|
on Central Banking |
| By: | Bennett T. McCallum (Professor, Carnegie Mellon University and National Bureau of Economic Research (E-mail: bmccallum@cmu.edu)) |
| Abstract: | It is well known that the concept of "determinacy"-a single stable solution-plays a major role in contemporary monetary policy analysis. But while determinacy is desirable, other things equal, it is not necessary for a solution to be plausible and is not sufficient for a solution to be desirable. There is a related but distinct criterion of "learnability" that seems more crucial. This paper argues that recognition of information feasibility requires that a candidate solution must, to be plausible, be quantitatively learnable on the basis of information generated by the economy itself. Since a prominent least- squares(LS) learning process is highly "biased" toward learnability, it is reasonable to regard it as a necessary condition for any specific solution to be relevant. This implies that determinacy is not necessary for policy analysis; there may be more than one stable solution but only one that is LS learnable. Also, determinacy is not sufficient for satisfactory policy analysis; explosive solutions pertaining to nominal variables will not be eliminated by transversality conditions. For these and other reasons, the role of determinacy in monetary policy analysis should be reconsidered and substantially de-emphasized. |
| Keywords: | Determinacy, Learnability, Rational Expectations, Multiple Solutions, Monetary Policy |
| JEL: | C62 E4 E5 E52 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-17&r=cba |
| By: | Maurice Obstfeld (Professor, University of California, Berkeley (E-mail: obstfeld@econ.berkeley.edu)) |
| Abstract: | The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last- resort lender that channels central bank liquidity where it is needed. The IMF's effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time. |
| Keywords: | Lender of Last Resort, Financial Crisis, Central Banking, International Monetary System, International Monetary Fund |
| JEL: | E58 F33 F36 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-18&r=cba |
| By: | Vasco Cúrdia; Michael Woodford |
| Abstract: | We consider the desirability of modifying a standard Taylor rule for a central bank's interest-rate policy to incorporate either an adjustment for changes in interest-rate spreads (as proposed by Taylor [2008] and by McCulley and Toloui [2008]) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al. [2007]). We consider the consequences of such adjustments for the way in which policy would respond to a variety of types of possible economic disturbances, including (but not limited to) disturbances originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using the simple DSGE model with credit frictions developed in Curdia and Woodford (2009), and compare the equilibrium responses to a variety of disturbances under the modified Taylor rules to those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve upon the standard Taylor rule, but the optimal size is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of the variation in credit spreads. A response to credit is less likely to be helpful, and the desirable size (and even the right sign) of the response to credit is less robust to alternative assumptions about the nature and persistence of disturbances. |
| JEL: | E44 E52 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15289&r=cba |
| By: | Ester Faia; Wolfgang Lechthaler; Christian Merkl |
| Abstract: | We study the design of optimal monetary policy in a New Keynesian model with labor turnover costs in which wages are set according to a right to manage bargaining where the firms’ counterpart is given by currently employed workers. Our model captures well the salient features of European labor market, as it leads to sclerotic dynamics of worker flows. The coexistence of those types of labor market frictions alongside with sticky prices gives rise to a non-trivial trade-off for the monetary authority. In this framework, firms and current employees extract rents and the policy maker finds it optimal to use state contingent inflation taxes/subsidies to smooth those rents. Hence, in the optimal Ramsey plan, inflation deviates from zero and the optimal volatility of inflation is an increasing function of firing costs. The optimal rule should react to employment alongside inflation |
| Keywords: | optimal monetary policy, hiring and firing costs, labor market frictions, policy trade-off |
| JEL: | E52 E24 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1534&r=cba |
| By: | Vincenzo Cuciniello (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland); Luisa Lambertini (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland) |
