nep-cba New Economics Papers
on Central Banking
Issue of 2010‒01‒16
forty-five papers chosen by
Alexander Mihailov
University of Reading

  1. Inflation persistence By Jeffrey C. Fuhrer
  2. Macro-finance models of interest rates and the economy By Glenn D. Rudebusch
  3. Policy Announcements and Welfare By Christian A. Stoltenberg; Vadym Lepetyuk
  4. Do credit constraints amplify macroeconomic fluctuations? By Zheng Liu; Pengfei Wang; Tao Zha
  5. On the social cost of transparency in monetary economies By David Andolfatto
  6. Getting Talk Back on Target: The Exchange Rate and the Inflation Rate By David Laidler
  7. Anchors Away: How Fiscal Policy Can Undermine “Good” Monetary Policy By Eric M. Leeper
  8. Inflation Targeting Twenty Years on: Where, When, Why, With what Effects, What lies ahead? By Klaus Schmidt-Hebbel.
  9. The Valuation Channel of External Adjustment By Fabio Ghironi; Jaewoo Lee; Alessandro Rebucci
  10. Consumption and real exchange rates in professional forecasts By Michael B Devereux; Gregor W Smith; James Yetman
  11. Excess Comovements between the Euro/US dollar and British pound/US dollar exchange rates By Michael Kühl
  12. U.S. Monetary Policy and Stock Prices: Should the Fed Attempt to Control Stock Prices? By John, Tatom
  13. Monetary policy and the housing bubble By Jane Dokko; Brian Doyle; Michael T. Kiley; Jinill Kim; Shane Sherlund; Jae Sim; Skander Van den Heuvel
  14. What explains the surge in euro area sovereign spreads during the financial crisis of 2007-09? By Maria-Grazia Attinasi; Cristina Checherita; Christiane Nickel
  15. Closed-form estimates of the New Keynesian Phillips Curve with time-varying trend inflation By Michelle L. Barnes; Fabià Gumbau-Brisa; Denny Lie; Giovanni P. Olivei
  16. The implications of inflation in an estimated new-Keynesian model By Pablo A. Guerron-Quintana
  17. Measuring consumer uncertainty about future inflation By Wandi Bruine de Bruin; Charles F. Manski; Giorgio Topa; Wilbert van der Klaauw
  18. Estimating the cross-sectional distribution of price stickiness from aggregate data By Carlos Carvalho; Niels Arne Dam
  19. Estimating DSGE-Model-Consistent Trends for Use in Forecasting By Jean-Philippe Cayen; Marc-André Gosselin; Sharon Kozicki
  20. Downward nominal and real wage rigidity : survey evidence from European firms By Babecky, Jan; Caju, Philip Du; Kosma, Theodora; Lawless, Martina; Messina, Julian; Room, Tairi
  21. Inflation Targeting Pillars: Transparency and Accountability By Charles Freedman; Douglas Laxton
  22. Accounting for Global Dispersion of Current Accounts By Yongsung Chang; Sun-Bin Kim; Jaewoo Lee
  23. Debt Valuation Effects when there is Foreign Currency-Denominated Debt By Claudia Martínez; Rodrigo Vergara.; Rodrigo Vergara.
  24. Diverse Beliefs By Angus A Brown; L C G Rogers
  25. Behavioral Social Learning By Christoph March; Anthony Ziegelmeyer
  26. Real time underlying inflation gauges for monetary policymakers By Marlene Amstad; Simon Potter
  27. The Camp View of Inflation Forecasts By Felix Geiger; Oliver Sauter; Kai D. Schmid
  28. The Road to Recovery: Fiscal Stimulus, Financial Sector Rehabilitation, and Exit from Policy Easing By Zhiwei Zhang; Wenlang Zhang
  29. The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of England and the financial market turmoil By Samuel Cheun; Isabel von Köppen-Mertes; Benedict Weller
  30. Monetary policy and potential output uncertainty: a quantitative assessment. By Simona Delle Chiaie
  31. Forecast disagreement among FOMC members By Chanont Banternghansa; Michael W. McCracken
  32. The Demand for Excess Reserves in the Euro Area and the Impact of the Current Credit Crisis By Fátima Teresa Sol Murta; Ana Margarida Garcia
  33. Optimal Structure of Monetary Policy Committees By Keiichi Morimoto
  34. Oilgopoly: A General Equilibrium Model Of The Oil-Macroeconomy Nexus By Anton Nakov; Galo Nuño
  35. Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy By Papa M'B. P. N'Diaye
  36. Instrumental variable estimation of a nonlinear Taylor rule By Zisimos Koustas; Jean-Francois Lamarche
  37. fiscal policy shocks in the euro area and the us: an empirical assessment By Pablo Burriel; francisco de castro; daniel garrote; esther gordo; joan paredes; javier j. pérez
  38. Quasi-Fiscal Policies of Independent Central Banks and Inflation By Seok Gil Park
  39. The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank By Gebhard Kirchgässner; Jürgen Wolters
  40. Inflation dynamics and the New Keynesian Phillips curve in EU-4 By Borek Vasicek
  41. Forecasting the US Real House Price Index: Structural and Non-Structural Models with and without Fundamentals By Rangan Gupta; Alain Kabundi; Stephen M. Miller
  42. Emerging Economy Responses to the Global Financial Crisis of 2007-09: An Empirical Analysis of the Liquidity Easing Measures By Etienne B. Yehoue
  43. The new macroeconometric model of the Polish economy By Katarzyna Budnik; Michal Greszta; Michal Hulej; Marcin Kolasa; Karol Murawski; Michal Rot; Bartosz Rybaczyk; Magdalena Tarnicka
  44. Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone By Przystupa, Jan
  45. Systemic Liquidity Management in the U.A.E.: Issues and Options By Alexandre Chailloux; Dalia Hakura

  1. By: Jeffrey C. Fuhrer
    Abstract: This paper examines the concept of inflation persistence in macroeconomic theory. It begins with a definition of persistence, emphasizing the difference between reduced-form and structural persistence. It then examines a number of empirical measures of reduced-form persistence, considering the possibility that persistence may have changed over time. The paper then examines the theoretical sources of persistence, distinguishing “intrinsic” from “inherited” persistence, and deriving a number of analytical results on persistence. It summarizes the implications for persistence from the literatures on “sticky-information” models, learning models, and so-called “trend inflation models,” providing some new results throughout.
