nep-cba New Economics Papers
on Central Banking
Issue of 2010‒04‒04
thirty-six papers chosen by
Alexander Mihailov
University of Reading

  1. Monetary Policy and Unemployment By Jordi Galí
  2. New Monetarist Economics: Methods By Williamson, Stephen D.; Wright, Randall
  3. Price, wage and employment response to shocks: evidence from the WDN survey By Bertola, Giuseppe; Dabusinskas, Aurelijus; Hoeberichts, Marco; Izquierdo, Mario; Kwapil, Claudia
  4. Monetary Policy in a Systemic Crisis By Xavier Freixas
  5. Bank Liquidity, Interbank Markets and Monetary Policy By Xavier Freixas; Antoine Martin; David Skeie
  6. Fiscal Policy, Fairness between Generations and National Saving By Ray Barrell; Martin Weale
  7. Inflation Expectations and Stability in an Overlapping Generations Experiment with Money Creation By Peter Heemeijer; Cars Hommes; Joep Sonnemans; Jan Tuinstra
  8. Redundancy or Mismeasurement? A Reappraisal of Money By Hendrickson, Joshua
  9. The Troubling Economics and Politics of Paying Interest on Bank Reserves: A Critique of the Federal Reserve’s Exit Strategy By Thomas I Palley
  10. Macro Modelling with Many Models By James Mitchell; Bache, I.W., Ravazzolo, F., Vahey, S.P.
  11. Dual Wage Rigidities: Theory and Some Evidence By Kim , Insu
  12. Central Bank Communication and Exchange Rate Volatility: A GARCH Analysis By roman Horvath; Radovan Fiser
  13. Financial Market Liberalization, Monetary Policy, and Housing Price Dynamics By Rangan Gupta; Stephen M. Miller; Dylan van Wyk
  14. Financial Market Liberalization, Monetary Policy,and Housing Price Dynamics By Rangan Gupta; Stephen M. Miller; Dylan van Wyk
  15. Measuring monetary policy in open economies By Cerdeiro, Diego A.
  16. Two crises, two responses By Jean Pisani-Ferry; André Sapir
  17. Barro-Gordon revisited: reputational equilibria in a New Keynesian model By Totzek, Alexander; Wohltmann, Hans-Werner
  18. Theoretical Structure of the FAGE Model By Jingliang Xiao
  19. Monetary Policy, Global Liquidity and Commodity Price Dynamics By Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
  20. "Evaluating Macroeconomic Forecasts: A Review of Some Recent Developments" By Philip Hans Franses; Michael McAleer; Rianne Legerstee
  21. Predictive Ability of Business Cycle Indicators under Test: A Case Study for the Euro Area Industrial Production By Carstensen, Kai; Wohlrabe, Klaus; Ziegler, Christina
  22. On the Advantages of Disaggregated Data: Insights from Forecasting the U.S. Economy in a Data-Rich Environment By Nikita Perevalov; Philipp Maier
  23. Forecasting with a CGE model: does it work? By Peter B. Dixon; Maureen T. Rimmer
  24. Practice and Prospects of Medium-term Economic Forecasting By Torsten Schmidt; Helmut Hofer; Klaus Weyerstrass
  25. Explaining oil price dynamics By Paul J.J. Welfens
  26. The monetary analysis of hyperinflation and the appropriate specification of the demand for money By Sokic, Alexandre
  27. The Euro-dividend: public debt and interest rates in the Monetary Union By L. Marattin; S. Salotti
  28. Die griechisch-europäische Krise: Ungleichgewichte, Finanzmärkte und die Stabilität des Euroraums. By Gloede, Oliver; Menkhoff, Lukas
  29. Inflation Differentials in the Euro Area and their Determinants – an empirical view By Juan Ignacio Aldasoro; Václav Žďárek
  30. European Monetary Policy and the ECB Rotation Model – Voting Power of the Core versus the Periphery By Ansgar Belke; Barbara von Schnurbein
  31. (How) Do the ECB and the Fed React to Financial Market Uncertainty? – The Taylor Rule in Times of Crisis By Ansgar Belke; Jens Klose
  32. Is Euro Area Money Demand (Still) Stable? – Cointegrated VAR versus Single Equation Techniques By Ansgar Belke; Robert Czudaj
  33. Monetary policy rules and inflation process in open emerging economies: evidence for 12 new EU members By Borek Vasicek
  34. Inflation dynamics and the New Keynesian Phillips curve in EU-4 By Borek Vasicek
  36. Financial stability, monetary autonomy and fiscal interference: Bulgaria in search of its way, 1879-1913 By Kalina Dimitrova; Luca Fantacci

  1. By: Jordi Galí
    Abstract: Much recent research has focused on the development and analysis of extensions of the New Keynesian framework that model labor market frictions and unemployment explicitly. The present paper describes some of the essential ingredients and properties of those models, and their implications for monetary policy.
