nep-cba New Economics Papers
on Central Banking
Issue of 2009‒12‒11
35 papers chosen by
Alexander Mihailov
University of Reading

  1. Quantitative Easing: A Rationale and Some Evidence from Japan By Volker Wieland
  2. Evaluating Monetary Policy By Svensson, Lars E.O.
  3. 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
  4. Labor Supply Heterogeneity and Macroeconomic Co-movement By Stefano Eusepi; Bruce Preston
  5. Debt, deficits and finite horizons: the stochastic case By Roger E.A. Farmer; Carine Nourry; Alain Venditti
  6. Investment Shocks and Business Cycles By Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
  7. What Drives Personal Consumption? The Role of Housing and Financial Wealth. By Jiri Slacalek
  8. Downward nominal and real wage rigidity : Survey evidence from European firms By Jan Babecky; Philip Du Caju; Theodora Kosma; Martina Lawless; Julian Messina; Tairi Room
  9. GDP nowcasting with ragged-edge data : A semi-parametric modelling By Laurent Ferrara; Dominique Guegan; Patrick Rakotomarolahy
  10. Exchange Rate Misalignments at World and European Levels By Se-Eun Jeong; Jacques Mazier; Jamel Saadaoui
  11. Arbitrage and Equilibrium with Portfolio Constraints By Bernard Cornet; Ramu Gopalan
  12. How Deep is a Crisis? Policy Responses and Structural Factors Behind Diverging Performances By Jean-Paul Fitoussi; Francesco Saraceno
  13. The quality of monetary policy and inflation performance: globalization and its aftermath By Bohl , Martin T; Mayes , David G; Siklos, Pierre L
  14. Using Inflation to Erode the U.S. Public Debt By Joshua Aizenman; Nancy Marion
  15. Changes in International Business Cycle Affiliations By Erdenebat Bataa; Denise R. Osborn; Marianne Sensier; Dick van Dijk
  16. The Balassa-Samuelson model in general equilibrium with markup variations By Romain Restout
  17. Why the Publication of Socially Harmful Information May Be Socially Desirable By Volker Hahn
  18. Export pricing and the cross-country correlation of stock prices By Tervala, Juha
  19. A new approach to estimating equilibrium exchange rates for small open economies: The case of Canada By Tino Berger; Bernd Kempa
  20. Monetary policy, inflation expectations and the price puzzle By Castelnuovo, Efrem; Surico, Paolo
  21. "The Euro and Its Guardian of Stability--The Fiction and Reality of the 10th Anniversary Blast" By Joerg Bibow
  22. The evolving role and definition of the federal funds rate in the conduct of U.S. monetary policy By Belongia, Michael; Hinich, Melvin
  23. Does inflation targeting really matter? Another look at the OECD economies By Brito, Ricardo D.
  24. Monetary Policy in a Currency Union with Heterogeneous Limited Asset Markets Participation By Fabian Eser
  25. Optimal Fiscal Stabilisation through Government Spending By Fabian Eser
  26. Nonlinearities in the Real Exchange Rate and Monetary Policy: Interest Rate Rules Reconsidered By Konstantinos D. Mavromatis
  27. Do Central Bank Independence Reforms Matter for Inflation Performance? By Landström, Mats
  28. Two Essays on Central Bank Independence Reforms By Landström, Mats
  29. Coping With Uncertainty: Historical and Real-Time Estimates Of The Natural Unemployment Rate and The Uk Monetary Policy By George Chouliarakis
  30. Fiscal Policy in the European Monetary Union By Betty C. Daniel; Christos Shiamptanis
  31. DEVOLUTION OF THE FISHER EQUATION: Rational Appreciation to Money Illusion By James R. Rhodes
  32. Advantages of Fixed Exchange Rate Regime from a General Equilibrium Perspective By Viktors Ajevskis; Kristine Vitola
  33. ‘History of the Official Currency and the Central Bank of Cyprus’ Preliminary Conclusions for the Period 1960-2007 By Sophocles Michaelides
  34. The role of income in money demand during hyper-inflation: the case of Yugoslavia By Zorica Mladenovic; Bent Nielsen
  35. Transmission of macro shocks to loan losses in a deep crisis: the case of Finland By Jokivuolle, Esa; Viren , Matti; Vähämaa, Oskari

  1. By: Volker Wieland
    Abstract: This paper reviews the rationale for quantitative easing when central bank policy rates reach near zero levels in light of recent announcements regarding direct asset purchases by the Bank of England, the Bank of Japan, the U.S. Federal Reserve and the European Central Bank. Empirical evidence from the previous period of quantitative easing in Japan between 2001 and 2006 is presented. During this earlier period the Bank of Japan was able to expand the monetary base very quickly and significantly. Quantitative easing translated into a greater and more lasting expansion of M1 relative to nominal GDP. Deflation subsided by 2005. As soon as inflation appeared to stabilize near a rate of zero, the Bank of Japan rapidly reduced the monetary base as a share of nominal income as it had announced in 2001. The Bank was able to exit from extensive quantitative easing within less than a year. Some implications for the current situation in Europe and the United States are discussed.
