nep-cba New Economics Papers
on Central Banking
Issue of 2010‒02‒05
nineteen papers chosen by
Alexander Mihailov
University of Reading

  1. Limited asset market participation and the consumption-real exchange rate anomaly By Robert Kollmann
  2. An area-wide real-time database for the euro area By Domenico Giannone; Jérôme Henry; Magdalena Lalik; Michele Modugno
  3. Size and composition of the central bank balance sheet: revisiting Japan's experience of the quantitative easing policy By Shigenori Shiratsuka
  4. Audit the Federal Reserve? By Barnett, William A.
  5. The role of central bank transparency for guiding private sector forecasts By Michael Ehrmann; Sylvester Eijffinger; Marcel Fratzscher
  6. How Anchored Are Inflation Expectations in EMU Countries? By Carin van der Cruijsen; Carin van der Cruijsen
  7. Central bank independence and conservatism under uncertainty: Substitutes or complements? By Carsten Hefeker; Blandine Zimmer
  8. The Taylor Rule and “Opportunistic” Monetary Policy By Helle Bunzel; Walter Enders
  9. On the Informational Loss Inherent in Approximation Procedures: Welfare Implications and Impulse Responses By Sebastian Sienknecht
  10. Rational Partisan Theory, Uncertainty and Spatial Voting: Evidence for the Bank of England’s MPC By Bhattacharjee, A.; Holly, S.
  11. Understanding Interactions in Social Networks and Committees By Bhattacharjee, A.; Holly, S.
  12. A Multimarket Approach for Estimating a New Keynesian Phillips Curve By Juan de Dios Tena; Jorge Dresdner; Iván Araya
  13. Alternative Phillips Curves Models with Endogenous Real-Time Expectations By David Kiefer
  14. All is Quiet in the Fiscal Front: Fiscal Policy for the Global Economic Crisis By Matías Vernengo
  15. A multi-sectoral approach to the U.S. Great Depression By Pedro S. Amaral; James C. MacGee
  16. Deciding to peg the exchange rate in developing countries: the role of private-sector debt By Harms, Philipp; Hoffmann, Mathias
  17. An institutional approach to balancing international monetary relations : the case for a US-China settlement facility By Piffaretti, Nadia F.; Rossi, Sergio
  18. Assessing Predictive Content of the KOF Barometer in Real Time By Boriss Siliverstovs
  19. Efeitos da Globalização na Inflação Brasileira By Rafael Santos; Márcia S. Leon

  1. By: Robert Kollmann
    Abstract: Under efficient consumption risk sharing, as assumed in standard international business cycle models, a country's aggregate consumption rises relative to foreign consumption, when the country's real exchange rate depreciates. Yet, empirically, relative consumption and the real exchange rate are essentially uncorrelated. I show that this "consumption-real exchange rate anomaly" can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand-to-mouth (HTM) lives. HTM behavior also generates greater volatility of the real exchange rate and of net exports, which likewise brings the model closer to the data.
    Keywords: International economic integration ; Economic forecasting ; Financial markets ; Foreign exchange rates ; Consumption (Economics)
    Date: 2010
  2. By: Domenico Giannone (Université Libre de Bruxelles, ECARES CP 144, B-1050 Bruxelles, Belgium.); Jérôme Henry (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Magdalena Lalik (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michele Modugno (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper describes how we constructed a real-time database for the euro area covering more than 200 series regularly published in the European Central Bank Monthly Bulletin, as made available ahead of publication to the Governing Council members before their first meeting of the month. We describe the database in details and study the properties of the euro area real-time data flow and data revisions, also providing comparisons with the United States and Japan. We finally illustrate how such revisions can contribute to the uncertainty surrounding key macroeconomic ratios and the NAIRU. JEL Classification: C01, C82, E24, E58.
    Keywords: real-time; euro area; revisions; database.
