nep-cba New Economics Papers
on Central Banking
Issue of 2009‒12‒19
fifty-two papers chosen by
Alexander Mihailov
University of Reading

  1. Global Imbalances and the Financial Crisis: Products of Common Causes By Obstfeld, Maurice; Rogoff, Kenneth
  2. Managed Floats to Damp Shocks like 1982-5 and 2006-9: Field and Laboratory Evidence for Chinese Interest in a Single World Currency By Robin Pope, ,; Reinhard Selten,; Sebastian Kube,; Jürgen von Hagen
  3. Ambulance Economics: The Pros and Cons of Fiscal Stimuli By W. Max Corden
  4. The Great Depression Analogy By Michael D. Bordo; Harold James
  5. The Limits to Fiscal Stimulus By Buiter, Willem H.
  6. Reversing unconventional monetary policy: technical and political considerations By Buiter, Willem H.
  7. "Non-Traditional Monetary Polices: G7 Central Banks during 2007-2009 and the Bank of Japan during 1998-2006" By Kazuo Ueda
  8. The new multi-polar international monetary system By Dailami, Mansoor; Masson, Paul
  9. Stabilizing an unstable economy: on the choice of proper policy measures By Asada, Toichiro; Chiarella, Carl; Flaschel, Peter; Mouakil, Tarik; Proaño, Christian R.
  10. Measuring output gap uncertainty By Anthony Garratt; James Mitchell; Shaun P. Vahey
  11. Combining VAR and DSGE forecast densities By Ida Wolden Bache; Anne Sofie Jore; James Mitchell; Shaun P. Vahey
  12. Putting the New Keynesian DSGE model to the real-time forecasting test. By Marcin Kolasa; Michał Rubaszek; Paweł Skrzypczyński
  13. Monetary Policy in a Currency Union with Heterogeneous Limited Asset Markets Participation By Fabian Eser
  14. Do expectations matter? The Great Moderation revisited By Canova, Fabio; Gambetti, Luca
  15. From Wage Rigidities to Labour Market Rigidities: A Turning-Point in Explaining Equilibrium Unemployment? By Marco Guerrazzi; Nicola Meccheri
  16. A unified framework for understanding and comparing dynamic wage and price-setting models. By Dixon, H. D.
  17. Learning in an Estimated Medium-Scale DSGE Model By Sergey Slobodyan; Raf Wouters
  18. The Role of Financial Variables in Predicting Economic Activity. By Raphael Espinoza; Fabio Fornari; Marco J. Lombardi
  19. Discretionary Fiscal Policies over the Cycle: New Evidence based on the ESCB Disaggregated Approach. By Luca Agnello; Jacopo Cimadomo
  20. The role of central bank transparency for guiding private sector forecasts By Ehrmann, Michael; Eijffinger, Sylvester C. W.; Fratzscher, Marcel
  21. External rebalancing is not just an exporters' story: real exchange rates, the non-tradable sector and the euro By Ruscher, Eric; Wolff, Guntram B.
  22. How Changes in Oil Prices Affect the Macroeconomy By Brian DePratto; Carlos de Resende; Philipp Maier
  23. Asset fire sales and purchases and the international transmission of financial shocks By Jotikasthira, Chotibhak; Lundblad, Christian T.; Ramadorai, Tarun
  24. Distortionary tax instruments and implementable monetary policy By L. Marattin; M. Marzo; P. Zagaglia
  25. Impulse Response Identification in DSGE Models By Martin Fukac
  26. Structural Macro-Econometric Modelling in a Policy Environment By Martin Fukac; Adrian Pagan
  27. Structural macro-wconometric modelling in a policy environment By Martin Fukac; Adrian Pagan
  28. Estimating the Evolution of Money's Role in the U.S. Monetary Business Cycle By Efrem Castelnuovo
  29. Estimating a NKBC Model for the U.S. Economy with Multiple Filters By Efrem Castelnuovo
  30. Why inflation targeting central banks seem to follow a standard Taylor rule By Kühn Stefan; Muysken Joan
  31. Money and uncertainty in democratised financial markets By Browne, Frank; Kelly, Robert
  32. Recent Oil Price Movements: Forces and Policy Issues By Eckhard Wurzel; Luke Willard; Patrice Ollivaud
  33. Exchange Rate Pass-Through and Inflation: A Nonlinear Time Series Analysis By Mototsugu Shintani; Akiko Terada-Hagiwara; Tomoyoshi Yabu
  34. Does the Fed Respond to Oil Price Shocks? By Kilian, Lutz; Lewis, Logan
  35. Monetary effects on nominal oil prices By Max Gillman; Anton Nakov
  36. US Fiscal Indicators, Inflation and Output By Yunus Aksoy; Giovanni Melina
  37. The triffin dilemma again By Campanella, Edoardo
  38. Forecasting Euro-area recessions using time-varying binary response models for financial. By Bellégo, C.; Ferrara, L.
  39. Forecasting the US Real House Price Index: Structural and Non-Structural Models with and without Fundamentals By Rangan Gupta; Alain Kabundi; Stephen M. Miller
  40. Inflation and investment in monetary growth models By Ciżkowicz, Piotr; Hołda, Marcin; Rzońca, Andrzej
  41. Interest rate convergence in the EMS prior to European Monetary Union By M. FRÖMMEL; R. KRUSE
  42. Trends and Cycles : an Historical Review of the Euro Area. By Barthélemy, J.; Marx, M.; Poissonnier, A.
  43. Exchange rate pass-through to domestic prices in the Central European countries By Mirdala, Rajmund
  44. Real Convergence, Capital Flows, and Competitiveness in Central and Eastern Europe By Ansgar Belke; Gunther Schnabl; Holger Zemanek
  45. Japan's Lost Decade: Does Money have a Role? By Canova, Fabio; Menz, Tobias
  46. The paradox of monetary profits: an obstacle to understanding financial and economic Crisis? By Bruun , Charlotte; Heyn-Johnsen, Carsten
  47. Interest Rate Dynamics and Monetary Policy Implementation in Switzerland By Puriya Abbassi; Dieter Nautz; Christian J. Offermanns
  48. What macroeconomic shocks affect the German banking system? Analysis in an integrated micro-macro model By Blank, Sven; Dovern, Jonas
  49. Monetary Policy Rules in Central and Eastern European Countries: Does the Exchange Rate Matter? By M. FRÖMMEL; G. GARABEDIAN; F. SCHOBERT
  50. Central bank independence: The case of Croatia By Tomislav Ćorić; Dajana Cvrlje
  51. The Conduct of Monetary Policy in Turkey in the Pre- and Post-crisis Period of 2001 in Comparative Perspective: a Case for Central Bank Independence By Alper, Emre; Hatipoglu, Ozan
  52. Real Interest Rates, Bubbles and Monetary Policy in the GCC countries By Razzak, Weshah; Bentour, E M

  1. By: Obstfeld, Maurice; Rogoff, Kenneth
    Abstract: This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through U.S. and ultimately through global financial markets. In the U.S., the interaction among the Fed’s monetary stance, global real interest rates, credit market distortions, and financial innovation created the toxic mix of conditions making the U.S. the epicenter of the global financial crisis. Outside the U.S., exchange rate and other economic policies followed by emerging markets such as China contributed to the United States’ ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble.
