wages covering the entire economy over the period 2001-2006 with monthly frequency. We find that the wage flexibility at the discretion of the firm is rather low once we limit measurement error and remove wage changes due to institutional factors (indexation, changes in statutory minimum wage, age and marital status). The so adjusted frequency of wage change lies between 5% and 7%. On average, wages change less often than consumer prices. Less than one percent of (nominal) wages are cut both from month to month and from year to year. Due to automatic wage indexation, wages appear to be subject to substantial downward real wage rigidity. Finally, wage changes tend to be highly synchronised as they are concentrated around the events of wage indexation and the month of January. JEL Classification: J31.
    Keywords: wage flexibility, wage rigidity.
    Date: 2009–07
  17. By: Jan Marc Berk (De Nederlandsche Bank, Statistics & Information Division, PO Box 98, 1000AB Amsterdam, the Netherlands.); Beata K. Bierut (De Nederlandsche Bank, Economics & Research Division, PO Box 98, 1000AB Amsterdam, the Netherlands)
    Abstract: Monetary Policy Committees differ in the way the interest rate proposal is prepared and presented in the policy meeting. In this paper we show analytically how different arrangements could affect the voting behaviour of individual MPC members and therefore policy outcomes. We then apply our results to the Bank of England and the Federal Reserve. A general finding is that when MPC members are not too diverse in terms of expertise and experience, policy discussions should not be based on pre-repared policy options. Instead, interest rate proposals should arise endogenously as a majority of views expressed by the members, as is the case at the Bank of England and appears to be the case in the FOMC under Chairman Bernanke. JEL Classification: E58, D71, D78.
    Keywords: monetary policy committee, voting, Bank of England, Federal Open Market Committee.
    Date: 2009–07
  18. By: Mario Cerrato; Nicholas Sarantis; Alex Saunders
    Abstract: This paper examines the effect that heterogeneous customer orders flows have on exchange rates by using a new propreitary dataset of weekly net order flow segmented by customer type across nine of the most liquid currency pairs. We make three contributions. First, we investigate the extent to which order flow can help to explain exchange rate movements over and above the influence of macroeconomic variables. Second, we look at the usefulness of order flow in forecasting exchange rate movements at longer horizons than those generally considered in the microstructure literature. Finally we address the question of whether the out-of-sample exchange rate forecasts generated by order flows can be employed profitably in the foreign exchange markets.
    Keywords: Customer order flow; exchange rates; microstructure; forecasting
    JEL: F31 F41 G10
    Date: 2009–07
    Abstract: We examine the macroeconomic effects of different types of oil shocks and the oil transmission mechanism in the Euro area. A comparison is made with the US and across individual member countries. First, we find that the underlying source of the oil price shift is crucial to determine the repercussions on the economy and the appropriate monetary policyreaction. Second, the transmission mechanism is considerably different compared to the US. In particular, inflationary effects in the US are mainly driven by a strong direct passthrough of rising energy prices and indirect effects of higher production costs. In contrast, Euro area inflation reacts sluggishly and is much more driven by second-round effects of increasing wages. Third, there are also substantial asymmetries across member countries. These differences are due to different labour market dynamics which are further aggravated by a common monetary policy stance which does not fit all.
    Date: 2009–04
  20. By: Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyses the importance of common factors in shaping non-fuel commodity price movements for the period 1957-2008. For this purpose, a dynamic factor model is estimated using Kalman Filtering techniques. Based on this set-up we are able to separate common and idiosyncratic developments of commodity prices. Our estimation results show that there exists one common significant factor for most non-fuel commodity prices and that this common factor has recently become increasingly important in driving non-fuel commodity prices. However during the seventies and early eighties, the co-movement was much higher. In a next step, we then rely on an instrumental variable approach to uncover which variables could be linked to the common factor. We find that the main statistically significant variables are the oil price, the US dollar effective exchange rate, the real interest rate but more recently also global demand (as measured by a proxy for global industrial production). JEL Classification: E30, F00.
    Keywords: Commodity prices, dynamic factor and Kalman filter.
