nep-cba New Economics Papers
on Central Banking
Issue of 2010‒02‒20
37 papers chosen by
Alexander Mihailov
University of Reading

  1. Simple Analytics of the Government Expenditure Multiplier By Michael Woodford
  2. Simple Analytics of the Government Expenditure Multiplier By Michael Woodford
  3. Interest Rate Risk and Other Determinants of Post-WWII U.S. Government Debt/GDP Dynamics By George J. Hall; Thomas J. Sargent
  4. Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable By Joseph E. Stiglitz
  5. The interbank market after August 2007: what has changed, and why? By Paolo Angelini; Andrea Nobili; Maria Cristina Picillo
  6. Sources of Variation in Holding Returns for Fed Funds Futures Contracts By James D. Hamilton; Tatsuyoshi Okimoto
  7. Exits from Recessions: The U.S. Experience 1920-2007 By Michael D. Bordo; John Landon-Lane
  8. Sacrifice ratio or welfare gain ratio? Disinflation in a DSGE monetary model By Guido Ascari; Tiziano Ropele
  9. Credit and banking in a DSGE model of the euro area By Andrea Gerali; Stefano Neri; Luca Sessa; Federico M. Signoretti
  10. Alternative Policies for US Economic Recovery By Byron Gangnes
  11. Non-linear DSGE Models and The Optimized Particle Filter By Martin M. Andreasen
  12. The monetary mechanics of the crisis By Jürgen von Hagen
  13. Monetary Policy on the Way Out of the Crisis By Jürgen von Hagen
  14. A European Exit Strategy By Jürgen von Hagen; Jean Pisani-Ferry; Jakob von Weizsäcker
  15. Weathering the storm- Fair weather versus stormy-weather governance in the euro area By Jean Pisani-Ferry; André Sapir
  16. The Crisis: Policy Lessons and Policy Challenges By Agnès Bénassy-Quéré; Benoît Coeuré; Pierre Jacquet; Jean Pisani-Ferry
  17. The G20 is not just a G7 with extra chairs By Jean Pisani-Ferry; Agnès Bénassy-Quéré; Rajiv Kumar
  18. Reshaping the global economy By Jean Pisani-Ferry; Indhira Santos
  19. Can A Less Boring ECB Remain Accountable? By Jean Pisani-Ferry; Jakob von Weizsäcker
  20. A solution for Europe's banking problem By Adam Posen; Nicolas Véron
  21. Does it matter how aggregates are measured? The case of monetary transmission mechanisms in the euro area By Andreas Beyer; Katarina Juselius
  22. The Pittsburgh G20 Checklist By Ignazio Angeloni
  23. Monetary Policy Rules and the Effects of Fiscal Policy By Kudoh, Noritaka; Nguyen, Hong Thang
  24. The signaling role of policy action. By Romain Baeriswyl; Camille Cornand
  25. Fiscal and monetary interaction under monetary policy uncertainty By Di Bartolomeo Giovanni; Giuli Francesco
  26. Reconciling VAR-based and Narrative Measures of the Tax-Multiplier By Carlo A. Favero; Francesco Giavazzi
  27. Do bank loans and credit standards have an effect on output? A panel approach for the euro area By Lorenzo Cappiello; Arjan Kadareja; Christoffer Kok Sørensen; Marco Protopapa
  28. On the Informational Role of Term Structure in the U.S. Monetary Policy Rule. By Jesús Vázquez; Ramón María-Dolores; Juan M. Londoño
  29. Testing for Group-Wise Convergence with an Application to Euro Area Inflation By Lopez, Claude; Papell, David
  30. What Determines Productivity? By Chad Syverson
  31. ECB Projections: should leave it to the pros? By Pacheco, Luis
  32. Methodological advances in the assessment of equilibrium exchange rates By Matthieu Bussière; Michele Ca’ Zorzi; Alexander Chudík; Alistair Dieppe
  33. Political Limits to Globalization By Daron Acemoglu; Pierre Yared
  34. External trade and monetary policy in a currency area By Martina Cecioni
  35. The EU's Role in Supporting Crisis-Hit Countries in Central and Eastern Europe By Zsolt Darvas
  36. A Bird's Eye View of OECD Housing Markets By Christophe André
  37. Modeling the Impact of Warming in Climate Change Economics By Robert S. Pindyck

  1. By: Michael Woodford
    Abstract: This paper explains the key factors that determine the effectiveness of government purchases as a means of increasing output and employment in New Keynesian models, through a series of simple examples that can be solved analytically. Delays in the adjustment of prices or wages can allow for larger multipliers than exist in the case of fully flexible prices and wages; in a fairly broad class of simple models, the multiplier is 1 in the case that the monetary authority maintains a constant path for real interest rates. The multiplier can be considerably smaller, however, if the monetary authority raises real interest rates in response to increases in inflation or real activity resulting from the fiscal stimulus. A large multiplier is especially plausible when monetary policy is constrained by the zero lower bound on nominal interest rates; in such a case, expected utility is maximized by expanding government purchases to at least partially fill the output gap that would otherwise exist owing to the central bank's inability to cut interest rates. However, it is important in such a case that neither the increased government purchases nor the increased taxes required to finance them be expected to persist beyond the period over which monetary policy is constrained by the zero lower bound.
