nep-cba New Economics Papers
on Central Banking
Issue of 2009‒10‒31
48 papers chosen by
Alexander Mihailov
University of Reading

  1. Can Learnability Save New-Keynesian Models? By John H. Cochrane
  2. Prices and quantities in the monetary policy transmission mechanism By Tobias Adrian; Hyun Song Shin
  3. Financial intermediaries and monetary economics By Tobias Adrian; Hyun Song Shin
  4. Monetary tightening cycles and the predictability of economic activity By Arturo Estrella; Tobias Adrian
  5. Why are the 2000s so different from the 1970s? A structural interpretation of changes in the macroeconomic effects of oil prices By Olivier J. Blanchard; Marianna Riggi
  6. Cross-country causes and consequences of the 2008 crisis: international linkages and American exposure By Andrew K. Rose; Mark M. Spiegel
  7. Cointegrated TFP processes and international business cycles By Pau Rabanal; Juan F. Rubio-Ramirez; Vicente Tuesta
  8. Cointegrated TFP Processes and International Business Cycles By Pau Rabanal; Vicente Tuesta; Juan F. Rubio-Ramirez
  9. The Sub-Prime Crisis and UK Monetary Policy By Martin, Christopher; Milas, C.
  10. Causes of the Financial Crisis: An Assessment using UK Data By Martin, Christopher; Milas, C
  11. Revised System for the Classification of Exchange Rate Arrangements By Harald Anderson; Romain Veyrune; Annamaria Kokenyne; Karl Friedrich Habermeier
  12. The Effectiveness of Central Bank Interventions During the First Phase of the Subprime Crisis By Heiko Hesse; Nathaniel Frank
  13. La crisi e le responsabilità della teoria economica: la paura della complessità By Sergio Bruno
  14. Credit crises, money, and contractions: A historical view By Michael D. Bordo; Joseph G. Haubrich
  15. The Uncertainty Channel of Contagion By Prakash Kannan; Fritzi Köhler-Geib
  16. Monetary policy implementation frameworks: a comparative analysis By Antoine Martin; Cyril Monnet
  17. Large Changes in Fiscal Policy: Taxes Versus Spending By Alberto F. Alesina; Silvia Ardagna
  18. Optimal Monetary Policy When Asset Markets are Incomplete By R. Anton BRAUN; NAKAJIMA Tomoyuki
  19. Exchange Rates and Stock Prices in the Long Run and Short Run By Morley, Bruce
  20. Do uncertainty and technology drive exchange rates? By Pablo A. Guerron-Quintana
  21. Reverse Shooting of Exchange Rates By Peijie Wang
  22. State-dependent pricing, local-currency pricing, and exchange rate pass-through By Anthony Landry
  23. Taylor-type rules and permanent shifts in productivity growth By William T. Gavin; Benjamin D. Keen; Michael R. Pakko
  24. Inflation and monetary regimes By Gerald P. Dwyer; Mark Fisher
  25. Money Talks. By Marie Hoerova; Cyril Monnet; Ted Temzelides
  26. Inflation Expectations: Does the Market Beat Professional Forecasts? By Makram El-Shagi
  27. How robust are popular models of nominal frictions? By Benjamin D. Keen; Evan F. Koenig
  28. Identifying Government Spending Shocks: It's All in the Timing By Valerie A. Ramey
  29. The local effects of monetary policy By Neville Francis; Michael T. Owyang; Tatevik Sekhposyan
  30. Household inflation experiences in the U.S.: a comprehensive approach By Bart Hobijn; Kristin Mayer; Carter Stennis; Giorgio Topa
  31. Controlling Capital? Legal Restrictions and the Asset Composition of International Financial Flows By Martin Schindler; Mahir Binici; Michael Hutchison
  32. Testing the structural interpretation of the price puzzle with a cost channel model By Castelnuovo, Efrem
  33. Macroeconomic forecasting with real-time data: an empirical comparison By Heij, C.; Dijk, D.J.C. van; Groenen, P.J.F.
