nep-cba New Economics Papers
on Central Banking
Issue of 2010‒03‒20
thirty-one papers chosen by
Alexander Mihailov
University of Reading

  1. New Monetarist Economics: Models By Williamson, Stephen D.; Wright, Randall
  2. Endogenous Price Flexibility and Optimal Monetary Policy By Ozge Senay; Alan Sutherland
  3. The Timing of Asset Trade and Optimal Policy in Dynamic Open Economies By Ozge Senay; Alan Sutherland
  4. Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy By Ozge Senay; Alan Sutherland
  5. Firm-specific capital, nominal rigidities and the business cycle By David Altig; Lawrence J. Christiano; Martin Eichenbaum; Jesper Linde
  6. A short note on the nowcasting and the forecasting of Euro-area GDP using non-parametric techniques By Dominique Guegan; Patrick Rakotomarolahy
  7. A short note on the nowcasting and the forecasting of Euro-area GDP using non-parametric techniques. By Dominique Guegan; Patrick Rakotomarolahy
  8. Managing beliefs about monetary policy under discretion By Elmar Mertens
  9. Understanding Interactions in Social Networks and Committees By Arnab Bhattacharjee; Sean Holly
  10. Forecast densities for economic aggregates from disaggregate ensembles By Francesco Ravazzolo; Shaun P. Vahey
  11. Robust International Portfolio Management By Raquel J. Fonseca; Wolfram Wiesemann; Berc Rustem
  12. Should the central bank be concerned about housing prices? By Karsten Jeske; Zheng Liu
  13. Evaluating and estimating a DSGE model for the United Kingdom By Harrison, Richard; Oomen, Özlem
  14. Household debt, house prices and consumption in the United Kingdom: a quantitative theoretical analysis By Waldron, Matt; Zampolli, Fabrizio
  15. Time-varying dynamics of the real exchange rate. A structural VAR analysis By Mumtaz, Haroon; Sunder-Plassmann, Laura
  16. Optimal Monetary Policy under Sectoral Heterogeneity in Inflation Persistence (Sektorel Enflasyon Ataleti Farkliligi Altinda Optimal Para Politikasi) By Sevim Kosem Alp
  17. Do oil shocks drive business cycles? some U.S. and international evidence By Kristie M. Engemann; Kevin L. Kliesen; Michael T. Owyang
  18. Comparing Monetary Policy Rules in a Small Open Economy Framework: An Empirical Analysis Using Bayesian Techniques By Eschenhof, Sabine
  19. Standard Taylor rules revisited - A cross country study for European countries By Eschenhof, Sabine
  20. Monetary Policy with Heterogeneous Households and Financial Frictions By Jae Won Lee
  21. Heterogeneous Households in a Sticky Price Model By Jae Won Lee
  22. The G20 Proposal on IMF Governance: Is there Progress? By Menkhoff, Lukas; Meyer, Reeno
  23. Regime-dependent effects of monetary policy shocks. Evidence from threshold vector autoregressions By Martin Mandler
  24. Regime-dependent effects of monetary policy shocks. Evidence from threshold vector autoregressions By Mandler, Martin
  25. Qualitative Matrices and Information By Andrew J. Buck; George M. Lady
  26. Sticky Information vs Sticky Prices: An Empirical comparison within a D S G E framework for the Euro Area By Haider, Adnan; Ramzi, Drissi
  27. All together now: do international factors explain relative price comovements? By Karagedikli, Özer; Mumtaz, Haroon; Tanaka, Misa
  28. Announced Regime Switch: Optimal Policy for Transition Period By Frantisek Brazdik
  29. Has the Accuracy of German Macroeconomic Forecasts Improved? By Herman Stekler; Ullrich Heilemann
  30. Real Interest Rates, Bubbles and Monetary Policy in the GCC countries By E. M. Bentour; W. A. Razzak
  31. Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa By Patrick Minford; Ruthira Naraidoo

  1. By: Williamson, Stephen D.; Wright, Randall
    Abstract: he purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets.