    JEL: E62
    Date: 2010–01
  2. By: Michael Woodford (Columbia University - Department of Economics)
    Abstract: This paper explains the key factors that determine the effectiveness of government purchases as a means of increasing output and employment in New Keynesian models, through a series of simple examples that can be solved analytically. Delays in the adjustment of prices or wages can allow for larger multipliers than exist in the case of fully flexible prices and wages; in a fairly broad class of simple models, the multiplier is 1 in the case that the monetary authority maintains a constant path for real interest rates despite the increase in government spending. The multiplier can be considerably smaller, however, if the monetary authority raises real interest rates in response to increases in inflation or real activity resulting from the fiscal stimulus. A large multiplier is especially plausible when monetary policy is constrained by the zero lower bound on nominal interest rates; in this case real interest rates fall as a result of the inflationary effect of the stimulus, and a multiplier well in excess of 1 is possible. In such a case, welfare is maximized by expanding government purchases to at least partially fill the output gap that would otherwise exist owing to the central bank's inability to cut interest rates. However, it is important in such a case that neither the increased government purchases nor the increased taxes required to finance them be expected to persist beyond the period over which monetary policy is constrained by the zero lower bound.
    Date: 2010
  3. By: George J. Hall; Thomas J. Sargent
    Abstract: This paper uses the sequence of government budget constraints to motivate estimates of interest payments on the U.S. Federal government debt. We explain why our estimates differ conceptually and quantitatively from those reported by the U.S. government. We use our estimates to account for contributions to the evolution of the debt to GDP ratio made by inflation, growth, and nominal returns paid on debts of different maturities.
    JEL: E31 E43 H6
    Date: 2010–01
  4. By: Joseph E. Stiglitz
    Abstract: This paper provides a general framework for analyzing the optimal degree and form of financial integration. Full integration is not in general optimal: faced with a choice between two polar regimes, full integration or autarky, autarky may be superior. The intuition is simple: if underlying technologies are not convex, then risk-sharing can lower expected utility. The simplistic models arguing for financial integration typically employed in economics assume convexity; but the world is rife with non-convexities, e.g. associated with bankruptcy. The architecture of the credit market can, for instance, affect the likelihood of a bankruptcy cascade, “contagion,” and systemic risk.
    JEL: F33 F36 G32
    Date: 2010–02
  5. By: Paolo Angelini (Bank of Italy); Andrea Nobili (Bank of Italy); Maria Cristina Picillo (Bank of Italy)
    Abstract: The outbreak of the financial crisis coincided with a sharp increase of worldwide interbank interest rates. We analyze the micro and macroeconomic determinants of this phenomenon, finding that before August 2007 interbank rates were insensitive to borrower characteristics, whereas afterwards they became reactive to borrowers’ creditworthiness. At the same time, conditions for large borrowers became relatively more favorable, both before and after the failure of Lehman Brothers. This suggests that banks have become more discerning in their lending, a welcome change, but that moral hazard considerations related to the â€too big to fail†argument should remain a main concern for central banks.
    Keywords: Interbank markets, Spreads, Financial crisis
    JEL: E43 E52
    Date: 2009–10
  6. By: James D. Hamilton; Tatsuyoshi Okimoto
    Abstract: This paper relates predictable gains from positions in fed funds futures contracts to violations of the expectations hypothesis of the term structure of interest rates. Although evidence for predictable gains from positions in short-horizon contracts is mixed, we find that gains in longer horizon contracts can be well described using Markov-switching models, with predictability associated with particular episodes in which economic activity was weak and variability in the returns to these contracts was quite high.
