|
on Central Banking |
| By: | Wohltmann, Hans-Werner; Winkler, Roland |
| Abstract: | The purpose of this paper is to show how to solve linear dynamic rational expectations models with anticipated shocks by using the generalized Schur decomposition method. Furthermore, we determine the optimal unrestricted and restricted policy responses to anticipated shocks. We demonstrate our solution method by means of a micro-founded hybrid New Keynesian model and show that anticipated cost-push shocks entail higher welfare losses than unanticipated shocks of equal size. |
| Keywords: | Anticipated Shocks,Optimal Monetary Policy,Rational Expectations,Generalized Schur Decomposition,Welfare Effects |
| JEL: | C61 C63 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:200901&r=cba |
| By: | Winkler, Roland C.; Wohltmann, Hans-Werner |
| Abstract: | This paper analyzes the impacts of news shocks on macroeconomic volatility. Whereas in any purely forward-looking model, such as the baseline New Keynesian model, anticipation amplifies volatility, we obtain ambiguous results when including a backward-looking component. In addition to these theoretical findings, we use the estimated model of Smets and Wouters (2003) to provide numerical evidence that news shocks increase the volatility of key macroeconomic variables in the euro area when compared to unanticipated shocks. |
| Keywords: | Anticipated shocks,business cycles,volatility |
| JEL: | E32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:200905&r=cba |
| By: | Urban Jermann; Vincenzo Quadrini |
| Abstract: | In this paper we document the cyclical properties of U.S. firms' financial flows. Equity payouts are procyclical and debt payouts are countercyclical. We develop a model with explicit roles for debt and equity financing and explore how the observed dynamics of real and financial variables are affected by `financial shocks', that is, shocks that affect the firms' capacity to borrow. Standard productivity shocks can only partially explain the movements in real and financial variables. The addition of financial shocks brings the model much closer to the data. The recent events in the financial sector show up clearly in our model as a tightening of firms' financing conditions causing the GDP decline in 2008-09. Our analysis also suggests that the downturns in 1990-91 and 2001 were strongly influenced by changes in credit conditions. |
| JEL: | E32 G10 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15338&r=cba |
| By: | Robert B. Barsky; Eric R. Sims |
| Abstract: | We implement a new approach for the identification of "news shocks" about future technology. In a VAR featuring a measure of aggregate technology and several forward-looking variables, we identify the news shock as the shock orthogonal to technology innovations that best explains future variation in technology. In the data, news shocks account for the bulk of low frequency variation in technology. News shocks are positively correlated with consumption, stock price, and consumer confidence innovations, and negatively correlated with inflation innovations. The disinflationary nature of news shocks is consistent with the implications of sensibly modified versions of a New Keynesian model. |
| JEL: | E0 E00 E1 E10 E2 E20 E3 E30 E31 E32 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15312&r=cba |
| By: | Yener Altunbas (University of Wales); Leonardo Gambacorta (Bank for International Settlements); David Marqués-Ibáñez (European Central Bank) |
| Abstract: | We find evidence of a bank lending channel for the euro area operating via bank risk. Financial innovation and the new ways to transfer credit risk have tended to diminish the informational content of standard bank balance-sheet indicators. We show that bank risk conditions, as perceived by financial market investors, need to be considered, together with the other indicators (i.e. size, liquidity and capitalization), traditionally used in the bank lending channel literature to assess a bankÂ’s ability and willingness to supply new loans. Using a large sample of European banks, we find that banks characterized by lower expected default frequency are able to offer a larger amount of credit and to better insulate their loan supply from monetary policy changes. |
| Keywords: | Bank, Risk, Bank Lending Channel, Monetary Policy |
| JEL: | E44 E52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_712_09&r=cba |
| By: | María-Dolores, Ramon; Vazquez, Jesus; Londoño, Juan M. (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico) |
| Abstract: | This paper proposes an extended version of the New Keynesian Monetary (NKM) model which contemplates revision processes of output and inflation data in order to assess the influence of data revisions on the estimated monetary policy rule parameters. In line with the evidence provided by Aruoba (2008), by using the indirect inference principle, we observe that real-time data are not rational forecasts of revised data. This result along with the differences observed when estimating a model restricted to white noise revision processes provide evidence that policymakers decisions could be determined by the availability of data at the time of policy implementation. |
