nep-cba New Economics Papers
on Central Banking
Issue of 2009‒08‒02
thirty-two papers chosen by
Alexander Mihailov
University of Reading

  1. A New Data Set on Monetary Policy: The Economic Forecasts of Individual Members of the FOMC By David H. Romer
  2. Inflation Risk Premia and Survey Evidence on Macroeconomic Uncertainty By Soderlind, Paul
  3. Illiquidity and Interest Rate Policy By Douglas W. Diamond; Raghuram G. Rajan
  4. The propagation of regional recessions By James D. Hamilton; Michael T. Owyang
  5. Can Parameter Instability Explain the Meese-Rogoff Puzzle? By Philippe Bacchetta; Eric van Wincoop; Toni Beutler
  6. Incomplete Financial Markets and Jumps in Asset Prices By Hervé Crès; Tobias Markeprand; Mich Tvede
  7. Does money matter in inflation forecasting? By Jane M. Binner; Peter Tino; Jonathan Tepper; Richard G. Anderson; Barry Jones; Graham Kendall
  8. International Comovements, Business Cycle and Inflation: a Historical Perspective By Haroon Mumtaz; Saverio Simonelli; Paolo Surico
  9. Insulation impossible: fiscal spillovers in a monetary union By Russell Cooper; Hubert Kempf; Dan Peled
  10. The macroeconomics of financial crises: How risk premiums, liquidity traps and perfect traps affect policy options By Manfred Gärtner; Florian Jung
  11. Evaluating a monetary business cycle model with unemployment for the euro area By Nicolas Groshenny
  12. On the Accuracy of the Probability Method for Quantifying Beliefs about Inflation By Thomas Maag
  13. Resolving the unbiasedness puzzle in the foreign exchange market By Daniel L. Thornton
  14. The global credit boom: challenges for macroeconomics and policy By Hume, Michael; Sentance, Andrew
  15. Euro membership as a U.K. monetary policy option: results from a structural model By Riccardo DiCecio; Edward Nelson
  16. The great inflation in the United States and the United Kingdom: reconciling policy decisions and data outcomes By Riccardo DiCecio; Edward Nelson
  17. Productivity Growth and the Phillips Curve: A Reassessment of the US Experience By Karanassou, Marika; Sala, Hector
  18. The US Inflation-Unemployment Tradeoff: Methodological Issues and Further Evidence By Marika Karanassou; Hector Sala
  19. Sources of Current Account Fluctuations in Industrialized Countries By Aikaterini Karadimitropoulou; Miguel A. León-Ledesma
  20. Irrational Bias in Inflation Forecasts By Kim , Insu; Kim, Minsoo
  21. Expected Inflation, Sunspots Equilibria and Persistent Unemployment Fluctuations By Dufourt, Frédéric; Lloyd-Braga, Teresa; Modesto, Leonor
  22. Larger crises, slower recoveries: the asymmetric effects of financial frictions By Guillermo L. Ordoñez
  23. Business cycle implications of internal consumption habit for new Keynesian models By Takashi Kano; James M. Nason
  24. Liquidity and welfare in a heterogeneous-agent economy By Yi Wen
  25. When does heterogeneity matter? By Yi Wen
  26. Milton Friedman and U.K. economic policy: 1938-1979 By Edward Nelson
  27. The sensitivity of DSGE models' results to data detrending By Simona Delle Chiaie
  28. Improving real-time estimates of the output gap By Thomas M. Trimbur
  29. Globalized banks: lending to emerging markets in the crisis By Nicola Cetorelli; Linda S. Goldberg
  30. Speculative bubbles and financial crisis By Pengfei Wang; Yi Wen
  31. The Persistence of Inflation in Switzerland: Evidence from Disaggregate Data By Simone Elmer; Thomas Maag
  32. A Suggested Method for the Measurement of World-Leading Research (Illustrated with Data on Economics) By Oswald, Andrew J.

  1. By: David H. Romer
    Abstract: This paper describes a new data set of the forecasts of output growth, inflation, and unemployment prepared by individual members of the Federal Open Market Committee. The paper discusses the scope of the data set, possibilities for extending it, and some potential uses. It offers a preliminary examination of some of the cross-sectional features of the data.
    JEL: E52 E58
    Date: 2009–07
  2. By: Soderlind, Paul (University of St. Gallen)
    Abstract: Nominal and real U.S. interest rates (1997Q1-2008Q2) are combined with inflation expectations from the Survey of Professional Forecasters to calculate time series of risk premia. It is shown that survey data on inflation and output growth uncertainty, as well as a proxy for liquidity premia can explain a large amount of the variation in these risk premia.