    JEL: E40 E50 G13
    Date: 2010–02
  7. By: Michael D. Bordo; John Landon-Lane
    Abstract: In this paper we provide some evidence on when central banks have shifted from expansionary to contractionary monetary policy after a recession has ended—the exit strategy. We examine the relationship between the timing of changes in several instruments of monetary policy and the timing of changes of selected real macro aggregates and price level (inflation) variables across U.S. business cycles from 1920-2007. We find, based on historical narratives, descriptive evidence and econometric analysis, that in the 1920s and the 1950s the Fed would generally tighten when the price level turned up. By contrast, since 1960 the Fed has generally tightened when unemployment peaked and this tightening often occurred after inflation began to rise. The Fed is often too late to prevent inflation.
    JEL: N12
    Date: 2010–02
  8. By: Guido Ascari (University of Pavia and Kiel Institute for the World Economy); Tiziano Ropele (Bank of Italy and Kiel Institute for the World Economy JEL classification: E31, E5)
    Abstract: When taken to examine disinflation monetary policies, the current workhorse DSGE model of business cycle fluctuations successfully accounts for the main stylized facts in terms of recessionary effects and sacrifice ratio. We complement the transitional analysis of the short-run costs with a rigorous welfare evaluation and show that, despite the long-lasting economic downturn, disinflation entails non-zero overall welfare gains.
    Keywords: disinflation, sacrifice ratio, non-linearities
    Date: 2010–01
  9. By: Andrea Gerali (Bank of Italy); Stefano Neri (Bank of Italy); Luca Sessa (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: This paper studies the role of credit-supply factors in business cycle fluctuations. For this purpose, we introduce an imperfectly competitive banking sector into a DSGE model with financial frictions. Banks issue collateralized loans to both households and firms, obtain funding via deposits and accumulate capital from retained earnings. Margins charged on loans depend on bank capital-to-assets ratios and on the degree of interest rate stickiness. Bank balance-sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the existence of a banking sector partially attenuates the effects of demand shocks, while it helps propagate supply shocks. Second, shocks originating in the banking sector explain the largest share of the fall of output in 2008 in the euro area, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital has a substantial impact on the real economy and particularly on investment.
    Keywords: collateral constraints, banks, banking capital, sticky interest rates
    JEL: E30 E32 E43 E51 E52
    Date: 2010–01
  10. By: Byron Gangnes (Department of Economics, University of Hawaii at Manoa)
    Abstract: Recovery has begun in the United States and global economies. The US recovery is likely to be anemic by historical standards, raising the possibility that additional stimulus may be desirable. The President and Democrats in Congress have called for a “jobs bill,” and the Federal Reserve has demonstrated that it has a flexible toolkit for providing additional liquidity if deemed appropriate. The possible need for such stimulus will come up against the reality of an expanding public debt on the one hand, and inflationary concerns on the other. In this paper, I use simulations of the IHS Global Insight Model to assess the potential impact on the recovery path of alternative macro policies.
    Keywords: United States (US) recession and recovery, fiscal and monetary policy,econometric model forecast simulation, IHS Global Insight model
    JEL: E37 C53
    Date: 2010–02–08
  11. By: Martin M. Andreasen (Bank of England and CREATES)
    Abstract: This paper improves the accuracy and speed of particle filtering for non-linear DSGE models with potentially non-normal shocks. This is done by introducing a new proposal distribution which i) incorporates information from new observables and ii) has a small optimization step that minimizes the distance to the optimal proposal distribution. A particle filter with this proposal distribution is shown to deliver a high level of accuracy even with relatively few particles, and this filter is therefore much more efficient than the standard particle filter.