    Date: 2009–07
  21. By: Lutz Kilian; Robert Vigfusson
    Abstract: A common view in the literature is that the effect of energy price shocks on macroeconomic aggregates is asymmetric in energy price increases and decreases. We show that widely used asymmetric vector autoregressive models of the transmission of energy price shocks are misspecified, resulting in inconsistent parameter estimates, and that the implied impulse responses have been routinely computed incorrectly. As a result, the quantitative importance of unanticipated energy price increases for the U.S. economy has been exaggerated. In response to this problem, we develop alternative regression models and methods of computing responses to energy price shocks that yield consistent estimates regardless of the degree of asymmetry. We also introduce improved tests of the null hypothesis of symmetry in the responses to energy price increases and decreases. An empirical study reveals little evidence against the null hypothesis of symmetry in the responses to energy price shocks. Our analysis also has direct implications for the theoretical literature on the transmission of energy price shocks and for the debate about policy responses to energy price shocks.
    Date: 2009
  22. By: Georges Prat; Remzi Uctum
    Abstract: Using Consensus Forecast survey data on WTI oil price expectations for three and twelve month horizons over the period November 1989 – December 2008, we find that the rational expectation hypothesis is rejected and that none of the traditional extrapolative, regressive and adaptive processes fits the data. We suggest a mixed expectation model defined as a linear combination of these traditional processes, which we interpret as the aggregation of individual mixing behavior and of heterogenous groups of agents using simple processes. This approach is consistent with the economically rational expectations theory. We show that the target price included in the regressive component of this model depends on macroeconomic fundamentals whose effects are subject to structural changes. The estimation results led to validate the mixed expectational model for the two horizons.
    Keywords: Expectations formation, oil price
    JEL: D84 G14 Q43
    Date: 2009
  23. By: Dai, Meixing
    Abstract: In this paper, it is argued that money supply in a narrow sense and repo interest rate are two independent monetary policy instruments when the effect of interest rate policy cannot be efficiently transmitted to the economy through the monetary and financial markets. In this case, the control of money supply is necessary to reduce the discrepancy between the repo interest rate and the interest rates at which private agents lend and borrow. Using a simple macro-economic model, this study shows how a twopillar monetary policy strategy as practiced by the European central bank (ECB) can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. This strategy can be interpreted as a combination of inflation targeting and monetary targeting. Well conceived monetary targeting with a commitment to a long-run money growth rate corresponding to inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. However, an inflation-targeting regime associated with Friedman’s money supply rule can generate dynamic instability in output, inflation and money demand. Three feedback monetary targeting rules, of which the design depends on economic structure and central bank preferences, are discussed relative to their capability of warranting macroeconomic stability.
    Keywords: Two-pillar monetary policy strategy, inflation targeting, monetary targeting, macroeconomic stability, Friedman’s k-percent rule
    JEL: E44 E52 E58
    Date: 2009
  24. By: Ulrich Fritsche (Department for Socioeconomics, Department for Economics, University of Hamburg); Sarah Lein (Swiss National Bank (SNB)); Sebastian Weber (German Institute for Economic Research (DIW) Berlin)
    Abstract: This paper examines the current state of price convergence amongst the eleven initial EMU member states. Special attention is given to possible changes in the convergence process during the euro cash changeover. We apply the sigma-convergence approach using both panel estimates of changes in the deterministic time trend of a coefficient of variation and stochastic kernel-density estimates. We find that convergence took place before 2000, slowed down substantially between 2000 and 2003, and resurfaced after 2003. This points to a non-linear convergence path. We show that stronger convergence is associated with periods of positive and less-dispersed output gaps across member states. There are no big differences between the results for tradables and non-tradables, indicating that Balassa-Samuelson effects are relatively weak.
    Keywords: Prices, European Monetary Union, Sigma-convergence, Kernel-density Estimation, Balassa-Samuelson Effect
    JEL: C14 C33 E31 F15
    Date: 2009–07
  25. By: Yuriy Gorodnichenko; Serena Ng
    Abstract: Dynamic Stochastic General Equilibrium (DSGE) models are often solved and estimated under specific assumptions as to whether the exogenous variables are difference or trend stationary. However, even mild departures of the data generating process from these assumptions can severely bias the estimates of the model parameters. This paper proposes new estimators that do not require researchers to take a stand on whether shocks have permanent or transitory effects. These procedures have two key features. First, the same filter is applied to both the data and the model variables. Second, the filtered variables are stationary when evaluated at the true parameter vector. The estimators are approximately normally distributed not only when the shocks are mildly persistent, but also when they have near or exact unit roots. Simulations show that these robust estimators perform well especially when the shocks are highly persistent yet stationary. In such cases, linear detrending and first differencing are shown to yield biased or imprecise estimates.
