nep-cba New Economics Papers
on Central Banking
Issue of 2009‒10‒24
forty-one papers chosen by
Alexander Mihailov
University of Reading

  1. A defence of the FOMC By Martin Ellison; Thomas J. Sargent
  2. FINANCIAL CRISES AND LIQUIDITY SHOCKS: A Bank-Run Perspective By Guillermo A. Calvo
  3. Macroeconomic Volatility and Terms of Trade Shocks By Dan Andrews; Daniel Rees
  4. Financial Globalization, Financial Crises and Contagion By Enrique G. Mendoza; Vincenzo Quadrini
  5. Second Order Accurate Approximation to the Rotemberg Model Around a Distorted Steady State By Tatiana Damjanovic; Charles Nolan
  6. Inflation targeting and private sector forecasts By Stephen G. Cecchetti; Craig Hakkio
  8. The US dollar shortage in global banking and the international policy response By Goetz von Peter; Patrick McGuire
  9. Information Criteria for Impulse Response Function Matching Estimation of DSGE Models By Alastair R. Hall; Atsushi Inoue; James M Nason; Barbara Rossi
  10. A sequential modelling of the VaR By Alain Monfort.
  11. Learning and Heterogeneity in GDP and Inflation Forecasts By Kajal Lahiri; Xuguang Sheng
  12. Political institutions and central bank independence revisited By Davide Ferrari; Barbara Pistoresi; Francesco Salsano
  13. On the Use of Density Forecasts to Identify Asymmetry in Forecasters¡¯ Loss Functions By Kajal Lahiri; Fushang Liu
  14. Measuring Forecast Uncertainty by Disagreement: The Missing Link By Kajal Lahiri; Xuguang Sheng
  15. Overconfidence, Monetary Policy Committees and Chairman Dominance By Carl Andreas Claussen; Egil Matsen; Øistein Røisland; Ragnar Torvik
  16. Inflation/unemployment regimes and the instability of the Phillips curve By Ormerod, Paul; Rosewell, Bridget; Phelps, Peter
  17. New panel tests to assess inflation persistence By Roy Cerqueti; Mauro Costantini; Luciano Gutierrez
  18. Analyzing aggregate real exchange rate persistence through the lens of sectoral data. By Laura Mayoral; Maria Dolores Gadea
  19. Heterogeneous dynamics, aggregation and the persistence of economic shocks. By Laura Mayoral
  20. Real-Time Inflation Forecasting in a Changing World By Jan J. J. Groen; Richard Paap; Francesco Ravazzolo
  21. Evaluating Exclusion-from-Core Measures of Inflation using Real-Time Data By Tierney, Heather L.R.
  22. Timeless perspective vs discretionary policymaking when the degree of inflation persistence is unknown By Juan Paez-Farrell
  23. One TV, One Price? By Jean Imbs; Haroon Mumtaz; Morten O. Ravn; Hélène Rey
  24. Estimating the implicit inflation target in the Euro area By Fève, P.; Matheron, J.; Sahuc, J-G.
  25. Monetary Asset Substitution in the Euro Area By Zagaglia, Paolo
  26. Evaluation of Nonlinear time-series models for real-time business cycle analysis of the Euro. By Monica Billio; Laurent Ferrara; Dominique Guegan; Gian Luigi Mazzi
  27. Economists, Incentives, Judgment, and the European CVAR Approach to Macroeconometrics By David Colander
  28. Exchange Rate Pass-through and Monetary Policy: How Strong is the Link? By Stephen Murchison
  29. The welfare effect of foreign monetary conservatism with non-atomistic wage setters By Vincenzo Cuciniello
  30. International monetary policy cooperation revisited: conservatism and non-atomistic wage setting By Vincenzo Cuciniello
  31. Monetary-Labor Interactions, International Monetary Regimes, and Central Bank Conservatism By Vincenzo Cuciniello
  32. Optimal Monetary and Fiscal Policy in the EMU: Does Fiscal Policy Coordination matter? By Chiara Forlati
  33. Macroeconomic interdependence under collective wage bargaining By Vincenzo Cuciniello
  34. Optimal Exchange-Rate Targeting with Large Labor Unions By Vincenzo Cuciniello; Luisa Lambertini
  35. Central Bank Economic Research: Output, Demand, Productivity, and Relevance By Miguel sarmiento
  36. Disinflation and unemployment in the euro area : A SVAR-based analysis By Fève, P.; Matheron, J.; Sahuc, J-G.
  37. "An Alternative View of Finance, Saving, Deficits, and Liquidity" By L. Randall Wray
  38. Medium Term Business Cycles in Developing Countries By Diego A. Comin; Norman Loayza; Farooq Pasha; Luis Serven
  39. Estonia and Euro Adoption: Small Country Challenges of Joining EMU By Zuzana Brixiova; Margaret Morgan; Andreas Wörgötter
  40. Iceland: Challenging Times for Monetary and Fiscal Policies By Andrea de Michelis
  41. A Note on the Volatilities of the Interest Rate and the Exchange Rate Under Different Monetary Policy Instruments: Mexico 1998-2008. By Guillermo Benavides; Carlos Capistrán

  1. By: Martin Ellison; Thomas J. Sargent
    Abstract: We defend the forecasting performance of the FOMC from the recent criticism of Christina and David Romer. Our argument is that the FOMC forecasts a worst-case scenario that it uses to design decisions that will work well enough (are robust) despite possible misspecification of its model. Because these FOMC forecasts are not predictions of what the FOMC expects to occur under its model, it is inappropriate to compare their performance in a horse race against other forecasts. Our interpretation of the FOMC as a robust policymaker can explain all the findings of the Romers and rationalises differences between FOMC forecasts and forecasts published in the Greenbook by the staff of the Federal Reserve System.
