nep-cba New Economics Papers
on Central Banking
Issue of 2009‒11‒27
77 papers chosen by
Alexander Mihailov
University of Reading

  1. Evaluating Monetary Policy By Svensson, Lars E O
  2. Fiscal Policy Can Reduce Unemployment: But There is a Better Alternative By Farmer, Roger E A
  3. Internal Rationality and Asset Prices By Adam, Klaus; Marcet, Albert
  4. From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons By Miguel Almunia; Agustín S. Bénétrix; Barry Eichengreen; Kevin H. O'Rourke; Gisela Rua
  5. Inflation Targeting and Business Cycle Synchronization By Flood, Robert P; Rose, Andrew K
  6. Optimal Time-Invariant Monetary Policy By Charles Brendon
  7. The Myth of Financial Innovation and the Great Moderation By Den Haan, Wouter; Sterk, Vincent
  8. Learning and the Great Moderation By Bullard, James B.; Singh, Aarti
  9. Conventional and Unconventional Monetary Policy By Cúrdia, Vasco; Woodford, Michael
  10. Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure By Rose, Andrew K; Spiegel, Mark
  11. A defence of the FOMC By Ellison, Martin; Sargent, Thomas J
  12. Expectations, Deflation Traps and Macroeconomic Policy By Evans, George W.; Honkapohja, Seppo
  13. Decomposing Federal Funds Rate forecast uncertainty using real-time data By Martin Mandler
  14. "Optimal monetary policy when asset markets are incomplete" By Richard Anton Braun; Tomoyuki Nakajima
  15. Limited Asset Market Participation and the Consumption-Real Exchange Rate Anomaly By Kollmann, Robert
  16. How Important is the Currency Denomination of Exports in Open-Economy Models? By Michael Dotsey; Margarida Duarte
  17. Real and Nominal Rigidities in Price Setting: A Bayesian Analysis Using Aggregate Data By Fang Yao
  18. On Quality Bias and Inflation Targets By Schmitt-Grohé, Stephanie; Uribe, Martín
  19. Current Account Fact and Fiction By David Backus; Espen Henriksen; Frederic Lambert; Christopher Telmer
  20. Foreign Currency Debt, Financial Crises and Economic Growth: A Long Run View By Michael D. Bordo; Christopher M. Meissner; David Stuckler
  21. Money is an Experience Good: Competition and Trust in the Private Provision of Money By Marimon, Ramon; Nicolini, Juan Pablo; Teles, Pedro
  22. Monetary Policy and the Financing of Firms By De Fiore, Fiorella; Teles, Pedro; Tristani, Oreste
  23. Foreign Demand for Domestic Currency and the Optimal Rate of Inflation By Schmitt-Grohé, Stephanie; Uribe, Martín
  24. Optimal Monetary Policy and Firm Entry By V. LEWIS
  25. Fiscal Deficits and Current Account Deficits By Michael Kumhof; Douglas Laxton
  26. Identification of slowdowns and accelerations for the euro area economy By Darné, Olivier; Ferrara, Laurent
  27. Predicting recoveries and the importance of using enough information By Cai, Xiaoming; Den Haan, Wouter
  28. Credit Ratings Failures and Policy Options By Pagano, Marco; Volpin, Paolo
  29. The Macroeconomic Costs and Benefits of the EMU and other Monetary Unions: An Overview of Recent Research By Beetsma, Roel; Giuliodori, Massimo
  30. Three Cycles: Housing, Credit, and Real Activity By Alain N. Kabundi; Deniz Igan; Marcelo Pinheiro; Francisco Nadal-De Simone; Natalia T. Tamirisa
  31. Macroeconomic Patterns and Monetary Policy in the Run-up to Asset Price Busts By Pau Rabanal; Prakash Kannan; Alasdair Scott
  32. Monetary-Fiscal Policy Interactions and Fiscal Stimulus By Davig, Troy; Leeper, Eric M.
  33. Government Purchases and the Real Exchange Rate By Kollmann, Robert
  34. Non-Separable Preferences and Frisch Labor Supply: One Solution to a Fiscal Policy Puzzle By Bilbiie, Florin Ovidiu
  35. How Rigid Are Producer Prices? By Pinelopi Goldberg; Rebecca Hellerstein
  36. Global Liquidity Trap: A Simple Analytical Investigation By Ippei Fujiwara; Nao Sudo; Yuki Teranishi
  37. Delegating Optimal Monetary Policy Inertia By Bilbiie, Florin Ovidiu
  38. Keynesian government spending multipliers and spillovers in the euro area By Cwik, Tobias; Wieland, Volker
  39. How Large Are the Effects of Tax Changes? By Favero, Carlo A; Giavazzi, Francesco
  40. Cross-border spillovers from fiscal stimulus By Corsetti, Giancarlo; Meier, André; Müller, Gernot
  41. Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks By Mertens, Karel; Ravn, Morten O.
  42. The Fed’s perceived Phillips curve: Evidence from individual FOMC forecasts By Peter Tillmann
  43. Currency Carry Trade Regimes: Beyond the Fama Regression By Richard Clarida; Josh Davis; Niels Pedersen
  44. Estimated Interest Rate Rules: Do they Determine Determinacy Properties? By Jensen, Henrik
  45. Political Constraints on Monetary Policy During the U.S. Great Inflation By Weise, Charles L.
  46. Money in monetary policy design: Monetary cross-checking in the New-Keynesian model By Beck, Günter; Wieland, Volker
  47. Inflation Targeting at 20: Achievements and Challenges By Scott Roger
  48. Hybrid Inflation Targeting Regimes By Jorge Restrepo; Carlos Garcia; Scott Roger
  49. International Competition and Inflation: A New Keynesian Perspective By Guerrieri, Luca; Gust, Christopher; López-Salido, J David
  50. Growing Up in a Recession: Beliefs and the Macroeconomy By Giuliano, Paola; Spilimbergo, Antonio
  51. One TV, One Price? By Imbs, Jean; Mumtaz, Haroon; Ravn, Morten O.; Rey, Hélène
  52. How much nominal rigidity is there in the US Economy? Testing a New Keynesian DSGE model using indirect inference By Le, Vo Phuong Mai; Minford, Patrick; Wickens, Michael R.
  53. The Taylor Rule and Interest Rate Uncertainty in the U.S. 1970-2006 By Martin Mandler
  54. Can Parameter Instability Explain the Meese-Rogoff Puzzle? By Bacchetta, Philippe; Beutler, Toni; van Wincoop, Eric
  55. Macroeconomic Effects of Financial Shocks By Jermann, Urban; Quadrini, Vincenzo
  56. Monetary Policy Implementation and Overnight Rate Persistence By Dieter Nautz; Jan Scheithauer
  57. Low-frequency determinants of inflation in the euro area By Sven Schreiber
  58. Methods versus Substance: Measuring the Effects of Technology Shocks on Hours By Fuentes-Albero, Cristina; Kryshko, Maxym; Ríos-Rull, José-Víctor; Santaeulàlia-Llopis, Raül; Schorfheide, Frank
  59. Monetary Policy, Velocity, and the Equity Premium By Gust, Christopher; López-Salido, J David
  60. The Role of Financial Variables in Predicting Economic Activity in the Euro Area By Raphael A. Espinoza; Fabio Fornari; Marco Lombardi
  61. Nowcasting, Business Cycle Dating and the Interpretation of New Information when Real-Time Data are Available By Lee, Kevin; Olekalns, Nils; Shields, Kalvinder K
  62. Monetary and Macroprudential Policy Rules in a Model with House Price Booms By Pau Rabanal; Prakash Kannan; Alasdair Scott
  63. The Crisis in the Foreign Exchange Market By Melvin, Michael; Taylor, Mark P
  64. Macroeconomic Forecasting and Structural Change By D Agostino, Antonello; Gambetti, Luca; Giannone, Domenico
  65. Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach By Mertens, Karel; Ravn, Morten O.
  66. Depression Econometrics: A FAVAR Model of Monetary Policy During the Great Depression By Ahmadi, Pooyan Amir; Ritschl, Albrecht
  67. Depression Econometrics: A FAVAR Model of Monetary Policy During the Great Depression By Pooyan Amir Ahmadi; Albrecht Ritschl
  68. Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks By Mertens, Karel; Ravn, Morten O.
  69. Empirical evidence on the aggregate effects of anticipated and unanticipated US tax policy shocks By Karel Mertens; Morten O. Ravn
  70. Forecasting Large Datasets with Bayesian Reduced Rank Multivariate Models By Carriero, Andrea; Kapetanios, George; Marcellino, Massimiliano
  71. Two Orthogonal Continents? Testing a Two-country DSGE Model of the US and EU Using Indirect Inference By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael R.
  72. The 'Puzzles' Methodology: en route to Indirect Inference? By Le, Vo Phuong Mai; Minford, Patrick; Wickens, Michael R.
