|
on Central Banking |
| By: | Vasco Cúrdia; Michael Woodford |
| Abstract: | We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunities along with two sources of (potentially time-varying) credit spreads and to allow a role for the central bank's balance sheet in determining equilibrium. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions and to consider additional dimensions of central bank policy--variations in the size and composition of the central bank's balance sheet as well as payment of interest on reserves--alongside the traditional question of the proper operating target for an overnight policy rate. We also study the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions within a single unified framework, and to achieve policy prescriptions that apply equally well regardless of whether financial markets work efficiently or not and regardless of whether the zero bound on nominal interest rates is reached or not. |
| Keywords: | Banks and banking, Central ; Monetary policy ; Interest rates |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:404&r=cba |
| By: | Michael Woodford (Columbia University - Department of Economics) |
| Abstract: | Dani Rodrik (2008) offers a provocative argument for policies that seek to maintain an "undervalued" exchange rate in order to promote economic growth. The key to his argument is the empirical evidence that he presents, indicating correlation of his measure of undervaluation with economic growth in cross-country panel regressions. Rodrik does not really discuss the measures that should be undertaken to maintain an undervalued exchange rate, and whether it is likely that a country that pursues undervaluation as a growth strategy should be able to maintain persistent undervalu- ation. For example, he remarks (as justification for interest in the question of a causal effect of undervaluation on growth) that "one of the key findings of the open-economy macro literature is that nominal exchange rates and real exchange rates move quite closely together." But while this is true, and while it is widely interpreted as indicat- ing that monetary policy can affect real exchange rates (since it can obviously move nominal rates), it hardly follows that monetary policy alone can maintain a weak real exchange rate for long enough to serve as part of a long-run growth strategy. Indeed, conventional theoretical models with short-run price stickiness, that are perfectly consistent with the observed short-run effects of monetary policy on real exchange rates, imply that monetary policy should not have long-run effects on real exchange rates. Rodrik also cites evidence showing that sterilized interventions in the foreign-exchange market can affect real exchange rates. But economic theory suggests that interventions not associated with any change in current or subsequent monetary policy should have even more transitory effects. And the experiences of countries that have sought to use devaluation to boost economic growth have often found that the real exchange rate effect of a nominal devaluation is not long-lasting. Nonetheless, the point of the paper is to provide evidence that undervaluation favors growth, on the assumption that policies to maintain undervaluation are avail- able, and it is that central contention that I shall examine here. I find the evidence less persuasive than the paper suggests, for two reasons. First, I believe that the paper exaggerates the strength and robustness of the association between the real exchange rate and growth in the cross-country evidence. And second, even granting the existence of such a correlation, a causal effect of real exchange rates on growth is hardly the only possible interpretation. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:clu:wpaper:0809-13&r=cba |
| By: | Vasco Cúrdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University - Department of Economics) |
| Abstract: | We consider the desirability of modifying a standard Taylor rule for a cen- tral bank's interest-rate policy to incorporate either an adjustment for changes in interest-rate spreads (as proposed by Taylor, 2008, and by McCulley and Toloui, 2008) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al., 2007). We consider the consequences of such adjustments for the way in which policy would respond to a variety of types of possible economic disturbances, including (but not limited to) disturbances originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using the simple DSGE model with credit frictions developed in C¶urdia and Woodford (2009), and compare the equilibrium responses to a variety of disturbances under the modified Tay- lor rules to those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve upon the standard Taylor rule, but the optimal size is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of the variation in credit spreads. A response to credit is less likely to be helpful, and the desirable size (and even sign) of response to credit is less robust to alternative assumptions about the nature and persistence of the disturbances to the economy. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:clu:wpaper:0910-01&r=cba |
| By: | James D. Hamilton; Seth Pruitt; Scott C. Borger |
| Abstract: | We introduce a novel method for estimating a monetary policy rule using macroeconomic news. Market forecasts of both economic conditions and monetary policy are affected by news, and our estimation links the two effects. This enables us to estimate directly the policy rule agents use to form their expectations, and in so doing flexibly capture the particular dynamics of policy response. We find evidence that between 1994 and 2007 the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude. In a standard model we show that output smoothing caused by a larger inflation response magnitude is offset by the more measured pace of response. Our response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:982&r=cba |
| By: | Anastasios G. Karantounias with Lars Peter Hansen; Thomas J. Sargent |
| Abstract: | This paper studies an optimal fiscal policy problem of Lucas and Stokey (1983) but in a situation in which the representative agent's distrust of the probability model for government expenditures puts model uncertainty premia into history-contingent prices. This situation gives rise to a motive for expectation management that is absent within rational expectations and a novel incentive for the planner to smooth the shadow value of the agent's subjective beliefs to manipulate the equilibrium price of government debt. Unlike the Lucas and Stokey (1983) model, the optimal allocation, tax rate, and debt become history dependent despite complete markets and Markov government expenditures. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2009-29&r=cba |
| By: | Evans , George W (University of Oregon, University of St. Andrews); Honkapohja, Seppo (Bank of Finland) |
| Abstract: | We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja, European Economic Review (2008), we find that under normal monetary and fiscal policy the intended steady state is locally but not globally stable. Unstable deflationary paths can arise after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero lower bound, temporary increases in government spending can effectively insulate the economy from deflation traps. |