    Keywords: current account deficit; financial crisis; financial reform; global imbalances; housing bubble
    JEL: E44 E58 F32 F33 F42 G15
    Date: 2009–12
  2. By: Robin Pope, ,; Reinhard Selten,; Sebastian Kube,; Jürgen von Hagen
    Abstract: This paper’s field evidence is: (1) many official sectors rapidly forget the damage of the 1982-85 exchange rate liquidity crisis and reverted to what caused that crisis, namely a closed economy clean floats perspective; and (2) the 2006-2008/9 exchange rate liquidity shock would have been more drastic but for central bank currency swaps. This evidence is bolstered by a laboratory experiment that incorporates more aspects of real world complexity and more different sorts of official and private sector agents than are feasible in econometric or algebraic investigations and employs a new central bank cooperation-conflict model of exchange rate determination , and is within an umbrella theory of Pope, namely SKAT, the Stages of Knowledge Ahead Theory. SKAT allows for risk effects from stages omitted in normal models, including those from (a) difficulties of agents in evaluating alternatives in a complex environment in which the assumed maximization of expected utility is impossible; and (b) preference for safety and reliability is not trivialized. Our joint field plus laboratory evidence indicates that official sectors should maintain an international exchange rate oriented perspective, or better yet, a single world currency as recommended by Zhou Xiaochuan, head of the People’s Bank of China. To avoid rapid forgetting of havoc from isolationist clean floats and the value of stable exchange rates, a new syllabus, as under the SKAT umbrella, is fundamental in the education of official sector members in order to furnish them with a coherent alternative intellectual framework to current university education that excludes liquidity crises.
    Keywords: clean float, managed float, IMF imposed conditions, exchange rate regime, exchange rate volatility, experiment, SKAT the Stages of Knowledge Ahead Theory, monetary policy, transparent policy, exchange rate shocks, central bank cooperation, central bank conflict
    JEL: D80 F31
    Date: 2009–10
  3. By: W. Max Corden
    Abstract: This lecture deals not with the causes of the world financial crisis nor how to forecast or avoid one in the future, nor how to revive the financial sector, but rather with the crucial emergency "ambulance" policy of fiscal stimulus. What are the main effects of stimuli policies, and, in particular, the post-crisis effects? What are the main decisions to make and practical problems involved? What difference does a preexisting public debt problem make? Seven arguments against fiscal stimuli will be examined. Finally, fundamental ideological issues, namely government failure versus market failure, and fear of inflation versus fear of depression, will be noted.
    Keywords: financial crisis, depression, fiscal policy, Keynes
    JEL: E12 E62 H62
    Date: 2009
  4. By: Michael D. Bordo; Harold James
    Abstract: This paper examines three areas in which analogies have been made between the interwar depression and the financial crisis of 2007 which reached a dramatic climax in September 2008 with the collapse of Lehman Brothers and the rescue of AIG: they can be labeled macro-economic, micro-economic, and geo-political. First, the paper considers the story of monetary policy failures; second, there follows an examination of the micro-economic issues concerned with bank regulation and the reorganization of banking following the failure of one or more major financial institutions and the threat of systemic collapse; third, the paper turns to the issue of global imbalances and asks whether there are parallels that might be found in this domain too between the 1930s and the events of today.
    JEL: E58 N0 N12
    Date: 2009–12
  5. By: Buiter, Willem H.
    Abstract: The paper considers the case for an internationally coordinated further fiscal stimulus during the second half of 2009. Although this makes some of the analysis period-specific, most of the issues and principles considered are timeless. For a fiscal stimulus to be both effective there must be idle resources due to a failure of effective demand. For it to be desirable, there must be no alternative policy instruments (including monetary policy) for boosting demand. There must be no complete financial crowding out and no complete direct crowding out, through Ricardian equivalence/debt neutrality, through Minsky equivalence or through a high degree of substitutability between private and public exhaustive expenditure in private preferences or production possibilities. Finally, for international coordination to be desirable, there must be cross-border externalities from national fiscal stimuli. The paper considers each of these conditions in turn.
    Keywords: Crowding out; Debt sustainability; Fiscal Policy; Minsky neutrality; Ricardian equivalence
    JEL: E4 E5 E6 F3 H3 H5 H6
    Date: 2009–12
  6. By: Buiter, Willem H.
    Abstract: There are few if any technical problems involved in reversing the unconventional monetary policies - quantitative easing, credit easing and enhanced credit support - implemented by central banks around the world as short-term nominal interest rates became constrained by the zero lower bound. The two main obstacles to an early and easy exit from unconventional monetary policies are political. The first is a potential conflict between the central bank and the fiscal authority about the role of monetary financing in the fiscal-financial-monetary programme of the state. If there is a conflict about the role of seigniorage in closing the government’s solvency gap, the likely outcome is a win for the fiscal authority, except in the case of the ECB. The second political impediment to a prompt and painless exit from unconventional monetary policy is that scaling down the size of the central bank’s balance sheet and the scale and scope of its other interventions in financial markets and institutions is likely to reveal the true extent of the central bank’s quasi-fiscal activities during the crisis and its aftermath. The large-scale ex-ante and ex-post quasi-fiscal subsidies handed out by the Fed and to a lesser extent by the other leading central banks, and the sheer magnitude of the redistribution of wealth and income among private agents that the central banks have engaged in could (and in my view should) cause a political storm. Delay in the dropping of the veil is therefore likely.
    Keywords: Credit easing; Enhanced credit support; Quantitative easing; quasi-fiscal policy; regulatory capture
    JEL: E4 E5 E6 G1 H6
    Date: 2009–12
  7. By: Kazuo Ueda (Faculty of Economics, University of Tokyo)
    Abstract: This paper offers a brief summary of non-traditional monetary policy measures currently adopted by G7 central banks and their provisional evaluation in the light of the Bank of Japan (BOJ)'s experience during the period of 1998-2006. The paper points out that although unprecedented measures seem to have been adopted by major central banks since 2007, many of them have been tried in one way or another in earlier episodes of financial crises, especially by the BOJ during 1998-2006 and are in this sense not new. We summarize the BOJ's and G7 central banks' policies based on a typology of policies that can be used even when interest rates are very low. Non-traditional policy measures can be classified into managing interest rate expectations, targeted asset purchases and quantitative easing, all of which were used by the BOJ. The so-called credit easing can be considered to be a part of targeted asset purchases. In the current episode, targeted asset purchases or credit easing has been employed by most central banks, while expectations management and (strong forms of) quantitative easing have not been widely used. We explore reasons for such a choice of policy strategy in the current period. In addition, some important lessons can be learned about the effectiveness of non-traditional policies from what the BOJ and the Japanese government did and did not do during the early to mid 1990s and its ultimate failure to avoid deflation.
