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on Central Banking |
| By: | Fiorella De Fiore (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Pedro Teles (Universidade Católica Portuguesa, alma de Cima, CP-1649-023 Lisboa, Portugal.); Oeste Tristani (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idiosyncratic shocks which may force them to default on their debt. Firms’assets and liabilities are denominated in nominal terms and predetermined when shocks occur. Monetary policy can therefore affect the real value of funds used to finance production. Furthermore, policy affects the loan and deposit rates. We find that allowing for short-term inflation volatility in response to exogenous shocks can be optimal; that the optimal response to adverse financial shocks is to lower interest rates, if not at the zero bound, and to engineer a short period of inflation; that the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones. JEL Classification: E20, E44, E52. |
| Keywords: | Financial stability, debt deflation, bankruptcy costs, price level volatility, optimal monetary policy, stabilization policy. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091123&r=cba |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christian Saborowski (University of Warwick, Coventry CV4 7AL, United Kingdom.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper shows that monetary policy shocks exert a substantial effect on the size and composition of capital flows and the trade balance for the United States, with a 100 basis point easing raising net capital inflows and lowering the trade balance by 1% of GDP, and explaining about 20-25% of their time variation. Monetary policy easing causes positive returns to both equities and bonds. Yet such a monetary policy easing shock also induces a shift in portfolio composition out of equities and into bonds, implying a negative conditional correlation between flows in equities and bonds. Moreover, such shocks induce a negative conditional correlation between equity flows and equity returns, but a positive conditional correlation between bond flows and bond returns. The findings thus provide evidence for the presence of a portfolio rebalancing motive behind investment decisions in equities, but the dominance of what is akin to a return chasing motive for bonds, conditional on monetary policy shocks. The results also shed light on the puzzle of the strongly time-varying equity-bond return correlations found in the literature. JEL Classification: F4, E52, G1, F32. |
| Keywords: | monetary policy, trade balance, capital flows, portfolio choice, asset prices, United States, vector auto regressions, sign restrictions. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091122&r=cba |
| By: | Michael Dotsey; Margarida Duarte |
| Abstract: | The authors show that standard alternative assumptions about the currency in which firms price export goods are virtually inconsequential for the properties of aggregate variables, other than the terms of trade, in a quantitative open-economy model. This result is in contrast to a large literature that emphasizes the importance of the currency denomination of exports for the properties of open-economy models. |
| Keywords: | Exports ; Pricing |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-32&r=cba |
| By: | Alejandro Justiniano; Bruce Preston |
| Abstract: | This paper explores optimal policy design in an estimated model of three small open economies: Australia, Canada and New Zealand. Within a class of generalized Taylor rules, we show that to stabilize a weighted objective of output, consumer price inflation and nominal interest variation optimal policy does not respond to the nominal exchange. This is despite the presence of local currency pricing and due, in large part, to observed exchange rate disconnect in these economies. Optimal policies that account for the uncertainty of model estimates, as captured by the parameters' posterior distrbution, similarly exhibit a lack of exchange rate response. In contrast to Brainard (1967), the presence of parameter uncertainty can lead to more or less aggressive policy responses, depending on the model at hand. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-09-21&r=cba |
| By: | Alejandro Justiniano; Bruce Preston |
| Abstract: | This paper demonstrates that an estimated, structural, small open-economy model of the Canadian economy cannot account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The benchmark model assumes uncorrelated shocks across countries and implies that U.S. shocks account for less than 3 percent of the variability observed in several Canadian series, at all forecast horizons. Accordingly, model-implied cross-correlation functions between Canada and U.S. are essentially zero. Both findings are at odds with the data. A specification that assumes correlated cross-country shocks partially resolves this discrepancy, but still falls well short of matching reduced-form evidence. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-09-19&r=cba |