    Keywords: Inflation (Finance) ; Phillips curve
    Date: 2009
  2. By: Glenn D. Rudebusch
    Abstract: During the past decade, much new research has combined elements of finance, monetary economics, and macroeconomics in order to study the relationship between the term structure of interest rates and the economy. In this survey, I describe three different strands of such interdisciplinary macro-finance term structure research. The first adds macroeconomic variables and structure to a canonical arbitrage-free finance representation of the yield curve. The second examines bond pricing and bond risk premiums in a canonical macroeconomic dynamic stochastic general equilibrium model. The third developsa new class of arbitrage-free term structure models that are empirically tractable and well suited to macro-finance investigations.
    Keywords: Interest rates ; Macroeconomics - Econometric models
    Date: 2010
  3. By: Christian A. Stoltenberg (Universiteit van Amsterdam, Department of Economics); Vadym Lepetyuk (Universidad de Alicante, Departamento de Fundamentos del Analisis Economico)
    Abstract: In the presence of idiosyncratic risk, the public revelation of information about uncertain aggregate outcomes such as policy choices can be detrimental to social welfare. By announcing informative signals on non-insurable aggregate risk, the policy maker distorts agents’ insurance incentives and increases the riskiness of the optimal allocation that is feasible in self-enforceable arrangements. As an application, we consider a monetary authority that may reveal changes in the inflation target, and document that the negative effect of distorted insurance incentives can very well dominate conventional effects in favor for the release of better information.
    Keywords: Social value of information, policy announcements, monetary policy, transparency
    JEL: D81 D86 E21 E52 E65
    Date: 2009
  4. By: Zheng Liu; Pengfei Wang; Tao Zha
    Abstract: Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a DSGE model: we identify shocks that shift the demand for collateral assets and we allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints.
    Keywords: Credit ; Macroeconomics - Econometric models
    Date: 2009
  5. By: David Andolfatto
    Abstract: I study a class of models commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to exogenous news events, but whose expected long-run return is independent of this information. I show that there are circumstances in which the nondisclosure of news by an asset manager is welfare-improving. When nondisclosure is infeasible, the framework admits a role for government debt. The theory is used to interpret the nondisclosure practices of reputable financial agencies and suggests caveats for legislation designed to promote financial market transparency.
    Keywords: Transparency ; Monetary policy
    Date: 2010
  6. By: David Laidler (C.D. Howe Institute)
    Abstract: Recent efforts by the Bank of Canada to “talk down” the dollar in its public statements have led to public perceptions that the Bank is considering action to weaken it.In permitting this response to gather momentum, the Bank has stepped onto a slippery slope, because if talk seems to be failing, people might reasonably expect direct intervention in the exchange market to follow.
    Keywords: Bank of Canada, inflation rate, exchange rate
    JEL: E58 E31 F31 E4
    Date: 2009–12
  7. By: Eric M. Leeper (Indiana University)
    Abstract: Slow moving demographics are aging populations around the world and pushing many countries into an extended period of heightened fiscal stress. In some countries, taxes alone cannot or likely will not fully fund projected pension and health care ex- penditures. If economic agents place sufficient probability on the economy hitting its “fiscal limit” at some point in the future—after which further tax revenues are not forthcoming—it may no longer be possible for “good” monetary policy behavior to control inflation or anchor inflation expectations. In the period leading up to the fiscal limit, the more aggressively that monetary policy leans against inflationary winds, the more expected inflation becomes unhinged from the inflation target. Problems con- frontingmonetary policy are exacerbated when policy institutions leave fiscal objectives and targets unspecified and, therefore, fiscal expectations unanchored.
    Date: 2009–11
  8. By: Klaus Schmidt-Hebbel. (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: This paper looks back at 20 years of inflation targeting (IT) in the world, reviewing previous findings and reporting new cross-country and panel-data evidence on the determinants or IT regime choice and the results of IT adoption. After describing the where and when of IT adoption, the paper assesses the determinants of why countries choose this monetary regime against alternative candidates. Which have been the main results under IT? Next the paper focuses on several dimensions of monetary policy performance under IT. One is target achievement; beyond measuring cross-country differences in target deviations, the paper assesses empirically what lies behind those deviations. Two, it reviews monetary policy efficiency more broadly, comparing output and inflation volatility under IT to volatility observed in non-IT experiences. Three, it surveys descriptive evidence on monetary policy transparency attained under IT in comparison to other monetary regimes. A discussion of the very important challenges posed by the recent boom-and-bust cycle to IT close the paper.
