nep-cba New Economics Papers
on Central Banking
Issue of 2009‒09‒11
thirty-six papers chosen by
Alexander Mihailov
University of Reading

  1. Cross-country causes and consequences of the 2008 crisis: early warning By Andrew K. Rose; Mark M. Spiegel
  2. Time to reject the privileging of economic theory over empirical evidence? A Reply to Lawson (2009) By Katarina Juselius
  3. Inflation dynamics with labour market matching: assessing alternative specifcations By Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
  4. Growing Up in a Recession: Beliefs and the Macroeconomy By Paola Giuliano; Antonio Spilimbergo
  5. Subjectivity in Inductive Inference By Itzhak Gilboa; Larry Samuelson
  6. The Real and Financial Implications of the Global Saving Glut: A Three-Country Model By Jean-Baptiste Gossé
  7. Consumption and labor supply with partial insurance: an analytical framework By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  8. Monetary Policy Transmission and House Prices: European Cross Country Evidence By Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
  9. Rigidity, Dispersion and Discreteness in Chain Prices By Benjamin Eden; Matthew Jaremski
  10. A parsimonious macroeconomic model for asset pricing By Fatih Guvenen
  11. How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience By Daniel L. Thornton
  12. The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks By Daniel L. Thornton
  13. On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals By Philippe Bacchetta; Eric van Wincoop
  14. Methods versus substance: measuring the effects of technology shocks on hours By José-Víctor Ríos-Rull; Frank Schorfheide; Cristina Fuentes-Albero; Raul Santaeulalia-Llopis; Maxym Kryshko
  15. Problems in the numerical simulation of models with heterogeneous agents and economic distortions By Adrian Peralta-Alva; Manuel S. Santos
  16. Visualizing the Invisible: Estimating The New Keynesian Output Gap Via A Bayesian Approach By Tim Willems
  17. Nature of Oil Price Shocks and Monetary Policy By Junhee Lee; Joonhyuk Song
  18. LOLA 1.0 : Luxembourg OverLapping generation model for policy Analysis By Olivier Pierrard; Henri R. Sneessens
  19. What happened to the US stock market? Accounting for the last 50 years By Michele Boldrin; Adrian Peralta-Alva
  20. Money talks By Marie Hoerova; Cyril Monnet; Ted Temzelides
  21. Flow-of-funds analysis at the ECB – framework and applications By Louis Bê Duc; Gwenaël Le Breton
  22. Employment and exchange rates: the role of openness and technology By Fernando Alexandre; Pedro Bação; João Cerejeira; Miguel Portela
  23. Sources of exchange rate fluctuations: are they real or nominal? By Luciana Juvenal
  24. Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production By Aurélien Eyquem; Gunes Kamber
  25. European Financial Market Integration: A Closer Look at Government Bonds in Eurozone Countries By Sebastian Weber
  26. The Macroeconomic Effects of European Financial Development: A Heterogenous Panel Analysis By Sean Holly; Mehdi Raissi
  27. Nested forecast model comparisons: a new approach to testing equal accuracy By Todd E. Clark; Michael W. McCracken
  28. In-sample tests of predictive ability: a new approach By Todd E. Clark; Michael W. McCracken
  29. The impact of the global financial crisis on business cycles in Asian emerging economies By Korhonen, Iikka; Fidrmuc , Jarko
  30. What Is the Impact of the Global Financial Crisis on the Banking System in East Asia? By Michael Pomerleano
  31. How to Measure the Rule of Law By Stefan Voigt
  32. Asset prices, Credit and Investment in Emerging Markets By Tuomas A. Peltonen; Ricardo M. Sousa; Isabel S. Vansteenkiste
  33. "Some Simple Observations on the Reform of the International Monetary System" By Jan Kregel
  34. The Struggle Over the Real Wage In the Monetary Production Economy By Hernando Matallana
  35. Bank of Canada Communication and the Predictability of Canadian Monetary Policy By Bernd Hayo; Matthias Neuenkirch
  36. Structural Change and Counterfactual Inflation-Targeting in Hong Kong By Paul D. McNelis

  1. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 107 countries; we focus on national causes and consequences of the crisis, ignoring crosscountry "contagion" effects. Our model of the incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of "early warning" systems of potential crises, which must also predict their timing.