  73. MIDAS vs. mixed-frequency VAR: Nowcasting GDP in the Euro Area By Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
  74. Monetary Policy Analysis and Forecasting in the World Economy: A Panel Unobserved Components Approach By Francis Vitek
  75. Monetary Policy and the Lost Decade: Lessons from Japan By Daniel Leigh
  76. Size and Composition of the Central Bank Balance Sheet: Revisiting Japanfs Experience of the Quantitative Easing Policy By Shigenori Shiratsuka
  77. DSGE-CH: A dynamic stochastic general equilibrium model for Switzerland By Cuche-Curti, Nicolas A.; Dellas, Harris; Natal, Jean-Marc

  1. By: Svensson, Lars E O
    Abstract: Evaluating inflation-targeting monetary policy is more complicated than checking whether inflation has been on target, because inflation control is imperfect and flexible inflation targeting means that deviations from target may be deliberate in order to stabilize the real economy. A modified Taylor curve, the forecast Taylor curve, showing the tradeoff between the variability of the inflation-gap and output-gap forecasts can be used to evaluate policy ex ante, that is, taking into account the information available at the time of the policy decisions, and even evaluate policy in real time. In particular, by plotting mean squared gaps of inflation and output-gap forecasts for alternative policy-rate paths, it may be examined whether policy has achieved an efficient stabilization of both inflation and the real economy and what relative weight on the stability of inflation and the real economy has effectively been applied. Ex ante evaluation may be more relevant than evaluation ex post, after the fact. Publication of the interest-rate path also allows the evaluation of its credibility and the effectiveness of the implementation of monetary policy.
    Keywords: forecast Taylor curve; mean squared gaps; Monetary policy evaluation
    JEL: E52 E58
    Date: 2009–09
  2. By: Farmer, Roger E A
    Abstract: This paper uses a model with a continuum of equilibrium unemployment rates to explore the effectiveness of fiscal policy. The existence of multiple steady states is explained by a model of costly search and recruiting that leads to a situation of bilateral monopoly. Using this framework, I explain the current financial crisis as a shift to a high unemployment equilibrium, induced by the self-fulfilling beliefs of market participants about asset prices. Using this model, I ask two questions. 1) Can fiscal policy help us out of the crisis? 2) Is there an alternative to fiscal policy that is less costly and more effective? The answer to both questions is yes.
    Keywords: Financial crisis; Fiscal policy; Unemployment
    JEL: E24 E44
    Date: 2009–11
  3. By: Adam, Klaus; Marcet, Albert
    Abstract: We present a decision theoretic framework with agents that are learning about the behavior of market determined variables. Agents are 'internally rational', i.e., maximize discounted expected utility under uncertainty given consistent beliefs about the future, but may not be 'externally rational', i.e., may not know the true stochastic process for market determined variables (asset prices) and fundamentals (dividends). We apply this approach to a simple asset pricing model with heterogeneity and incomplete markets. We show how knowledge about dividends and optimal behavior alone fail to fully inform agents about equilibrium prices, so that learning about price behavior, as in Adam, Marcet and Nicolini (2008), is fully consistent with internal rationality. We also show that equilibrium prices depend on expectations of the discounted price and dividend in the next period only, rather than on the expected discounted sum of future dividends. Discounted sums emerge only after making very strong assumptions about agents' knowledge and prove extremely sensitive to the details about agents' prior beliefs about the dividend process.
    Keywords: learning; rationality
    JEL: D83 D84 G12 G14
    Date: 2009–10
  4. By: Miguel Almunia; Agustín S. Bénétrix; Barry Eichengreen; Kevin H. O'Rourke; Gisela Rua
    Abstract: The Great Depression of the 1930s and the Great Credit Crisis of the 2000s had similar causes but elicited strikingly different policy responses. It may still be too early to assess the effectiveness of current policy responses, but it is possible to analyze monetary and fiscal policies in the 1930s as a “natural experiment” or “counterfactual” capable of shedding light on the impact of recent policies. We employ vector autoregressions, instrumental variables, and qualitative evidence for a panel of 27 countries in the period 1925-1939. The results suggest that monetary and fiscal stimulus was effective – that where it did not make a difference it was not tried. The results also shed light on the debate over fiscal multipliers in episodes of financial crisis. They are consistent with multipliers at the higher end of those estimated in the recent literature, consistent with the idea that the impact of fiscal stimulus will be greater when banking system are dysfunctional and monetary policy is constrained by the zero bound.
    JEL: E63 F16 N10 N27
    Date: 2009–11
  5. By: Flood, Robert P; Rose, Andrew K
    Abstract: Inflation targeting seems to have a small but positive effect on the synchronization of business cycles; countries that target inflation seem to have cycles that move slightly more closely with foreign cycles. Thus the advent of inflation targeting does not explain the decoupling of global business cycles, for two reasons. Indeed business cycles have not in fact become less synchronized across countries.
    Keywords: bilateral; data; empirical; GDP; insulation; regime
    JEL: F42
    Date: 2009–07
  6. By: Charles Brendon
    Abstract: This paper investigates how best to determine time-invariant policy rules in macroeconomic models with forward-looking constraints, where fully optimal policy is known to be time-inconsistent. It proposes a new ‘coefficient optimisation’ approach that improves upon the timeless perspective method of Woodford (2003) in deterministic problems, and on average in stochastic problems, without resorting to asymptotic (‘unconditional’) loss comparisons.
    Keywords: Timeless perspective, Time consistency, Optimal monetary policy, Time-invariant policy
    JEL: E31 E52 E58 E61
    Date: 2009
  7. By: Den Haan, Wouter; Sterk, Vincent
    Abstract: Financial innovation is widely believed to be at least partly responsible for the recent financial crisis. At the same time, there are empirical and theoretical arguments that support the view that changes in financial markets played a role in the "great moderation". If both are true, then the price of reducing the likelihood of another crisis, e.g., through new regulation, could be giving up another episode of sustained growth and low volatility. However, this paper questions empirical evidence supporting the view that innovation in consumer credit and home mortgages reduced cyclical variations of key economic variables. We find that especially the behaviour of aggregate home mortgages changed less during the great moderation than is typically believed. For example, aggregate home mortgages declined during monetary tightenings, both before and during the great moderation. A remarkable change we do find is that monetary tightenings became episodes during which financial institutions other than banks increased their holdings in mortgages. Once can question the desirability of such strong substitutions of ownership during economic downturns.
    Keywords: consumer credit; impulse response functions; mortgages
    JEL: E32 E44 G21
    Date: 2009–10
  8. By: Bullard, James B.; Singh, Aarti
    Abstract: We study a stylized theory of the volatility reduction in the U.S. after 1984 - the Great Moderation - which attributes part of the stabilization to less volatile shocks and another part to more difficult inference on the part of Bayesian households attempting to learn the latent state of the economy. We use a standard equilibrium business cycle model with technology following an unobserved regime-switching process. After 1984, according to Kim and Nelson (1999a), the variance of U.S. macroeconomic aggregates declined because boom and recession regimes moved closer together, keeping conditional variance unchanged. In our model this makes the signal extraction problem more difficult for Bayesian households, and in response they moderate their behavior, reinforcing the effect of the less volatile stochastic technology and contributing an extra measure of moderation to the economy. We construct example economies in which this learning effect accounts for about 30 percent of a volatility reduction of the magnitude observed in the postwar U.S. data.
    Keywords: Bayesian learning; business cycles; information; regime-switching
    JEL: D8 E3
    Date: 2009–08
  9. By: Cúrdia, Vasco; Woodford, Michael
    Abstract: We extend a standard New Keynesian model to incorporate heterogeneity in spending opportunities and two sources of (potentially time-varying) credit spreads, and to allow a role for the central bank's balance sheet in equilibrium determination. 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, and payment of interest on reserves --- alongside the traditional question of the proper choice of an operating target for an overnight policy rate. We also give particular attention to 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 provide policy prescriptions that apply equally when financial markets work efficiently and when they are subject to substantial disruptions, and equally when the zero bound is reached and when it is not a concern.
    Keywords: credit frictions; credit spread; interest on reserves; quantitative easing
    JEL: E52
    Date: 2009–10
  10. By: Rose, Andrew K; Spiegel, Mark
    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: asset; common; contagion; country; credit; cross-section; data; empirical; export; financial; international; MIMIC; model; stock; trade
    JEL: E65 F30
    Date: 2009–09
  11. By: Ellison, Martin; Sargent, Thomas J
    Abstract: We defend the forecasting performance of the FOMC from the recent criticism of Christina and David Romer. Our argument is that the FOMC forecasts a worst-case scenario that it uses to design decisions that will work well enough (are robust) despite possible misspecification of its model. Because these FOMC forecasts are not predictions of what the FOMC expects to occur under its model, it is inappropriate to compare their performance in a horse race against other forecasts. Our interpretation of the FOMC as a robust policymaker can explain all the findings of the Romers and rationalises differences between FOMC forecasts and forecasts published in the Greenbook by the staff of the Federal Reserve System.