    Keywords: Likelihood inference, Non-linear DSGE models, Non-normal shocks, Particle filtering
    JEL: C13 C15 E10 E32
    Date: 2010–01–27
  12. By: Jürgen von Hagen
    Abstract: In response to the financial and economic crisis, central banks, unlike in the 1930s, have created enormous amounts of money. There are fears that this will lead to inflation, but it is base money (the central bank's liabilities) that has expanded; total monetary aggregates have not. By contrast, in the 1930s, base money remained stable and monetary aggregates dropped. The reason for this is that in a crisis the relationship between the base money and monetary aggregates is altered. The money multiplier drops. It is therefore necessary to create more base money so that monetary aggregates remain stable. This is what central banks have done in the current crisisand rightly so. They have learned the lessons of the Great Depression. This framework helps understand differences across countries. The crisis affected the euro area money and credit supply process much less than the US and the UK. Therefore, the European Central Bank was right to respond to the crisis with a less expansionary monetary policy than the Bank of England and the Federal Reserve. However, stabilising the money supply may not have been enough to stabilise the supply of credit.
    Date: 2009–08
  13. By: Jürgen von Hagen
    Abstract: Senior Non-Resident Fellow Jürgen von Hagen offers his recommendations for the proper monetary policy to lead the eurozone out of the crisis. He argues that the tentative recovery in the euro area indicates that both monetary and fiscal policy can be normalised soon. However, because delaying fiscal consolidation would result in greater debt burdens whereas monetary policy can be quickly adjusted to respond to unforeseen developments, there is less risk involved if a fiscal exit comes first. In any case, the two strategies must be coordinated and the European Central Bank must be very clear on its interest rate policies. This paper was prepared as part of testimony for the European Parliament's Economic and Monetary Affairs Committee. 
    Date: 2009–12
  14. By: Jürgen von Hagen; Jean Pisani-Ferry; Jakob von Weizsäcker
    Abstract: This Policy Brief was adapted from a paper written by the three authors and presented by Bruegel Director Jean Pisani-Ferry at the informal ECOFIN Council meetings in Gothenburg, Sweden, on 1 Oct. In the brief, the authors argue that bank recapitalisation and restructuring should be a matter of urgency for EU member states and that governments should not undertake the necessary fiscal and monetary policy exit until problems within the financial sector are addressed. The authors also recommend that European states set debt targets to be reached by the end of 2014 and explain that proper incentives are necessary to ensure that an exit strategy, once implemented, is done so in coordination between various institutional actors. Such a policy framework should be in place by summer 2010, the authors say, in order to avoid a buildup of financial instability during the process.
    Date: 2009–10
  15. By: Jean Pisani-Ferry; André Sapir
    Abstract: Jean Pisani-Ferry and André Sapir believe that the euro has proved attractive as a fair-weather currency for countries and investors well beyond its borders. But it still remains to be seen if its governance is strong enough for it to succeed as a stormy-weather currency. The authors already detect, howevever, that the crisis shows the euro-area governance system lacks some crucial properties: speed of reaction, policy discretion and centralised decision-making.
    Date: 2009–03
  16. By: Agnès Bénassy-Quéré; Benoît Coeuré; Pierre Jacquet; Jean Pisani-Ferry
    Abstract: Bruegel Director Jean Pisani-Ferry, with Agnès Bénassy-Quéré (CEPII, University Paris-Ouest and Ecole Polytechnique, Paris), Benoît Coeuré (Ecole Polytechnique, Paris) and Pierre Jacquet (ENPC, Paris, and Agence Française de Développement) provide an in-depth analysis of the financial crisis. The authors review the main causes of the crisis, pointing to three different, non-mutually exclusive lines of explanation: wrong incentives in the financial sector, unsustainable macroeconomic outcomes, and misunderstood and mismanaged systemic complexity. They also discuss supervisory and regulatory reform going forward, including an examination of the issues of moral hazard, the separation of retail and investment banking, the desirable size of financial institutions, risk management, the role of central banks, and other issues. This working paper was previously published as CEPII (Centre d'études prospectives et d'informations internationales) working document 2009-28.
    Date: 2009–12
  17. By: Jean Pisani-Ferry; Agnès Bénassy-Quéré; Rajiv Kumar
    Abstract: The G20 is not just a G7 with Extra Chairs is a joint paper written by Agnes Benassy-Quere, Rajiv Kumar and Jean Pisani-Ferry (Director of Bruegel) following the  International Cooperation in Times of Global Crisis: Views from G20 Countries conference in Delhi  on 14th and 15th of September, organised by Bruegel, CEPII and ICRIER. The publication draws together the authors' conclusions from the Delhi conference and reviews the real role of the G20, while questioning where the non-G7 interests fit into the group's agenda.