    JEL: E3 F4 O4
    Date: 2009–07
  26. By: Joerg Doepke (University of Applied Sciences Merseburg); Ulrich Fritsche (Department for Socioeconomics, Department for Economics, University of Hamburg); Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: Based on annual data for growth and inflation forecasts for Germany covering the time span from 1970 to 2007 and up to 17 different forecasts per year, we test for a possible asymmetry of the forecasters' loss function and estimate the degree of asymmetry for each forecasting institution using the approach of Elliot et al. (2005). Furthermore, we test for the rationality of the forecasts under the assumption of a possibly asymmetric loss function and for the features of an optimal forecast under the assumption of a generalized loss function. We find only limited evidence for the existence of an asymmetric loss functions of German forecasters. As regards the rationality of the forecasts the results depend on the underlying assumption of the test. The rationality of inflation forecasts is more doubtful than those of growth forecasts.
    Keywords: Business cycle forecast evaluation, asymmetric loss function, and rational expectations
    JEL: C53 E42
    Date: 2009–07
  27. By: Thomas Lux; Leonardo Morales-Arias
    Abstract: We examine the performance of volatility models that incorporate features such as long (short) memory, regime-switching and multifractality along with two competing distributional assumptions of the error component, i.e. Normal vs Student-t. Our precise contribution is twofold. First, we introduce a new model to the family of Markov-Switching Multifractal models of asset returns (MSM), namely, the Markov-Switching Multifractal model of asset returns with Student-t innovations (MSM-t). Second, we perform a comprehensive panel forecasting analysis of the MSM models as well as other competing volatility models of the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) legacy. Our cross-sections consist of all-share equity indices, bond indices and real estate security indices at the country level. Furthermore, we investigate complementarities between models via combined forecasts. We find that: (i) Maximum Likelihood (ML) and Generalized Method of Moments (GMM) estimation are both suitable for MSM-t models, (ii) empirical panel forecasts of MSM-t models show an improvement over the alternative volatility models in terms of mean absolute forecast errors and that (iii) forecast combinations obtained from the different MSM and (FI)GARCH models considered appear to provide some improvement upon forecasts from single models
    Keywords: Multiplicative volatility models, long memory, Student-t innovations, international volatility forecasting
    JEL: C20 G12
    Date: 2009–07
  28. By: Chen, Pu
    Abstract: In this note the author discusses the problem of updating forecasts in a time-discrete forecasting model when information arrives between the current period and the next period. To use the information that arrives between two periods, he assumes that the process between two periods can be approximated by a linear interpolation of the timediscrete forecasting model. Based on this assumption the author drives the optimal updating rule for the forecast of the next period when new information arrives between the current period and the next period. He demonstrates by theoretical arguments and empirical examples that this updating rule is simple, intuitively appealing, defendable and useful.
    Keywords: Forecast
    JEL: C32
    Date: 2009
  29. By: Anastasios Xepapadeas (Athens University of Economics and Business and Beijer Fellow); William Brock (University of Wisconsin and Beijer Fellow)
    Abstract: This paper presents a fairly general treatment of recursive infinite horizon forward looking optimizing systems on infinite dimensional spatial domains. It includes optimal control, an analysis of local stability of spatially flat optimal steady states and development of techniques to compute spatially heterogeneous optimal steady states. The paper also develops a concept of rational expectations equilibrium, a local stability analysis for spatially homogeneous rational expectations steady states, and computational techniques for spatially heterogeneous rational expectations steady states.
    Keywords: Pattern Formation, Spatial Spillovers, Optimal Control, Spillover Induced Instability, Growth Models
    JEL: C61
    Date: 2009–06
  30. By: Hsiufen Hsu (Osaka School of International Public Policy (OSIPP),Osaka University)
    Abstract: In this paper the feasibility of forming a common currency area in East Asia is investigated. A three-variable SVAR model is employed to identify three types of shocks, i.e. global, regional, and domestic shocks. The empirical results do not provide strong support for forming a common currency area in this region because the symmetric "prevalent shock" cannot be defined. However, it is found that since the late 1990s the importance of asymmetric domestic shocks has declined while that of symmetric global and regional shocks has increased. Furthermore, East Asia is as symmetric as the Euro Area in terms of the correlation of global and regional shocks. The findings suggest that most East Asian economies have become symmetric in terms of economic shocks, and imply that a common currency area may become viable through deepening regional integration.