| By: | Florian Heider (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marie Hoerova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Cornelia Holthausen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We study the functioning and possible breakdown of the interbank market in the presence of counterparty risk. We allow banks to have private information about the risk of their assets. We show how banks’ asset risk affects funding liquidity in the interbank market. Several interbank market regimes can arise: i) normal state with low interest rates; ii) turmoil state with adverse selection and elevated rates; and iii) market breakdown with liquidity hoarding. We provide an explanation for observed developments in the interbank market before and during the 2007-09 financial crisis (dramatic increases of unsecured rates and excess reserves banks hold, as well as the inability of massive liquidity injections by central banks to restore interbank activity). We use the model to discuss various policy responses. JEL Classification: G01, G21, D82. |
| Keywords: | Financial crisis, Interbank market, Liquidity, Counterparty risk, Asymmetric information. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091126&r=cba |
| By: | Eduardo Levy-Yeyati; Federico Sturzenegger; Iliana Reggio |
| Abstract: | The literature has identified three main approaches to account for the way exchange rate regimes are chosen: i) the optimal currency area theory; ii) the financial view, which highlights the consequences of international financial integration; and iii) the political view, which stresses the use of exchange rate anchors as credibility enhancers in politically challenged economies. Using de facto and de jure regime classifications, we test the empirical relevance of these approaches separately and jointly. We find overall empirical support for all of them, although the incidence of financial and political aspects varies substantially between industrial and non-industrial economies. Furthermore, we find that the link between de facto regimes and their underlying fundamentals has been surprisingly stable over the years, suggesting that the global trends often highlighted in the literature can be traced back to the evolution of their natural determinants, and that actual policies have been little influenced by the frequent twist and turns in the exchange rate regime debate. |
| Keywords: | Exchange rates, Growth, Impossible trinity, Dollarization, Capital flows |
| JEL: | F30 F33 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we098374&r=cba |
| By: | Ferdinand Fichtner (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rasmus Rüffer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Bernd Schnatz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Using OECD composite leading indicators (CLI), we assess empirically whether the ability of the country-specific CLIs to predict economic activity has diminished in recent years, e.g. due to rapid advances in globalisation. Overall, we find evidence that the CLI encompasses useful information for forecasting industrial production, particularly over horizons of four to eight months ahead. The evidence is particularly strong when taking cointegration relationships into account. At the same time, we find indications that the forecast accuracy has declined over time for several countries. Augmenting the country-specific CLI with a leading indicator of the external environment and employing forecast combination techniques improves the forecast performance for several economies. Over time, the increasing importance of international dependencies is documented by relative performance gains of the extended model for selected countries. JEL Classification: C53, E32, E37, F47. |
| Keywords: | Leading Indicator, Business Cycle, Forecast Comparison, Globalisation, Structural Change. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091125&r=cba |
| By: | Stefan Niemann; Paul Pichler; Gerhard Sorger |
| Abstract: | We examine the dynamic properties of inflation in a model of optimal discretionary fiscal and monetary policies. The lack of commitment and the presence of nominally risk-free debt provide the government with an incentive to implement policies which induce positive and persistent inflation rates. We show that this property obtains already in an environment with flexible prices and perfectly competitive product markets. Introducing nominal rigidities and imperfect competition has no qualitative but important quantitative implications. In particular, with a modest degree of price stickiness our model generates inflation dynamics very similar to those experienced in the U.S. since the Volcker disinflation of the early 1980s. |
| Date: | 2009–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:681&r=cba |
| By: | D. Sornette; R. Woodard |
| Abstract: | The financial crisis of 2008, which started with an initially well-defined epicenter focused on mortgage backed securities (MBS), has been cascading into a global economic recession, whose increasing severity and uncertain duration has led and is continuing to lead to massive losses and damage for billions of people. Heavy central bank interventions and government spending programs have been launched worldwide and especially in the USA and Europe, with the hope to unfreeze credit and boltster consumption. Here, we present evidence and articulate a general framework that allows one to diagnose the fundamental cause of the unfolding financial and economic crisis: the accumulation of several bubbles and their interplay and mutual reinforcement has led to an illusion of a ``perpetual money machine'' allowing financial institutions to extract wealth from an unsustainable artificial process. Taking stock of this diagnostic, we conclude that many of the interventions to address the so-called liquidity crisis and to encourage more consumption are ill-advised and even dangerous, given that precautionary reserves were not accumulated in the ``good times'' but that huge liabilities were. The most ``interesting'' present times constitute unique opportunities but also great challenges, for which we offer a few recommendations. |