  34. External Balance in Low Income Countries By Thierry Tressel; Lone Engbo Christiansen; Alessandro Prati; Luca Antonio Ricci
  35. Efectos del incremento del precio del petróleo en la economía española: Análisis de cointegración y de la política monetaria mediante reglas de Taylor By Hernandez Martinez, Fernando
  36. In-sample tests of predictive ability: a new approach By Todd E. Clark; Michael W. McCracken
  37. Nested forecast model comparisons: a new approach to testing equal accuracy By Todd E. Clark; Michael W. McCracken
  38. Constructing Forecast Confidence Bands During the Financial Crisis By Ondra Kamenik; Marianne Johnson; Kevin Clinton; Huigang Chen; Douglas Laxton
  39. Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters. By Magnus Andersson; Boris Hofmann
  40. The effects of monetary policy on unemployment dynamics under model uncertainty: Evidence from the US and the euro area. By Carlo Altavilla; Matteo Ciccarelli
  41. Inflation Dynamics in the New EU Member States: How Relevant Are External Factors? By Alexander Mihailov; Fabio Rumler; Johann Scharler
  42. Evaluating inflation determinants with a money supply rule in four Central and Eastern European EU member states By Mehrotra, Aaron; Slacik, Tomas
  43. Monetary and fiscal policy aspects of indirect tax changes in a monetary union. By Anna Lipińska; Leopold von Thadden
  44. Unconventional Central Bank Measures for Emerging Economies By Etienne B. Yehoue; Kotaro Ishi; Mark R. Stone
  45. The WTO: Theory and Practice By Kyle Bagwell; Robert W. Staiger
  46. Evaluating German Business Cycle Forecasts Under an Asymmetric Loss Function By Jörg Döpke; Ulrich Fritsche; Boriss Siliverstovs
  47. The Dual Stickiness Model and Inflation Dynamics in Spain By Torres Torres, Diego José
  48. Monetary and Exchange Rate Policies for the Perfect Storm: The Case of The Bahamas, Barbados, Guyana, Haiti, Jamaica, Suriname, and Trinidad & Tobago By Andre Minella; Alessandro Rebucci; Nelson Souza-Sobrino

  1. By: John H. Cochrane
    Abstract: Bennett McCallum (2009), applying Evans and Honkapohja's (2001) results, argues that "learnability" can save New-Keynesian models from their indeterminacies. He claims the unique bounded equilibrium is learnable, and the explosive equilibria are not. However, he assumes that agents can directly observe the monetary policy shock. Reversing this assumption, I find the opposite result: the bounded equilibrium is not learnable and the unbounded equilibria are learnable. More generally, I argue that a threat by the Fed to move to an "unlearnable" equilibrium for all but one value of inflation is a poor foundation for choosing the bounded equilibrium of a New-Keynesian model.
    JEL: E0
    Date: 2009–10
  2. By: Tobias Adrian; Hyun Song Shin
    Abstract: Central banks have a variety of tools for implementing monetary policy, but the tool that has received the most attention in the literature has been the overnight interest rate. The financial crisis that erupted in the summer of 2007 has refocused attention on other channels of monetary policy, notably the transmission of policy through the supply of credit and overall conditions in the capital markets. In 2008, the Federal Reserve put into place various lender-of-last-resort programs under section 13(3) of the Federal Reserve Act in order to cushion the strains on financial intermediaries' balance sheets and thereby target the unusually wide spreads in a variety of credit markets. While classic monetary policy targets a price (for example, the federal funds rate), the liquidity facilities affect balance-sheet quantities. The financial crisis forcefully demonstrated that the collapse of the financial sector's balance-sheet capacity can have powerful adverse effects on the real economy. We reexamine the distinctions between prices and quantities in monetary policy transmission.
    Keywords: Interest rates ; Capital market ; Intermediation (Finance) ; Monetary policy ; Credit ; Liquidity (Economics)
    Date: 2009
  3. By: Tobias Adrian; Hyun Song Shin
    Abstract: We reconsider the role of financial intermediaries in monetary economics. We explore the hypothesis that financial intermediaries drive the business cycle by way of their role in determining the price of risk. In this framework, balance sheet quantities emerge as a key indicator of risk appetite and hence of the "risk-taking channel" of monetary policy. We document evidence that the balance sheets of financial intermediaries reflect the transmission of monetary policy through capital market conditions. We find short-term interest rates to be important in influencing the size of financial intermediary balance sheets. Our findings suggest that the traditional focus on the money stock for the conduct of monetary policy may have more modern counterparts, and we suggest the importance of tracking balance sheet quantities for the conduct of monetary policy.
    Keywords: Interest rates ; Capital market ; Intermediation (Finance) ; Monetary policy ; Risk ; Business cycles
    Date: 2009
  4. By: Arturo Estrella; Tobias Adrian
    Abstract: Eleven of fourteen monetary tightening cycles since 1955 were followed by increases in unemployment; three were not. The term spread at the end of these cycles discriminates almost perfectly between subsequent outcomes, but levels of nominal or real interest rates, as well as other interest rate spreads, generally do not.
    Keywords: Monetary policy ; Business cycles ; Unemployment ; Interest rates
    Date: 2009
  5. By: Olivier J. Blanchard; Marianna Riggi
    Abstract: In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, and at least until the end of 2007, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach Blanchard and Gali (2007a) argued that this has reflected in large part a change in the causal relation from the price of oil to output and inflation. In order to shed light on the possible factors behind the decrease in the macroeconomic effects of oil price shocks, we develop a new-Keynesian model, with imported oil used both in production and consumption, and we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of the two samples (pre and post 1984), the distance between the empirical SVAR-based impulse response functions and those implied by the model. Our results point to two relevant changes in the structure of the economy, which have modified the transmission mechanism of the oil shock: vanishing wage indexation and an improvement in the credibility of monetary policy. The relative importance of these two structural changes depends however on how we formalize the process of expectations formation by economic agents.
    JEL: E3 E52
    Date: 2009–10
  6. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 85 countries; we focus on international linkages that may have allowed the crisis to spread across countries. Our model of the cross-country incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. The causes we consider are both national (such as equity market run-ups that preceded the crisis) and, critically, international financial and real linkages between countries and the epicenter of the crisis. We consider the United States to be the most natural origin of the 2008 crisis, though we also consider six alternative sources of the crisis. A country holding American securities that deteriorate in value is exposed to an American crisis through a financial channel. Similarly, a country which exports to the United States is exposed to an American downturn through a real channel. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to find strong evidence that international linkages can be clearly associated with the incidence of the crisis. In particular, countries heavily exposed to either American assets or trade seem to behave little differently than other countries; if anything, countries seem to have benefited slightly from American exposure.
