nep-cba New Economics Papers
on Central Banking
Issue of 2009‒12‒05
27 papers chosen by
Alexander Mihailov
University of Reading

  1. Demography and Growth: A Unified Treatment of Overlapping Generations By Neil Bruce; Stephen J. Turnovsky
  2. From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons By Almunia, Miguel; Bénétrix, Agustín; Eichengreen, Barry; O Rourke, Kevin H.; Rua, Gisela
  3. Pros and Cons of various fiscal measures to stimulate the economy By Carine Bouthevillain; John Caruana; Cristina Checherita; Jorge Cunha; Esther Gordo; Stephan Haroutunian; Amela Hubic; Geert Langenus; Bernhard Manzke; Javier J. Pérez; Pietro Tommasino
  4. Limitations on the Effectiveness of Forward Guidance at the Zero Lower Bound By Levin, Andrew; López-Salido, J David; Nelson, Edward; Yun, Tack
  5. Financial (in)stability, supervision and liquidity injections: a dynamic general equilibrium approach By Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
  6. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008 By Schularick, Moritz; Taylor, Alan M.
  7. The Carry Trade and Fundamentals: Nothing to Fear But FEER Itself By Jordà, Òscar; Taylor, Alan M.
  8. Unconventional monetary policies: an appraisal By Claudio Borio; Piti Disyatat
  9. Ten propositions about liquidity crises By Claudio Borio
  10. Do supermarket prices change from week to week? By Ellis, Colin
  11. An Optimum-Currency-Area Odyssey By Harris Dellas; George S.Tavlas
  12. Accuracy of Deterministic Extended-Path Solution Methods for Dynamic Stochastic Optimization Problems in Macroeconomics By David R.F. Love
  13. Evaluating ensemble density combination - forecasting GDP and inflation By Karsten R. Gerdrup; Anne Sofie Jore; Christie Smith; Leif Anders Thorsrud
  14. Lending Relationships and Monetary Policy By Yunus Aksoy; Henrique S. Basso; Javier Coto-Martinez
  15. Optimal Monetary Policy during Endogenous Housing-Market Boom-Bust Cycles By Hajime Tomura
  16. Causal Links Between US Economic Sectors By Gladys Hui Ting Lee; Yiting Zhang; Jian Cheng Wong; Manamohan Prusty; Siew Ann Cheong
  17. International spillover effects and monetary policy activism By Lipinska, Anna; Spange, Morten; Tanaka, Misa
  18. ECB Monetary Policy and Term Structure of Interest Rates in the Euro Area: an Empirical Analysis By Filippo COSSETTI; Francesco GUIDI
  19. Aggregate Comovements, Anticipation, and Business Cycles. By David R.F. Love
  20. Asymmetric Standing Facilities: An Unexploited Monetary Policy Tool By Gabriel Pérez Quirós; Hugo Rodríguez Mendizábal
  21. Testing the Monetary Policy Rule in the US: a Reconsideration of the Fed’s Behaviour By Minford, Patrick; Ou, Zhirong
  22. Can the Fiscal Theory of the price Level explain UK inflation in the 1970s? By Fan, Jingwen; Minford, Patrick
  23. Fiscal adjustments and asset price movements By Athanasios Tagkalakis
  24. Bagehot for beginners: The making of lending of last resort operations in the mid-19th century By Vincent Bignon; Marc Flandreau; Stefano Ugolini
  25. Price stability and inflation persistence during the international gold standard: The Scandinavian case By ola Grytten; Arngrim Hunnes
  26. The historical connection between short term output and prices in a small open economy By ola Grytten; Arngrim Hunnes
  27. A Note on the Predictive Content of PPI over CPI Inflation: The Case of Mexico By José Julián Sidaoui; Carlos Capistrán; Daniel Chiquiar; Manuel Ramos Francia

  1. By: Neil Bruce; Stephen J. Turnovsky
    Abstract: We construct a unified overlapping-generations (OLG) framework of equilibrium growth that includes the Blanchard “perpetual youth” model, the Samuelson model, and the infinitely-lived representative agent growth model as limit specifications of a “realistic”, two-parameter survivorship function. We analyze how demographic conditions affect the equilibrium growth and savings rates in an economy by computing equilibrium rates under different specifications of the survivorship function. Differences in population growth rates, life-expectancies, retirement durations, and the degree of concavity of the survivorship function are found to have significant impacts on equilibrium growth rates. The observed effects are consistent with some cross-country correlations between demographic conditions and growth rates. We also identify a potential “Malthusian growth trap” in economies where life expectancy is short, fertility rates are high, and households work most of their lives—conditions often found in less developed economies.