    Date: 2010–01
  3. By: Shigenori Shiratsuka
    Abstract: This paper re-examines Japan's experience of the quantitative easing policy in light of the policy responses against the current financial and economic crisis. Central banks use various unconventional measures in the range of financial assets being purchased and in the scale of such purchases. As the scope of such unconventional measures expands, it is often emphasized that the U.S. Federal Reserve policy reactions focus more on the asset side of its balance sheet, the so-called credit easing. By contrast, the Bank of Japan's quantitative easing policy from 2001 to 2006 set a target for the current account balances, the liability side of its balance sheet. It is crucial to understand that central banks combine the two elements of their balance sheets, size and composition, to enhance the overall effects of unconventional policy measures, given constraints on policy implementation.
    Keywords: Financial markets ; Monetary policy ; Banks and banking, Central ; Financial crises
    Date: 2010
  4. By: Barnett, William A.
    Abstract: An independent institute for monetary statistics is needed in the United States. Expanded Congressional audit would be a second best alternative, but would not fully address the needs and would carry risks.
    Keywords: Federal Reserve; data institute; audit; GAO; monetary aggregation; index number theory
    JEL: C82 E01 E50 E41
    Date: 2010–02–26
  5. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Sylvester Eijffinger (Tilburg University, Koopmans building, Warandelaan 2, 5037 AB Tilburg, The Netherlands.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: There is a broad consensus in the literature that costs of information processing and acquisition may generate costly disagreements in expectations among economic agents, and that central banks may play a central role in reducing such dispersion in expectations. This paper analyses empirically whether enhanced central bank transparency lowers dispersion among professional forecasters of key economic variables, using a large set of proxies for central bank transparency in 12 advanced economies. It finds evidence for a significant and sizeable effect of central bank transparency on forecast dispersion, be it by means of announcing a quantified inflation objective, other forms of communication, or by publishing central banks’ inflation and output forecasts. However, there also appear to be limits to central bank transparency, with decreasing marginal returns to enhancing (economic) transparency, and given our findings that disagreement among inflation expectations in the general public is not affected by the various central bank transparency measures analyzed in this paper. JEL Classification: E37, E52, C53.
    Keywords: central banking; transparency; disagreement; survey expectations; monetary policy; inflation targeting; central bank communication; forecasting.
    Date: 2010–01
  6. By: Carin van der Cruijsen; Carin van der Cruijsen
    Abstract: Anchored inflation expectations help stabilize inflation. Previous results indicate that monetary policy has been effective in breaking the link between actual and expected inflation at the euro area level. In this paper we examine whether this is also true at the national level. We define the ‘disconnect' between inflation and inflation expectations and then proceed to examine the extent to which this disconnect exists for a number of euro area countries. Our findings suggest that country-specific inflation experiences still affect national inflation expectations, and certainly more by comparison to the aggregate euro area level. EMU has therefore not made this link disappear at the national level.
    Keywords: Inflation expectations; monetary policy; EMU. J.E.L. codes : E52; E58.
    Date: 2010–01
  7. By: Carsten Hefeker; Blandine Zimmer
    Abstract: This paper revisits the trade-off between central bank independence and conservatism using a New Keynesian model with uncertainty about the central banker's output gap target. It is shown that when this uncertainty is high, the trade-off no longer holds. In this case, the optimal combination between independence and conservatism is characterised by complementarity.
    Keywords: central bank independence, conservatism, transparency of monetary policy
    JEL: E52 E58
    Date: 2010
  8. By: Helle Bunzel (Department of Economics, Iowa State University and CREATES); Walter Enders (Department of Economics, Finance & Legal Studies, University of Alabama)
    Abstract: We investigate the possibility that the Taylor rule should be formulated as a threshold process such that the Federal Reserve acts more aggressively in some circumstances than in others. It seems reasonable that the Federal Reserve would act more aggressively when inflation is high than when it is low. Similarly, it might be expected that the Federal Reserve responds more to a negative than a positive output gap. Although these specifications receive some empirical support, we find that a modified threshold model that is consistent with “opportunistic” monetary policy makes significant progress towards explaining Federal Reserve behavior.