    Keywords: Forecasting, Monetary policy, Robustness
    JEL: C53 E52 E58
    Date: 2009
  2. By: Guillermo A. Calvo
    Abstract: This note is motivated by trying to understand the macroeconomic implications of assuming that periods of financial bonanza and turmoil are driven by financial innovation and collapse in line with the “bank run†literature of the Diamond-Dybvig (1983) variety. Bypassing a host of important but, for the present purposes, secondary details the note assumes that the initial effects of financial innovation and crash can be summarized by a parameter that determines the “liquidity†or “moneyness†of land or capital. This simplification helps to shed light on some issues that are at the center of the policy debate. In particular, one can show that preventing price deflation is not enough to offset asset meltdown. Furthermore, lower policy interest rates increase asset prices and steady-state output which, however, gets reversed as liquidity is destroyed. An interesting result is that, in the neighborhood of a first-best capital allocation, an increase in the moneyness of capital may lower the welfare of the representative individual, even if the higher liquidity of capital is sustainable and, hence, not destroyed by future crash. Moreover, an extension of the basic model supports the conjecture that low policy interest rates may have given incentives to the development of “shadow banking.â€
    JEL: E5 E58 F41 G2
    Date: 2009–10
  3. By: Dan Andrews (Reserve Bank of Australia); Daniel Rees (Reserve Bank of Australia)
    Abstract: This paper explores the effect of terms of trade volatility on macroeconomic volatility using a panel of 71 countries from 1971–2005. It finds that terms of trade volatility has a statistically significant and positive impact on the volatility of output growth and inflation, although the magnitudes of these effects depend on the policy framework and the structure of markets. Specifically, adopting a more flexible exchange rate tends to ameliorate the effect of terms of trade shocks on macroeconomic volatility. The paper also finds some evidence that a monetary policy regime that focuses on low inflation helps to moderate the volatility of output and inflation in the face of a volatile terms of trade. The same is true of financial market development in the case of output volatility. Using data on the expenditure components of GDP, the channels through which terms of trade shocks affect output are examined. The results suggest that terms of trade volatility has its largest effect on the volatility of consumption, exports and imports. There is evidence to suggest that greater financial market development helps to mitigate the effect of terms of trade volatility on consumption volatility, while monetary policy that focuses on low inflation is associated with lower volatility of imports.
    Keywords: terms of trade shocks; growth; inflation; structural reform
    JEL: E20 F41
    Date: 2009–10
  4. By: Enrique G. Mendoza; Vincenzo Quadrini
    Abstract: Two observations suggest that financial globalization played an important role in the recent financial crisis. First, more than half of the rise in net borrowing of the U.S. nonfinancial sectors since the mid 1980s has been financed by foreign lending. Second, the collapse of the U.S. housing and mortgage-backed-securities markets had worldwide effects on financial institutions and asset markets. Using an open-economy model where financial intermediaries play a central role, we show that financial integration leads to a sharp rise in net credit in the most financially developed country and leads to large asset price spillovers of country-specific shocks to bank capital. The impact of these shocks on asset prices are amplified by bank capital requirements based on mark-to-market.
    JEL: E44 F36 F41
    Date: 2009–10
  5. By: Tatiana Damjanovic; Charles Nolan
    Abstract: Less is known about social welfare objectives when it is costly to change prices, as in Rotemberg (1982), compared with Calvo-type models. We derive a quadratic approximate welfare function around a distorted steady state for the costly price adjustment model. We highlight the similarities and differences to the Calvo setup. Both models imply inflation and output stabilization goals. It is explained why the degree of distortion in the economy influences inflation aversion in the Rotemberg framework in a way that has no counterpart in the Calvo setup.
    Keywords: Price stickiness; Rotember model; costly price adjustment.
    JEL: E52 E61 E63
    Date: 2009–09
  6. By: Stephen G. Cecchetti; Craig Hakkio
    Abstract: Transparency is one of the biggest innovations in central bank policy of the past quarter century. Modern central bankers believe that they should be as clear about their objectives and actions as possible. However, is greater transparency always beneficial? Recent work suggests that when private agents have diverse sources of information, public information can cause them to overreact to the signals from the central bank, leading the economy to be too sensitive to common forecast errors. Greater transparency could be destabilizing. While this theoretical result has clear intuitive appeal, it turns on a combination of assumptions and conditions, so it remains to be established that it is of empirical relevance. In this paper we study the degree to which increased information about monetary policy might lead to individuals coordinating their forecasts. Specifically, we estimate a series of simple models to measure the impact of inflation targeting on the dispersion of private sector forecasts of inflation. Using a panel data set that includes 15 countries over 20 years we find no convincing evidence that adopting an inflation targeting regime leads to a reduction in the dispersion of private sector forecasts of inflation. While for some specifications adoption of inflation target does seem to reduce the standard deviation of inflation forecasts, the impact is rarely precise and always small.
    JEL: E31 E42 E52 E58
    Date: 2009–10
  7. By: Max Bruche (CEMFI, Centro de Estudios Monetarios y Financieros); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper develops a tractable general equilibrium model in which money markets provide structural funding to some banks. When bank default risk becomes significant, retail deposit insurance creates an asymmetry between banks that operate in savingsrich regions, which can remain financed at cheap risk-free rates, and in savings-poor regions, which have to pay either large spreads in money markets or high rates for the scarce regional savings. We show that this asymmetry can cause a severe distortion of the aggregate allocation of credit. When interdependencies across borrowers are large (e.g., via demand externalities), output and welfare losses are also large and can be dramatically reduced by an aggressive subsidization of money market borrowing. The analysis offers some insights on the rationale for responding to a money markets freeze with full-allotment fixed-rate lending policies by central banks or the extension of government guarantees on non-deposit liabilities.