    Keywords: Financial crises ; Econometric models
    Date: 2009
  7. By: Pau Rabanal; Juan F. Rubio-Ramirez; Vicente Tuesta
    Abstract: A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that total factor productivity processes for the United States and the rest of the world are characterized by a vector error correction model (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also, we show that the observed increase of the real exchange rate volatility with respect to output in the past twenty years can be explained by changes in the parameter of the VECM.
    Date: 2009
  8. By: Pau Rabanal; Vicente Tuesta; Juan F. Rubio-Ramirez
    Abstract: A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that TFP processes for the U.S. and the "rest of the world," is characterized by a vector error correction (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also we show that the observed increase of the real exchange rate volatility with respect to output in the last 20 year can be explained by changes in the parameter of the VECM.
    Keywords: Business cycles , Consumer goods , Demand , Economic models , Exchange rates , External shocks , Industrial production , International trade , Price elasticity , Prices , Private consumption , Productivity , Real effective exchange rates , Spillovers ,
    Date: 2009–09–29
  9. By: Martin, Christopher; Milas, C.
    Abstract: The “sub-prime” crisis, which led to major turbulence in global financial markets beginning in mid-2007, has posed major challenges for monetary policymakers. We analyse the impact on monetary policy of the widening differential between policy rates and the 3-month Libor rate, the benchmark for private sector interest rates. We show that the optimal monetary policy rule should include the determinants of this differential, adding an extra layer of complexity to the problems facing policymakers. Our estimates reveal significant effects of risk and liquidity measures, suggesting the widening differential between base rates and Libor was largely driven by a sharp increase in unsecured lending risk. We calculate that the crisis increased libor by up to 60 basis points; in response base rates fell further and quicker than would otherwise have happened as policymakers sought to offset some of the contractionary effects of the sub-prime crisis
    Keywords: optimal monetary policy; sub-prime crisis
    Date: 2009
  10. By: Martin, Christopher; Milas, C
    Abstract: We present empirical evidence that the marked rise in liquidity in 2001-2007 was due to large and persistent current account deficits and loose monetary policy. If this increase in liquidity was a pre-condition for the financial crisis that began in July 2007, we can conclude that loose monetary and the deterioration in current account balances were causes of the financial crisis.
    Keywords: financial crisis; liquidity; monetary policy; global imbalances
    Date: 2009
  11. By: Harald Anderson; Romain Veyrune; Annamaria Kokenyne; Karl Friedrich Habermeier
    Abstract: Since 1998, the staff of the International Monetary Fund has published a classification of countries' de facto exchange rate arrangements. Experience in operating this classification system has highlighted a need for changes. The present paper provides information on revisions to the system in early 2009. The changes are expected to allow for greater consistency and objectivity of classifications across countries, expedite the classification process, conserve resources, and improve transparency.
    Keywords: Cross country analysis , Currency boards , Currency pegs , Data collection , Data quality assessment framework , Exchange rate developments , Exchange rates , Floating exchange rates , Foreign exchange , Fund role , Publications , Transparency ,
    Date: 2009–09–29
  12. By: Heiko Hesse; Nathaniel Frank
    Abstract: This paper provides evidence that central bank interventions had a statistically significant impact on easing stress in unsecured interbank markets during the first phase of the subprime crisis which began in July 2007. Extraordinary liquidity provisions, such as the Term Auction Facility by the Federal Reserve, are analyzed. First a decomposition of the Libor-OIS spread indicates that credit premia increased in importance as the crisis deepened. Second, using Markov switching models, central bank operations are then graphically associated with reductions in term funding stress. Finally, bivariate VAR and GARCH models are adopted to econometrically quantified these impacts. While helpful in compressing Libor spreads, the economic magnitudes of central interventions have overall not been very large.
    Keywords: Bank credit , Banking sector , Central bank policy , Central banks , Credit risk , Economic models , Financial crisis , Liquidity management , Loans , Monetary policy , Risk management ,
    Date: 2009–09–25
  13. By: Sergio Bruno (Dipartimento di Economia, Sapienza University of Rome Italy)
    Abstract: The debate on the financial crisis risks to hide the black holes which are nested in accepted theories and policy guidelines. Among such black holes there are important issues: how money is created in a growing economy, which is the role of wealth assets not linked with current production, which are the relations between such phenomena and monetary savings, how chronological time affects production and in its changes, how the emergence of sophisticated contracts and the explosion of discretionary behaviours have complicated the problem of coordination. The paper, which aims at reaching an audience of social scientists wider than the economists’ community, shows that the endogenous creation of money for financing the productive activities (Wicksell) is unlikely to be sufficient to feed a moving economy. Additional money is likely to be needed. It can be provided by public deficit or by credit going to finance speculative investments. In the meanwhile monetary savings have a high probability to result, in developed economies, in excess with respect to productive investments. These interrelated elements may imply an inflation concerning the prices of unproductive assets and a possible displacement of real activities. However, while the inflation concerning productive flows is considered as an evil, everybody seems to be happy when the values of assets not directly connected with current production increase, and the central banks end up admitting that they support such tendencies. The paper discusses how we ought to revise policy strategies, favouring a non-Keynesian policy of deficit spending linked to long lasting programs and adopting banking policies for the financing of industrial projects.