    Keywords: Inflation targeting, inflation, monetary regimes
    JEL: E31 E52 C53
    Date: 2009
  9. By: Fabio Ghironi; Jaewoo Lee; Alessandro Rebucci
    Abstract: International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the valuation channel, namely capital gains and losses on external assets and liabilities. We examine this valuation channel in a dynamic equilibrium portfolio model with international trade in equity. By separating asset prices and quantities, we can characterize the first-order dynamics of valuation effects and the current account in macroeconomic dynamics. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete.
    Date: 2009–12–17
  10. By: Michael B Devereux; Gregor W Smith; James Yetman
    Abstract: Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations across countries. The striking lack of evidence for this link - the consumption/real-exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to explain the evidence.
    Keywords: international risk sharing, Backus-Smith puzzle
    Date: 2009–12
  11. By: Michael Kühl
    Abstract: The aim of this paper is to discuss excess comovements for the Euro/US dollar and British pound/US dollar exchange rates, i.e. we look for comovements of exchange rates which are stronger than implied by fundamentals. The results of the empirical analysis give evidence that excess comovements indeed exist. A long-run analysis on correlations can verify that the correlations dynamics of exchange rates, relative inflation rates, long-term interest rates, economic sentiments and money supply are linked. We found that money supply and prices play major roles. From the investigation of our exchange rate pair it becomes obvious that non-fundamental factors in exchange rates have an important meaning for modelling foreign exchange rates.
    Keywords: Foreign Exchange Market, DCC-GARCH, Excess Comovements
    JEL: E44 F31 G15
    Date: 2009–11–18
  12. By: John, Tatom
    Abstract: This article rejects the linkages in proposals that the Federal Reserve Bank (Fed) target equity prices. The real federal funds rate (RFF) and stock prices (SP) are uncorrelated; causality tests show a positive effect of SP on RFF and a negative effect of SP on RFF. These results occur as part of the dynamics of a negative cointegrated relationship between SP and RFF. A theoretically expected inverse relation between SP and inflation accounts for the results. The negative effect of SP on FF is also confirmed in a Taylor Rule estimate. Higher stock prices anticipate lower, not higher, inflation.
    Keywords: Monetary Policy; Bubbles; Asset Prices; Inflation.
    JEL: E32 G12 E58 E52
    Date: 2009–12–01
  13. By: Jane Dokko; Brian Doyle; Michael T. Kiley; Jinill Kim; Shane Sherlund; Jae Sim; Skander Van den Heuvel
    Abstract: We examine the role of monetary policy in the housing bubble. Our review examines the setting of monetary policy in the middle of this decade, the impetus from monetary policy to the housing market, and other factors that may have contributed to the run-up, and subsequent collapse, in house prices.
    Date: 2009
  14. By: Maria-Grazia Attinasi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Cristina Checherita (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christiane Nickel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper uses a dynamic panel approach to explain the determinants of widening sovereign bond yield spreads vis-à-vis Germany in selected euro area countries during the period end-July 2007 to end-March 2009, when the financial turmoil developed into a full-blown financial and economic crisis. Emphasis is given to the role of fiscal fundamentals and government announcements of substantial bank rescue packages. The paper finds that higher expected budget deficits and/or higher government debt ratios relative to Germany contributed to higher government bond yield spreads in the euro area during the analysed period. More importantly, the announcements of bank rescue packages have led to a re-assessment, from the part of investors, of sovereign credit risk, first and foremost through a transfer of risk from the private financial sector to the government. JEL Classification: E62, E43, G12.
    Keywords: Fiscal Policy, Sovereign Spreads, Fiscal Announcements.
    Date: 2009–12
  15. By: Michelle L. Barnes; Fabià Gumbau-Brisa; Denny Lie; Giovanni P. Olivei
    Abstract: We compare estimates of the New Keynesian Phillips Curve (NKPC) when the curve is specified in two different ways. In the standard difference equation (DE) form, current inflation is a function of past inflation, expected future inflation, and real marginal costs. The alternative closed form (CF) specification explicitly solves the DE form to express inflation as a function of past inflation and a present-discounted value of current and expected future marginal costs. The CF specification places model-consistent constraints on expected future inflation that are not imposed in the DE form. In a Monte Carlo exercise, we show that estimating the CF version of the NKPC gives estimates that are much more efficient than the estimates obtained from the DE specification. We then compare DE and CF estimates of the NKPC with time-varying trend inflation on actual data. The data and estimation methodology are the same as in Cogley and Sbordone (2008). We show that DE and CF estimates differ substantially and have very different implications for inflation dynamics. As in Cogley and Sbordone, it is possible to estimate DE specifications of the NKPC where lagged inflation plays no role once trend inflation is taken into account. The CF estimates of the NKPC, however, typically imply as large a role for lagged inflation as for expected future inflation. These estimates thus suggest that trend inflation is not in itself sufficient to explain the persistent dynamics of inflation.
    Keywords: Inflation (Finance) ; Phillips curve
    Date: 2009
  16. By: Pablo A. Guerron-Quintana
    Abstract: This paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. It is found that 10 percentage points of inflation entails a steady state welfare cost as high as 13 percent of annual consumption. This large cost is mainly driven by staggered price contracts and price indexation. The transition from high to low inflation inflicts a welfare loss equivalent to 0.53 percent. The role of nominal/real frictions as well as that of parameter uncertainty is also addressed.