    Keywords: break-even inflation; liquidity premium; Survey of Professional Forecasters
    JEL: E27 E47
    Date: 2009–01–28
  3. By: Douglas W. Diamond; Raghuram G. Rajan
    Abstract: The cheapest way for banks to finance long term illiquid projects is typically to borrow short term from households. But when household needs for funds are high, interest rates will rise sharply, debtors will have to shut down illiquid projects, and in extremis, will face more damaging runs. Authorities may want to push down interest rates to maintain economic activity in the face of such illiquidity, but intervention may not always be feasible, and when feasible, could encourage banks to increase leverage or fund even more illiquid projects up front. This could make all parties worse off. Authorities may want to commit to a specific policy of interest rate intervention to restore appropriate incentives. For instance, to offset incentives for banks to make more illiquid loans, authorities may have to commit to raising rates when low, to counter the distortions created by lowering them when high. We draw implications for interest rate policy to combat illiquidity.
    JEL: E4 E44 E5 E52 E58 G21 G38
    Date: 2009–07
  4. By: James D. Hamilton; Michael T. Owyang
    Abstract: This paper develops a framework for inferring common Markov-switching components in a panel data set with large cross-section and time-series dimensions. We apply the framework to studying similarities and differences across U.S. states in the timing of business cycles. We hypothesize that there exists a small number of cluster designations, with individual states in a given cluster sharing certain business cycle characteristics. We find that although oil-producing and agricultural states can sometimes experience a separate recession from the rest of the United States, for the most part, differences across states appear to be a matter of timing, with some states entering recession or recovering before others.
    Keywords: Business cycles ; Recessions
    Date: 2009
  5. By: Philippe Bacchetta; Eric van Wincoop; Toni Beutler
    Abstract: The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. This result is behind the famous Meese-Rogoff puzzle. In this paper we evaluate whether parameter instability can account for this puzzle. We consider a theoretical reduced-form relationship between the exchange rate and fundamentals in which parameters are either constant or time varying. We calibrate the model to data for exchange rates and fundamentals and conduct the exact same Meese-Rogoff exercise with data generated by the model. Our main finding is that the impact of time-varying parameters on the prediction performance is either very small or goes in the wrong direction. To help interpret the findings, we derive theoretical results on the impact of time-varying parameters on the out-of-sample forecasting performance of the model. We conclude that it is not time-varying parameters, but rather small sample estimation bias, that explains the Meese-Rogoff puzzle.
    Keywords: exchange rate forecasting; time-varying coefficients
    JEL: F31 F37 F41
    Date: 2009–07
  6. By: Hervé Crès (Sciences Po, Paris); Tobias Markeprand (Department of Economics, University of Copenhagen); Mich Tvede (Department of Economics, University of Copenhagen)
    Abstract: A dynamic pure-exchange general equilibrium model with uncertainty is studied. Fundamentals are supposed to depend continuously on states of nature. It is shown that: 1. if financial markets are complete, then asset prices vary continuously with states of nature, and; 2. if financial markets are incomplete, jumps in asset prices may be unavoidable. Consequently incomplete financial markets may increase volatility in asset prices significantly.
    Keywords: general equilibrium; financial markets; jumps in asset prices
    JEL: D52 D53 G12
    Date: 2009–06
  7. 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
  8. By: Haroon Mumtaz (Center for Central Banking Studies, Bank of England); Saverio Simonelli (Università di Napoli Federico II, EUI and CSEF); Paolo Surico (External MPC unit, Bank of England)
    Abstract: Using a dynamic factor model, we uncover four main empirical regularities on international comovements in a long-run panel of real and nominal variables. First, the contribution of world comovements to domestic output growth has decreased over the post-WWII period. The contribution of regional comovements, however, has increased significantly. Second, the share of inflation variation due to a global factor has become larger since 1985. Third, over most of the post-WWII period, international comovements within regions have accounted for the bulk of fluctuations in business cycle and inflation. Fourth, prices have become significantly less countercyclical during the post-1984 sample, with the largest contribution due to external developments.
    Keywords: output growth, in.ation, geographic identi.cation, dynamic factor model
    JEL: E30 F40 N10
    Date: 2009–07–10
  9. 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.
