nep-cba New Economics Papers
on Central Banking
Issue of 2009‒10‒17
thirty papers chosen by
Alexander Mihailov
University of Reading

  1. Activist Fiscal Policy to Stabilize Economic Activity By Alan J. Auerbach; William G. Gale
  2. The Feldstein-Horioka Fact By Domenico Giannone; Michele Lenza
  3. Why are we in a recession? The Financial Crisis is the Symptom not the Disease! By Ravi Jagannathan; Mudit Kapoor; Ernst Schaumburg
  4. Crises and Liquidity in Over-the-Counter Markets By Ricardo Lagos; Guillaume Rocheteau; Pierre-Olivier Weill
  5. Nowcasting Euro Area Economic Activity in Real-Time: The Role of Confidence Indicator By Domenico Giannone; Lucrezia Reichlin; Saverio Simonelli
  6. Did the crisis affect inflation expectations? By Gabriele Galati; Steven Poelhekke; Chen Zhou
  7. Macroeconomic Forecasting and Structural Change By Antonello D'Agostino; Luca Gambetti; Domenico Giannone
  8. Risk Premium Shocks and the Zero Bound on Nominal Interest Rates By Robert Amano; Malik Shukayev
  9. Estimation of quasi-rational DSGE monetary models By Luca Fanelli
  10. The Announcement of Monetary Policy Intentions By Giuseppe Ferrero; Alessandro Secchi
  11. The Importance of Global Shocks for National Policymakers: Rising Challenges for Central Banks By Ansgar Belke; Andreas Rees
  12. Taking Home Bias Seriously: Absolute and Relative Measures Explaining Consumption Risk-Sharing By Holinski Nils; Kool Clemens; Muysken Joan
  13. Why Do Politicians Implement Central Bank Independence Reforms? By Daunfeldt, Sven-Olov; Hellström, Jörgen; Landström, Mats
  14. Comportement du banquier central en environnement incertain By Avouyi-Dovi, S.; Sahuc, J-G.
  15. Monetary policy as a source of uncertainty By André P. Calmon; Thomas Vallée; João B. R. Do Val
  16. Minimum Distance Estimation and Testing of DSGE Models from Structural VARs By Fève, P.; Matheron, J.; Sahuc, J-G.
  17. Technology, convergence and business cycles. By Galo Nuño
  18. Memories of high inflation. By Michael Ehrmann; Panagiota Tzamourani
  19. The Macroeconomic Performance of the Inflation Targeting Policy : An Approach Based on the Evolutionary Co-spectral Analysis By Zied Ftiti
  20. Currency Runs, International Reserves Management and Optimal Monetary Policy Rules By Mika Kato; Christian R. Proano; Willi Semmler
  21. Stochastic Growth in the United States and Euro Area By Peter N. Ireland
  22. Does inflation targeting lead to excessive exchange rate volatility? By Thórarinn G. Pétursson
  23. Medium Term Business Cycles in Developing Countries By Diego A. Comin; Norman Loayza; Farooq Pasha; Luis Serven
  24. Large shocks in U.S. macroeconomic time series: 1860–1988 By Olivier Darné; Amélie Charles
  25. Money in a DSGE framework with an application to the Euro Zone By Benchimol, Jonathan; Fourçans, André
  26. Inflation Target Shocks and Monetary Policy Inertia in the Euro Area By Fève,P.; Materon,J.; Sahuc, J-G.
  27. Determinants of government bond spreads in new EU countries. By Ioana Alexopoulou; Irina Bunda; Annalisa Ferrando
  28. Adjustment in EMU: Is Convergence Assured? By Sebastian Dullien; Ulrich Fritsche; Ingrid Groessl; Michael Paetz
  29. Exchange Rate Regimes and Reserve Policy on the Periphery: The Italian Lira 1883-1911 By Filippo Cesarano; Giulio Cifarelli; Gianni Toniolo
  30. The impact of oil price changes on Spanish and euro area consumer price inflation By Luis J. Álvarez; Samuel Hurtado; Isabel Sánchez; Carlos Thomas

  1. By: Alan J. Auerbach; William G. Gale
    Abstract: We review the evidence on the practice and effects of discretionary fiscal policy, particularly in the context of recent efforts to stimulate the economy, reaching two main conclusions. First, policy interventions have increased in this decade, pre-dating the 2009 stimulus. Second, despite a large economic literature on the topic, the state of theory and evidence is not as "shovel ready" as one would like. Although consumption and investment clearly respond to tax incentives and structural vector autoregressions show that lower taxes and higher government purchases can boost output, it is difficult to apply the findings in the current context, in part because multipliers and policy lags are likely to vary with economic conditions. Dynamic stochastic general equilibrium models can be adapted to address extreme economic conditions, but yield an extremely wide range of predicted impacts. The experience from large downturns – the U.S. Great Depression and the Japanese Lost Decade – is illuminating, but provides little evidence about policy effectiveness because systematic and sustained fiscal interventions were not attempted in either case.