| Abstract: | We study whether monetary policy should target the exchange rate in a two-country model with non-atomistic wage setters, non-traded goods and different degrees of exchange-rate pass through. Commitment to an exchange rate target reduces the labor market distortion. Large labor unions anticipate that higher wages depreciate the exchange rate, which triggers an increase in the interest rate and restrain wage demands. However, reduced exchange rate flexibility worsens the distortion stemming from preset pricing. Targeting the nominal exchange rate will be optimal when the labor market distortion is larger than the preset-pricing one. This result arises with cooperation both under producer and local currency pricing, even though the optimal degree of exchange-rate targeting is higher under local currency pricing. In the Nash equilibrium, the terms-of-trade effect raises optimal wage mark-ups thereby reducing the optimal weight on the exchange rate target. The terms-of-trade effect is stronger as openness and substitutability among Home and Foreign goods increase. |
| Keywords: | Monetary policy, International Finance, Open-Economy Macroeconomics |
| JEL: | F3 F41 E52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cif:wpaper:005&r=cba |
| By: | Guglielmo Maria Caporale; Luca Onorante; Paolo Paesani |
| Abstract: | This paper estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates the linkages between them in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steady-state inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has increased, mainly owing to exogenous shocks. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, implying that the ECB can achieve lower inflation uncertainty by lowering the inflation rate. |
| Keywords: | Inflation, inflation uncertainty, time-varying parameters, GARCH models, ECB, EMU |
| JEL: | E31 E52 C22 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp909&r=cba |
| By: | Philippe Moutot (European Central Bank, Directorate Monetary Policy, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Giovanni Vitale (European Central Bank, Directorate Monetary Policy, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper discusses the structural implications of real and financial globalisation, with the aim of drawing lessons for the conduct of monetary policy and, in particular, for the assessment of risks to price stability. The first conclusion of the paper is that globalisation may have played only a limited role in reducing inflation and output volatility in developed economies. Central banks should remain focused on their mandate to preserve price stability. However, the globalisation of financial markets over the last 25 years has had major implications for the conduct of monetary policy. Four elements characterise the new financial landscape: the decline in the “home bias”; the increase in the size of international financial transactions relative to transactions in goods and services; the increase in the number of countries adopting inflation targeting and currency peg monetary regimes; and the transformation of financial market microstructure. The paper argues that in this new environment monetary policy should systematically incorporate financial analysis into its assessment of the risks to price stability. Monetary policy should “lean against the wind” of asset price bubbles that could burst at a high cost and hinder the maintenance of macroeconomic and financial stability. Further, in view of the interlinkages among financial markets worldwide, macro-financial surveillance at the international level needs to be strengthened and monetary policymakers need to cooperate and exchange information on a wider scale and at a deeper level with financial supervisors. Finally, the paper reviews the rationale for a central bank to act (in concert with other central banks) as the ultimate provider of liquidity to financial markets in situations of extreme instability and market malfunctioning. A sudden and sharp liquidity drought in the market should be tackled with appropriate measures that could even go beyond the extraordinary refinancing of monetary and financial institutions. In these circumstances, the central bank should clearly communicate that the aim of its liquidity provision measures is to support the proper functioning of financial markets, and that they do not indicate a change in the monetary policy stance (“separation principle”). JEL Classification: E44, E58, F33, F42. |
| Keywords: | Globalisation, Monetary policy, Asset prices, Financial markets. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20090106&r=cba |
| By: | John Galbraith; Simon van Norden |