    Keywords: Common currency area, Monetary integration, OCA, SVAR, East Asia
    JEL: F3 F4
    Date: 2009–07
  31. By: Tatevik Sekhposyan; Barbara Rossi
    Abstract: We evaluate various economic models’ relative performance in forecasting future US output growth and inflation on a monthly basis. Our approach takes into account the possibility that the models’ relative performance can be varying over time. We show that the models’ relative performance has, in fact, changed dramatically over time, both for revised and realtime data, and investigate possible factors that might explain such changes. In addition, this paper establishes two empirical stylized facts. Namely, most predictors for output growth lost their predictive ability in the mid-1970s, and became essentially useless in the last two decades. When forecasting inflation, instead, fewer predictors are significant, and their predictive ability significantly worsened around the time of the Great Moderation.
    Keywords: Output Growth Forecasts, Inflation Forecasts, Model Selection, Structural Change, Forecast Evaluation, Real-time data. Evaluation
    JEL: C22 C52 C53
    Date: 2009
  32. By: Gary Koop (Department of Economics, University of Strathclyde and RCEA); Dimitris Korobilis (Department of Economics, University of Strathclyde and RCEA)
    Abstract: There is a large literature on forecasting inflation using the generalized Phillips curve (i.e. using forecasting models where inflation depends on past inflation, the unemployment rate and other predictors). The present paper extends this literature through the use of econometric methods which incorporate dynamic model averaging. These not only allow for coefficients to change over time (i.e. the marginal effect of a predictor for inflation can change), but also allows for the entire forecasting model to change over time (i.e. different sets of predictors can be relevant at different points in time). In an empirical exercise involving quarterly US inflation, we fi…nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark approaches (e.g. random walk or recursive OLS forecasts) and more sophisticated approaches such as those using time varying coefficient models.
    Keywords: Option Pricing; Modular Neural Networks; Non-parametric Methods
    JEL: E31 E37 C11 C53
    Date: 2009–01
  33. By: Nikolay Nenovsky
    Abstract: In this paper I am going to explore some of the major theoretical concepts and ideas in Luca Fantacci’s work devoted to the history of money. As a historical check on Fantacci’s theory I will present various moments in Russian monetary history interpreted in the light of the ideas of the La moneta: storia di un’instituzione mancata. I will compare Fantacci’s theory of division between the unit of account and the medium of exchange with those of Walther Eucken and the Austrian School as well as of some other contemporary authors. A new institutional reading of the evolution of money “money as an institutional compound” is proposed.
    Keywords: institution, money, monetary history
    JEL: B52 E42 N10
    Date: 2009–07
  34. By: David Laidler (University of Western Ontario)
    Abstract: This paper examines Robert E. Lucas's views on the relationship of macroeconomics to real world economic phenomena, and on Keynes's place in its history, suggesting that these stem from a particular and debatable understanding of how the subdiscipline has evolved. It considers some implications for today's awkward economic facts of aspects of Keynes' General Theory, not so much its speculations about the role of psychology and social conventions in the economic decisions of individual agents recently highlighted by Akerlof and Shiller (2009) however, as its insights into the influence of the monetary system on the coordination of these decisions, along lines later extended by Clower (1965) and Leijonhufvud (1968). It concludes that the questions about co-ordination that Keynes addressed, not to mention some of his answers, are well worth revisiting.
    Keywords: Crisis; Co-ordination; Clearing Markets; Auctioneer; Money; Financial Markets; Animal Spirits; Psychology; Keynes; Lucas
    JEL: B22 B31 E12 E13 E32
    Date: 2009
  35. By: Kleiner, George B.
    Abstract: The basics of a new theory of economic systems are proposed in this article as a fundamental synthetic field of economics. This theory proposes to unify a description of economic phenomena usually studied by different areas of economics: economic agents, i.e., legal and physical entities, formal and informal institutions, economic processes, and projects. A basic classification of economic systems is developed, their key functions are defined, and the need for power parity of the basic types of economic systems is proved. The results obtained are used to classify the types of national economic policy and elaborate measures aimed at preventing crisis phenomena and building a well-balanced economy.
