nep-cba New Economics Papers
on Central Banking
Issue of 2009‒10‒03
forty-one papers chosen by
Alexander Mihailov
University of Reading

  1. Inflation and unemployment in the long run By Aleksander Berentsen; Guido Menzio; Randall Wright
  2. Modelling the Global Financial Crisis By Warwick J McKibbin; Andy Stoeckel
  3. Exchange rates during the crisis By Weber, Sebastian; Wyplosz, Charles
  4. Inflation and output volatility under asymmetric incomplete information. By Giacomo Carboni; Martin Ellison
  5. Price discovery on traded inflation expectations: does the financial crisis matter? By Schulz, Alexander; Stapf, Jelena
  6. The Monetary Policy Implications of Behavioral Asset Bubbles By ap Gwilym, Rhys
  7. Hyperbolic discounting is rational: Valuing the far future with uncertain discount rates By J. Doyne Farmer; John Geanakoplos
  8. Essential interest-bearing money By David Andolfatto
  9. Households Forming Inflation Expectations: Who Are the 'Active' and 'Passive' Learners? By J. Easaw J.; R. Golinelli
  10. Fear of depression - Asymmetric monetary policy with respect to asset markets By Hoffmann, Andreas
  11. Can long-horizon forecasts beat the random walk under the Engel-West explanation? By Charles Engel; Jian Wang; Jason Wu
  12. Inflation and growth: new evidence from a dynamic panel threshold analysis By Kremer, Stephanie; Bick, Alexander; Nautz, Dieter
  13. Has Macro Progressed? By Ray C. Fair
  14. New Keynesian versus Old Keynesian Government Spending Multipliers. By John F. Cogan; Tobias Cwik; John B. Taylor; Volker Wieland
  15. Outside versus inside bonds: A Modigliani-Miller type result for liquidity constrained economies By Aleksander Berentsen; Christopher Waller
  16. Liquidity, innovation and growth By Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi
  17. Money and capital as competing media of exchange in a news economy By David Andolfatto; Fernando M. Martin
  18. Firm entry and monetary policy transmission under credit rationing By Kobayashi, Teruyoshi
  19. Inflation, Human Capital and Tobin's <i>q</i> By Basu, Parantap; Gillman, Max; Pearlman, Joseph
  20. A Note on the Anchoring Effect of Explicit Inflation Targets By Jan Libich
  21. Optimal Monetary Policy and Downward Nominal Wage Rigidity in Frictional Labor Markets. By Abo-Zaid, Salem
  22. The Quantitative Importance of News Shocks in Estimated DSGE Models By Hashmat Khan; John Tsoukalas
  23. Global rebalancing in a three-country model By Engler, Philipp
  24. When You’ve Seen One Financial Crisis… By Simon van Norden
  25. Can behavioral finance models account for historical asset prices? By ap Gwilym, Rhys
  26. Do institutional changes affect business cycles? Evidence from Europe By Fabio Canova; Matteo Ciccarelli; Eva Ortega
  27. Monetary Business Cycle Accounting By Sustek, Roman
  28. Capital constraints, counterparty risk, and deviations from covered interest rate parity By Niall Coffey; Warren B. Hrung; Asani Sarkar
  29. Estimating the border effect: some new evidence By Gita Gopinath; Pierre-Olivier Gourinchas; Chang-Tai Hsieh; Nicholas Li
  30. Wavelet Based Volatility Clustering Estimation of Foreign Exchange Rates By A. N. Sekar Iyengar
  31. Possible Macroeconomic Consequences of Large Future Federal Government Deficits By Ray C. Fair
  32. The impact of the European Monetary Union on inflation persistence in the euro area By Meller, Barbara; Nautz, Dieter
  33. Controllability and persistence of money market rates along the yield curve: evidence from the euro area By Busch, Ulrike; Nautz, Dieter
  34. Testing the Monetary Policy Rule in the US: A Reconsideration of the Fed's Behaviour By Minford, Patrick; Ou, Zhirong
  35. Rescuing Banks from the Effects of the Financial Crisis By Michele Fratianni; Francesco Marchionne
  36. Real effects of banking crises: a survey of the literature By Luisa Carpinelli
  37. The reform of IMF quotas: the way towards the 2008 resolution By Andrea Colabella; Enrica Di Stefano; Claudia Maurini
  39. The 2008-2009 Financial Crisis and the HIPCs: Another Debt Crisis? By Andrea Filippo Presbitero
  40. Inflation Targeting in Latin America: Toward a Monetary Union? By Marc Hofstetter
  41. The Distribution Analysis of the Inflation Components of Turkey By A. Nazif Catik; A. Özlem Önder

  1. By: Aleksander Berentsen; Guido Menzio; Randall Wright
    Abstract: We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first document in the data a positive relation between these variables at low frequencies. We then develop a framework where unemployment and money are both modeled using microfoundations based on search and bargaining theory, providing a unified theory for analyzing labor and goods markets. The calibrated model shows that money can account for a sizable fraction of trends in unemployment. We argue it matters, qualitatively and quantitatively, whether one uses monetary theory based on search and bargaining, or an alternative ad hoc specification.