| Keywords: | adaptive learning; monetary policy; fiscal policy; zero interest rate lower bound |
| JEL: | E52 E58 E63 |
| Date: | 2009–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_024&r=cba |
| By: | Robert E. Hall |
| Abstract: | During World War II and the Korean War, real GDP grew by about half the amount of the increase in government purchases. With allowance for other factors holding back GDP growth during those wars, the multiplier linking government purchases to GDP may be in the range of 0.7 to 1.0, a range generally supported by research based on vector autoregressions that control for other determinants, but higher values are not ruled out. New Keynesian macro models have multipliers in that range as well. On the other hand, neoclassical models have a much lower multiplier, because they predict that consumption falls when purchases rise. The key features of a model that delivers a higher multiplier are (1) the decline in the markup ratio of price over cost that occurs in those models when output rises, and (2) the elastic response of employment to an increase in demand. These features alone deliver a fairly high multiplier and they are complementary to another feature associated with Keynes, the linkage of consumption to current income. Multipliers are higher—perhaps around 1 .7—when the nominal interest rate is at its lower bound of zero, as it was during 2009. |
| JEL: | E24 E62 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15496&r=cba |
| By: | Jaroslav Borovička; Lars Peter Hansen; Mark Hendricks; José A. Scheinkman |
| Abstract: | We present a novel approach to depicting asset pricing dynamics by characterizing shock exposures and prices for alternative investment horizons. We quantify the shock exposures in terms of elasticities that measure the impact of a current shock on future cash-flow growth. The elasticities are designed to accommodate nonlinearities in the stochastic evolution modeled as a Markov process. Stochastic growth in the underlying macroeconomy and stochastic discounting in the representation of asset values are central ingredients in our investigation. We provide elasticity calculations in a series of examples featuring consumption externalities, recursive utility, and jump risk. |
| JEL: | C52 E44 G12 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15506&r=cba |
| By: | Troy Davig; Eric M. Leeper |
| Abstract: | Increases in government spending trigger substitution effects both inter- and intra-temporal and a wealth effect. The ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes create a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between active and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model's predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act's implied path for government spending under alternative monetary-fiscal policy combinations. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-12&r=cba |
| By: | Eric M. Leeper |
| Abstract: | Slow moving demographics are aging populations around the world and pushing many countries into an extended period of heightened fiscal stress. In some countries, taxes alone cannot or likely will not fully fund projected pension and health care expenditures. If economic agents place sufficient probability on the economy hitting its "fiscal limit" at some point in the future--after which further tax revenues are not forthcoming--it may no longer be possible for monetary policy behavior that obeys the Taylor principle to control inflation or anchor inflation expectations. In the period leading up to the fiscal limit, the more aggressively that monetary policy leans against inflationary winds, the more expected inflation becomes unhinged from the inflation target. Problems confronting monetary policy are exacerbated when policy institutions leave fiscal objectives and targets unspecified and, therefore, fiscal expectations unanchored. In light of this theory, the paper contrasts monetary-fiscal policy frameworks in the United States and Chile. |
| JEL: | E31 E52 E62 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15514&r=cba |
| By: | Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Roberto Dieci (Department of Mathematics for Economics and Social Sciences, University of Bologna); Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney) |
| Abstract: | We introduce heterogeneous beliefs in to the mean-variance framework of the standard CAPM, in contrast to the standard approach which assumes homogeneous beliefs. By assuming that agents form optimal portfolios based upon their heterogeneous beliefs about conditional means and covariances of the risky asset returns, we set up a framework for the CAPM that incorporates the heterogeneous beliefs when the market is in equilibrium. In this framework we first construct a consensus belief (with respect to the means and covariances of the risky asset returns) to represent the aggregate market belief when the market is in equilibrium. We then extend the analysis to a repeated one-period set-up and establish a framework for a dynamic CAPM using a market fraction model in which agents are grouped according to their beliefs. The exact relation between heterogeneous beliefs, the market equilibrium returns and the ex-ante beta-coeffcients is obtained. CAPM and Heterogeneous beliefs. |
| Date: | 2009–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:254&r=cba |
| By: | Mikhail Golosov; Guido Lorenzoni; Aleh Tsyvinski |
| Abstract: | The paper studies asset pricing in informationally decentralized markets. These markets have two key frictions: trading is decentralized (bilateral), and some agents have private information. We analyze how uninformed agents acquire information over time from their bilateral trades. In particular, we show that uninformed agents can learn all the useful information in the long run and that the long-run allocation is Pareto efficient. We then explore how informed agents can exploit their informational advantage in the short run and provide sufficient conditions for the value of information to be positive. Finally, we provide a numerical analysis of the equilibrium trading dynamics and prices. |
| JEL: | D82 D84 G12 G14 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15513&r=cba |
| By: | Gauti B. Eggertsson |
| Abstract: | Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today. |
| Keywords: | Fiscal policy ; Interest rates ; Taxation ; Government spending policy |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:402&r=cba |
| By: | Fitz Gerald, John |
| Keywords: | Policy |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp326&r=cba |
| By: | Christian Laux; Christian Leuz |
| Abstract: | The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the current financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks’ assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets. |
| JEL: | F3 G15 G21 G24 G38 K22 M41 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15515&r=cba |
| By: | Alejandro García; Andrei Prokopiw |