| Abstract: | This paper applies new diagnostics to the Bank of England’s pioneering density forecasts (fan charts). We compute their implicit probability forecast for annual rates of inflation and output growth that exceed a given threshold (in this case, the target inflation rate and 2.5% respectively.) Unlike earlier work on these forecasts, we measure both their calibration and their resolution, providing both formal tests and graphical interpretations of the results. These results both reinforce earlier evidence on some of the limitations of these forecasts and provide new evidence on their information content. <P>Cet étude développe et applique des nouvelles techniques pour diagnostiquer les prévisions de densité de la Banque d’Angleterre (leur “fan charts”). Nous calculons leurs probabilités implicites pour des taux d’inflation et de croissance du PIB qui dépassent des seuils critiques (soit le taux d’inflation ciblé, soit 2.5%.) En contraste avec des travaux antérieurs sur ces prévisions, nous gaugeons leur calibration aussi bien que leur résolution, en donnant des tests formels et des interprétations graphiques. Les résultats renforcent des conclusions déjà existant sur les limites de ces prévisions et ils donnent de nouvelles évidences sur leurs valeurs ajoutées. |
| Keywords: | calibration, density forecast, probability forecast, resolu, calibration, prévisions de densité, probabilités implicites, résolution. |
| Date: | 2009–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2009s-36&r=cba |
| By: | Ceyhun Bora Durdu; Enrique G. Mendoza; Marco E. Terrones |
| Abstract: | Theory predicts that a nation's stochastic intertemporal budget constraint is satisfied if net foreign assets (NFA) are integrated of any finite order, or if net exports (NX) and NFA satisfy an error-correction specification with a residual integrated of any finite order. We test these conditions using data for 21 industrial and 29 emerging economies for the 1970-2004 period. The results show that, despite the large global imbalances of recent years, NFA and NX positions are consistent with external solvency. Country-specific unit root tests on NFA-GDP ratios suggest that nearly all of them are integrated of order 1. Pooled Mean Group error-correction estimation yields evidence of a statistically significant, negative response of the NX-GDP ratio to the NFA-GDP ratio that is largely homogeneous across countries. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:975&r=cba |
| By: | Ida Wolden Bache (Norges Bank (Central Bank of Norway)); James Mitchell (National Institute of Economic and Social Research); Francesco Ravazzolo (Norges Bank (Central Bank of Norway)); Shaun P. Vahey (Melbourne Business School) |
| Abstract: | We argue that the next generation of macro modellers at Inflation Targeting central banks should adapt a methodology from the weather forecasting literature known as `ensemble modelling'. In this approach, uncertainty about model specifications (e.g., initial conditions, parameters, and boundary conditions) is explicitly accounted for by constructing ensemble predictive densities from a large number of component models. The components allow the modeller to explore a wide range of uncertainties; and the resulting ensemble `integrates out' these uncertainties using time-varying weights on the components. We provide two examples of this modelling strategy: (i) forecasting inflation with a disaggregate ensemble; and (ii) forecasting inflation with an ensemble DSGE. |
| Keywords: | Ensemble modelling, Forecasting, DSGE models, Density combination |
| JEL: | C11 C32 C53 E37 E52 |
| Date: | 2009–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_15&r=cba |
| By: | Margarita Rubio (Banco de España) |
| Abstract: | This paper studies the implications of cross-country housing market heterogeneity for a monetary union, also comparing the results with a flexible exchange rate and independent monetary policy setting. I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore this issue. Results show that in a monetary union, consumption reacts more strongly to monetary policy shocks in countries with high loan-to-value ratios (LTVs), a high proportion of borrowers or variable-rate mortgages. As for asymmetric technology shocks, output and house prices increase by more in the country receiving the shock if it can conduct monetary policy independently. I also fi nd that after country-specific housing price shocks consumption does not only increase in the country where the shock takes place, there is an international transmission. From a normative perspective, I conclude that housing-market homogenization in a monetary union is not beneficial per se, only when it is towards low LTVs or predominantly fixed-rate mortgages. Furthermore, I show that when there are asymmetric shocks but identical housing markets, it is beneficial to form a monetary union with respect to having a flexible exchange rate regime. However, for the examples I consider, net benefits decrease substantially if there is LTV heterogeneity and are negative under different mortgage contracts. |
| Keywords: | Housing market, collateral constraint, monetary policy, monetary union |
| JEL: | E32 E44 F36 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0916&r=cba |
| By: | Todd Keister; James McAndrews |