    Date: 2009
  10. By: Manfred Gärtner; Florian Jung
    Abstract: The paper shows that structural models of the IS-LM and Mundell-Fleming variety have a lot to tell about the macroeconomics of the current global crisis. In addition to demonstrating how the emergence of risk premiums in money and capital markets may drive economies into recessions, it shows the following: (1) Liquidity traps may occur not only when interest rates approach zero but at positive and/or rising rates as well; (2) Fiscal policy works even in a small, open economy under flexible exchange rates when the country is stuck in a liquidity trap; (3) Near the fringe of liquidity traps, the risk arises of perfect traps, in which neither monetary nor fiscal policy works when used in isolation, but policy coordination is called for; and (4) Massive financial crises in the domestic money market may even destabilize the economy.
    Keywords: financial crisis, credit crunch, liquidity trap, zero lower bound, risk premiums, policy options, fiscal policy, monetary policy, open economy.
    JEL: E63 F01 F41
    Date: 2009–07
  11. By: Nicolas Groshenny (Reserve Bank of New Zealand, Economics department)
    Abstract: This paper estimates a medium-scale DSGE model with search unemployment by matching model and data spectra. Price mark-up shocks emerge as the main source of business-cycle fluctuations in the euro area. Key factors in the propagation of these disturbances are a high degree of inflation indexation and a persistent response of monetary policy to deviations from the inflation target
    Keywords: DSGE models, business cycles, frequency-domain analysis
    JEL: E32 C51 C52
    Date: 2009–07
  12. By: Thomas Maag (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper assesses the probability method for quantifying EU consumer survey data on perceived and expected inflation. Based on micro-data from the Swedish consumer survey that asks for both qualitative and quantitative responses, I find that the theoretical assumptions of the method do not hold. In particular, estimated models of response behavior indicate that qualitative inflation expectations are not ordered. Nevertheless, the probability method generates series that are highly correlated with the mean of actual quantitative beliefs. For quantifying the cross-sectional dispersion of beliefs, however, an index of qualitative variation outperforms the probability method.
    Keywords: quantification, inflation expectations, inflation perceptions, qualitative response data, belief formation
    JEL: C53 D84 E31
    Date: 2009–06
  13. By: Daniel L. Thornton
    Abstract: An unresolved puzzle in the empirical foreign exchange literature is that tests of forward rate unbiasedness using the forward rate and forward premium equations yield markedly different conclusions about the unbiasedness of the forward exchange rate. This puzzle is resolved by showing that because of the persistence in exchange rates, estimates of the slope coefficient from the forward premium equation are extremely sensitive to small violations of the null hypothesis of the type and magnitude that are likely to exist in the real world. Moreover, contrary to suggestions in the literature and common practice, the forward premium equation does not necessarily provide a better test of unbiasedness than the forward rate equation.
    Keywords: Foreign exchange
    Date: 2009
  14. By: Hume, Michael (Monetary Policy Committee Unit, Bank of England); Sentance, Andrew (Monetary Policy Committee Unit, Bank of England)
    Abstract: The recent financial crisis has put the spotlight on the rapid rise in credit which preceded it. In this paper, we provide an empirical and theoretical analysis of the credit boom and the macroeconomic context in which it developed. We find that the boom was unusually long and associated with neither particularly strong growth nor rising inflation in the economies in which it took place. We show that this type of credit and financial cycle is hard to reconcile with existing economic theory and argue that, while the 'global savings glut' may account for the cycle's initial phase, other factors - such as the conduct of monetary policy and perceptions of declining macroeconomic risk - were more important from the mid-2000s onwards. We conclude by identifying some of the challenges now facing macroeconomics and policy.
    Keywords: credit; business cycle; financial crisis; monetary policy; asset prices; boom and bust
    JEL: E30 E50
    Date: 2009–06–01
  15. By: Riccardo DiCecio; Edward Nelson
    Abstract: Developments in open-economy modeling, and the accumulation of experience with the monetary policy regimes prevailing in the United Kingdom and the euro area, have increased our ability to evaluate the effects that joining monetary union would have on the U.K. economy. This paper considers the debate on the United Kingdom's monetary policy options using a structural open-economy model. We use the Erceg, Gust, and Lopez-Salido (EGL) (2007) model to explore both the existing U.K. regime (CPI inflation targeting combined with a floating exchange rate), and adoption of the euro, as monetary policy options for the United Kingdom. Experiments with a baseline estimated version of the model suggest that there is improved stability for the U.K. economy with monetary union. Once large differences in the degree of nominal rigidity across economies are considered, the balance tilts toward the existing U.K. monetary policy regime. The improvement in U.K. economic stability under monetary union also diminishes if imports from the euro area are modeled as primarily intermediates instead of finished goods; or if we assume that the pressures reflected in foreign exchange market shocks, instead of vanishing with monetary union, are now manifested as an additional source of disturbances to domestic aggregate spending.