    Keywords: Inflation (Finance) ; Econometric models ; Keynesian economics
    Date: 2010
  17. By: Wandi Bruine de Bruin; Charles F. Manski; Giorgio Topa; Wilbert van der Klaauw
    Abstract: Survey measures of consumer inflation expectations have an important shortcoming in that, while providing useful summary measures of the distribution of point forecasts across individuals, they contain no direct information about an individual's uncertainty about future inflation. The latter is important not only for forecasting inflation and other macroeconomic outcomes, but also for assessing a central bank's credibility and effectiveness of communication. This paper explores the feasibility of eliciting individual consumers' subjective probability distributions of future inflation outcomes. ; In November 2007, we began administering web-based surveys to participants in RAND's American Life Panel. In addition to their point predictions, respondents were asked for their subjective assessments of the percentage chance that inflation will fall in each of several predetermined intervals. We find that our measures of individual forecast densities and uncertainty are internally consistent and reliable. Those who are more uncertain about year-ahead price inflation are also generally more uncertain about longer term price inflation and future wage changes. We find also that participants expressing higher uncertainty in their density forecasts make larger revisions to their point forecasts over time. Measures of central tendency derived from individual density forecasts are highly correlated with point forecasts, but they usually differ, often substantially, at the individual level. ; Finally, we relate our direct measure of aggregate consumer uncertainty to a more conventional approach that uses disagreement among individual forecasters, as seen in the dispersion of their point forecasts, as a proxy for forecast uncertainty. Although the two measures are positively correlated, our results suggest that disagreement and uncertainty are distinct concepts, both relevant to the analysis of inflation expectations.
    Keywords: Consumer surveys ; Inflation (Finance) ; Economic forecasting
    Date: 2009
  18. By: Carlos Carvalho; Niels Arne Dam
    Abstract: We estimate a multisector sticky-price model for the U.S. economy in which the degree of price stickiness is allowed to vary across sectors. For this purpose, we use a specification that allows us to extract information about the underlying cross-sectional distribution from aggregate data. Identification is possible because sectors play different roles in determining the response of aggregate variables to shocks at different frequencies: Sectors where prices are stickier are relatively more important in determining the low-frequency response. Estimating the model using only aggregate data on nominal and real output, we find that the inferred distribution of price stickiness is strikingly similar to the empirical distribution constructed from the recent microeconomic evidence on price setting in the U.S. economy. We also provide macro-based estimates of the underlying distribution for ten other countries. Finally, we explore our Bayesian approach to combine the aggregate time-series data with the microeconomic information on the distribution of price rigidity. Our results show that allowing for this type of heterogeneity is critically important to understanding the joint dynamics of output and prices, and it constitutes a step toward reconciling the extent of nominal price rigidity implied by aggregate data with the evidence from microeconomic data on price stickiness.
    Keywords: Prices ; Bayesian statistical decision theory ; Time-series analysis
    Date: 2009
  19. By: Jean-Philippe Cayen; Marc-André Gosselin; Sharon Kozicki
    Abstract: The workhorse DSGE model used for monetary policy evaluation is designed to capture business cycle fluctuations in an optimization-based format. It is commonplace to loglinearize models and express them with variables in deviation-from-steady-state format. Structural parameters are either calibrated, or estimated using data pre-filtered to extract trends. Such procedures treat past and future trends as fully known by all economic agents or, at least, as independent of cyclical behaviour. With such a setup, in a forecasting environment it seems natural to add forecasts from DSGE models to trend forecasts. While this may be an intuitive starting point, efficiency can be improved in multiple dimensions. Ideally, behaviour of trends and cycles should be jointly modeled. However, for computational reasons it may not be feasible to do so, particularly with medium- or large-scale models. Nevertheless, marginal improvements on the standard framework can still be made. First, pre-filtering of data can be amended to incorporate structural links between the various trends that are implied by the economic theory on which the model is based, improving the efficiency of trend estimates. Second, forecast efficiency can be improved by building a forecast model for model-consistent trends. Third, decomposition of shocks into permanent and transitory components can be endogenized to also be model-consistent. This paper proposes a unified framework for introducing these improvements. Application of the methodology validates the existence of considerable deviations between trends used for detrending data prior to structural parameter estimation and model-consistent estimates of trends, implying the potential for efficiency gains in forecasting. Such deviations also provide information on aspects of the model that are least coherent with the data, possibly indicating model misspecification. Additionally, the framework provides a structure for examining cyclical responses to trend shocks, among other extensions.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods
    JEL: E3 D52 C32
    Date: 2009
  20. By: Babecky, Jan; Caju, Philip Du; Kosma, Theodora; Lawless, Martina; Messina, Julian; Room, Tairi
    Abstract: It has been well established that the wages of individual workers react little, especially downwards, to shocks that hit their employer. This paper presents new evidence from a unique survey of firms across Europe on the prevalence of downward wage rigidity in both real and nominal terms. The authors analyse which firm-level and institutional factors are associated with wage rigidity. The results indicate that it is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models (e.g. efficiency wage theory, insider-outsider theory). The analysis also finds that wage rigidity depends on the labour market institutional environment. Collective bargaining coverage is positively related with downward real wage rigidity, measured on the basis of wage indexation. Downward nominal wage rigidity is positively associated with the extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations.
    Keywords: Labor Policies,Environmental Economics&Policies,Labor Markets,Income,Markets and Market Access
    Date: 2009–12–01
  21. By: Charles Freedman; Douglas Laxton
    Abstract: This is the fourth chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation- Targeting Regimes: Saying What You Do and Doing What You Say." It examines a number of issues related to transparency and accountability in an inflation-targeting regime. It first looks at the factors behind the move to increased transparency in recent years and the important role of a communications strategy in transparency. It then turns to the role of the forecast in communications, how risks surrounding the forecast are communicated, and whether there should be limits on what is made public. It concludes with a short discussion of accountability.