    JEL: E62 H3
    Date: 2009–10
  2. By: Domenico Giannone; Michele Lenza
    Abstract: This paper shows that general equilibrium effects can partly rationalize the high correlation between saving and investment rates observed in OECD countries. We find that once controlling for general equilibrium effects the saving-retention coefficient remains high in the 70’s but decreases considerably since the 80’s, consistently with the increased capital mobility in OECD countries.
    Keywords: Saving-Investment correlation, capital mobility, international comovement, dynamic factor model.
    JEL: C23 F32 F41
    Date: 2009
  3. By: Ravi Jagannathan; Mudit Kapoor; Ernst Schaumburg
    Abstract: Globalization has brought a sharp increase in the developed world’s labor supply. Labor in developing countries – countries with vast pools of underemployed people – can now more easily augment labor in the developed world, without having to relocate, in ways not thought possible only a few decades ago. We argue that the large increase in the developed world’s labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession. The inability of existing institutions in the US and the rest of the world to cope with this shock set the stage for the great recession: The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives; and the inability of the US economy to adjust to the perverse incentives caused by huge money inflows leading to a breakdown of checks and balances at various financial institutions. The financial crisis in the US was but the first acute symptom that had to be treated. A sustainable recovery will only occur when the natural flow of capital from developed to developing nations is restored.
    JEL: E0 E00 E2 E3 G0 G00 G2
    Date: 2009–10
  4. By: Ricardo Lagos; Guillaume Rocheteau; Pierre-Olivier Weill
    Abstract: We study the efficiency of dealers’ liquidity provision and the desirability of policy intervention in over-the-counter (OTC) markets during crises. Our theory emphasizes two key frictions in OTC markets: finding counterparties takes time, and trade is bilateral, with quantities and prices determined by bargaining. We model a crisis as a negative shock to investors’ asset demands that lasts until a random recovery time. In this context, dealers can provide liquidity to outside investors by acting as counterparties in trades and by accumulating asset inventories. We find that, when frictions are severe, even well capitalized dealers may not find it optimal to accumulate inventories, given that investors choose asset positions that require small reallocations. In such circumstances, the market allocative efficiency can increase if the government steps in, purchases private assets on its own account, and resells them when the economy recovers.
    JEL: C78 D83 E44
    Date: 2009–10
  5. By: Domenico Giannone; Lucrezia Reichlin; Saverio Simonelli
    Abstract: This paper assesses the role of surveys for the early estimates of GDP in the euro area in a model-based automated procedures which exploits the timeliness of their release. The analysis is conducted using both an historical evaluation and a real time case study on the current conjuncture.
    Keywords: Forecasting, factor model, real time data, large data sets, survey.
    JEL: E52 C33 C53
    Date: 2009
  6. By: Gabriele Galati; Steven Poelhekke; Chen Zhou
    Abstract: We investigate whether the anchoring properties of long-run inflation expectations in the United States, the euro area and the United Kingdom have changed around the economic crisis that erupted in mid-2007. We document that in these three economies, expectations measures extracted from inflation-indexed bonds and inflation swaps became much more volatile in 2007. Moreover, their sensitivity to news about inflation and other domestic macroeconomic variables – a measure of anchoring – increased first during the oil price rally in 2006–07, and then during the heightened turmoil triggered by the collapse of Lehman Brothers. Liquidity premia and technical factors have significantly influenced the behaviour of inflation-indexed markets since the outburst of the crisis. We show, however, that these factors did not contaminate the relationship between macroeconomic news and financial market-based inflation expectations at the daily frequency. By testing for structural breaks we conclude that in the United States, the euro area and the United Kingdom, long-run inflation expectations have become less firmly anchored during the crisis.