    Date: 2009–09
  18. By: Jean Pisani-Ferry; Indhira Santos
    Abstract: Jean Pisani-Ferry and Indhira Santos observe that the crisis and the national responses to it have started to reshape the global economy. But beyond the specifics of shock transmission, the crisis has also exposed that, in spite of regional integration and the emergence of new economic powers, the global economy lacks resilience. The authors explain how they believe the international community could build a stronger and more legitimate globalised governance out of the crisis.
    Date: 2009–03
  19. By: Jean Pisani-Ferry; Jakob von Weizsäcker
    Abstract: Through Bruegel's role on the Monetary Experts Panel for the European Parliament's Committee on Economic and Monetary Affairs, Bruegel scholars contributed to the Committee's Monetary Dialogue with the European Central Bank meeting on 28 September. In this briefing paper for the Panel, Director Jean-Pisani Ferry and Resident Fellow Jakob von Weizsacker point out that, in the wake of the financial crisis, the ECB will take on much more responsibility for macro-prudential supervision of the financial system. With this added responsibility, however, comes serious questions about the mechanisms in place to ensure the ECB's accountability. Previously focused almost solely on price stability, the ECB will now likely be asked to increase its discretionary decision-making, especially in dealing with financial regulation. The accompanying accountability questions, the authors say, need to be addressed proactively.
    Date: 2009–09
  20. By: Adam Posen; Nicolas Véron
    Abstract: Nicolas Véron and Adam Posen believe Europe should build new long term European joint-action to face the likely high rising number of insolvent banks on the continent. The authors propose on the one hand, a centralised triage and restructuring process of bad European banks lead by a new temporary European Institution, a European Bank Support Authority (EBSA), and on the other hand, long-term EU Institutions dedicated to the completion of an integrated market.
    Date: 2009–06
  21. By: Andreas Beyer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Katarina Juselius (Department of Economics, University of Copenhagen, Studiestræde 6, 1455 Copenhagen K, Denmark.)
    Abstract: Beyer, Doornik and Hendry (2000, 2001) show analytically that three out of four aggregation methods yield problematic results when exchange rate shifts induce relative-price changes between individual countries and found the least problematic method to be the variable weight method of growth rates. This papers shows, however, that the latter is sensitive to the choice of base year when based on real GDP weights whereas not on nominal GDP weights. A comparison of aggregates calculated with different methods shows that the differences are tiny in absolute value but highly persistent. To investigate the impact on the cointegration properties in empirical modelling, the monetary model in Coenen &Vega (2001) based on fixed weights was re-estimated using flexible real and nominal GDP weights. In general, the results remained reasonably robust to the choice of aggregation method. JEL Classification: C32, C42, E41.
    Keywords: Aggregation, Flexible weights, Eurowide money demand, Cointegration.
    Date: 2010–01
  22. By: Ignazio Angeloni
    Abstract: In this timely policy contribution, Visiting Scholar Ignazio Angeloni suggests that the Pittsburgh G20 may represent policymakers' last chance at real financial market reform. He develops a shortlist of recommendations for world leaders to tackle at the summit and says that world leaders at the summit must strengthen the stability of the financial sector while avoid micro-management. G20 leaders must also strengthen the global financial governance structures and work on an IMF-led framework to containing the development of future current-account imbalances across nations. This latest version also includes a postscript written by Angeloni and published in the October 2009 issue of Intereconomics: Review of European Economic Policy judging the outcome of the summit.
    Date: 2009–09
  23. By: Kudoh, Noritaka; Nguyen, Hong Thang
    Abstract: We explore the implications of adopting a Taylor-type interest-rate rule in a simple monetary growth model in which budget deficits are financed partly by unbacked government debt. To ensure uniqueness of the steady-state equilibrium, monetary policy cannot be either too "active" or too "passive". The effects of fiscal policy depend crucially on whether monetary policy is active or passive, and are independent of the "tightness" of monetary policy.
    Keywords: monetary policy rules, fiscal policy, overlapping generations,
    JEL: E52 E62 H62 H63
    Date: 2010–02
  24. By: Romain Baeriswyl; Camille Cornand
    Abstract: This paper analyzes the conduct of the optimal monetary policy with imperfect information on the shocks hitting the economy where firms’ prices are strategic complements. Monetary policy entails a dual stabilizing role, as a policy response that influences directly the economy and as a vehicle for information that shapes firms’ beliefs. In the case where more information is welfare detrimental, the central bank faces a dilemma, for its monetary instrument aimed at stabilizing the economy may harmfully shape firms’ beliefs. Recognizing the signaling role of its instrument, the central bank finds it optimal to distort its policy response in order to mitigate the detrimental information that it may convey.