| Abstract: | The quantity of reserves in the U.S. banking system has risen dramatically since September 2008. Some commentators have expressed concern that this pattern indicates that the Federal Reserve’s liquidity facilities have been ineffective in promoting the flow of credit to firms and households. Others have argued that the high level of reserves will be inflationary. We explain, through a series of examples, why banks are currently holding so many reserves. The examples show how the quantity of bank reserves is determined by the size of the Federal Reserve’s policy initiatives and in no way reflects the initiatives’ effects on bank lending. We also argue that a large increase in bank reserves need not be inflationary, because the payment of interest on reserves allows the Federal Reserve to adjust short-term interest rates independently of the level of reserves. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:380&r=cba |
| By: | Eric M. Leeper (Indiana University) |
| Abstract: | In this lecture, I argue that there are remarkable parallels between how monetary and fiscal policies operate on the macro economy and that these parallels are sufficient to lead us to think about transforming fiscal policy and fiscal institutions as many countries have transformed monetary policy and monetary institutions. Making fiscal transparency comparable to monetary transparency requires fiscal authorities to discuss future possible fiscal policies explicitly. Enhanced fiscal transparency can help anchor expectations of fiscal policy and make fiscal actions more predictable and effective. As advanced economies move into a prolonged period of heightened fiscal activity, anchoring fiscal expectations will become an increasingly important aspect of macroeconomic policy. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2009-015&r=cba |
| By: | Troy Davig, Eric Leeper (Federal Reserve Bank of Kansas City, Indiana University Bloomington) |
| Abstract: | Increases in government spending trigger substitution effects—both inter- and intra-temporal—and a wealth effect. The ultimate impacts on the econ- omy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes cre- ate a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between ac- tive and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model’s predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act’s implied path for government spending under alternative monetary-fiscal policy combina- tions. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2009-010&r=cba |
| By: | Troy Davig, Eric Leeper (Federal Reserve Bank of Kansas City, Indiana University Bloomington) |
| Abstract: | Increases in government spending trigger substitution effects—both inter- and intra-temporal—and a wealth effect. The ultimate impacts on the econ- omy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes cre- ate a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between ac- tive and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model’s predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act’s implied path for government spending under alternative monetary-fiscal policy combina- tions. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2009-006&r=cba |
| By: | ERIC M. LEEPER, MICHAEL PLANTE, NORA TRAUM (Indiana University Bloomington, Indiana University and Ball State University, Indiana University Office) |
| 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 specifica- tions 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 esti- mated 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. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2009-012&r=cba |
| By: | ERIC M. LEEPER, TODD B. WALKER, AND SHU-CHUN S. YANG (Indiana University Bloomington, Indiana University, Congressional Budget Office) |
| Abstract: | This paper contributes to the debate about fiscal multipliers by studying the impacts of government investment in conventional neoclassical growth models. The analysis focuses on two dimensions of fiscal policy that are critical for understanding the effects of government investment: implementation delays associated with building public capital projects and expected future fiscal adjustments to debt-financed spending. Implementation delays can produce small or even negative labor and output responses in the short run; anticipated fiscal financing adjustments matter both quantitatively and qualitatively for long-run growth effects. Taken together, these two dimensions have important implications for the short-run and long-run impacts of fiscal stimulus in the form of higher government infrastructure investment. The analysis is conducted in several models with features relevant for studying government spending, including utility-yielding government consumption, time- to-build for private investment, and government production. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2009-011&r=cba |
| By: | Carlo Favero; Francesco Giavazzi |