    Date: 2009–11
  8. By: Dailami, Mansoor; Masson, Paul
    Abstract: Backed by rapid economic growth, growing financial clout, and a newfound sense of assertiveness in recent years, the BRIC countries - Brazil, Russia, India, and China - are a driving force behind an incipient transformation of the world economy away from a US-dominated system toward a multipolar one in which developing countries will have a major say. It is, however, in the international monetary arena that the notion of multipolarity - more than two dominant poles - commands renewed attention and vigorous debate. For much of its history, the quintessential structural feature of the international monetary system has been unipolarity - as American hegemony of initiatives and power as well as its capacity to promote a market-based, liberal order came to define and shape international monetary relations. As other currencies become potential substitutes for the US dollar in international reserves and in cross-border claims, exchange rate volatility may become more severe. There are also risks that the rivalry among the three economic blocs may spill over into something more if not kept in check by a strong global governance structure. While the transition will be difficult and drawn out, governments should take immediate steps to prevent financial volatility by enhancing cooperation on monetary policies, currency market intervention and financial regulation.
    Keywords: Currencies and Exchange Rates,Debt Markets,Emerging Markets,Fiscal&Monetary Policy,Economic Theory&Research
    Date: 2009–12–01
  9. By: Asada, Toichiro; Chiarella, Carl; Flaschel, Peter; Mouakil, Tarik; Proaño, Christian R.
    Abstract: Currently, many monetary and fiscal policy measures are aimed at preventing the financial market meltdown that started in the US subprime sector and has spread worldwide as a great recession. Although some slow recovery appears to be on the horizon, it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of Keynesian macro models. Fragilities and destabilizing feedback mechanisms are known to be potential features of all markets—the product markets, the labor market, and the financial markets. In this paper we in particular focus on the financial market. We use a Tobin-like macroeconomic portfolio approach, and the interaction of heterogeneous agents on the financial market to characterize the potential for financial market instability. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we study the potential that labor market, fiscal and monetary policies have to stabilize unstable macroeconomies. Besides other stabilizing policies we in particular propose a countercyclical monetary policy that sells assets in the boom and purchases assets in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of those suggested policies. --
    Keywords: Monetary Business Cycles,Portfolio Choice,(In-)Stability,Stabilizing Policy Measures
    JEL: E12 E24 E31 E52
    Date: 2009
  10. By: Anthony Garratt; James Mitchell; Shaun P. Vahey (Reserve Bank of New Zealand)
    Abstract: We propose a methodology for producing density forecasts for the output gap in real time using a large number of vector autoregessions in inflation and output gap measures. Density combination utilizes a linear mixture of experts framework to produce potentially non-Gaussian ensemble densities for the unobserved output gap. In our application, we show that data revisions alter substantially our probabilistic assessments of the output gap using a variety of output gap measures derived from univariate detrending filters. The resulting ensemble produces well-calibrated forecast densities for US inflation in real time, in contrast to those from simple univariate autoregressions which ignore the contribution of the output gap. Combining evidence from both linear trends and more flexible univariate detrending filters induces strong multi-modality in the predictive densities for the unobserved output gap. The peaks associated with these two detrending methodologies indicate output gaps of opposite sign for some bservations, reflecting the pervasive nature of model uncertainty in our US data.
    JEL: C32 C53 E37
    Date: 2009–12
  11. By: Ida Wolden Bache (Norges Bank); Anne Sofie Jore (Norges Bank); James Mitchell (NIESR); Shaun P. Vahey (Melbourne Business School)
    Abstract: A popular macroeconomic forecasting strategy takes combinations across many models to hedge against instabilities of unknown timing; see (among others) Stock and Watson (2004), Clark and McCracken (2010), and Jore et al. (2010). Existing studies of this forecasting strategy exclude Dynamic Stochastic General Equilibrium (DSGE) models, despite the widespread use of these models by monetary policymakers. In this paper, we combine inflation forecast densities utilizing an ensemble system comprising many Vector Autoregressions (VARs), and a policymaking DSGE model. The DSGE receives substantial weight (for short horizons) provided the VAR components exclude structural breaks. In this case, the inflation forecast densities exhibit calibration failure. Allowing for structural breaks in the VARs reduces the weight on the DSGE considerably, and produces well-calibrated forecast densities for inflation.
    Keywords: Ensemble modeling, Forecast densities, Forecast evaluation, VAR models, DSGE models
    JEL: C32 C53 E37
    Date: 2009–11–05
  12. By: Marcin Kolasa (National Bank of Poland, ul. Swietokrzyska 11/21, PL-00-919 Warsaw, Poland.); Michał Rubaszek (National Bank of Poland, ul. Swietokrzyska 11/21, PL-00-919 Warsaw, Poland.); Paweł Skrzypczyński (National Bank of Poland, ul. Swietokrzyska 11/21, PL-00-919 Warsaw, Poland.)
    Abstract: Dynamic stochastic general equilibrium models have recently become standard tools for policy-oriented analyses. Nevertheless, their forecasting properties are still barely explored. We fill this gap by comparing the quality of real-time forecasts from a richly-specified DSGE model to those from the Survey of Professional Forecasters, Bayesian VARs and VARs using priors from a DSGE model. We show that the analyzed DSGE model is relatively successful in forecasting the US economy in the period of 1994-2008. Except for short-term forecasts of inflation and interest rates, it is as good as or clearly outperforms BVARs and DSGE-VARs. Compared to the SPF, the DSGE model generates better output forecasts at longer horizons, but less accurate short-term forecasts for interest rates. Conditional on experts' now casts, however, the forecasting power of the DSGE turns out to be similar or better than that of the SPF for all the variables and horizons. JEL Classification: C11, C32, C53, D58, E17.
    Keywords: Forecasting, DSGE, Bayesian VAR, SPF, Real-time data.
    Date: 2009–11
  13. By: Fabian Eser
    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 gaurantee 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. 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
  14. By: Canova, Fabio; Gambetti, Luca
    Abstract: We examine the role of expectations in the Great Moderation episode. We derive theoretical restrictions in a New-Keynesian model and test them using measures of expectations obtained from survey data, the Greenbook and bond markets. Expectations explain the dynamics of inflation and interest rates but their importance is roughly unchanged over time. Systems with and without expectations display similar reduced form characteristics. Results are robust to changes in the structure of the empirical model.