    Date: 2009–09
  2. By: Warwick J McKibbin; Andy Stoeckel
    Abstract: This paper models the global financial crisis as a combination of shocks to global housing markets and sharp increases in risk premia of firms, households and international investors in an intertemporal (or DSGE) global model. The model has six sectors of production and trade in 15 major economies and regions. The paper shows that a ‘switching’ of expectations about risk premia shocks in financial markets can easily generate the severe economic contraction in global trade and production currently being experienced in 2009 and subsequent events. The results show that the future of the global economy depends critically on whether the shocks to risk are expected to be permanent or temporary. The best representation of the crisis may be one where initial long lasting pessimism about risk is unexpectedly revised to a more moderate scenario. This suggests a rapid recovery in countries not experiencing a balance sheet adjustment problem.
    Date: 2009–09
  3. By: Weber, Sebastian; Wyplosz, Charles
    Abstract: Nearly two years after the onset of the financial crises, many central banks have brought their policy interest rates down to, or close to zero. Various governments have seen their budget deficits soar. Both policies have affected exchange rates, partly through market expectations. With a majority of exchange rates officially floating, exchange rate movements do not necessarily reflect official decisions as was the case in the 1930s. Yet, also in the 2008 crisis, authorities have directly intervened in the foreign exchange market, sometimes in order to defend a falling currency but in other instances with the aim to limit appreciation pressure, akin of competitive devaluations. This paper documents the exchange rate interventions during the height of the 2008/09 financial crisis and identifies the countries which have particular high incentives to intervene in the foreign exchange market to competitively devalue their currency. While various countries had increased incentives to devalue, we find that direct exchange rate interventions have been rather limited and contagion of devaluation has been restricted to one regionally contained case. However, sharp market-driven exchange rate movements have reshaped competitive positions. It appears that these movements have so far not seriously disrupted global trade. After all, a world crisis is likely to require widespread exchange rate adjustments as different countries are affected in different ways and have different capacities to weather the shocks.
    Keywords: Currencies and Exchange Rates,Debt Markets,Emerging Markets,Economic Stabilization,Economic Theory&Research
    Date: 2009–09–01
  4. By: Giacomo Carboni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Ellison (Department of Economics, University of Oxford, Manor Road Building, Oxford, OX1 2UQ, United Kingdom.)
    Abstract: The assumption of asymmetric and incomplete information in a standard New Keynesian model creates strong incentives for monetary policy transparency. We assume that the central bank has better information about its objectives than the private sector, and that the private sector has better information about shocks than the central bank. Transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised. Our analysis improves upon existing work by endogenising the volatility of both output and inflation. Improved transparency most likely manifests itself in falling output volatility. JEL Classification: E32, E37, E52.
    Keywords: Imperfect credibility, Asymmetric information, Signal extraction.
    Date: 2009–09
  5. By: Schulz, Alexander; Stapf, Jelena
    Abstract: We analyze contributions of different markets to price discovery on traded inflation expectations and how it changed during the financial crisis. The quicker information is processed on one market and the less one market is disrupted by the financial crisis the more valuable is its information for central banks and market participants. We use a new high frequency data set on inflation-indexed and nominal government bonds as well as inflation swaps to calculate information shares of break-even inflation rates in the euro area and the US. For maturities up to 5 years new information comes from both the swap and the bond markets. For longer maturities the swap market provides less and less information in the euro area. In the US where the market volume of inflation-linked bonds is large the bond market dominates the price discovery process for all maturities. The severe financial crisis that spread out in Autumn 2008 drove a wedge between bond and swap break-even inflation rates in both currencies. Price discovery ceased to take place on the swap market. Disruptions coming from the short-end of the market even separated price formation on both segments for maturities of up to 6 years in the US. Against the backdrop of the most severe financial crisis in decades contributions to price formation concentrated a lot more on the presumably safest financial instrument: government bonds.