    Keywords: monetary policy; inflation and inflation compensation; anchors for expectations; crisis; liquidity.
    JEL: E31 E44 E52 E58
    Date: 2009–09
  7. By: Antonello D'Agostino; Luca Gambetti; Domenico Giannone
    Abstract: The aim of this paper is to assess whether explicitly modeling structural change increases the accuracy of macroeconomic forecasts. We produce real time out-of-sample forecasts for inflation, the unemployment rate and the interest rate using a Time-Varying Coe±cients VAR with Stochastic Volatility (TV-VAR) for the US. The model generates accurate predictions for the three variables. In particular for inflation the TV-VAR outperforms, in terms of mean square forecast error, all the competing models: fixed coefficients VARs, Time-Varying ARs and the naaive random walk model. These results are also shown to hold over the most recent period in which it has been hard to forecast inflation.
    Keywords: Forecasting, infation, stochastic Volatility, time varying vector autoregression.
    JEL: C32 E37 E47
    Date: 2009
  8. By: Robert Amano; Malik Shukayev
    Abstract: There appears to be a disconnect between the importance of the zero bound on nominal interest rates in the real-world and predictions from quantitative DSGE models. Recent economic events have reinforced the relevance of the zero bound for monetary policy whereas quantitative models suggest that the zero bound does not constrain (optimal) monetary policy. This paper attempts to shed some light on this disconnect by studying a broader range of shocks within a standard DSGE model. Without denying the possibility of other factors, we find that risk premium shocks are key to building quantitative models where the zero bound is relevant for monetary policy design. The risk premium mechanism operates by increasing the spread between the rates of return on private capital and risk-free government bonds. Other common shocks, such as aggregate productivity, investment-specific productivity, government spending and money demand shocks, are unable to push nominal bond rates close to zero as the same risk premium spread mechanism is not at play.
    Keywords: Monetary policy framework
    JEL: E32 E52
    Date: 2009
  9. By: Luca Fanelli (Alma Mater Studiorum Università di Bologna)
    Abstract: This paper proposes the estimation of small-scale dynamic stochastic general equilibrium (DSGE) monetary models under the quasi-rational expectations (QRE) hypothesis. The QRE-DSGE model is based on the idea that the determinate reduced form solution associated with the structural model, if it exists, must have the same lag structure as the ‘best fitting’ vector autoregressive (VAR) model for the observed time series. After discussing solution properties and the local identifiability of the model, a likelihood-based iterative algorithm for estimating the structural parameters and testing the data adequacy of the system is proposed. A Monte Carlo experiment shows that, even controlling for the omitted dynamics bias, the over-rejection of the nonlinear cross-equation restrictions when asymptotic critical values are used and variables are highly persistent is a relevant issue in finite samples. An application based on euro area data illustrates the advantages of using error-correcting formulations of the QRE-DSGE model when the inflation rate and the short-term interest rate are approximated as difference stationary processes. A parametric bootstrap version of the likelihood-ratio test for the implied cross-equation restrictions does not reject the estimated QRE-DSGE model.
    Keywords: Dynamic stochastic general equilibrium model, Maximum Likelihood estimation, Quasi-Rational Expectations, VAR. Modelli DSGE, Stima di massima verosimiglianza, Aspettative Quasi-Razionali, Modelli VAR.
    Date: 2009
  10. By: Giuseppe Ferrero (Bank of Italy); Alessandro Secchi (Bank of Italy)
    Abstract: Whether a central bank should share with the public its views about the future evolution of short term interest rates is an unresolved issue. Disclosing this information might allow a more precise control of market expectations and a more effective achievement of the ultimate goals of the monetary authority. Yet, if the public do not understand the conditional nature of this forecast, it could also undermine the credibility of the central bank. We provide new evidence on the effects of this announcement on private expectations about future short term interest rates. The communication of policy intentions tends to be associated with a greater predictability of monetary policy decisions. Moreover, focussing on New Zealand, where the central bank releases interest rate projections, we find that market expectations react significantly and persistently to the unexpected part of such forecasts. Finally it emerges that the predicted component of the changes in these projections is large, suggesting that market operators understand their conditionality.