    Keywords: Expectations; Indeterminacy; Term structure; VARs
    JEL: C11 E12 E32 E62
    Date: 2009–12
  15. By: Marco Guerrazzi; Nicola Meccheri
    Abstract: This paper offers a critical discussion of the concept of labour market rigidity relevant to explaining unemployment. Starting from Keynes’s own view, we discuss how the concept of labour market flexibility has changed over time, involving nominal or real wage flexibility, contract flexibility or labour market institution flexibility. We also provide a critical assessment of the factors that lead the search framework highlighting labour market rigidities (frictions) to challenge the more widespread explanation of equilibrium unemployment grounded on wage rigidity.
    Keywords: Labour Market Rigidities, Nominal and Real Wages, Unemployment, Search Theory.
    JEL: E12 E24
    Date: 2009–11–26
  16. By: Dixon, H. D.
    Abstract: This paper argues that the cross-sectional approach to durations is essential to understand nominal rigidity because this captures the fact that price-spells are generated by firms' price-setting behavior. Since the distribution of durations is dominated by a proliferation of short contracts, the cross-sectional measure corrects for this by length-biased sampling. Modelling the price-spell durations in this way enables us to see how Taylor, Calvo and their generalizations relate to each other, and enable us to compare price-setting behavior for a given distribution of durations. We also show how the micro-data can be directly related to the macroeconomic pricing models in this setting.
    Keywords: Price-spell, steady state, hazard rate, Calvo, Taylor.
    JEL: E50
    Date: 2009
  17. By: Sergey Slobodyan; Raf Wouters
    Abstract: In this paper we evaluate the empirical relevance of learning by private agents in an estimated medium–scale DSGE model. We replace the standard rational expectation assumption in the Smets and Wouters (2007) model by a constant gain learning mechanism. If agents know the correct structure of the model and only learn about the parameters, both expectation mechanisms result in a similar fit, and only the transition dynamics that are generated by specific initial beliefs are responsible for the differences between the two approaches. If, in addition, agents use only a reduced information set in forming the perceived law of motion, the implied model dynamics change and for some initial beliefs the marginal likelihood of the model is further improved. The learning models with the highest posterior probabilities add some additional persistence to the DSGE model that reduce the gap between the IRFs of the DSGE model and the more data-driven DSGE-VAR model. However, the additional dynamics that are introduced by the learning process do not systematically alter the estimated structural parameters related to the nominal and real frictions in the DSGE model.
    Keywords: Constant gain adaptive learning, medium–scale DSGE model, DSGE–VAR.
    JEL: C11 D84 E30 E52
    Date: 2009–11
  18. By: Raphael Espinoza (International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, USA.); Fabio Fornari (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco J. Lombardi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Previous research has shown that the US business cycle leads the European cycle by a few quarters, and can therefore help predicting euro area GDP. We investigate whether financial variables provide additional predictive power. We use a VAR model of the US and the euro area GDPs and extend it to take into account common global shocks and information provided by selected combinations of financial variables. In-sample analysis shows that shocks to financial variables influence real activity with a peak around 4 to 6 quarters after the shock. Out-of-sample Root-Mean- Squared Forecast Error (RMFE) shows that adding financial variables yields smaller errors in forecasting US economic activity, especially at a five-quarter horizon, but the gain is overall tiny in economic terms. This link is even less prominent in the euro area, where financial indicators do not improve short and medium term GDP forecasts even when their timely availability, relative to a given GDP release, is exploited. The same conclusion is reached with a dataset of quarterly industrial production indices, although financial variables marginally improve forecasts of monthly industrial production. We argue that the findings that financial variables have no predictive power for future activity in the euro area relate to the unconditional nature of the RMFE metric. When forecasting ability is assessed as if in real time (i.e. conditionally on the information available at the time when forecasts are made), we find that models using financial variables would have been preferred in many episodes, and in particular between 1999 and 2002. Results from the historical decomposition of a VAR model indeed suggest that in that period shocks were predominantly of financial nature. JEL Classification: F30, F42, F47.
    Keywords: VAR, Financial Variables, International Linkages, Conditional Forecast.
    Date: 2009–11
  19. By: Luca Agnello (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jacopo Cimadomo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper explores how discretionary fiscal policies on the revenue side of the government budget have reacted to economic fluctuations in European Union countries. For this purpose, it uses data on legislated revenue changes and structural indicators provided twice per year by National Central Banks of European Union countries in the ESCB framework for analysing fiscal policy. The analysis is based on the estimation of fiscal policy rules linking these measures of legislated fiscal policy changes to the output gap and other control variables. Then, baseline results are compared with regression estimates where variations of cyclically-adjusted indicators are used as proxy for discretionary fiscal policies, as conventionally proposed in the empirical literature on fiscal policy. Results suggest that, overall, legislated changes in taxes and social security contributions have responded in a strongly pro-cyclical way to the business cycle, while commonly-used cyclical-adjustment methods point to a-cyclicality. JEL Classification: E62, E65, H20.
    Keywords: Discretionary fiscal policies, government revenues, cyclical sensitivity, legislation changes, narrative approach, ESCB disaggregated framework.
    Date: 2009–11
  20. By: Ehrmann, Michael; Eijffinger, Sylvester C. W.; Fratzscher, Marcel
    Abstract: There is a broad consensus in the literature that costs of information processing and acquisition may generate costly disagreements in expectations among economic agents, and that central banks may play a central role in reducing such dispersion in expectations. This paper analyses empirically whether enhanced central bank transparency lowers dispersion among professional forecasters of key economic variables, using a large set of proxies for central bank transparency in 12 advanced economies. It finds evidence for a significant and sizeable effect of central bank transparency on forecast dispersion, be it by means of announcing a quantified inflation objective, other forms of communication, or by publishing central banks’ inflation and output forecasts. However, there also appear to be limits to central bank transparency, with decreasing marginal returns to enhancing (economic) transparency, and given our findings that disagreement among inflation expectations in the general public is not affected by the various central bank transparency measures analyzed in this paper.
    Keywords: central bank communication; central banking; disagreement; forecasting; inflation targeting; monetary policy; survey expectations; transparency
    JEL: C53 E37 E52
    Date: 2009–12
  21. By: Ruscher, Eric; Wolff, Guntram B.
    Abstract: Global and European trade balances have seen strong divergences combined with strong movements in the exchange rate. Trade balances and real effective exchange rates are related. Using different measures of the real effective exchange rate, we show that this long-run link hinges on the relative price of non-tradable to tradable goods and services in relation to their trading partners. An improvement in the trade balance is associated with a fall in the relative price of non-tradable goods and services. The elimination of nominal exchange rates with the euro does not change these relationships. Government consumption increases the relative price of nontradable goods. The results highlight the importance of internal price adjustments for external balances, a point frequently overlooked in policy debates.