    Keywords: monetarism; monetary theory; monetary policy; banking; financial intermediation
    JEL: E5 E4 E3
    Date: 2010–02–28
  2. By: Ozge Senay; Alan Sutherland
    Abstract: Much of the literature on optimal monetary policy uses models in which the degree of nominal price flexibility is exogenous. There are, however, good reasons to suppose that the degree of price flexibility adjusts endogenously to changes in monetary conditions. This paper extends the standard New Keynesian model to incorporate an endogenous degree of price flexibility. The model shows that endo?genising the degree of price flexibility tends to shift optimal monetary policy towards complete inflation stabilisation, even when shocks take the form of cost-push distur?bances. This contrasts with the standard result obtained in models with exogenous price flexibility, which show that optimal monetary policy should allow some degree of inflation volatility in order to stabilise the welfare-relevant output gap.
    Keywords: Welfare, Endogenous Price Flexibility, Optimal Monetary Policy.
    JEL: E31 E52
    Date: 2010–02
  3. By: Ozge Senay; Alan Sutherland
    Abstract: Using a standard open economy DSGE model, it is shown that the timing of asset trade relative to policy decisions has a potentially important impact on the welfare evaluation of monetary policy at the individual country level. If asset trade in the initial period takes place before the announcement of policy, a national pol?icymaker can choose a policy rule which reduces the work effort of households in the policymaker¡¯s country in the knowledge that consumption is fully insured by optimally chosen international portfolio positions. But if asset trade takes place after the policy announcement, this insurance is absent and households in the poli?cymaker¡¯s country bear the full consumption consequences of the chosen policy rule. The welfare incentives faced by national policymakers are very different between the two cases. Numerical examples confirm that asset market timing has a significant impact on the optimal policy rule.
    Keywords: Optimal Policy, Timing of Asset Trade, Monetary Policy in Open Economies.
    JEL: E52 F41 G15
    Date: 2010–01
  4. By: Ozge Senay; Alan Sutherland
    Abstract: The implications of local currency pricing (LCP) for monetary regime choice are analysed for a country facing foreign monetary shocks. In this analysis expenditure switching is potentially welfare reducing. This contrasts with the existing LCP literature, which focuses on productivity shocks and thus analyses a world where expenditure switching is welfare enhancing. This paper shows that, when home and foreign pro?ducers follow LCP, expenditure switching is absent and a floating rate is preferred by the home country. But when only home producers follow LCP, expenditure switching is present and a fixed rate can be welfare enhancing for the home country.
    Keywords: Monetary Policy, Foreign Monetary Shocks, Expenditure Switching, Exchange Rates, Local Currency Pricing, Reference Currency.
    JEL: E52 F41 F42
    Date: 2010–02
  5. By: David Altig; Lawrence J. Christiano; Martin Eichenbaum; Jesper Linde
    Abstract: This paper formulates and estimates a three-shock US business cycle model. The estimated model accounts for a substantial fraction of the cyclical variation in output and is consistent with the observed inertia in inflation. This is true even though firms in the model reoptimize prices on average once every 1.8 quarters. The key feature of our model underlying this result is that capital is firm-specific. If we adopt the standard assumption that capital is homogeneous and traded in economy-wide rental markets, we find that firms reoptimize their prices on average once every 9 quarters. We argue that the micro implications of the model strongly favor the firm-specific capital specification.
    Date: 2010
  6. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Patrick Rakotomarolahy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: The aim of this paper is to introduce a new methodology to forecast the monthly economic indicators used in the Gross Domestic Product (GDP) modelling in order to improve the forecasting accuracy. Our approach is based on multivariate k-nearest neighbors method and radial basis function method for which we provide new theoretical results. We apply these two methods to compute the quarter GDP on the Euro-zone, comparing our approach, with GDP obtained when we estimate the monthly indicators with a linear model, which is often used as a benchmark.
