nep-cba New Economics Papers
on Central Banking
Issue of 2010‒03‒06
33 papers chosen by
Alexander Mihailov
University of Reading

  1. Optimal Target Criteria for Stabilization Policy By Marc P. Giannoni; Michael Woodford
  2. The Return of the Wage Phillips Curve By Jordi Galí
  3. The Inflation-Output Trade-off with Downward Wage Rigidities By Pierpaolo Benigno; Luca Antonio Ricci
  4. Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy By Orazio P. Attanasio; Guglielmo Weber
  5. Which Parts of Globalization Matter for Catch-up Growth? By Paul M. Romer
  6. Modelling a Housing and Mortgage Crisis By Alexandros Vardoulakis; Dimitrios Tsomocos; Charles Goodhart
  7. What Determines European Real Exchange Rates? By Martin Berka; Michael B. Devereux
  8. Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs By Linda S. Goldberg; Craig Kennedy; Jason Miu
  9. The Role of Central Bank Transparency for Guiding Private Sector Forecasts. By Ehrmann, M.; Eijffinger, S.C.W.; Fratzcher, M.
  10. How Soon? How Fast? Interest Rates and Other Monetary Policy Decisions in 2010 By Michael Parkin
  11. Industry Evidence on the Effects of Government Spending By Christopher J. Nekarda; Valerie A. Ramey
  12. Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms By Jan Babecky; Philip Du Caju; Theodora Kosma; Martina Lawless; Julian Messina; Tairi Room
  13. Employment, exchange rates and labour market rigidity By Fernando Alexandre; Pedro Bação; João Cerejeira; Miguel Portela
  14. Loss avoidance in nominal frames and fairness in downward nominal wage rigidity and disinflation By Lunardelli, André
  15. Optimal monetary policy in a small open economy with financial frictions By Merola, Rossana
  16. Some observations in the high-frequency versions of a standard new-keynesian model By Franke, Reiner; Sacht, Stephen
  17. Forecasting the Yield Curve in a Data-Rich Environment using the Factor-Augmented Nelson-Siegel Model By Exterkate, P.; Dijk, D.J.C. van; Heij, C.; Groenen, P.J.F.
  18. Money and Inflation: The Role of Persistent Velocity Movements By Makram El-Shagi; Sebastian Giesen
  19. The Role of Central Banks in Sustaining Economic Recovery and in Achieving Financial Stability By Siregar, Reza Yamora; Lim, CS Vincent
  20. Expectations-Driven Cycles in the Housing Market By Mendicino, Caterina; Lambertini, Luisa; Punzi , Maria Teresa
  21. The Great Recession versus the Great Depression: stylized facts on siblings that were given different foster parents By Aiginger, Karl
  22. Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis By David Laibson; Johanna Mollerstrom
  23. The Great Increase in Relative Volatility of Real Wages in the United States By Julien Champagne; André Kurmann
  24. Commodity prices, commodity currencies, and global economic developments By Jan J. J. Groen; Paolo A. Pesenti
  25. Is Specialization Desirable in Committee Decision Making? By Ruth Ben-Yashar; Winston Koh; Shmuel Nitzan
  26. Real exchange rate misalignments and economic performance for the G20 countries By Audrey Sallenave
  27. Institutionelle Möglichkeiten zur Begrenzung der Staatsverschuldung in föderalen Staaten By Gebhard Kirchgässner
  28. Quantitative easing works: Lessons from the unique experience in Japan 2001-2006 By Eric Girardin; Zakaria Moussa
  29. Time Variation in Okun's Law: A Canada and U.S. Comparison By Kimberly Beaton
  30. Is the Chinese currency substantially misaligned to warrant further appreciation? By Qin, Duo; He, Xinhua
  31. Risk premium shocks, monetary policy and exchange rate pass-through in the Czech Republic, Hungary and Poland By Balázs Vonnák
  33. Effects of Reserve Requirements in an Inflation Targeting Regime: The Case of Colombia By Hernando Vargas Herrera; Carlos Varela; Yanneth R. Betancourt; Norberto Rodríguez

  1. By: Marc P. Giannoni; Michael Woodford
    Abstract: This paper considers a general class of nonlinear rational-expectations models in which policymakers seek to maximize an objective function that may be household expected utility. We show how to derive a target criterion that is: (i) consistent with the model's structural equations, (ii) strong enough to imply a unique equilibrium, and (iii) optimal, in the sense that a commitment to adjust the policy instrument at all dates so as to satisfy the target criterion maximizes the objective function. The proposed optimal target criterion is a linear equation that must be satisfied by the projected paths of certain economically relevant "target variables". It takes the same form at all times and generally involves only a small number of target variables, regardless of the size and complexity of the model. While the projected path of the economy requires information about the current state, the target criterion itself can be stated without reference to a complete description of the state of the world. We illustrate the application of the method to a nonlinear DSGE model with staggered price-setting, in which the objective of policy is to maximize household expected utility.