| Keywords: | NKM model, Monetary Policy Rule, Indirect Inference, Real-time Data, Rational Forecast Errors |
| JEL: | D12 R23 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:mur:wpaper:4695&r=cba |
| By: | María-Dolores, Ramon; Vázquez, Jesús; Londoño, Juan M. (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico) |
| Abstract: | The term spread may play a major role in a monetary policy rule whenever data revisions of output and inflation are not well behaved. In this paper we use a structural approach based on the indirect inference principle to estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure using both revised and real-time data. The estimation results show that the term spread becomes a significant determinant of the U.S. estimated monetary policy rule when revised and real-time data of output and inflation are both considered. |
| Keywords: | NKM model, term structure, Indirect Inference, real-time and revised data, monetary policy rule |
| JEL: | D12 R23 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:mur:wpaper:4699&r=cba |
| By: | Jesús Vázquez (Universidad del País Vasco); Ramón María-Dolores (Universidad de Murcia); Juan-Miguel Londoño (Universidad del País Vasco) |
| Abstract: | The term spread may play a major role in a monetary policy rule whenever data revisions of output and inflation are not well behaved. In this paper we use a structural approach based on the indirect inference principle to estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure using both revised and real-time data. The estimation results show that the term spread becomes a significant determinant of the U.S. estimated monetary policy rule when revised and real-time data of output and inflation are both considered. |
| Keywords: | NKM model, term structure, monetary policy rule, indirect inference, real-time and revised data |
| JEL: | C32 E30 E52 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0919&r=cba |
| By: | María-Dolores, Ramon (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico) |
| Abstract: | This paper uses data on import unit values for nine different product categories and bilateral imports to study the pass-through of exchange rate changes into the prices of imports that originated inside the Euro Area made by some New Member States (NMSs) of the European Union and one candidate country (Turkey). I estimate industry-specific rates of pass-through across and within countries using the methodological approach proposed by de Bandt, Banerjee and Kozluk (2008). I did not find evidence in favour of the hypothesis of Local Currency Pricing (zero pass-through) and the hypothesis of Producer Currency Pricing (complete pass-through) could be accepted in some countries for different industries. My results also show that there is a clear positive relationship between exchange rate pass-through and average inflation in these countries. I do find a slightly positive pattern for the relationship between exchange rate pass-through and openness. With reference to the relationship between exchange rate pass-through and the type of exchange rate regime I observe that a less volatile exchange rate implies a less degree of exchange rate pass-through. In industries I obtain a less degree of exchange rate pass-through in differentiated manufactured products. By including possible statistical break-dates in the estimation process I observe that some NMSs have decreased the exchange rate pass-through in recent years. Some of the breaks are close to the dates of some major institutional changes in these countries (changes in monetary policy and exchange rate regimes and the starting up of the EU membership). |
| Keywords: | exchange rates, monetary union, pass-through, panel cointegration |
| JEL: | D12 R23 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:mur:wpaper:4698&r=cba |
| By: | Mathias Trabandt; Harald Uhlig |
| Abstract: | We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring â€constant Frisch elasticity†(CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation. |
| JEL: | E0 E60 H0 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15343&r=cba |
| By: | Sevim Kosem-Alp |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0903&r=cba |
| By: | Bermingham, Colin (Central Bank and Financial Services Authority of Ireland) |
| Abstract: | Core inflation rates are widely calculated. The perceived benefit of core inflation rates is that they help to inform monetary policy. This is achieved by uncovering the underlying trend in inflation or by helping to forecast inflation. Studies which compare core inflation rates frequently assess candidate core rates on these two criteria. Using U.S. data, the two standard tests of core inflation - the ability to track trend inflation and the ability to forecast inflation -are applied to a more comprehensive set of core inflation rates than has been the case in the literature to date. Furthermore, the tests are applied in a more rigorous fashion. A key difference in this paper is the inclusion of benchmarks to the tests, which is non-standard in the literature. Two problems with core inflation rates emerge. Firstly, it is very difficult to distinguish between different core rates according to these tests, as they tend to perform to a very similar level. Secondly, once the benchmarks are introduced to the tests, the core inflation rates fail to outperform the benchmarks. This failure suggests that core inflation rates are of less practical usefulness than previously thought. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:7/rt/09&r=cba |