    Keywords: Threshold regression, Nonlinear Taylor rule, Opportunistic Monetary Policy
    JEL: C22 E32 E52
    Date: 2009–12–06
  9. By: Sebastian Sienknecht (Department of Economics, Friedrich-Schiller-University of Jena)
    Abstract: This paper shows the inappropriatedness of approximation procedures for welfare rankings across suboptimal policy strategies. On the grounds of a simple general equilibrium model, we ï¬nd that even commonly accepted techniques are not suitable to achieve accurate welfare orderings. This result points to a non-universality of these methods, since we unveil welfare reversals when we compare them with the implications of the corresponding Ramsey problem. We believe that the spurious outcomes originate from restricting the approximations to only ï¬rst and second-order moments. The order of approximation needed to obtain accuracy obviously depends on the underlying type of general equilibrium model and on its parameter values. But this creates uncertainty about the correct degree of approximation adopted by researchers in order to obtain clear welfare insights. Therefore, we strongly recommend that normative analyses should rely exclusively on the exact optimality conditions delivered by the Ramsey problem. Nonetheless, we are able to propose approximation methods in order to characterize macroeconomic fluctuations triggered by small disturbances.
    Keywords: Monetary Policy, Macroeconomic Policy Consistency, First-order approximation, Second-order approximation, Purely quadratic approach
    JEL: C63 E52 E61
    Date: 2010–01–20
  10. By: Bhattacharjee, A.; Holly, S.
    Abstract: The transparency and openness of the monetary policymaking process at the Bank of England has provided very detailed information on both the decisions of individual members of the Monetary Policy Committee and the information on which they are based. In this paper we consider this decision making process in the context of a model in which inflation forecast targeting is used but there is heterogeneity among the members of the committee. We find that rational partisan theory can explain spatial voting behaviour under forecast uncertainty about the output gap. Internally generated forecasts of output and market generated expectations of medium term inflation provide the best description of discrete changes in interest rates, in combination with uncertainty in the macroeconomic environment. There is also a role for developments in asset housing and labour markets. Further, spatial voting patterns clearly differentiates between internal and externally appointed members of the Monetary Policy Committee. The results have important implications for committee design and the conduct of monetary policy.
    Keywords: Monetary policy, interest rates, Monetary Policy Committee, Committee decision making
    JEL: E42 E43 E50 E58
    Date: 2010–01–22
  11. By: Bhattacharjee, A.; Holly, S.
    Abstract: While much of the literature on cross section dependence has focused mainly on estimation of the regression coefficients in the underlying model, estimation and inferences on the magnitude and strength of spill-overs and interactions has been largely ignored. At the same time, such inferences are important in many applications, not least because they have structural interpretations and provide useful interpretation and structural explanation for the strength of any interactions. In this paper we propose GMM methods designed to uncover underlying (hidden) interactions in social networks and committees. Special attention is paid to the interval censored regression model. Our methods are applied to a study of committee decision making within the Bank of England’s monetary policy committee.
    Keywords: Committee decision making; Social networks; Cross section and spatial interaction; Generalised method of moments; Censored regression model; Expectation-Maximisation Algorithm; Monetary policy; Interest rates
    JEL: D71 D85 E43 E52 C31 C34
    Date: 2010–01–22
  12. By: Juan de Dios Tena (Departamento de Estadística, Universidad Carlos III, Madrid, España.); Jorge Dresdner (Departamento de Economía, Universidad de Concepción); Iván Araya (Departamento de Economía, Universidad de Concepción)
    Abstract: We propose a new approach for estimating a “hybrid” New Keynesian Phillips Curve (NKPC)that includes demand pressures coming from disequilibrium relations in three differentmarkets: (1) monetary and financial, (2) international, and (3) labour. The results of theapplication of this approach show that all three markets contribute to the evolution of inflation. However, shocks on equilibrium in the labour market and short-run movements in cyclical output are relatively more important than other shocks. Econometric tests indicate that this specification is superior to the traditional NKPC, which includes a single variable to account for demand pressures.
    Keywords: New Keynesian Phillips Curve, Cointegration, Monetary Policy.