| Abstract: | Understanding the nature of credit risk has important implications for financial stability. Since authorities—notably, central banks—focus on risks that have systemic implications, it is crucial to develop ways to measure these risks. The difficulty lies in finding reliable measures of aggregate credit risk in the economy, as opposed to firmlevel credit risk. In this paper, the authors examine two models recently developed for this purpose: a reduced-form model applied to credit default swap index tranches, and a structural model applied to the spread on U.S. corporate bond indexes. The authors find that these models provide information on the nature of credit events—that is, whether the event is systemic or not—and on the type of risk priced in corporate bonds (i.e., credit or liquidity risk). However, although the two models provide potentially useful information for policy-makers, at this stage it is difficult to corroborate the accuracy of the information obtained from them. Further work is needed before authorities can include conclusions drawn from the two models into their policy decisions. |
| Keywords: | Credit and credit aggregates; Financial markets; Financial stability |
| JEL: | G10 G12 G13 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:09-12&r=cba |
| By: | Andrea Finicelli (Bank of Italy); Patrizio Pagano (Bank of Italy); Massimo Sbracia (Bank of Italy) |
| Abstract: | We introduce a novel methodology to measure the relative TFP of the tradeable sector across countries, based on the relationship between trade and TFP in the model of Eaton and Kortum (2002). The logic of our approach is to measure TFP not from its "primitive" (the production function) but from its observed implications. In particular, we estimate TFPs as the productivities that best fit data on trade, production, and wages. Applying this methodology to a sample of 19 OECD countries, we estimate the TFP of each country's manufacturing sector from 1985 to 2002. Our measures are easy to compute and, with respect to the standard development-accounting approach, are no longer mere residuals. Nor do they yield common "anomalies", such as the higher TFP of Italy relative to the US. |
| Keywords: | Multi-factor productivity, TFP measurement, Eaton-Kortum model |
| JEL: | F10 D24 O40 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_729_09&r=cba |
| By: | Stephanie Schmitt-Grohe; Martin Uribe |
| Abstract: | A policy issue central banks are confronted with is whether inflation targets should be adjusted to account for the systematic upward bias in measured inflation due to quality improvements in consumption goods. We show that in the context of a Ramsey equilibrium the answer to this question depends on what prices are assumed to be sticky. If nonquality-adjusted prices are assumed to be sticky, then the Ramsey plan predicts that the inflation target should not be corrected. If, on the other hand, quality-adjusted (or hedonic) prices are assumed to be sticky, then the Ramsey plan calls for raising the inflation target by the magnitude of the bias. |
| JEL: | E52 E6 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15505&r=cba |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | More than half of U.S. currency circulates abroad. As a result, much of the seignorage income of the United States is generated outside of its borders. In this paper we characterize the Ramsey-optimal rate of inflation in an economy with a foreign demand for its currency. In the absence of such demand, the model implies that the Friedman rule—deflation at the real rate of interest—maximizes the utility of the representative domestic consumer. We show analytically that once a foreign demand for domestic currency is taken into account, the Friedman rule ceases to be Ramsey optimal. Calibrated versions of the model that match the range of empirical estimates of the size of foreign demand for U.S. currency deliver Ramsey optimal rates of inflation between 2 and 10 percent per annum. The domestically benevolent government finds it optimal to impose an inflation tax as a way to extract resources from the rest of the world in the form of seignorage revenue. |
| JEL: | E41 E5 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15494&r=cba |
| By: | Moritz Schularick; Alan M. Taylor |
| Abstract: | The crisis of 2008–09 has focused attention on money and credit fluctuations, financial crises, and policy responses. In this paper we study the behavior of money, credit, and macroeconomic indicators over the long run based on a newly constructed historical dataset for 12 developed countries over the years 1870– 2008, utilizing the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates, and we also find a decline in safe assets on banks' balance sheets. We also show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we can also show that credit growth is a powerful predictor of financial crises, suggesting that such crises are “credit booms gone wrong” and that policymakers ignore credit at their peril. It is only with the long-run comparative data assembled for this paper that these patterns can be seen clearly. |
| JEL: | E44 E51 E58 G20 N10 N20 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15512&r=cba |
| By: | Martin Bodenstein; Christopher J. Erceg; Luca Guerrieri |
| Abstract: | In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound for policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. The duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the liquidity trap, implying more contractionary effects for the home country; conversely, large positive shocks can prompt an early exit, implying effects that are closer to those when the zero bound constraint is not binding. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:983&r=cba |
| By: | Stefano Bosi (EQUIPPE - Université de Lille I); Kazuo Nishimura (Kyoto University - Kyoto University); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | In this paper, we study the occurrence of local indeterminacy in two-sector monetary economies. In order to capture the credit market imperfections and the liquidity services of money, we consider a general MIUF model with two alternative timings in monetary payments: the Cash-In-Advance timing, in which the cash available to buy goods is money in the consumers' hands after they leave the bond market but before they enter the goods market, and the Cash-After-the-Market timing, in which agents hold money for transactions after leaving the goods market. We consider three standard specifications of preferences: the additively separable formulation, the Greenwood-Hercovitz-Huffman (GHH) [18] formulation and the King-Plosser-Rebelo (KPR) [21] formulation. First, we show that for all the three types of preferences, local indeterminacy easily arises under the CIA timing with a low enough interest rate elasticity of money demand. Second, we show that with the CAM timing, determinacy always holds under separable preferences, but local indeterminacy can arise in the case of GHH and KPR preferences. We thus prove that compared to aggregate models, two-sector models provide new rooms for local indeterminacy when non-separable standard preferences are considered. |