| By: | José Dorich |
| Abstract: | I present a structural econometric analysis supporting the hypothesis that money is still relevant for shaping inflation and output dynamics in the United States. In particular, I find that real money balance effects are quantitatively important, although smaller than they used to be in the early postwar period. Moreover, I show three additional implications of the econometric estimates for monetary policy analysis. First, by including real money balance effects into the standard sticky price model, two stylized facts can be explained: the modestly procyclical real wage response to a monetary policy shock and the supply side effects of monetary policy. Second, the existence of real money balance effects causes higher volatility of output and lower volatility of interest rates under the optimal monetary policy. Third, the reduction in the size of real money balance effects can account for a significant decline in macroeconomic volatility. |
| Keywords: | Business fluctutations and cycles, Monetary aggregates, Transmission of monetary policy |
| JEL: | E31 E32 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-24&r=cba |
| By: | Rokon Bhuiyan (QED) |
| Abstract: | I identify a forward-looking monetary policy function in a structural VAR model by using forecasts of macroeconomic variables, in addition to the realized variables used in a standard VAR. Both impulse responses and variance decompositions of the monetary policy variable of this forecast-augmented VAR model suggest that forecasted variables play a greater role than realized variables in a central bank’s policy decisions. I also find that a contractionary policy shock instantaneously increases the market interest rate as well as the forecast of the market interest rate. The policy shock also appreciates both the British pound and the forecast of the pound on impact. On the other hand, the policy shock lowers expected inflation immediately, but affects realized inflation with a lag. When I estimate the standard VAR model encompassed in the forecast-augmented model, I find that a contractionary policy shock raises the inflation rate and leads to a gradual appreciation of the domestic currency. However, the inclusion of inflation expectations reverses this puzzling response of the inflation rate, and the inclusion of both the market interest rate forecast and the exchange rate forecast removes the delayed overshooting response of the exchange rate. These findings suggest that a standard VAR may incorrectly identify the monetary policy function. |
| JEL: | C32 E52 F37 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1214&r=cba |
| By: | Nicolas Groshenny (Reserve Bank of New Zealand) |
| Abstract: | This paper estimates a medium-scale DSGE model with search unemployment by matching model and data spectra. Price markup shocks emerge as the main source of business-cycle fluctuations in the euro area. Key for the propagation of these disturbances are a high degree of inflation ndexation and a persistent response of monetary policy to deviations of inflation from the target. |
| JEL: | E32 C51 C52 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2009/08&r=cba |
| By: | Blaes, Barno |
| Abstract: | This paper investigates the transmission of monetary policy in the euro area based on the factor augmented vector autoregressive approach of Bernanke, Boivin and Eliasz (2005) as well as on a standard VAR model. We focus on the reaction of monetary aggregates to a one-off monetary policy shock. We find that - as theory suggests - money growth is dampened by a restrictive monetary policy stance in the longer term. In the short-run, however, M3 growth may increase due to portfolio shifts caused by the rise in the short-term interest rate. This has consequences for the interpretation of money growth as an input for monetary policy decisions. |
| Keywords: | Monetary policy transmission,FAVAR,VAR,money stock,euro area. |
| JEL: | C32 E40 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:200918&r=cba |
| By: | Bilin Neyapti |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0902&r=cba |
| By: | Hoffmann, Mathias; Holtemöller, Oliver |
| Abstract: | We discuss how the welfare ranking of fixed and flexible exchange rate regimes in a New Open Economy Macroeconomics model depends on the interplay between the degree of exchange rate pass-through and the elasticity of substitution between home and foreign goods. We identify combinations of these two parameters for which flexible and for which fixed exchange rates are superior with respect to welfare as measured by a representative household's utility level. We estimate the two parameters for six non-EMU European countries (Czech Republic, Hungary, Poland, Slovakia, Sweden, United Kingdom) using a heterogeneous dynamic panel approach. |