    Keywords: forecasting; monetary policy; robustness
    JEL: C53 E52 E58
    Date: 2009–10
  12. By: Evans, George W.; Honkapohja, Seppo
    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 (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 pushing interest rates to the zero lower bound, temporary increases in government spending can be used to insulate the economy from deflation traps.
    Keywords: Adaptive Learning; Fiscal Policy; Monetary Policy; Zero Interest Rate Lower Bound
    JEL: E52 E58 E63
    Date: 2009–08
  13. By: Martin Mandler (University of Giessen, Department of Economics and Business, Licher Straße 66, D-35394 Gießen)
    Abstract: Using real-time data I estimate out-of-sample forecast uncertainty about the Federal Funds Rate. Combining a Taylor rule with a model of economic fundamentals I disentangle economically interpretable components of forecast uncertainty: uncertainty about future economic conditions and uncertainty about future monetary policy. Uncertainty about U.S. monetary policy fell to unprecedented low levels in the 1980s and remained low while uncertainty about future output and inflation declined only temporarily. This points to an important role of increased predictability of monetary policy in explaining the decline in macroeconomic volatility in the U.S. since the mid-1980s.
    Keywords: monetary policy reaction function, interest rate uncertainty, state-space model
    JEL: E52 C32 C53
    Date: 2009
  14. By: Richard Anton Braun (Faculty of Economics, University of Tokyo); Tomoyuki Nakajima (Institute of Economic Research, Kyoto University)
    Abstract: This paper considers the properties of an optimal monetary policy when households are subject to countercyclical uninsured income shocks. We develop a tractable incompletemarkets model with Calvo price setting. Incomplete markets creates a new distortion and that distortion is large in the sense that the welfare cost of business cycles is large in our model. 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
  15. By: Kollmann, Robert
    Abstract: Under efficient consumption risk sharing, as assumed in standard international business cycle models, a country’s aggregate consumption rises relative to foreign consumption, when the country’s real exchange rate depreciates. Yet, empirically, relative consumption and the real exchange rate are essentially uncorrelated. I show that this ‘consumption-real exchange rate anomaly’ can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand-to-mouth (HTM) lives. HTM behavior also generates greater volatility of the real exchange rate and of net exports, which likewise brings the model closer to the data.
    Keywords: consumption; hand to mouth consumers; limited asset market participation; real exchange rate
    JEL: F36 F41
    Date: 2009–09
  16. By: Michael Dotsey; Margarida Duarte
    Abstract: We show that standard alternative assumptions about the currency in which firms price export goods are virtually inconsequential for the properties of aggregate variables, other than the terms of trade, in a quantitative open-economy model. This result is in contrast to a large literature that emphasizes the importance of the currency denomination of exports for the properties of open-economy models.
    Keywords: local currency pricing; producer currency pricing; international relative prices; exchange rates; nontraded goods; distribution services
    JEL: F3 F41
    Date: 2009–11–20
  17. By: Fang Yao
    Abstract: This paper uses the Bayesian approach to solve and estimate a New Keynesian model augmented by a generalized Phillips curve, in which the shape of the price reset hazards can be identi…ed using aggregate data. My empirical result shows that a constant hazard function is easily rejected by the data. The empirical hazard function for post-1983 periods in the U.S. is consistent with micro evidence obtained using data from similar periods. The hazard for pre-1983 periods, however, exhibits a remarkable increasing pattern, implying that pricing decisions are characterized by both time- and state-dependent aspects. Additionally, real rigidity plays an important role, but not as big a role as found in empirical studies using limited information methods.
    Keywords: Real rigidity, Nominal rigidity, Hazard function, Bayesian estimation
    JEL: E12 E31
    Date: 2009–11
  18. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: This paper studies whether the central bank should adjust its inflation target to account for the systematic upward bias in measured inflation due to quality improvements in consumption goods. We show that 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 inflation target should not be corrected. If, on the other hand, quality-adjusted (or hedonic) prices are assumed to be sticky, then the inflation target should be raised by the magnitude of the bias.
    Keywords: Inflation Targets; Quality Bias; Ramsey Policy
    JEL: E52 E6
    Date: 2009–11
  19. By: David Backus; Espen Henriksen; Frederic Lambert; Christopher Telmer
    Abstract: With US trade and current account deficits approaching 6% of GDP, some have argued that the country is "on the comfortable path to ruin" and that the required "adjustment'' may be painful. We suggest instead that things are fine: although national saving is low, the ratios of household and consolidated net worth to GDP remain high. In our view, the most striking features of the world at present are the low rates of investment and growth in some of the richest countries, whose surpluses account for about half of the US deficit. The result is that financial capital is flowing out of countries with low investment and growth and into the US and other fast-growing countries. Oil exporters account for much of the rest.
    JEL: E21 F21 F32
    Date: 2009–11
  20. By: Michael D. Bordo; Christopher M. Meissner; David Stuckler
    Abstract: Foreign currency debt is widely believed to increase risks of financial crisis, especially after being implicated as a cause of the East Asian crisis in the late 1990s. In this paper, we study the effects of foreign currency debt on currency and debt crises and its indirect short and long run effects on output between 1880-1913 and 1973-2003 for 45 countries. Greater ratios of foreign currency debt to total debt are associated with increased risks of currency and debt crises, although the strength of the association depends crucially on the size of a country’s reserve base and its policy credibility. We find that financial crises, driven by exposure to foreign currency, resulted in significant permanent output losses. We evaluate our findings by looking at the risk posed by high levels of foreign currency liabilities in eastern Europe in late 2008.
    JEL: F34 F36 F43 N10
    Date: 2009–11
  21. By: Marimon, Ramon; Nicolini, Juan Pablo; Teles, Pedro
    Abstract: We study the interplay between competition and trust as efficiency-enhancing mechanims in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a lower bound on efficiency. Stationary inflation must be positive and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good. We show that the two problems, the time-inconsistency in the private provision of money and moral-hazard in the provision of experience goods, are isomorphic, and therefore the same results are attained in both settings.
    Keywords: Currency competition; Experience goods; Inflation; Trust
    JEL: E40 E50 E58 E60
    Date: 2009–08
  22. By: De Fiore, Fiorella; Teles, Pedro; Tristani, Oreste
    Abstract: How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idyosincratic shocks which may force them to default on their debt. Firms' assets and liabilities are denominated in nominal terms and predetermined when shocks occur. Monetary policy can therefore affect the real value of funds used to finance production. Furthermore, policy affects the loan and deposit rates. We find that maintaining price stability at all times is not optimal; that the optimal response to adverse financial shocks is to lower interest rates, if not at the zero bound, and engineer a short period of inflation; that the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones.
    Keywords: bankruptcy costs; debt deflation; Financial stability; optimal monetary policy; price level volatility; stabilization policy.
    JEL: E20 E44 E52
    Date: 2009–08
  23. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    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 year. 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.
    Keywords: Foreign demand for Currency; Friedman Rule; Optimal Inflation Rate
    JEL: E41
    Date: 2009–11
  24. By: V. LEWIS
    Abstract: This paper characterises optimal short-run monetary policy in an economy with monopolistic competition, endogenous firm entry, a cash-in-advance constraint and preset wages. Firms must make profits to cover entry costs; thus the markup on goods prices is efficient. However, a distortion results from the absence of a markup on leisure. This distortion affects the investment margin due to the labour requirement in entry. In the absence of fiscal instruments such as labour income subsidies, the optimal monetary policy under sticky wages achieves higher welfare than under flexible wages. The policy maker uses the money supply instrument to raise the real wage - the cost of leisure - above its flexible-wage level, in response to expansionary shocks. This induces a rise in labour hours and more production of goods and new firms.
    Keywords: entry, optimal policy
    JEL: E52 E63
    Date: 2009–08
  25. By: Michael Kumhof; Douglas Laxton
    Abstract: The effectiveness of recent fiscal stimulus packages significantly depends on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, fiscal deficits can have worrisome implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50 percent of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75 percent for a large economy such as the United States, and almost 100 percent for a small open economy.
    Keywords: Budget deficits , Business cycles , Current account deficits , Economic models , Fiscal policy , Fiscal sustainability , Gross domestic product , Monetary policy , Private sector , Public debt , Savings ,
    Date: 2009–10–28
  26. By: Darné, Olivier; Ferrara, Laurent
    Abstract: In addition to quantitative assessment of economic growth using econometric models, business cycle analyses have been proved to be helpful to practitioners in order to assess current economic conditions or to anticipate upcoming fluctuations. In this paper, we focus on the acceleration cycle in the euro area, namely the peaks and troughs of the growth rate which delimitate the slowdown and acceleration phases of the economy. Our aim is twofold: First, we put forward a reference turning point chronology of this cycle on a monthly basis, based on gross domestic product and industrial production index. We consider both euro area aggregate level and country specific cycles for the six main countries of the zone. Second, we come up with a new turning point indicator, based on business surveys carefully watched by central banks and short-term analysts, in order to follow in real-time the fluctuations of the acceleration cycle.