    JEL: E31 E52 E58 E61
    Date: 2009–12
  2. By: Svensson, Lars E.O. (Executive Board)
    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: Monetary policy evaluation; forecast Taylor curve; mean squared gaps
    JEL: E52 E58
    Date: 2009–10–01
  3. By: Miguel Almunia (Department of Economics, University of California, Berkeley); Agustín S. Bénétrix (Institute for International Integration Studies, Trinity College Dublin); Barry Eichengreen (Department of Economics, University of California, Berkeley); Kevin H. O'Rourke (Institute for International Integration Studies, Trinity College Dublin; Department of Economics, Trinity College Dublin); Gisela Rua (Institute for International Integration Studies, Trinity College Dublin)
    Abstract: The Great Depression of the Thirties and the Great Credit Crisis of the "Noughties 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
  4. By: Stefano Eusepi; Bruce Preston
    Abstract: Standard real-business-cycle models must rely on total factor productivity (TFP) shocks to explain the observed co-movement between consumption, investment and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption, can generate co-movement in absence of TFP shocks. Intertemporal substitution of goods and leisure induces co-movement over the business cycle through heterogeneity in consumption behavior of employed and unemployed workers. The result is due to two model features that are introduced to capture important characteristics of US labor market data. First, individual consumption is affected by the number of hours worked with employed consuming more on average than unemployed. Second, changes in the employment rate, a central explanator of total hours variation, then affects aggregate consumption. Demand shocks --- such as shifts in the marginal efficiency of investment, government spending shocks and news shocks --- are shown to generate economic fluctuations consistent with observed business cycles.
    JEL: E13 E24 E32
    Date: 2009–12
  5. By: Roger E.A. Farmer (UCLA Economics - University of California, Los Angeles); Carine Nourry (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: We introduce aggregate uncertainty and complete markets into Blanchard's (1985) perpetual youth model. We show how to construct a simple formula for the pricing kernel in terms of observable aggregate variables. We study a pure trade version of our model and we show it behaves much like the two-period overlapping generations model. Our methods are easily generalized to economies with production and they should prove useful to researchers who seek a tractable stochastic model in which fiscal policy has real effects on aggregate allocations.
    Keywords: Overlapping generations ; indeterminacy ; sunspot equilibria ; aggregate uncertainty
    Date: 2009
  6. By: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: We study the driving forces of fluctuations in an estimated New Neoclassical Synthesis model of the U.S. economy with several shocks and frictions. In this model, shocks to the marginal efficiency of investment account for the bulk of fluctuations in output and hours at business cycle frequencies. Imperfect competition and, to a lesser extent, technological frictions are the key to their transmission. Labor supply shocks explain a large fraction of the variation in hours at very low frequencies, but are irrelevant over the business cycle. This is important because their microfoundations are widely regarded as unappealing.
    JEL: C11 E3 E32
    Date: 2009–12
  7. By: Jiri Slacalek (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: I investigate the effect of wealth on consumption in a new dataset with financial and housing wealth from 16 countries. The baseline estimation method based on the sluggishness of consumption growth implies that the eventual (long-run) marginal propensity to consume out of total wealth is 5 cents (averaged across countries). While the wealth effects are quite strong—between 4 and 6 cents—in countries with more developed mortgage markets and in market-based, Anglo-Saxon and non euro area economies, consumption only barely reacts to wealth elsewhere. The effect of housing wealth is somewhat smaller than that of financial wealth for most countries, but not for the US and the UK. The housing wealth effect has risen substantially after 1988 as it has become easier to borrow against housing wealth. JEL Classification: E21, E32, C22.