| Abstract: | We use the time series of shifts in U.S. Federal tax liabilities constructed by Romer and Romer to estimate tax multipliers. Differently from the single-equation approach adopted by Romer and Romer, our estimation strategy (a Var that includes output, government spending and revenues, inflation and the nominal interest rate) does not rely upon the assumption that tax shocks are orthogonal to each other as well as to lagged values of other macro variables. Our estimated multiplier is much smaller: one, rather than three at a three-year horizon. When we split the sample in two sub-samples (before and after 1980) we find, before 1980, a multiplier whose size is never greater than one, after 1980 a multiplier not significantly different from zero. Following the findings in Bohn (1998), we also experiment with a model that includes debt and the non-linear government budget constraint. We find that, while in general not very important, the non-linearity that arises from the budget constraint makes a difference after 1980, when the response of fiscal variables to the level of the debt becomes stronger. |
| JEL: | E62 H60 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15303&r=cba |
| By: | Martine Druant (National Bank of Belgium, boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Silvia Fabiani (Bank of Italy, Via Nazionale 91, I-00184 Rome, Italy.); Gabor Kezdi (Central European University and Magyar Nemzeti Bank, Szabadság tér 8-9, H-1850 Budapest, V., Hungary.); Ana Lamo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Fernando Martins (Universidade Lusíada of Lisbon and Bank of Portugal, 1150 Lisbon, Portugal.); Roberto Sabbatini (Bank of Italy, Via Nazionale 91, I-00184 Rome, Italy.) |
| Abstract: | This paper presents new evidence on the patterns of price and wage adjustment in European firms and on the extent of nominal rigidities. It uses a unique dataset collected through a firm-level survey conducted in a broad range of countries and covering various sectors. Several conclusions are drawn from this evidence. Firms adjust wages less frequently than prices: the former tend to remain unchanged for about 15 months on average, the latter for around 10 months. The degree of price rigidity varies substantially across sectors and depends strongly on economic features, such as the intensity of competition, the exposure to foreign markets and the share of labour costs in total cost. Instead, country specificities, mostly related to the labour market institutional setting, are more relevant in characterising the pattern of wage adjustment. The latter exhibits also a substantial degree of time-dependence, as firms tend to concentrate wage changes in a specific month, mostly January in the majority of countries. Wage and price changes feed into each other at the micro level and there is a relationship between wage and price rigidity. JEL Classification: D21, E30, J31. |
| Keywords: | survey, wage rigidity, price rigidity, indexation, institutions, time dependent. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091084&r=cba |
| By: | Carlsson, Mikael (Research Department, Central Bank of Sweden); Nordström Skans, Oskar (Uppsala University and IZA) |
| Abstract: | Using data on product-level prices matched to the producing firm´s unit labor cost, we reject the hypothesis of a full and immediate pass-through of marginal cost. Since we focus on idiosyncratic variation, this does not fit the predictions of the Ma´ckowiak and Wiederholt (2009) version of the Rational Inattention Model. Neither do we find that firms react strongly to predictable marginal cost changes, as expected from the Mankiw and Reis (2002) Sticky Information Model. We find that, in line with Staggered Contracts models, firms consider both the current and future expected marginal cost when setting prices with a sum of coeffients cients not significantly different from unity. |
| Keywords: | Price Setting; Business Cycles; Information; Micro Data |
| JEL: | D80 E30 L16 |
| Date: | 2009–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0231&r=cba |
| By: | James K. Galbraith |
| Abstract: | A group of experts associated with the Economists for Peace and Security and the Initiative for Rethinking the Economy met recently in Paris to discuss financial and monetary issues; their viewpoints, summarized here by Senior Scholar James K. Galbraith, are largely at odds with the global political and economic establishment. Despite noting some success in averting a catastrophic collapse of liquidity and a decline in output, the Paris group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus that the precrisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levppb:ppb_103&r=cba |
| By: | Ehsan U. Choudhri; Lawrence L. Schembri |
| Abstract: | The paper examines how the Balassa-Samuelson hypothesis is affected by a modern variation of the standard model that allows product differentiation (within the traded and nontraded goods sectors) with the number of firms determined exogenously or endogenously. The hypothesis is found to be fragile in the modified framework. Small variations in the elasticity of substitution between home and foreign traded goods (within the range of estimates suggested in the literature), for example, can make the effect of a traded-goods productivity improvement on the real exchange rate negative or positive, as well as small or large. This result provides a potential explanation of the mixed empirical results that have been obtained on the relationship between productivity and the real exchange rate. |