    Keywords: Central bank policy , Central banks , Inflation , Inflation targeting , Monetary policy , Transparency ,
    Date: 2009–12–02
  22. By: Yongsung Chang; Sun-Bin Kim; Jaewoo Lee
    Abstract: We undertake a quantitative analysis of the dispersion of current accounts in an open economy version of incomplete insurance model, incorporating important market frictions in trade and financial flows. Calibrated with conventional parameter values, the stochastic stationary equilibrium of the model with limited borrowing can account for about two-thirds of the global dispersion of current accounts. The easing of financial frictions can explain nearly all changes in the current account dispersion in the past four decades whereas the easing of trade frictions has almost no impact on the current account dispersion.
    Date: 2009–12–17
  23. By: Claudia Martínez; Rodrigo Vergara.; Rodrigo Vergara.
    Abstract: This paper discusses the way in which the existence of debt denominated in both domestic and foreign currency affects debt-sustainability analyses. Ignoring valuation issues can lead to misleading conclusions regarding fiscal sustainability. We show that a devaluation of the domestic currency can significantly change the path of a sustainable fiscal policy. In our model, the adjustment not only comes through the change in the value of the foreign currency-denominated public debt, but also though the effects on the interest rate and growth. We find that the required fiscal adjustment to achieve fiscal sustainability after a devaluation increases with the size of the devaluation, the length of the adjustment period, the effect on interest rates and growth, and the share of public debt that is denominated in foreign currency.
    Keywords: Public debt, valuation effects, debt management.
    JEL: F34 H63 H87
    Date: 2009
  24. By: Angus A Brown; L C G Rogers
    Abstract: This paper presents a general framework for studying diverse beliefs in dynamic economies. Within this general framework, the characterization of a central-planner general equilbrium turns out to be very easy to derive, and leads to a range of interesting applications. We show how for an economy with log investors holding diverse beliefs, rational overconfidence is to be expected; volume-of-trade effects are effectively modelled; the Keynesian `beauty contest' can be modelled and analysed; and bubbles and crashes arise naturally. We remark that models where agents receive private information can formally be considered as models of diverse beliefs.
    Date: 2010–01
  25. By: Christoph March (Max Planck Institute of Economics, IMPRS "Uncertainty", Jena (Germany)); Anthony Ziegelmeyer (Max Planck Institute of Economics, Strategic Interaction Group, Jena (Germany) and Technical University of Berlin, Faculty of Economics and Management, Berlin (Germany))
    Abstract: We revisit the economic models of social learning by assuming that individuals update their beliefs in a non-Bayesian way. Individuals either overweigh or underweigh (in Bayesian terms) their private information relative to the public information revealed by the decisions of others and each individual's updating rule is private information. First, we consider a setting with perfectly rational individuals with a commonly known distribution of updating rules. We show that introducing heterogeneous updating rules in a simple social learning environment reconciles equilibrium predictions with laboratory evidence. Additionally, a model of social learning with bounded private beliefs and sufficiently rich updating rules corresponds to a model of social learning with unbounded private beliefs. A straightforward implication is that heterogeneity in updating rules is efficiency-enhancing in most social learning environments. Second, we investigate the implications of heterogeneous updating rules in social learning environments where individuals only understand the relation between the aggregate distribution of decisions and the state of the world. Unlike in rational social learning, heterogeneous updating rules do not lead to a substantial improvement of the societal welfare and there is always a non-negligible likelihood that individuals become extremely and wrongly conï¬dent about the state of the world.
    Keywords: Social learning, Non-Bayesian updating, Herding, Informational cascades
    JEL: D82 D83
    Date: 2009–12–21
  26. By: Marlene Amstad; Simon Potter
    Abstract: Central banks analyze a wide range of data to obtain better measures of underlying inflationary pressures. Factor models have widely been used to formalize this procedure. Using a dynamic factor model this paper develops a measure of underlying inflation (UIG) at time horizons of relevance for monetary policymakers for both CPI and PCE. The UIG uses a broad data set allowing for high-frequency updates on underlying inflation. The paper complements the existing literature on U.S. "core" measures by illustrating how UIG is used and interpreted in real time since late 2005.
    Keywords: Inflation (Finance) ; Economic indicators ; Economic forecasting ; Monetary policy ; Banks and banking, Central
    Date: 2009
  27. By: Felix Geiger; Oliver Sauter; Kai D. Schmid
    Abstract: Analyzing sample moments of survey forecasts, we derive disagreement and un- certainty measures for the short- and medium term inflation outlook. The latter provide insights into the development of inflation forecast uncertainty in the context of a changing macroeconomic environment since the beginning of 2008. Motivated by the debate on the role of monetary aggregates and cyclical variables describing a Phillips-curve logic, we develop a macroeconomic indicator spread which is assumed to drive forecasters’ judgments. Empirical evidence suggests procyclical dynamics between disagreement among forecasters, individual forecast uncertainty and the macro-spread. We call this approach the camp view of inflation forecasts and show that camps form up whenever the spread widens.