| Keywords: | Money-in-the-utility-function, Indeterminacy, Sunspot equilibria |
| Date: | 2009–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00432258_v1&r=cba |
| By: | Stefano Bosi (EQUIPPE - Université de Lille I); Kazuo Nishimura (Kyoto University - Kyoto University); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | We consider a two-sector economy with money-in-the-utility-function and sector-specific externalities. We provide conditions on technologies leading to the existence of local indeterminacy for any value of the interest rate elasticity of money demand, provided the elasticity of intertemporal substitution in consumption is large enough. Moreover, we show that the occurrence of multiple equilibria is intimately linked with the existence of a flip bifurcation and period-two cycles. |
| Keywords: | Money-in-the-utility-function ; two-sector economy ; sector-specific externalities ; indeterminacy ; period-two cycles ; sunspot equilibria |
| Date: | 2009–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00432268_v1&r=cba |
| By: | Òscar Jordà; Alan M. Taylor |
| Abstract: | The carry trade is the investment strategy of going long in high-yield target currencies and short in low-yield funding currencies. Recently, this naive trade has seen very high returns for long periods, followed by large crash losses after large depreciations of the target currencies. Based on low Sharpe ratios and negative skew, these trades could appear unattractive, even when diversified across many currencies. But more sophisticated conditional trading strategies exhibit more favorable payoffs. We apply novel (within economics) binary-outcome classification tests to show that our directional trading forecasts are informative, and out-of-sample loss-function analysis to examine trading performance. The critical conditioning variable, we argue, is the fundamental equilibrium exchange rate (FEER). Expected returns are lower, all else equal, when the target currency is overvalued. Like traders, researchers should incorporate this information when evaluating trading strategies. When we do so, some questions are resolved: negative skewness is purged, and market volatility (VIX) is uncorrelated with returns; other puzzles remain: the more sophisticated strategy has a very high Sharpe ratio, suggesting market inefficiency. |
| JEL: | C44 F31 F37 G14 G15 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15518&r=cba |
| By: | Domenico Giannone; Michele Lenza |
| Abstract: | This paper shows that general equilibrium effects can partly rationalize the high correlation between saving and investment rates observed in OECD countries. We find that once controlling for general equilibrium effects the saving-retention coefficient remains high in the 70’s but decreases considerably since the 80’s, consistently with the increased capital mobility in OECD countries. |
| JEL: | C23 F32 F41 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15519&r=cba |
| By: | Ken Burdett; Eric Smith |
| Abstract: | Considerable evidence demonstrates that significant dispersion exists in the prices charged for seemingly homogeneous goods. This paper adopts a simple, flexible equilibrium model of search to investigate the way the market structure influences price dispersion. Using the noisy search approach, the paper demonstrates the effects of having a single large, price-leading firm with multiple outlets and a competitive fringe of small firms with one retail outlet each. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2009-27&r=cba |
| By: | Linda S. Goldberg; Cédric Tille |
| Abstract: | We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunities along with two sources of (potentially time-varying) credit spreads and to allow a role for the central bank's balance sheet in determining equilibrium. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions and to consider additional dimensions of central bank policy--variations in the size and composition of the central bank's balance sheet as well as payment of interest on reserves--alongside the traditional question of the proper operating target for an overnight policy rate. We also study the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions within a single unified framework, and to achieve policy prescriptions that apply equally well regardless of whether financial markets work efficiently or not and regardless of whether the zero bound on nominal interest rates is reached or not. |
| Keywords: | International trade ; Exports ; Imports ; Currency substitution |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:405&r=cba |
| By: | Rebecca Hellerstein; William Ryan |
| Abstract: | This paper examines the determinants of cross-border flows of U.S. dollar banknotes, using a new panel data set of bilateral flows between the United States and 103 countries from 1990 to 2007. We show that a gravity model explains international flows of currency as well as it explains international flows of goods and financial assets. We find important roles for market size and transaction costs, consistent with the traditional gravity framework, as well as roles for financial depth, the behavior of the nominal exchange rate, the size of the informal sector, the amount of remittance credits, the degree of competition with the euro, and the history of macroeconomic instability over the previous generation. We find no role for official trade flows of goods. Our results thus confirm several hypotheses about the determinants of using a secondary currency. |
| Keywords: | Flow of funds ; Dollar, American ; Currency substitution |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:400&r=cba |
| By: | Jérémi Montornès (Banque de France, 31, rue croix-des-petits-champs, 75 049 Paris Cedex 01, France); Jacques-Bernard Sauner-Leroy (Banque de France, 31, rue croix-des-petits-champs, 75 049 Paris Cedex 01, France) |
| Abstract: | We investigate the wage-setting behavior of French companies using an ad-hoc survey conducted specifically for this study. Our main results are the following. i) Wages are changed infrequently. The mean duration of wage contracts is one year. Wage changes occur at regular intervals during the year and are concentrated in January and July. ii) We find a lower degree of downward real wage rigidity and nominal wage rigidity in France compared to the European average. iii) About one third of companies have an internal policy to grant wage increases according to inflation. iv) When companies are faced adverse shocks, only a partial response is transmitted into prices. Companies also adopt cost-cutting strategies. The wage of newly hired employees plays an important role in this adjustment. JEL Classification: E3, D4, L11. |
| Keywords: | wage rigidity, wage-setting behavior, survey data. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091102&r=cba |
| By: | Yoshiyasu Ono; Junichiro Ishida |