    Date: 2009–06
  8. By: Goetz von Peter; Patrick McGuire
    Abstract: Among the policy responses to the global financial crisis, the international provision of US dollars via central bank swap lines stands out. This paper studies the build-up of stresses on banks' balance sheets that led to this coordinated policy response. Using the BIS international banking statistics, we reconstruct the worldwide consolidated balance sheets of the major national banking systems. This allows us to investigate the structure of banks' global operations across their offices in various countries, shedding light on how their international asset positions are funded across currencies and counterparties. The analysis first highlights why a country's "national balance sheet", a residency-based measure, can be a misleading guide to where the vulnerabilities faced by that country's national banking system (or residents) lie. It then focuses on banking systems' consolidated balance sheets, and shows how the growth (since 2000) in European and Japanese banks' US dollar assets produced structural US dollar funding requirements, setting the stage for the dollar shortage when interbank and swap markets became impaired.
    Keywords: international banking, financial crises, funding risk, US dollar shortage, central bank swap lines
    Date: 2009–10
  9. By: Alastair R. Hall; Atsushi Inoue; James M Nason; Barbara Rossi
    Abstract: We propose new information criteria for impulse response function matching estimators (IRFMEs). These estimators yield sampling distributions of the structural parameters of dynamic sto- chastic general equilibrium (DSGE) models by minimizing the distance between sample and theoretical impulse responses. First, we propose an information criterion to select only the responses that produce consistent estimates of the true but unknown structural parameters: the Valid Impulse Response Selection Criterion (VIRSC). The criterion is especially useful for mis-speci?ed models. Second, we propose a criterion to select the impulse responses that are most informative about DSGE model parameters: the Relevant Impulse Response Selection Criterion (RIRSC). These criteria can be used in combination to select the subset of valid impulse response functions with minimal dimension that yields asymptotically efficient estimators. The criteria are general enough to apply to impulse responses estimated by VARs, local projections, and simulation methods. We show that the use of our criteria signi?cantly a¤ects estimates and inference about key parameters of two well-known new Keynesian DSGE models. Monte Carlo evidence indicates that the criteria yield gains in terms of ?nite sample bias as well as o¤ering tests statistics whose behavior is better approximated by ?rst order asymptotic theory. Thus, our criteria improve on existing methods used to implement IRFMEs.
    Date: 2009
  10. By: Alain Monfort.
    Abstract: We consider the VaR associated with the global loss generated by a set risk sources. We propose a sequence of simple models incorporating progressively the notions of contagion due to instantaneous correlations, of serial correlation, of evolution of the instantaneous correlations, of volatility clustering, of conditional heteroskedasticity and of persistency of shocks. The tools used are the standard and extended Kalman filters.
    Keywords: VaR, factor models, correlation, volatility clustering, Kalman filter.
    JEL: C10 G11
    Date: 2009
  11. By: Kajal Lahiri; Xuguang Sheng
    Abstract: Using a Bayesian learning model with heterogeneity across agents, our study aims to identify the relative importance of alternative pathways through which professional forecasters disagree and reach consensus on the term structure of inflation and real GDP forecasts, resulting in different patterns of forecast accuracy. Forecast disagreement arises from two primary sources in our model: differences in the initial prior beliefs, and differences in the interpretation of new public information. Estimated model parameters, together with two separate case studies on (i) the dynamics of forecast disagreement in the aftermath of the 9/11 terrorist attack in the U.S. and (ii) the successful inflation targeting experience in Italy after 1997, firmly establish the importance of these two pathways to expert disagreement, and help to explain the relative forecasting accuracy of these two macroeconomic variables.
    Date: 2009
  12. By: Davide Ferrari; Barbara Pistoresi; Francesco Salsano
    Abstract: We build on earlier studies regarding Central Bank independence (CBI) by relating it to political, institutional and economic variables. The data suggest that CBI is positively related to the presence of federalism, the features of the electoral system and parties, the correlation between the shocks to the level of economic activity in the countries included in the sample and, for a sub-sample of economies, the convergence criteria to join the European Monetary Union (EMU).
    Keywords: ICentral Bank independence; institutional systems; variable selection
    JEL: E5
    Date: 2009–07
  13. By: Kajal Lahiri; Fushang Liu
    Abstract: Abstract: We consider how to use information from reported density forecasts from surveys to identify asymmetry in forecasters¡¯ loss functions. We show that, for the three common loss functions - Lin-Lin, Linex, and Quad-Quad - we can infer the direction of loss asymmetry by just comparing point forecasts and the central tendency (mean or median) of the underlying density forecasts. If we know the entire distribution of the density forecast, we can calculate the loss function parameters based on the first order condition of forecast optimality. This method is applied to forecasts for annual real output growth and inflation obtained from the Survey of Professional Forecasters (SPF). We find that forecasters treat underprediction of real output growth more dearly than overprediction, reverse is true for inflation.
    Date: 2009
  14. By: Kajal Lahiri; Xuguang Sheng
    Abstract: Using a standard decomposition of forecasts errors into common and idiosyncratic shocks, we show that aggregate forecast uncertainty can be expressed as the disagreement among the forecasters plus the perceived variability of future aggregate shocks. Thus, the reliability of disagreement as a proxy for uncertainty will be determined by the stability of the forecasting environment, and the length of the forecast horizon. Using density forecasts from the Survey of Professional Forecasters, we find direct evidence in support of our hypothesis. Our results support the use of GARCH-type models, rather than the ex post squared errors in consensus forecasts, to estimate the ex ante variability of aggregate shocks as a component of aggregate uncertainty.