    Date: 2009–04
  2. By: Almunia, Miguel; Bénétrix, Agustín; Eichengreen, Barry; O Rourke, Kevin H.; Rua, Gisela
    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.
    Keywords: credit crisis; Great Depression; multipliers
    JEL: E63 N10
    Date: 2009–11
  3. By: Carine Bouthevillain; John Caruana; Cristina Checherita; Jorge Cunha; Esther Gordo; Stephan Haroutunian; Amela Hubic; Geert Langenus; Bernhard Manzke; Javier J. Pérez; Pietro Tommasino
    Abstract: We review the theoretical and empirical literature on the effects of discretionary fiscal policies, against the background of renewed fiscal policy activism. In this sense, we analyze the main pros and cons of various fiscal tools to stimulate the economy. We show that it is extremely difficult to elaborate an unambiguous catalogue of measures defining an ?optimal? fiscal package. Among the requirements that fiscal measures should be ?timely, targeted and temporary? (TTT), the implementation of the first one ? timeliness ? is the least controversial criterion in the current situation. On the basis of the literature review, we provide some hints on the appropriate composition of a fiscal stimulus packages. The review of the pros and cons of short-term fiscal stimulus packages cannot be decoupled from the discussion of the ?exit strategies?, i.e. the means of financing fiscal expansions, and the intertemporal consistency of fiscal plans.
    Date: 2009–09
  4. By: Levin, Andrew; López-Salido, J David; Nelson, Edward; Yun, Tack
    Abstract: The recent literature on monetary policy in the presence of a zero lower bound on interest rates has shown that forward guidance regarding the path of interest rates can be very effective in preserving macroeconomic stability in the face of a contractionary demand shock; moreover, that literature apparently leaves little scope for any further improvements in stabilization performance via nontraditional monetary policies. In this paper, we characterize optimal policy under commitment in a prototypical New Keynesian model and examine whether those conclusions are sensitive to the specification of the shock process and to the interest elasticity of aggregate demand. Although forward guidance is effective in offsetting natural rate shocks of moderate size and persistence, we find that the macroeconomic outcomes are much less appealing for larger and more persistent shocks, especially when the interest elasticity parameter is set to values widely used in the literature. Thus, while forward guidance could be sufficient for mitigating the effects of a 'Great Moderation'-style shock, a combination of forward guidance and other monetary policy measures - such as large-scale asset purchases - might well be called for in responding to a 'Great Recession'-style shock.
    Keywords: Forward Guidance; Optimal Policy under Commitment; Zero Lower Bound
    JEL: E32 E43 E52
    Date: 2009–11
  5. By: Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
    Abstract: This paper develops a dynamic stochastic general equilibrium model with interactions between a heterogeneous banking sector and other private agents. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbank market. Our aim is to understand the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real data and used for simulations. We show that liquidity injections reduce financial instability but have ambiguous effects on output fluctuations. The model also confirms the partial equilibrium literature results on the procyclicality of Basel II.
    Keywords: DSGE, Banking sector, Default risk, Supervision, Money
    JEL: E13 E20 G21 G28
    Date: 2008–10
  6. By: Schularick, Moritz; Taylor, Alan M.
    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
    Keywords: banking; central banking; financial stability; liquidity; monetary policy
    JEL: E44 E51 E58 G20 N10 N20
    Date: 2009–11
  7. By: Jordà, Òscar; Taylor, Alan M.
    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.