| Abstract: | We formulate nominal wage adjustment by incorporating various concepts of fairness. By applying it into a continuous-time money-in-utility model we examine macroeconomic dynamics with and without a liquidity trap and obtain the condition for persistent unemployment, and that for temporary unemployment, to occur. These conditions turn out to be critical, since policy implications significantly differ between the two cases. A monetary expansion raises private consumption under temporary unemployment but does not under persistent unemployment. A fiscal expansion may or may not increase short-run private consumption but crowds out long-run consumption under temporary unemployment. Under persistent unemployment, however, it always increases private consumption. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0760&r=cba |
| By: | Jan Babecký (Czech National Bank, Na Příkopě 28, 115 03 Praha 1, Czech Republic.); Philip Du Caju (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Theodora Kosma (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Martina Lawless (Central Bank and Financial Services Authority of Ireland, Dame Street, Dublin 2, Ireland.); Julián Messina (The World Bank, 1818 H Street, NW, Washington, DC 20433, USA.); Tairi Rõõm (Bank of Estonia, Estonia pst. 13, ET-15095 Tallinn, Estonia.) |
| Abstract: | It has been well established that the wages of individual workers react little, especially downwards, to shocks that hit their employer. This paper presents new evidence from a unique survey of firms across Europe on the prevalence of downward wage rigidity in both real and nominal terms. We analyse which firm-level and institutional factors are associated with wage rigidity. Our results indicate that it is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models (e.g. efficiency wage theory, insider-outsider theory). We also find that wage rigidity depends on the labour market institutional environment. Collective bargaining coverage is positively related with downward real wage rigidity, measured on the basis of wage indexation. Downward nominal wage rigidity is positively associated with the extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations. JEL Classification: J30, J31, J32, C81, P5. |
| Keywords: | downward nominal wage rigidity, downward real wage rigidity, wage indexation, survey data, European Union. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091105&r=cba |
| By: | Lawless, Martina (Central Bank and Financial Services Authority of Ireland); Babecký, Jan (Czech National Bank); Du Caju, Philip (National Bank of Belgium); Kosma, Theodora (Bank of Greece); Messina, Julián (World Bank); Rõõm, Tairi (Bank of Estonia) |
| Abstract: | It has been well established that the wages of individual workers are only marginally affected, particularly downwards, by shocks to their firms. This paper presents new evidence from a unique survey of firms across Europe on the prevalence of downward wage rigidity in both real and nominal terms. We analyse which firm-level and institutional factors are associated with wage rigidity. Our results indicate that downward wage rigidity is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models (e.g. efficiency wage theory, insider-outsider theory). We also find that wage rigidity depends on the labour market institutional environment. Collective bargaining coverage is positively related with downward real wage rigidity, measured on the basis of wage indexation. Downward nominal wage rigidity is positively associated with the presence of permanent contracts and this effect is stronger in countries with stricter employment protection regulations. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:11/rt/09&r=cba |
| By: | Martine Druant (National Bank of Belgium); Silvia Fabiani (Bank of Italy); Gabor Kezdig (Central European University); Ana Lamo (European Central Bank); Fernando Martins (Bank of Portugal); Roberto Sabbatini (Bank of Italy, Economic Research Department) |
| Abstract: | This paper presents new evidence on the patterns of price and wage adjustment in European firms and on the extent of nominal rigidities. It uses a unique dataset collected through a firm-level survey conducted in a broad range of countries and covering various sectors. Several conclusions are drawn from this evidence. Firms adjust wages less frequently than prices: the former tend to remain unchanged for about 15 months on average, the latter for around 10 months. The degree of price rigidity varies substantially across sectors and depends strongly on economic features, such as the intensity of competition, the exposure to foreign markets and the share of labour costs in total cost. Instead, country specificities, mostly related to the labour marketÂ’s institutional setting, are more relevant in characterising the pattern of wage adjustment. The latter also exhibits a substantial degree of time-dependence, as firms tend to concentrate wage changes in a specific month, mostly January in the majority of countries. Wage and price changes feed into each other at the micro level and there is a relationship between wage and price rigidity. |
| Keywords: | survey, wage rigidity, price rigidity, indexation, labour market institutions, time dependence |
| JEL: | D21 E30 J31 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_725_09&r=cba |
| By: | António Portugal Duarte (Faculdade de Economia/GEMF, Universidade de Coimbra); João Sousa Andrade (Faculdade de Economia/GEMF, Universidade de Coimbra); Adelaide Duarte (Faculdade de Economia/GEMF, Universidade de Coimbra) |
| Abstract: | The aim of this study is to assess to what extent the Portuguese participation in the European Monetary System (EMS) has been characterized by mean reverting behaviour, as predicted by the exchange rate target zone model developed by Krugman (1991). For this purpose, a new class of mean reversion tests is introduced. The empirical analysis of mean reversion in the Portuguese exchange rate shows that most of the traditional unit root and stationarity tests point to the nonstationarity of the exchange rate within the band. However, using a set of variance-ratio tests, it was possible to detect the presence of a martingale difference sequence. This suggests that the Portuguese foreign exchange market has functioned efficiently, allowing us to conclude that the adoption of an exchange rate target zone regime has contributed decisively to the creation of the macroeconomic stability conditions necessary for the participation of Portugal in the euro area. |
| Keywords: | difference sequence, mean reversion, stationarity, target zones and unit roots |
| JEL: | C32 C51 F31 F41 G15 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2009-15&r=cba |
| By: | Christopher Erceg; Luca Guerrieri; Steven B. Kamin |