| Keywords: | Financial crisis, bubbles, real estate bubble, derivatives, super-exponential |
| JEL: | O16 |
| Date: | 2009–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:stz:wpaper:ccss-09-00003&r=cba |
| By: | Alexander Kriwoluzky; Christian A. Stoltenbergz |
| Abstract: | Uncertainty about the appropriate choice among nested models is a central concern for optimal policy when policy prescriptions from those models differ. The standard procedure is to specify a prior over the parameter space ignoring the special status of some sub-models, e.g. those resulting from zero restrictions. This is especially problematic if a model's generalization could be either true progress or the latest fad found to fit the data. We propose a procedure that ensures that the specified set of sub-models is not discarded too easily and thus receives no weight in determining optimal policy. We find that optimal policy based on our procedure leads to substantial welfare gains compared to the standard practice. |
| Keywords: | Optimal monetary policy, model uncertainty, Bayesian model estimation |
| JEL: | E32 C51 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/37&r=cba |
| By: | Thorsten Lehnert (Luxembourg School of Finance, University of Luxembourg); Aleksandar Andonov (Limburg Institute of Financial Economics, Maastricht University); Florian Bardong (Fixed Income Research, Barclays Global Investors, London) |
| Abstract: | Previous research indicates that the US market for inflation-linked bonds is not efficient and that market inefficiencies can be exploited by informed traders who include survey estimations or inflation model forecasts in trades on break-even inflation. Results from this extended research over a time-period in which the TIPS market matured and increased in depth, while the volatility of real yields and inflation increased, confirm that TIPS market inefficiency was not temporary but persisted over the entire time period between 1997 and 2009. Using estimations generated by the Survey of Professional Forecasters or forecasts based on the Kothari and Shanken (2004) inflation model to construct a break-even trading strategy leads to excess returns over a static buy-and-hold strategy. These excess returns remain substantial even after accounting for trading costs. Furthermore, TIPS returns still include a substantial liquidity premium, which increased during the financial crisis. |
| Keywords: | TIPS, market, inflation expectations, survey of Professional Forecasters, financial crisis |
| JEL: | E31 E43 E44 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:09-09&r=cba |
| By: | Michelle L. Barnes; Zvi Bodie; Robert K. Triest; J. Christina Wang |
| Abstract: | In September 1997, the U.S. Treasury developed the TIPS market in order to achieve three important policy objectives: (1) to provide consumers with a class of assets that allows for hedging against real interest rate risk, (2) to provide holders of nominal contracts a means of hedging against inflation risk, and (3) to provide everyone with a reliable indicator of the term structure of expected inflation. This paper evaluates progress toward the achievement of these objectives and analyzes prospective ways to better meet these objectives in the future, by, for example, extending the maturity of TIPS and/or the use of inflation indexes suited to particular geographic regions or demographics. We conclude by arguing that while it is tempting to consider completing markets by introducing more TIPS-like securities indexed to inflation rates more tailored to particular demographics, our analysis suggests that TIPS indexed to CPI do, in fact, facilitate good synthetic hedges against unexpected changes in inflation for many different investors, since the various inflation measures are very highly correlated. We do, however, argue for extending the maturity of TIPS. |
| Keywords: | Treasury bonds ; Treasury notes ; Inflation-indexed bonds |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:09-8&r=cba |
| By: | Morley, Bruce |
| Abstract: | Using the ARDL bounds testing approach to cointegration this paper provides evidence of a stable long run relationship between the exchange rate and stock prices for the UK, Japan and Swiss currencies with respect to the US dollar. The resultant error correction models suggest a positive relationship between stock prices and the exchange rate, which in an out-of-sample forecast outperforms the random walk. We compare these results with a similar model incorporating interest rates, suggested by Solnik (1987), however this does not in general improve the results. |
| Keywords: | Exchange Rates; Stock Prices; Forecast; Cointegration |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:5/09&r=cba |
| By: | Christian Wolff (Luxembourg School of Finance, University of Luxembourg); Ron Jongen (Erasmus School of Economics, Erasmus University Rotterdam); Willem F.C. Verschoor (Erasmus School of Economics, Erasmus University Rotterdam); Remco C.J. Zwinkels (Erasmus School of Economics, Erasmus University Rotterdam) |