    JEL: E52 E61
    Date: 2010–02
  2. By: Jordi Galí
    Abstract: The standard New Keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment. Under some assumptions, that relation takes a form similar to that found in empirical applications–starting with the original Phillips (1958) curve–and may thus be viewed as providing some theoretical foundations to the latter. The structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the U.S. economy, even under the strong assumption of a constant natural rate of unemployment.
    JEL: E31 E32
    Date: 2010–02
  3. By: Pierpaolo Benigno; Luca Antonio Ricci
    Abstract: In the presence of downward nominal wage rigidities, wage setters take into account the future consequences of their current wage choices, when facing both idiosyncratic and aggregate shocks. We derive a closed-form solution for a long-run Phillips curve which relates average output gap to average wage inflation: it is virtually vertical at high inflation and flattens at low inflation. Macroeconomic volatility shifts the curve outward and reduces output. The results imply that stabilization policies play an important role, and that optimal inflation may be positive and differ across countries with different macroeconomic volatility.
    JEL: E24 E3 E30 E5 E50
    Date: 2010–02
  4. By: Orazio P. Attanasio; Guglielmo Weber
    Abstract: This paper provides a critical survey of the large literature on the life cycle model of consumption, both from an empirical and a theoretical point of view. It discusses several approaches that have been taken in the literature to bring the model to the data, their empirical successes and failures. Finally, the paper reviews a number of changes to the standard life cycle model that could help solve the remaining empirical puzzles.
    JEL: D11 D12 E21
    Date: 2010–02
  5. By: Paul M. Romer
    Abstract: Economists devote too much attention to international flows of goods and services and not enough to international flows of ideas. Traditional trade flows are an imperfect substitute for flows of the underlying ideas. The simplest textbook trade model shows that a welfare-enhancing move toward freer flows of ideas should be associated with a reduction in conventional trade. The large quantitative effect from the flow of ideas is evident in the second half of the 20th century as the life expectancies in poor and rich countries began to converge. Another example comes from China, where authorities dramatically reduced accident rates by adopting rules of civil aviation that were developed in the United States. All economists, including trade economists, would be better equipped to talk about international flows of technologies and rules if they adopted a consistent vocabulary based on the concepts of nonrivalry and excludability. An analysis of the interaction between rules and technologies may help explain important puzzles such as why private firms have successfully diffused some technologies (mobile telephony) but not others (safe municipal water.)
    JEL: F1 I1 O1 O33
    Date: 2010–02
  6. By: Alexandros Vardoulakis; Dimitrios Tsomocos; Charles Goodhart
    Abstract:  The purpose of this paper is to explore financial instability in this case due to a housing crisis and defaults on mortgages. The model incorporates heterogeneous banks and households. Mortgages are secured by collateral, which is equal to the amount of housing which agents purchase. Individual default is spread through the economy via the interbank market. Several comparative statics illustrate the directional effects of a variety of shocks in the economy.
    Date: 2010–02
  7. By: Martin Berka; Michael B. Devereux
    Abstract: We study a newly constructed panel data set of relative prices of a large number of consumer goods among 31 European countries. We find that there is a substantial and non-diminishing deviation from PPP at all levels of aggregation, even among eurozone members. However, real exchange rates are very closely tied to relative GDP per capita within Europe, both across countries and over time. This relationship is highly robust at all levels of aggregation. We construct a simple two-sector endowment economy model of real exchange rate determination. Simulating the model using the historical relative GDP per capita for each country, we find that for most (but not all) countries there is a very close fit between the actual and simulated real exchange rate.