    Keywords: real exchange rate; non-tradable sector; euro
    JEL: F32 F41 F31
    Date: 2009–04
  22. By: Brian DePratto; Carlos de Resende; Philipp Maier
    Abstract: We estimate a New Keynesian general-equilibrium open economy model to examine how changes in oil prices affect the macroeconomy. Our model allows oil price changes to be transmitted through temporary demand and supply channels (affecting the output gap), as well as through persistent supply side effects (affecting trend growth). We estimate this model for Canada, the United Kingdom, and the United States over the period 1971-2008, and find that it matches the data very well in terms of first and second moments. We conclude that (i) energy prices affect the economy primarily through the supply side, whereas we do not find substantial demand-side effects; (ii) higher oil prices have temporary negative effects on both the output gap and on trend growth, which translates into a permanent reduction in the level of potential and actual output. Also, results for the United States indicate that oil supply shocks have more persistent negative effects on trend growth than oil demand shocks. These effects are statistically significant; however, our simulations also indicate that the effects are economically small.
    Keywords: Economic models; Interest rates; Transmission of monetary policy; Productivity; Potential output
    JEL: F41 Q43
    Date: 2009
  23. By: Jotikasthira, Chotibhak; Lundblad, Christian T.; Ramadorai, Tarun
    Abstract: We provide new evidence on the channels through which financial shocks are transmitted across international borders. Employing monthly data from 1996 to 2008 on over 1,000 developed country-domiciled mutual and hedge funds, we show that inflows and outflows experienced by these funds translate into significant changes in their portfolio allocations in 25 emerging markets. Despite funds' efforts to ameliorate the price impact of these portfolio allocation shifts, they substantially impact emerging market equity returns, and are associated with increases in co-movement between emerging and developed markets.
    Keywords: co-movement; contagion; hedge funds; international finance; mutual funds
    JEL: F32 G12 G15
    Date: 2009–12
  24. By: L. Marattin; M. Marzo; P. Zagaglia
    Abstract: We introduce distortionary taxes on consumption, labor and capital income into a New Keynesian model with Calvo pricing and nominal bonds. We study the relation between tax instruments and optimal monetary policy by computing simple rules for monetary and fiscal policy when one tax instrument at a time varies, while the other two are fixed at their steady-state level. The optimal rules maximize the second-order approximation to intertemporal utility. Three results emerge: (a) when prices are sticky, perfect inflation stabilization is optimal independently from the tax instrument adopted; (b) the optimal degree of responsiveness of monetary policy to output varies depending on which tax instrument induces fluctuations in the average tax rate; (c) when prices are flexible, fiscal rules that prescribe unexpected variations in the price level to support debt changes are always welfare-maximizing.
    JEL: E52 E61 E63
    Date: 2009–11
  25. By: Martin Fukac (Reserve Bank of New Zealand)
    Abstract: DSGE models have become a widely used tool for policymakers. This paper takes the global identification theory used for structural vectorautoregressions, and applies it to dynamic stochastic general equilibrium (DSGE) models. We use this modified theory to check whether a DSGE model structure allows for unique estimates of structural shocks and their dynamic effects. The potential cost of a lack of identification for policy oriented models along that specific dimension is huge, as the same model can generate a number of contrasting yet theoretically and empirically justifiable recommendations. The problem and methodology are illustrated using a simple New Keynesian business cycle model.
    JEL: C30 C52
    Date: 2009–12
  26. By: Martin Fukac (Reserve Bank of NA); Adrian Pagan (QUT)
    Abstract: The paper looks at the development of macroeconometric models over the past sixty years. In particular those that have been used for analysing policy options. We argue that there have been four generations of these. Each generation has evolved new features that have been partly drawn from the developing academic literature and partly from the perceived weaknesses in the previous generation. Overall the evolution has been governed by a desire to answer a set of basic questions and sometimes by what can be achieved using new computational methods. Our account of each generation considers their design, the way in which parameters were quantiÂ…ed and how they were evaluated.
    Keywords: DSGE models;Phillips Curve;Macroeconometric Models;Bayesian Estimation
    JEL: E12 E13 C51 C52
    Date: 2009–11–17
  27. By: Martin Fukac; Adrian Pagan (Reserve Bank of New Zealand)
    Abstract: In this paper we review the evolution of macroeconomic modelling in a policy environment that took placeover the past sixty years. We identify and characterise four generations of macro models. Particular attention is paid to the fourth generation – dynamic stochastic general equilibrium models. We discuss some of the problems in how these models are implemented and quantified.
    JEL: B16 C50
    Date: 2009–12
  28. By: Efrem Castelnuovo (University of Padua)
    Abstract: We assess the time-varying money's role in the post-WWII U.S. business cycle by estimating a new-Keynesian framework featuring nonseparability in real balances and consumption, portfolio adjustment costs, and a systematic reaction of policymakers to money growth. Rolling-window Bayesian estimations a la Canova (2009) are contrasted to a full sample fixed-coefficient investigation. Our results suggest that the assumption of stable parameters is unwarranted. The omission of money may induce biased assessments on the impact of structural shocks to the U.S. macroeconomic aggregates, especially during the great inflation period.
    JEL: E31 E51 E52
    Date: 2009–11
  29. By: Efrem Castelnuovo (University of Padua)
    Abstract: This paper estimates a new-Keynesian DSGE model of the U.S. business cycle by employing a variety of business cycle proxies, either one-by-one or, following a recent proposal by Canova and Ferroni (2009), in a joint fashion. Objects such as posterior densities, impulse-response functions, and forecast error variance decompositions are shown to be remarkably sensitive to different filtering. This uncertainty notwithstanding, shocks to trend inflation are given robust support as the main inflation driver in the post-WWII era.
    JEL: C32 E32 E37
    Date: 2009–11
  30. By: Kühn Stefan; Muysken Joan (METEOR)
    Abstract: Studies on central bank reaction functions find that central banks only caring about inflation stability, like the ECB, seem to follow a standard Taylor rule in the sense that the interest rate reacts significantly to variations in the output gap. We explain this result by claiming that the alleged reaction to the output gap could in fact be a reaction of the nominal interest rate to variations in the natural real rate of interest, which monetary policy should take into account. This provides a rationale for central banks to observe the output gap in the conduct of purely inflation targeting monetary policy.
    Keywords: monetary economics ;
    Date: 2009
  31. By: Browne, Frank (Central Bank and Financial Services Authority of Ireland); Kelly, Robert (Central Bank and Financial Services Authority of Ireland)
    Abstract: Developments in broad money since the start of the new millennium cannot be explained by the traditional determinants of money demand, namely, income, prices and portfolio effects. Households’ direct and indirect participation in financial markets have led to the widespread democratisation of these markets in the US since the 1970’s. In the pre-democratised era, an increase in uncertainty would have resulted in a fall in the transactions demand for money due to pessimism regarding income and employment prospects. When markets become more democratised, the precautionary, or store-of-value function of money dominates the transactions demand in which case an increase in uncertainty results in a net increase in the demand for money. Our Kalman Filter estimates are consistent with this theory. The money-uncertainty coefficient has been subject to an increasing trend over the whole sample period shifting gradually from significantly negative values up to the mid-to-late-1990s before becoming significantly positive by the early years of the new millennium. There are important repercussions from these new behavioural patterns for both monetary and financial stability which are discussed in this paper.