    Keywords: k-nearest neighbors method, radial basis function method, non-parametric, forecasts, GDP, Euro-area.
    Date: 2010–01
  7. By: Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Patrick Rakotomarolahy (Centre d'Economie de la Sorbonne)
    Abstract: The aim of this paper is to introduce a new methodology to forecast the monthly economic indicators used in the Gross Domestic Product (GDP) modelling in order to improve the forecasting accuracy. Our approach is based on multivariate k-nearest neighbors method and radial basis function method for which we provide new theoretical results. We apply these two methods to compute the quarter GDP on the Euro-zone, comparing our approach, with GDP obtained when we estimate the monthly indicators with a linear model, which is often used as a benchmark.
    Keywords: k-nearest neighbors method, radial basis function method, non-parametric forecasts, GDP, Euro-area.
    JEL: C22 C53 E32
    Date: 2010–01
  8. By: Elmar Mertens
    Abstract: In models of monetary policy, discretionary policymaking often lacks the ability to manage public beliefs, which explains the theoretical appeal of policy rules and commitment strategies. But as shown in this paper, when a policymaker possesses private information, belief management becomes an integral part of optimal discretion policies and improves their performance. ; Solving for optimal policy in a simple New Keynesian model, this paper shows how discretionary losses are reduced when the policymaker has private information. Furthermore, disinflations are pursued more vigorously, when the hidden information problem is larger, even when inflation is partly backward-looking.
    Date: 2010
  9. By: Arnab Bhattacharjee; Sean Holly
    Abstract: While much of the literature on cross section dependence has fo?cused mainly on estimation of the regression coefficients in the under?lying 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 inter?pretation and structural explanation for the strength of any interac?tions. 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: 2010–09
  10. By: Francesco Ravazzolo (Norges Bank (Central Bank of Norway)); Shaun P. Vahey
    Abstract: We propose a methodology for producing forecast densities for economic aggregates based on disaggregate evidence. Our ensemble predictive methodology utilizes a linear mixture of experts framework to combine the forecast densities from potentially many component models. Each component represents the univariate dynamic process followed by a single disaggregate variable. The ensemble produced from these components approximates the many unknown relationships between the disaggregates and the aggregate by using time-varying weights on the component forecast densities. In our application, we use the disaggregate ensemble approach to forecast US Personal Consumption Expenditure in°ation from 1997Q2 to 2008Q1. Our ensemble combining the evidence from 11 disaggregate series outperforms an aggregate autoregressive benchmark, and an aggregate time-varying parameter specification in density forecasting.
    Keywords: Ensemble forecasting, disaggregates
    JEL: C11 C32 C53 E37 E52
    Date: 2010–03–05
  11. By: Raquel J. Fonseca; Wolfram Wiesemann; Berc Rustem
    Abstract: We present an international portfolio optimization model where we take into account the two different sources of return of an international asset: the local returns denominated in the local currency, and the returns on the foreign exchange rates. The explicit consideration of the returns on exchange rates introduces non-linearities in the model, both in the objective function (return maximization) and in the triangulation requirement of the foreign exchange rates. The uncertainty associated with both types of returns is incorporated directly in the model by the use of robust optimization techniques. We show that, by using appropriate assumptions regarding the formulation of the uncertainty sets, the proposed model has a semidefinite programming formulation and can be solved efficiently. While robust optimization provides a guaranteed minimum return inside the uncertainty set considered, we also discuss an extension of our formulation with additional guarantees through trading in quanto options for the foreign assets and in equity options for the domestic assets.
    Keywords: robust optimization, international portfolio optimization, quanto options, semidefinite programming
    Date: 2010–02–09
  12. By: Karsten Jeske; Zheng Liu
    Abstract: Housing is an important component of the consumption basket. Since both rental prices and goods prices are sticky, the literature suggests that optimal monetary policy should stabilize both types of prices, with the optimal weight on rental inflation proportional to the housing expenditure share. In a two-sector DSGE model with sticky rental prices and goods prices, however, we find that the optimal weight on rental inflation in the Taylor rule is small—much smaller than that implied by the housing expenditure share. Since production of housing services uses the stocks of housing intensively, large fluctuations in the price of housing stocks lead to large adjustments in reset rental prices. This weak strategic complementarity in rental price setting calls for a small optimal weight on rental price inflation.