    JEL: F31 F41
    Date: 2010–02
  8. By: Linda S. Goldberg; Craig Kennedy; Jason Miu
    Abstract: Following a scarcity of dollar funding available internationally to banks and financial institutions, starting in December 2007 the Federal Reserve established or expanded Temporary Reciprocal Currency Arrangements with fourteen foreign central banks. These central banks had the capacity to use these swap facilities to provide dollar liquidity to institutions in their jurisdictions. This paper presents the developments in the dollar swap facilities through the end of 2009. The facilities were a response to dollar funding shortages outside the United States during a period of market dysfunction. Formal research, as well as more descriptive accounts, suggests that the dollar swap lines among central banks were effective at reducing the dollar funding pressures abroad and stresses in money markets. The central bank dollar swap facilities are an important part of a toolbox for dealing with systemic liquidity disruptions.
    JEL: E44 F36 G32
    Date: 2010–02
  9. By: Ehrmann, M.; Eijffinger, S.C.W. (Tilburg University); Fratzcher, M.
    Date: 2010
  10. By: Michael Parkin (University of Western Ontario)
    Abstract: With the economic recovery taking hold and the Bank of Canada’s conditional commitment to keep the overnight rate at 0.25 percent expiring soon, a number of questions about the conduct of monetary policy need to be considered. The author argues the Bank should keep its conditional commitment, but should thereafter raise the overnight rate sharply by 50 basis points at every announcement date until mid-2011. In addition, the Bank should publish conditional statements about the future path of the policy rate to help shape market expectations and avoid surprises that disrupt financial markets, output, and employment. Further, the Bank should withdraw its injection of excess reserves at a future preannounced date and should gradually wind down credit easing measures.
    Keywords: Monetary Policy, Bank of Canada, overnight interest rate
    JEL: E58 E52
    Date: 2010–02
  11. By: Christopher J. Nekarda; Valerie A. Ramey
    Abstract: This paper investigates industry-level effects of government purchases in order to shed light on the transmission mechanism for government spending on the aggregate economy. We begin by highlighting the different theoretical predictions concerning the effects of government spending on industry labor market equilibrium. We then create a panel data set that matches output and labor variables to shifts in industry-specific government demand. The empirical results indicate that increases in government demand raise output and hours, but lower real product wages and productivity. Markups do not change as a result of government demand increases. The results are consistent with the neoclassical model of government spending, but they are not consistent with the New Keynesian model of the effects of government spending.
    JEL: E24 E31 E62
    Date: 2010–02
  12. By: Jan Babecky; Philip Du Caju; Theodora Kosma; Martina Lawless; Julian Messina; Tairi Room
    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. We analyse which firm-level and institutional factors are associated with wage rigidity. Our results indicate that wage rigidity 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). We also find 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: Downward nominal wage rigidity, downward real wage rigidity, wage indexation, survey data, European Union.
    JEL: J30 J31 J32 C81 P5
    Date: 2009–12
  13. By: Fernando Alexandre (University of Minho and NIPE); Pedro Bação (University of Coimbra and GEMF); João Cerejeira (University of Minho and NIPE); Miguel Portela (University of Minho, NIPE and IZA)
    Abstract: There is increasing evidence that the interaction between shocks and labour market institutions is crucial to understanding the dynamics of employment. In this paper, we show that the inclusion of labour adjustment costs in a trade model affects the impact of exchange rate movements on employment. We also explore how labour market rigidities interact with the degree of exposure to international competition and with the technology level. Our model-based predictions are consistent with estimates obtained using panel data for 23 OECD countries. Namely, our estimates suggest that employment in low-technology sectors that have a very high degree of openness to trade and are located in countries with more flexible labour markets are more sensitive to exchange rate changes. Our model and estimates therefore provide additional evidence on the importance of interacting external shocks and labour market institutions.
    Keywords: exchange rates, international trade, job flows, employment protection.
    JEL: J23 F16 F41
    Date: 2010–02
  14. By: Lunardelli, André
    Abstract: This paper proposes a more general definition of loss avoidance, relates it to fairness and applies it to the labor market. By influencing judgments about what is a fair wage readjustment, it can lead to coordination failures, generating downward nominal wage rigidity (DNWR) and disinflation costs even with common knowledge of credible policies. This suggests that policies with good frames, including inflation targeting, can mitigate the sacrifice ratio.