    Keywords: Monetary policy - European Union countries ; Monetary policy - Great Britain ; Great Britain
    Date: 2009
  16. By: Riccardo DiCecio; Edward Nelson
    Abstract: We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. The explanation does not appeal to common shocks or to exchange rate linkages, but to the common doctrine underlying the systematic monetary policy choices in each country. The nonmonetary approach to inflation control that was already influential in the United Kingdom came to be adopted by the United States during the 1970s. We document our position by examining official policymaking doctrine in the United Kingdom and the United States in the 1970s, and by considering results from a structural macroeconomic model estimated using U.K. data.
    Keywords: Inflation (Finance) ; Great Britain
    Date: 2009
  17. By: Karanassou, Marika (University of London); Sala, Hector (Universitat Autònoma de Barcelona)
    Abstract: In this paper we analyse a new Phillips curve (NPC) model and demonstrate that (i) frictional growth, i.e. the interplay of wage-staggering and money growth, generates a nonvertical NPC in the long-run, and (ii) the Phillips curve (PC) shifts with productivity growth. On this basis we estimate a dynamic system of macrolabour equations to evaluate the slope of the PC and explain the evolution of inflation and unemployment in the US from 1970 to 2006. Since our empirical methodology relies heavily on impulse response functions, it represents a synthesis of the traditional structural modelling and (structural) vector autoregressions (VARs). We find that the PC is downward-sloping with a slope of -3.58 in the long-run. Furthermore, during the stagflating 70s, the productivity slowdown contributed substantially to the increases in both unemployment and inflation, while the monetary expansion was quite ineffective and led mainly to higher inflation. Finally, the monetary expansion and productivity speedup of the roaring 90s were both responsible for the significant lowering of the unemployment rate.
    Keywords: new Phillips curve, frictional growth, productivity growth, stagflating seventies, roaring nineties, impulse response functions
    JEL: E24 E31
    Date: 2009–07
  18. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA)
    Abstract: This paper adresses the various methodological issues surrounding vector autoregressions, simultaneous equations, and chain reactions, and provides new evidence on the long-run inflation-unemployment tradeoff in the US. It is argued that money growth is a superior indicator of the monetary environment than the federal funds rate and, thus, the focus is on the inflation/unemployment responses to money growth shocks. SVAR (structural vector autoregression) and GMM (generalised method of moments) estimations confirm earlier findings in Karanassou, Sala and Snower (2005, 2008b) obtained from chain reaction structural models: the slope of the US Phillips curve is far from vertical, even in the long-run, which implies that the nominal and real sides of the economy are symbiotic. In the light of the significant and robust long-run inflation-unemployment tradeoffs, policy makers should reconsider the classical dichotomy thesis.
    Keywords: Inflation, Unemployment, Money growth, SVAR, GMM, Structural modelling, Chain reactions
    JEL: E24 E31 E51
    Date: 2009–07
  19. By: Aikaterini Karadimitropoulou; Miguel A. León-Ledesma
    Abstract: We analyze the sources of current account fluctuations for the G6 economies. Based on Bergin and Sheffrin’s (2000) two-goods inter-temporal framework, we build a SVAR model including the world real interest rate, net output, real exchange rate, and the current account. The theory model allows for the identification of structural shocks in the SVAR using longrun restrictions. Our results suggest three main conclusions: i) we find evidence in favour of the present-value model of the CA for all countries except France; ii) there is substantial support for the two-good intertemporal model, since both external supply and preferences shocks account for an important proportion of CA fluctuations; iii) temporary domestic shocks account for a large proportion of CA fluctuations, but the excess response of the CA is less pronounced than in previous studies.
    Keywords: Current account; real exchange rate; two-good intertemporal model; SVAR
    JEL: F32 F41
    Date: 2009–07
  20. By: Kim , Insu; Kim, Minsoo
    Abstract: This paper investigates the issue of rational expectations using inflation forecasts from the Survey of Professional Forecasters (SPF) and the Green Book. We provide an alternative test of rational expectations hypothesis by measuring the degree of persistence of potential systematic mistakes. The test is obtained by solving a signal extraction problem that distinguishes between systematic and non-systematic forecast errors. The findings indicate highly persistent systematic mistakes, which are driven by the inefficient use of available information, and reject the rational expectations hypothesis. The estimated time-varying bias can be used to improve the SPF and Green Book inflation forecast performance by at least 13.4%. This paper also documents evidence that the real interest rate plays a crucial role in explaining the level of bias that leads to under- and over predictions of actual inflation.