    Date: 2009–11
  32. By: Eckhard Wurzel; Luke Willard; Patrice Ollivaud
    Abstract: Crude oil prices have trended up since the end of the 1990s, peaking at a historic high in mid-2008 that was followed by a steep price correction with a subsequent rebound. This paper considers major forces behind the evolution of the oil price, using a simple model of supply and demand elasticities as a benchmark, highlights implications for inflation and economic activity and draws some conclusions for macroeconomic policy. The analysis suggests that the run-up in crude oil prices since 2003 was due to both vigorous oil demand growth by emerging markets and, from the middle of the decade onward, a weaker than expected oil supply response to rising prices. Prices are unlikely to fall back to levels seen in the first years of the decade either over the short or medium term.<P>Évolution récente du prix du pétrole : Facteurs explicatifs et questions de politiques économiques<BR>Les prix du pétrole brut ont crû régulièrement depuis la fin des années 90, jusqu’à atteindre un plus haut historique à la mi-2008 et ont ensuite été suivi par une baisse significative puis un nouveau rebond. Ce document met en exergue les forces principales derrière cette évolution des prix du pétrole en utilisant comme référence un modèle simple d’élasticités de l’offre et de la demande. Ensuite sont mis en évidence les implications pour l’inflation et l’activité économique. Enfin des conclusions sont tirées pour la politique macroéconomique. L’analyse suggère que l’augmentation des prix du pétrole depuis 2003 provient à la fois d’une croissance dynamique de la demande de pétrole en provenance des marchés émergents, et depuis la seconde moitié de la décennie d’une réaction plus faible que prévue de l’offre de pétrole face à des prix en hausse. Il est peu probable que les prix retombent à des niveaux prévalant les premières années de cette décennie que ce soit dans le court ou le moyen terme.
    Keywords: crude oil price, macroeconomic issues, oil demand, oil supply, demande de pétrole, offre de pétrole, prix du pétrole brut, questions macroéconomiques
    JEL: Q41 Q43
    Date: 2009–12–04
  33. By: Mototsugu Shintani (Department of Economics, Vanderbilt University); Akiko Terada-Hagiwara (Economics and Reasearch Department, Asian Development Bank); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University)
    Abstract: This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Using a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well-approximated by a class of smooth transition autoregressive (STAR) models with inflation as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to U.S. domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation.
    Keywords: Import prices, inflation indexation, pricing-to-market, smooth transition autoregressive models, sticky prices
    JEL: C22 E31 F31
    Date: 2009–11
  34. By: Kilian, Lutz; Lewis, Logan
    Abstract: Since Bernanke, Gertler and Watson (1997), a common view in the literature has been that systematic monetary policy responses to the inflation triggered by oil price shocks are an important source of aggregate fluctuations in the U.S. economy. We show that there is no evidence of systematic monetary policy responses to oil price shocks after 1987 and that this lack of a policy response is unlikely to be explained by reduced real wage rigidities. Prior to 1987, according to standard VAR models, the Federal Reserve was not responding to the inflation triggered by oil price shocks, as commonly presumed, but rather to the oil price shocks directly, consistent with a preemptive move by the Federal Reserve to counteract potential inflationary pressures. There are indications that this response is poorly identified, however, and there is no evidence that this policy response in the pre-1987 period caused substantial fluctuations in the Federal Funds rate or in real output. Our analysis suggests that the traditional monetary policy reaction framework explored by BGW and incorporated in subsequent DSGE models should be replaced by DSGE models that take account of the endogeneity of the real price of oil and that allow policy responses to depend on the underlying causes of oil price shocks.
    Keywords: Counterfactual; Oil; Recessions; Systematic Monetary Policy; Temporal Instability
    JEL: E31 E32 E52 Q43
    Date: 2009–12
  35. By: Max Gillman (Cardiff University Business School); Anton Nakov (Banco de España)
    Abstract: The paper presents a theory of nominal asset prices for competitively owned oil. Focusing on monetary effects, with flexible oil prices the US dollar oil price should follow the aggregate US price level. But with rigid nominal oil prices, the nominal oil price jumps proportionally to nominal interest rate increases. We find evidence for structural breaks in the nominal oil price that are used to illustrate the theory of oil price jumps. The evidence also indicates strong Granger causality of the oil price by US inflation as is consistent with the theory.
    Keywords: oil prices, infl ation, cash-in-advance, multiple structural breaks, Granger causality
    JEL: E31 E4
    Date: 2009–12
  36. By: Yunus Aksoy; Giovanni Melina (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: In this paper we explore the information content of a large set of fiscal indicators for US real output growth and inflation. We provide evidence that fluctuations in certain fiscal variables contain valuable information to predict fluctuations in output and prices. The distinction between federal and state-local fiscal indicators yields useful insights and helps define a new set of stylized facts for US macroeconomic conditions. First, we find that variations in state-local indirect taxes as well as state government surplus or deficit help predict output growth. Next, the federal counterparts of these indicators contain valuable information for inflation. Finally, state-local expenditures help predict US inflation. A set of formal and informal stability tests confirm that these relationships are stable. The fiscal indicators in questions are also among the ones that yield the best in-sample and out-of-sample performances.
    Date: 2009–12
  37. By: Campanella, Edoardo
    Abstract: Tiny changes in the American monetary policy can have dramatic effects on the rest of the world because of its double role of national and international currency. This is what I call the Triffin dilemma, an ever green concept in international finance. In the paper I show how it works through three examples: price of commodities, dollarization, and the international financial position of the US. I argue that to solve this situation, it would be important to create a more democratic monetary system, in which all the countries have a decision weight. In particular, I think that globalization and regionalization should be the two forces leading towards the new monetary system. The main economies should adopt the same currency through a system of fixed exchange rates (global money); developing countries should create regional monetary unions (regional money), preserving the real exchange rate as real shock absorber, but gaining in terms of time consistency and credibility. --
    Keywords: Triffin dilemma,global currency,regional monetary union,dollarization
    JEL: F33
    Date: 2009
  38. By: Bellégo, C.; Ferrara, L.
    Abstract: Recent macroeconomic evolutions during the years 2008 and 2009 have pointed out the impact of financial markets on economic activity. In this paper, we propose to evaluate the ability of a set of financial variables to forecast recessions in the euro area by using a non-linear binary response model associated with information combination. Especially, we focus on a time-varying probit model whose parameters evolve according to a Markov chain. For various forecast horizons, we provide a readable and leading signal of recession by combining information according to two combining schemes over the sample 1970-2006. First we average recession probabilities and second we linearly combine variables through a dynamic factor model in order to estimate an innovative factor-augmented probit model. Out-of-sample results over the period 2007-2008 show that financial variables would have been helpful in predicting a recession signal as September 2007, that is around six months before the effective start of the 2008-2009 recession in the euro area.