    Date: 2009
  15. By: Carl Andreas Claussen (Sveriges Riksbank and Norges Bank (Central Bank of Norway)); Egil Matsen (Norwegian University of Science and Technology and Norges Bank); Øistein Røisland (Norges Bank (Central Bank of Norway)); Ragnar Torvik (Norwegian University of Science and Technology and Norges Bank)
    Abstract: We suggest that overconfidence among policymakers explains why formal decision power over monetary policy is given to committees, while much of the real power to set policy remains with central bank chairmen. Overconfidence implies that the chairman underweights advice from his staff, increasing policy risk if he alone decides. A committee with decision power reduces this risk, because it induces moderation from the chairman. Overconfidence also yields disagreement and dissent in the committee, consistent with evidence from monetary policy committees. As the chairman is on average better informed, through his wider access to the staff, this would give him a suboptimal influence if policy is set through simple majority voting. Giving the chairman extra decision power, through e.g. agenda-setting rights, restores his influence. A monetary policy committee with a strong chairman balances the risks and influence distortions that occur if policymakers are overconfident.
    Keywords: Central Bank Governance, Monetary Policy Committees, Overcon?dence, Agenda-setting
    JEL: D02 D71 E58
    Date: 2009–10–13
  16. By: Ormerod, Paul; Rosewell, Bridget; Phelps, Peter
    Abstract: Using the statistical technique of fuzzy clustering, regimes of inflation and unemployment are explored for the United States, the United Kingdom and Germany between 1871 and 2009. We identify for each country three distinct regimes in inflation/unemployment space. There is considerable similarity across the countries in both the regimes themselves and in the timings of the transitions between regimes. However, the typical rates of inflation and unemployment experienced in the regimes are substantially different. Further, even within a given regime, the results of the clustering show persistent fluctuations in the degree of attachment to that regime of inflation/unemployment observations over time. The economic implications of the results are that, first, the inflation/unemployment relationship experiences from time to time major shifts. Second, that it is also inherently unstable even in the short run. It is likely that the factors which govern the inflation/unemployment trade off are so multi-dimensional that it is hard to see that there is a way of identifying periods of short run Phillips curves which can be assigned to particular historical periods with any degree of accuracy or predictability. The short run may be so short as to be meaningless. The analysis shows that reliance on any kind of trade off between inflation and unemployment for policy purposes is entirely misplaced.
    Keywords: Phillips curve,inflation,structural change,fuzzy clustering
    JEL: C19 E31 N10
    Date: 2009
  17. By: Roy Cerqueti (University of Macerata); Mauro Costantini (University of Vienna); Luciano Gutierrez (University of Sassari)
    Abstract: <p><font face="CMR9" size="1"><font face="CMR9" size="1"><p align="left">In this paper we propose new panel tests to detect changes in persistence. The test statistics</p><p align="left">are used to test the null hypothesis of stationarity against the alternative of a change in</p><p align="left">persistence from I(0) to I(1), from I(1) to I(0), and in an unknown direction. The limiting</p><p align="left">distributions of the tests under the hypothesis of cross-sectional independence are derived.</p><p align="left">Cross-sectional dependence is also considered. The tests are applied to the in°ation rates of</p><p align="left">19 OECD countries over the period 1972-2008. Evidence of a change in persistence from I(1)</p><p align="left">to I(0) is found for a set of these countries</p></font></font></p>
    Keywords: Panel data,Persistence,Stationarity
    JEL: C12 C23
    Date: 2009–10
  18. By: Laura Mayoral; Maria Dolores Gadea
    Abstract: In this paper we analyze the persistence of aggregate real exchange rates (RERs) for a group of EU-15 countries by using sectoral data. The tight relation between aggregate and sectoral persistence recently investigated by Mayoral (2008) allows us to decompose aggregate RER persistence into the persistence of its different subcomponents. We show that the distribution of sectoral persistence is highly heterogeneous and very skewed to the right, and that a limited number of sectors are responsible for the high levels of persistence observed at the aggregate level. We use quantile regression to investigate whether the traditional theories proposed to account for the slow reversion to parity (lack of arbitrage due to nontradibilities or imperfect competition and price stickiness) are able to explain the behavior of the upper quantiles of sectoral persistence. We conclude that pricing to market in the intermediate goods sector together with price stickiness have more explanatory power than variables related to the tradability of the goods or their inputs.
    Keywords: PPP puzzle, real exchange rates, persistence, heterogeneous dynamics, aggregation bias, nontradability, imperfect competition, pricing-to-market.
    Date: 2009–10–13
  19. By: Laura Mayoral
    Abstract: It has been recently emphasized that, if individuals have heterogeneous dynamics, estimates of shock persistence based on aggregate data are significatively higher than those derived from its disaggregate counterpart. However, a careful examination of the implications of this statement on the various tools routinely employed to measure persistence is missing in the literature. This paper formally examines this issue. We consider a disaggregate linear model with heterogeneous dynamics and compare the values of several measures of persistence across aggregation levels. Interestingly, we show that the average persistence of aggregate shocks, as measured by the impulse response function (IRF) of the aggregate model or by the average of the individual IRFs, is identical on all horizons. This result remains true even in situations where the units are (short-memory) stationary but the aggregate process is long-memory or even nonstationary. In contrast, other popular persistence measures, such as the sum of the autoregressive coefficients or the largest autoregressive root, tend to be higher the higher the aggregation level. We argue, however, that this should be seen more as an undesirable property of these measures than as evidence of different average persistence across aggregation levels. The results are illustrated in an application using U.S. inflation data.
    Keywords: Heterogeneous dynamics, aggregation, persistence, impulse response function, sum of the autoregressive coefficients, U.S. inflation persistence.