    Keywords: housing prices, wealth effect, consumption dynamics, portfolio choice.
    Date: 2009–11
  8. By: Jan Babecky (Czech National Bank); Philip Du Caju (National Bank of Belgium, Research Department); Theodora Kosma (Bank of Greece); Martina Lawless (Central Bank and Financial Services Authority of Ireland); Julian Messina (World Bank); Tairi Room (Bank of Estonia)
    Abstract: It has been well established that the wages of individual workers react little, especially downwards, to shocks that hit their employer. This paper presents new evidence from a unique survey of firms across Europe on the prevalence of downward wage rigidity in both real and nominal terms. We analyse which firm-level and institutional factors are associated with wage rigidity. Our results indicate that it is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models (e.g. efficiency wage theory, insider-outsider theory). We also find that wage rigidity depends on the labour market institutional environment. Collective bargaining coverage is positively related with downward real wage rigidity, measured on the basis of wage indexation. Downward nominal wage rigidity is positively associated with the extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations
    Keywords: downward nominal wage rigidity, downward real wage rigidity, wage indexation, survey data, European Union
    JEL: J30 J31 J32 C81 P5
    Date: 2009–11
  9. By: Laurent Ferrara (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Banque de France - Business Conditions and Macroeconomic Forecasting Directorate); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Patrick Rakotomarolahy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This papier formalizes the process of forecasting unbalanced monthly data sets in order to obtain robust nowcasts and forecasts of quarterly GDP growth rate through a semi-parametric modelling. This innovative approach lies on the use on non-parametric methods, based on nearest neighbors and on radial basis function approaches, ti forecast the monthly variables involved in the parametric modelling of GDP using bridge equations. A real-time experience is carried out on Euro area vintage data in order to anticipate, with an advance ranging from six to one months, the GDP flash estimate for the whole zone.
    Keywords: Euro area GDP, real-time nowcasting, forecasting, non-parametric models.
    Date: 2009–11
  10. By: Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Since the mid-1990s, we observe an increase of world current account imbalances. These imbalances have only been partially reduced since the burst of the crisis in 2007. They reflect, to some extent, exchange rate misalignments, an issue which has been frequently studied in the literature. However, imbalances, which have reinforced in the 2000s, are also important inside the Euro area. This analysis cannot be reduced to simple estimates of euro misalignment at the world level because of specific constraints that exist for each member of the Euro area. This article aims to examine to what extent intra-European imbalances reflect exchange rate misalignments for each “national euro”.
    Keywords: Equilibrium Exchange Rate; Current Account Balance; Macroeconomic Balance
    Date: 2009–11–24
  11. By: Bernard Cornet (Department of Economics, The University of Kansas and Universite Paris 1 Pantheon-Sorbonne); Ramu Gopalan (Washington and Jefferson College)
    Abstract: We consider a multiperiod financial exchange economy with nominal assets and restricted participation, where each agent’s portfolio choice is restricted to a closed, convex set containing zero, as in Siconolfi (1989). Using an approach that dates back to Cass (1984, 2006) in the unconstrained case, we seek to isolate arbitrage-free asset prices that are also quasi-equilibrium or equilibrium asset prices. In the presence of such portfolio restrictions, we need to confine our attention to aggregate arbitrage-free asset prices, i.e., for which there is no arbitrage in the space of marketed portfolios. Our main result states that such asset prices are quasi-equilibrium prices under standard assumptions and then deduce that they are equilibrium prices under a suitable condition on the accessibility of payoffs by agents, i.e., every payoff that is attainable in the aggregate can be marketed through some agent’s portfolio set. This latter result extends previous work by Martins-da-Rocha and Triki (2005).