    Keywords: Financial crises ; Econometric models
    Date: 2009
  2. By: Katarina Juselius (Department of Economics, University of Copenhagen)
    Abstract: The present financial and economic crisis has revealed a systemic failure of academic economics and emphasized the need to re-think how to model economic phenomena. Lawson (2009) seems concerned that critics of standard models now will fill academic journals with contributions that make the same methodological mistakes, albeit in slightly different guise. In particular, he is rather sceptical to use of mathematical statistical models, such as the CVAR approach, as a way of learning about economic mechanisms. In this paper I discuss whether this is a relevant claim and argue that it is likely to be based on a misunderstanding of what a proper statistical analysis is and can offer. In particular, I argue that the strong evidence of (near) unit roots and (structural) breaks in economic variables suggests that standard economic models need to be modified or changed to incorporate these strong features of the data. Furthermore, I argue that a strong empirical methodology that allows data to speak freely about economic mechanisms, such as the CVAR, would ensure that important information in the data is not over heard when needed. Adequately applied such models would provide us with an early warnings system signalling that the economy is moving seriously out of equilibrium.
    Keywords: economic crisis; Dahlem report; CVAR approach; Theory-first; Reality-first; Imperfect Knowledge Expectations; non-stationary data
    JEL: A1 B4 C3 C5 E0 E1 E2 E6
    Date: 2009–08
  3. By: Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
    Abstract: This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behavior. In a search and matching environment, we consider the following modeling setups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates.
    Date: 2009–05
  4. By: Paola Giuliano; Antonio Spilimbergo
    Abstract: Do generations growing up during recessions have different socio-economic beliefs than generations growing up in good times? We study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. Using time and regional variations in macroeconomic conditions to identify the effect of recessions on beliefs, we show that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’ beliefs.
    JEL: E60 P16 Z13
    Date: 2009–09
  5. By: Itzhak Gilboa (Tel Aviv University); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: This paper examines circumstances under which subjectivity enhances the effectiveness of inductive reasoning. We consider a game in which Fate chooses a data generating process and agents are characterized by inference rules that may be purely objective (or data-based) or may incorporate subjective considerations. The basic intuition is that agents who invoke no subjective considerations are doomed to "overfit" the data and therefore engage in ineffective learning. The analysis places no computational or memory limitations on the agents -- the role for subjectivity emerges in the presence of unlimited reasoning powers.
    Keywords: Induction, Simplicity, Bayesian learning
    JEL: D8 C0
    Date: 2009–08
  6. By: Jean-Baptiste Gossé (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: The model presented in this paper has two objectives. First, it models global imbalances in a simple way while conserving real and - nancial approaches. This double approach is necessary because Global Imbalances are due to the conjunction of nancial and real phenomena: the increase in the price of commodities, the accumulation of foreign reserves by the Asian central banks, the limited absorption capacity of the OPEC countries, the insucient development of the Asian nancial system and the perception of better returns in the US. The second objective is to model the global saving glut hypothesis and to show its implications. We start with a model which consists of three identical countries and then we replicate the current pattern of global imbalances in introducing three asymmetries: a xed exchange rate between Asia and the United States, a limited absorption capacity in Asia and endogenous propensity to spend in the United States. In order to avoid the recession linked to the increase of their propensity to import, the United States increase their propensity to spend. This adjustment has a cost: (i) the Global Imbalances grow quickly with an increase of current account imbalances and net foreign assets in both the US and Asia ; (ii) the euro area supports an appreciation of its exchange rate which put it in a long depression.
    Keywords: International Macroeconomics, Global Imbalances, Balance of Payments, International Finance , Simulation and Forecast
    Date: 2009–08–26
  7. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: This paper studies consumption and labor supply in a model where agents have partial insurance and face risk and initial heterogeneity in wages and preferences. Equilibrium allocations and variances and covariances of wages, hours and consumption are solved for analytically. We prove that all parameters of the structural model are identified given panel data on wages and hours, and cross-sectional data on consumption. The model is estimated on US data. Second moments involving hours and consumption show that the rise in wage dispersion in the 1970s was effectively insured by households, while the rise in the 1980s was not.