    Keywords: differential information, monetary policy, transparency.
    JEL: E52 E58 D82
    Date: 2010
  25. By: Di Bartolomeo Giovanni; Giuli Francesco
    Abstract: Despite the recent increasing number of studies on monetary policy uncertainty, its role on the strategic interactions between fiscal and monetary policies has not been fully explored. Our paper aims to fill this gap by tackling this issue by evaluating the consequences produced by multiplicative uncertainty in such a context.
    Keywords: Monetary-fiscal policy interactions, paramenter uncertainty, symbiosis, monetary policy attenuation
    JEL: E61 E63
    Date: 2009–12
  26. By: Carlo A. Favero; Francesco Giavazzi
    Abstract: The currently available empirical evidence shows remarkable differences between various estimates of the effects on U.S output of an exogenous shift in Federal tax liabilities. Shocks identified via the narrative method, imply a multiplier of about three over . an horizon of three years. Tax shocks identified in fiscal VAR models deliver a much smaller multipier of about one. Is this heterogeneity real, or is it simply the result of different approaches to the identification of exogenous shifts in taxes? Or of different specifications of the empirical model used to estimate the tax multiplier? In this paper we reconcile this apparently contradictory evidence by showing that the large multiplier obtained via the narrative identification methods are generated by the choice of a limited information approach in their estimation and not by the different nature of the shocks. Using the shocks identified by a Narrative methods in a multivariate dynamic model delivers estimates of the tax multiplier very much in line with those obtained in the traditional fiscal VAR approach.
    Date: 2010
  27. By: Lorenzo Cappiello (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arjan Kadareja (Bank of Albania, Sheshi “Skënderbej”, No.1 Tirana, Albania.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco Protopapa (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Applying the identification strategy employed by Driscoll (2004) for the United States, this paper provides empirical evidence for the existence of a bank lending channel of monetary policy transmission in the euro area. In addition, and in contrast to recent findings for the US, we find that in the euro area changes in the supply of credit, both in terms of volumes and in terms of credit standards applied on loans to enterprises, have significant effects on real economic activity. This highlights the importance of the monitoring of credit developments in the toolkit of monetary policy and underpins the reasoning behind giving monetary and credit analysis a prominent role in the monetary policy strategy of the ECB. It also points to the potential negative repercussions on real economic growth of bank balance sheet impairments arising in the context of the financial crisis erupting in mid-2007 which led to the need for banks to delever their balance sheets and possibly to reduce their loan supply. JEL Classification: C23, E51, E52, G21.
    Keywords: bank credit, bank lending channel, euro area, panel data.
    Date: 2010–01
  28. By: Jesús Vázquez (Universidad del País Vasco); Ramón María-Dolores (Universidad de Murcia); Juan M. Londoño (Tilburg University)
    Abstract: This paper uses a structural approach based on the indirect inference principle to estimate a standard version of the new Keynesian monetary (NKM) model augmented with term structure using both revised and real-time data. The estimation results show that the term spread and policy inertia are both important determinants of the U.S. estimated monetary policy rule whereas the persistence of shocks plays a small but significant role when revised and real-time data of output and inflation are both considered. More importantly, the relative importance of term spread and persistent shocks in the policy rule and the shock transmission mechanism drastically change when it is taken into account that real-time data are not well behaved.
    Keywords: NKM model, term structure, monetary policy rule, indirect inference, real-time
    JEL: C32 E30 E52
    Date: 2010–02–10
  29. By: Lopez, Claude; Papell, David
    Abstract: We propose a new procedure to increase the power of panel unit root tests when used to study group-wise convergence. When testing for stationarity of the differential between a group of series and their cross-sectional means, although each differential has non-zero mean, the group of differentials has a cross-sectional average of zero for each time period by construction. We incorporate this constraint for estimation and generating finite sample critical values. Applying this new procedure to Euro Area inflation, we find strong evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency.