    Keywords: efficient markets hypothesis; foreign exchange market
    JEL: C44 F31 F37 G14 G15
    Date: 2009–11
  8. By: Claudio Borio; Piti Disyatat
    Abstract: The recent global financial crisis has led central banks to rely heavily on "unconventional" monetary policies. This alternative approach to policy has generated much discussion and a heated and at times confusing debate. The debate has been complicated by the use of different definitions and conflicting views of the mechanisms at work. This paper sets out a framework for classifying and thinking about such policies, highlighting how they can be viewed within the overall context of monetary policy implementation. The framework clarifies the differences among the various forms of unconventional monetary policy, provides a systematic characterisation of the wide range of central bank responses to the crisis, helps to underscore the channels of transmission, and identifies some of the main policy challenges. In the process, the paper also addresses a number of contentious analytical issues, notably the role of bank reserves and their inflationary consequences.
    Keywords: unconventional monetary policy, balance sheet policy, credit policy, quantitative easing, credit easing, monetary policy implementation, transmission mechanism, interest rates
    Date: 2009–11
  9. By: Claudio Borio
    Abstract: What are liquidity crises? And what can be done to address them? This short paper brings together some personal reflections on this issue, largely based on previous work. In the process, it questions a number of commonly held beliefs that have become part of the conventional wisdom. The paper is organised around ten propositions that cover the following issues: the distinction between idiosyncratic and systematic elements of liquidity crises; the growing reliance on funding liquidity in a market-based financial system; the role of payment and settlement systems; the need to improve liquidity buffers; the desirability of putting in place (variable) speed limits in the financial system; the proper role of (retail) deposit insurance schemes; the double-edged sword nature of liquidity provision by central banks; the often misunderstood role of "monetary base" injections in addressing liquidity disruptions; the need to develop principles for the provision of central bank liquidity; and the need to reconsider the preventive role of monetary (interest rate) policy.
    Keywords: market and funding liquidity, liquidity crises, deposit insurance, central bank operations, monetary base
    Date: 2009–11
  10. By: Ellis, Colin (Daiwa Securities SMBC Europe Ltd)
    Abstract: This paper examines the behaviour of supermarket prices in the United Kingdom, using weekly scanner data supplied by Nielsen. A number of stylised facts about pricing behaviour are uncovered. First, prices change very frequently in supermarkets, with 40% of prices changing each week, and even controlling for ‘temporary’ changes, a quarter of prices change each week. Importantly, there is evidence that focusing on monthly observations, rather than weekly ones, overstates the implied stickiness of prices. Second, the probability of price changes is not constant over time – all product categories have declining hazard functions. Third, the range of price changes is very wide, with some very large price cuts and price rises; but despite this, a significant number of price changes are very small. Fourth, there appears to be little link between the frequency and magnitude of price changes – prices that change less frequently do not tend to change by more. Fifth, the strongest correlation between price and volume changes is contemporaneous, suggesting that prices and volumes move together from week to week. And sixth, rough analysis based on simplifying assumptions suggests that consumers are fairly price sensitive: volumes change by more than prices.
    Keywords: Supermarket prices; behaviour of prices; demand elasticities
    JEL: D40 E31
    Date: 2009–11–27
  11. By: Harris Dellas (University of Bern); George S.Tavlas (Bank of Greece)
    Abstract: The theory of optimum-currency-areas was conceived and developed in three highly influential papers, written by Mundell (1961), McKinnon (1963) and Kenen (1969). Those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally- tailored monetary policy and the adjustment of an exchange rate of a national currency. We trace the development of optimum currency- area theory, which, after a flurry of research into the subject in the 1960s, was relegated to intellectual purgatory for about 20 years. We then discuss factors that led to a renewed interest into the subject, beginning in the early 1990s. Milton Friedman plays a pivotal role in our narrative; Friedman’s work on monetary integration in the early 1950s presaged subsequent optimum-currency-area contributions; Mundell’s classic formulation of an optimal currency area was aimed, in part, at refuting Friedman’s ‘‘strong’’ case for floating exchange rates; and Friedman’s work on the role of monetary policy had the effect of helping to revive interest in optimum-currency-area analysis. The paper concludes with a discussion of recent analytical work, using New Keynesian models, which has the promise of fulfilling the unfinished agenda set-out by the original contributors to the optimum-currency-area literature, that is, providing a consistent framework in which a country’s characteristics can be used to determine its optimal exchange-rate regime
    Keywords: Optimum-currency-areas; Exchange-rate regimes; New Keynesian models
    JEL: F33 F41
    Date: 2009–09
  12. By: David R.F. Love (Department of Economics, Brock University)
    Abstract: The deterministic extended-path method for solving dynamic stochastic optimization problems approximates conditional expectations instead of approximating a model's complex non-linear dynamics. We show that this straightforward approach provides similar accuracy to the best results reported for alternative methods, and gives uniform performance across the entire state space. Our implementation requires roughly 4 fold more computer time than Galerkin projection, but the method has offsetting simplicity and generality that make it an attractive choice.