    Keywords: Inflation-linked bonds,inflation swaps,price discovery,financial crisis
    JEL: E43 F37 G15
    Date: 2009
  6. By: ap Gwilym, Rhys
    Abstract: I introduce behavioral asset pricing rules into a wider dynamic stochastic general equilibrium framework. Asset price bubbles emerge endogenously within the model. I find that in this model the only monetary policy that would be likely to enhance welfare is a counter-intuitive 'running with the wind' policy. I conclude that the optimal policy is highly dependent on the nature of the behavioral rules that are stipulated. Given that monetary authorities have limited information about the ways in which agents actually behave, a systematic monetary policy response to asset price misalignments is unlikely to enhance welfare.
    Date: 2009–09
  7. By: J. Doyne Farmer; John Geanakoplos
    Date: 2009–09–25
  8. By: David Andolfatto
    Abstract: I examine optimal monetary policy in a Lagos and Wright [A unified framework for monetary theory and policy analysis, J. Polit. Econ. 113 (2005) 463?484] model where trade is centralized and all exchange is voluntary. I identify a class of incentive feasible policies that improve welfare beyond what is achievable with zero intervention. Any policy in this class necessarily entails a non-negative inflation rate and a strictly positive nominal interest rate. Despite the absence of a lump-sum tax instrument, there exists an incentive-feasible policy that implements the first-best allocation.
    Keywords: Money theory ; Econometric models
    Date: 2009
  9. By: J. Easaw J.; R. Golinelli
    Date: 2009–08
  10. By: Hoffmann, Andreas
    Abstract: The paper suggests that during Greenspan’s incumbency the fear of depression caused the Federal Reserve to lower interest rates rapidly when asset price developments suggested a crisis potential. Whereas, when asset markets were growth-supporting, it did not raise interest rates. This asymmetry contributed to a downward-trend in interest rates which pushed US interest rates down to zero in the current crisis.
    Keywords: Fear of depression; Monetary policy; Taylor rule; Asset prices
    JEL: E58 E52 D82
    Date: 2009–09–15
  11. By: Charles Engel; Jian Wang; Jason Wu
    Abstract: Engel and West (EW, 2005) argue that as the discount factor gets closer to one, present-value asset pricing models place greater weight on future fundamentals. Consequently, current fundamentals have very weak forecasting power and exchange rates appear to follow approximately a random walk. We connect the Engel-West explanation to the studies of exchange rates with long-horizon regressions. We find that under EW's assumption that fundamentals are I(1) and observable to the econometrician, long-horizon regressions generally do not have significant forecasting power. However, when EW's assumptions are violated in a particular way, our analytical results show that there can be substantial power improvements for long-horizon regressions, even if the power of the corresponding shorthorizon regression is low. We simulate population Rsquared for long-horizon regressions in the latter setting, using Monetary and Taylor Rule models of exchange rates calibrated to the data. Simulations show that long-horizon regression can have substantial forecasting power for exchange rates.
    Keywords: Foreign exchange rates ; Financial markets ; Asset pricing ; Forecasting ; Random walks (Mathematics) ; Regression analysis
    Date: 2009
  12. By: Kremer, Stephanie; Bick, Alexander; Nautz, Dieter
    Abstract: We introduce a dynamic panel threshold model to shed new light on the impact of inflation on long-term economic growth. The empirical analysis is based on a large panel-data set including 124 countries during the period from 1950 to 2004. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation hampers growth if it exceeds 17%. Below this threshold, however, the impact of inflation on growth remains insignificant. Therefore, our results do not support growth-enhancing effects of inflation in developing countries.
    Keywords: Inflation Thresholds,Inflation and Growth,Dynamic Panel Threshold Model
    JEL: E31 C23 O40
    Date: 2009
  13. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: There have been a number of recent papers arguing that there has been considerable convergence in macro research and to the good. This paper considers the question whether what has been converged to is good. Has progress been made in understanding how the macro economy works?
    Keywords: Macro process
    JEL: E10
    Date: 2009–09
  14. By: John F. Cogan (Stanford University - The Hoover Institution on War, Revolution and Peace, HHMB Rm 347, Stanford, CA 94305, USA.); Tobias Cwik (Goethe University Frankfurt, Grüneburgplatz 1, Uni-Pf. 77, D-60323 Frankfurt am Main, Germany.); John B. Taylor (Stanford University, Stanford, CA 94305, USA.); Volker Wieland (University of Frankfurt, P.O. Box 94, Mertonstrasse 17, D-60054 Frankfurt am Main, Germany.)