    Date: 2009–10–13
  20. By: Jan J. J. Groen (Federal Reserve Bank of New York); Richard Paap; Francesco Ravazzolo (Norges Bank (Central Bank of Norway))
    Abstract: This paper revisits ination forecasting using reduced form Phillips curve forecasts, i.e., inflation forecasts using activity and expectations variables. We propose a Phillips curve-type model that results from averaging across different regression specifications selected from a set of potential predictors. The set of predictors includes lagged values of inflation, a host of real activity data, term structure data, nominal data and surveys. In each of the individual specifications we allow for stochastic breaks in regression parameters, where the breaks are described as occasional shocks of random magnitude. As such, our framework simultaneously addresses structural change and model certainty that unavoidably affects Phillips curve forecasts. We use this framework to describe PCE deflator and GDP deflator inflation rates for the United States across the post-WWII period. Over the full 1960-2008 sample the framework indicates several structural breaks across different combinations of activity measures. These breaks often coincide with, amongst others, policy regime changes and oil price shocks. In contrast to many previous studies, we find less evidence for autonomous variance breaks and inflation gap persistence. Through a real-time out-of-sample forecasting exercise we show that our model specification generally provides superior one-quarter and one-year ahead forecasts for quarterly inflation relative to a whole range of forecasting models that are typically used in the literature.
    Keywords: Inflation forecasting, Phillips correlations, real-time data, structural breaks, model uncertainty, Bayesian model averaging.
    JEL: C11 C22 C53 E31
    Date: 2009–08–01
  21. By: Tierney, Heather L.R.
    Abstract: Using parametric and nonparametric methods, inflation persistence is examined through the relationship between the exclusions-from-core measure of inflation and total inflation for two sample periods and five in-sample forecast horizons ranging from one to twelve quarters over fifty vintages of real-time data in two measures of inflation: personal consumption expenditure and the consumer price index. This paper finds that core inflation is only able to capture the overall trend of total inflation for the twelve-quarter in-sample forecast horizon using the consumer price index in both the parametric and nonparametric models in the longer sample period. The nonparametric model outperforms the parametric model for both data samples and for all five in-sample forecast horizons.
    Keywords: Inflation Persistence; Real-Time Data; Monetary Policy; Nonparametrics; In-Sample Forecasting
    JEL: C53 C14 E52
    Date: 2009–08
  22. By: Juan Paez-Farrell (Dept of Economics, Loughborough University)
    Abstract: It is often assumed that monetary policy in forward looking models yields higher welfare, measured in terms of the unconditional loss, when it operates under the timeless perspective than under discretion. This paper consider the robustness of such a result in a New Keynesian model when the degree of intrinsic inflation persistence is misperceived by the policymaker. It finds that for reasonable parameter values discretion can be superior to the timeless perspective. The reason for this stems from the fact that the timeless perspective policy varies more with the degree of inflation persistence than does the discretionary policy.
    Keywords: discretion, timeless perspective, inflation persistence, uncertainty
    JEL: E52 E58
    Date: 2009–09
  23. By: Jean Imbs; Haroon Mumtaz; Morten O. Ravn; Hélène Rey
    Abstract: We use a unique dataset on television prices across European countries and regions to investigate the sources of differences in price levels. Our findings are as follows: (i) Quality is a crucial determinant of price differences. Even in an integrated economic zone as Europe, rich economies tend to consume higher quality goods. This effect accounts for the lion’s share of international price dispersion. (ii) Sizable international price differentials subsist even for the same television sets. The average bilateral price difference is as high as 80 euros, or 8% of the average TV price in our sample. (iii) EMU countries display lower price dispersion than non-EMU countries. (iv) absolute price differentials and relative price volatility are positively correlated with exchange rate volatility, but not with conventional measures of transport costs. (v) Importantly we show brand premia are sizable. They differ markedly across borders, in a way that does not correlate with transport costs, nor exchange rate movements. Taken together, the evidence is consistent firms exploiting market power through brand values to price discriminate across borders.
    JEL: F0 F1 F15 F23 F41
    Date: 2009–10
  24. By: Fève, P.; Matheron, J.; Sahuc, J-G.
    Abstract: Euro area countries as a whole have experienced a marked downward trend over the 1980s. Over this period, the unemployment rate has increased and economic activity has been sluggish. Changes in the implicit inflation target, viewed as low frequency movements of inflation, might possibly explain these developments. To highlight this issue, the present study estimates the dynamics of the implicit inflation target in the euro zone over the period 1970Q1-2004Q4. Based on a small macroeconometric model, the implicit target, not known by the econometrician, is identified through a minimal set of theoretical restrictions: (i) the inflation target is a non stationary process, (ii) inflation is a monetary phenomenon in the long-run, and (iii) changes in the implicit target have no long-run effects whatsoever on real variables. The model is estimated so as to match output growth, changes in inflation and the ex post real interest rate. Our main results are: (i) inflation target shocks account for the bulk of nominal fluctuations; (ii) due to monetary policy inertia and nominal stickiness, changes in the target generate large swings in the real interest rate translating into substantial short-run effects on real variables; (ii) in spite of this inflation target shocks moderately impact on output dynamics.
    Keywords: Implicit inflation target, Macroeconometric modelling, Euro area.
    JEL: E31 E32 E52
    Date: 2009
  25. By: Zagaglia, Paolo
    Abstract: I estimate time-varying elasticities of substitution between monetary assets for the Euro area using the semi-nonparametric method of Gallant (1981). The estimated elasticities suggest are consistent with the assumption of imperfect substitution between asset. Furthermore, the elasticities provide little evidence for the presence of structural breaks in money demand in the period 2001-2003 suggested by the ECB (2003).