| Abstract: | Among the various explanations for the runup in oil and commodity prices of recent years, one story focuses on the role of monetary policy in the United States and in developing economies. In this view, developing countries that peg their currencies to the dollar were forced to ease their monetary policies after reductions in U.S. interest rates, leading to economic overheating, excess demand for oil and other commodities, and rising commodity prices. We assess that hypothesis using the Federal Reserve staff’s forward-looking, multicountry, dynamic general equilibrium model, SIGMA. We find that even if many developing country currencies were pegged to the dollar, an easing of U.S. monetary policy would lead to only a transitory runup in oil prices. Instead, strong economic growth in many developing economies, as well as shortfalls in oil production, better explain the sustained runup in oil prices observed until earlier this year. Moreover, a closer look at exchange rates and interest rates around the world suggests that the monetary policies of many developing economies, including in East Asia, are less closely influenced by U.S. policies than is frequently assumed. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:979&r=cba |
| By: | Ravi Bansal; Dana Kiku; Amir Yaron |
| Abstract: | We provide an empirical evaluation of the forward-looking long-run risks (LRR) model and highlight model differences with the backward-looking habit based asset pricing model. We feature three key results: (i) Consistent with the LRR model, there is considerable evidence in the data of time-varying expected consumption growth and volatility, (ii) The LRR model matches the key asset markets data features, (iii) In the data and in the LRR model accordingly, past consumption growth does not predict future asset prices, whereas lagged consumption in the habit model forecasts future price-dividend ratios with an R2 of over 40%. Overall, our evidence implies that the LRR model provides a coherent framework to analyze and interpret asset prices. |
| JEL: | E0 G0 G1 G12 G14 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15504&r=cba |
| By: | Jan Marc Berk; Beata Bierut |
| Abstract: | This paper models monetary policy decisions as being taken by an interacting group of heterogeneous policy makers, organized in a committee. Disclosing the premises on which an individual view on the interest rate is based is likely to provide value added in terms of the quality of the collective decision over-and-above simultaneous voting on interest rates. However, this is not generally true, as communication also involves a trade-off in the quality of views of committee members, which can lead to a reduction in the quality of collective decisions below the outcome achieved under simple majority voting. Still, communication is a relatively effective way to implement the 'knowledge pooling' argument pro-collective decision-making, compared to expanding the size of the MPC. |
| Keywords: | committees; deliberations; correlated votes; simple majority voting. |
| JEL: | E58 D71 D78 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:226&r=cba |
| By: | Florian Heider (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marie Hoerova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We study the functioning of secured and unsecured interbank markets in the presence of credit risk. The model generates empirical predictions that are in line with developments during the 2007-2009 financial crises. Interest rates decouple across secured and unsecured markets following an adverse shock to credit risk. The scarcity of underlying collateral may amplify the volatility of interest rates in secured markets. We use the model to discuss various policy responses to the crisis. JEL Classification: G01, G21, E58. |
| Keywords: | Financial crisis, Interbank market, Liquidity, Credit risk, Collateral. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091107&r=cba |
| By: | Benk, Szilárd; Gillman, Max (Cardiff Business School); Kejak, Michal |
| Abstract: | The paper shows that US GDP velocity of M1 money has exhibited long cycles around a 1.25% per year upward trend, during the 1919-2004 period. It explains the velocity cycles through shocks constructed from a DSGE model and annual time series data (Ingram et al., 1994). Model velocity is stable along the balanced growth path, which features endogenous growth and decentralized banking that produces exchange credit. Positive shocks to credit productivity and money supply increase velocity, as money demand falls, while a positive goods productivity shock raises temporary output and velocity. The paper explains such velocity volatility at both business cycle and long run frequencies. With filtered velocity turning negative, starting during the 1930s and the 1987 crashes, and again around 2003, results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times. |
| Keywords: | Volatility; business cycle; credit shocks; velocity |
| JEL: | E13 E32 E44 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2009/25&r=cba |
| By: | Xin Huang; Hao Zhou; Haibin Zhu |
| Abstract: | This paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as the insurance cost to protect against distressed losses in a banking system, is a risk-neutral concept of capital based on publicly available information that can be appropriately aggregated across different subsets. An application of our methodology to a portfolio of twenty-two major banks in Asia and the Pacific illustrates the dynamics of the spillover effects of the global financial crisis to the region. The increase in the perceived systemic risk, particularly after the failure of Lehman Brothers, was mainly driven by the heightened risk aversion and the squeezed liquidity. The analysis on the marginal contribution of individual banks to the systemic risk suggests that ``too-big-to-fail" is a valid concern from a macroprudential perspective of bank regulation. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-44&r=cba |
| By: | Joscha Beckmann; Ansgar Belke; Michael Kühl |
| Abstract: | This paper examines the significance of different fundamental regimes by applying various monetary models of the exchange rate to one of the politically most important exchange rates, the exchange rate of the US dollar vis-à-vis the euro (the DM). We use monthly data from 1975:01 to 2007:12. Applying a novel time-varying coefficient estimation approach, we come up with interesting properties of our empirical models. First, there is no stable long-run equilibrium relationship among fundamentals and exchange rates since the breakdown of Bretton Woods. Second, there are no recurring regimes, i.e. across different regimes either the coefficient values for the same fundamentals differ or the significance differs. Third, there is no regime in which no fundamentals enter. Fourth, the deviations resulting from the stepwise cointegrating relationship act as a significant error-correction mechanism. In other words, we are able to show that fundamentals play an important role in determining the exchange rate although their impact differs significantly across different sub-periods. |
| Keywords: | Structural exchange rate models, cointegration, structural breaks, switching regression, time-varying coefficient approach |
| JEL: | E44 F31 G12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp944&r=cba |
| By: | Gebhard Kirchgässner; Jürgen Wolters |