    Abstract: Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modelling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large. JEL Classification: C52, E62.
    Keywords: Fiscal Multiplier, New Keynesian Model, Fiscal Stimulus, Government Spending, Macroeconomic Modeling.
    Date: 2009–09
  15. By: Aleksander Berentsen; Christopher Waller
    Abstract: When agents are liquidity constrained, two options exist — sell assets or borrow. We compare the allocations arising in two economies: in one, agents can sell government bonds (outside bonds) and in the other they can borrow (issue inside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds but that the converse is not true. However, the optimal policy in each economy makes the allocations equivalent.
    Keywords: Liquidity, financial markets, monetary policy, search
    JEL: E4 E5
    Date: 2009–09
  16. By: Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi
    Abstract: Many countries simultaneously suffer from high rates of inflation, low growth rates of per capita income and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation and financial development. A novel feature of the model is that the market for innovation goods is decentralized. Financial intermediaries arise endogenously to provide liquid funds to the innovation sector. We calibrate the model to address two quantitative issues. One is the effects of an exogenous improvement in the productivity of the financial sector on welfare and per capita growth. The other is the effects of inflation on welfare and growth. Consistent with the data but in contrast to previous work, reducing inflation generates large gains in the growth rate of per capita income as well as in welfare. Relative to reducing inflation, improving the efficiency of the financial market increases growth and welfare by much smaller amounts.
    Keywords: Money, Credit, Innovation, Growth
    Date: 2009–09
  17. By: David Andolfatto; Fernando M. Martin
    Abstract: Conventional theory suggests that fiat money will have value in capital-poor economies. We demonstrate that fiat money may also have value in capital-rich economies, if the price of capital is excessively volatile. Excess asset-price volatility is generated by news; information that has no social value, but is privately useful in forming forecasts over the short-run return to capital. One advantage of fiat money is that its expected return is not linked directly to news concerning the prospects of an underlying asset. When money and capital compete as media of exchange, excess volatility in the short-term returns of liquid asset portfolios is mitigated and welfare is improved. A legal restriction that prohibits the use of capital as a payment instrument renders the expected return to money perfectly stable and, as a consequence, may generate an additional welfare benefit.
    Keywords: Money theory ; Capital
    Date: 2009
  18. By: Kobayashi, Teruyoshi
    Abstract: This paper presents an additional credit channel for monetary policy that would arise in the presence of credit rationing. I formally examine a situation in which new entry firms have no choice but to borrow funds from a financial intermediary to cover entry costs, taking into account the fact that most of the small and young firms are bank dependent in practice. It turns out that the presence of nominal debt contracts allows the central bank to influence firm entry and thereby aggregate output through its effect on the severity of credit rationing even in the absence of price stickiness. This is because a decrease in the nominal interest rate reduces the cost of funds for lending, which enables financial intermediaries to extend credit to less creditworthy firms. This ``credit rationing effect" is absent in the conventional balance-sheet channel, where loan rates are determined such that credit demand is equal to credit supply.
    Keywords: credit channel; credit rationing; firm entry; monetary policy transmission.
    JEL: E32 E52 E44
    Date: 2009–09–28
  19. By: Basu, Parantap; Gillman, Max (Cardiff Business School); Pearlman, Joseph
    Abstract: A pervasive empirical finding for the US economy is that inflation is negatively correlated with the normalized market price of capital (Tobin's q) and growth. A dynamic stochastic general equilibrium model of endogenous growth is developed to explain these stylized facts. In this model, human capital is the principal driver of self-sustained growth. Long run comparative statics analysis suggests that inflation diverts scarce time resource to leisure which lowers human capital utilization. This impacts growth adversely and modulates capital adjustment cost downward resulting in a decline in Tobin's q. For the short run, a Tobin effect of inflation on growth weakens the negative association between inflation and q.
    Date: 2009–09
  20. By: Jan Libich
    Abstract: Empirical literature provided convincing evidence that explicit (ie legislated) inflation targets anchor expectations. We propose a novel game theoretic framework with generalized timing that allows us to formally capture this beneficial anchoring effect. Using the framework we identify several factors that influence whether and how strongly expectations are anchored, namely: (i) the public’s cost of decision-making, (ii) the public’s inflation aversion, (iii) the slope of the Phillips curve, (iv) the magnitude of supply shocks, (v) the degree of central bank conservatism, and under many (but not all) circumstances, (vi) the explicitness of the inflation target.