| Abstract: | This paper analyzes the sources of the differential beliefs of market participants in the foreign exchange market and their relative role in forming exchange rate expectations. We find that there are distinct periods of high and low dispersion and document that dispersion arises because of a combined effect of market participants holding individual information and attach different weights to some elements of the common information set. In addition to these two effects, we also document evidence of the existence of different types of agents and find that chartist rules are predominantly used at the shorter spectrum of the forecast horizon and fundamentalist rules are predominantly used at the longer spectrum of the forecast horizon. Finally, our evidence suggests that the relationship between market volatility and trader dispersion tends to be significant and positive for different measures of both trader heterogeneity and market volatility. |
| Keywords: | Exchange rate expectations, heterogeneity, dispersion of beliefs, bounded rationality, tail behavior, survey data. |
| JEL: | F31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:09-01&r=cba |
| By: | Luciana Lo Bue; Antonio Ribba |
| Abstract: | In this paper we undertake an empirical investigation concerning the performance of the traditional measure of core inflation in recent years. We consider the group of G7 countries and explore both the high-frequency and the low-frequency relations between overall inflation and core inflation. We find that the traditional core measure, obtained by subtracting from the overall index those components which exhibit high volatility and which are responsible for the short-run variability of inflation, is a reliable indicator of trend inflation for a group of countries including the USA, Canada and Japan. The innovation accounting shows that for the three countries the transitory shock, i.e. the total inflation shock, has limited persistence and hence there is a relatively quick convergence of overall inflation to its trend component. |
| Keywords: | Core Inflation Indicator; Structural Cointegrated VARs; Permanent-transitory Decompositions |
| JEL: | C43 E31 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:037&r=cba |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Policy counterfactuals based on estimated structural VARs routinely suggest that bringing Alan Greenspan back in the 1970s’ United States would not have prevented the Great Inflation. We show that a standard policy counterfactual suggests that the Bundesbank–which is near-universally credited for sparing West Germany the Great Inflation–would also not have been able to prevent the Great Inflation in the United States. The sheer implausibility of this result sounds a cautionary note on taking the outcome of SVAR-based policy counterfactuals at face value, and raises questions on the very reliability of such exercises. JEL Classification: E32, E47, E52, E58. |
| Keywords: | Bayesian VARs; time-varying parameters; stochastic volatility; identified VARs; Great Inflation; policy counterfactuals. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091134&r=cba |
| By: | Pinelopi Koujianou Goldberg; Rebecca Hellerstein |
| Abstract: | Conventional wisdom suggests that producer prices are more rigid than consumer prices and therefore play less of a role in the allocation of goods and services. Analyzing 1987-2008 microdata collected by the U.S. Bureau of Labor Statistics for the producer price index, we find that producer prices for finished goods and services in fact exhibit roughly the same rigidity as consumer prices that include sales and substantially less rigidity than consumer prices that exclude them. Moreover, large firms change prices two to three times more frequently than small firms do, and by smaller amounts, particularly in the case of price decreases. Longer price durations are associated with larger price changes, although there is considerable heterogeneity in this relationship. Long-term contracts are associated with somewhat greater price rigidity for goods and services, although the differences are not dramatic. The size of price decreases plays a key role in inflation dynamics, while the size of price increases does not. The frequencies of price increases and decreases tend to move together and so cancel one another out. |
| Keywords: | Price indexes ; Consumer price indexes ; Inflation (Finance) ; Prices |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:407&r=cba |
| By: | G.C. Lim; R. Dixon; S. Tsiaplias |
| Abstract: | A time-varying Phillips curve was estimated as a means to examine the changing nature of the relationship between wage inflation and the unemployment rate in Australia. The implied time-varying equilibrium unemployment rate was generated and the analysis showed the important role played by variations in the slope of the Phillips curve in changing the equilibrium unemployment rate. The deviations of actual unemployment rates from the estimated equilibrium unemployment rates also performed remarkedly well as measures of inflationary pressure. |
| Keywords: | Phillips curve; equilibrium unemployment rate; inflation |
| JEL: | E24 E31 E32 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1070&r=cba |
| By: | Paul Soderlind |