| Keywords: | Exchange rates; Productivity |
| JEL: | F41 F31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-22&r=cba |
| By: | Jonas Dovern (Kiel Economics Research & Forecasting, Fraunhoferstr. 13, D-24118 Kiel, Germany.); Ulrich Fritsche (University of Hamburg, Edmund-Siemers-Allee 1, D-20146 Hamburg, Germany.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Using the Consensus Economics dataset with individual expert forecasts from G7 countries we investigate determinants of disagreement (crosssectional dispersion of forecasts) about six key economic indicators. Disagreement about real variables (GDP, consumption, investment and unemployment) has a distinct dynamic from disagreement about nominal variables (inflation and interest rate). Disagreement about real variables intensifies strongly during recessions, including the current one (by about 40 percent in terms of the interquartile range). Disagreement about nominal variables rises with their level, has fallen after 1998 or so (by 30 percent), and is considerably lower under independent central banks (by 35 percent). Cross-sectional dispersion for both groups increases with uncertainty about the underlying actual indicators, though to a lesser extent for nominal series. Country-by-country regressions for inflation and interest rates reveal that both the level of disagreement and its sensitivity to macroeconomic variables tend to be larger in Italy, Japan and the United Kingdom, where central banks became independent only around the mid-1990s. These findings suggest that more credible monetary policy can substantially contribute to anchoring of expectations about nominal variables; its effects on disagreement about real variables are moderate. JEL Classification: E31, E32, E37, E52, C53. |
| Keywords: | disagreement, survey expectations, monetary policy, forecasting. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091082&r=cba |
| By: | David Peel; Ivan Paya; E Pavlidis |
| Abstract: | This paper deals with the nonlinear modeling and forecasting of the dollar-sterling real exchange rate using a long span of data. Our contribution is threefold. First, we provide significant evidence of smooth transition dynamics in the series by employing a battery of recently developed in-sample statistical tests. Second, we investigate the small sample properties of several evaluation measures for comparing recursive forecasts when one of the competing models is nonlinear. Finally, we run a forecasting race for the post-Bretton Woods era between the nonlinear real exchange rate model, the random walk, and the linear autoregressive model. The winner turns out to be the nonlinear model, against the odds. |
| Keywords: | Real Exchange Rate, Nonlinearity, Robust Linearity Tests, Forecast Evaluation, Bootstrapping. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:006075&r=cba |
| By: | Michael Ehrmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); David Sondermann (University of Münster, Schlossplatz 2, D-48149 Münster, Germany.) |
| Abstract: | How do financial markets price new information? This paper analyzes price setting at the intersection of private and public information, by testing whether and how the reaction of financial markets to public signals depends on the relative importance of private information in agents’ information sets at a given point in time. It studies the reaction of UK short-term interest rates to the Bank of England’s inflation report and to macroeconomic announcements. Due to the quarterly frequency at which the Bank of England releases one of its main publications, it can become stale over time. In the course of this process, financial market participants need to rely more on private information. The paper develops a stylized model which predicts that, the more time has elapsed since the latest release of an inflation report, market volatility should increase, the price response to macroeconomic announcements should be more pronounced, and macroeconomic announcements should play a more important role in aligning agents’ information set, thus leading to a stronger volatility reduction. The empirical evidence is fully supportive of these hypotheses. JEL Classification: E58, E43, G12, G14. |
| Keywords: | public signals, inflation reports, monetary policy, interest rates, announcement effects, co-ordination of beliefs, Bank of England. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091077&r=cba |
| By: | Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jakob de Haan (Faculty of Economics and Business, University of Groningen, The Netherlands) |