    Keywords: Housing - Prices ; Monetary policy ; Inflation targeting
    Date: 2010
  13. By: Harrison, Richard (Bank of England); Oomen, Özlem (Bank of England)
    Abstract: We build a small open economy dynamic stochastic general equilibrium model, featuring many types of nominal and real frictions that have become standard in the literature. In recent years it has become possible to estimate such models using Bayesian methods. These exercises typically involve augmenting a stochastically singular model with a number of shocks to structural equations to make estimation feasible, even though the motivation for the choice of these shocks is often unspecified. In an attempt to put this approach on a more formal basis, we estimate the model in two stages. First, we evaluate a calibrated version of the stochastically singular model. Then, we augment the model with structural shocks motivated by the results of the evaluation stage and estimate the resulting model using UK data using a Bayesian approach. Finally, we reassess the adequacy of this augmented and estimated model in reconciling the dynamics of the model with the data. Our findings suggest that the shock processes play a crucial role in helping to match the data.
    Keywords: DSGE models; model evaluation; Bayesian estimation; monetary policy
    JEL: E40 E50
    Date: 2010–03–10
  14. By: Waldron, Matt (Bank of England); Zampolli, Fabrizio (Bank of England)
    Abstract: Household debt and house prices in the United Kingdom rose substantially between 1987 and 2006. In this paper we use a calibrated overlapping generations model of the household sector to examine the extent to which changes in demographics, lower inflation, and a lower long-run real interest rate may explain the build-up of debt and the rise in house prices over that period. Our model suggests that lower real interest rates were particularly important. If households expected lower real interest rates to persist, then the model can more than explain the rise in debt and can explain most of the rise in house prices. However, the model leaves a puzzle because it predicts that an unanticipated fall in real interest rates should lead to a consumption boom that did not materialise in the data.
    Keywords: Consumption; housing market; collateral constraints; life cycle; OLG
    JEL: E21 R31
    Date: 2010–03–10
  15. By: Mumtaz, Haroon (Bank of England); Sunder-Plassmann, Laura (University of Minnesota)
    Abstract: The aim of this paper is to explore the evolution of real exchange rate dynamics over time. We use a time-varying structural vector autoregression to investigate the role of demand, supply and nominal shocks and consider their impact on, and contribution to fluctuations in, the real exchange rate, output growth and inflation in four major economies over the past four decades. Our analysis therefore extends recent empirical research on evolving macroeconomic dynamics which has primarily focused on inflation and output and the time-varying impact of monetary policy on these variables. In addition we generalise recent VAR studies on exchange rate dynamics where the analysis is limited to a time-invariant setting. Our main results are as follows. The transmission of demand, supply and nominal shocks to the real exchange rate, output and inflation has changed substantially over time. Demand shocks have a larger impact on the real exchange rate after the mid-1980s for the United Kingdom, euro area and Japan and after the mid-1990s for Canada. Nominal shocks had a larger impact on output and inflation during the 1970s relative to the recent past. The forecast error variance of the real exchange rate is explained mainly by demand shocks with a smaller role for nominal shocks.
    Keywords: Real exchange rate; time-varying VAR; sign restrictions; Bayesian estimation
    JEL: C32 E42 F31 F33
    Date: 2010–03–10
  16. By: Sevim Kosem Alp
    Date: 2010
  17. By: Kristie M. Engemann; Kevin L. Kliesen; Michael T. Owyang
    Abstract: Hamilton (2005) noted that nine of the last ten recessions in the United States were preceded by a substantial increase in the price of oil. In this paper, we consider whether oil price shocks significantly increase the probability of recessions in a number of countries. Because business cycle turning points generally are not available for other countries, we estimate the turning points together with oil's effect in a Markov-switching model with time-varying transition probabilities. We find that, for most countries, oil shocks do affect the likelihood of entering a recession. In particular, an average sized shock to oil prices increases the probability of recession in the U.S. by about 60 percentage points over the following year.