    JEL: E61 E63
    Date: 2009–08
  21. By: Abo-Zaid, Salem
    Abstract: Recent empirical evidence suggests that nominal wages in the U.S. are downwardly rigid. This paper studies optimal monetary policy in a labor search and matching framework under the presence of Downward Nominal Wage Rigidity (DNWR). The study shows that when nominal wages are downwardly rigid, optimal monetary policy targets a positive inflation rate; the annual long-run inflation rate is around 2 percent. Positive inflation in this environment “greases the wheels” of the labor market by facilitating real wage adjustments, and hence it eases job creation and prevents excessive increase in unemployment. In addition, there is an asymmetry in the response of the economy to positive and negative productivity shocks, particularly those of large sizes. Finally, the optimal long-run inflation rate predicted by this study is considerably higher than in otherwise neoclassical labor markets, suggesting that the nature of the labor market in which DNWR is studied can matter for policy recommendations.
    Keywords: Downward Nominal Wage Rigidity; Optimal Monetary Policy; Long Run Inflation Rate; Labor Market Frictions; Labor Search and Matching.
    JEL: E5 E4 E3
    Date: 2009–09–24
  22. By: Hashmat Khan (Department of Economics, Carleton University); John Tsoukalas (Department of Economics, University of Nottingham)
    Abstract: We estimate a dynamic stochastic general equilibrium (DSGE) model with several frictions and shocks, including news shocks to total factor productivity (TFP) and investment-specic (IS) technology, using quarterly US data from 1954-2004 and Bayesian methods. When all types of shocks are considered, TFP news and IS news compete with other atemporal and intertemporal shocks and account for less than 1.5% and 0.15% of the unconditional variance of output growth, respectively. In the fleexible price-wage environment, the contributions of the two shocks are 2.4% and 0%, respectively. When we exclude an atemporal (price markup) shock, the role for TFP news rises but the t of that model is substantially poorer relative to the benchmark model. Based on the variance decompositions and impulse responses, our ndings suggest that news shocks are likely to be less important in estimated sticky price-wage DSGE models relative to perfectly competitive models.
    Keywords: News shocks, Business cycles, DSGE models
    JEL: E2 E3
    Date: 2009–09–22
  23. By: Engler, Philipp
    Abstract: This paper extends the model of Engler et al. (2007) on the adjustment of the US current account to a three-country world economy. This allows an analysis of the differential impact of a reversal of the US current account on Europe and Asia. In particular, the outcomes under different exchange rate policies are analysed. The main finding is that large factor re-allocations from non-tradables to tradables will be necessary in the US. The direction of factor re-allocation in Asia depends on whether the Bretton-Woods-II regime of unilaterally fixed or manipulated exchange rates in Asia is continued. If this is the case, the tradables sector and the current account surplus will continue to grow even when the US deficit closes. The flip side of this result is that Europe will face a huge real appreciation and an enormous current account deficit. With floating exchange rates worldwide, the impact on Europe will be limited while Asia´s tradables sector will shrink.
    Keywords: Global imbalances,US current account deficit,dollar adjustment,sectoral adjustment
    JEL: E2 F32 F41
    Date: 2009
  24. By: Simon van Norden
    Abstract: Financial market crises may differ, but severe banking crises typically share many common features. The most recent crisis shares many features with the US Savings and Loan crisis of the 1980s and early 90s as well as some features of the LTCM crisis of 1998. More generally, banking crises are commonly associated with real estate market collapses. Effectively reducing the risk of future crisis requires some combination of reducing the potential size of real estate market collapses and the banking sector’s exposure to real estate losses. <P>Les crises des marchés des capitaux peuvent différer, mais les crises bancaires graves partagent en général de nombreuses caractéristiques. La crise la plus récente ressemble à de nombreux égards à la crise américaine de l’épargne et du crédit (Savings and Loans) des années 80 et du début des années 90, ainsi qu’à la crise LTCM en 1998. De façon plus générale, les crises bancaires sont souvent associées aux effondrements du marché immobilier. Pour réduire efficacement le risque de crises futures, il faut réduire l’ampleur potentielle des effondrements du marché immobilier, diminuer la vulnérabilité du secteur bancaire aux pertes du marché immobilier, ou les deux.