    Keywords: Acceleration cycle; Business surveys; Dating chronology; Euro area; Turning point indicator
    JEL: C22 C52 E32
    Date: 2009–07
  27. By: Cai, Xiaoming; Den Haan, Wouter
    Abstract: Several papers that make forecasts about the long-term impact of the current financial crisis rely on models in which there is only one type of financial crisis. These models tend to predict that the current crisis will have long lasting negative effects on economic growth. This paper points out the deficiency in this approach by analyzing the ability of "one-type-shock" models to correctly forecast the recovery from past economic downturns. It is shown that these models often overestimate the long-run impact of recessions and that slightly richer models that allow the effects of recessions to be both persistent and transitory predict recoveries much better.
    Keywords: financial crisis; forecasting; great recession; unit root
    JEL: C51 C53 E37
    Date: 2009–10
  28. By: Pagano, Marco; Volpin, Paolo
    Abstract: This paper examines the role of credit rating agencies in the subprime crisis that triggered the 2007-08 financial turmoil. The focus of the paper is on two aspects of ratings that contributed to the boom and bust of the market for asset-backed securities: rating inflation and coarse information disclosure. The paper discusses how regulation can be designed to mitigate these problems in the future. The suggestion is that regulators should require rating agencies to be paid by investors rather than by issuers (or at least constrain the way they are paid by issuers) and force greater disclosure of information about the underlying pool of securities.
    Keywords: credit rating agencies; crisis; default; liquidity; securitization; transparenccy
    JEL: D82 G18 G21
    Date: 2009–11
  29. By: Beetsma, Roel; Giuliodori, Massimo
    Abstract: This article provides an overview of recent research into the macroeconomic costs and benefits of monetary unification. We are primarily interested in Europe’s monetary union. Given that unification entails the loss of a policy instrument its potential benefits have to be found elsewhere. Unification may serve as a vehicle for beneficial institutional changes. In particular, it may be a route towards an independent monetary policy, which alleviates the scope for political pressure to relax monetary policy. Unification also eliminates harmful monetary policy spill-overs and competitive devaluations. We explore how disagreement between the monetary and fiscal authorities about their policy objectives can lead to extreme macroeconomic outcomes. Further, we pay considerable attention to the desirability (or not) of fiscal constraints and fiscal coordination in a monetary union. Monetary commitment and fiscal free-riding play a key role in this regard. Similar free-riding issues also feature prominently in the analysis of how unification influences structural reforms. We end with a brief discussion of monetary unification outside Europe. The cost-benefit trade-off of unification may differ substantially between industrialized and less-developed countries, where differences in fiscal needs and, hence, the reliance on seigniorage revenues may dominate the scope for unification.
    Keywords: credibility; EMU; euro; exchange rates; fiscal constraints; fiscal policy; structural reforms
    JEL: E5 E6 F4
    Date: 2009–10
  30. By: Alain N. Kabundi; Deniz Igan; Marcelo Pinheiro; Francisco Nadal-De Simone; Natalia T. Tamirisa
    Abstract: We examine the characteristics and comovement of cycles in house prices, credit, real activity and interest rates in advanced economies during the past 25 years, using a dynamic generalized factor model. House price cycles generally lead credit and business cycles over the long term, while in the short to medium term the relationship varies across countries. Interest rates tend to lag other cycles at all time horizons. While global factors are important, the U.S. business cycle, house price cycle and interest rate cycle generally lead the respective cycles in other countries over all time horizons, while the U.S. credit cycle leads mainly over the long term.
    Keywords: Bank credit , Business cycles , Credit demand , Cross country analysis , Developed countries , Economic growth , Economic models , Household credit , Housing prices , Interest rates , Time series ,
    Date: 2009–10–22
  31. By: Pau Rabanal; Prakash Kannan; Alasdair Scott
    Abstract: We find that inflation, output and the stance of monetary policy do not typically display unusual behavior ahead of asset price busts. By contrast, credit, shares of investment in GDP, current account deficits, and asset prices typically rise, providing useful, if not perfect, leading indicators of asset price busts. These patterns could also be observed in the build-up to the current crisis. Monetary policy was not the main, systematic cause of the current crisis. But, with inflation typically under control, central banks effectively accommodated these growing imbalances, raising the risk of damaging busts.
    Keywords: Asset prices , Credit expansion , Housing prices , Monetary policy , Price increases , Stock prices ,
    Date: 2009–11–16
  32. By: Davig, Troy; Leeper, Eric M.
    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.
    Keywords: fiscal stimulus; multipliers; zero interest rate bound
    JEL: E52 E62 E63
    Date: 2009–10
  33. By: Kollmann, Robert
    Abstract: Recent empirical research documents that an exogenous rise in government purchases in a given country triggers a persistent depreciation of its real exchange rate - which raises an important puzzle, as standard macro models predict an appreciation of the real exchange rate. This paper presents a simple model with limited international risk sharing that can account for the empirical real exchange rate response. When faced with a country-specific rise in government purchases, local households experience a negative wealth effect; they thus work harder, and domestic output increases. Under balanced trade (financial autarky) this supply-side effect is so strong that the terms of trade worsen, and the real exchange rate depreciates. In a bonds-only economy, an increase in government purchases triggers a real exchange rate depreciation, if the rise in government purchases is sufficiently persistent and/or labor supply is highly elastic.
    Keywords: government purchases; limited international risk sharing; real exchange rate
    JEL: E62 F36 F41
    Date: 2009–08
  34. By: Bilbiie, Florin Ovidiu
    Abstract: This paper proposes a theoretical explanation of the empirical finding that private consumption increases in response to an increase in government spending. The explanation requires two ingredients. First, labor demand expands (e.g. prices are sticky). Second, general non-separable preferences over consumption and leisure should be such that Frisch labor supply elasticity is lower than the constant-consumption elasticity; this implies that constant-consumption labor supply shifts left. Existing empirical evidence on the relative magnitudes of the two elasticities supports this hypothesis. The parametric conditions under which the result occurs are consistent with restrictions of concavity and non-inferiority of consumption and leisure.
    Keywords: fiscal policy; Frisch elasticity of labor supply; government spending; non-separable preferences; private consumption; sticky prices
    JEL: D11 E21 E62 H31
    Date: 2009–10
  35. By: Pinelopi Goldberg (Princeton University); Rebecca Hellerstein (Federal Reserve Bank of New York)
    Abstract: How rigid are producer prices? Conventional wisdom is that producer prices are more rigid than and so play less of an allocative role than do consumer prices. In the 1987-2008 micro data collected by the U.S. Bureau of Labor Statistics for the PPI, we find that producer prices for finished goods and services in fact exhibit roughly the same rigidity as do consumer prices that include sales, and substantially less rigidity than do consumer prices that exclude sales. Large firms change prices two to three times more frequently than do small firms, and by smaller amounts, particularly for price decreases. Longer price durations are associated with larger price changes, though there is considerable heterogeneity in this relationship. Long-term contracts are associated with somewhat greater price rigidity for goods and services, though the differences are not dramatic. The size of price decreases plays a key role in inflation dynamics, while the size of price increases does not. The frequencies of price increases and decreases tend to move together, and so cancel one another out.
    Keywords: Producer prices, consmer prices, contracts
    JEL: D24 D40 E30 E37 H31
    Date: 2009–11
  36. By: Ippei Fujiwara (Director, Institute for Monetary and Economic Studies (currently, Financial Markets Department), Bank of Japan. (E-mail:; Nao Sudo (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan. (E-mail:; Yuki Teranishi (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan. (E-mail:
    Abstract: How should monetary policy cooperation be designed when more than one country simultaneously faces zero lower bounds on nominal interest rates? To answer this question, we examine monetary policy cooperation with both optimal discretion and commitment policies in a two- country model. We reach the following conclusions. Under discretion, monetary policy cooperation is characterized by the intertemporal elasticity of substitution (IES), a key parameter measuring international spillovers, and no history dependency. On the other hand, under commitment, monetary policy features history dependence with international spillover effects.
    Keywords: Optimal Monetary Policy Cooperation, Zero Lower Bound
    JEL: E52 F33 F41
    Date: 2009–11
  37. By: Bilbiie, Florin Ovidiu
    Abstract: This paper shows that absent a commitment technology, central banks can nevertheless achieve the (timeless-)optimal commitment equilibrium if they are delegated with an objective function that is different from the societal one. In a prototypical forward-looking New Keynesian model, I develop a general linear-quadratic method to solve for the optimal delegation parameters that generate the optimal amount of inertia in a Markov-perfect equilibrium. I study the optimal design of some policy regimes that are nested within this framework: inflation, output-gap growth and nominal income growth targeting; and inflation and output-gap contracts. Notably, since the timeless-optimal equilibrium is time-consistent, so is any delegation scheme that implements it.