    Keywords: Business cycles ; Petroleum industry and trade
    Date: 2010
  18. By: Eschenhof, Sabine
    Abstract: This paper examines the role of exchange rate changes in the monetary policy for the Euro Area. Moreover, it compares different Taylor-type policy rules with respect to the numerical results as well as the impulse responses to exogenous shocks and the fit of the different data model specifications when using the underlying data. Overall, a monetary policy rule which includes the expected inflation rate as well as the output gap performs best and supports a possible role of exchange rate changes in the Euro Area's monetary policy.
    Keywords: Bayesian Estimation, Small Open Economy, Monetary Policy, Taylor Rule
    Date: 2009–12
  19. By: Eschenhof, Sabine
    Abstract: In this paper we want to estimate basic Taylor rules with a cross country study approach for European countries before the reorganization of the system of central banks. We compare basic and extended Taylor rules to give a hint if the exchange rate plays a significant role in the decision making of monetary policy. Fixed Effects, GMM and SGMM estimators are used to check for robustness. The obtained results adumbrate that there may be an influence of exchange rate changes on the monetary policy decision making process but the results are not fully robust and deliver only a weak tendency.
    Keywords: Cross Country Study, Taylor Rules, Exchange Rate, FE Estimation, SGMM Estimation
    Date: 2009–12
  20. By: Jae Won Lee (Rutgers University, Department of Economics)
    Abstract: This paper presents and estimates a sticky-price model with heterogenous households and financial frictions. Frictions in state-contingent asset markets lead to imperfect risk-sharing among households with idiosyncratic labor incomes. I study the impacts of the introduced financial frictions on optimal monetary policy by documenting implications for the central bank's objective function, the equation that characterizes inflation-output gap trade-offs, targeting rules, interest rate rules, and welfare of the economy. Employing the estimated model, the paper argues that the central bank should place a stronger emphasis on stabilizing inflation than it has, and failing to do so can generate nontrivial welfare costs.
    Keywords: monetary policy, financial frictions, heterogeneous households, New Keynesian, nominal rigidities
    JEL: E
    Date: 2010–02–12
  21. By: Jae Won Lee (Rutgers University, Department of Economics)
    Abstract: This paper introduces heterogeneous households into an otherwise standard sticky-price model with industry-specific labor markets. Households differ in labor incomes and asset markets are incomplete. I show that household heterogeneity affects equilibrium dynamics nontrivially by amplifying price stickiness endogenously through wealth effects on labor supply. To quantify the importance of household heterogeneity in amplifying stickiness, I estimate and compare representative and heterogeneous household models. The quantitative exercise shows the heterogenous household model performs better than its representative counterpart in accounting for aggregate and sectoral dynamics in the U.S., while being more consistent with empirical evidence on nominal rigidity at the aggregate and sectoral levels, thanks to the stickiness endoge
    Keywords: DSGE model, heterogeneity, multiple sectors, real rigidities, price stickiness
    JEL: E
    Date: 2010–02–12
  22. By: Menkhoff, Lukas; Meyer, Reeno
    Abstract: The G20 summits in 2009 have proposed major changes in governance of the International Monetary Fund (IMF). Most important seems to be the acknowledgment that the IMF in its current form lacks legitimacy and ownership. Accordingly, the G20 suggests a reallocation of voting shares to emerging and developing countries, an antedated reform of the quota system, a delinking of the managing director's election from regional origin and support for the Singapore quota and voice reform of 2006. Unfortunately, these reform decisions remain in part imprecise, they leave crucial issues untouched and they are not implemented, not even by several G20 countries themselves. So the intended reform takes the right direction but it must be implemented soon before any progress can be stated.