    Keywords: Wages ; Consumption (Economics)
    Date: 2009
  8. By: Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
    Abstract: This paper explores the importance of housing and mortgage market heterogeneity in 13 European countries for the transmission of monetary policy. We use a pooled VAR model which is estimated over the period 1995-2006 to generate impulse responses of key macroeconomic variables to a monetary policy shock. We split our sample of countries into two disjoint groups according to the impact of the monetary policy shock on real house prices. Our results suggest that in countries with a more pronounced reaction of real house prices the propagation of monetary policy shocks to macroeconomic variables is amplified.
    Keywords: Pooled VAR model, house prices, monetary policy transmission, country clusters, sign restrictions
    JEL: C32 C33 E52
    Date: 2009
  9. By: Benjamin Eden (Department of Economics, Vanderbilt University); Matthew Jaremski (Department of Economics, Vanderbilt University)
    Abstract: This paper studies price setting within a chain of grocery stores, using a scanner database that contains observations of retail prices for 435 products within 75 stores over 121 weeks. We find price dispersion within the chain. Although price dispersion is pervasive 75% of the prices are equal to the modal price. The mode changes frequently: 35% of the modes change in an average week. This suggests that the distribution of prices may react relatively fast to aggregate shocks. Stores differentiate themselves by the prices of relatively few items. Typically most prices in the store are at the mode of the cross sectional price distribution, some are above the mode and some are below the mode. The probability of a price change is 3.6% when the price is at the mode and 76.2% when the price is not at the mode. We explain the apparent attraction to the mode in terms of a model in which price discreteness plays an important role but there is no inertia. We also find that the probability of a price change is higher when the deviation from the mean of the cross sectional price distribution is large. But unlike conventional wisdom, the probability of a price change is higher for young prices.
    Keywords: Price discreteness, price dispersion, price changes, price rigidity
    JEL: E00 L11
    Date: 2009–06
  10. By: Fatih Guvenen
    Abstract: I study asset prices in a two-agent macroeconomic model with two key features: limited stock market participation and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices, such as a high equity premium; relatively smooth interest rates; procyclical stock prices; and countercyclical variation in the equity premium, its volatility, and in the Sharpe ratio. In this model, the risk-free asset market plays a central role by allowing non-stockholders (with low EIS) to smooth the fluctuations in their labor income. This process concentrates non-stockholders' labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the US data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model's ability to generate a countercyclical equity premium. When it comes to business cycle performance the model's progress has been more limited: consumption is still too volatile compared to the data, whereas investment is still too smooth. These are important areas for potential improvement in this framework.
    Keywords: Wealth ; Stock market
    Date: 2009
  11. By: Daniel L. Thornton
    Abstract: This paper advances the hypothesis that the transition from there-is-little-central-banks-can-do-to-control-inflation to inflation targeting occurred because central banks, especially the Federal Reserve, demonstrated that central banks can control inflation rather than a consequence of marked improvement in the professions understanding of how monetary policy controls inflation. As consequence, monetary theorists and central bankers have returned to a Phillips curve framework for formulating and evaluating the monetary policy. I suggest that the return to the Phillips curve framework endangers the continued effectiveness, and perhaps even viability, of inflation targeting, recommend three steps that inflation-targeting central banks should take to preserve and strengthen inflation targeting.
    Keywords: Monetary policy ; Phillips curve ; Inflation targeting
    Date: 2009
  12. By: Daniel L. Thornton
    Abstract: It is common practice to estimate the response of asset prices to monetary policy actions using market-based measures of monetary policy shocks, such as the federal funds futures rate. I show that because interest rates and market-based measures of monetary policy shocks respond simultaneously to all news and not simply news about monetary policy actions, market-based measures of monetary policy shocks yield biased estimates of the response of interest rates to monetary policy actions. I propose a methodology that corrects for this "joint-response bias." The results indicate that the response of Treasury yields to monetary policy actions is considerably weaker than previously estimated. In particular, there is no statistically significant response of longer-term Treasury yields before February 2000 and no statistically significant response of any Treasury rate after.