    Date: 2009–03
  36. By: Jean-Pierre Allegret (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Kosta Josifidis (Faculty of Economics Subotica - Novi Sad University); Emilija Beker Pucar (Faculty of Economics Subotica - Novi Sad University)
    Abstract: The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.
    Keywords: Exchange rate targeting; Inflation targeting; Intermediate exchange rate regimes; Monetary transmission channels
    Date: 2009
  37. By: Iancu, Aurel (Academia Romana, Institutul National de Cercetari Economice)
    Abstract: After presenting the institutional construction during the pre-accession and post-accession to the Economic and Monetary Union (EMU), the exchange rate mechanisms (ERM) in several countries and the convergence criteria, we go on with a brief analysis of the way the CEE countries cope with the convergence criteria in accordance with the Maastricht Treaty. Then, the study deals with a topic often discussed in the scientific literature and included on the agenda of decision-makers at various levels, in order to clarify the following major issues: a shorter transition to the euro, the exchange rate equilibrium versus the inflation rate diminution and the Balassa-Samuelson effect, the exchange rates and the exchange rate deviation index, evidences concerning the real exchange rate equilibrium and the appreciation of the exchange rate in the CEE countries. * Study within the CEEX Programme – Project No. 220/2006 “Economic Convergence and Role of Knowledge in Relation to the EU Integration”.
    Keywords: Convergence criteria, exchange rate, exchange rate mechanisms, Euro Area, Balassa-Samuelson effect, tradable goods, non-tradable goods, exchange rate deviation index, purchasing power parity.
    JEL: F31 O43 O47
    Date: 2009–07
  38. By: James Butkiewicz (Department of Economics,University of Delaware)
    Abstract: Turkey experienced a financial crisis in 2000-2001 which led to significant financial reforms. The reforms resulted in a switch to a floating exchange rate, granted greater central bank independence and pursuit of a more credible monetary policy. Investigation of the channels of monetary policy in both periods finds that monetary policy’s output effects have been strengthened considerable by the reforms. In the pre-crisis period monetary policy was highly inflationary, while in the post-crisis period, monetary policy targets low inflation and has become a tool for output stabilization. These results support the importance of central bank independence and a credible policy.
    Keywords: monetary transmission mechanism, central bank independence, inflation targeting.
    JEL: E42
    Date: 2009
  39. By: Ercan Eren (Department of Economics, Yildiz Technical University); Serkan Çiçek
    Abstract: The aim of paper to search whether there is a change in relationship between inflation rate and domestic economic activity in Turkey and to test whether an increase in the level of globalization has an impact on this changing. The findings point out that the slope of Phillips Curve has declined in Turkey. The effect of globalization that is foreseen the reason of flattening, is tested by global output gap hypothesis. The results show that globalization has an impact on domestic inflation rate -especially on traded goods inflation rate. özet Çalışmanın amacı Türkiye’de enflasyon oranı ile yurtiçi ekonomik aktivite arasındaki ilişkinin seyri noktasında bir değişimin olup olmadığını araştırmak ve küreselleşme düzeyinde yaşanan artışın bu değişim üzerinde etkili olup olmadığını sınamaktır. Elde edilen bulgular Türkiye’de Phillips eğrisinin eğiminin azaldığına işaret etmektedir. Azalışın nedeni olarak öngörülen küreselleşmenin etkisi, küresel çıktı açığı hipotezi çerçevesinde sınanmıştır. Tahmin sonuçları küreselleşmenin Türkiye’deki enflasyon oranı üzerinde –özellikle ticarete konu olan malların enflasyon oranı üzerinde– etkili olduğunu göstermiştir.