    Keywords: Financial Crisis, banking crisis, bubbles, real estate, financial regulation, regulatory reform , crises financières, crises bancaires, marché immobilier, réglementation financière
    Date: 2009–09–01
  25. By: ap Gwilym, Rhys
    Abstract: I construct a behavioral model of asset pricing in which agents choose whether to base their expectations on chartist or fundamental forecasts. I simulate the model in order to test its efficacy in explaining the moments and time series properties of the FTSE All-Share index, and find that the model cannot be rejected as the data generating process.
    Keywords: Behavioral finance; Asset pricing
    JEL: G12
    Date: 2009–09
  26. By: Fabio Canova (ICREA-UPF); Matteo Ciccarelli (European Central Bank); Eva Ortega (Banco de España)
    Abstract: We study the effects that the Maastricht treaty, the creation of the ECB, and the Euro changeover had on the dynamics of European business cycles using a panel VAR and data from ten European countries - seven from the Euro area and three outside of it. There are slow changes in the features of business cycles and in the transmission of shocks. Time variations appear to be unrelated to the three events of interest and instead linked to a process of European convergence and synchronization.
    Keywords: Business cycles, European Monetary Union, Panel VAR, Structural changes
    JEL: C15 C33 E32 E42
    Date: 2009–09
  27. By: Sustek, Roman
    Abstract: This paper investigates the quantitative importance of various types of frictions for inflation and nominal interest rate dynamics by extending business cycle accounting to monetary models. Representing a variety of real and nominal frictions as `wedges' to standard equilibrium conditions allows a quantitative assessment of those frictions. Decomposing the data into movements due to these wedges shows that frictions that are equivalent to wedges in TFP and equilibrium conditions for asset markets are essential. In contrast, wedges in equilibrium conditions for capital accumulation and the resource constraint, and wedges capturing distortionary effects of sticky prices, play only a secondary role.
    Keywords: Business cycle accounting; inflation; nominal interest rate
    JEL: E43 E32 E31 E52
    Date: 2009–09–25
  28. By: Niall Coffey; Warren B. Hrung; Asani Sarkar
    Abstract: We provide robust evidence of a deviation in the covered interest rate parity (CIP) relation since the onset of the financial crisis in August 2007. The CIP deviation exists with respect to several different dollar-denominated interest rates and exchange rate pairings of the dollar vis-a-vis other currencies. The results show that our proxies for margin conditions and for the cost of capital are significant determinants of the CIP deviations, especially during the crisis period. The supply of dollars by the Federal Reserve to foreign central banks via reciprocal currency arrangements (swap lines) reduced CIP deviations at this time. Following the bankruptcy of Lehman Brothers, uncertainty about counterparty risk became a significant determinant of CIP deviations, and the swap lines program no longer affected the CIP deviations significantly. These results indicate a breakdown of arbitrage transactions in the international capital markets that owes partly to lack of capital and partly to heightened counterparty credit risk. Central bank interventions helped reduce the funding liquidity risk of global institutions.
    Keywords: Interest rates ; Currency substitution ; Foreign exchange rates ; Swaps (Finance) ; Banks and banking, Central
    Date: 2009
  29. By: Gita Gopinath; Pierre-Olivier Gourinchas; Chang-Tai Hsieh; Nicholas Li
    Abstract: To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question the authors use a dataset with product-level retail prices and wholesale costs for a large grocery chain with stores in the United States and Canada. They develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. They report three main facts: One, the median absolute retail price and wholesale cost discontinuities between adjacent stores on either side of the U.S.-Canadian border are as high as 21 percent. In contrast, within-country border discontinuity is close to 0 percent. Two, the variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups. Three, the border gaps in prices and costs co-move almost one-to-one with changes in the U.S.-Canadian nominal exchange rate. They show these facts suggest that the price gaps they estimate provide only a lower bound on border costs.
    Keywords: Prices ; Price indexes ; Wholesale price indexes ; Retail trade
    Date: 2009
  30. By: A. N. Sekar Iyengar
    Abstract: We have presented a novel technique of detecting intermittencies in a financial time series of the foreign exchange rate data of U.S.- Euro dollar(US/EUR) using a combination of both statistical and spectral techniques. This has been possible due to Continuous Wavelet Transform (CWT) analysis which has been popularly applied to fluctuating data in various fields science and engineering and is also being tried out in finance and economics. We have been able to qualitatively identify the presence of nonlinearity and chaos in the time series of the foreign exchange rates for US/EURO (United States dollar to Euro Dollar) and US/UK (United States dollar to United Kingdom Pound) currencies. Interestingly we find that for the US-INDIA(United States dollar to Indian Rupee) foreign exchange rates, no such chaotic dynamics is observed. This could be a result of the government control over the foreign exchange rates, instead of the market controlling them.