    Keywords: Prices ; Monetary policy ; Federal funds rate
    Date: 2009
  13. By: Philippe Bacchetta (University of Lausanne, Centre for Economic Policy Research, Hong Kong Institute for Monetary Research); Eric van Wincoop (University of Virginia, National Bureau of Economic Research, Hong Kong Institute for Monetary Research)
    Abstract: It is well known from anecdotal, survey and econometric evidence that the relationship between the exchange rate and macro fundamentals is highly unstable. This could be explained when structural parameters are known and very volatile, neither of which seems plausible. Instead we argue that large and frequent variations in the relationship between the exchange rate and macro fundamentals naturally develop when structural parameters in the economy are unknown and change very slowly. We show that the reduced form relationship between exchange rates and fundamentals is driven not by the structural parameters themselves, but rather by expectations of these parameters. These expectations can be highly unstable as a result of perfectly rational "scapegoat" effects. This happens when parameters can potentially change much more in the long run than the short run. This generates substantial uncertainty about the level of parameters, even though monthly or annual changes are small. This mechanism can also be relevant in other contexts of forward looking variables and could explain the widespread evidence of parameter instability found in macroeconomic and financial data. Finally, we show that parameter instability has remarkably little effect on the volatility of exchange rates, the in-sample explanatory power of macro fundamentals and the ability to forecast out of sample.
    Date: 2009–08
  14. By: José-Víctor Ríos-Rull; Frank Schorfheide; Cristina Fuentes-Albero; Raul Santaeulalia-Llopis; Maxym Kryshko
    Abstract: In this paper, we employ both calibration and modern (Bayesian) estimation methods to assess the role of neutral and investment-specific technology shocks in generating fluctuations in hours. Using a neoclassical stochastic growth model, we show how answers are shaped by the identification strategies and not by the statistical approaches. The crucial parameter is the labor supply elasticity. Both a calibration procedure that uses modern assessments of the Frisch elasticity and the estimation procedures result in technology shocks accounting for 2% to 9% of the variation in hours worked in the data. We infer that we should be talking more about identification and less about the choice of particular quantitative approaches.
    Keywords: Business cycles ; Technology - Economic aspects
    Date: 2009
  15. By: Adrian Peralta-Alva; Manuel S. Santos
    Abstract: Our work has been concerned with the numerical simulation of dynamic economies with heterogeneous agents and economic distortions. Recent research has drawn attention to inherent difficulties in the computation of competitive equilibria for these economies: A continuous Markovian solution may fail to exist, and some commonly used numerical algorithms may not deliver accurate approximations. We consider a reliable algorithm set forth in Feng et al. (2009), and discuss problems related to the existence and computation of Markovian equilibria, as well as convergence and accuracy properties. We offer new insights into numerical simulation.
    Keywords: Econometric models
    Date: 2009
  16. By: Tim Willems (University of Amsterdam)
    Abstract: As both the natural level of output and the New Keynesian output gap cannot be observed in practice, there is quite some debate on the question how these variables look like in practice. Rather than taking the standard approach of using a time trend or the HP-filter to obtain estimates of these two objects, this paper takes a theoretically more sound route by separating trend from cycle via Bayesian estimation of a New Keynesian model, augmented with an unobserved components model for output. This delivers us with model consistent estimates of both the natural level of output and the New Keynesian output gap. These estimates are then compared with the dominant output gap proxies used in the literature. It turns out that the benefits of using the model-based approach taken in this paper mainly emerge in real time, thereby making this method potentially useful for the conduct of monetary policy.