    Keywords: Dynamic stochastic equilibrium, computational methods, non-linear solutions
    JEL: E10 E30 E37
    Date: 2009–11
  13. By: Karsten R. Gerdrup (Norges Bank (Central Bank of Norway)); Anne Sofie Jore (Norges Bank (Central Bank of Norway)); Christie Smith (Reserve Bank of New Zealand); Leif Anders Thorsrud (Norges Bank (Central Bank of Norway))
    Abstract: Forecast combination has become popular in central banks as a means to improve forecasts and to alleviate the risk of selecting poor models. However, if a model suite is populated with many similar models, then the weight attached to other independent models may be lower than warranted by their performance. One way to mitigate this problem is to group similar models into distinct `ensembles'. Using the original suite of models in Norges Bank's system for averaging models (SAM), we evaluate whether forecast performance can be improved by combining ensemble densities, rather than combining individual model densities directly. We evaluate performance both in terms of point forecasts and density forecasts, and test whether the densities are well-calibrated. We find encouraging results for combining ensembles.
    Keywords: forecasting, density combination; model combination; clustering; ensemble density; pits.
    JEL: C52 C53 E52
    Date: 2009–11–11
  14. By: Yunus Aksoy; Henrique S. Basso; Javier Coto-Martinez (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.
    Date: 2009–10
  15. By: Hajime Tomura
    Abstract: This paper uses a small-open economy model for the Canadian economy to examine the optimal Taylor-type monetary policy rule that stabilizes output and inflation in an environment where endogenous boom-bust cycles in house prices can occur. The model shows that boom-bust cycles in house prices emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. These boom-bust cycles replicate the stylized features of housing-market boom-bust cycles in industrialized countries. In an environment where mortgage borrowers are occasionally over-optimistic, the central bank should be less responsive to inflation, more responsive to output, and slower to adjust the nominal policy interest rate. This optimal monetary policy rule dampens endogenous boom-bust cycles in house prices, but prolongs inflation target horizons due to weak policy reactions to inflation fluctuations after fundamental shocks.
    Keywords: Credit and credit aggregates; Financial stability; Inflation targets
    JEL: E44 E52
    Date: 2009
  16. By: Gladys Hui Ting Lee; Yiting Zhang; Jian Cheng Wong; Manamohan Prusty; Siew Ann Cheong
    Abstract: In this paper, we perform a comparative segmentation and clustering analysis of the time series for the ten Dow Jones US economic sector indices between 14 February 2000 and 31 August 2008. From the temporal distributions of clustered segments, we find that the US economy took one and a half years to recover from the mid-1998-to-mid-2003 financial crisis, but only two months to completely enter the present financial crisis. We also find the oil & gas and basic materials sectors leading the recovery from the previous financial crisis, while the consumer goods and utilities sectors led the descent into the present financial crisis. On a macroscopic level, we find sectors going earlier into a crisis emerge later from it, whereas sectors going later into the crisis emerge earlier. On the mesoscopic level, we find leading sectors experiencing stronger and longer volatility shocks, while trailing sectors experience weaker and shorter volatility shocks. In our shock-by-shock causal-link analysis, we also find shorter delays between corresponding shocks in more closely related economic sectors. In addition, our analysis reveals evidences for complex sectorial structures, as well as nonlinear amplification in the propagating volatility shocks. From a perspective relevant to public policy, our study suggests an endogeneous sectorial dynamics during the mid-2003 economic recovery, in contrast to strong exogeneous driving by Federal Reserve interest rate cuts during the mid-2007 onset. Most interestingly, we find for the sequence of closely spaced interest rate cuts instituted in 2007/2008, the first few cuts effectively lowered market volatilities, while the next few cuts counter-effectively increased market volatilities. Subsequent cuts evoked little response from the market.