    Date: 2009
  14. By: Michael D. Bordo; Joseph G. Haubrich
    Abstract: The relatively infrequent nature of major credit distress events makes a historical approach particularly useful. Using a combination of historical narrative and econometric techniques, we identify major periods of credit distress from 1875 to 2007, examine the extent to which credit distress arises as part of the transmission> of monetary policy, and document the subsequent effect on output. Using turning points defined by the Harding-Pagan algorithm, we identify and compare the timing, duration, amplitude, and comovement of cycles in money, credit, and output. Regressions show that financial distress events exacerbate business cycle downturns both in the nineteenth and twentieth centuries and that a confluence of such events makes recessions even worse.
    Keywords: Monetary policy ; Credit ; Business cycles
    Date: 2009
  15. By: Prakash Kannan; Fritzi Köhler-Geib
    Abstract: The 2007 subprime crisis in the U.S. triggered a succession of financial crises around the globe, reigniting interest in the contagion phenomenon. Not all crises, however, are contagious. This paper models a new channel of contagion where the degree of anticipation of crises, through its impact on investor uncertainty, determines the occurrence of contagion. Incidences of surprise crises lead investors to doubt the accuracy of their informationgathering technology, which endogenously increases the probability of crises elsewhere. Anticipated crisis, instead, have the opposite effect. Importantly, this channel is empirically shown to have an independent effect beyond other contagion channels.
    Keywords: Capital markets , Cross country analysis , Currencies , Economic models , Financial crisis , Investment , Sovereign debt , Spillovers , Stock markets ,
    Date: 2009–10–08
  16. By: Antoine Martin; Cyril Monnet
    Abstract: The authors compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, while the second framework relies only on open market operations. They show that the Friedman rule cannot be implemented when the central bank uses standing facilities, while it can be implemented with open market operations. For a given rate of inflation, the authors show that standing facilities unambiguously achieve higher welfare than just conducting open market operations. They conclude that elements of both frameworks should be combined. Also, their results suggest that any monetary policy implementation framework should remunerate both required and excess reserves.
    Keywords: Monetary policy ; Open market operations ; Banks and banking, Central
    Date: 2009
  17. By: Alberto F. Alesina; Silvia Ardagna
    Abstract: We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.
    JEL: H2 H3
    Date: 2009–10
  18. By: R. Anton BRAUN; NAKAJIMA Tomoyuki
    Abstract: his paper considers the properties of an optimal monetary policy when households are subject to counter-cyclical uninsured income shocks. We develop a tractable incomplete-markets model with Calvo price setting. In our model the welfare cost of business cycles is large when the variance of income shocks is counter-cyclical. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.
    Date: 2009–10
  19. By: Morley, Bruce
    Abstract: Using the ARDL bounds testing approach to cointegration this paper provides evidence of a stable long run relationship between the exchange rate and stock prices for the UK, Japan and Swiss currencies with respect to the US dollar. The resultant error correction models suggest a positive relationship between stock prices and the exchange rate, which in an out-of-sample forecast outperforms the random walk. We compare these results with a similar model incorporating interest rates, suggested by Solnik (1987), however this does not in general improve the results.
    Keywords: Exchange Rates; Stock Prices; Forecast; Cointegration
    Date: 2009
  20. By: Pablo A. Guerron-Quintana
    Abstract: This paper investigates the extent to which technology and uncertainty contribute to fluctuations in real exchange rates. Using a structural VAR and bilateral exchange rates, the author finds that neutral technology shocks are important contributors to the dynamics of real exchange rates. Investment-specific and uncertainty shocks have a more restricted effect on international prices. All three disturbances cause short-run deviations from uncovered interest rate parity.
    Keywords: Foreign exchange ; Uncertainty ; Technological innovations
    Date: 2009
  21. By: Peijie Wang (University of Hull, IESEG School of Management)
    Abstract: Reverse shooting of the exchange rate has been put forward in this paper by scrutinizing the adjustment and evolution of the exchange rate towards its new long-run equilibrium level following a change in money supply. Joint and sequential effects of covered interest rate parity and the sticky price on the rise, from the short-term through the long-run horizon, result in a feature of reverse shooting of the exchange rate. Regardless of what the immediate response of the exchange rate to the change in money supply can be argued for, reverse shooting homogenizes the evolution path of exchange rate adjustment and movement from different views.
    Keywords: exchange rate, reverse shooting
    JEL: F31 F37
    Date: 2009–04
  22. By: Anthony Landry
    Abstract: This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey, King, and Wolman (1999) in which firms price-discriminate across countries by setting prices in local currency. In this model, a domestic monetary expansion has greater spillover effects to foreign prices and foreign economic activity than an otherwise identical model with time-dependent pricing. In addition, the predictions of the state-dependent pricing model match the business-cycle moments better than the predictions of the time-dependent pricing model when driven by monetary policy shocks.