    Keywords: Key words: Bayesian estimation; unobserved components model; New Keynesian model; output gap; New Keynesian Phillips curve
    JEL: C53 E32 E37 E52
    Date: 2009–08–21
  17. By: Junhee Lee; Joonhyuk Song
    Abstract: We investigate the nature of oil price shocks to the Korean economy in recent years and find that the recent hike in oil price is induced by the increase in oil demand in contrast to the previous years when oil price run-up is mostly from supply disruptions. We also study how monetary responses to oil price shocks affect economic stability and find that an accommodative policy yields more stable outcomes.
    JEL: E32 E52 E58
    Date: 2009–09
  18. By: Olivier Pierrard; Henri R. Sneessens
    Abstract: We build on the DSGE literature to propose an overlapping generation model for Luxembourg.By way of illustration, the model is then used to study the consequences of the ageing of the population and the potential effects of alternative macroeconomic policies.
    Date: 2009–04
  19. By: Michele Boldrin; Adrian Peralta-Alva
    Abstract: The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that, in the long run, the market reverts to well understood fundamentals. Our work suggests this belief should be questioned as well. First, we show actual dividends cannot account for the secular trends of stock market values. We then consider a more comprehensive measure of capital income. This measure displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, however, this measure fails to account for stock market movements as well. We thus abandon the perfect foresight assumption. Assuming instead that forecasts of future capital income are performed using a distributed lag equation and information available up to the forecasting period only, we find that standard asset pricing theory can be reconciled with the secular trends in the stock market. Nevertheless, our studyleaves open an important puzzle for asset pricing theory: the market value of U.S. corporations was much lower than the replacement cost of corporate tangible assets from the mid 1970s to the mid 1980s.
    Keywords: Stock market ; Asset pricing
    Date: 2009
  20. By: Marie Hoerova; Cyril Monnet; Ted Temzelides
    Abstract: The authors study credible information transmission by a benevolent central bank. They consider two possibilities: direct revelation through an announcement, versus indirect information transmission through monetary policy. These two ways of transmitting information have very different consequences. Since the objectives of the central bank and those of individual investors are not always aligned, private investors might rationally ignore announcements by the central bank. In contrast, information transmission through changes in the interest rate creates a distortion, thus lending an amount of credibility. This induces the private investors to rationally take into account information revealed through monetary policy.
    Keywords: Banks and banking, Central ; Information theory
    Date: 2009
  21. By: Louis Bê Duc (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Gwenaël Le Breton (European Central Bank, Directorate Economic Developments, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The financial crisis has enhanced the need for close monitoring of financial flows in the economy of the euro area and at the global level focusing, in particular, on the development of financial imbalances and financial intermediation. In this context flow-of-funds analysis appears particularly useful, as flow-of-funds data provide the most comprehensive and consistent set of macro-financial information for all sectors in the economy. This occasional paper presents different uses of flow-of-funds statistics for economic and monetary analysis in the euro area. Flow-of-funds data for the euro area have developed progressively over the past decade. The first data were published in 2001, and fully-fledged quarterly integrated economic and financial accounts by institutional sector have been published since 2007. The paper illustrates how flow-of-funds data enable portfolio shifts between money and other financial assets to be assessed and trends in bank intermediation to be monitored, in particular. Based on data (and first published estimates) on financial wealth over the period 1980-2007, the paper analyses developments in the balance sheet of households and non-financial corporations in euro area countries over the last few decades and looks at financial soundness indicators using flow-of-funds data, namely debt and debt service ratios, and measures of financial wealth. Interactions with housing investment and saving are also analysed. In addition, the paper shows how flow-of-funds data can be used for assessing financial stability. Finally, the paper presents the framework for and use of flow-of-funds projections produced in the context of the Eurosystem staff macroeconomic projection exercises, and reports the outcome of a sensitivity analysis that considers the impact of interest rate changes on the interest payments and receipts of households and non-financial corporations. JEL Classification: E44, E47, E51.
    Keywords: Flow of funds, financial account, saving, sector balance sheet, financial projections.