    Keywords: monetary policy, communication, interest rates
    JEL: E58 E52 E43
    Date: 2009–09
  11. By: Ansgar Belke; Andreas Rees
    Abstract: We analyze the importance of global shocks for the global economy and national policy makers. More specifically, we investigate whether monetary policy has become less effective in the wake of financial globalization. We also examine whether there is increasing uncertainty for central banks due to globalization-driven changes in the national economic structure. A FAVAR framework is applied to derive structural shocks on a worldwide level and their impact on other global and also national variables. We estimate our macro model using quarterly data from Q1 1984 to Q4 2007 for the G7 countries plus the euro area. According to our results, global liquidity shocks are a driving force of the global economy and various national economies. However, some other shocks originating in house prices, GDP, technology and long-term interest rates play a role at the global level as well. These results prove to be robust across different specifications. Structural break tests indicate that global liquidity shocks have recently become more important as a determinant for house prices. In general, global variables have become more powerful over time in driving national variables.
    Keywords: Global shocks, international business cycle, international policy coordination and transmission, factor augmented vector autoregressive (FAVAR) models, common factors
    JEL: C22 E31 E32 F42
    Date: 2009
  12. By: Holinski Nils; Kool Clemens; Muysken Joan (METEOR)
    Abstract: Recent empirical work has shown that ongoing international financial integration facilitates cross-country consumption risk-sharing. While these studies typically employ absolutemeasures to account for a country''s integration in international capital markets, we devise a relative measure that is motivated by the International Capital Asset Pricing Model (I-CAPM) literature. Our measure captures the composition of a country''s international portfolio relative to the world portfolio, which all countries should optimally hold according to the I-CAPM. Using panel-data regression for a group of OECD countries during the financial globalization period 1980-2007, we show that the geography of international portfolioshelps to explain the degree of consumption risk-sharing obtained.
    Keywords: macroeconomics ;
    Date: 2009
  13. By: Daunfeldt, Sven-Olov (The Ratio Institute); Hellström, Jörgen (Department of Economics, Umeå University); Landström, Mats (Department of Economics, University of Gävle)
    Abstract: This paper is a first empirical attempt to investigate why politicians around the world have chosen to give up power to independent central banks, thereby reducing their ability to fine-tune the economy. A new data-set covering 132 countries, of which 89 countries had implemented such reforms, was collected. Politicians in non-OECD countries were more likely to delegate power to independent central banks if their country has been characterized by a high variability in historical inflation and if they faced a high probability of being replaced. No such effects were found for OECD-countries.
    Keywords: inflation; institutional reforms; monetary policy; time-inconsistency
    JEL: E52 E58 P48
    Date: 2009–10–07
  14. By: Avouyi-Dovi, S.; Sahuc, J-G.
    Abstract: Several recent papers are devoted to the examination of the central banker's behaviour in an uncertain economic environment. This paper proposes, from a central banker's point of view, a synthesis of the main sources of uncertainty as well as an illustration of their effects within an analytical framework. In particular, it shows that depending on the type of uncertainty and the choice of the selected loss function, the recommendations for monetary policy can be noticeably different. Retaining an ad hoc loss function - discretionary choice - in place of an endogenous loss function - choice consistent with the structural parameters - can involve considerable welfare losses.
    Keywords: Monetary policy , Uncertainty , Macroeconomic Model.
    JEL: D81 E52 E61
    Date: 2009
  15. By: André P. Calmon (FAPESP - Department of Telematics of the School of Electrical and Computer Engineering - University of Campinas,); Thomas Vallée (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); João B. R. Do Val (FAPESP - Department of Telematics of the School of Electrical and Computer Engineering - University of Campinas,)
    Abstract: This paper proposes a model in which control variations induce an increase in the uncertainty of the system. The aim of our paper is to provide a stochastic theoretical model that can be used to explain under which uncertainty conditions monetary policy rules should be less or more aggressive, or, simply, applied or not.
    Date: 2009
  16. By: Fève, P.; Matheron, J.; Sahuc, J-G.
    Abstract: The aim of this paper is to complement the MDE--SVAR approach when the weighting matrix is not optimal. In empirical studies, this choice is motivated by stochastic singularity or collinearity problems associated with the covariance matrix of Impulse Response Functions. Consequently, the asymptotic distribution cannot be used to test the economic model's fit. To circumvent this difficulty, we propose a simple simulation method to construct critical values for the test statistics. An empirical application with US data illustrates the proposed method.