| Abstract: | Using Swiss data from 1983 to 2008, this paper investigates whether growth rates of the different measures of the quantity of money and or excess money can be used to forecast inflation. After a preliminary data analysis, money demand relations are specified, estimated and tested. Then, employing error correction models, measures of excess money are derived. Using recursive estimates, indicator properties of monetary aggregates for inflation are assessed for the period from 2000 onwards, with time horizons of one, two, and three years. In these calculations, M2 and M3 clearly outperform M1, and excess money is generally a better predictor than the quantity of money. Taking into account also the most (available) recent observations that represent the first three quarters of the economic crisis, the money demand function of M3 remains stable while the one for M2 is strongly influenced by these three observations. While in both cases forecasts for 2010 show inflation rates inside the target zone between zero and two percent, and the same holds for forecasts based on M3 for 2011, forecasts based on M2 provide evidence that the upper limit of this zone might be violated in 2011. |
| Keywords: | Stability of Money Demand, Monetary Aggregates and Inflation |
| JEL: | E41 E52 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2009:2009-30&r=cba |
| By: | Andreas Beyer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper we present an empirically stable money demand model for Euro area M3. We show that housing wealth is an important explanatory variable of long-run money demand that captures the trending behaviour of M3 velocity, in particular its shift in the first half of this decade. We show that the current financial crisis has no impact on the stability of our money demand model. JEL Classification: C22, C32, E41. |
| Keywords: | Money Demand, Parameter Constancy, Wealth, Cointegration, Vector Error Correction Model. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091111&r=cba |
| By: | Christopher Gust; Robert Vigfusson |
| Abstract: | Are structural vector autoregressions (VARs) useful for discriminating between macro models? Recent assessments of VARs have shown that these statistical methods have adequate size properties. In other words, in simulation exercises, VARs will only infrequently reject the true data generating process. However, in assessing a statistical test, we often also care about power: the ability of the test to reject a false hypothesis. Much less is known about the power of structural VARs. ; This paper attempts to fill in this gap by exploring the power of long-run structural VARs against a set of DSGE models that vary in degree from the true data generating process. We report results for two tests: the standard test of checking the sign on impact and a test of the shape of the response. For the models studied here, testing the shape is a more powerful test than simply looking at the sign of the response. In addition, relative to an alternative statistical test based on sample correlations, we find that the shape-based tests have greater power. Given the results on the power and size properties of long-run VARs, we conclude that these VARs are useful for discriminating between macro models. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:978&r=cba |
| By: | Bettina Landau (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frauke Skudelny (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper we analyse in a mark-up framework the pass-through of commodity price and exchange rate shocks to the main components of producer and consumer prices. Thereby we link movements in prices at the different production stages as firms set their prices as a mark-up over production costs. The empirical results reveal significant linkages between different price stages in the euro area. The overall results are roughly in line with the literature and provide insight into the effects at different stages of the production chain. Non-energy commodity prices turn out to be important determinants of euro area prices. JEL Classification: E31, E37. |
| Keywords: | Pass-through, producer prices, consumer prices, commodity prices, exchange rate. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091104&r=cba |
| By: | Niall Ferguson (Harvard Business School, Business, Government and the International Economy Unit); Moritz Schularick (Freie Universität Berlin) |
| Abstract: | For the better part of the past decade, the world economy has been dominated by a world economic order that combined Chinese export-led development with US over-consumption. The financial crisis of 2007-2009 likely marks the beginning of the end of the Chimerican relationship. In this paper we look at this era as economic historians, trying to set events in a longer-term perspective. In some ways China's economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the U.S. played a major role in propelling growth. But there were two key differences. First, the scale of Chinese currency intervention was without precedent, as were the resulting distortions of the world economy. Second, the Chinese have so far resisted the kind of currency appreciation to which West Germany and Japan consented. We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. A continuation of Chimerica at a time of dollar devaluation would give rise to new and dangerous distortions in the global economy. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:10-037&r=cba |
| By: | Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper empirically assesses which factors trigger prolonged periods of inflation for a sample of 91 countries over the period 1960-2006. The paper employs pooled probit analysis to estimate the contribution of the key factors to inflation starts. The empirical results suggest that for all cases considered a more fixed exchange rate regime and lower real policy rates increase the probability of an inflation start. For developing countries, other relevant factors include food price inflation, the degree of trade openness, the level of past inflation, the ratio of external debt to GDP and the durability of the political regime. For advanced economies, these factors turn out to be statistically insignificant but instead a positive output gap, higher global inflation and a less democratic environment were seen to be detrimental for triggering inflation starts. Finally, oil prices, M2 growth and government spending were never statistically significant. JEL Classification: E31, E58. |
| Keywords: | Panel Probit, Inflation, emerging markets. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091109&r=cba |
| By: | Mei Li, (Department of Economics,University of Guelph); Junfeng Qiu (Central University of Finance and Economics) |
| Abstract: | This paper examines the optimal appreciation path of an under-valued currency in the presence of speculative capital inflows that are endogenously affected by the appreciation path. A central bank decides the optimal appreciation path based on three factors: (i) Misalignment costs associated with the gap between the actual exchange rate and the fundamental exchange rate, (ii) short-term adjustment costs due to fast appreciation, and (iii) capital losses due to speculative capital inflows. We examine two cases in which speculators do and do not face liquidity shocks. We show that, in the case without liquidity shocks, the central bank should appreciate quickly to discourage speculative capital, and should appreciate more quickly in initial periods than in later periods. In the case with liquidity shocks, the central bank should pre-commit to a slow appreciation path to discourage speculative capital. The central bank should appreciate slowest when the probability of liquidity shocks takes middle values. If the central bank cannot commit and can only take a discretionary policy, appreciation should be faster. |