    Keywords: monetary policy, survey forecasts, inflation uncertainty, heterogenous beliefs and expectations, monetary aggregates
    JEL: E47 E51 E52 E58 E66
    Date: 2009–12
  28. By: Zhiwei Zhang (Research Department, Hong Kong Monetary Authority); Wenlang Zhang (Research Department, Hong Kong Monetary Authority)
    Abstract: The worst of the global financial crisis is probably behind us, but the trajectory to recovery may vary widely across economies. Employing a dynamic structural multi-country model with a financial accelerator, this paper studies the role of three important policy actions in economic recovery: fiscal stimulus, financial sector rehabilitation and exit from policy easing. The main finding is that while both fiscal stimulus and financial sector rehabilitation contribute to economic recovery, the former is likely to be less effective from a medium-term perspective and may generate some negative side effects. This finding suggests that policy priority (of advanced economies in particular) should be on continued financial sector rehabilitation. Moreover, international policy co-ordination is beneficial as it can generate spillovers to regional economies. We also study the effects of over-estimation of the post-crisis potential output by the monetary authorities in advanced economies in their policymaking. We find that this may affect economic recovery in the region through inflationary pressure and the consequent policy tightening.
    Keywords: GIMF model; Financial accelerator; Fiscal stimulus; Financial rehabilitation
    JEL: G30 H50 H60
    Date: 2009–12
  29. By: Samuel Cheun (Federal Reserve Bank of New York, United States of America.); Isabel von Köppen-Mertes (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Benedict Weller (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: In response to the turmoil in global financial markets which began in the second half of 2007, central banks have changed the way in which they implement monetary policy. This has drawn particular attention to the type of collateral used for backing central banks’ temporary open market operations and the range of counterparties which can participate in these operations. This paper provides an overview of the features of the different operational and collateral frameworks of three central banks that have been significantly affected by the crisis: the Eurosystem, the Federal Reserve System and the Bank of England. The paper describes the factors that shaped the three frameworks prior to the turmoil. It then describes the actions the three central banks took in response to the turmoil and analyses to what extent these actions were dependent on the initial design of the operational and collateral framework. JEL Classification: E52, E58, G01, G20.
    Keywords: Collateral Framework, Central Bank Repo Auctions, Collateral, Open Market Operations, Financial Market Turmoil 2007-2009.
    Date: 2009–12
  30. By: Simona Delle Chiaie (Oesterreichische National Bank, Economic Studies Division, Otto-Wagner Platz 3, 1090 Wien, Austria.)
    Abstract: I estimate a dynamic stochastic general equilibrium model where the policymaker and the private sector have imperfect knowledge about potential output. The estimation of the structural parameters and of the monetary authorities’objectives is key to assess the quantitative relevance of the imperfect information problem and to evaluate the robustness of previous exercises based on calibration. The estimated model also allows me to revisit the Orphanides (2001, 2003) findings that the central bank can make large and persistent mistakes to estimate potential output in response to productivity and cost shocks. I find that when real unit labor cost is used as a monetary policy indicator, the potential output uncertainty has quantitatively negligible consequences on policy behaviour and inflation dynamics. JEL Classification: E4, E5.
    Keywords: Monetary policy, potential output uncertainty, indicator variables, real unit labor cost.
    Date: 2009–12
  31. By: Chanont Banternghansa; Michael W. McCracken
    Abstract: This paper presents empirical evidence on the disagreement among Federal Open Market Committee (FOMC) forecasts. In contrast to earlier studies that analyze the range of FOMC forecasts available in the Monetary Policy Report to the Congress, we analyze the forecasts made by each individual member of the FOMC from 1992 to 1998. This newly available dataset, while rich in detail, is short in duration. Even so, we are able to identify a handful of patterns in the forecasts related to i) forecast horizon; ii) whether the individual is a Federal Reserve Bank president, governor, and/or Vice Chairman; and iii) whether individual is a voting member of the FOMC. Additional comparisons are made between forecasts made by the FOMC and the Survey of Professional Forecasters.
    Keywords: Federal Open Market Committee ; Monetary policy ; Economic forecasting
    Date: 2009
  32. By: Fátima Teresa Sol Murta (Faculdade de Economia/GEMF, Universidade de Coimbra); Ana Margarida Garcia (Faculdade de Economia, Universidade de Coimbra)
    Abstract: One of the risks that banks need to manage, in their financial intermediation activities, is liquidity risk. Thus, banks hold reserves for precautionary reasons, in order to keep enough cash to meet their obligations. In this work, we analyze the demand for excess reserves by Euro Area banks, since the change in the framework of the single monetary policy in March 2004. Our main conclusions are that there is a positive relationship between the demand for reserves and its financing cost and also that the environment of uncertainty present in the credit crisis is not significant in the demand for excess reserves: the ECB achieved control over the money market tensions.
    Keywords: banks; excess reserves; liquidity risk
    JEL: G21 E52 E58
    Date: 2010–01
  33. By: Keiichi Morimoto (Graduate School of Economics, Osaka University)
    Abstract: This paper explores an optimal personnel organization problem of monetary policy committees. First, I construct an analytically tractable model for monetary policy analysis which starts from decision-making in the monetary policy committee. Using the model, I investigate the relationship between preference heterogeneity among the committee members and the optimal structure of the monetary policy committee. The result shows that it is optimal in general cases to appoint not only inflation-minded (hawkish) persons but also output-minded (dovish) persons. This is a theoretical justification for the fact that the actual monetary policy committees (e.g., MPC of Bank of England and FOMC) usually consist of both type members as the empirical researches suggest. It also explains why the committees have replaced the single policy makers in the actual central banks.