    Keywords: Nominal rigidities, labor market frictions, wage rigidities.
    JEL: E32
    Date: 2009–10
  2. By: Williamson, Stephen D.; Wright, Randall
    Abstract: This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: it has something in common with Old Monetarism, but there are also some important differences; it has little in common with Old or New Keynesianism. We describe the key principles of these schools and contrast them with our approach. To show how it works in practice, we build a benchmark New Monetarist model, and use it to address frontier issues concerning asset markets and banking.
    Keywords: New Monetarism; Monetary economoics; financial intermediation; New Keynesian
    JEL: E5 E6 E10 E4 G21
    Date: 2010–03–17
  3. By: Bertola, Giuseppe; Dabusinskas, Aurelijus; Hoeberichts, Marco; Izquierdo, Mario; Kwapil, Claudia
    Abstract: This paper analyses information from survey data collected in the framework of the Eurosystem's Wage Dynamics Network (WDN) on patterns of firm-level adjustment to shocks. We document that the relative intensity and the character of price vs. cost and wage vs. employment adjustments in response to cost-push shocks depend - in theoretically sensible ways - on the intensity of competition in firms' product markets, on the importance of collective wage bargaining and on other structural and institutional features of firms and of their environment. Focusing on the passthrough of cost shocks to prices, our results suggest that the pass-through is lower in highly competitive firms. Furthermore, a high degree of employment protection and collective wage agreements tend to make this pass-through stronger. --
    Keywords: Wage bargaining,labour-market institutions,survey data,European Union
    JEL: J31 J38 P50
    Date: 2010
  4. By: Xavier Freixas
    Abstract: This paper examines the monetary policy followed during the current financial crisis from the perspective of the theory of the lender of last resort. It is argued that standard monetary policy measures would have failed because the channels through which monetary policy is implemented depend upon the well functioning of the interbank market. As the crisis developed, liquidity vanished and the interbank market collapsed, central banks had to inject much more liquidity at low interest rates than predicted by standard monetary policy models. At the same time, as the interbank market did not allow for the redistribution of liquidity among banks, central banks had to design new channels for liquidity injection.
    Date: 2009–11
  5. By: Xavier Freixas; Antoine Martin; David Skeie
    Abstract: A major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs. This paper studies the efficiency of the interbank lending market in allocating funds. We consider two different types of liquidity shocks leading to different implications for optimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held among banks, the central bank should lower the interbank rate. This view implies that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two different instruments, interest rates and liquidity injection, are therefore required to cope with the two different types of liquidity shocks. Finally, we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs.
    Keywords: Bank liquidity, interbank markets, central bank policy, financial fragility, bank runs.
    JEL: G21 E43 E44 E52 E58
    Date: 2010–02
  6. By: Ray Barrell; Martin Weale
    Abstract: We assess fiscal policy from the perspective of fairness between generations and the relationship between this and national saving , in the context where the United Kingdom is the lowest-saving of all the OECD economies. Cross-section and pooled data suggest that governments are in a position to influence national saving and we set out a simple overlapping generation model to show the effects of national debt, of pay as you benefit systems, of legacies and movements to land prices as means of effecting transfers between generations. Having shown that governments can influence the distribution of resources between generations we then discuss three notions of fairness between generations, i) that each cohort should pay its own way, ii) that a social planner should reallocate resources between generations to achieve and inter-temporal optimum and iii ) that resources should be reallocated so that generations alive at the same time have similar living standards. In the light of these observations we di cuss appropriate responses to a variety of economic shocks and we conclude with implications for policy in the aftermath of the recession.