    Date: 2009–11
  17. By: Lipinska, Anna (Bank of England); Spange, Morten (Danmarks Nationalbank); Tanaka, Misa (Bank of England)
    Abstract: This paper examines how the preferences of a large economy’s central bank affect the trade-off between output and inflation volatility faced by the central bank of a small open economy by analysing the impact of a global cost-push shock. We demonstrate that under the assumption of producer currency pricing, the trade-off faced by the small open economy is likely to worsen as the foreign central bank becomes more focused on output stabilisation relative to inflation stabilisation; but the opposite is true in the case of local currency pricing.
    Keywords: Open economy; policy trade-offs; producer versus local currency pricing
    JEL: E58 F41 F42
    Date: 2009–11–27
  18. By: Filippo COSSETTI (Universita' Politecnica delle Marche, Dipartimento di Economia); Francesco GUIDI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: This paper aims to explore the effects of the ECB monetary policy on the Euro area yield curve. Using cointegration techniques, this paper investigates the long-run relationships among the EONIA and Euro area money market interest rates. Results show that presence of cointegration was rejected for maturities longer than six years, implying that European Central Bank monetary policy actions do not exert significant impact on the entire spectrum of the yield curve. In addition, we also consider the transmission of EONIA interest rate volatility to the money market interest rates using EGARCH models. We find that EONIA volatility is transmitted to short and medium-period interest rates, whereas longer-term rates are not affected.
    Keywords: EGARCH models, Monetary policy, cointegration, term structure of interest rates
    JEL: E42 E43 E58
    Date: 2009–11
  19. By: David R.F. Love (Department of Economics, Brock University)
    Abstract: This paper shows that negative comovements between major macroeconomic variables at business-cycle frequencies are commonly observed, but that standard Real Business Cycle (RBC) theory fails to predict this feature of the data. We show that allowing for ``anticipation effects'' in response to ``news shocks'' enables standard RBC models to predict both the observed patterns of negative comovement and overall positive correlations. Anticipation also improves magnification of shocks in the model without harming predictions for the other second moments central to RBC studies. Anticipation effects improve on standard RBC frameworks by offering an empirically plausible explanation for the nontrivial fraction of time that aggregate variables are observed to comove negatively.
    Keywords: Comovements, Anticipation, News, Real Business Cycles, Equilibrium Dynamics
    JEL: E10 E30 E37
    Date: 2009–11
  20. By: Gabriel Pérez Quirós; Hugo Rodríguez Mendizábal
    Abstract: This paper analyzes the role of standing facilities in the determination of the demand for reserves in the overnight money market. In particular, we study how the asymmetric nature of the deposit and lending facilities could be used as a powerful policy tool for the simultaneous control of prices and quantities in the market for daily funds.
    Keywords: Monetary policy implementation; standing facilities; overnight interest rates; fine-tuning operations.
    JEL: E52 E58 E43
    Date: 2009–11–29
  21. By: Minford, Patrick; Ou, Zhirong
    Abstract: We calibrate a standard New Keynesian model with three alternative representations of monetary policy- an optimal timeless rule, a Taylor rule and another with interest rate smoothing- with the aim of testing which if any can match the data according to the method of indirect inference. We find that the only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent 'Taylor rules' and 'interest rate smoothing' in the data, even though neither represents the true monetary policy.