    Keywords: monetary policy, committee, delegation, imperfect information, higher order expectations
    JEL: D71 D84 E58
    Date: 2009–10
  34. By: Anton Nakov (Banco de España); Galo Nuño (Banco de España)
    Abstract: Saudi Arabia Is The Largest Player In The World Oil Market. It Maintains Ample Spare Capacity, Restricts Investment In Developing Reserves, And Its Output Is Negatively Correlated With Other Opec Producers. While This Behavior Does Not F T Into The Perfect Competition Paradigm, We Show That It Can Be Rationalized As That Of A Dominant Producer With Competitive Fringe. We Build A Quantitative General Equilibrium Model Along These Lines Which Is Capable Of Matching The Historical Volatility Of The Oil Price, Competitive And Non-Competitive Oil Output, And Of Generating The Observed Comovement Among The Oil Price, Oil Quantities, And U.S. Gdp. We Use Our Framework To Answer Questions On Which Available Models Are Silent: (1) What Are The Proximate Determinants Of The Oil Price And How Do They Vary Over The Cycle? (2) How Large Are Oil Prof Ts And What Losses Do They Imply For Oil-Importers? (3) What Do Different Fundamental Shocks Imply For The Comovement Of Oil Prices And Gdp? (4) What Are The General Equilibrium Effects Of Taxes On Oil Consumption Or Oil Production? We F Nd, In Particular, That The Existence Of An Oil Production Distortion Does Not Necessarily Justify An Oil Consumption Tax Different From Zero.
    Keywords: Oil Price, Oil Shocks, Dominant F Rm, Competitive Fringe, Pigovian Tax.
    JEL: D43 E32 E62 Q43
    Date: 2009–12
  35. By: Papa M'B. P. N'Diaye
    Abstract: This paper explores how prudential regulations can support monetary policy in reducing output fluctuations while maintaining financial stability. It uses a new framework that blends a standard model for monetary policy analysis with a contingent claims model of financial sector vulnerabilities. The results suggest that binding countercyclical prudential regulations can help reduce output fluctuations and lessen the risk of financial instability. More specifically, countercyclical rules such as countercyclical capital adequacy rules, can allow monetary authorities to achieve the same output and inflation objectives but with smaller adjustments in interest rates. The countercyclical rules can help stem swings in asset prices, lean against a financial accelerator process, and thereby help to lower risks of macroeconomic and financial instability. In economies with fixed exchange rates, where countercyclical monetary policy is not possible, prudential regulations can provide a useful mechanism for mitigating a run-up in asset prices and for promoting output stability.
    Keywords: Asset prices , Capital , Economic models , Financial stability , Inflation , Market interest rates , Monetary policy ,
    Date: 2009–11–19
  36. By: Zisimos Koustas (Department of Economics, Brock University); Jean-Francois Lamarche (Department of Economics, Brock University)
    Abstract: This paper estimates a nonlinear threshold model using instrumental variables. This estimation strategy was originally developed with dynamic panel models in mind and we extend it to time series models. In particular, we consider a forward-looking Taylor rule and test to see if the Bank of England followed a nonlinear Taylor rule in setting the short-term interest rate.
    Keywords: Thresholds; Nonlinear Models; Instrumental Variables; Taylor Rule
    JEL: C22 C12 C13 C87 E58
    Date: 2009–12
  37. By: Pablo Burriel (Banco de España); francisco de castro (Banco de España); daniel garrote (Banco de España); esther gordo (Banco de España); joan paredes (european central bank); javier j. pérez (Banco de España)
    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.
    Keywords: euro area, svar, fiscal shocks, fiscal multipliers.
    JEL: E62 H30
    Date: 2009–12
  38. By: Seok Gil Park (Indiana University)
    Abstract: Recently, central banks expanded their balance sheets by unconventional actions, including credit easing operations. Although such quasi-?scal operations are signi?cant in size and assumed to be crucial for the economy?s recovery, little theory is available to explain the possible macroeconomic consequences of these operations. The main contribution of this paper is to show that quasi-?scal shocks may a¤ect in?ation in plausible cases by utilizing a simple DSGE model that embraces the budgetary inde- pendence of the central banks. In the active quasi-?scal policy regime, the shocks in the central bank?s earnings alter the private agent?s portfolio between consumption and the nominal money balance, thus a¤ecting in?ation. Conventional macroeconomic models have implicitly assumed policy regimes in which the aforementioned mechanism does not restrict equilibria; however, this paper shows that such assumptions generally are not guaranteed to hold. The extensions of the basic model show that quasi-?scal shocks may produce undesirable e¤ects, such as in?ation following de?ationary mone- tary policy during the implementation of exit strategy.
    Date: 2009–10
  39. By: Gebhard Kirchgässner; Jürgen Wolters
    Abstract: Using Swiss data from 1983 to 2008, this paper investigates whether growth rates of the different measures of the quantity of money and or excess money can be used to forecast inflation. After a preliminary data analysis, money demand relations are specified, estimated and tested. Then, employing error correction models, measures of excess money are derived. Using recursive estimates, indicator properties of monetary aggregates for inflation are assessed for the period from 2000 onwards, with time horizons of one, two, and three years. In these calculations, M2 and M3 clearly outperform M1, and excess money is generally a better predictor than the quantity of money. Taking into account also the most (available) recent observations that represent the first three quarters of the economic crisis, the money demand function of M3 remains stable while the one for M2 is strongly influenced by these three observations. While in both cases forecasts for 2010 show inflation rates inside the target zone between zero and two percent, and the same holds for forecasts based on M3 for 2011, forecasts based on M2 provide evidence that the upper limit of this zone might be violated in 2011.