    Keywords: Stochastic Financial exchange economies; Incomplete markets; Financial equilibrium; Constrained portfolios; Multiperiod models; Arbitrage-free asset prices
    JEL: C62 D52 D53 G11 G12
    Date: 2009–12
  12. By: Jean-Paul Fitoussi (Observatoire Français des Conjonctures Économiques); Francesco Saraceno (Observatoire Français des Conjonctures Économiques)
    Abstract: The effects of the current crisis on the level of output, and consequently on unemployment and poverty, are likely to be deep and long lasting; they should not be underestimated, especially now that some timid signs of recovery are appearing. The crisis was triggered by the US financial sector, but its roots are real, and can be traced to the deepening income inequality of the last three decades, which led to a chronic deficiency of aggregate demand. In the Unites States, the center of the crisis, the policy reaction has been bold, and as a consequence the effects of the crisis are less striking than in the eurozone, where only France has a comparable performance. The policy inertia of the eurozone countries, in fact, is more structural, and is related to the institutions for the economic governance of Europe. The statute of the ECB and the SGP reflect the doctrine opposed to discretionary macroeconomic policies, constrain eurozone governments and its monetary policy. The relatively better performance of France can in fact be explained with these lenses(?) as on one side it has a well developed system of automatic stabilizers, and on the other it suffered less than other OECD countries the deepening of income inequality. Developing countries, suffering from a crisis that certainly they did not originate, should be given the means to carry on policies to contrast the crisis, thus avoiding pauperization and the long term negative effects of the adverse shock they experienced.
    Keywords: Economic Crisis, Fiscal Policy, Monetary Policy, Income Distribution, Policy Coordination, European Governance
    JEL: E24 E50 E61 F01
    Date: 2009–11
  13. By: Bohl , Martin T (Westfälische-Wilhelms Universität); Mayes , David G (University of Auckland); Siklos, Pierre L (Wilfrid Laurier University, Viessmann European Research Centre, Waterloo, ON, Canada. Freie Universität, Berlin, Germany. Centre for International Governance Innovation (CIGI))
    Abstract: With a few unfortunate exceptions the last three decades have seen reductions in inflation around the world to the point that many would argue that further improvements in price stability would offer only limited welfare gains. This experience is the result of many factors, some of which are country-specific. In this paper we seek to isolate one of the factors, namely, the improvement in the quality of monetary policy. There are two novel aspects to the study. Firstly, we essentially estimate a gravity-like model. Secondly, we propose generally a more exhaustive analysis of the potential role of a large number of institutional factors than has been done before. Briefly, we find that institutional factors play a role in explaining inflation relative to the US experience, which is used as the benchmark. Nevertheless, any reduction in inflation stemming from greater central bank autonomy is a feature of the 1980s and early 1990s. Thereafter, central banks in the OECD look very much alike.
    Keywords: globalization; inflation differentials; monetary policy strategy; institutional change
    JEL: C33 E42 E58
    Date: 2009–11–09
  14. By: Joshua Aizenman; Nancy Marion
    Abstract: As a share of GDP, the U.S. Federal debt held by the public exceeds 50 percent in FY2009, the highest debt ratio since 1955. Projections indicate the debt ratio may be in the 70-100 percent range within ten years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6 percent. Inflation reduced this ratio about 40 percent within a decade. Yet there are some important differences –shorter debt maturities today reduce the temptation to inflate, while the larger share held by foreigners increases it. This paper lays out an analytical framework for determining the impact of a large nominal debt overhang on the temptation to inflate. It suggests that when economic growth is stalled, the U.S. debt overhang may trigger an increase in inflation of about 5 percent for several years. This additional inflation would significantly reduce the debt ratio, even with some shortening of debt maturities.
    JEL: E6 F4 H6
    Date: 2009–12
  15. By: Erdenebat Bataa; Denise R. Osborn; Marianne Sensier; Dick van Dijk
    Abstract: We investigate changes in international business cycle affiliations using an iterative procedure for detecting system-wide structural breaks. We analyze GDP growth rates in two systems, one with the US, Euro-area, UK and Canada and the other for the Euro-area countries of France, Germany and Italy. We discover that international dynamic interactions change in both the mid-1980s and early 1990s, with such changes being particularly important for studying influences on the aggregate Euro-area. However, contemporaneous (conditional) correlations between these Euro-area countries increase in 1984 and 1998, with a large increase in correlations also evident across the international system during the 1990s.