    Keywords: loss avoidance; fair wage effort hypothesis; nominal frame; higher order beliefs; Keynesian beauty contest; Phillips curve; inflation inertia; disinflation; downward nominal wage rigidity.
    JEL: E32 E31 E42 E52 C72 J30
    Date: 2009–09–21
  15. By: Merola, Rossana
    Abstract: I analyze how the introduction of financial frictions can affect the trade-off between output stabilization and inflation stability and whether, in the presence of financial frictions, the optimal outcome can be realized or approached more closely if monetary policy is allowed to react to aggregate financial variables. Moreover, I explore the issue of whether an inflation targeting cum exchange rate stabilization and a price-level targeting are more suitable rules in minimizing distortions generated by the presence of liabilities defined in foreign currency and in nominal terms. I find that, when the financial accelerator mechanism is working, a price-level targeting rule dominates. One caveat is that the source of the shock plays an important role. Onee the financial shock is not operative, the gain fram a price-level targeting rule decreases significantly. --
    Keywords: Monetary policy,Taylor rule,financial accelerator,price-level targeting,asset prices
    JEL: E31 E44 E52 E58
    Date: 2010
  16. By: Franke, Reiner; Sacht, Stephen
    Abstract: In a small-scale New-Keynesian model with a hybrid Phillips curve and IS equation, the paper is concerned with an arbitrary frequency of the agents’ synchronized decision making. It investigates the validity of a fundamental methodological precept according to which no substantive prediction or explanation of a well-defined macroeconomic period model should depend on the real time length of the period. While this principle is basically satisfied as the period goes to zero, the impulse-response functions of the high-frequency versions can qualitatively as well as quantitatively be fairly dissimilar from their quarterly counterpart. The result proves to be robust under variations of the degree of price stickiness. The main conclusion is that DSGE modelling may be more sensitive to its choice of the agents’ decision interval. --
    Keywords: Hybrid New-Keynesian model,high-frequency modelling,impulse-response functions,Foley's methodological precept
    JEL: C63 E31 E32 E52
    Date: 2010
  17. By: Exterkate, P.; Dijk, D.J.C. van; Heij, C.; Groenen, P.J.F. (Erasmus Econometric Institute)
    Abstract: Various ways of extracting macroeconomic information from a data-rich environment are compared with the objective of forecasting yield curves using the Nelson-Siegel model. Five issues in factor extraction are addressed, namely, selection of a subset of the available information, incorporation of the forecast objective in constructing factors, specification of a multivariate forecast objective, data grouping before constructing factors, and selection of the number of factors in a data-driven way. Our empirical results show that each of these features helps to improve forecast accuracy, especially for the shortest and longest maturities. The data-driven methods perform well in relatively volatile periods, when simpler models do not suffice.
    Keywords: yield curve prediction;Nelson-Siegel model;factor extraction;variable selection
    Date: 2010–02–23
  18. By: Makram El-Shagi; Sebastian Giesen
    Abstract: While the long run relation between money and inflation is well established, empirical evidence on the adjustment to the long run equilibrium is very heterogeneous. In the present paper we use a multivariate state space framework, that substantially expands the traditional vector error correction approach, to analyze the short run impact of money on prices. We contribute to the literature in three ways: First, we distinguish changes in velocity of money that are due to institutional developments and thus do not induce inflationary pressure, and changes that reflect transitory movements in money demand. This is achieved with a newly developed multivariate unobserved components decomposition. Second, we analyze whether the high volatility of the transmission from monetary pressure to inflation follows some structure, i.e., if the parameter regime can assumed to be constant. Finally, we use our model to illustrate the consequences of the monetary policy of the Fed that has been employed to mitigate the impact of the financial crisis, simulating different exit strategy scenarios.