    Keywords: Pricing ; Foreign exchange rates ; Equilibrium (Economics) - Mathematical models ; Monetary policy ; Price discrimination
    Date: 2009
  23. By: William T. Gavin; Benjamin D. Keen; Michael R. Pakko
    Abstract: This paper examines the impact of a permanent shock to the productivity growth rate in a New Keynesian model when the central bank does not immediately adjust its policy rule to that shock. Our results show that inflation and productivity growth are negatively correlated at business cycle frequencies when the central bank follows a Taylor-type policy rule that targets the output gap. We then demonstrate that inflation is more stable after a permanent productivity shock when monetary policy targets the output growth rate (not the output gap) or the price-level path (not the inflation rate). As for the welfare implications, both the output growth and price-level path rules generate much less volatility in output and inflation after a productivity shock than occurs with the Taylor rule.
    Keywords: Taylor's rule ; Productivity ; Inflation (Finance)
    Date: 2009
  24. By: Gerald P. Dwyer; Mark Fisher
    Abstract: Correlations of inflation with the growth rate of money increase when data are averaged over longer time periods. Correlations of inflation with the growth of money also are higher when high-inflation as well as low-inflation countries are included in the analysis. We show that serial correlation in the underlying inflation rate ties these two observations together and explains them. We present evidence that averaging increases the correlation of inflation and money growth more when the underlying inflation rate has higher serial correlation.
    Date: 2009
  25. By: Marie Hoerova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Cyril Monnet (Federal Reserve Bank of Philadelphia, Research Department, Ten Independence Mall, Philadelphia, PA 19106-1574, USA.); Ted Temzelides (Rice University, Department of Economics, P.O. Box 1892, Houston, TX 77251-1892, USA.)
    Abstract: We study credible information transmission by a benevolent Central Bank. We consider two possibilities: direct revelation through an announcement, versus indirect information transmission through monetary policy. These two ways of transmitting information have very different consequences. Since the objectives of the Central Bank and those of individual investors are not always aligned, private investors might rationally ignore announcements by the Central Bank. In contrast, information transmission through changes in the interest rate creates a distortion, thus, lending an amount of credibility. This induces the private investors to rationally take into account information revealed through monetary policy. JEL Classification: D80, E40, E52.
    Keywords: Information, Interest rates, Monetary policy.
    Date: 2009–09
  26. By: Makram El-Shagi
    Abstract: The present paper compares expected inflation to (econometric) inflation forecasts based on a number of forecasting techniques from the literature using a panel of ten industrialized countries during the period of 1988 to 2007. To capture expected inflation we develop a recursive filtering algorithm which extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect. The extracted unexpected inflation is compared to the forecasting errors of ten econometric forecasts. Beside the standard AR(p) and ARMA(1,1) models, which are known to perform best on average, we also employ several Phillips curve based approaches, VAR, dynamic factor models and two simple model avering approaches.
    Keywords: Inflation Expectations,Rational Expectations,Inflation Forecasting
    JEL: E31 E37
    Date: 2009–10
  27. By: Benjamin D. Keen; Evan F. Koenig
    Abstract: This paper analyzes three popular models of nominal price and wage frictions to determine which best fits post-war U.S. data. We construct a dynamic stochastic general equilibrium (DSGE) model and use maximum likelihood to estimate each model's parameters. Because previous research finds that the conduct of monetary policy and the behavior of inflation changed in the early 1980s, we examine two distinct sample periods. Using a Bayesian, pseudo-odds measure as a means for comparison, a sticky price and wage model with dynamic indexation best fits the data in the early-sample period, whereas either a sticky price and wage model with static indexation or a sticky information model best fits the data in the late-sample period. Our results suggest that price- and wage-setting behavior may be sensitive to changes in the monetary policy regime. If true, the evaluation of alternative monetary policy rules may be even more complicated than previously believed.
    Keywords: Econometric models - Evaluation ; Business cycles - Econometric models ; Monetary policy ; Price levels ; Wages
    Date: 2009
  28. By: Valerie A. Ramey
    Abstract: Do shocks to government spending raise or lower consumption and real wages? Standard VAR identification approaches show a rise in these variables, whereas the Ramey-Shapiro narrative identification approach finds a fall. I show that a key difference in the approaches is the timing. Both professional forecasts and the narrative approach shocks Granger-cause the VAR shocks, implying that the VAR shocks are missing the timing of the news. Simulations from a standard neoclassical model in which government spending is anticipated by several quarters demonstrate that VARs estimated with faulty timing can produce a rise in consumption even when it decreases in the model. Motivated by the importance of measuring anticipations, I construct two new variables that measure anticipations. The first is based on narrative evidence that is much richer than the Ramey-Shapiro military dates and covers 1939 to 2008. The second is from the Survey of Professional Forecasters, and covers the period 1969 to 2008. All news measures suggest that most components of consumption fall after a positive shock to government spending. The implied government spending multipliers range from 0.6 to 1.1.
    JEL: E62 H3 H56
    Date: 2009–10
  29. By: Neville Francis; Michael T. Owyang; Tatevik Sekhposyan
    Abstract: Previous studies have documented disparities in the regional responses to monetary policy shocks; this variation has been found to depend, in part, on differences in the industrial composition of the regional economies. However, because of computational issues, the literature has often neglected the richest level of disaggregation: the city. In this paper, we estimate the city-level responses to monetary policy shocks in a Bayesian VAR. The Bayesian VAR allows us to model the entire panel of metropolitan areas through the imposition of a shrinkage prior. We then seek the origin of the city-level asymmetric responses.