| Abstract: | An affine yield curve model is estimated on daily Swiss data 2002--2009. The market price of risk is modelled in terms of proxies for uncertainty, which are estimated from interest rate options. The estimated model generates innovations in the 3-month rate that are similar to external evidence of monetary policy surprises - as well as term premia that are consistent with survey data. The results indicate that a surprise increase in the policy rate gives a reasonably sized decrease (-0.25%) in term premia for longer maturities. |
| Keywords: | affine price of risk, interest rate caps, survey data |
| JEL: | E27 E47 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2009:2009-33&r=cba |
| By: | Jørn Inge Halvorsen (Norges Bank and Norwegian School of Management (BI)); Dag Henning Jacobsen (Norges Bank (Central Bank of Norway)) |
| Abstract: | We analyze the importance of bank lending shocks on real activity in Norway and the UK, using structural VARs and based on quarterly data for the past 21 years. The VARs are identified using a combination of sign and short-term zero restrictions, allowing for simultaneous interaction between various variables. We find that a negative bank lending shock causes output to contract. The significance of bank lending shocks seems evident as they explain a substantial share of output gap variability. This suggests that the banking sector is an important source of shocks. The empirical analysis comprises the Norwegian banking crisis (1988-1993) and the recent period of banking failures and recession in the UK. The results are clearly non-negligible also when omitting periods of systemic banking distress from the sample. |
| Keywords: | Identification, VAR, Monetary Policy, Bank lending. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_27&r=cba |
| By: | Pablo Burriel (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Francisco de Castro (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Daniel Garrote (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Esther Gordo (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Joan Paredes (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Javier J. Pérez (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.) |
| Abstract: | We analyse the impact of fiscal policy shocks in the euro area as a whole, using a newly available quarterly dataset of fiscal variables for the period 1981-2007. To allow for comparability with previous results on euro area countries and the US, we use a standard structural VAR framework, and study the impact of aggregated and disaggregated government spending and net taxes shocks. In addition, to frame euro area results, we apply the same methodology for the same sample period to US data. We also explore the sensitivity of the provided results to the inclusion of variables aiming at measuring “financial stress” (increases in risk) and “fiscal stress” (sustainability concerns). Analysing US and euro area data with a common methodology provides some interesting insights on the interpretation of fiscal policy shocks. JEL Classification: E62, H30. |
| Keywords: | Euro area, SVAR, Fiscal Shocks, Fiscal multipliers. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091133&r=cba |
| By: | Marco Buchmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper addresses the estimation of Phillips curve equations for the euro area while employing less stringent assumptions on the functional correspondence between price inflation, inflation expectations and marginal costs. Expectations are not assumed to be an unbiased predictor of actual inflation and instead derived from the European Commission’s Consumer Survey data. The results suggest that expectations drive inflation with a lag of about 6 months, which casts further doubt on the validity of the New Keynesian Phillips curve. Moreover, the trade off between inflation and real economic activity is not vertical in the short run. Non- and Semiparametric estimates reveal an important nonlinearity in the sense that demand pressure on price inflation is not invariant to the state of the economy as it increases considerably at times of high economic activity. Conventional linear Phillips curves cannot capture this empirical regularity. Some implications for monetary policy are discussed. JEL Classification: C14, E31, E32. |
| Keywords: | Inflation, Phillips Curve, Survey Expectations, Non- and Semiparametric Econometrics, Monetary Policy. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091119&r=cba |
| By: | Olli Castrén (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ilja Kristian Kavonius (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The financial crisis has highlighted the need for models that can identify counterparty risk exposures and shock transmission processes at the systemic level. We use the euro area financial accounts (flow of funds) data to construct a sector-level network of bilateral balance sheet exposures and show how local shocks can propagate throughout the network and affect the balance sheets in other, even seemingly remote, parts of the financial system. We then use the contingent claims approach to extend this accounting-based network of interlinked exposures to risk-based balance sheets which are sensitive to changes in leverage and asset volatility. We conclude that the bilateral cross-sector exposures in the euro area financial system constitute important channels through which local risk exposures and balance sheet dislocations can be transmitted, with the financial intermediaries playing a key role in the processes. High financial leverage and high asset volatility are found to increase a sector’s vulnerability to shocks and contagion. JEL Classification: C22, E01, E21, E44, F36, G01, G12, G14. |