    Keywords: Stability of Money Demand; Monetary Aggregates and Inflation
    JEL: E41 E52
    Date: 2009–12
  40. By: Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: The paper seeks to shed light on inflation dynamics of four new EU member states: the Czech Republic, Hungary, Poland and Slovakia. To this end, the New Keynesian Phillips curve augmented for open economies is estimated and additional statistical tests applied. We find the following. (1) The claim of New Keynesians that the real marginal cost is the main inflation-forcing variable is fragile. (2) Inflation seems to be driven by external factors. (3) Although inflation holds a forward- looking component, the backward-looking component is substantial. An intuitive explanation for higher inflation persistence may be rather adaptive than rational price setting of local firms.
    Keywords: Inflation dynamics, New Keynesian Phillips curve, CEEC, GMM estimation
    JEL: C32 E31
    Date: 2009–12
  41. By: Rangan Gupta (University of Pretoria); Alain Kabundi (University of Johannesburgh); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    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-of-sample 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
  42. By: Etienne B. Yehoue
    Abstract: This paper draws on a unique data set on the nontraditional systemic liquidity easing measures recently undertaken by many emerging market economies. It offers an empirical analysis of the key determinants affecting the decision to undertake these measures over the period September 2008-March 2009. The paper finds that economy size, access to international credit markets, CDS spreads, currency depreciation, and current account balances are among the key factors influencing the adoption of these measures. It provides a rationale for the differences in central bank policy responses, which reflect differences in economic structures rather than conflicting views on fundamental principles. The paper also provides a preliminary assessment of the effectiveness of these measures and points out that despite their positive impacts, they have not fully shielded the real economy from the recent financial meltdown.
    Keywords: Capital markets , Central bank policy , Cross country analysis , Currency swaps , Emerging markets , Financial crisis , Foreign exchange reserves , Global Financial Crisis 2008-2009 , Interest rate policy , Monetary measures , Monetary policy ,
    Date: 2009–12–02
  43. By: Katarzyna Budnik (National Bank of Poland, Economic Institute); Michal Greszta (National Bank of Poland, Economic Institute; University of Warsaw, Faculty of Economics); Michal Hulej (National Bank of Poland, Economic Institute); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Karol Murawski (National Bank of Poland, Economic Institute); Michal Rot (National Bank of Poland, Economic Institute); Bartosz Rybaczyk (National Bank of Poland, Economic Institute); Magdalena Tarnicka (National Bank of Poland, Economic Institute)
    Abstract: This paper presents the structural macroeconometric model of the Polish economy, NECMOD, which was developed foremost to facilitate implementation of the monetary policy in Poland through a regular delivery of inflation and GDP projections. The model encompasses all major channels of the monetary policy transmission mechanism and is able to deliver a comprehensive account of factors underlying the main economic developments. With its complex labour market structure, explicit incorporation of inflation expectations, distortionary fiscal policy and heterogeneity of the capital stock, NECMOD is able to describe propagation of a range of macroeconomic shocks. As a forecasting and simulation tool, the model is specifically designed to reflect the dynamic nature of a converging economy.
    Date: 2009
  44. By: Przystupa, Jan
    Abstract: Taking into account a large number of types of nominal and real exchange rates, while estimating the real equilibrium exchange rate, one should always remember that there is no a single, universal equilibrium exchange rate. A point value or a path of that exchange rate depends on the adopted definitions and assumptions as well as on the method and purpose of the analysis. However, a value added of each estimation of the equilibrium exchange rate is an answer, whether the economic policy causes upset or stabilisation of the economy. Moreover, in the period of discussion on the exchange rate of accession to ERM-2, showing an interval of the exchange rate where all values of the exchange rate ensure at least suboptimal behaviour of the economy may help to make a decision on the date of accession to ERM-2 that will minimise costs of retention of the exchange rate within a definite currency band. For Poland, estimated by the NATREX method the long-run real equilibrium exchange rate ensures the internal equilibrium with annual growth rates of GDP amounting to 4.1%, comprised of growth of consumption by 4% p.a., investment by 8.7%, volume of exports by 8.5% and volume of imports by 8.1% p.a. Estimating on the ground of real exchange rates an approximate value of nominal exchange rates, one can state that the long-term equilibrium in the economy is ensured with the exchange rate of 3.80-3.90 zlotys for 1 euro. The current exchange rate will probably approach the equilibrium exchange rate at the turn of 2010 and 2011, and it will remain near that level over 5-6 quarters. This means that in that period cost of retention of the PLN exchange rate within a narrow band of fluctuations is relatively the least. The next period where the current exchange rate should approach the optimal exchange rate is 2014. Then, also in the medium term, the exchange rate of zloty should be comprised within the interval of 3.80-3.90 (assuming the stable exchange rate of USD/EUR=1.40)
    Keywords: equilibrium exchange rate; NATREX
    JEL: E52 F31
    Date: 2009–10–04
  45. By: Alexandre Chailloux; Dalia Hakura
    Abstract: The paper analyzes the U.A.E.'s liquidity management framework in the context of the 2008 global financial crisis and the measures taken by the Central Bank of the U.A.E. to ease liquidity pressures in the second half of 2008. Drawing also on an empirical analysis of data for 15 U.A.E. banks through end-2008, the paper emphasizes the importance of making available to banks additional instruments to manage their liquidity as well as to strengthen the monitoring of a more comprehensive set of liquidity risk indicators. As regards the former, the paper discusses the merits and scope for the U.A.E. to introduce a domestic bond market.
    Keywords: Banking sector , Central bank policy , Exchange rate regimes , Financial crisis , Financial instruments , Global Financial Crisis 2008-2009 , Liquidity management , Monetary measures , Monetary policy , Monetary unions , United Arab Emirates ,
    Date: 2009–12–01

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