| Keywords: | exchange rate, appreciation, capital flows |
| JEL: | F31 F32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2009-5&r=cba |
| By: | Christopher Gust; David López-Salido |
| Abstract: | We develop a DSGE model in which aggregate shocks induce endogenous movements in risk. The key feature of our model is that households rebalance their financial portfolio allocations infrequently, as they face a fixed cost of transferring cash across accounts. We show that the model can account for the mean returns on equity and the risk-free rate, and generates countercyclical movements in the equity premium that help explain the response of stock prices to monetary shocks. The model is consistent with empirical evidence documenting that unanticipated changes in monetary policy have important effects on equity prices through changes in risk. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:984&r=cba |
| By: | Matthew Denes; Gauti B. Eggertsson |
| Abstract: | This paper outlines a simple Bayesian methodology for estimating tax and spending multipliers in a dynamic stochastic general equilibrium (DSGE) model. After forming priors about the parameters of the model and the relevant shock, we used the model to exactly match only one data point: the trough of the Great Depression, that is, an output collapse of 30 percent, deflation of 10 percent, and a zero short-term nominal interest rate. Because we form our priors as distributions, the key economic inference of our analysis--the multipliers of tax and spending--are well-defined probability distributions derived from the posterior of the model. While the Bayesian methods used are standard, the application is slightly unusual. We conjecture that this methodology can be applied in several different settings with severe data limitations and where more informal calibrations have been the norm. The main advantage over usual calibration exercises is that the posterior of the model offers an interesting way to think about sensitivity analysis and gives researchers a useful way to describe model-based inference. We apply our simple estimation method to the American Recovery and Reinvestment Act (ARRA), passed by Congress as part of the 2009 stimulus plan. The mean of our estimate indicates that ARRA increased output by 3.6 percent in 2009 and 2010. The standard deviation of this estimate is 1 percent. |
| Keywords: | Depressions ; Econometric models ; Taxation ; Government spending policy |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:403&r=cba |
| By: | Brzoza-Brzezina, Michal; Makarski, Krzysztof |
| Abstract: | We construct an open-economy DSGE model with a banking sector to analyse the impact of the recent credit crunch on a small open economy. In our model the banking sector operates under monopolistic competition, collects deposits and grants collateralized loans. Collateral effects amplify monetary policy actions, interest rate stickiness dampens the transmission of interest rates, and financial shocks generate non-negligible real and nominal effects. As an application we estimate the model for Poland - a typical small open economy. According to the results, financial shocks had a substantial, though not overwhelming, impact on the Polish economy during the 2008/09 crisis, lowering GDP by a little over one percent. |
| Keywords: | credit crunch; monetary policy; DSGE with banking sector |
| JEL: | E32 E52 E44 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:18595&r=cba |
| By: | Davide Furceri (OCDE - Organisation de coopération et de développement économiques - OCDE); Aleksandra Zdzienicka-Durand (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | The aim of this work is to assess the impact of financial crises on output for 11 European transition economies (CEECs). The results suggest that financial crises have a significant and permanent effect, lowering long-term output by about 17 percent. The effect is more important in smaller countries, with relative higher dependence on external financing, and in which the banking sector noticed more important financial disequilibria. We also found that fiscal policy measures have been the most efficient tools in dealing with the crises, while the role of monetary policy instruments has been rather blinded. Exchange rate resulted to be more a propagator than a crises absorber, while the IMF credit has been found to have positive (but not significant) impact on growth performance. Finally, the effect for the CEECs is much bigger than in the EU advanced economies, for which we found that financial crises lowers long-term output only by 2 percent. |
| Keywords: | Output Growth ; Financial Crisis ; CEECs |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00431044_v1&r=cba |
| By: | Davide Furceri (OECD and University of Palermo); Aleksandra Zdzienicka (GATE-CNRS/ENS LSH, University of Lyon, France) |
| Abstract: | The aim of this work is to assess the impact of financial crises on output for 11 European transition economies (CEECs). The results suggest that financial crises have a significant and permanent effect, lowering long-term output by about 17 percent. The effect is more important in smaller countries, with relative higher dependence on external financing, and in which the banking sector noticed more important financial disequilibria. We also found that fiscal policy measures have been the most efficient tools in dealing with the crises, while the role of monetary policy instruments has been rather blinded. Exchange rate resulted to be more a propagator than a crises absorber, while the IMF credit has been found to have positive (but not significant) impact on growth performance. Finally, the effect for the CEECs is much bigger than in the EU advanced economies, for which we found that financial crises lowers long-term output only by 2 percent. |
| Keywords: | Output Growth, Financial Crisis, CEECs. |
| JEL: | G1 E6 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0920&r=cba |
| By: | Maria Popa |
| Abstract: | Is inflation persistence in the New Member States comparable to that in the Euro Area? We argue that persistence may not be as different between the two groups as one might expect. The paper provides a structural measure for the inflation persistence in the New Member States: New Hybrid Phillips Curve. The data set used includes samples for five new member of the EU. We describe the dynamics of inflation using the New Hybrid Phillips Curve as framework. Structural measures show that backward-looking behavior may be a more important component in explaining inflation persistence in the New Member States than in the Euro Area. |
| Keywords: | inflation persistence, Hybrid Phillips Curve |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cab:wpaefr:31&r=cba |