    Keywords: Velocity,multivariatestatespacemodel,in?ation,money
    JEL: E31 E52 C32
    Date: 2010–02
  19. By: Siregar, Reza Yamora; Lim, CS Vincent
    Abstract: Whenever a financial crisis occurs, threatening a possible financial meltdown, central banks have to be at the forefront in combating, neutralizing the crisis and restoring financial stability and economic growth. In this regards, the present sub-prime crisis which originated from the US highlights a few key issues for the Southeast Asian Central banks (SEACEN). This paper reviews the policy responses to the crisis which include exit policy strategies from stimulus monetary packages. To strengthen the soundness of the financial system, going forward, the paper also highlights counter-cyclical and macro-prudential regulations that central banks may want to actively look into. These include cross-border policy cooperation and coordination, particularly in the form of the college of supervisors.
    Keywords: - SEACEN; -Central Banks; - Financial Stability; - Prudential Regulation; -Supervision.
    JEL: E58 E44 E41
    Date: 2010–02–15
  20. By: Mendicino, Caterina; Lambertini, Luisa; Punzi , Maria Teresa
    Abstract: This paper analyzes housing market boom-bust cycles driven by changes in households'expectations. We explore the role of expectations not only on productivity but on several other shocks that originate in the housing market, the credit market and the conduct of monetary policy. We find that, in the presence of nominal rigidities, expectations on both the conduct of monetary policy and future productivity can generate housing market boom-bust cycles in accordance with the empirical findings. Moreover, expectations of either a future reduction in the policy rate or a temporary increase in the central bank's inflation target that are not fulfilled generate a macroeconomic recession. Increased access to credit generates a boom-bust cycle in most variables only if it is expected to be reversed in the near future.
    Keywords: Credit Frictions; Boom-Bust Cycles; News Shocks; Housing Prices.
    JEL: E32 E52 E44
    Date: 2010
  21. By: Aiginger, Karl
    Abstract: This paper compares the depth of the Recent Crisis and the Great Depression. We use a new data set to compare the drop in activity in the industrialized countries for seven activity indicators. This is done under the assumption that the Recent Crisis leveled off in mid-2009 for production and will do so for unemployment in 2010. Our data indicate that the Recent Crisis indeed had the potential to be another Great Depression, as shown by the speed and simultaneity of the decline in the first nine months. However, if we assume that a large second dip can be avoided, the drop in all indicators overall will have been smaller than during the Great Depression. This holds true specifically for GDP, employment and priced, and least for manufacturing output. The difference in the depth in the crises concurs with differences in policy reaction. This time monetary policy and fiscal policy were applied courageously, speedily and partly internationally coordinated. During the Great Depression for several years fiscal policy tried to stabilize budgets instead of aggregate demand, and either monetary policy was not applied or was rather ineffective insofar as deflation turned lower nominal interest rates into higher real rates. Only future research will be able to prove the exact impact of economic policy, but the current tentative conclusion is that economic policy prevented the Recent Crisis from developing into a second Great Depression. This is also a partial vindication for economists. The majority of them might not have been able to predict the crisis, but it shows that the science did learn its lesson from the Great Depression and was able to give decent policy advice to at least limit the depth of the Recent Crisis. --
    Keywords: Financial crisis,business cycle,stabilisation policy,resilience
    JEL: E20 E30 E32 E44 E60 G18 G28
    Date: 2010
  22. By: David Laibson; Johanna Mollerstrom
    Abstract: Bernanke (2005) hypothesized that a “global savings glut” was causing large trade imbalances. However, we show that the global savings rates did not show a robust upward trend during the relevant period. Moreover, if there had been a global savings glut there should have been a large investment boom in the countries that imported capital. Instead, those countries experienced consumption booms. National asset bubbles explain the international imbalances. The bubbles raised consumption, resulting in large trade deficits. In a sample of 18 OECD countries plus China, movements in home prices alone explain half of the variation in trade deficits.
    JEL: F01
    Date: 2010–02
  23. By: Julien Champagne; André Kurmann
    Abstract: This paper documents that over the past 25 years, aggregate hourly real wages in the United States have become substantially more volatile relative to output. We use micro-data from the Current Population Survey (CPS) to show that this increase in relative volatility is predominantly due to increases in the relative volatility of hourly wages across different groups of workers. Compositional changes, by contrast, account for at most 12% of the increase in relative wage volatility. Using a Dynamic Stochastic General Equilibrium (DSGE) model, we show that the observed increase in relative wage volatility is unlikely to come from changes outside of the labor market (e.g. smaller exogenous shocks or more aggressive monetary policy). By contrast, increased flexibility in wage setting is capable of accounting for a large fraction of the observed increase in relative wage volatility. At the same time, increased wage flexibility generates a substantial decrease in the magnitude of business cycle fluctuations, which suggests a promising new explanation for the Great Moderation.