    Date: 2009
  16. By: Romain Restout
    Abstract: This contribution embeds the Balassa-Samuelson hypothesis in a general equilibrium model that combines monopolistic competition and markup variations to examine the determinants of relative prices of nontradables. The model emphasizes the role of markup variations as an important aspect driving relative price movements. Variations in the markup makes fiscal policy non-neutral and provides a strong magnification mechanism for shocks to productivity. The empirical evidence of these predictions are examined by using a panel cointegration framework. On the whole, the econometric findings support theoretical implications, suggesting that our model is more closely in line with data relative to the supply-side Balassa-Samuelson framework that abstracts from variations in the degree of competition.
    Keywords: Balassa-Samuelson effect, Monopolistic competition, Fiscal policy.
    JEL: E20 E62 F31 F41
    Date: 2009
  17. By: Volker Hahn (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: We propose a signaling model in which the central bank and firms receive information on cost-push shocks independently from each other. If the firms’ signals are rather unlikely to be informative, central banks should remain silent about their own private signals. If, however, firms are sufficiently likely to be informed, it is socially desirable for the central bank to reveal its private information. By doing so, the central bank eliminates the distortions stemming from the signaling incentives under opacity. Our model may also explain the recent trend towards more transparency in monetary policy.
    Keywords: signaling games, transparency, monetary policy, central banks, communication
    JEL: D82 D83 E58
    Date: 2009–11
  18. By: Tervala, Juha (University of Turku)
    Abstract: This study analyses cross-country correlations of stock prices (values of firms) using the basic New Open Economy Macroeconomics model. We show that cross-country correlations of stock prices greatly depend on the currency of export pricing in the case of monetary shocks but not notably for temporary technology shocks. In the case of a money supply shock, the producer (local) currency pricing version of the model generates a negative (positive) cross-country correlation of stock prices.
    Keywords: stock prices; international business cycles; open economy
    JEL: E32 F30 F41 G10
    Date: 2009–11–02
  19. By: Tino Berger; Bernd Kempa
    Abstract: This paper proposes a new approach to estimating equilibrium exchange rates for small open economies. We set up a simple structural model of output, the rate of in ation and the real exchange rate. These observed variables are explained by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974-2008 we jointly estimate the unobserved components and the structural pa- rameters using the Kalman lter and Bayesian technique. We nd that Canada's equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate.
    Keywords: equilibrium exchange rate, unobserved components, Kalman lter, Bayesian analysis, Importance sampling
    JEL: C22 G12
    Date: 2009–08
  20. By: Castelnuovo, Efrem (University of Padua); Surico, Paolo (London Business School)
    Abstract: This paper re-examines the VAR evidence on the price puzzle and proposes a new theoretical interpretation. Using actual data and two identification strategies based on zero restrictions and model-consistent sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the sub-samples that are typically associated with a weak interest rate response to inflation. Using pseudo data generated by a sticky price model of the US economy, we then show that the structural VARs are capable of reproducing the price puzzle only when monetary policy is passive. The omission in the VARs of a variable capturing expected inflation is found to account for the price puzzle observed in simulated and actual data.
    Keywords: SVARs; price puzzle; sticky price model; Taylor principle; passive policy
    JEL: E30 E52
    Date: 2009–11–08
  21. By: Joerg Bibow
    Abstract: This paper investigates why Europe fared particularly poorly in the global economic crisis that began in August 2007. It questions the self-portrait of Europe as the victim of external shocks, pushed off track by reckless policies pursued elsewhere. It argues instead that Europe had not only contributed handsomely to the buildup of global imbalances since the 1990s and experienced their implosive unwinding as an internal crisis from the beginning, but that it had also nourished its own homemade intra-Euroland and intra-EU imbalances, the simultaneous implosion of which has further aggravated Europe's predicament. To keep its own house in order in the future, Euroland must shun the outdated "stability oriented" policy wisdom inherited from Germany's mercantilist past and Bundesbank mythology. Steps toward a fiscal union to back the euro are also warranted.