| Keywords: | Balance sheet contagion, financial accounts, network models, contingent claims analysis, systemic risk, macro-prudential analysis. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091124&r=cba |
| By: | Martin, Christopher; Milas, C |
| Abstract: | We present empirical evidence that the marked rise in liquidity in 2001-2007 was due to large and persistent current account deficits and loose monetary policy. If this increase in liquidity was a pre-condition for the financial crisis that began in July 2007, we can conclude that loose monetary and the deterioration in current account balances were causes of the financial crisis. |
| Keywords: | financial crisis; liquidity; monetary policy; global imbalances |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:18/09&r=cba |
| By: | Martin, Christopher; Milas, C. |
| Abstract: | The “sub-prime” crisis, which led to major turbulence in global financial markets beginning in mid-2007, has posed major challenges for monetary policymakers. We analyse the impact on monetary policy of the widening differential between policy rates and the 3-month Libor rate, the benchmark for private sector interest rates. We show that the optimal monetary policy rule should include the determinants of this differential, adding an extra layer of complexity to the problems facing policymakers. Our estimates reveal significant effects of risk and liquidity measures, suggesting the widening differential between base rates and Libor was largely driven by a sharp increase in unsecured lending risk. We calculate that the crisis increased libor by up to 60 basis points; in response base rates fell further and quicker than would otherwise have happened as policymakers sought to offset some of the contractionary effects of the sub-prime crisis |
| Keywords: | optimal monetary policy; sub-prime crisis |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:1/09&r=cba |
| By: | Shin-ichi Fukuda (Faculty of Economics, University of Tokyo) |
| Abstract: | Under the financial turbulence, the Bank of Japan (BOJ) had launched a series of unprecedented monetary policies in the late 1990s and the early 2000s. The conventional monetary policies were not effective under liquidity trap. However, some unconventional monetary policies, including zero interest rate, quantitative easing, and credit easing, had important roles in stabilizing the economy. The first is to stabilize long-run expectations through the BOJ's commitment that the policy will continue until deflationary concerns disappear. The second is to maintain the proper functioning of the market so as to avoid disturbance in the short-term money market. The latter part of this paper shows that the second element was successful in stabilizing the short-term money market in Japan in the early 2000s. The credit easing policy was more powerful tool in providing ample liquidity under the Japanese Financial Crisis. However, the unconventional monetary policies caused a variety of moral hazards in the markets. We show that the extreme monetary policy was useful in improving macroeconomic performance with some nonnegligible costs. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:tky:jseres:2009cj215&r=cba |
| By: | Jingliang Xiao; Glyn Wittwer |
| Abstract: | We use a dynamic CGE model of China with a financial module and sectoral detail to examine the real and nominal impacts of a nominal exchange rate appreciation alone, fiscal policy alone and a combined fiscal and monetary package to redress China's external imbalance. The exchange rate policy alone is ineffective in both the short run and long run at reducing China's current account surplus. Fiscal policy is less effective than a combination of fiscal and monetary policy in reducing the surplus. |
| Keywords: | dynamic financial CGE, foreign reserves, trade surplus, monetary policy, fiscal policy |
| JEL: | D58 E52 E62 F31 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cop:wpaper:g-192&r=cba |
| By: | John Beirne (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Bijsterbosch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper provides estimates of the exchange rate pass-through (ERPT) to consumer prices for nine central and eastern European EU Member States. Using a five-variate cointegrated VAR (vector autoregression) for each country and impulse responses derived from the VECM (vector error correction model), we show that ERPT to consumer prices averages about 0.6 using the cointegrated VAR and 0.5 using the impulse responses. We also find that the ERPT seems to be higher for countries that have adopted some form of fixed exchange rate regime. These results are robust to alternative normalisation of the VAR and alternative ordering of the impulse responses. JEL Classification: E31, F31. |
| Keywords: | exchange rate pass-through, inflation, central and eastern Europe. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091120&r=cba |
| By: | Joan Paredes (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Diego J. Pedregal (Uuniversidad. Castilla-La Mancha, Real Casa de la Misericordia C/ Altagracia 50, 13071 Ciudad Real, España.); Javier J. Pérez (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.) |