    Keywords: bootstrap simulation; indirect inference; Monetary policy; New Keynesian model; Taylor-type rules; the 'target rule'; VAR; Wald statistic
    JEL: E12 E17 E42 E52 E58
    Date: 2009–11
  22. By: Fan, Jingwen (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: We investigate whether the Fiscal Theory of the Price Level can deliver a reasonable explanation for UK inflation in the 1970s, a period in which the government greatly increased public spending without raising taxes and monetary policy was accommodative. The model is tested using the method of indirect inference, under which the model's simulated behaviour is compared with the inflation time-series process. We find that the two are consistent.
    Keywords: UK Inflation; Fiscal Theory of the Price Level; Bootstrap simulation; Indirect inference; Wald statistic
    JEL: E31 E37 E62 E65
    Date: 2009–11
  23. By: Athanasios Tagkalakis (Bank of Greece)
    Abstract: This paper examines the links between asset price movements and fiscal adjustments. Our findings suggest that a pick up in asset prices increases the probability of initiating a fiscal adjustment, but it does not necessarily lead to a sustainable correction of fiscal imbalances. However, higher real equity prices increase the probability of success.
    Keywords: Asset prices; fiscal adjustments
    JEL: E61 E62 H61 H62 E32
    Date: 2009–10
  24. By: Vincent Bignon (Graduate Institute, Geneva); Marc Flandreau (Graduate Institute, Geneva and CEPR, London); Stefano Ugolini (Graduate Institute, Geneva)
    Abstract: According to a Keynesian view, short term output fluctuations are normally demand side led. Since prices reflect demand, they should mirror output fluctuations. Thus, prices and output are expected to move in the same direction in the short run. The present paper investigates the historical co-movements of output and prices for a small open raw material based economy, in this case Norway 1830-2006. We find little evidence of a positive relationship. On the contrary, we rather find negative correlations between the two variables, indicating that supply side shocks through the foreign sector were more important for historical business cycles in Norway than assumed hitherto.
    Keywords: Lending of last resort, Bagehot, Bank of England, financial crises, history of monetary policy
    JEL: E58 N13
    Date: 2009–10–05
  25. By: ola Grytten (Norwegian School of Economics and Business Administration (NHH)); Arngrim Hunnes (University of Agder (UiA))
    Abstract: In the 1870s the three Scandinavian countries Denmark, Norway and Sweden formed the Scandinavian Currency Union. Both the adoption of gold and the monetary union were supposed to lead to price stability in and between these countries. By drawing on new indices of consumer prices the present paper offers an examination of inflation dynamics, defined as price stability and inflation persistence, in the periphery of Scandinavia during the heyday of the international gold standard.
    Keywords: Currency union, Gold Standard, Inflation persistence, Price stability, Scandinavia
    JEL: E31 E42 N13
    Date: 2009–11–11
  26. By: ola Grytten (Norwegian School of Economics and Business Administration (NHH)); Arngrim Hunnes (University of Agder (UiA))
    Abstract: According to a Keynesian view, short term output fluctuations are normally demand side led. Since prices reflect demand, they should mirror output fluctuations. Thus, prices and output are expected to move in the same direction in the short run. The present paper investigates the historical co-movements of output and prices for a small open raw material based economy, in this case Norway 1830-2006. We find little evidence of a positive relationship. On the contrary, we rather find negative correlations between the two variables, indicating that supply side shocks through the foreign sector were more important for historical business cycles in Norway than assumed hitherto.
    Keywords: Business cycles; Output; Small open economy; Price fluctuations.
    JEL: E31 E32 N10 N13 N14
    Date: 2009–10–29
  27. By: José Julián Sidaoui; Carlos Capistrán; Daniel Chiquiar; Manuel Ramos Francia
    Abstract: This note studies the causal relationship that may exist between the producer price index (PPI) and the consumer price index (CPI). In contrast with previous international studies, the results suggest that, in the case of Mexico, information on the PPI seems to be useful to improve forecasts of CPI inflation. In particular, CPI inflation responds significantly to disequilibrium errors with respect to the long-run relationship between consumer and producer prices. These results are based on in-sample and out-of-sample tests of Granger causality, in the context of an error correction model.
    Keywords: Cointegration, forecast evaluation, Granger causality, vector error correction.
    JEL: C32 C53 E31 E37
    Date: 2009–11

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