    Keywords: Economic and Monetary Union; Euro; European Central Bank; Global Imbalances; Global Crisis; Intra-area Imbalances; Competitiveness Positions; Policy Coordination; Tax-push Inflation; Financial Supervision; Mercantilism
    JEL: E30 E42 E52 E58 E61 E63 E65 F36
    Date: 2009–12
  22. By: Belongia, Michael; Hinich, Melvin
    Abstract: Over the past twenty years, the federal funds rate has evolved from being an intermediate target or indicator variable in discussions of monetary policy to the Federal Reserve’s (exogenous) policy instrument. How the funds rate is characterized has important implications for modeling, particularly in settings such as the popular Taylor Rule. Crucially, however, little investigation has been done to examine whether the funds rate meets the conditions one would require for an instrument of policy. This paper offers empirical evidence on the relationships among the federal funds rate, variables that might influence its behavior and variables of interest to monetary policy.
    Keywords: federal funds rate; monetary policy; causality tests; reserves
    JEL: E43 E58 E52
    Date: 2009–04
  23. By: Brito, Ricardo D.
    Date: 2009–10
  24. By: Fabian Eser (Nuffield College, Oxford University, Oxford.)
    Abstract: This paper examines monetary policy in a currency union whose member countries exhibit heterogeneous rates of limited asset markets participation (LAMP). As a result risk sharing among member countries is imperfect and the monetary transmission mechanism can differ across countries. In the limit the elasticity of output to the union-wide nominal interest rate can be of opposite sign in different countries. I develop a tractable model in which the dispersion of asset markets participation (AMP) becomes a key parameter. While monetary policy can guarantee determinacy by following an active or passive rule depending on the sign of the interest-elasticity of output, ignoring dispersion can lead to incorrect computation of the sign and the size of the latter. Taking the heterogeneity into account is thus central for sound policy Furthermore, due to the failure of risk sharing, determinacy for union-aggregates does not guarantee determinacy in every member country. However, the more open a country is in trade terms, the greater the rate of LAMP for which the country still displays equilibrium determinacy. For complete openness, determinacy is guaranteed. This underlines the importance of risk sharing and trade integration for the functioning of a currency union. Considering the optimal union-wide targeting rule, a higher mean and dispersion of LAMP increase the desired inflation volatility and decrease the desired output volatility. The implied optimal Taylor rule shows that subject to the Taylor principle, the higher are mean and dispersion of LAMP, the softer should be the response of the nominal interest rate to expected inflation.
    Keywords: Monetary Union, Limited Asset Markets Participation, Heterogeneity, (Optimal) Monetary Policy, Real (In)determinacy, Sticky Prices
    JEL: E52 F41 E44
    Date: 2009–11–19
  25. By: Fabian Eser (Nuffield College, Oxford University, Oxford.)
    Abstract: This paper examines under what conditions fiscal policy in the form of government spending should contribute to macroeconomic stabilisation. To this end optimal fiscal targeting rules minimising the microfounded social loss are examined in the following settings. Firstly, for the benchmark New Keynesian model, where monetary policy is unconstrained, a neutrality result for fiscal obtains: fiscal policy should not respond to any shocks. Secondly, if monetary policy is constrained to follow a Taylor rule, a stabilisation role for fiscal policy emerges. Fiscal policy should 'lean against' inflation and be countercyclical relative to output. Crucially, the Taylor principle is shown to remain the key requirement on policy to guarantee equilibrium determinacy. Thirdly, the fiscal targeting rule obtained under a Taylor rule is shown to be optimal, too, when policy is optimal but subject to monetary frictions. Thus, there is a stabilisation role for government spending under monetary frictions, changing the role of monetary and fiscal policy fundamentally.
    Keywords: Monetary Policy, Fiscal Policy, Macroeconomic Stabilisation, Discretion, Dynamic General Equilibrium, Sticky Prices, Monetary Frictions, Equilibrium Determinacy
    JEL: E5 E6 C62
    Date: 2009–10–13
  26. By: Konstantinos D. Mavromatis (University of Warwick)
    Abstract: Empirical research during the last ten years has found significant evidence in favour of a nonlinear-threshold type behaviour of the real exchange rate. Interest rate rules which include the exchange rate appear to have either an insignificant effect on or generate small coefficients for the real exchange rate. However, the empirical studies do not take into account the nonlinear behaviour of the exchange rate. The inclusion of nonlinearities in the real exchange rate could imply nonlinear behaviour in the interest rate rule, whenever the exchange rate is included. We use a two-country sticky price model to show that nonlinear Taylor-type rules where the exchange rate is included lead to lower variation in output and inflation.