    Keywords: International Monetary Fund, governance, reform, quota system
    JEL: F33
    Date: 2010–03
  23. By: Martin Mandler (University of Giessen, Department of Economics and Business, Licher Straße 66, D-35394 Gießen)
    Abstract: This paper studies regime dependence in the effects of monetary policy shocks for the U.S. using a threshold vector autoregressive model. In a high inflation regime the standard results from the literature obtain. In a low inflation regime output shows no significant response to monetary policy while the inflation response is negative. The paper endogenously determines two distinct regimes, while the literature thus far only considers alternative subsamples.
    Keywords: monetary policy shocks, threshold vector autoregression
    JEL: E52 E58 C32
    Date: 2010
  24. By: Mandler, Martin
    Abstract: This paper studies regime dependence in the effects of monetary policy shocks for the U.S. using a threshold vector autoregressive model. In a high inflation regime the standard results from the literature obtain. In a low inflation regime output shows no significant response to monetary policy while the inflation response is negative. The paper endogenously determines two distinct regimes, while the literature thus far only considers alternative subsamples.
    Keywords: monetary policy shocks; threshold vector autoregression
    JEL: C32 E58 E52
    Date: 2010–03
  25. By: Andrew J. Buck (Department of Economics, Temple University); George M. Lady (Department of Economics, Temple University)
    Abstract: This paper proposes a method for assessing the information content and validity of a mathematical structural model for which only the directions of influence among its endogenous and exogenous variables are known, as expressed by the sign patterns of associated arrays. The traditional literature on this issue presents extremely restrictive conditions under which such a “qualitative analysis” can be conducted. As a result, there have been very few successful applications of the traditional method. We propose a means of vastly expanding the scope of such an analysis to virtually any applied model. Our method works with the restrictions found for the sign patterns of complete rows and columns, or even the entire sign pattern, of the reduced form, rather than only individual entries. The information provided by the model is measured by the Shannon entropy of the possible sign patterns of the reduced form and the frequency of occurrence of each possibility. An example of the method is provided for Klein’s Model I. Although this model has been used for over fifty years for a variety of purposes, we found that the sign pattern of the estimated, unrestricted reduced form from the original data set was not consistent with the proposed, structural directions of influence among the model’s variables.
    Keywords: Qualitative Analysis, Entropy, Falsification, Comparative Statics
    JEL: C12 C14 C52
    Date: 2010–03
  26. By: Haider, Adnan; Ramzi, Drissi
    Abstract: In this paper we estimate four competing closed economy DSGE models: a standard Calvo (1983) type pricing model; Hernandez’s (2004) state-dependent pricing model; Mankiw and Reis (2002) standard sticky information model; and a mixed version of sticky price-information model. Each model incorporates various other standard New-Keynesian features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilization. Using Bayesian Simulation techniques, we estimate each DSGE model for the Euro Area. While estimation, we also studies the welfare properties of various monetary policies. In particular, the Ramsey allocation has been computed, giving a natural benchmark for welfare comparisons. Our interesting results show that despite the apparent similarities of all models, their responses to shocks and fit to data are quite different and there is no agreement on their relative performance. As a result, Monetary Authorities cannot afford to rely on a single reference model of the economy but need a large number of alternative modeling tools available when they take their decision of optimal monetary policy.
    Keywords: new Keynesian economics; DSGE models; nominal rigidities; monetary policy; Bayesian Approach
    JEL: E32 E31 E37
    Date: 2010–03–03
  27. By: Karagedikli, Özer (Reserve Bank of New Zealand); Mumtaz, Haroon (Bank of England); Tanaka, Misa (Bank of England)
    Abstract: Recent research has found evidence of increasing comovement in CPI inflation rates across industrialised countries. This paper considers whether this can be attributed to greater global integration of product markets. To examine this question, we build a data set of 28 matched product category price indices for fourteen advanced economies for 1998 Q1 to 2008 Q2, and decompose the inflation rates into a world factor, country-specific factors, and category-specific factors using a Bayesian dynamic factor model with Gibbs sampling. We find that the category-specific factors account for a large part of the comovement in the prices of goods which are intensive in internationally traded primary commodities; but this is less evident for other traded goods. We also find that both the world factor and the category-specific factors become more significant in explaining the movement in the relative prices in the second half of our sample.