    Keywords: group wise convergence; inflation; euro
    JEL: C32 E31
    Date: 2010
  30. By: Chad Syverson
    Abstract: Economists have shown that large and persistent differences in productivity levels across businesses are ubiquitous. This finding has shaped research agendas in a number of fields, including (but not limited to) macroeconomics, industrial organization, labor, and trade. This paper surveys and evaluates recent empirical work addressing the question of why businesses differ in their measured productivity levels. The causes are manifold, and differ depending on the particular setting. They include elements sourced in production practices—and therefore over which producers have some direct control, at least in theory—as well as from producers’ external operating environments. After evaluating the current state of knowledge, I lay out what I see are the major questions that research in the area should address going forward.
    JEL: D2 D24 E2 E23 F1 L1 L11 L2 L23
    Date: 2010–01
  31. By: Pacheco, Luis (Universidade Portucalense)
    Abstract: Forecasts are an inherent part of economic science and the quest for perfect foresight occupies economists and researchers in multiple fields. The release of economic forecasts (and its revisions) is a popular and often publicized event, with a multitude of institutions and think-tanks devoted almost exclusively to that task. The European Central Bank (ECB) also publishes its forecasts for the euro area, however ECB’s forecast accuracy is not a deeply researched theme. The ECB forecasts’ accuracy is the main point developed in this paper, which tries to contribute to understand the nature of the errors committed by the ECB forecasts and its main differences compared to other projections. What we try to infer is whether the ECB is accurate in its projections, making less errors than the others, maybe due to some informational advantage. We conclude that the ECB seems to consistently underestimate the HICP inflation rate and overestimate GDP growth. Comparing it with the others, the ECB shows a superior performance, committing almost always fewer errors. So, this signals a possible informational advantage from the ECB. Since the forecasting errors could jeopardize ECB’s credibility public criticism could be avoided if the ECB simply let forecasts for the others. Naturally, this change should be weighted against the benefits of publishing forecasts.
    Keywords: European Central Bank; Staff projections; Monetary Policy; Forecasting; Central Bank Communication
    JEL: E52 E58
    Date: 2010–02–08
  32. By: Matthieu Bussière (Banque de France, 31 rue Croix-des-Petits-Champs, 75001 Paris, France.); Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alexander Chudík (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alistair Dieppe (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper reviews three different concepts of equilibrium exchange rates that are widely used in policy analysis and constitute the backbone of the IMF CGER assessment: the Macroeconomic Balance, the External Sustainability and the reduced form approaches. We raise a number of econometric issues that were previously neglected, proposing some methodological advances to address them. The first issue relates to the presence of model uncertainty in deriving benchmarks for the current account, introducing Bayesian averaging techniques as a solution. The second issue reveals that, if one considers all the sets of plausible identification schemes, the uncertainty surrounding export and import exchange rate elasticities is large even at longer horizons. The third issue discusses the uncertainty associated to the estimation of a reduced form relationship for the real exchange rate, concluding that inference can be improved by panel estimation. The fourth and final issue addresses the presence of strong and weak cross section dependence in panel estimation, suggesting which panel estimators one could use in this case. Overall, the analysis puts forward a number of innovative solutions in dealing with the large uncertainties surrounding equilibrium exchange rate estimates. JEL Classification: F31, F32, F41.
    Keywords: Equilibrium exchange rates, IMF CGER methodologies, current account, trade elasticities, global imbalances.
    Date: 2010–01
  33. By: Daron Acemoglu; Pierre Yared
    Abstract: Despite the major advances in information technology that have shaped the recent wave of globalization, openness to trade is still a political choice, and trade policy can change with shifts in domestic political equilibria. This paper suggests that a particular threat and a limiting factor to globalization and its future developments may be militarist sentiments that appear to be on the rise among many nations around the globe today. We proxy militarism by spending on the military and the size of the military, and document that over the past 20 years, countries experiencing greater increases in militarism according to these measures have had lower growth in trade. Focusing on bilateral trade flows, we also show that controlling flexibly for country trends, a pair of countries jointly experiencing greater increases in militarism has lower growth in bilateral trade.