    Keywords: Taylor rules, real exchange rate, nonlinearities
    JEL: E52 F41 F42
    Date: 2009–10
  27. By: Landström, Mats (Department of Economics, Umeå University)
    Abstract: A difference-in-difference approach was used to investigate whether Central Bank Indepencence (CBI) reforms matter for inflation, based on a novel data set including the possible occurence of such reforms in 132 countries during the period 1980-2003. CBI-reforms are found to have contributed to bringing down high inflation rates where those existed, but they seem unrelated to performance in low-inflation countries.
    Keywords: Monetary policy; institutional reforms; central banking; price stability; political economy; delegation
    JEL: E52 E58
    Date: 2009–11–27
  28. By: Landström, Mats (Department of Economics, Umeå University)
    Abstract: This thesis consists of two empirically oriented papers on Central Bank Independence (CBI) Reforms. Paper [1] is an investigation of why politicians around the world have chosen to give up power to independent central banks, thereby reducing their ability to control the economy. A new data-set covering 132 countries, of which 89 had implemented CBI reforms during 1980-2005, was collected. Politicians in non-OECD countries were more likely to delegate power to independent central banks if their country had been characterized by high variability in inflation and if they faced a high probability of being replaced. No such effects were found for OECD countries. Paper [2], using a difference-in-difference approach, studies whether CBI reform matters for inflation performance. The analysis is based on a dataset including the possible occurence of CBI reforms in 132 countries during the period 1980-2005. CBI reform is found to have contributed to bringing down inflation in high-inflation countries, but it seems unrelated to inflation performance in low-inflation countries.
    Keywords: Monetary policy; institutional reform; central banking; price stability; political economy; delegation; institutional economics; inflation; time-inconsistency; accountability
    JEL: E52 E58 P48
    Date: 2009–11–27
  29. By: George Chouliarakis
    Abstract: The paper derives and compares historical and real-time estimates of the UK natural unemployment rate and shows that real-time estimates are fraught with noise and should be treated with scepticism. A counterfactual exercise shows that, for most of the 1990s, the Bank of England tracked changes in the natural rate relatively successfully, albeit with some recognition lag which, at times, might have led to excessively cautious policy. A careful scrutiny of the minutes of the monetary policy committee meetings reveals that such ‘cautiousness’ should be taken as evidence of awareness of the real-time informational limitations that monetary policy is facing.
    Date: 2009
  30. By: Betty C. Daniel (University at Albany); Christos Shiamptanis (Central Bank of Cyprus)
    Abstract: An EMU country that adheres to the Maastricht and the Stability and Growth Pact limits is implicitly promising not to allow its fiscal stance to deteriorate to a position in which it places pressure on the European Central Bank to forgo its price level target to finance fiscal deficits. Violation of these limits has raised questions about potential fiscal encroachment on the monetary authority’s freedom to determine the price level. We show that for the monetary authority to have the freedom to control price, the primary surplus must respond strongly enough to lagged debt. Panel estimates are consistent with monetary control of the price level.
    Keywords: European Monetary Union, monetary policy, fiscal policy, Fiscal Theory of the Price Level, panel cointegration, error correction
    JEL: C32 C33 E42 E62 F33
    Date: 2009–07
  31. By: James R. Rhodes (National Graduate Institute for Policy Studies)
    Abstract: In Appreciation and Interest Irving Fisher (1896) derived an equation connecting interest rates in any two standards of value. The original Fisher equation (OFE) was expressed in terms of the expected appreciation of money [percent change in E(1/P)] whereas the ubiquitous conventional Fisher equation (CFE) uses expected goods inflation [percent change in E(P)]. Since Jensen?s inequality implies the non-equivalence of the two equations, the OFE is not subject to standard criticisms of non-rationality leveled against the CFE. The puzzling substitution of inflation for expected money appreciation in Fisher (1930) is resolved by taking into account Fisher's theory of “money illusion.”