    Date: 2009–08
  22. By: Fernando Alexandre (Universidade do Minho - NIPE); Pedro Bação (GEMF and Universidade de Coimbra); João Cerejeira (Universidade do Minho - NIPE); Miguel Portela (Universidade do Minho - NIPE and IZA)
    Abstract: Real exchange rate movements are important drivers of the reallocation of resources between sectors of the economy. Economic theory suggests that the impact of exchange rates should vary with the degree of exposure to internacional competition and with the technology level. This paper contributes by bringing together these two views, both theoretically and empirically. We show the both the degree of openness and the technology level mediate the impact of exchange rate movements on labour market developments. According to our estimations, whereas employment in high-technology sectors seems to be relatively immune to changes in real exchange rates, these appear to have sizable and significant effects on highly open low-technology sectors. The analysis of job flows suggests that the impact of exchange rates on these sectors occurs through employment destruction.
    Keywords: exchange rates; international trade; employment destruction.
    JEL: J23 F16 F41
    Date: 2009
  23. By: Luciana Juvenal
    Abstract: I analyze the role of real and monetary shocks on the exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 23% and 38% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.
    Keywords: Foreign exchange rates ; Vector autoregression
    Date: 2009
  24. By: Aurélien Eyquem (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Gunes Kamber (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, C - centre d'Etudes des Politiques Economiques de l'université d'Evry - Université d'Evry-Val d'Essonne)
    Abstract: This paper shows that internationalized production, modelled as trade in intermediate goods, challenges the standard result according to which exchange rate volatility insulates small open economies from external shocks. Movements of relative prices affect the economy through an additional channel, denoted as the cost channel. We show that this channel also acts as an automatic stabilizer and that macroeconomic volatility is dramatically reduced when trade in intermediate goods is taken into account. Finally, trade in intermediate goods affects the exchange rate pass-through to consumption prices and may contribute explaining the puzzle described by McCallum & Nelson (2000).
    Keywords: Small open economy ; internationalized production ; macroeconomic volatility ; exchange rate pass-through
    Date: 2009
  25. By: Sebastian Weber
    Abstract: The European Union made a number of steps not least of them the introduction of a common currency to foster the integration of the European financial markets. A number of papers have tried to gauge the degree of integration for various financial markets looking at the convergence of interest rates. A common finding is that government bond markets are quite well integrated. In this paper stochastic Kernel density estimates are used to take a closer look at the dynamics that drive the process of interest rate convergence. The main finding is that countries with large initial deviations from the mean interest rate do indeed converge. Interestingly the candidates least suspected namely the countries initially with interest rates at the mean level show a pattern of slight divergence.
    Keywords: Financial markets integration, euro area government bonds, stochastic Kernel density estimates
    JEL: C23 E44 G15
    Date: 2009
  26. By: Sean Holly; Mehdi Raissi
    Abstract: This paper investigates the macroeconomic benefits of international financial integration and domestic financial sector development for the European Union. The sample consists of 26 European countries with annual data during the period 1970.2004. We attempt to exploit more fully the temporal dimension in the data by making use of the common correlated effects (CCE) estimator. We also account for the nonstationarity of time series by employing the cross-section augmented panel unit root test of Pesaran (2007) and recently developed panel cointegration techniques. We check the robustness of these results by using the fully modified OLS method of Pedroni (2000). Our empirical results suggest a relationship between domestic financial sector development and labour productivity. We report evidence that real GDP per worker is positively linked to a measure of international financial integration (stock of international financial assets and liabilities expressed as a ratio to GDP). We also try to disentangle the effects on real GDP per worker of di¤erent types of capital flows (FDI, Portfolio equity, Debt) and are able to identify a significant positive effect on GDP per worker of debt inflows which we could attribute to the institutional environment that has been fostered by the European Union.
    Date: 2009
  27. By: Todd E. Clark; Michael W. McCracken
    Abstract: This paper develops bootstrap methods for testing whether, in a finite sample, competing out-of-sample forecasts from nested models are equally accurate. Most prior work on forecast tests for nested models has focused on a null hypothesis of equal accuracy in population basically, whether coefficients on the extra variables in the larger, nesting model are zero. We instead use an asymptotic approximation that treats the coefficients as non-zero but small, such that, in a finite sample, forecasts from the small model are expected to be as accurate as forecasts from the large model. Under that approximation, we derive the limiting distributions of pairwise tests of equal mean square error, and develop bootstrap methods for estimating critical values. Monte Carlo experiments show that our proposed procedures have good size and power properties for the null of equal finite-sample forecast accuracy. We illustrate the use of the procedures with applications to forecasting stock returns and inflation.