    Keywords: money demand; asset substitution; nonparametric methods
    JEL: C63 C14 E41
    Date: 2009–10–14
  26. By: Monica Billio (University Ca' Foscari of Venice); Laurent Ferrara (Banque de France); Dominique Guegan (Paris School of Economics - Centre d'Economie de la Sorbonne); Gian Luigi Mazzi (Eurostat)
    Abstract: In this paper, we aim at assessing Markov-switching and threshold models in their ability to identify turning points of economic cycles. By using vintage data that are updated on a monthly basis, we compare their ability to detect ex-post the occurrence of turning points of the classical business cycle, we evaluate the stability over time of the signal emitted by the models and assess their ability to detect in real-time recession signals. In this respect, we have built an historical vintage database for the Euro area going back to 1970 for two monthly macroeconomic variables of major importance for short-term economic outlook, namely the Industrial Production Index and the Unemployment Rate.
    Keywords: Business cycle, Euro zone, Markov switching model, SETAR mpdel, unemployment, industrial production.
    JEL: C22 C52
    Date: 2009–08
  27. By: David Colander
    Abstract: This paper argues that the DSGE approach to macroeconometrics is the dominant approach because it meets the institutional needs of the replicator dynamics of the profession, not because it is necessarily the best way to do macroeconometrics. It further argues that this “DSGE-theory first” approach is inconsistent with the historical approach that economists have advocated in the past and that the alternative European CVAR approach is much more consistent with economist’s historically used methodology, correctly understood. However, because the European CVAR approach requires explicit researcher judgment, it does not do well in the replicator dynamics of the profession. The paper concludes with the suggestion that there should be an increase in dialog between the two approaches.
    Keywords: methodology, macroeconometrics, general to specific, DSGE, VAR, judgment, incentives
    JEL: C10 A1
    Date: 2009–12
  28. By: Stephen Murchison
    Abstract: Several authors have presented reduced-form evidence suggesting that the degree of exchange rate pass-through to the consumer price index has declined in Canada since the early 1980s and is currently close to zero. Taylor (2000) suggests that this phenomenon, which has been observed for several other countries, may be due to a change in the behaviour of inflation. Specifically, moving from a high to a low-inflation environment has reduced the expected persistence of cost changes and, by consequence, the degree of pass-through to prices. This paper extends his argument, suggesting that this change in persistence is due to a change in the parameters of the central bank's policy rule. Evidence is presented for Canada indicating that policy has responded more aggressively to inflation deviations over the low pass-through period relative to the high pass-through period. We test the quantitative importance of this change in policy for exchange rate pass-through by varying the parameters of a simple monetary policy rule embedded in an open economy, dynamic stochastic general equilibrium model. Results suggest that increases in the aggressiveness of policy consistent with that observed for Canada are sufficient to effectively eliminate measured pass-through. However, this conclusion depends critically on the inclusion of price-mark-up shocks in the model. When these are excluded, a more modest decline to pass-through is predicted.
    Keywords: Exchange rates; Transmission of monetary policy
    JEL: F31 F41 E52
    Date: 2009
  29. By: Vincenzo Cuciniello (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: This paper sheds light on the real effects of foreign central bank’s degree of inflation aversion in presence of non-atomistic wage setters. It extends the Lippi’s (2003) framework to an open economy and identifies the key strategic mechanisms between monetary policy and wage-setting decisions so as to assess the real effects of domestic and foreign policy makers’ aversion to inflation. A main finding is that foreign central bank’s aversion to inflation always increases employment. The impact of domestic central bank’s aversion to inflation instead depends on the combination of three strategic effects.
    Keywords: Foreign central bank conservatism, centralized wage setting, open-economy macro
    JEL: E58 F41 J51
    Date: 2009–04
  30. By: Vincenzo Cuciniello (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: This paper presents a simple model of policy coordination in line with the New Open Economy Macroeconomics literature. I extent the analysis on non-cooperative toward cooperative solutions by incorporating a collective wage bargaining system and conservative central banks. It turns out that previous results on international monetary policy cooperation are modified such that cooperation is welfare improving. The finding in the model relies on wage setters’ perceptions about affecting monetary policy. It is shown that under cooperation wage setters perceive a tighter monetary policy, thereby inducing wage restraints.
    Keywords: Monetary policy games , International policy coordination , Central bank conservatism, Monopoly unions
    JEL: E58 F41 F42 J51
    Date: 2009–06
  31. By: Vincenzo Cuciniello (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: A two-country general equilibrium model with large wage setters and conservative monetary authorities is employed to investigate the welfare implications of three international monetary regimes: i) non-cooperative, ii) cooperative, and iii) monetary union. The analysis shows that the unions’ wage claims depend on three strategic effects which are substantially different between the international policy arrangements. In contrast with recent studies, a switch from non-cooperation to monetary union is welfare improving with a sufficiently conservative central bank because unions perceive wage hikes as delivering lower terms-of-trade gains; while a switch from non-cooperation to cooperation is always beneficial because wage hikes do not yield any terms-of-trade gain. Finally, the paper qualifies Lippi’s (2003) findings.
    Keywords: Central bank conservatism, non-atomistic wage setting, open-economy macro, monetary regime
    JEL: E42 E58 F33 F41 J5
    Date: 2009–02
  32. By: Chiara Forlati (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: I develop and analyze a DSGE model of a currency union to revise the question of how to conduct monetary and fiscal policy in countries that share the same currency. In contrast with the previous literature which assumes coordination, this paper analyzes the case where coordination lacks among fiscal authorities as well as between fiscal and monetary authorities. I show that the normative prescriptions emphasized by former analyses are not valid any more once policymakers are not coordinated. Indeed, in that case the common central bank does not stabilize the average union in ation as if it were in a closed economy because it has to take into account the distortions caused by the lack of coordination among fiscal policymakers. At the same time, if there is not a common agreement to coordinate fiscal policies, autonomous governments should use government expenditure as a stabilization tool even if shocks are symmetric.