    Keywords: Vector autoregression ; Econometric models
    Date: 2009
  30. By: Bart Hobijn; Kristin Mayer; Carter Stennis; Giorgio Topa
    Abstract: We present new measures of household-specific inflation experiences based on comprehensive information from the Consumer Expenditure Survey (CEX). We match households in the Interview and the Diary Surveys from the CEX to produce both complete and detailed pictures of household expenditures. The resulting household inflation measures are based on a more accurate and detailed description of household expenditures than those previously available. We find that our household-based inflation measures track aggregate measures such as the CPI-U quite well and that the addition of Diary Survey data induces small but significant differences in the measurement of household inflation. The distribution of inflation experiences across households exhibits a large amount of dispersion over the entire sample period. In addition, we uncover a significantly negative relationship between mean inflation and inflation inequality across households.
    Keywords: Inflation (Finance) ; Households - Economic aspects
    Date: 2009
  31. By: Martin Schindler; Mahir Binici; Michael Hutchison
    Abstract: How effective are capital account restrictions? We provide new answers based on a novel panel data set of capital controls, disaggregated by asset class and by inflows/outflows, covering 74 countries during 1995-2005. We find the estimated effects of capital controls to vary markedly across the types of capital controls, both by asset categories, by the direction of flows, and across countries' income levels. In particular, both debt and equity controls can substantially reduce outflows, with little effect on capital inflows, but only high-income countries appear able to effectively impose debt (outflow) controls. The results imply that capital controls can affect both the volume and the composition of capital flows.
    Keywords: Asset management , Capital account , Capital controls , Capital flows , Cross country analysis , Economic integration , Globalization , Time series ,
    Date: 2009–09–28
  32. By: Castelnuovo, Efrem (University of Padua)
    Abstract: We estimate a new-Keynesian DSGE model with the cost channel to assess its ability to replicate the price puzzle ie the inflationary impact of a monetary policy shock typically arising in VAR analysis. In order to correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to trend inflation ie the time-varying inflation target set by the Fed. While offering some statistical support to the cost channel, our estimated model clearly implies a negative inflation reaction to a tightening of monetary policy. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.
    Keywords: cost channel; inflation dynamics; price puzzle; trend inflation
    JEL: E30 E52
    Date: 2009–09–07
  33. By: Heij, C.; Dijk, D.J.C. van; Groenen, P.J.F. (Erasmus Econometric Institute)
    Abstract: Macroeconomic forecasting is not an easy task, in particular if future growth rates are forecasted in real time. This paper compares various methods to predict the growth rate of US Industrial Production (IP) and of the Composite Coincident Index (CCI) of the Conference Board, over the coming month, quarter, and half year. It turns out that future IP growth rates can be forecasted in real time from ten leading indicators, by means of the Composite Leading Index (CLI) or, even somewhat better, by principal components regression. This amends earlier negative findings for IP by Diebold and Rudebusch. For CCI, on the other hand, simple autoregressive models do not provide significantly less accurate forecasts than single-equation and bivariate vector autoregressive models with the CLI. This amends some of the more positive results for CCI recently reported by the Conference Board. Not surprisingly, all forecast methods improve considerably if `ex post' data are used, after possible data updates and revisions.
    Keywords: vintage date;leading indicators;forecast evaluation;recessions;industrial production;composite coincident index
    Date: 2009–10–19
  34. By: Thierry Tressel; Lone Engbo Christiansen; Alessandro Prati; Luca Antonio Ricci
    Abstract: This paper offers a coherent empirical analysis of the determinants of the real exchange rate, the current account, and the net foreign assets position in low income countries. The paper focuses on indicators specific to low income countries, such as the quality of policies and institutions, the special access to official external financing, and the role of shocks. In addition to more standard factors, we find that domestic financial liberalization is associated with higher current account balances and net foreign asset positions, while capital account liberalization is associated with lower current account balances and net foreign asset positions and with more appreciated real exchange rates. Negative exogenous shocks tend to raise (reduce) the current account in countries with closed (opened) capital accounts. Finally, foreign aid is progressively absorbed over time through net imports, and is associated with a more depreciated real exchange rate in the long-run.
    Keywords: Capital account , Capital flows , Cross country analysis , Current account , External financing , External shocks , Financial assets , Foreign investment , Low-income developing countries , Real effective exchange rates , Terms of trade , Time series ,
    Date: 2009–10–13
  35. By: Hernandez Martinez, Fernando
    Abstract: The main purpose of this paper is to show evidence about the negative impact of oil price shocks in the economy of Spain. Since oil demand is continuously increasing all around the world and OPEC countries use to act having certain power to raise them, it is necessary to study how these price levels affect to inflation rate and output growth. Oil prices, inflation and interest rates and Gross Domestic Product historical data are collected for contegration analysis. Forward-looking and Backward-looking Taylor Rules are also estimated to compare their trend with respect to official interest rates and finally conclude if the European Central Banks takes these rules patterns into account.