| Keywords: | Elasticity of substitution between home and foreign goods,exchange rate pass-through,exchange rate regime choice,expenditure switching effect,heterogeneous dynamic panel,New Open Economy Macroeconomics |
| JEL: | F41 F31 F14 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:200921&r=cba |
| By: | Christian R. Proano (IMK at the Hans Boeckler Foundation) |
| Abstract: | In this paper the role of behavioral forecasting rules of chartist and fun-damentalist type for the dynamic macroeconomic stability of a two-country system is investigated both analytically and numerically. The main result of the paper is that for large trend-chasing parameters in the chartist rule used in the FX market, not only this market but the entire macroeconomic system is destabilized. This takes place despite of the presence of monetary policy rules in both countries which satisfy the Taylor Principle. |
| Keywords: | (D)AS-AD, monetary policy, behavioral heterogenous expectations, FX market dynamics. |
| JEL: | E12 E31 E32 F41 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:3-2009&r=cba |
| By: | Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC) |
| Abstract: | This paper argues that Hyman Minsky's financial instability hypothesis weaves together a medium term Keynesian approach to the business cycles in the spirit of Samuelson (1936) and Hicks (1950) with long cycle thinking of economists such as Schumpeter (1939) and Kondratieff. Post Keynesians have devoted considerable attention to the medium term dimension of Minsky's thinking. The current paper concentrates on the long swing dimension and introduces the idea of "Minsky super-cycles." It is the supercycle that ultimately permits financial crisis. Whereas financially driven business cycles occur every decade, financial crises occur over longer durations reflecting the longer phase of the super-cycle. |
| Keywords: | Minsky, business cycles, financial instability hypothesis |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:5-2009&r=cba |
| By: | Mayer, Eric; Stähler, Nikolai |
| Abstract: | In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors. |
| Keywords: | Fiscal policy,debt brake,welfare,dsge |
| JEL: | E32 E62 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:200924&r=cba |
| By: | Patrick Lünnemann; Ladislav Wintr |
| Abstract: | This paper assesses the degree of wage flexibility in Luxembourg using an administrative data set on individual base wages covering the entire economy over the period 2001?2006 with monthly frequency. We find that the wage flexibility at the discretion of the firm is rather low once we limit measurement error and remove wage changes due to institutional factors (indexation, changes in statutory minimum wage, age and marital status). The so adjusted frequency of wage change lies between 5% and 7%. On average, wages change less often than consumer prices. In addition, less than one percent of (nominal) wages are cut both from month to month and from year to year. Given full automatic indexation of wages covering vast majority of employees in Luxembourg, wages appear to be subject to substantial downward real wage rigidity. Finally, wage changes tend to be highly synchronised as they are concentrated around the events of wage indexation and the month of January. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:cahier_etudes_39&r=cba |
| By: | Juha Tervala |
| Abstract: | This study examines whether the fiscal multiplier can be negative for certain types of government spending. The key result is that the fiscal multiplier can be negative if there is a high degree of substitutability between private and government consumption and government consumption is complementary to leisure. |
| Keywords: | fiscal policy, fiscal multiplier, effectiveness of fiscal policy |
| JEL: | E62 H31 H42 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp54&r=cba |
| By: | Bachmann, Ruediger; Bayer, Christian |
| Abstract: | Using a unique German firm-level data set, this paper is the first to jointly study the cyclical properties of the cross-sections of firm-level real value added and Solow residual innovations, as well as capital and employment adjustment. We find two new business cycle facts: 1) The cross-sectional standard deviation of firm-level innovations in the Solow residual, value added and employment is robustly and significantly countercyclical. 2) The cross-sectional standard deviation of firm-level investment is procyclical. We show that a heterogeneousfirm RBC model with quantitatively realistic countercyclical innovations in the firm-level Solow residual and non-convex adjustment costs calibrated to the non-Gaussian features of the steady state investment rate distribution, produces investment dispersion that positively comoves with the cycle, with a correlation coefficient of 0.65, compared to 0.61 in the data. We argue more generally that the cross-sectional business cycle dynamics impose tight empirical restrictions on structural parameters and stochastic properties of driving forces in heterogeneousfirmmodels, and are therefore paramount in the calibration of these models. |
| Keywords: | Ss model,RBC model,cross-sectional firm dynamics,lumpy investment,countercyclical risk,aggregate shocks,idiosyncratic shocks,heterogeneous firms. |