    Date: 2009
  13. By: David Kiefer
    Abstract: Originally presented as an empirical regularity, a variety of microeconomic derivations of the Phillips tradeoff between inflation and real output have been developed. Since these new Phillips curve models are expressed in terms of unobserved variables and expectations, we develop estimates of these unobservables using a state space characterization of the short-run political-economic equilibrium. This method is appropriate because it yields recursive forecasts based on contemporaneous information, and because we apply it to a real-time data set in order to accurately measure available information. Although none of the new Phillips curve tested are completely adequate, we find that Calvo’s sticky price formulation provides the best fit for US data. It is inadequate because the estimate coefficient for the driving variable (either the output gap or the marginal cost) is essentially zero
    Keywords: new Phillips curve, microfoundations, real-time data
    JEL: E3 E6
    Date: 2010–03
  14. By: Matías Vernengo
    Abstract: The current economic global crisis has thrown fiscal policy onto the center stage. However, the current crisis episode has not produced any change regarding the standing role and function of fiscal policy in developed and developing market economies that has dominated the economics profession for decades. In fact, the uncertain prospects for recovery underscore the fact that free market economies lack the mechanisms to bring about and maintain full employment. Full employment requires designing and making operational institutions at the national and global levels that can manage aggregate demand. This paper reviews the evidence on current fiscal efforts around the world.
    Keywords: Fiscal Policy, Fiscal Deficit
    JEL: E62 H62
    Date: 2010–02
  15. By: Pedro S. Amaral; James C. MacGee
    Abstract: We document sectoral differences in changes in output, hours worked, prices, and nominal wages in the United States during the Great Depression. We explore whether contractionary monetary shocks combined with different degrees of nominal wage frictions across sectors are consistent with both sectoral as well as aggregate facts. To do so, we construct a two-sector model where goods from each sector are used as intermediates to produce the sectoral goods that in turn produce final output. One sector is assumed to have flexible nominal wages, while nominal wages in the other sector are set using Taylor contracts. We calibrate the model to the U.S. economy in 1929, and then feed in monetary shocks estimated from the data. We find that while the model can qualitatively replicate the key sectoral facts, it can account for less than a third of the decline in aggregate output. This decline in output is roughly half as large as the one implied by a one-sector model. Alternatively, if wages are set using Calvo-type contracts, the decline in output is even smaller.
    Keywords: Depressions ; Wages ; Prices
    Date: 2009
  16. By: Harms, Philipp; Hoffmann, Mathias
    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. --
    Keywords: Exchange rate regimes,foreign debt,monetary policy
    JEL: E52 F31 F41
    Date: 2009
  17. By: Piffaretti, Nadia F.; Rossi, Sergio
    Abstract: Management of international monetary relations between China and the United States will be one of the crucial parameters for the stability or instability of the global financial system in the next decade. Although most of the literature suggests rebalancing through either adjustment of relative prices or adjustment of behavior in both countries, this paper explores an institutional approach to rebalancing. Applying the lessons from Keynes'1944 plan for a United States-United Kingdom international clearing union, the paper explores the creation of a bilateral United States-China settlement facility as an institutional contribution to the structural rebalancing of global imbalances.
    Keywords: Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Access to Finance
    Date: 2010–01–01
  18. By: Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: We investigate whether the KOF Barometer–a leading indicator regularly released by the KOF Swiss Economic Institute–can be useful for short-term out-of-sample prediction of year-on-year quarterly real GDP growth rates in Switzerland. We find that the KOF Barometer appears to be useful for prediction of GDP growth rates. Even the earliest forecasts, made seven months ahead of the first official GDP estimate, allow us to predict GDP growth rates more accurately than forecasts based on an univariate autoregressive model. At every subsequent forecast round as new monthly releases of the KOF Barometer become available we observe a steady increase in forecast accuracy.
    Keywords: Leading indicators, forecasting, Bayesian model averaging, Switzerland
    JEL: C53 C22
    Date: 2010–01
  19. By: Rafael Santos; Márcia S. Leon
    Abstract: In this paper we present a dynamic stochastic general equilibrium (DSGE) model, which aims at evaluating the effects of trade globalization over inflation. The period of the inflation targeting regime (1999-2008) is employed to estimate the parameters for the Brazilian economy. The results show that trade globalization appreciates the terms of trade and reduces the inflation rate. Meanwhile to implement barriers to trade - for example, by increasing import and/or export taxes - affects positively the inflation rate. Under a secondary purpose of disseminating technical information, we derive in the appendix the model developed in the paper and we describe in the introduction the recent evolution of the Brazilian international trade.
    Date: 2010–01

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