    JEL: F01 F10 F52
    Date: 2010–01
  34. By: Martina Cecioni (Bank of Italy, Economics, Research and International Relations)
    Abstract: For historical and geographical reasons, the member countries of the European Monetary Union (EMU) display different degrees of external trade openness. The paper lays out a model for a currency area composed of two regions. One region is more open to trade with a third country outside the area than the other. Using the utility-based loss function for the currency area, the optimal monetary policy is compared to the one for a homogeneous area. In the model with heterogeneity, the relative competitiveness across regions influences the extent to which shocks are transmitted to the area-wide inflation and output gap. Under a plausible calibration for the EMU, the optimal policy plan exhibits a stronger tendency towards currency area exchange rate stabilization than the one in the homogeneity case. Moreover, it is welfare-improving to forgo some area-wide inflation stabilization to dampen inflation differentials.
    Keywords: Monetary union, optimal monetary policy, loss function
    JEL: E52 F41
    Date: 2010–01
  35. By: Zsolt Darvas
    Abstract: The crisis has hit central and eastern European countries harder than other regions of the world. In this policy contribution Resident Scholar Zsolt Darvas looks at the role of the EU and its institutions in supporting crisis-hit CEE countries; the stabilising effects of the EU's coordinated multilateral financial assistance; and the commitment shown by Western European banks to the region. However Darvas argues that there were certain actions, or failures to act, on the part of EU institutions and governments, that have amplified the effects on CEE countries of the crisis. The European Central Bank has given little direct support to non-euro-area countries, and the EU has done little for EU neighbourhood countries. Meanwhile, euro-area membership has shielded from the crisis some countries with worse fundamentals than certain CEE countries.
    Date: 2009–12
  36. By: Christophe André
    Abstract: Housing markets have played a prominent role in macroeconomic developments over recent years. For a great part of the 2000s, buoyant housing markets have contributed to sustained economic activity in most OECD countries. But many markets overheated and the collapse of the US subprime mortgage market has been at the epicentre of a deep financial and economic crisis. Against this background, this paper: i) documents housing market developments in 18 OECD countries since the 1970s, putting recent evolutions into historical perspective; ii) examines the drivers of supply and demand for housing; iii) investigates the interactions between housing markets and the wider economy; iv) assesses the responsibilities of housing taxation, monetary policy and financial supervision and regulation in fuelling or amplifying housing booms; v) explores the link between global imbalances and housing booms.<P>Un survol des marchés immobiliers de l’OCDE<BR>Les marchés immobiliers ont joué un rôle important dans les évolutions macroéconomiques de ces dernières années. Durant une grande partie des années 2000, des marchés immobiliers dynamiques ont contribué à une activité économique soutenue dans la plupart des pays de l’OCDE. Mais de nombreux marchés se sont emballés et l’écroulement du marché hypothécaire « subprime » aux États-Unis a été à l’épicentre d’une profonde crise financière et économique. Dans ce contexte, ce document : i) analyse les évolutions des marchés immobiliers dans 18 pays de l’OCDE depuis les années 1970, replaçant les développements récents dans une perspective historique ; ii) examine les déterminants de l’offre et de la demande de logements ; iii) étudie les interactions entre les marchés immobiliers et l’économie dans son ensemble ; iv) évalue les responsabilités de la fiscalité du logement, de la politique monétaire, de la régulation et de la supervision financières dans l’alimentation ou l’amplification des « booms » immobiliers ; v) considère le lien entre déséquilibres mondiaux et envolées immobilières.
    Keywords: taxation, wealth, house prices, monetary policy, mortgage markets, housing market, financial regulation, saving, global imbalances, fiscalité, prix des logements, politique monétaire, marchés hypothécaires, marché immobilier, épargne, déséquilibres mondiaux, patrimoine, régulation financière
    JEL: E21 E52 F32 F34 G18 G21 H24 R21 R31
    Date: 2010–01–28
  37. By: Robert S. Pindyck
    Abstract: Any economic analysis of climate change policy requires some model that describes the impact of warming on future GDP and consumption. Most integrated assessment models (IAMs) relate temperature to the level of real GDP and consumption, but there are theoretical and empirical reasons to expect temperature to affect the growth rate rather than level of GDP. Does this distinction matter in terms of implications for policy? And how does the answer depend on the nature and extent of uncertainty over future temperature change and its impact? I address these questions by estimating the fraction of consumption society would be willing to sacrifice to limit future increases in temperature, using probability distributions for temperature and impact inferred from studies assembled by the IPCC, and comparing estimates based on a direct versus growth rate impact of temperature on GDP.
    JEL: D81 Q5 Q54
    Date: 2010–01

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