    Keywords: inflation, output gap growth and nominal income growth targeting.; discretion and commitment; inertia; optimal delegation; stabilization bias; time inconsistency; timeless-optimal policy
    JEL: C61 C73 E31 E52 E61
    Date: 2009–10
  38. By: Cwik, Tobias; Wieland, Volker
    Abstract: The global financial crisis has lead to a renewed interest in discretionary fiscal stimulus. Advocates of discretionary measures emphasize that government spending can stimulate additional private spending --- the so-called Keynesian multiplier effect. Thus, we investigate whether the discretionary spending announced by Euro area governments for 2009 and 2010 is likely to boost euro area GDP by more than one for one. Because of modeling uncertainty, it is essential that such policy evaluations be robust to alternative modeling assumptions and different parameterizations. Therefore, we use five different empirical macroeconomic models with Keynesian features such as price and wage rigidities to evaluate the impact of fiscal stimulus. Four of them suggest that the planned increase in government spending will reduce private spending for consumption and investment purposes significantly. If announced government expenditures are implemented with delay the initial effect on euro area GDP, when stimulus is most needed, may even be negative. Traditional Keynesian multiplier effects only arise in a model that ignores the forward-looking behavioral response of consumers and firms. Using a multi-country model, we find that spillovers between euro area countries are negligible or even negative, because direct demand effects are offset by the indirect effect of euro appreciation.
    Keywords: crowding-out; fiscal policy; fiscal stimulus; government spending multipliers; New-Keynesian models
    JEL: E62 E63 H31
    Date: 2009–08
  39. By: Favero, Carlo A; Giavazzi, Francesco
    Abstract: We use the time series of shifts in U.S. Federal tax liabilities constructed by Romer and Romer to estimate tax multipliers. Differently from the single-equation approach adopted by Romer and Romer, our estimation strategy (a Var that includes output, government spending and revenues, inflation and the nominal interest rate) does not rely upon the assumption that tax shocks are orthogonal to each other as well as to lagged values of other macro variables. Our estimated multiplier is much smaller: one, rather than three at a three-year horizon. When we split the sample in two sub-samples (before and after 1980) we find, before 1980, a multiplier whose size is never greater than one, after 1980 a multiplier not significantly different from zero. Following the findings in Bohn (1998), we also experiment with a model that includes debt and the non-linear government budget constraint. We find that, while in general not very important, the non-linearity that arises from the budget constraint makes a difference after 1980, when the response of fiscal variables to the level of the debt becomes stronger.
    Keywords: fiscal policy; government budget constraint; public debt; VAR models
    JEL: E62 H60
    Date: 2009–08
  40. By: Corsetti, Giancarlo; Meier, André; Müller, Gernot
    Abstract: The global recession of 2008-09 has revived interest in the international repercussions of domestic policy choices. This paper focuses on the case of fiscal stimulus, investigating cross-border spillovers from an increase in exhaustive government spending on the basis of a two-country business cycle model. Our model allows spillovers to be affected by a range of features, including trade elasticities, the size and openness of economies, as well as financial imperfections. Beyond these well-known determinants, however, we highlight the central importance of policy frameworks, notably the medium-term debt consolidation regime. We consider the plausible case in which a temporary debt-financed increase in government spending gives rise to higher future taxes along with some reduction in spending over time. The anticipated spending reversal not only strengthens the domestic stimulus effect but also enhances positive cross-border spillovers through its impact on global long-term interest rates. Thus, our findings lend support to the notion that coordinated short-term stimulus policies are most effective when coupled with credible medium-term consolidation plans featuring at least some spending restraint.
    Keywords: debt consolidation; Fiscal policy; international spillovers; monetary policy
    JEL: E62 F42
    Date: 2009–11
  41. By: Mertens, Karel; Ravn, Morten O.
    Abstract: We evaluate the extent to which a dynamic stochastic general equilibrium model can account for the impact of "surprise" and "anticipated" tax shocks estimated from U.S. time-series data. In U.S. data, surprise tax cuts have expansionary and persistent effects on output, consumption, investment and hours worked. Anticipated tax liability tax cuts give rise to contractions in output, investment and hours worked before their implementation while thereafter giving rise to an economic expansion. A DSGE model with changes in tax rates that may be anticipated or not, is shown to be able to account for the empirically estimated impact of tax shocks. The important features of the model include adjustment costs, variable capacity utilization and consumption habits. We derive Hicksian decompositions of the consumption and labor supply responses and show that substitution effects are key for understanding the impact of tax shocks. When allowing for rule-of-thumb consumers, we find that the estimate of their share of the population is only around 10-11 percent.
    Keywords: anticipation effects; fiscal policy; structural estimation; tax liabilities
    JEL: E20 E32 E62 H30
    Date: 2009–10
  42. By: Peter Tillmann (Justus Liebig University Gießen, Department of Economics, Licher Straße 62, D-35394 Gießen)
    Abstract: This note uncovers the Phillips curve trade-off perceived by U.S. monetary policymakers. For that purpose we use data on individual forecasts for unemployment and inflation submitted by each individual FOMC member, which was recently made available for the period 1992-1998. The results point to significant changes in the perceived trade-off over time with the Phillips curve flattening and the implied NAIRU falling towards the second half of the sample. Hence, the results suggest that policymakers were aware of these changes in real-time.
    Keywords: inflation forecast, NAIRU, Phillips curve, monetary policy, Federal Reserve
    JEL: E43 E52
    Date: 2009
  43. By: Richard Clarida; Josh Davis; Niels Pedersen
    Abstract: We examine the factors that account for the returns on currency carry trade strategies. Using a dataset of daily returns spanning 18 years for 5 different long - short currency carry portfolios, we first document a robust empirical relationship between carry trade excess returns and exchange rate volatility, both realized and implied. Specifically, we extend and refine the results in Bhansali (2007) by documenting that currency carry trade strategies implemented with forward contracts have payoff and risk characteristics that are similar to those of currency option strategies that sell out of the money puts on high interest rates currencies. Both strategies have the feature of collecting premiums or carry to generate persistent excess returns that unwind sharply resulting in losses when actual and implied volatility rise. We next also document significant volatility regime sensitivity for Fama regressions estimated over low and high volatility periods. Specifically we find that the well known result that a regression of the realized exchange rate depreciation on the lagged interest rate differential produces a negative slope coefficient (instead of unity as predicted by uncovered interest parity) is an artifact of the volatility regime: when volatility is in the top quartile, the Fama regression produces a positive coefficient that is greater than unity. The third section of the paper documents the existence of an intuitive and significant co-movement between currency risk premium and risk premia in yield curve factors that drive bond yields in the countries that comprise carry trade pairs. We show that yield curve level factors are positively correlated with carry trade excess returns while yield curve slope factors are negatively correlated with carry trade excess returns. Importantly, we show that this correlation is robust to the current crisis and to the inclusion of equity volatility in the model. What distinguishes carry trade returns in the current crisis from non crisis periods is not changed loading on yield curve factors but a much larger loading on the equity factor.
    JEL: F3 F31
    Date: 2009–11
  44. By: Jensen, Henrik
    Abstract: No. I demonstrate that econometric estimations of nominal interest rate rules may tell little, if anything, about an economy's determinacy properties. In particular, correct inference about the interest-rate response to inflation provides no information about determinacy. Instead, it could reveal whether optimal monetary policymaking is performed under discretion or commitment.
    Keywords: Equilibrium determinacy; Estimated Taylor rules; Interest rate rules; Monetary policy; Rules vs. discretion.
    JEL: E52 E58
    Date: 2009–11
  45. By: Weise, Charles L.
    Abstract: This paper argues that the Federal Reserve’s failure to control inflation during the 1970s was due to constraints imposed by the political environment. Members of the Fed understood that a serious attempt to tackle inflation would be unpopular with the public and would generate opposition from Congress and the Executive branch. The result was a commitment to the policy of gradualism, under which the Fed would attempt to reduce inflation with mild policies that would not trigger an outright recession, and premature abandonment of anti-inflation policies at the first sign of recession. Alternative explanations, in particular misperceptions of the natural rate of unemployment and misunderstandings of the nature of inflation, do not provide a complete explanation for Fed policy at key turning points during the Great Inflation. Evidence for this explanation of Fed behavior is found in Minutes and Transcripts of FOMC meetings and speeches of Fed chairmen. Empirical analysis verifies that references to the political environment at FOMC meetings are correlated with the stance of monetary policy during this period.
    Keywords: Great Inflation; Federal Reserve; monetary policy
    JEL: N1 E5 E6
    Date: 2009–10–10
  46. By: Beck, Günter; Wieland, Volker
    Abstract: In the New-Keynesian model, optimal interest rate policy under uncertainty is formulated without reference to monetary aggregates as long as certain standard assumptions on the distributions of unobservables are satisfied. The model has been criticized for failing to explain common trends in money growth and inflation, and that therefore money should be used as a cross-check in policy formulation (see Lucas (2007)). We show that the New-Keynesian model can explain such trends if one allows for the possibility of persistent central bank misperceptions. Such misperceptions motivate the search for policies that include additional robustness checks. In earlier work, we proposed an interest rate rule that is near-optimal in normal times but includes a cross-check with monetary information. In case of unusual monetary trends, interest rates are adjusted. In this paper, we show in detail how to derive the appropriate magnitude of the interest rate adjustment following a significant cross-check with monetary information, when the New-Keynesian model is the central bank's preferred model. The cross-check is shown to be effective in offsetting persistent deviations of inflation due to central bank misperceptions.