    Keywords: Inflation Expectations; Bias; Forecasts; Rational Expectations.
    JEL: D84 E31 E37
    Date: 2009–07–23
  21. By: Dufourt, Frédéric (BETA-CNRS); Lloyd-Braga, Teresa (Universidade Catolica Portuguesa, Lisbon); Modesto, Leonor (Universidade Catolica Portuguesa, Lisbon)
    Abstract: We propose and estimate a model where unemployment fluctuations result from self-fulfilling changes in expected inflation (sunspot shocks) affecting nominal wage bargaining. Since the estimated parameters fall near the locus of Hopf bifurcations, country-specific expected inflation shocks can replicate the strong persistence and heterogeneity observed in European unemployment rates. They also generate positive comovements in macroeconomic variables and a large relative volatility of consumption. All these features, hardly accounted for by standard sunspot-driven models, are explained here by the fact that liquidity constrained workers, facing earnings uncertainty in the context of imperfect unemployment insurance, choose to consume their current income.
    Keywords: unemployment fluctuations, sunspots equilibria, expected inflation, wage bargaining
    JEL: J60 E32 E37
    Date: 2009–07
  22. By: Guillermo L. Ordoñez
    Abstract: It is well known that movements in lending rates are asymmetric; they rise quickly and sharply, but fall slowly and gradually. Not known is the fact that the asymmetry is stronger the less developed a country's financial system is. This new fact is here documented and explained in a model with an endogenous flow of information about economic conditions. The stronger asymmetry in less developed countries stems from their greater financial system frictions, such as monitoring and bankruptcy costs, which first magnify jumps of lending rates and then delay their recoveries by restricting the generation of information after the crisis. A quantitative exploration of the model shows the data are consistent with this explanation.
    Keywords: Financial crises ; Developing countries
    Date: 2009
  23. By: Takashi Kano; James M. Nason
    Abstract: This paper studies the implications of internal consumption habit for propagation and monetary transmission in New Keynesian dynamic stochastic general equilibrium (NKDSGE) models. We use Bayesian methods to evaluate the role of internal consumption habit in NKDSGE model propagation and monetary transmission. Simulation experiments show that internal consumption habit often improves NKDSGE model fit to output and consumption growth spectra by dampening business cycle periodicity. Nonetheless, habit NKDSGE model fit is vulnerable to nominal rigidity, the choice of monetary policy rule, the frequencies used for evaluation, and spectra identified by permanent productivity shocks.
    Date: 2009
  24. By: Yi Wen
    Abstract: This paper reconsiders the welfare costs of inflation and the welfare gains from financial intermediation in a heterogeneous-agent economy where money is held as a store of value (as in Bewley, 1980). The dynamic stochastic general equilibrium model recaptures some essential features of the liquidity-preference theory of Keynes (1930, 1936). Because of heterogeneous liquidity demand, transitory lump-sum money injections can have persistent expansionary effects despite flexible prices, and such effects can be greatly amplified by the banking system through the credit channel. However, permanent money growth can be extremely costly: With log utility functions, consumers are willing to reduce consumption by 15% (or more) to avoid a 10% annual inflation. For the same reason, financial intermediation can significantly improve welfare: The welfare costs of a collapse of the banking system is estimated as about 10-68% of aggregate output. These welfare implications differ dramatically from those of the existing literature.
    Keywords: Liquidity (Economics)
    Date: 2009
  25. By: Yi Wen
    Abstract: How do movements in the distribution of income affect the macroeconomy? Krusell and Smith (1998) analyzed this question in a neoclassical growth model, and their results show that the representative-agent assumption provides a good approximation for aggregate behaviors of heterogeneous agents. This paper extends their analysis to a cash-in-advance model with heterogeneous money demand. It is shown that movements in the distribution of monetary income can have significant impact on the macroeconomy. For example, the dynamic responses of aggregate output to monetary shocks behave very differently from those of a representative agent; the welfare costs of moderate inflation are much higher than previously thought, up to 20% of consumption when the inequality of cash distribution is sufficiently large. This is in sharp contrast to the findings of Cooley and Hansen (1989) and Lucas (2000) based on representative-agent models.