    Date: 2009
  28. By: Todd E. Clark; Michael W. McCracken
    Abstract: This paper presents analytical, Monte Carlo, and empirical evidence linking in-sample tests of predictive content and out-of-sample forecast accuracy. Our approach focuses on the negative effect that finite-sample estimation error has on forecast accuracy despite the presence of significant population-level predictive content. Specifically, we derive simple-to-use in-sample tests that test not only whether a particular variable has predictive content but also whether this content is estimated precisely enough to improve forecast accuracy. Our tests are asymptotically non-central chi-square or non-central normal. We provide a convenient bootstrap method for computing the relevant critical values. In the Monte Carlo and empirical analysis, we compare the effectiveness of our testing procedure with more common testing procedures.
    Date: 2009
  29. By: Korhonen, Iikka (BOFIT); Fidrmuc , Jarko (BOFIT)
    Abstract: We analyze the transmission of global financial crisis to business cycles in China and India. The pattern of business cycles in emerging Asian economies generally displays a low degree of synchronization with the OECD countries, which is consistent with the decoupling hypothesis. By contrast, however, the current financial crisis has had a significant effect on economic developments in emerging Asian economies. Applying dynamic correlations, we find wide differences for different frequencies of cyclical development. More specifically, at business cycle frequencies, dynamic correlations are typically low or negative, but they are also influenced most by the global financial crisis. Finally, we find a significant link between trade ties and dynamic correlations of GDP growth rates in emerging Asian countries and OECD countries.
    Keywords: financial crisis; business cycles; decoupling; trade; dynamic correlation
    JEL: E32 F15 F41
    Date: 2009–08–04
  30. By: Michael Pomerleano
    Abstract: This paper assesses the condition and outlook of the financial sectors—in particular, the banking sector—in the East Asia region in the aftermath of the current global financial crisis. The risks in the banking systems in East Asia are analyzed using the standard supervisory framework, which assesses capital adequacy, asset quality, management, earnings, and liquidity (CAMEL). [WP 146].
    Keywords: financial sectors, banking sector, banking, financial, East Asia, Asia, banking system, capital, capital adequacy, asset, management, earnings, liquidity, CAMEL, global financial crisis, Thailand, exchange rate, lonas, Japan,
    Date: 2009
  31. By: Stefan Voigt (MACIE (Philipps University Marburg), Barfüßertor 2, 35032 Marburg, Germany; CESifo; ICER, Torino)
    Abstract: I argue that the rule of law consists of many dimensions and that much information is lost when variables proxying for these dimensions are simply aggregated. I draw on the most important innovations from various legal traditions to propose a concept of the rule of law likely to find general support. To make the concept measurable, an ideal approach is contrasted with a pragmatic one. The pragmatic approach consists of eight different dimensions. I show that the bivariate correlations between them are usually very low, evidence that more fine-grained indicators of the rule of law, rather than a single hard-to-interpret one, are necessary for its measurement. The paper presents a list of desirable variables that could improve the measurement of various aspects of the rule of law.
    Keywords: Rule of Law, Institutions, Governance, Measurement, Formal vs. Informal Institutions
    JEL: B41 H11 K00 O17 O43 O57
    Date: 2009
  32. By: Tuomas A. Peltonen (European Central Bank); Ricardo M. Sousa (Universidade do Minho - NIPE); Isabel S. Vansteenkiste (European Central Bank)
    Abstract: We build a panel of 31 emerging economies to uncover the determinants of private investment growth in emerging markets. Using several econometric techniques and quarterly data for the period 1990:1-2008:3, we show that: (i) the GDP and the cost of capital are among the fundamental determinants of private investment; (ii) the equity price impacts positively and significantly on investment; (iii) financial factors (such as, credit and lending rate) play an important role on the dynamics of investment, in particular, for Asian and Latin American countries; (iv) investment growth exhibits substantial persistence and responds sluggishly to shocks; and (v) crises episodes magnify the negative response of investment.