    Date: 2009–10
  31. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper uses a macroeconometric model of the U.S. economy to analyze possible macroeconomic consequences of the large future federal government deficits. The analysis has the advantage of accounting for the endogeneity of the deficit. The results are bleak. Assuming no large tax increases or spending cuts and no bad dollar and stock market shocks, the debt/GDP ratio rises substantially through 2020. These estimates are in line with other estimates. If the dollar depreciates in response to the deficits, inflation increases but the effect on the debt/GDP ratio is modest. It does not appear that the United States can inflate its way out of its deficit problem. If in addition U.S. stock prices fall, this makes matters worse by lowering output. Large personal tax increases or transfer payment decreases solve the deficit problem, but at a cost of considerable lost output over a decade. The Fed's ability to offset these losses is modest according to the model. Introducing a national sales tax is more contractionary than is increasing personal income taxes or decreasing transfer payments.
    Keywords: Federal deficit, Federal debt
    JEL: E17
    Date: 2009–09
  32. By: Meller, Barbara; Nautz, Dieter
    Abstract: This paper uses the European Monetary Union (EMU) as a natural experiment to investigate whether more effective monetary policy reduces the persistence of inflation. Taking into account the fractional integration of inflation, we confirm that inflation dynamics differed considerably across Euro area countries before the start of EMU. Since 1999, however, results obtained from panel estimation indicate that the degree of long run inflation persistence has converged. In line with theoretical predictions, we find that the persistence of inflation has significantly decreased in the Euro area probably as a result of the more effective monetary policy of the ECB.
    Keywords: Monetary Policy Effectiveness and Inflation Persistence,Panel Test for Fractional Integration,Change in Inflation Persistence
    JEL: C22 C23 E31
    Date: 2009
  33. By: Busch, Ulrike; Nautz, Dieter
    Abstract: Controllability of longer-term interest rates requires that the persistence of their deviations from the central bank's policy rate (i.e. the policy spreads) remains sufficiently low. This paper applies fractional integration techniques to assess the persistence of policy spreads of euro area money market rates along the yield curve. Independently from anticipated policy rate changes, there is strong evidence for all maturities that policy spreads exhibit long memory. We show that recent changes in the operational framework and the communication strategy of the European Central Bank have significantly decreased the persistence of euro area policy spreads and, thus, have enhanced the central bank's in influence on longer-term money market rates.
    Keywords: Long memory and fractional integration,controllability and persistence of interest rates,new operational framework of the ECB
    JEL: C22 E43 E52
    Date: 2009
  34. By: Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We calibrate a standard New Keynesian model with three alternative representations of monetary policy - an optimal timeless rule, a Taylor Rule and another with interest rate smoothing - with the aim of testing which if any can match the data according to the method of indirect inference. We find that the only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent 'Taylor Rules' and 'interest rate smoothing' in the data, even though neither represents the true monetary policy.
    Keywords: Monetary policy; Kew Keynesian model; the 'target rule'; Taylor-type rules; Bootstrap simulation; VAR; Indirect inference; Wald statistic
    JEL: E12 E17 E42 E52 E58
    Date: 2009–09
  35. By: Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR); Francesco Marchionne (Universit… Politecnica delle Marche, Faculty of Economics "Giorgio Fu…")
    Abstract: This paper examines government policies aimed at rescuing banks from the effects of the great financial crisis of 2007-2009. To delimit the scope of the analysis, we concentrate on the fiscal side of interventions and ignore, by design, the monetary policy reaction to the crisis. The policy response to the subprime crisis started in earnest after Lehman's failure in mid September 2008, accelerated after February 2009, and has become very large by September 2009. Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in the form of debt and asset guarantees, while purchases of bad assets have been very limited. We employ event study methodology to estimate the benefits of government interventions on banks and their shareholders.;Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets as cumulative abnormal rates of return over the selected window periods.;General announcements tend to be associated with positive cumulative abnormal returns and specific announcements with negative ones. General announcements exert cross-area spillovers but are perceived by the home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements exert spillovers on other banks. Our results are also sensitive to the information environment. Specific announcements tend to exert a positive impact on rates of return in the pre-crisis sub-period, when announcements are few and markets have relative confidence in the "normal" information flow. The opposite takes place in the turbulent crisis sub-period when announcements are the order of the day and markets mistrust the "normal" information flow. These results appear consistent with the observed reluctance of individual institutions to come forth with requests for public assistance.