| Abstract: | Nowadays, it is widely believed that greater disclosure and clarity over policy may lead to greater predictability of central bank actions. We examine whether communication by the European Central Bank (ECB) adds information compared to the information provided by a Taylor rule model in which real time expected inflation and output are used. We use five indicators of ECB communication that are all based on the ECB President’s introductory statement at the press conference following an ECB policy meeting. Our results suggest that even though the indicators are sometimes quite different from one another, they add information that helps predict the next policy decision of the ECB. Furthermore, also when the interbank rate is included in our Taylor rule model, the ECB communication indicators remain significant. |
| Keywords: | ECB, central bank, communication, Taylor rule |
| JEL: | E52 E53 E3 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:09-236&r=cba |
| By: | Lee E. Ohanian |
| Abstract: | Herbert Hoover. I develop a theory of labor market failure for the Great Depression based on Hoover's industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation and low levels of nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation. |
| JEL: | E3 N1 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15258&r=cba |
| By: | Ansgar Belke; Jens Klose |
| Abstract: | We assess the differences that emerge in Taylor rule estimations for the ECB when using ex-post data instead of real time forecasts and vice versa. We argue that previous comparative studies in this field mixed up two separate effects. First, the differences resulting from the use of ex-post and real time data per se and, second, the differences emerging from the use of non-modified real time data instead of real-time data based forecasted values and vice versa. Since both effects can influence the reaction to inflation and the output gap either way, we use a more clear-cut approach to disentangle the partial effects. Our estimation results indicate that using real time instead of ex post data leads to higher estimated inflation coefficients while the opposite is true for the output gap coefficients. If real time data forecasts for the current period are used (since actual data become available with a lag), this empirical pattern is even strengthened in the sense of even increasing the inflation response but lowering the reaction to the output gap while the reverse is true if "true" forecasts of real time data for several periods are employed. |
| Keywords: | European Central Bank, monetary policy, real time data, Taylor rule |
| JEL: | E43 E58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp917&r=cba |
| By: | MICHAEL PLANTE (Indiana University, Ball State University) |
| Abstract: | This paper examines welfare maximizing optimal monetary policy and simple mon- etary policy rules in a New Keynesian model that incorporates oil as an intermediate input and as a consumption good. I show under several dierent assumptions that the optimal policy focuses on stabilizing some combination of nominal wage and core ination while allowing for signicant movements in value added and CPI (headline) in- ation. Wage indexation to headline ination does not change this result. The optimal response of the nominal rate is sensitive to the assumptions of the model. For all cases examined the optimal policy is well approximated, in welfare terms, by a simple policy rule that suciently stabilizes core ination. Empirical evidence using data from after 1986 supports the hypothesis that the Federal Reserve has been responding to real oil price changes in a manner similar to what the model says is optimal. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2009-013&r=cba |
| By: | Micheal Plante (Indiana University, Ball State University) |
| Abstract: | This paper examines monetary policy responses to oil price shocks in a small open economy that produces traded and non-traded goods. When only labor and oil are used in production and prices are sticky in the non-traded sector the behavior of ination, the nominal exchange rate, and the relative price of the non-traded good depends crucially upon whether the ratio of the cost share of oil to the cost share of labor is higher for the traded or non-traded sector. If the ratio is smaller (higher) for the traded sector then a policy that fully stabilizes non-traded ination causes the nominal exchange rate to appreciate (depreciate) and the relative price of the non-traded good to rise (fall) when there is a surprise rise in the price of oil. Similar results can hold for a policy that stabilizes CPI ination. Under a policy that xes the nominal exchange rate, non-traded ination rises (falls) if the ratio is smaller (larger) for the traded sector. Analytical results show that a policy of xing the exchange rate always produces a unique solution and that a policy of stabilizing non-traded ination produces a unique solution so long as the nominal interest rate is raised more than one-for-one with rises in non-traded ination. A policy that stabilizes CPI ination, however, produces multiple equilibria for a wide range of calibrations of the policy rule. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2009-016&r=cba |
| By: | McAleer, M.; Jimenez-Marin, J-. A.; Perez-Amaral, T. (Erasmus Econometric Institute) |