    Keywords: MDE, SVAR, DSGE models.
    JEL: C15 C32 E32
    Date: 2009
  17. By: Galo Nuño (Banco de España)
    Abstract: In this paper we integrate Schumpeterian endogenous growth into a general equilibrium framework. By explicitely modelling the innovation and technology adoption process we are able to match some stylized economic facts such as entry rates and survival times of firms in the U.S. economy or the maximum convergence rates accross countries. Additionally, it allows us to propose a new definition of what a technology shock is and to compare it with the standard definition. Results show how this framework provides a plausible description of how economies grow and respond to the arrival of new technologies.
    Keywords: Medium-term business cycles, Schumpeterian growth, technology adoption
    JEL: E3 O3 O4
    Date: 2009–10
  18. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Panagiota Tzamourani (Bank of Greece, 21, E. Venizelos Avenue, GR-10250 Athens, Greece.)
    Abstract: Inflation has been well contained over the last decades in most industrialized countries. This implies, however, that memories of high inflation are likely to fade, because over time larger parts of the population have never experienced high inflation, whereas those who have might forget. This paper tests whether memories of high inflation affect agents’ preferences about the importance attached to price stability, using a large database covering over 52,000 survey responses from 23 countries over the years 1981-2000. It finds that memories of hyperinflation are there to last, whereas those of less drastic inflation experiences tend to erode after around 10 to 15 years. The recent decline in the importance attached to price stability does therefore most likely reflect mitigated inflation concerns in an environment of low and stable inflation, but also the consequences of fading memories of high inflation. The longer central banks have successfully delivered price stability, the more important it is for them to engage in a proactive communication, especially with the younger generations, about the merits of low and stable inflation. JEL Classification: D10, E31, E52.
    Keywords: Inflation aversion, inflation memories, hyperinflation, World Values Survey, inflation targeting.
    Date: 2009–09
  19. By: Zied Ftiti (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper proposes a new methodology to check the economic performance of a monetary policy and in particular the inflation targeting policy (ITP). The main idea of this work is to consider the ITP as economically efficient when it generates a stable monetary environment. The latter is considered as stable when a long-run equilibrium exists to which the paths of economic variables (inflation rate, interest rate and GDP growth) converge. The convergence of the variables' paths implies that these variables are more predictable and implies a lower degree of uncertainty in the economic environment. To measure the degree of convergence between economic variables, we propose, in this paper, a dynamic time-varying variable presented in the frequency approach named cohesion. This variable is estimated from the evolutionary co-spectral theory as defined by Priestley and Tong (1973) and Priestley (1988-1996). We apply this theory to the measure of cohesion presented by Croux et al (2001) to obtain a dynamic time-varying measure. In the last step of the study, we apply the Bai and Perron test (1998-2003b) to determine the change in the cohesion path. The results show that the implementation of the ITP generates a high degree of convergence between economic series that implies less uncertainty into the monetary environment. We conclude that the inflation targeting generates a stable monetary environment. This result allows us to conclude that the ITP is relevant in the case of industrialized countries.
    Keywords: Inflation Targeting ; Co-Spectral Analysis ; Cohesion, Stability Environment ; Economic Performance and Structural Change
    Date: 2009
  20. By: Mika Kato (Howard University, Washington, D.C., USA); Christian R. Proano (IMK at the Hans Boeckler Foundation); Willi Semmler (New School Univeristy New York, USA)
    Abstract: This paper studies the design of optimal monetary policy rules for emerging economies confronted to sharp capital outflows and speculative attacks. We extend Taylor type monetary policy rules by allowing the central bank to give some weight to the level of precautionary foreign reserve balances as one of its targets. We show that a currency crisis scenario can easily occur when the weight is zero, and that it can be avoided when the weight is positive. The impacts of the central bank's monetary control on the output level, the inflation rate, the exchange rate, and the foreign reserve level are investigated as well. By applying both the Hamiltonian as well as the Hamilton-Jacobi-Bellman (HJB) equation (the latter leading to a dynamic programming formulation of the problem), we can explore safe domains of attractions in a variety of complicated model variants. Given the uncertainties the central banks faces, we also show of how central banks can enlarge safe domains of attraction.