    Keywords: announcements, financial crisis, rescue plan, undercapitalization
    JEL: G1 G21 N20
    Date: 2009–09
  36. By: Luisa Carpinelli (Banca d'Italia)
    Abstract: The literature is unanimous in highlighting that banking crises have a negative impact on GDP, usually more pronounced in developing economies. The magnitude of the losses is more controversial: the quantitative results of studies on the repercussions of banking crises on economic activity, in fact, are quite uneven. Estimates on the correlation between financial variables and GDP indicate output losses generally greater than ten percentage points of pre-crisis output and exhibit high variability, as a result of the large number of different methodologies adopted to measure real costs. The very high values thus obtained often reflect a problem in identifying the causal nexus between banking crises and real output fluctuations. The most recent literature, which examines the relevance of specific channels of transmission based on individual data, tends to produce a lower estimate of the direct causal effects of banking crises, which are rarely found to cause an output loss exceeding 2 per cent.
    Keywords: banking crises, real effects, transmission channesl, procyclicality
    JEL: G21 E44 E51
    Date: 2009–09
  37. By: Andrea Colabella (Bank of Italy, International Economic Analysis and Relation Department); Enrica Di Stefano (Bank of Italy, International Economic Analysis and Relation Department); Claudia Maurini (Bank of Italy, International Economic Analysis and Relation Department)
    Abstract: Policy evaluation based on the estimation of dynamic stochastic general equilibrium models with aggregate macroeconomic time series rests on the assumption that a representative agent can be identified, whose behavioural parameters are independent of the policy rules. Building on earlier work by Geweke, the main goal of this paper is to show that the representative agent is in general not structural, in the sense that its estimated behavioural parameters are not policyindependent. The paper identifies two different sources of nonstructurality. The latter is shown to be a fairly general feature of optimizing representative agent rational expectations models estimated on macroeconomic data.
    Keywords: International Relations, International Monetary Fund, governance Classification JEL: F53, F59
    Date: 2009–09
  38. By: Kühl Teles, Vladimir; Zaidan, Marta
    Abstract: The goal of this paper is to evaluate the validity of the Taylor principle for inflation control in 12 developing countries that use inflationtargeting regimes: Brazil, Chile, Colombia, Hungary, Israel, Mexico,Peru, Philippines, Poland, South Africa, Thailand and Turkey. The test is based on a state-space model to determine when each country hasfollowed the principle; then a threshold unit root test is used to verify if the stationarity of the deviation of the expected inflation from itstarget depends on compliance with the Taylor principle. The results show that such compliance leads to the stationarity of the deviation of the expected inflation from its target in all cases. Furthermore, in mostcases, non-compliance with the Taylor principle leads to nonstationary deviation of the expected inflation.
    Date: 2009–08–26
  39. By: Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Date: 2009–09
  40. By: Marc Hofstetter
    Abstract: In recent years, five of the main economies in Latin America —Brazil, Chile, Mexico, Colombia and Peru— have adopted Inflation Targeting regimes. In the context of these converging monetary strategies, would the IT nations in the region be better o adopting a common currency? Would they be better o if they dollarize? Would a common currency be a better alternative than dollarization? The answers to these questions are yes, yes and maybe.
    Date: 2009–08–04
  41. By: A. Nazif Catik (Department of Economics, Ege University); A. Özlem Önder (Department of Economics, Ege University)
    Abstract: This paper investigates distribution of inflation items using various measures of skewness and kurtosis for Turkey covering the period 1996-2007. Considering sensitivity of traditional distribution measures to outlying observations robust skewness and kurtosis are also computed as a novelty. Analysis results mainly reveal that inflation components are right skewed and fat tailed as documented by the previous studies. However due to possible effects of the outliers traditional measures, in particular skewness, are lagging behind the robust measures in identifying underlying dispersion. Therefore one can say that weighted mean inflation used to measure general price changes is not trustworthy and a biased estimator of central location. Our results further suggest that core measures based on constant and symmetric trimming applied by the previous studies for Turkey is somewhat deficient since skewness of the data is ignored in the estimation process. Therefore, to obtain more reliable information in monitoring general price movements we suggest use of asymmetric trimmed means estimators which allows trimming different percentages from each tail of the distribution.
    Keywords: Infation, Prices, Distribution, Robust Skewness, Robust, Kurtosis.
    JEL: C43 E31 E52
    Date: 2009–09

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