    Keywords: European Central Bank; monetary policy; money; New-Keynesian model; policy under uncertainty; quantity theory
    JEL: E32 E41 E43 E52 E58
    Date: 2009–10
  47. By: Scott Roger
    Abstract: This paper provides an overview of inflation targeting frameworks and macroeconomic performance under inflation targeting. Inflation targeting frameworks are generally quite similar across countries, and a broad consensus has developed in favor of "flexible" inflation targeting. The evidence shows that, although inflation target ranges are missed frequently in most countries, the inflation and growth performance under inflation targeting compares very favorably with performance under alternative frameworks. Inflation targeters also tentatively appear to be coping better with the commodity price and financial shocks in 2007-2009 than non-inflation targeters. Key issues going forward include adapting inflation targeting to emerging market and developing countries, and incorporating financial stability issues into the framework.
    Keywords: Central bank policy , Cross country analysis , Developing countries , Disinflation , Emerging markets , Financial sector , Financial stability , Inflation targeting , Monetary policy , Price stabilization , Transparency ,
    Date: 2009–10–27
  48. By: Jorge Restrepo; Carlos Garcia; Scott Roger
    Abstract: This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank's policy reaction function can improve macroeconomic performance. It is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exhange rate smoothing because of the perverse impact of exchange rate movements on activity.
    Keywords: Central bank policy , Demand , Developing countries , Economic models , Exchange rates , External shocks , Inflation targeting , Monetary policy , Risk premium ,
    Date: 2009–10–26
  49. By: Guerrieri, Luca; Gust, Christopher; López-Salido, J David
    Abstract: We develop and estimate an open economy New Keynesian Phillips curve (NKPC) in which variable demand elasticities give rise to movements in desired markups in response to changes in competitive pressure from abroad. A parametric restriction on our specification yields the standard NKPC, in which the elasticity is constant, and there is no role for foreign competition to influence domestic inflation. By comparing the unrestricted and restricted specifications, we provide evidence that foreign competition plays an important role in accounting for the behavior of inflation in the traded goods sector. Our estimates suggest that foreign competition accounted for more than half of a 4 percentage point decline in domestic goods inflation in the 1990s. Our results also provide evidence against demand curves with a constant elasticity in the context of models of monopolistic competition.
    Keywords: inflation; New Keynesian Phillips curve; variable markups
    JEL: E31 E32 F41
    Date: 2009–11
  50. By: Giuliano, Paola; Spilimbergo, Antonio
    Abstract: Do generations growing up during recessions have different socio-economic beliefs than generations growing up in good times? We study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. Using time and regional variations in macroeconomic conditions to identify the effect of recessions on beliefs, we show that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’ beliefs.
    Keywords: belief formation; macroeconomic shocks; recession; role of the governement
    JEL: E60 P16 Z13
    Date: 2009–08
  51. By: Imbs, Jean; Mumtaz, Haroon; Ravn, Morten O.; Rey, Hélène
    Abstract: We use a unique dataset on television prices across European countries and regions to investigate the sources of differences in price levels. Our findings are as follows: (i) Quality is a crucial determinant of price differences. Even in an integrated economic zone as Europe, rich economies tend to consume higher quality goods. This effect accounts for the lion’s share of international price dispersion. (ii) Sizable international price differentials subsist even for the same television sets. The average bilateral price difference is as high as 80 euros, or 8% of the average TV price in our sample. (iii) EMU countries display lower price dispersion than non-EMU countries. (iv) Absolute price differentials and relative price volatility are positively correlated with exchange rate volatility, but not with conventional measures of transport costs. (v) Importantly we show brand premia are sizable. They differ markedly across borders, in a way that does not correlate with transport costs, nor exchange rate movements. Taken together, the evidence is consistent firms exploiting market power through brand values to price discriminate across borders.
    Keywords: border effects; brand perception; international and regional price differences
    JEL: F15 F23 F41
    Date: 2009–10
  52. By: Le, Vo Phuong Mai; Minford, Patrick; Wickens, Michael R.
    Abstract: We evaluate the Smets-Wouters model of the US using indirect inference with a VAR representation of the main US data series. We find that the original New Keynesian SW model is on the margin of acceptance when SW's own estimates of the variances and time-series behaviour of the structural errors are used. However when the structural errors implied jointly by the data and the structural model are used the model is rejected. We also construct an alternative (New Classical) version of the model with flexible wages and prices and a one-period information lag. This too is rejected. But when small proportions of both the labour and product markets are assumed to be imperfectly competitive within otherwise flexible markets the resulting `weighted' model is accepted.
    Keywords: Bootstrap; DSGE; grea moderation; indirect inference; New Classical; New Keynesian; regime change; structural break; US Model; VAR; Wald statistic
    JEL: C12 C32 C52 E1
    Date: 2009–11
  53. By: Martin Mandler (University of Giessen, Department of Economics and Business, Licher Straße 62, D-35394 Gießen)
    Abstract: This paper shows how to estimate forecast uncertainty about future short-term interest rates by combining a time-varying Taylor rule with an unobserved components model of economic fundamentals. Using this model I separate interest rate uncertainty into economically meaningful components that represent uncertainty about future economic conditions and uncertainty about future monetary policy. Results from estimating the model on U.S. data suggest important changes in uncertainty about future short-term interest rates over time and highlight the relative importance of the different elements which underlie interest rate uncertainty for the U.S.
    Keywords: Monetary policy, reaction functions, state-space models, output-gap forecasts, inflation forecasts
    JEL: E52 C32 C53
    Date: 2009
  54. By: Bacchetta, Philippe; Beutler, Toni; van Wincoop, Eric
    Abstract: The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. This result is behind the famous Meese-Rogoff puzzle. In this paper we evaluate whether parameter instability can account for this puzzle. We consider a theoretical reduced-form relationship between the exchange rate and fundamentals in which parameters are either constant or time varying. We calibrate the model to data for exchange rates and fundamentals and conduct the exact same Meese-Rogoff exercise with data generated by the model. Our main finding is that the impact of time-varying parameters on the prediction performance is either very small or goes in the wrong direction. To help interpret the findings, we derive theoretical results on the impact of time-varying parameters on the out-of-sample forecasting performance of the model. We conclude that it is not time-varying parameters, but rather small sample estimation bias, that explains the Meese-Rogoff puzzle.
    Keywords: Exchange rate forecasting; exchange rate models
    JEL: F31 F37 F41
    Date: 2009–07
  55. By: Jermann, Urban; Quadrini, Vincenzo
    Abstract: In this paper we document the cyclical properties of U.S. firms' financial flows. Equity payouts are procyclical and debt payouts are countercyclical. We develop a model with explicit roles for debt and equity financing and explore how the observed dynamics of real and financial variables are affected by `financial shocks', that is, shocks that affect the firms' capacity to borrow. Standard productivity shocks can only partially explain the movements in real and financial variables. The addition of financial shocks brings the model much closer to the data. The recent events in the financial sector show up clearly in our model as a tightening of firms' financing conditions causing the GDP decline in 2008-09. Our analysis also suggests that the downturns in 1990-91 and 2001 were strongly influenced by changes in credit conditions.
    Keywords: business cycle; debt and equity; Financial frictions
    JEL: E32 G10
    Date: 2009–09
  56. By: Dieter Nautz; Jan Scheithauer
    Abstract: Overnight money market rates are the predominant operational target of monetary policy. As a consequence, central banks have re- designed the implementation of monetary policy to keep the deviations of the overnight rate from the key policy rate small and short-lived. This paper uses fractional integration techniques to explore how the operational framework of four major central banks affects the persis- tence of overnight rates. Our results suggest that a well-communicated and transparent interest rate target of the central bank is a particu- larly important condition for a low degree of overnight rate persistence.
    Keywords: Controllability and Persistence of Interest Rates; Oper- ational Framework of Central Banks; Long Memory and Fractional Integration
    JEL: E52 C22
    Date: 2009–11
  57. By: Sven Schreiber (Macroeconomic Policy Institute (IMK) at Hans Boeckler Foundation, Duesseldorf)
    Abstract: We use frequency-wise Granger-causality tests and error-correction models to investigate the driving forces behind longer-run inflation developments in the euro area. Employing an eclectic approach we consider various relevant theories. With a general-to-specific testing strategy we distill the unemployment rate and long-term interest rates as causal for low-frequency variations of inflation. Money growth is found to be causal for inflation only if other variables are omitted, which we therefore interpret as a spurious result.