    Keywords: Central Banks, Monetary Policy, Globalization, Inflation
    JEL: E52 E58
    Date: 2009
  40. By: Aranha, Marcel Z.; Moura, Marcelo L.
    Date: 2009–10
  41. By: Luiz de Mello; Mauro Pisu
    Abstract: This paper tests for the existence of a bank lending channel in the transmission of monetary policy in Brazil using monthly aggregate data for the period 1995:12 through 2008:6. The test is carried out in a VECM setting that allows for multiple cointegrating relationships among the variables of interest. We find evidence of two cointegrating vectors, which we identify as bank loan demand and supply functions by testing for a number of exclusion and exogeneity restrictions on the cointegrating relationships. Loan supply is negatively related to the interbank deposit certificate rate in the long term, which confirms the existence of a lending channel for monetary transmission. The VECM’s short-term dynamics show that loan demand is equilibrium-correcting. But short-term disequilibria in the supply of loans are corrected through changes in the interbank deposit certificate rate, suggesting that monetary policy plays a role in restoring equilibrium in the credit market by affecting the borrowing rate faced by banks to raise non-deposit funds. This Working Paper relates to the 2009 OECD Economic Survey of Brazil (<P>Le crédit bancaire comme canal de transmission de la politique monétaire au Brésil : Un modèle à correction d’erreur<BR>Ce document teste l’hypothèse de l’existence du crédit bancaire comme canal de transmission de la politique monétaire au Brésil à l’aide de données mensuelles agrégées pour la période allant de décembre 1995 à juin 2008. Le test est effectué dans le cadre d’un modèle à correction d’erreur (VECM) qui permet plusieurs vecteurs de cointégration parmi les variables d’intérêt. L’analyse empirique révèle l’existence de deux vecteurs de cointégration, que nous identifions comme la demande et l’offre de crédit bancaire sur la base d’un certain nombre de restrictions d’exclusion et d’exogénéité imposées sur les vecteurs de cointégration. L’offre des prêts bancaires est inversement liée au taux de long terme des certificats de dépôt interbancaire, ce qui confirme l’existence du crédit bancaire comme canal de transmission de la politique monétaire. La dynamique de court terme du VECM montre que la demande des prêts s’ajuste à l’équilibre de long terme. Mais à court terme, les déséquilibres dans l'offre des prêts sont corrigés par des changements dans le taux des certificats de dépôt interbancaire, ce qui suggère que la politique monétaire joue un rôle dans le rétablissement de l’équilibre sur le marché du crédit en affectant le taux d’emprunt des banques. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Brésil, 2009 (ésil).
    Keywords: monetary transmission mechanism, mécanisme de transmission monétaire, vector error-correction model, modèle à correction d’erreur, bank lending channel, canal du crédit bancaire
    JEL: E10 E44 E52
    Date: 2009–07–10
  42. By: Monique Reid (Department of Economics, University of Stellenbosch)
    Abstract: Price stability is widely recognised as the primary goal of modern monetary policy, and the management of private sector inflation expectations has become an essential channel through which this goal is achieved. This evaluation aims to improve the understanding of how the sensitivity of private sector inflation expectations to macroeconomic surprises in South Africa compares internationally, as this provides an indication of the contribution of monetary policy in South Africa to anchoring inflation expectations. If a central bank is credible, the financial markets should react less sensitively to macroeconomics surprises, because they trust the central bank to manage these incidents and achieve the objectives they communicated over the medium to long term. In this paper, the methodology of Gurkaynack, Sack and Swanson (2005a) is adopted in order to measure the sensitivity of South African inflation expectations to surprises. A comparison of South Africa’s results with those of countries in the original studies supports the contention that the SARB (South African Reserve Bank) has encouraged inflation expectations to be relatively insensitive to macroeconomic surprises, and offers support for the inflation targeting framework as a means to help anchor inflation expectations.
    Keywords: South Africa, Inflation targeting, Macroeconomic surprises, Sensitivity of inflation expectations
    JEL: E31 E52 E58
    Date: 2009
  43. By: Yinusa, D. Olalekan
    Abstract: The role played by macroeconomic fluctuations in stimulating deposit dollarization in developing countries have been a subject of intense debate in the last few decades especially in Latin America and transition economies of Eastern Europe with little attention on African economies. Apart from this, most of the studies on African economies are country case studies with little scope for generalisation. This article examines the effect of macroeconomic fluctuations on deposit dollarization in 18 selected Sub-Saharan Africa for the period 1980 to 2004. Using the standard money demand model accounting for dollarization in small open economies, the article finds that inflation, expectations about exchange rate changes coupled with interaction between capital account restrictions and domestic inflation plays dominant roles in explaining deposit dollarization in Sub-Sahara Africa. Given the consequences of deposit dollarization on the vulnerability of the domestic banking system, lack of independent monetary policy and optimal exchange rate choices, the article concludes that macroeconomic instability must be adequately brought under control in other to reduce deposit dollarization in these economies.
    Keywords: Macroeconomic Fluctuations; Demand for Money; Deposit Dollarization; Panel Data and Sub-Saharan Africa
    JEL: E31 C21
    Date: 2009

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