    Keywords: Oil prices; interest rates; inflation; Gross Direct Product; cointegration; Taylor rules
    JEL: C32 E58 E52 Q43
    Date: 2009–02
  36. By: Todd E. Clark; Michael W. McCracken
    Abstract: This paper presents analytical, Monte Carlo, and empirical evidence linking in-sample tests of predictive content and out-of-sample forecast accuracy. Our approach focuses on the negative effect that finite-sample estimation error has on forecast accuracy despite the presence of significant population-level predictive content. Specifically, we derive simple-to-use in-sample tests that test not only whether a particular variable has predictive content but also whether this content is estimated precisely enough to improve forecast accuracy. Our tests are asymptotically non-central chi-square or non-central normal. We provide a convenient bootstrap method for computing the relevant critical values. In the Monte Carlo and empirical analysis, we compare the effectiveness of our testing procedure with more common testing procedures.
    Keywords: Economic forecasting
    Date: 2009
  37. By: Todd E. Clark; Michael W. McCracken
    Abstract: This paper develops bootstrap methods for testing whether, in a finite sample, competing out-of-sample forecasts from nested models are equally accurate. Most prior work on forecast tests for nested models has focused on a null hypothesis of equal accuracy in population - basically, whether coefficients on the extra variables in the larger, nesting model are zero. We instead use an asymptotic approximation that treats the coefficients as non-zero but small, such that, in a finite sample, forecasts from the small model are expected to be as accurate as forecasts from the large model. Under that approximation, we derive the limiting distributions of pairwise tests of equal mean square error, and develop bootstrap methods for estimating critical values. Monte Carlo experiments show that our proposed procedures have good size and power properties for the null of equal finite-sample forecast accuracy. We illustrate the use of the procedures with applications to forecasting stock returns and inflation.
    Keywords: Economic forecasting
    Date: 2009
  38. By: Ondra Kamenik; Marianne Johnson; Kevin Clinton; Huigang Chen; Douglas Laxton
    Abstract: We derive forecast confidence bands using a Global Projection Model covering the United States, the euro area, and Japan. In the model, the price of oil is a stochastic process, interest rates have a zero floor, and bank lending tightening affects the United States. To calculate confidence intervals that respect the zero interest rate floor, we employ Latin hypercube sampling. Derived confidence bands suggest non-negligible risks that U.S. interest rates might stay near zero for an extended period, and that severe credit conditions might persist.
    Keywords: Bank credit , Credit restraint , Economic forecasting , Economic models , European Union , Inflation targeting , Interest rates , Japan , Monetary policy , Oil prices , United States ,
    Date: 2009–09–30
  39. By: Magnus Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Boris Hofmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper conducts a comparative analysis of the performances of the forward guidance strategies adopted by the Reserve Bank of New Zealand, the Norges Bank and the Riksbank, with the aim to gauge whether forward guidance via publication of an own interest rate path enhances a central bank’s ability to steer market expectations. Two main results emerge. First, we find evidence that all three central banks have been highly predictable in their monetary policy decisions and that long-term inflation expectations have been well anchored in the three economies, irrespective of whether forward guidance involved publication of an own interest rate path or not. Second, for New Zealand, we find weak evidence that a publication of a path could potentially enhance a central bank’s leverage on the medium term structure of interest rates. JEL Classification: E40, E43, E52.
    Keywords: Monetary policy, transparency, central bank communication, forward guidance, term structure of interest rates.
    Date: 2009–10
  40. By: Carlo Altavilla (University of Naples Parthenope, Via Medina, 40 - 80133 Naples, Italy.); Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule-based monetary policy on unemployment dynamics in the euro area and the US. We employ a Bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy. We find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions. Moreover, monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism. Finally, we show that a policy maker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism, but also about the differences between the euro area and the US, which are on average essentially small. JEL Classification: C11, E24, E52, E58.
    Keywords: Monetary policy, Model uncertainty, Bayesian model averaging, Unemployment gap, Taylor rule.
    Date: 2009–09
  41. By: Alexander Mihailov; Fabio Rumler; Johann Scharler
    Abstract: In this paper we evaluate the relative influence of external versus domestic inflation drivers in the 12 new European Union (EU) member countries. Our empirical analysis is based on the New Keynesian Phillips Curve (NKPC) derived in Galí and Monacelli (2005) for small open economies (SOE). Employing the Generalized Method of Moments (GMM), we find that the SOE NKPC is well supported in the new EU member states. We also find that the inflation process is dominated by domestic variables in the larger countries of our sample, whereas external variables are mostly relevant in the smaller countries.
    Keywords: New Keynesian Phillips Curve, small open economies, inflation dynamics, new EU member countries, GMM estimation
    JEL: C32 C52 E31 F41 P22
    Date: 2009–10
  42. By: Mehrotra, Aaron (BOFIT); Slacik, Tomas (BOFIT)
    Abstract: We evaluate the monetary determinants of inflation in the Czech Republic, Hungary, Poland and Slovakia by using the McCallum rule for money supply. The deviation of actual money growth from the rule is included in the estimation of Phillips curves for the four economies by Bayesian model averaging. We find that money provides information about price developments over a horizon of ten quarters ahead, albeit the estimates are in most cases rather imprecise. Moreover, the effect of excessive monetary growth on inflation is mixed: It is positive for Poland and Slovakia, but negative for the Czech Republic and Hungary. Nevertheless, these results suggest that money does provide information about future inflation and that a McCallum rule could potentially be used in the future as an additional indicator of the monetary policy stance once the precision of the estimation improves with more data available.