    Keywords: Macroeconomic forecasting, Business cycles, Turning points, Financial markets, Non-linear time series, Combining forecasts.
    JEL: C53 E32 E44
    Date: 2009
  39. By: Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg); Stephen M. Miller (College of Business, University of Las Vegas, Nevada)
    Abstract: We employ a 10-variable dynamic structural general equilibrium model to forecast the US real house price index as well as its turning point in 2006:Q2. We also examine various Bayesian and classical time-series models in our forecasting exercise to compare to the dynamic stochastic general equilibrium model, estimated using Bayesian methods. In addition to standard vector-autoregressive and Bayesian vector autoregressive models, we also include the information content of either 10 or 120 quarterly series in some models to capture the influence of fundamentals. We consider two approaches for including information from large data sets – extracting common factors (principle components) in a Factor-Augmented Vector Autoregressive or Factor-Augmented Bayesian Vector Autoregressive models or Bayesian shrinkage in a large-scale Bayesian Vector Autoregressive models. We compare the out-ofsample forecast performance of the alternative models, using the average root mean squared error for the forecasts. We find that the small-scale Bayesian-shrinkage model (10 variables) outperforms the other models, including the large-scale Bayesian-shrinkage model (120 variables). Finally, we use each model to forecast the turning point in 2006:Q2, using the estimated model through 2005:Q2. Only the dynamic stochastic general equilibrium model actually forecasts a turning point with any accuracy, suggesting that attention to developing forward-looking microfounded dynamic stochastic general equilibrium models of the housing market, over and above fundamentals, proves crucial in forecasting turning points.
    Keywords: US House prices, Forecasting, DSGE models, Factor Augmented Models, Large-Scale BVAR models
    JEL: C32 R31
    Date: 2009–12
  40. By: Ciżkowicz, Piotr; Hołda, Marcin; Rzońca, Andrzej
    Abstract: The article contains a review of monetary growth models. We analyze the ways in which money is introduced into these models and the models’ conclusions about the impact of inflation on investment. We find that the models differ widely with respect to the ways in which they account for money and its functions in the economy as well as with respect to the “technical” assumptions, about e.g. the form of the utility function or the production function. Despite these differences most models fail to adequately capture money’s role and are highly sensitive to changes in the assumptions. Moreover, the models differ in their predictions about inflation’s impact on capital accumulation, with some models offering conclusions that are not only counterintuitive but also inconsistent with empirical evidence.
    Keywords: investment, inflation, monetary models of growth, monetary search theoretic models
    JEL: O42 E31 E22 E52
    Date: 2009–11
  41. By: M. FRÖMMEL; R. KRUSE
    Abstract: In this paper we analyze the convergence of interest rates in the European Monetary System (EMS) in a framework of changing persistence. This allows us to estimate the exact date of full convergence from the data. A change in persistence means that a time series switches from stationarity to non-stationarity, or vice versa. It is often argued that due to the specific historical situation in the EMS the interest rate differential was non-stationary before the full convergence of interest rates was achieved and stationary afterwards. Our empirical results suggest that the convergence date has been very different for Belgium, France, the Netherlands and Italy and are in line with the conclusions one would draw from a narrative approach. We compare three different estimators for the convergence date and find that the results are quite robust. Our results therefore stress the importance of credibility for monetary policy.
    Keywords: Interest rates, convergence, changing persistence, EMS, EMU
    JEL: C22 F33 F36
    Date: 2009–05
  42. By: Barthélemy, J.; Marx, M.; Poissonnier, A.
    Abstract: We analyze the euro area business cycle in a medium scale DSGE model where we assume two stochastic trends: one on total factor productivity and one on the inflation target of the central bank. To justify our choice of integrated trends, we test alternative specifications for both of them. We do so, estimating trends together with the model's structural parameters, to prevent estimation biases. In our estimates, business cycle fluctuations are dominated by investment specific shocks and preference shocks of households. Our results cast doubts on the view that cost push shocks dominate economic fluctuations in DSGE models and show that productivity shocks drive fluctuations on a longer term. As a conclusion, we present our estimation's historical reading of the business cycle in the euro area. This estimation gives credible explanations of major economic events since 1985.
    Keywords: New Keynesian model, Business Cycle, Bayesian estimation.
    JEL: E32
    Date: 2009
  43. By: Mirdala, Rajmund
    Abstract: Exchange rate plays an important role in transmitting pressures from the external shocks to the domestic economy. Development of inflation in the domestic economy is significantly determined by the ability of exchange rate to transmit external price related pressures to the domestic market. Considering the new EU member countries obligation to adopt euro the loss of the monetary sovereignty should be analyzed not only in the view of the direct positive and negative effects of this decision but also in the view of many indirect effects. While the exchange rates of majority of the EMU candidate countries are strongly affected by the euro exchange rate on the international markets there is still room for them to float partially reflecting changes in the national economic development. Ability of the exchange rate to transfer external shocks to the national economy remains one of the most discussed areas relating to the current stage of the monetary integration process in the European single market. In the paper we analyze the ability of the exchange rate to weaken or eventually to strengthen the transmission of the external inflation pressures to the national economy in the Czech republic, Hungary, Poland and the Slovak republic. In order to meet this objective we estimate a vector autoregression (VAR) model correctly identified by the Cholesky decomposition of innovations that allows us to identify structural shocks hitting the model. Variance decomposition and impulse-response functions are computed in order to estimate the exchange rate pass-through from the foreign prices of import to the domestic consumer price indexes in the Visegrad countries. Ordering of the endogenous variables in the model is also considered allowing us to check the robustness of the empirical results.
    Keywords: exchange rate; inflation; VAR; Cholesky decomposition; variance decomposition; impulse-response function
    JEL: C32 E52
    Date: 2009–07
  44. By: Ansgar Belke; Gunther Schnabl; Holger Zemanek
    Abstract: The paper scrutinizes the role of wages and capital flows for competitiveness in the new EU member states in the context of real convergence. For this purpose it extends the seminal Balassa-Samuelson model by international capital markets. The augmented Balassa-Samuelson model is linked to the monetary overinvestment theories of Wicksell and Hayek in order to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1993 to 2008 reveal mixed evidence for the role of capital markets for both the economic catch-up process and international competitiveness of the Central and Eastern European countries.