    Keywords: Wage volatility, business cycles, great moderation, current population survey, dynamic stochastic general equilibrium models
    JEL: E24 E32
    Date: 2010
  24. By: Jan J. J. Groen; Paolo A. Pesenti
    Abstract: In this paper we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks, and revisit the forecasting performance of changes in commodity currencies as efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We find that the exchange rate-based model and especially the PLS factor-augmented model are more prone to outperform the naive statistical benchmarks. However, across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.
    JEL: C23 C53 F47
    Date: 2010–02
  25. By: Ruth Ben-Yashar (Department of Economics, Bar Ilan University); Winston Koh (Singapore Management University); Shmuel Nitzan (Department of Economics, Bar Ilan University)
    Abstract: Committee decision making is examined in this study focusing on the role assigned to the committee members. In particular, we are concerned about the comparison between committee performance under specialization and non-specialization of the decision makers.
    Keywords: framing, project selection, public policy, collective decision making, committee, uncertain dichotomous choice, specialization, simple majority rule
    JEL: D81 D71
    Date: 2009–06
  26. By: Audrey Sallenave
    Abstract: We evaluate the growth effects of real effective exchange rate misalignments for the G20 countries over the period 1980-2006. To this end, we first estimate real effective equilibrium exchange rates relying on the behavioral approach BEER, from which misalignments are derived. Second, we estimate a dynamic panel growth model in which among the traditional determinants of growth, our measure of misalignments is included. Our findings put forward some important differences between developed and emerging economies. The magnitude of the misalignments is more pronounced in the case of emerging countries, and the speed of convergence towards the estimated equilibrium exchange rate is slower for industrialized ones. Turning to our growth regression analysis, we find that misalignments have a negative effect on the economic growth. As a consequence, an appropriate exchange rate policy would close the gap between real exchange rates and their equilibrium level.
    Keywords: Equilibrium Real Effective Exchange Rate, Group of Twenty, Growth, Misalignments, Panel Cointegration
    JEL: C23 F31 O47
    Date: 2010
  27. By: Gebhard Kirchgässner
    Abstract: After some theoretical considerations, fiscal institutions called ‘debt brakes’ designed to prevent public deficit and debt from going off course, are discussed. We first present some models applied in some Swiss cantons, especially in the canton of St. Gallen, then the respective institution introduced in 2001 at the Swiss federal level, and finally the recently introduced German solution. While the models in the different cantons are quite successful, we still have to wait for the proof that the German model in particular is viable. We also discuss how the problem of a possible bail-out of states and local communities could be handled. We conclude that by choosing appropriate institutions federal countries are at least as able to perform a sustainable fiscal policy as unitary states.
    Keywords: Sustainability of Public Finances; Public Debt; Debt Brake
    JEL: H63 H74
    Date: 2010–02
  28. By: Eric Girardin (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Zakaria Moussa (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: The current financial crisis has now led most major central banks to rely covertly or overtly on quantitative easing. The unique Japanese experience of quantitative easing is the only experience which enables us to judge this therapy's effectiveness and the timing of the exit strategy. This paper provides a new empirical framework to examine the effectiveness of Japanese monetary policy during the "lost" decade and quantify the effect of quantitative easing on Japan's activity and prices. We combine advantages of Markov-Switching VAR methodology with those of factor analysis to establish two major findings. First, we show that the decisive change in regime occurred in two steps: it crept out from late 1995 and established itself durably in February 1999. Second, we show for the first time that quantitative easing was able not only to prevent further recession and deflation but also to provide considerable stimulation to both output and prices. If Japanese experience is any guide the quantitative easing policy must be seen as a symptomatic treatment; it must be accompanied with a dramatic restructuring in the financial framework. The exit from quantitative easing must be postponed and decided within a clear program and according to clear numerical objectives.