| Abstract: | The analysis of the macroeconomic impact of fiscal policies in the euro area has been traditionally limited by the absence of quarterly fiscal data. To overcome this problem, we provide two new databases in this paper. Firstly, we construct a quarterly database of euro area fiscal variables for the period 1980-2008 for a quite disaggregated set of fiscal variables; secondly, we present a real-time fiscal database for a subset of fiscal variables, composed of biannual vintages of data for the euro area period (2000-2009). All models are multivariate, state space mixed-frequencies models estimated with available national accounts fiscal data (mostly annual) and, more importantly, monthly and quarterly information taken from the cash accounts of the governments. We provide not seasonally- and seasonally-adjusted data. Focusing solely on intra-annual fiscal information for interpolation purposes allows us to capture genuine intra-annual "fiscal" dynamics in the data. Thus, we provide fiscal data that avoid some problems likely to appear in studies using fiscal time series interpolated on the basis of general macroeconomic indicators, namely the well-known decoupling of tax collection from the evolution of standard macroeconomic tax bases (revenue windfalls/shortfalls). JEL Classification: C53, E6, H6. |
| Keywords: | Euro area, Fiscal policies, Interpolation, Unobserved Components models, Mixed frequencies. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091132&r=cba |
| By: | Philipp Harms (RWTH Aachen University, Study Center Gerzensee); Matthias Hoffmann (Deutsche Bundesbank) |
| Abstract: | We argue that a higher share of the private sector in a country’s external debt raises the incentive to stabilize the exchange rate. We present a simple model in which exchange rate volatility does not affect agents’ welfare if all the debt is incurred by the government. Once we introduce private banks who borrow in foreign currency and lend to domestic firms, the monetary authority has an incentive to dampen the distributional consequences of exchange rate fluctuations. Our empirical results support the hypothesis that not only the level, but also the composition of foreign debt matters for exchange-rate policy. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:0906&r=cba |
| By: | Ronny Mazzocchi; Roberto Tamborini; Hans-Michael Trautwein |
| Abstract: | The current consensus in macroeconomics, as represented by the New Neoclassical Synthesis, is to work within frameworks that combine intertemporal optimization, imperfect competition and sticky prices. We contrast this “NNS triangle” with a model in the spirit of Wicksell and Keynes that sets the focus on interest-rate misalignments as problems of intertemporal coordination of consumption and production plans in imperfect capital markets. We show that, with minimal deviations from the standard perfect competition model, a model structure can be derived that looks similar to the NNS triangle, but yields substantially different conclusions with regard to the dynamics of inflation and output gaps and to the design of the appropriate rule for monetary policy. |
| JEL: | E20 E31 E32 E52 D84 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0906&r=cba |
| By: | Alessandra Del Boca; Michele Fratianni; Franco Spinelli; Carmine Trecroci |
| Abstract: | We examine Italian inflation rates and the Phillips curve with a very long-run perspective, one that covers the entire existence of the Italian lira from political unification (1861) to Italy’s entry in the European Monetary Union (end of 1998). We first study the volatility, persistence and stationarity of the Italian inflation rate over the long run and across various exchange-rate regimes that have shaped Italian monetary history. Next, we estimate alternative Phillips equations and investigate whether nonlinearities, asymmetries and structural changes characterize the inflation-output trade-off in the long run. We capture the effects of structural changes and asymmetries on the estimated parameters of the inflation-output trade-off, relying partly on sub-sample estimates and partly on time-varying parameters estimated via the Kalman filter. Finally, we investigate causal relationships between inflation rates and output and extend the analysis to include the US and the UK for comparison purposes. The inference is that Italy has experienced a conventional inflation-output trade-off only during times of low inflation and stable aggregate supply. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:0908&r=cba |
| By: | Martha R. López; Juan David Prada |
| Abstract: | The unfolding of the 2007 world financial and economic crisis has highlighted the vulnerability of real economic activity to strong fluctuations in asset prices. Which is the optimal monetary policy in an economy like the Colombian that is exposed to swings in asset prices? What is the implication in terms of Central Bank losses when it follows a standard simple rule instead of the optimal monetary policy? To answer these questions we use a Dynamic Stochastic General Equilibrium (DSGE) model with physical capital and sticky wages for the Colombian economy and derive the optimal monetary policy. Then, we explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic under the optimal policy rule and alternative specifications of simple rules and definitions of output gap. |
| Date: | 2009–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:006299&r=cba |