    Keywords: Currency Crises, Capital Outflows, Monetary Policy Rules
    JEL: E5 F3
    Date: 2009
  21. By: Peter N. Ireland (Boston College)
    Abstract: This paper constructs a two-country stochastic growth model in which neutral and investment-specific technology shocks are nonstationary but cointegrated across economies. It uses this model to interpret data showing that while real investment has grown faster than real consumption in the United States since 1970, the opposite has been true in the Euro Area. The model, when estimated with these data, reveals that the EA missed out on the rapid investment-specific technological change enjoyed in the US during the 1990s; the EA, however, experienced more rapid neutral technological progress while the US economy stagnated during the 1970s.
    Keywords: growth, shocks, Euro area, technological change
    JEL: E32 F41 F43 O41 O47
    Date: 2009–09–30
  22. By: Thórarinn G. Pétursson
    Abstract: This paper analysis whether the adoption of inflation targeting affects excessive exchange rate volatility, i.e. the share of exchange rate fluctuations not related to economic fundamentals. Using a signal-extraction approach to estimate this excessive volatility in multivariate exchange rates in a sample of forty-four countries, the empirical results show no systematic relationship between inflation targeting and excessive exchange rate volatility. Joint analysis of the effects of inflation targeting and EMU membership shows, however, that a membership in the monetary union significantly reduces this excessive volatility. Together, the results suggest that floating exchange rates not only serve as a shock absorber but are also an independent source of shocks, and that these excessive fluctuations in exchange rates can be reduced by joining a monetary union. At the same time the results suggest that adopting inflation targeting does not by itself contribute to excessive exchange rate volatility.
    Date: 2009–10
  23. By: Diego A. Comin (Harvard Business School, Business, Government and the International Economy Unit); Norman Loayza (Economics Research, World Bank Group); Farooq Pasha (Boston College, Economics); Luis Serven (World Bank - Office of the Chief Economist)
    Abstract: We build a two country asymmetric DSGE model with two features: (i) a product cycle structure determines the range of intermediate goods used to produce new capital in each country and (ii) there are investment flow adjustment costs in the developing economy. We calibrate the model to match the Mexico-US trade and FDI flows. The model is able to explain (i) why US shocks have a larger effect on Mexico than in the US and hence why the Mexican economy is more volatile than the US; (ii) why US business cycles lead over medium term fluctuations in Mexico and (iii) why Mexican consumption is not less volatile than output.
    Keywords: Business Cycles in Developing Countries, Co-movement between Developed and Developing economies, Volatility, Extensive Margin of Trade, Product Life Cycle, FDI.
    JEL: E3 O3
    Date: 2009–10
  24. By: Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Amélie Charles (Audencia Nantes, School of Management - Audencia, School of Management)
    Abstract: In this paper we examine the large shocks due to major economic or financial events that affected U.S. macroeconomic time series on the period 1860–1988, using outlier methodology. We show that these shocks can have temporary or permanent effects on the series and that most of them can be explained by the Great Depression, World War II and recessions as well as by monetary policy for the interest rate data. We also find that macroeconomic time series do not seem inconsistent with a stochastic trend once we adjusted the data of these shocks.
    Date: 2009
  25. By: Benchimol, Jonathan (ESSEC Business School); Fourçans, André (ESSEC Business School)
    Abstract: In the current New Keynesian literature, the role of monetary aggregates is generally neglected. Yet it’s hard to imagine money completely “passive” to the rest of the system. By entering real money balances in a non-separable utility function, we introduce an explicit role for money via preference redefinition in a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. It involves new inflation and output gap specifications where money plays a significant role. We use the General Method of Moments (GMM) to calibrate our DSGE model of the Euro area and we show that the European Central Bank –ECB) should react more strongly to economic shocks as far as the role of money is found significant.