    Keywords: investment, credit, asset prices, emerging markets.
    JEL: E22 E44 D24
    Date: 2009
  33. By: Jan Kregel
    Abstract: The demand for reform of the financial system has focused on the dollar's loss of international purchasing power (the Triffin dilemma) and its substitution by an international reserve currency that is not a national currency. The problem, however, is not the particular asset that serves as the international currency but rather the operation of the adjustment mechanism for dealing with global imbalances. In a preliminary report issued in May, the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System made clear that the international system suffers from an inherent tendency toward deficient aggregate demand, a reflection of the asymmetry in the international adjustment mechanism. Even the simple creation of a notional currency to be used in a clearing union (proposed by Keynes) cannot do this without some commitment to coordinated symmetric adjustment by both surplus and deficit countries. Thus, the first steps in the reform process must be (1) to offset the balance sheet losses caused by the collapse of asset values and (2) to provide an alternative source of demand to replace the U.S. consumer and an alternative source of finance to offset the deleveraging of financial institutions. This can be done through the coordinated introduction of traditional, countercyclical deficit expenditure policies, on a global scale.
    Date: 2009–08
  34. By: Hernando Matallana
    Abstract: Keynes contents in General Theory that the monetary market logic of the aggregate real wage in the monetary production economy conveys: (i) the determination of the average real wage rate, the level of employment, and the possibility of involuntary unemployment through the interaction of the monetary markets and the goods markets; and (ii) the determination of the money wage rate through the bargains of the firms and the workers as a market-theoretical stability condition of the economic system. Accordingly, (iii) the money wage claims of labour (in conformity with changes of the average labour productivity) do not alter the distribution of income between capital and labour; and (iv) the struggle about the money wages by different groups of workers is actually a zerosum game over the distribution of the aggregate real wage between the different fractions of the working class. The paper discusses Keynes’s contention in the context of the monetary-keynesian theory of the endogenous-money monetary production economy.
    Date: 2009–01–08
  35. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps-University Marburg); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps-University Marburg)
    Abstract: We explain changes in the Canadian target rate using macroeconomic variables and Bank of Canada (BOC) communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 60 target rate decisions between 1998 and 2006. We find that BOC communication is forward-looking, with a horizon that goes beyond the next meeting. Speeches and testimonies by Governing Council members have a statistically significant impact, whereas the less frequent monetary policy reports are insignificant. These communication variables significantly explain target rate changes but have no additional explanatory power over a standard Taylor rule. Prior to the introduction of Fixed Announcement Dates, BOC communication contained more information on upcoming policy moves. Communications by the U.S. Federal Reserve Bank (Fed)—which are much more frequent—outperform our Canadian communication indicators in predicting Canadian target rate decisions. We conclude that if the BOC is interested in improving the predictability of its monetary policy decisions, it should follow the Fed and use informal types of communication more frequently.newswire reports of Fed communications.
    Keywords: Bank of Canada, Central Bank Communication, Interest Rate Decision, Monetary Policy, Ordered Probit Model, Taylor Rule
    JEL: E43 E52 E58
    Date: 2009
  36. By: Paul D. McNelis (Hong Kong Institute for Monetary Research, Fordham University)
    Abstract: This paper evaluates structural change and adjustment in Hong Kong with Bayesian estimation of a small open economy with a fixed exchange rate show little or no change in the structural parameters or volatility estimates of the structural shocks before and after the Asian crisis and the experience of deflation. Terms of trade shocks are the most important sources of volatility for inflation in both periods. A counterfactual simulation shows that the dispersion of consumption and inflation volatility may have slightly decreased with an inflation-targeting regime with no uncertainty, but interest-rate volatility would have increased by factors of 50 to 100 percent.
    Keywords: Bayesian Estimation, Structural Change, Inflation Targeting
    JEL: E62 F41
    Date: 2009–07

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