    Keywords: money growth, Granger causality, quantity theory
    JEL: E31 E40
    Date: 2009
  58. By: Fuentes-Albero, Cristina; Kryshko, Maxym; Ríos-Rull, José-Víctor; Santaeulàlia-Llopis, Raül; Schorfheide, Frank
    Abstract: In this paper, we employ both calibration and modern (Bayesian) estimation methods to assess the role of neutral and investment-specific technology shocks in generating fluctuations in hours. Using a neoclassical stochastic growth model, we show how answers are shaped by the identification strategies and not by the statistical approaches. The crucial parameter is the labor supply elasticity. Both a calibration procedure that uses modern assessments of the Frisch elasticity and the estimation procedures result in technology shocks accounting for 2% to 9% of the variation in hours worked in the data. We infer that we should be talking more about identification and less about the choice of particular quantitative approaches.
    Keywords: Business Cycle Fluctuations; Calibration; DSGE Model Estimation; Technology Shocks
    JEL: C1 C8 E3
    Date: 2009–09
  59. By: Gust, Christopher; López-Salido, J David
    Abstract: We develop a DSGE model in which monetary policy generates 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. While stimulative monetary policy can lower risk in equity markets, it is also associated with higher inflation expectations and inflation risk premia. The model gives rise to periods in which the zero lower bound constraint on the nominal interest rate binds and demand for liquidity jumps, leading to procyclical movements in velocity.
    Keywords: equity premium; monetary policy; velocity
    JEL: E44 E52
    Date: 2009–08
  60. By: Raphael A. Espinoza; Fabio Fornari; Marco Lombardi
    Abstract: The U.S. business cycle typically leads the European cycle by a few quarters and this can be used to forecast euro area GDP. We investigate whether financial variables carry additional information. We use vector autoregressions (VARs) which include the U.S. and the euro area GDPs as a minimal set of variables as well as growth in the Rest of the World (an aggregation of seven small countries) and selected combinations of financial variables. Impulse responses (in-sample) show that shocks to financial variables influence real activity. However, according to out-of-sample forecast exercises using the Root Mean Square Error (RMSE) metric, this macro-financial linkage would be weak: financial indicators do not improve short and medium term forecasts of real activity in the euro area, even when their timely availability, relative to GDP, is exploited. This result is partly due to the 'average' nature of the RMSE metric: when forecasting ability is assessed as if in real time (conditionally on the information available at the time of the forecast), we find that models using financial variables would have been preferred, ex ante, in several episodes, in particular between 1999 and 2002. This result suggests that one should not discard, on the basis of RMSE statistics, the use of predictive models that include financial variables if there is a theoretical prior that a financial shock is affecting growth.
    Keywords: Asset prices , Business cycles , Cross country analysis , Economic forecasting , Economic growth , Economic models , Euro Area , Financial crisis , Financial sector , Global Financial Crisis 2008-2009 , Stock markets ,
    Date: 2009–09–14
  61. By: Lee, Kevin; Olekalns, Nils; Shields, Kalvinder K
    Abstract: A canonical model is described which reflects the real-time informational context of decision-making. Comparisons are drawn with ‘conventional’ models that incorrectly omit market-informed insights on future macroeconomic conditions and inappropriately incorporate information that was not available at the time. It is argued that conventional models are misspecified and misinterpret news but that these deficiencies will not be exposed either by diagnostic tests applied to the conventional models or by typical impulse response analyses. This is demonstrated through an analysis of quarterly US data 1968q4-2008q4. However, estimated real-time models considerably improve out-ofsample forecasting performance, provide more accurate ‘nowcasts’ of the current state of the macroeconomy and provide more timely indicators of the business cycle. The point is illustrated through an analysis of the US recessions of 1990q3-1991q2 and 2001q1-2001q4 and the most recent experiences of 2008.
    Keywords: Business Cycles; Nowcasting; Real-Time Data; Structural Modelling
    JEL: E52 E58
    Date: 2009–09
  62. By: Pau Rabanal; Prakash Kannan; Alasdair Scott
    Abstract: We argue that a stronger emphasis on macrofinancial risk could provide stabilization benefits. Simulations results suggest that strong monetary reactions to accelerator mechanisms that push up credit growth and asset prices could help macroeconomic stability. In addition, using a macroprudential instrument designed specifically to dampen credit market cycles would also be useful. But invariant and rigid policy responses raise the risk of policy errors that could lower, not raise, macroeconomic stability. Hence, discretion would be required.
    Keywords: Asset prices , Capital markets , Central banks , Credit controls , Credit demand , Credit risk , Economic models , External shocks , Household credit , Housing prices , Monetary policy , Price increases ,
    Date: 2009–09–23
  63. By: Melvin, Michael; Taylor, Mark P
    Abstract: We provide an overview of the important events of the recent global financial crisis and their implications for exchange rates and market dynamics. Our goal is to catalogue all that was truly of major importance in this episode. We also construct a quantitative measure of crises that allows for a comparison of the current crisis to earlier events. In addition, we address whether one could have predicted costly events before they happened in a manner that would have allowed market participants to moderate their risk exposures and yield better returns from currency speculation.
    Keywords: Financial crisis; foreign exchange market
    JEL: F31
    Date: 2009–09
  64. By: D Agostino, Antonello; Gambetti, Luca; Giannone, Domenico
    Abstract: The aim of this paper is to assess whether explicitly modeling structural change increases the accuracy of macroeconomic forecasts. We produce real time out-of-sample forecasts for inflation, the unemployment rate and the interest rate using a Time-Varying Coefficients VAR with Stochastic Volatility (TV-VAR) for the US. The model generates accurate predictions for the three variables. In particular for inflation the TV-VAR outperforms, in terms of mean square forecast error, all the competing models: fixed coefficients VARs, Time-Varying ARs and the naïve random walk model. These results are also shown to hold over the most recent period in which it has been hard to forecast inflation.
    Keywords: Forecasting; Inflation; Stochastic Volatility; Time Varying Vector Autoregression
    JEL: C32 E37 E47
    Date: 2009–11
  65. By: Mertens, Karel; Ravn, Morten O.
    Abstract: Empirical estimates of the impact of government spending shocks disagree on central issues such as the size of output multipliers and the responses of consumption and the real wage. One explanation for the disagreement is that fiscal shocks are often anticipated. Due to misspecification of the information set, anticipation effects may invalidate SVAR estimates of impulse responses. We use economic theory to derive a fiscal SVAR estimator that is applicable when fiscal shocks are anticipated. We study its properties and apply it to US data. We fail to find evidence that anticipation effects overturn the existing findings from the fiscal SVAR literature.
    Keywords: anticipation effects; fiscal policy; structural vector autoregressions
    JEL: C32 E20 E32 E62
    Date: 2009–08
  66. By: Ahmadi, Pooyan Amir; Ritschl, Albrecht
    Abstract: The prominent role of monetary policy in the U.S. interwar depression has been conventional wisdom since Friedman and Schwartz [1963]. This paper presents evidence on both the surprise and the systematic components of monetary policy between 1929 and 1933. Doubts surrounding GDP estimates for the 1920s would call into question conventional VAR techniques. We therefore adopt the FAVAR methodology of Bernanke, Boivin, and Eliasz [2005], aggregating a large number of time series into a few factors and inserting these into a monetary policy VAR. We work in a Bayesian framework and apply MCMC methods to obtain the posteriors. Employing the generalized sign restriction approach toward identification of Amir Ahmadi and Uhlig [2008], we find the effects of monetary policy shocks to have been moderate. To analyze the systematic policy component, we back out the monetary policy reaction function and its response to aggregate supply and demand shocks. Results broadly confirm the Friedman/Schwartz view about restrictive monetary policy, but indicate only moderate effects. We further analyze systematic policy through conditional forecasts of key time series at critical junctures, taken with and without the policy instrument. Effects are again quite moderate. Our results caution against a predominantly monetary interpretation of the Great Depression.
    Keywords: Bayesian FAVAR; Dynamic Factor Model; Friedman Schwartz Hypothesis; Great Depression; Monetary policy
    JEL: C11 C53 E37 E47 E52 N12
    Date: 2009–11
  67. By: Pooyan Amir Ahmadi; Albrecht Ritschl
    Abstract: The prominent role of monetary policy in the U.S. interwar depression has been conventional wisdom since Friedman and Schwartz [1963]. This paper presents evidence on both the surprise and the systematic components of monetary policy between 1929 and 1933. Doubts surrounding GDP estimates for the 1920s would call into question conventional VAR techniques. We therefore adopt the FAVAR methodology of Bernanke, Boivin, and Eliasz [2005], aggregating a large number of time series into a few factors and inserting these into a monetary policy VAR. We work in a Bayesian framework and apply MCMC methods to obtain the posteriors. Employing the generalized sign restriction approach toward identification of Amir Ahmadi and Uhlig [2008], we find the effects of monetary policy shocks to have been moderate. To analyze the systematic policy component, we back out the monetary policy reaction function and its response to aggregate supply and demand shocks. Results broadly confirm the Friedman/Schwartz view about restrictive monetary policy, but indicate only moderate effects. We further analyze systematic policy through conditional forecasts of key time series at critical junctures, taken with and without the policy instrument. Effects are again quite moderate. Our results caution against a predominantly monetary interpretation of the Great Depression.