    Keywords: ECB; Inflation; Monetary Policy; Money
    JEL: E31 E51 E58
    Date: 2009–09
  26. By: Fève,P.; Materon,J.; Sahuc, J-G.
    Abstract: The Euro area as a whole has experienced a marked downward trend in inflation over the past decades and, concomitantly, a protracted period of depressed activity. Can permanent and gradual shifts in monetary policy be held responsible for these dynamics? To answer this question, we embed serially correlated changes in the inflation target into a DSGE model with real and nominal frictions. The formal Bayesian estimation of the model suggests that gradual changes in the inflation target have played a major role in the Euro area business cycle. Following an inflation target shock, the real interest rate increases sharply and persistently, leading to a protracted decline in economic activity. Counter--factual exercises show that, had monetary policy implemented its new inflation objective at a faster rate, the Euro zone would have experienced more sustained growth than it actually did.
    Keywords: Inflation target shocks , Gradualism , DSGE models , Bayesian econometrics.
    JEL: E31 E32 E52
    Date: 2009
  27. By: Ioana Alexopoulou (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Irina Bunda (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Based on a rich database of government bond spreads and macroeconomic indicators over the period 2001-2008, we propose an empirical assessment of the role of fundamentals in driving long-term sovereign bond spreads of the new EU countries (Bulgaria, Czech Republic, Latvia, Lithuania, Hungary, Poland, Romania and Slovakia). The results of a dynamic panel error correction model that accounts for both common long-run determinants and cross-country heterogeneities in sovereign bond spreads tend to suggest that fundamentals still matter for market’s assessment of a country creditworthiness. Countries’ levels of external debt, fiscal and current account balances, exchange and inflation rates, their degree of trade openness as well as short-term interest rate spreads play an important role in the new EU countries’ access to long-term finance. We furthermore challenge the pooled mean approach in order to check whether other factors may become relevant in the long-run for two subgroups of countries according to the developments in their current account balances. Fiscal fundamentals seem to matter most for one group of countries, those characterised by widening external imbalances and historically high levels of spreads. In a context of heightened risk aversion and potential for spill over effects, this group of countries are more exposed to domestic sources of vulnerability as well as to swings in market perceptions of sovereign risks. JEL Classification: G12, H60, E62.
    Keywords: long-term government bond spreads, new EU countries, pooled mean group estimation.
    Date: 2009–09
  28. By: Sebastian Dullien (HTW Berlin, University of Applied Sciences, Germany); Ulrich Fritsche (University Hamburg, Germany); Ingrid Groessl (University Hamburg, Germany); Michael Paetz (University Hamburg, Germany)
    Abstract: Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades. Keywords: EMU, convergence, stability.
    Keywords: EMU, convergence, stability, inflation
    JEL: E32 E61 C32
    Date: 2009
  29. By: Filippo Cesarano (Banca D'Italia); Giulio Cifarelli (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Gianni Toniolo
    Abstract: The three exchange rate regimes adopted by Italy from 1883 up to the eve of World War I — the gold standard (1883-1893), floating rates (1894-1902), and “gold shadowing” (1903-1911) — produced a puzzling result: formal adherence to the gold standard ended in failure while shadowing the gold standard proved very successful. This paper discusses the main policies underlying Italy’s performance particularly focusing on the strategy of reserve accumulation. It presents a cointegration analysis identifying a distinct co-movement between exchange rate, reserves, and banknotes that holds over the three sub-periods of the sample. Given this long-run relationship, the different performance in each regime is explained by the diversity of policy measures, reflected in the different variables adjusting the system in the various regimes. Italy’s variegated experience during the gold standard provides a valuable lesson about current developments in the international scenario, showing the central role of fundamenals and consistent policies.
    Keywords: Exchange rate; gold standard; reserve policy; cointegration
    JEL: F31 F33 N13 N23
    Date: 2009
  30. By: Luis J. Álvarez (Banco de España); Samuel Hurtado (Banco de España); Isabel Sánchez (Banco de España); Carlos Thomas (Banco de España)
    Abstract: This paper assesses the impact of oil price changes on Spanish and euro area consumer price inflation. We find, consistently with recent international evidence, that the inflationary effect of oil price changes is limited, even though crude oil price fluctuations are a major driver of inflation variability. The impact on Spanish inflation is found to be somewhat higher than in the euro area. Direct effects are increasing over time, reflecting the higher spending of households on refined oil products, whereas indirect ones, defined in broad terms, are losing importance.
    Keywords: oil prices, consumer price infl ation, Spanish and Euro area infl ation, DSGE models
    JEL: E20 E31 E37
    Date: 2009–10

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.