    Keywords: determinants of inflation; McCallum rule; Phillips curve; Bayesian model averaging; Central and Eastern Europe
    JEL: C11 C22 E31 E52 O52
    Date: 2009–10–21
  43. By: Anna Lipińska (Bank of England, Monetary Analysis,Monetary Assessment and Strategy Division, Threadneedle Street, London EC2R 8AH, United Kingdom.); Leopold von Thadden (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In recent years a number of European countries have shifted their tax structure more strongly towards indirect taxes, motivated, inter alia, by the intention to foster competitiveness. Against this background, this paper develops a tractable two-country model of a monetary union, characterised by national fiscal and supranational monetary policy, with price-setting firms and endogenously determined terms of trade. The paper discusses a number of monetary and fiscal policy questions which emerge if one of the countries shifts its tax structure more strongly towards indirect taxes. Qualitatively, it is shown that the long-run effects of such a unilateral policy shift on output and consumption within and between the two countries depend sensitively on whether indirect tax revenues are used to lower direct taxes or to finance additional government expenditures. Moreover, short-run dynamics are shown to depend significantly on the speed at which fiscal adjustments take place, on the choice of the inflation index stabilised by the central bank, and on whether the tax shift is anticipated or not. Quantitatively, the calibrated model version indicates that only if the additional indirect tax revenues are used to finance a cut in direct taxes there is some, though limited scope for non-negligible spillovers between countries. JEL Classification: E61, E63, F42.
    Keywords: Fiscal regimes, Monetary policy, Currency union.
    Date: 2009–10
  44. By: Etienne B. Yehoue; Kotaro Ishi; Mark R. Stone
    Abstract: Unconventional central bank measures are playing a key policy role for many advanced economies in the 2007-09 global crisis. Are they playing a similar role for emerging economies? Emerging economies have widely used unconventional foreign exchange and domestic short-term liquidity easing measures. Their use of credit easing and quantitative easing measures has been much more limited. Thus, unconventional measures are much less important for emerging economies compared to advanced economies in achieving broader macroeconomic objectives. The difference can be attributed to the relatively limited financial stress in emerging economies, their external vulnerabilities and their limited scope for quasifiscal activities.
    Date: 2009–10–16
  45. By: Kyle Bagwell; Robert W. Staiger
    Abstract: We consider the purpose and design of the World Trade Organization (WTO) and its predecessor, GATT. We review recent developments in the relevant theoretical and empirical literature. And we describe the GATT/WTO architecture and briefly trace its historical antecedents. We suggest that the existing literature provides a useful framework for understanding and interpreting central features of the design and practice of the GATT/WTO, and we identify key unresolved issues.
    JEL: F02 F13
    Date: 2009–10
  46. By: Jörg Döpke (University of Applied Sciences Merseburg, Merseburg/Germany); Ulrich Fritsche (Hamburg University, Faculty Economics and Social Sciences and German Institute of Economic Research, Hamburg/Germany); Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zürich)
    Abstract: Based on annual data for growth and inflation forecasts for Germany covering the time span from 1970 to 2007 and up to 17 different forecasts per year, we test for a possible asymmetry of the forecasters' loss function and estimate the degree of asymmetry for each forecasting institution using the approach of Elliot et al. (2005). Furthermore, we test for the rationality of the forecasts under the assumption of a possibly asymmetric loss function and for the features of an optimal forecast under the assumption of a generalized loss function. We find evidence for the existence of an asymmetric loss function of German forecasters only in case of pooled data and a quad-quad loss function. We cannot reject the hypothesis of rationality of the growth forecasts based on data for single institutions, but based on a pooled data set. The rationality of inflation forecasts frequently is rejected in case of single institutions and also for pooled data.
    Keywords: Business cycle forecast evaluation, asymmetric loss function, and rational expectations
    JEL: C53 E42
    Date: 2009–08
  47. By: Torres Torres, Diego José
    Abstract: We estimate a model that integrates sticky prices and sticky information using Spanish data following Dupor et. al (2008). The model yields three empircal facts: a-) the frequency of price changes (around one year), b-) the firm's report that sticky information is no too important for nominal rigidities and c-) the inflation's persistence, the latter with more microfoundations than the Hybrid Model. We found that both types of stickiness are present in Spain, but the most important is the stickiness in prices.
    Keywords: Sticky Prices; Sticky Information; Spain; Inflation Dynamics
    JEL: E31
    Date: 2009–09–21
  48. By: Andre Minella; Alessandro Rebucci; Nelson Souza-Sobrino
    Abstract: This study provides a set of tools to analyze the monetary and exchange rate policy issues in the seven countries of the Inter-American Development Bank’s Caribbean region (The Bahamas, Barbados, Jamaica, Haiti, Guyana, Suriname, and Trinidad and Tobago). It then applies some of them to the analysis of the impact of the global turmoil on these economies in the last quarter of 2008. The paper also discusses, in light of both recent theoretical developments and key aspects of these economies, the monetary and exchange policy responses to the initial phase of the global turmoil.
    Keywords: Caribbean countries, Global crisis, Monetary policy
    JEL: F33 E52
    Date: 2009–10

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