    Keywords: Markov-switching; Factor-Augmented VAR; Japan; Monetary policy; Transmission channels
    Date: 2010–02–23
  29. By: Kimberly Beaton
    Abstract: TThis article investigates the stability of Okun's law for Canada and the United States using a time varying parameter approach. Time variation is modeled as driftless random walks and is estimated using the median unbiased estimator approach developed by Stock and Watson (1998). Okun's law exhibits structural instability in both countries, with the sensitivity of the unemployment rate to movements in output growth increasing recently over time in both Canada and the United States.
    Keywords: Business fluctuations and cycles; Labour markets
    JEL: E24 J00
    Date: 2010
  30. By: Qin, Duo; He, Xinhua
    Abstract: This study provides quarterly time-series estimates of the misalignment in the REER of the Renminbi (RMB). The estimation is based on a commonly used economic approach, but with a wider and more up-to-date coverage of data and a more extensive use of econometric modelling techniques. Our estimates corroborate and explain most of the previous estimates. More importantly, our estimates demonstrate that there is no significant undervaluation in the REER of the RMB though downward misalignment exists in the trilateral rates between the RMB, US$ and euro. The finding refutes the claim that RMB appreciation is the primary and necessary solution to the current global trade imbalance. --
    Keywords: Real exchange rate misalignment
    JEL: F31 F41
    Date: 2010
  31. By: Balázs Vonnák (Magyar Nemzeti Bank)
    Abstract: This paper investigates the role of monetary policy in a small open economy, where exchange rate shocks are important. VAR models are estimated for the Czech Republic, Hungary and Poland. Contemporaneous and sign restrictions are imposed in order to identify the effect of monetary policy and risk premium shocks. Estimates from the same model for Canada, Sweden and the UK are used as benchmark for developed economies with low inflation. The results suggest that the typical size a of risk premium shock renders it almost impossible for the interest rate policy to smooth the exchange rate with the aim of minimising inflationary consequences. On the other hand, low inflation may decrease the exchange rate pass-through, which helps the monetary policy ignore exchange rate shocks.
    Keywords: monetary policy, risk premium shocks, exchange rate pass-through, structural VAR, sign restriction.
    JEL: E31 E52 F31
    Date: 2010
  32. By: Patrick Honohan; Gavin Murphy (Institute for International Integration Studies, Trinity College Dublin)
    Abstract: Ireland had been considering a break in the long-standing currency link with sterling for some time when the ideal opportunity of a new exchange rate regime – potentially retaining the sterling link while stabilizing other exchange rates – seemed to offer itself in the form of the “zone of monetary stability in Europe” proposed by France and Germany in April 1978. Based on newly released archives, this paper reviews the evolving attitude of Irish officials and the Irish Government over the following months as the decision gradually shifted to one of breaking the sterling link and rejoining what was little more than an expanded “Snake” arrangement; the UK having decided to stay out. While financial issues were to the fore in the discussions, the final decision to join was based on a strategic vision that Ireland’s economic and political future lay with Europe rather than with the former colonial power.
    Date: 2010–02
  33. By: Hernando Vargas Herrera; Carlos Varela; Yanneth R. Betancourt; Norberto Rodríguez
    Abstract: The Colombian economy and financial system have coped reasonably well with the effects of the global financial crisis. Hence, “unconventional” policy measures have not been at the center of the policy decisions and discussions. Nominal short term interest rates have remained the main monetary policy tool and “Quantitative easing” measures have not been central in the policy response. The one “unconventional” monetary instrument used by the Central Bank in Colombia has been changes in reserve requirements (RR) on financial system deposits. Interestingly, they were adopted before the global financial crisis, as a reaction to domestic credit conditions. The effects of RR on interest rate and interest rate pass-through in an inflation targeting regime are not as straightforward as those under a monetary targeting regime. Conceptually, those effects depend on the degree of substitution between deposits and central bank credit as sources of funds for banks and on the extent to which RR changes affect the risks facing banks. The empirical results for Colombia suggest that RR are important long run determinants of business loan interest rates and have been effective in strengthening the pass-through from policy to deposit and lending interest rates.
    Date: 2010–02–11

This nep-cba issue is ©2010 by Alexander Mihailov. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.