    Keywords: Monetary and Fiscal Policy, Policy Coordination
    JEL: E52 E58 E62 F42
    Date: 2006–08
  33. By: Vincenzo Cuciniello (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: This paper uses a two-country, sticky-price model with non-atomistic wage setters to study the role of collective wage bargaining in the propagation of monetary shocks. I find that the welfare transmissions of a monetary expansion are reinforced by different labor market structures. Non-atomistic domestic unions anticipate that their wage demands raise real labor income through a movement of the terms of trade. This leads to an additional channel of transmission of monetary policy that goes through aggregate supply. Yet, workers benefit more from a monetary expansion when the exchange rate pass-through is not limited and the elasticity of substitution across traded goods is sizable. It follows that wage mark-ups charged by unions endogenously vary with those structural parameters. In particular, labor and product market distortions are strategic substitute in affecting the perceived labor demand elasticity.
    Keywords: non-atomistic agents, interdependence, exchange rate fluctuation, wage setting
    JEL: F41 F42 J5
    Date: 2009–07
  34. By: Vincenzo Cuciniello (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland); Luisa Lambertini (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: We study whether monetary policy should target the exchange rate in a two-country model with non-atomistic wage setters, non-traded goods and different degrees of exchange-rate pass through. Commitment to an exchange rate target reduces the labor market distortion. Large labor unions anticipate that higher wages depreciate the exchange rate, which triggers an increase in the interest rate and restrain wage demands. However, reduced exchange rate flexibility worsens the distortion stemming from preset pricing. Targeting the nominal exchange rate will be optimal when the labor market distortion is larger than the preset-pricing one. This result arises with cooperation both under producer and local currency pricing, even though the optimal degree of exchange-rate targeting is higher under local currency pricing. In the Nash equilibrium, the terms-of-trade effect raises optimal wage mark-ups thereby reducing the optimal weight on the exchange rate target. The terms-of-trade effect is stronger as openness and substitutability among Home and Foreign goods increase.
    Keywords: Monetary policy, International Finance, Open-Economy Macroeconomics
    JEL: F3 F41 E52
    Date: 2009–05
  35. By: Miguel sarmiento
    Abstract: The economic research of 30 central banks in OECD and Latin America countries from 2000 to 2007 is evaluated in this study. An international comparison based on four indexes that measure central bank research output, demand, productivity and relevance is included. From this view, the European Central Bank, the United States Federal Reserve Bank-Board of Governors- and the Bank of Canada showed the best results. The Central Bank of Colombia achieves an important position among the central banks selected for the study and holds that position in most of the indexes. Three aspects of research were examined in depth: i) focus of the research agenda, ii) the way research is organized, and iii) strategies for its development for six leading central banks in the sample, based on the results of the measure, including the Central Bank of Colombia. The study shows a tendency of central banks to develop studies with academic institutions. This practice allows them to broad the range of their analysis, by having an outside perspective, while getting expertise with recent techniques and theories for better economic analysis, which contributes to policy design.
    Date: 2009–10–12
  36. By: Fève, P.; Matheron, J.; Sahuc, J-G.
    Abstract: The present paper investigates the dynamic effects of disinflation shocks for a number of real macroeconomic variables in the euro area. Using structural VARs, we identify disinflation shocks as the only shocks that can exert a long--run effect on inflation as well as other nominal variables cointegrating with inflation. These shocks are found to generate large recessionary effects, notably when it comes to investment, and triggers a persistent rise in unemployment and in the real interest rate. The analysis is complemented by computing inefficiency measures on goods and labor markets. We show that, after a disinflation shock, inefficiencies in the labor market seem to prevail. These conclusions are robust to modifications of our baseline identification scheme.
    Keywords: SVAR, long-run restrictions, disinflation.
    JEL: C32 E31 E52
    Date: 2009
  37. By: L. Randall Wray
    Abstract: This paper contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity. The conventional view on the cause of the current global financial crisis points first to excessive United States trade deficits that are supposed to have "soaked up" global savings. Worse, this policy was ultimately unsustainable because it was inevitable that lenders would stop the flow of dollars. Problems were compounded by the Federal Reserve's pursuit of a low-interest-rate policy, which involved pumping liquidity into the markets and thereby fueling a real estate boom. Finally, with the world awash in dollars, a run on the dollar caused it to collapse. The Fed (and then the Treasury) had to come to the rescue of U.S. banks, firms, and households. When asset prices plummeted, the financial crisis spread to much of the rest of the world. According to the conventional view, China, as the residual supplier of dollars, now holds the fate of the United States, and possibly the entire world, in its hands. Thus, it's necessary for the United States to begin living within its means, by balancing its current account and (eventually) eliminating its budget deficit. I challenge every aspect of this interpretation. Our nation operates with a sovereign currency, one that is issued by a sovereign government that operates with a flexible exchange rate. As such, the government does not really borrow, nor can foreigners be the source of dollars. Rather, it is the U.S. current account deficit that supplies the net dollar saving to the rest of the world, and the federal government budget deficit that supplies the net dollar saving to the nongovernment sector. Further, saving is never a source of finance; rather, private lending creates bank deposits to finance spending that generates income. Some of this income can be saved, so the second part of the saving decision concerns the form in which savings might be held—as liquid or illiquid assets. U.S. current account deficits and federal budget deficits are sustainable, so the United States does not need to adopt austerity, nor does it need to look to the rest of the world for salvation. Rather, it needs to look to domestic fiscal stimulus strategies to resolve the crisis, and to a larger future role for government in helping to stabilize the economy.