| Abstract: | When dealing with market risk under the Basel II Accord, variation pays in the form of lower capital requirements and higher profits. Typically, GARCH type models are chosen to forecast Value-at-Risk (VaR) using a single risk model. In this paper we illustrate two useful variations to the standard mechanism for choosing forecasts, namely: (i) combining different forecast models for each period, such as a daily model that forecasts the supremum or infinum value for the VaR; (ii) alternatively, select a single model to forecast VaR, and then modify the daily forecast, depending on the recent history of violations under the Basel II Accord. We illustrate these points using the Standard and Poor’s 500 Composite Index. In many cases we find significant decreases in the capital requirements, while incurring a number of violations that stays within the Basel II Accord limits. |
| Keywords: | risk management;violations;aggressive risk strategy;conservative risk strategy;value-at-risk forecast |
| Date: | 2009–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureir:1765016512&r=cba |
| By: | Antonio Forte |
| Abstract: | In this paper I analyse the pass-through effect in four big areas using different approaches. On the one hand, I inspect this issue comparing the REER (real effective exchange rate) with the WARP (weighted average relative price) in the US, the UK, Japan and the Euro area. On the other hand, I try to support the findings of the first part with a double econometric analysis: I employ single equation and Var approaches in order to provide wide and robust results. The global conclusion is that in the major economies of the world the pass-through effect has been very light from January 1999 onward and that, especially in the Euro area, this result is linked with the firms behaviour. |
| Keywords: | Real effective exchange rate, weighted average relative price, WARP, REER, double econometric analysis. |
| JEL: | F30 F31 |
| Date: | 2009–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2009_08&r=cba |
| By: | Kenneth Judd; Lilia Maliar; Serguei Maliar |
| Abstract: | We develop numerically stable stochastic simulation approaches for solving dynamic economic models. We rely on standard simulation procedures to simultaneously compute an ergodic distribution of state variables, its support and the associated decision rules. We differ from existing methods, however, in how we use simulation data to approximate decision rules. Instead of the usual least-squares approximation methods, we examine a variety of alternatives, including the least-squares method using SVD, Tikhonov regularization, least-absolute deviation methods, principal components regression method, all of which are numerically stable and can handle ill-conditioned problems. These new methods enable us to compute high-order polynomial approximations without encountering numerical problems. Our approaches are especially well suitable for high-dimensional applications in which other methods are infeasible. |
| JEL: | C63 C68 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15296&r=cba |
| By: | Ulrich Müller; Mark W. Watson |
| Abstract: | Standard inference in cointegrating models is fragile because it relies on an assumption of an I(1) model for the common stochastic trends, which may not accurately describe the data's persistence. This paper discusses efficient low-frequency inference about cointegrating vectors that is robust to this potential misspecification. A simple test motivated by the analysis in Wright (2000) is developed and shown to be approximately optimal in the case of a single cointegrating vector. |
| JEL: | C32 E32 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15292&r=cba |
| By: | Edvinsson, Rodney (Dept. of Economic History, Stockholm University); Franzén, Bo (Dept. of Economic History, Stockholm University); Söderberg, Johan (Dept. of Economic History, Stockholm University) |
| Abstract: | The medieval system of payment in Sweden was complex. This paper aims at clarifying some essential features of it in a way that may facilitate further study of medieval Swedish economic history by international researchers. For instance, the presentation of the exchange rate between the silver mark and the mark penningar provides information that is indispensable to anyone who wishes to convert nominal Swedish prices into silver prices, which in turn is necessary for international comparisons. Part of the complexity of the monetary system is due to the lack of a country-wide monetary standard for most of the medieval era. Several currencies existed alongside the mark penning. In addition, various foreign gold coins circulated at a floating rate. The exchange rates between these various currencies are sometimes not known with any precision. We have, however, tried to summarize the available information in several tables. |
| Keywords: | monetary history; mark; silver; gold; Middle Ages; exchange |
| JEL: | E42 N13 N23 |
| Date: | 2009–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:suekhi:0009&r=cba |