| JEL: | E20 E22 E30 E32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:200917&r=cba |
| By: | Herrmann, Sabine |
| Abstract: | This paper examines the relationship between the exchange rate regime and the pace of current account adjustment. The panel data set we refer to includes 11 catching-up countries from central, eastern and south-eastern Europe between 1994 and 2007. The exchange rate regime is measured by a continuous z-score measure of exchange rate volatility proposed by Gosh, Gulde and Wolf (2003). Based on a basic autoregression estimation, the results indicate that a more flexible exchange rate regime significantly enhances the rate of current account adjustment. |
| Keywords: | Current account adjustment,exchange rate regime,Central and Eastern Europe |
| JEL: | F32 F31 O52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:200922&r=cba |
| By: | Rik G.P. Frehen; William N. Goetzmann; K. Geert Rouwenhorst |
| Abstract: | The first global financial bubble in stock prices occurred 1720 in Paris, London and the Netherlands. Explanations for these linked bubbles primarily focus on the irrationality of investor speculation and the corresponding stock price behavior of two large firms: the South Sea Company in Great Britain and the Mississippi Company in France. In this paper we examine a broad cross-section of security price data to evaluate the causes of the bubbles. Using newly collected stock prices for British and Dutch firms in 1720, we find evidence against indiscriminate irrational exuberance and evidence in favor of speculation about two factors: the Atlantic trade and the incorporation of insurance companies. The fundamentals of both sectors may have led to high expectations of future growth. Our findings are consistent with the hypothesis that financial bubbles require a plausible story to justify investor optimism. |
| JEL: | G15 N13 N15 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15332&r=cba |
| By: | Olivier Gossner; Ehud Kalai; Robert Weber |
| Abstract: | In Bayesian environments with private information, as described by the types of Harsanyi, how can types of agents be (statistically) disassociated from each other and how are such disassociations reflected in the agents’ knowledge structure? Conditions studied are (i) subjective independence (the opponents’ types are independent conditional on one’s own) and (ii) type disassociation under common knowledge (the agents’ types are independent, conditional on some common-knowledge variable). Subjective independence is motivated by its implications in Bayesian games and in studies of equilibrium concepts. We find that a variable that disassociates types is more informative than any common-knowledge variable. With three or more agents, conditions (i) and (ii) are equivalent. They also imply that any variable which is common knowledge to two agents is common knowledge to all, and imply the existence of a unique common-knowledge variable that disassociates types, which is the one defined by Aumann. |
| Keywords: | Bayesian games, independent types, common knowledge. |
| JEL: | D80 D82 C70 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1476&r=cba |
| By: | DeJong, David N.; Dharmarajan, Hariharan; Liesenfeld, Roman; Moura, Guilherme V.; Richard , Jean-François |
| Abstract: | We develop a numerical procedure that facilitates efficient likelihood evaluation in applications involving non-linear and non-Gaussian state-space models. The procedure approximates necessary integrals using continuous approximations of target densities. Construction is achieved via efficient importance sampling, and approximating densities are adapted to fully incorporate current information. We illustrate our procedure in applications to dynamic stochastic general equilibrium models. |
| Keywords: | particle filter,adaption,efficient importance sampling,kernel density approximation,dynamic stochastic general equilibrium model |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:200902&r=cba |
| By: | Costantini, Mauro (Department of Economics, University of Vienna BWZ, Vienna, Austria); Kunst, Robert M. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria) |
| Abstract: | We investigate whether and to what extent multiple encompassing tests may help determine weights for forecast averaging in a standard vector autoregressive setting. To this end we consider a new test-based procedure, which assigns non-zero weights to candidate models that add information not covered by other models. The potential benefits of this procedure are explored in extensive Monte Carlo simulations using realistic designs that are adapted to U.K. and to French macroeconomic data. The real economic growth rates of these two countries serve as the target series to be predicted. Generally, we find that the test-based averaging of forecasts yields a performance that is comparable to a simple uniform weighting of individual models. In one of our role-model economies, test-based averaging achieves some advantages in small samples. In larger samples, pure prediction models outperform forecast averages. |
| Keywords: | Combining forecasts, encompassing tests, model selection, time series |
| JEL: | C32 C53 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:243&r=cba |