    Keywords: Finance; Saving; Budget Deficits; Current Account Deficits; Financial Crisis
    JEL: E12 E21 E22 E42 E63 F32
    Date: 2009–10
  38. By: Diego A. Comin; Norman Loayza; Farooq Pasha; Luis Serven
    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.
    JEL: E3 F1 F2 F4 O3
    Date: 2009–10
  39. By: Zuzana Brixiova; Margaret Morgan; Andreas Wörgötter
    Abstract: Estonia gave up the exchange rate and monetary policy tools of macroeconomic management when it introduced its currency board in 1992. While the currency board arrangement served the country well during transition in the 1990s, it offers limited flexibility to implement policies that would ease the EU convergence as well as mitigate the global financial and economic crisis. The ongoing financial crisis has made euro adoption more attractive than ever and put it on the top of the country’s policy agenda. However, shocks affecting Estonia are only weakly synchronized with those of the euro area, and the structure of its economy also notably differs from the euro zone. To benefit fully from joining the EMU, Estonia must strengthen other adjustment mechanisms to shocks, including flexibility of the labour market, further improving its environment to do business and a framework, which allows for anti-cyclical fiscal policies.<P>L’Estonie et l’adoption de l’euro : Les problèmes que pose à un petit pays l’adhésion à l’UEM<BR>En mettant en place un régime de caisse d’émission en 1992, l’Estonie a renoncé pour sa gestion macroéconomique aux instruments que constituent la politique de taux de change et la politique monétaire. Tout en ayant été très utile pour le pays durant la période de transition des années 1990, le régime de caisse d’émission n’offre qu’une souplesse limitée pour mettre en œuvre les mesures qui faciliteraient la convergence par rapport à l’UE et qui atténueraient aussi la crise financière et économique mondiale. Du fait de la crise financière actuelle, l’adoption de l’euro est plus attrayante que jamais et est une des priorités du pays. Malgré tout, les chocs que subit l’Estonie ne sont que faiblement synchronisés avec ceux que connaît la zone euro et la structure de l’économie estonienne est également assez différente de celle de l’économie de la zone euro. Pour bénéficier pleinement de la participation à l’UEM, l’Estonie devra renforcer d’autres mécanismes d’ajustement aux chocs économiques ; il lui faudra un marché du travail plus flexible, un environnement plus propice aux activités industrielles et commerciales et un cadre qui lui permette de mener des actions budgétaires anticycliques.
    Keywords: EMU, UME, Estonia, Estonie, business cycle synchronization, synchronisation du cycle conjoncturel, structural VAR, VAR structurelle
    JEL: C53 E32 E42
    Date: 2009–10–13
  40. By: Andrea de Michelis
    Abstract: Monetary and fiscal policies face huge challenges: the banking sector has collapsed; the economy is in the midst of a deep recession; the exchange rate has plunged; capital flows have been frozen; inflation is elevated; public debt has risen; source of revenues have disappeared; social needs have increased; and the unemployment insurance fund has been nearly depleted. Against this difficult background, this paper discusses what policy makers should do in order to restore balance in the Icelandic economy and lay out the foundations for a sustainable recovery. The key recommendations are to seek entry in the euro area and implement the fiscal consolidation measures necessary to comply with the IMF programme.<P>Islande : Une période délicate pour la politique monétaire et budgétaire<BR>La politique monétaire et budgétaire est confrontée à de graves problèmes : le système bancaire s’est effondré ; l’économie traverse une profonde récession ; le taux de change s’est beaucoup déprécié ; les mouvements de capitaux se sont interrompus ; l’inflation est forte ; la dette publique a augmenté ; des sources de recettes ont disparu ; les besoins sociaux se sont accrus ; les ressources du fonds d’assurance chômage sont presque épuisées. Dans ce sombre contexte, cette étude expose ce que les autorités devraient faire pour rétablir l’équilibre de l’économie islandaise et poser les bases d’une reprise durable. Il leur est surtout recommandé de chercher à adhérer à la zone de l’euro et d’appliquer les mesures d’assainissement budgétaire nécessaires pour se conformer au programme du FMI.
    Keywords: impôt, Iceland, European Union, Union européenne, zone Euro, fiscal consolidation, euro area, inflation, inflation, inflation expectation, anticipation d'inflation, Islande, tax, assainissement budgétaire, inflation targeting, ciblage de l’inflation, public investment, investissement public, volatility, volatilité, capital controls, contrôle des mouvements de capitaux, efficiency of social spending, efficience des dépenses sociales, exchange rate targeting, objectif de taux de change, fiscal policy framework, cadre de la politique budgétaire, optimal currency area, policy credibility, crédibilité des politiques, producer support in agriculture, soutien aux producteurs dans l’agriculture, public-sector wages, salaires dans le secteur public, student-to-teacher ratio, nombre d’élèves par enseignant
    JEL: E21 E42 E52 E62 H51 H52 H60
    Date: 2009–10–09
  41. By: Guillermo Benavides; Carlos Capistrán
    Abstract: To advance our understanding of the mechanisms through which monetary policy affect the economy, in this note we analyze the volatilities of the Mexican short-term interest rate and of the peso-Dollar exchange rate under two monetary policy instruments: a non-borrowed reserves requirement target (the "Corto") and an interest rate target. Using tests for multiple structural changes, we document that both volatilities decreased around the time Banco de México started the transition from the former to the latter. With respect to the volatility transmission from interest rates to exchange rates and vice versa, we find, using a bivariate GARCH model and causality-in-variance tests, bi-causality during the period of the Corto, but no causal relation after the transition started.
    Keywords: Corto, granger causality, multiple structural breaks, multivariate volatility.
    JEL: C22 E43 E52 F31
    Date: 2009–10

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