    Keywords: Exchange rate regime, wages, Central and Eastern Europe, EMU accession, panel model
    JEL: E24 F16 F31 F32
    Date: 2009–10
  45. By: Canova, Fabio; Menz, Tobias
    Abstract: We study the contribution of the stock of money to the macroeconomic outcomes of the 1990s in Japan using a small scale structural model. Likelihood-based estimates of the parameters are provided and time stabilities of the structural relationships analyzed. Real balances are statistically important for output and inflation fluctuations and their role has changed over time. Models which give money no role give a distorted representation of the sources of cyclical fluctuations. The severe stagnation and the long deflation are driven by different causes.
    Keywords: deflation; Japan's Lost decade; money; structural model
    JEL: E31 E32 E52
    Date: 2009–12
  46. By: Bruun , Charlotte; Heyn-Johnsen, Carsten
    Abstract: The paradox of monetary profits has been a recurrent theme in macroeconomics since the problem was first formulated by Marx. Capitalists as a whole can at most get from workers, what they already paid out in wages. Marx did not solve this problem, and neither did Keynes, who had to face the problem in “The General Theory”. A consequential logical conclusion to Keynes’ treatment of the problem, leaves his concept of aggregate income indeterminate—based on imaginary magnitudes. Both Marx and Keynes tried to solve the problem by addressing current transaction flows, which is also the approach taken by more recent contributors. Another solution to the problem is to regard monetary profits as a flow arising from changes in stock magnitudes—more specifically the monetary valuation of real capital performed at financial markets. Besides solving the paradox of monetary profits, this solution also provides us with a very strong connection between the real and the financial spheres. The monetary profit inducing capitalist production, emanates from the sphere of finance. In a world of fundamental uncertainty this gives us an explanation of, not only what may drive financial booms and busts, but also how these movements on financial markets are related to the real sphere of production. --
    Keywords: Monetary production theory,stock-flow consistency,finance,national income accounting
    JEL: E44 E01 E11 E12 E25
    Date: 2009
  47. By: Puriya Abbassi; Dieter Nautz; Christian J. Offermanns
    Abstract: The maturity of the operational target of monetary policy is a distinguishing feature of the SNB's operational framework of monetary policy. While most central banks use targets for the overnight rate to signal the policy-intended interest rate level, the SNB announces a target range for the three-month Libor. This paper investigates the working and the consequences of the SNB's unique operational framework for the behavior of Swiss money market rates before and during the financial crisis.
    Keywords: Implementation of Monetary Policy, Operational Targets of Monetary Policy, Three-Month Rate Targeting, Financial Crisis
    JEL: E52 E58
    Date: 2009–12
  48. By: Blank, Sven; Dovern, Jonas
    Abstract: We analyze what macroeconomic shocks affect the soundness of the German banking system and how this, in turn, feeds back into the macroeconomic environment. Recent turmoils on the international financial markets have shown very clearly that assessing the degree to which banks are vulnerable to macroeconomic shocks is of utmost importance to investors and policy makers. We propose to use a VAR framework that takes feedback effects between the financial sector and the macroeconomic environment into account. We identify responses of a distress indicator for the German banking system to a battery of different structural shocks. We find that monetary policy shocks, fiscal policy shocks, and real estate price shocks have a significant impact on the probability of distress in the banking system. We identify some differences across type of banks and different distress categories, though these differences are often small and do not show any systematic patterns. --
    Keywords: VAR,banking sector stability,sign restriction approach
    JEL: C32 E44 G21
    Date: 2009
    Abstract: We estimate monetary policy rules for six central and eastern European countries (CEEC) during the period, when they prepared for membership to the EU and monetary union. By taking changes in the policy settings explicitly into account and by introducing several new methodological features we significantly improve estimation results for monetary policy rules in CEEC. We find that in the Czech Republic, Hungary and Poland the focus of the interest rate setting behaviour switched from defending the peg to targeting inflation. For Slovakia, however, there still seemed to be on ongoing focus on the exchange rate. For Slovenia and only after a policy switch for Romania we find a solid relation with inflation as well.
    Keywords: monetary policy, Taylor rules, transition economies, CEEC, inflation targeting
    JEL: E52 E58 P20
    Date: 2009–08
  50. By: Tomislav Ćorić (Department of Economics, School of Business Administration, Fort Lewis College); Dajana Cvrlje (Faculty of Economics and Business, University of Zagreb)
    Abstract: A trend of increasing role of central bank's independence took place in the most of modern economies. The central bank independence (CBI) is seen as a way of bringing economy to a higher level. It is argued that an independent central bank is more credible and moreover, that the higher degree of central bank independence facilitates central bank to identify signals of financial problems and alert financial markets. Furthermore, an independent central bank is less likely to be exposed to the inflationary bias, inherent in monetary policy, and is more aware of the inflation costs of expansionary monetary policy. This is in line with Friedman’s theoretical concept that the phenomenon of inflation is to be regulated by controlling the amount of money poured into the national economy by the central bank. In order to achieve the main goal; price stability, it is essential for a central bank to be connected to government as little as possible. However, governments generally have a certain influence over central banks, even in the case of banks who claim to be independent. The first part of the paper offers theoretical background for the central bank independence (CBI concept). The empirical evidence on the relationship between central bank independence and economic variables suggests negative relationship between central bank independence and inflation. The strong evidence of central bank independence influence on other macroeconomic variables so far has not been found. The analysis of the independence of Croatian national bank was made using 3 different methods; 1) central bank governor turnover rate (TOR), 2) Petursson G. Thorarinn criterion and 3) Cukierman, Webb and Neyapti (CWN) questionnaire. The obtained results affirm high level of central bank independence in Croatia.
    Keywords: monetary policy, central bank independence
    JEL: E58
    Date: 2009–11–12
  51. By: Alper, Emre; Hatipoglu, Ozan
    Abstract: We document the role of independence for Central Bank of Republic of Turkey (CBRT) as it matters to successful implementation of monetary policy. We compare the implementation of monetary policy pre- and post-crisis periods within an empirical framework which allows us to measure the role of independence quantitatively. We estimate a Taylor rule with time varying coefficients by employing a dual extended Kalman filter. We find that the coefficient of inflation gap has increased substantially since CBRT gained de-juro independence.
    Keywords: Taylor Rule; Kalman Filter; Monetary Policy
    JEL: E58 E52 E00 C11
    Date: 2009–01
  52. By: Razzak, Weshah; Bentour, E M
    Abstract: The Gulf Cooperation Council countries (GCC) include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. Their monetary policy objective is to stabilize the foreign price, i.e., exchange rate instead of the domestic price level, where the nominal interest rate is equalized with the US federal fund rate, but the inflation rates are independent. High oil prices and the depreciating US dollar caused inflation to rise and real interest rates to be persistently negative in the UAE and Qatar. Asset prices bubbles formed then burst creating large loses. They could have moderated the effect of, or avoided, the bubble had they floated the currency and stabilized domestic prices.
    Keywords: inflation; real interest rate; bubbles
    JEL: E31 E58 E37
    Date: 2009–12–01

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