    Keywords: Disaggregated international price; dynamic factor model; Gibbs sampling
    JEL: E30 E52
    Date: 2010–03–10
  28. By: Frantisek Brazdik
    Abstract: The novelty of this work is the presentation of the theoretical framework that allows to model annonced change of the monetary regime. I analyze behavior of small open economy that announced to adopt a monetary policy regime with focus on offsetting nominal exchange rate changes in given number of periods. First, I analyze effects for macroeconomic stability of choice of the monetary regime for transition period. For this analysis, I consider representative types of monetary regimes in the annoncement-change period. I also try to rank the examined regimes in terms of loss functions. Moreover, I try to analyze the evolution of business cycles synchronization over the transition.
    Keywords: New Keynesian Models, Small Open Economy, Monetary regime change.
    JEL: E17 E31 E52 E58 E61 F02 F41
    Date: 2009–12
  29. By: Herman Stekler (Department of Economics The George Washington University); Ullrich Heilemann
    Abstract: The major focus of this paper is to determine whether the accuracy of German macroeconomic forecasts has improved over time. We examine one-year-ahead forecasts of real GDP and inflation for the years 1967 to 2008 made by three major German forecasting groups and the OECD. We examine the accuracy of the forecasts over the entire period and in four sub-periods. We conclude that, with some exceptions, the errors of the German forecasters were similar to those of their U.S. and U.K. counterparts. While the absolute size of the forecast errors has declined, this is not the case for relative accuracy. A benchmark comparison of these predictions with the ex post forecasts of a macroeconometric model indicates that the quality of the growth forecasts can be improved but that the expected increase in accuracy may not be substantial.
    Keywords: Forecast evaluations; macroeconomic forecasting; accuracy limits
    JEL: E37
    Date: 2010–02
  30. By: E. M. Bentour; W. A. Razzak
    Abstract: The Gulf Cooperation Council countries (GCC) include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. Their monetary policy objective is to stabilize the foreign price, i.e., exchange rate instead of the domestic price level, where the nominal interest rate is equalized with the US federal fund rate, but the inflation rates are independent. High oil prices and the depreciating US dollar caused inflation to rise and real interest rates to be persistently negative in the UAE and Qatar. Asset prices bubbles formed then burst creating large loses. They could have moderated the effect of, or avoided, the bubble had they floated the currency and stabilized domestic prices.
    Keywords: Inflation, real interest rate, bubbles.
    JEL: E31 E37 E58
    Date: 2010–01–03
  31. By: Patrick Minford; Ruthira Naraidoo (Department of Economics, University of Pretoria; Department of Economics, University of Pretoria)
    Abstract: This paper estimates the optimal monetary authorities’ response to deviations of inflation and output from their target values for South Africa over the inflation targeting era. This is achieved using an empirical framework that allows the central bank’s policy preferences to be zone-like as well as asymmetric. The main findings are that the monetary authorities react in a passive manner when inflation is within the target band and become increasingly aggressive when it deviates from the target band and that they react with the same level of aggressiveness regardless whether inflation overshoots or undershoots the inflation target band, that is, the monetary authorities’ response towards inflation is zone symmetric. The second major finding shows that the monetary authorities’ response to output fluctuations is asymmetric such that they react more aggressively to negative deviations of output from the potential, therefore weighing more business cycle recessions versus expansions.
    Keywords: monetary policy preferences, target zones, asymmetries
    JEL: C51 C52 E52 E58
    Date: 2010–03

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.