    Keywords: Great Depression, monetary policy, Bayesian FAVAR, Dynamic Factor Model, Gibb Sampling
    JEL: N12 E37 E47 E52 C11 C53
    Date: 2009–11
  68. By: Mertens, Karel; Ravn, Morten O.
    Abstract: We provide empirical evidence on the dynamic effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes using a timing-convention. We document that pre-announced but not yet implemented tax cuts give rise to contractions in output, investment and hours worked while real wages increase. In contrast, there are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary and persistent effects on output, consumption, investment, hours worked and real wages. Results are shown to be very robust. We argue that tax shocks are empirically important impulses to the U.S. business cycle and that anticipation effects have been important during several business cycle episodes.
    Keywords: anticipation effects; business cycles; fiscal policy; tax liabilities
    JEL: E20 E32 E62 H30
    Date: 2009–07
  69. By: Karel Mertens (Cornell University); Morten O. Ravn (University College London; University of Southampton; CEPR)
    Abstract: The authors provide empirical evidence on the dynamic effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes using a timing convention. We document that pre-announced but not yet implemented tax cuts give rise to contractions in output, investment and hours worked, while real wages increase. In contrast, there are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary and persistent effects on output, consumption, investment, hours worked and real wages. The findings are shown to be very robust. We argue that tax shocks are empirically important impulses to the US business cycle and that anticipation effects have been significant over several business cycle episodes
    Keywords: fiscal policy shocks, tax liabilities, anticipation effects, business cycles
    JEL: E20 E32 E62 H30
    Date: 2009–11
  70. By: Carriero, Andrea; Kapetanios, George; Marcellino, Massimiliano
    Abstract: The paper addresses the issue of forecasting a large set of variables using multivariate models. In particular, we propose three alternative reduced rank forecasting models and compare their predictive performance for US time series with the most promising existing alternatives, namely, factor models, large scale Bayesian VARs, and multivariate boosting. Specifically, we focus on classical reduced rank regression, a two-step procedure that applies, in turn, shrinkage and reduced rank restrictions, and the reduced rank Bayesian VAR of Geweke (1996). We find that using shrinkage and rank reduction in combination rather than separately improves substantially the accuracy of forecasts, both when the whole set of variables is to be forecast, and for key variables such as industrial production growth, inflation, and the federal funds rate. The robustness of this finding is confirmed by a Monte Carlo experiment based on bootstrapped data. We also provide a consistency result for the reduced rank regression valid when the dimension of the system tends to infinity, which opens the ground to use large scale reduced rank models for empirical analysis.
    Keywords: Bayesian VARs; factor models; forecasting; reduced rank.
    JEL: C11 C13 C33 C53
    Date: 2009–09
  71. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael R.
    Abstract: We examine a two country model of the EU and the US. Each has a small sector of the labour and product markets in which there is wage/price rigidity, but otherwise enjoys flexible wages and prices with a one quarter information lag. Using a VAR to represent the data, we find the model as a whole is rejected. However it is accepted for real variables, output and the real exchange rate, suggesting mis-specification lies in monetary relationships. The model highlights a lack of spillovers between the US and the EU.
    Keywords: Bootstrap; DSGE; indirect inference; New Classical; New Keynesian; Open economy model; VAR; Wald statistic
    JEL: C12 C32 C52 E1
    Date: 2009–07
  72. By: Le, Vo Phuong Mai; Minford, Patrick; Wickens, Michael R.
    Abstract: We review the methods used in many papers to evaluate DSGE models by comparing their simulated moments with data moments. We compare these with the method of Indirect Inference to which they are closely related. We illustrate the comparison with contrasting assessments of a two-country model in two recent papers. We conclude that Indirect Inference is the proper end point of the puzzles methodology.
    Keywords: anomaly; Bootstrap; DSGE; indirect inference; puzzle; US-EU Model; VAR; Wald statistic
    JEL: C12 C32 C52 E1
    Date: 2009–11
  73. By: Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
    Abstract: This paper compares the mixed-data sampling (MIDAS) and mixed-frequency VAR (MF-VAR) approaches to model specification in the presence of mixed-frequency data, e.g., monthly and quarterly series. MIDAS leads to parsimonious models based on exponential lag polynomials for the coefficients, whereas MF-VAR does not restrict the dynamics and therefore can suffer from the curse of dimensionality. But if the restrictions imposed by MIDAS are too stringent, the MF-VAR can perform better. Hence, it is difficult to rank MIDAS and MF-VAR a priori, and their relative ranking is better evaluated empirically. In this paper, we compare their performance in a relevant case for policy making, i.e., nowcasting and forecasting quarterly GDP growth in the euro area, on a monthly basis and using a set of 20 monthly indicators. It turns out that the two approaches are more complementary than substitutes, since MF-VAR tends to perform better for longer horizons, whereas MIDAS for shorter horizons.
    Keywords: euro area growth; MIDAS; mixed-frequency data; mixed-frequency VAR; nowcasting
    JEL: C53 E37
    Date: 2009–09
  74. By: Francis Vitek
    Abstract: This paper develops a panel unobserved components model of the monetary transmission mechanism in the world economy, disaggregated into its fifteen largest national economies. This structural macroeconometric model features extensive linkages between the real and financial sectors, both within and across economies. A variety of monetary policy analysis and forecasting applications of the estimated model are demonstrated, based on a novel Bayesian framework for conditioning on judgment.
    Keywords: Business cycles , Cross country analysis , Developed countries , Economic forecasting , Economic models , Emerging markets , Financial sector , Inflation , International financial system , Monetary policy , Monetary transmission mechanism , Real sector ,
    Date: 2009–10–28
  75. By: Daniel Leigh
    Abstract: This paper investigates how monetary policy can help ward off a protracted deflationary slump when policy rates are near the zero bound by studying the experience of Japan during the "Lost Decade" which followed the asset-price bubble collapse in the early 1990s. Estimation results based on a structural model suggest that the Bank of Japan's interest-rate policy fits a conventional forward-looking reaction function with an inflation target of about 1 percent. The disappointing economic performance thus seems primarily due to a series of adverse economic shocks rather than an extraordinary policy error. In addition, counterfactual policy simulations based on the estimated structural model suggest that simply raising the inflation target would not have yielded a lasting improvement in performance. However, a price-targeting rule or a policy rule that combined a higher inflation target with a more aggressive response to output would have achieved superior stabilization results.
    Keywords: Deflation , Economic stabilization , Economic models , External shocks , Inflation targeting , Interest rate policy , Monetary policy ,
    Date: 2009–10–23
  76. By: Shigenori Shiratsuka (Associate Institute for Monetary and Economic Studies, Bank of Japan (
    Abstract: This paper re-examines Japanfs experience of the quantitative easing policy in light of the policy responses against the current financial and economic crisis. Central banks use various unconventional measures in the range of financial assets being purchased and in the scale of such purchases. As the scope of such unconventional measures expands, it is often emphasized that the U.S. Federal Reserve policy reactions focus more on the asset side of its balance sheet, the so- called credit easing. By contrast, the Bank of Japanfs quantitative easing policy from 2001 to 2006 set a target for the current account balances, the liability side of its balance sheet. It is crucial to understand that central banks combine the two elements of their balance sheets, size and composition, to enhance the overall effects of unconventional policy measures, given constraints on policy implementation.
    Keywords: Quantitative easing, Credit easing, Unconventional monetary policy, Central bank balance sheet
    JEL: E44 E52 E58
    Date: 2009–11
  77. By: Cuche-Curti, Nicolas A. (Swiss National Bank); Dellas, Harris (University of Bern); Natal, Jean-Marc (Swiss National Bank)
    Abstract: This paper presents a DSGE (dynamic stochastic general equilibrium) model of the Swiss economy used since 2007 in the monetary policy decision process at the Swiss National Bank. In addition to forecasting the likely course of main macro variables under various scenarios for the Swiss economy, the model DSGE-CH serves as a laboratory for studying business cycles and examining the effects of actual and hypothetical monetary policies. The microfounded model DSGE-CH represents Switzerland as a small open economy with optimizing economic agents facing several real and nominal rigidities and exogenous foreign and domestic shocks. The comparison of the model’s implications with the real world indicates that DSGE-CH performs well along standard dimensions. It captures the overall stochastic structure of the Swiss economy as represented by the moments of its key macroeconomic variables; furthermore, it has appropriate dynamic properties, as judged by its impulse response functions. Finally, it quite accurately replicates the historical path of major Swiss variables.
    Keywords: DSGE; forecasting; small open economy; Switzerland
    JEL: E27 E52 E58
    Date: 2009–10–01

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