    Keywords: Fisher equation, Fisher hypothesis, Fisher effect, money illusion, nominal interest rate, purchasing power of money, value of money.
    JEL: E40 B00 B31
    Date: 2006–06
  32. By: Viktors Ajevskis; Kristine Vitola
    Abstract: In this paper we estimate a small open economy DSGE model for Latvia following Lubik and Schorfheide (2007) using Bayesian methods. The estimates of the structural parameters fall within plausible ranges. Simulation results suggest that under inflation targeting inflation turns out to be more volatile than under the peg in the case of Latvia. Additional concern for output stabilisation accounts for lower inflation variability while it is still higher than under existing exchange rate regime with ±1% fluctuation bands. The model results therefore support the existing exchange rate policy.
    Keywords: DSGE, small open economy, exchange rate policy, Bayesian estimation
    JEL: C11 C3 C51 D58 E58 F41
    Date: 2009–11–25
  33. By: Sophocles Michaelides (Central Bank of Cyprus)
    Abstract: The period 1960 to 2007 – when the Cyprus pound was legal tender – is examined with a view to relating the major turning points of exchange, fiscal and monetary policies to their likely causes and consequences. Assumptions are made and conclusions are drawn regarding: the four periods of exchange rate policy (1960-1972, 1972-1992, 1992-1999, 1999-2007); the three phases of bank claims on the government sector (1960-1966, 1966-1975, 1975-2007); the five swings of bank credit to the private sector (1960-1965, 1965-1975, 1975-1984, 1984-2007); the five oscillations of the banking system’s foreign assets (1960-1971, 1971-1980, 1980-1989, 1989-1998, 1998-2007); the parallel tracks of GDP, CPI and the average annual salary during the 47 years under review. The above methodology is applied to the analysis and synthesis of the monetary and credit history of Cyprus between 1878 and 2007.
    Keywords: Economic history, business cycle, exchange rate, fiscal policy, private credit, price index, wage adjustment
    JEL: E3 E4 E5 N1
    Date: 2009–09
  34. By: Zorica Mladenovic (Faculty of Economics, University of Belgrade); Bent Nielsen (Department of Economics, University of Oxford)
    Abstract: During extreme hyper-inflations productivity tends to fall dramatically. Yet, in models of money demand in hyper-inflation variables such as real income has been given a somewhat passive role, either assuming it exogenous or to have a negligible role. In this paper we use an empirical methodology based on cointegrated vector autoregressions to analyse data from the extreme Yugoslavian episode to investigate the role of income. The analysis suggests that even in extreme hyper-inflation the monetary variables and real income are simultaneously determined. The methodology enables a description of the short term adjustment of the variables considered.
    Keywords: Cointegration, hyper-inflation, income, money-demand
    Date: 2009–03–27
  35. By: Jokivuolle, Esa (Bank of Finland Research); Viren , Matti (Bank of Finland Research and University of Turku); Vähämaa, Oskari (Bank of Finland Research)
    Abstract: Building on the work of Sorge and Virolainen (2006), we revisit the data on aggregate Finnish bank loan losses from the corporate sector, which covers the ‘Big Five’ crisis in Finland in the early 1990s. Several extensions to the empirical model are considered. These extensions are then used in the simulations of the aggregate loan loss distribution. The simulation results provide some guidance as to what might be the most important dimensions in which to improve the basic model. We found that making the average LGD depend on the business cycle seems to be the most important improvement. We also compare the empirical fit of the annual expected losses over a long period. In scenario-based analyses we find that a prolonged deep recession (as well as simultaneity of various macro shocks) has a convex effect on cumulative loan losses. This emphasizes the importance of an early policy response to a looming crisis. Finally, a comparison of the loan loss distribution on the eve of the 1990s crisis with the most recent distribution demonstrates the greatly elevated risk level prior to the 1990s crisis.
    Keywords: credit risk; bank loan losses; banking crisis; macro shocks; default rates; stress testing
    JEL: C15 E37 G21 G32 G33
    Date: 2009–11–02

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