    Keywords: Liquidity (Economics) ; Money theory
    Date: 2009
  26. By: Edward Nelson
    Abstract: This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979. The period under study is separated into 1938-1946, 1946-1959, 1959-1970, and 1970-1979. For each of these subperiods, I consider Friedman's observations on and dealings with key events, issues, and personalities in U.K. monetary policy and in general U.K. economic policy.
    Keywords: Friedman, Milton ; Economic policy - Great Britain
    Date: 2009
  27. By: Simona Delle Chiaie (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna,)
    Abstract: This paper aims to shed light on potential pitfalls of di¤erent data filtering and detrending procedures for the estimation of stationary DSGE models. For this purpose, a medium-sized New Keynesian model as the one developed by Smets and Wouters (2003) is used to assess the sensitivity of the structural estimates to preliminary data transformations. To examine the question, we focus on two widely used detrending and filtering methods, the HP filter and linear detrending. After comparing the properties of business cycle components, we estimate the model through Bayesian techniques using in turn the two different sets of transformed data. Empirical findings show that posterior distributions of structural parameters are rather sensitive to the choice of detrending. As a consequence, both the magnitude and the persistence of theoretical responses to shocks depend upon preliminary filtering.
    Keywords: DSGE models; Filters; Trends; Bayesian estimates
    JEL: E3
    Date: 2009–07–20
  28. By: Thomas M. Trimbur
    Abstract: This paper investigates strategies for real-time estimation of the output gap. First, I examine estimates from univariate models with stochastic cycles. This corresponds to the use of model-based band-pass filters in real-time, and I find that the turning points in real-time and final output gap series match more closely for higher order models and that the revisions properties and real-time accuracy are more favorable. Second, I investigate the use of capacity utilization as an auxiliary indicator to improve on output gap estimates in real-time. I find that this bivariate approach leads to significant gains in the accuracy of real-time estimates and in the quality of revisions.
    Date: 2009
  29. By: Nicola Cetorelli; Linda S. Goldberg
    Abstract: As banking has become more globalized, so too have the consequences of shocks originating in home and host markets. Global banks can provide liquidity and risk-sharing opportunities to the host market in the event of adverse host-country shocks, but they can also have profound effects across international markets. Indeed, global banks played a significant role in the transmission of the current crisis to emerging-market economies. Flows between global banks and emerging markets include both cross-border lending, which has long been recognized as responding significantly to shocks at home or abroad, and internal capital-market lending, which is the internal flow of funds within a banking organization (such as between a headquarters and its offices in foreign locations). Adverse liquidity shocks to developed-country banking, such as those that occurred in the United States in 2007 and 2008, have reduced lending in local markets through contractions in cross-border lending to banks and private agents and also through contractions in parent banks' support of foreign affiliates. Because all these forms of transmission impinge on the lending channel in recipient markets, the ownership structure of emerging-market banks does not by itself provide sufficient basis for identifying the degree of shock transmission from abroad.
    Keywords: Globalization ; Banks and banking, International ; Emerging markets ; Liquidity (Economics)
    Date: 2009
  30. 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
  31. By: Simone Elmer (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Thomas Maag (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper investigates persistence of Swiss consumer price inflation using aggregate and disaggregate inflation data covering 1983{2008. We document that persistence of sectoral inflation rates is below persistence of aggregate inflation. Our main finding is that inflation persistence significantly declines in the early 1990s. An estimated factor model reveals that inflation persistence stems from a persistent component that is common to inflation rates across sectors. Both the relevance and the persistence of the common component decline in the 1990s. Depending on the sample period and aggregation level, 70 to 90 percent of the variance in sectoral inflation rates is accounted for by short-lived sectoral factors.
    Keywords: inflation persistence, inflation dynamics, relative price variability, factor model
    JEL: E31 E52 C22
    Date: 2009–07
  32. By: Oswald, Andrew J. (University of Warwick)
    Abstract: Countries often spend billions on university research. There is growing interest in how to assess whether that money is well spent. Is there an objective way to assess the quality of a nation's world-leading science? I attempt to suggest a method, and illustrate it with modern data on economics. Of 450 genuinely world-leading journal articles, the UK produced 10%, and the rest of Europe slightly more. Interestingly, more than a quarter of these elite UK articles came from outside the best-known university departments. The proposed methodology could be applied to almost any academic discipline or nation.
    Keywords: Research Excellence Framework (REF), peer-review, United Kingdom, European economics, evaluation, science, citations, Research Assessment Exercise (RAE)
    JEL: A1 O38
    Date: 2009–07

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