    Date: 2009–09
  7. By: Peter Heemeijer; Cars Hommes; Joep Sonnemans; Jan Tuinstra
    Abstract: We investigate how non-specialists form inflation expectations by running an experiment using a basic Overlapping Generations (OLG) model. The participants of the experiment are students of the University of Amsterdam, who predict inflation during 50 successive periods and are rewarded based on their accuracy. We include a central bank in the OLG model which increases the money supply at a constant rate. Participants are placed in separate OLG economies and are divided over two treatments: one with a "low" and one with a "high" money supply growth. We find that participants in the second treatment have substantially more difficulty in stabilizing inflation development by submitting accurate predictions than participants in the first treatment. However, when linear prediction rules are estimated on individual predictions, there is little difference between the two treatments. In both treatments, the most popular rules are Fundamentalist Expectations (predictions equal to the inflation sample mean) and Focal Expectations (predictions equal to a constant close to equilibrium). To verify whether participants adjust their prediction rules during the experiment, the estimated rules are checked for structural breaks. We find a surprisingly small number of structural breaks in both treatments.
    Keywords: Experimental economics; Expectations feedback; Inflation expectations; Price stability; Anchoring.
    JEL: C D E1 E2 E6 G J
    Date: 2010–02
  8. By: Hendrickson, Joshua
    Abstract: The emerging consensus in monetary policy and business cycle analysis is that money aggregates are not useful as an intermediate target for monetary policy or as an information variable. The uselessness of money as an intermediate target is driven by empirical research that suggests that money demand is unstable. In addition, the informational quality of money has been called into question by empirical research that fails to identify a relationship between money growth and inflation, nominal income growth, and the output gap. Nevertheless, this research is potentially flawed by the use of simple sum money aggregates, which are not consistent with economic, aggregation, or index number theory. This paper therefore re-examines previous empirical evidence on money demand and the role of money as an information variable using monetary services indexes as monetary aggregates. These aggregates have the advantage of being derived from microtheoretic foundations as well as being consistent with aggregation and index number theory. The results of the re-evaluation suggest that previous empirical work might be driven by mismeasurement.
    Keywords: monetary aggregates; money; business cycles; money demand; cointegrated VAR
    JEL: E32 E31 E42 E41
    Date: 2010–02
  9. By: Thomas I Palley
    Abstract: The Federal Reserve has recently activated its newly acquired powers to pay interest on reserves of depository institutions. The Fed maintains its new policy increases economic efficiency and intends it to play a lead role in the exit from quantitative easing. This paper argues it is a bad policy that (1) has a deflationary bias; (2) is costly to taxpayers and that cost will increase as normal conditions return; and (3) establishes institutional lock-in that obstructs desirable changes to regulatory policy. The paper recommends repealing the Fed’s power to pay interest on bank reserves. Second, the Fed should repeal regulation Q that prohibits payment of interest on demand deposits. Third, the Fed should immediately implement an alternative system of asset based reserve requirements (liquidity ratios) that will improve monetary control and can help exit quantitative easing at no cost to the public purse. Now is the optimal time for this change. Lastly, the paper argues the new policy of paying interest on reserves reveals the troubling political economy governing the actions of the Federal Reserve and policy recommendations of the economics profession.
    Keywords: Interest on reserves, asset based reserve requirements, liquidity ratios
    JEL: E40 E42 E43
    Date: 2010
  10. By: James Mitchell; Bache, I.W., Ravazzolo, F., Vahey, S.P.
    Abstract: We argue that the next generation of macro modellers at Inflation Targeting central banks should adapt a methodology from the weather forecasting literature known as `ensemble modelling\\\'. In this approach, uncertainty about model specifications (e.g., initial conditions, parameters, and boundary conditions) is explicitly accounted for by constructing ensemble predictive densities from a large number of component models. The components allow the modeller to explore a wide range of uncertainties; and the resulting ensemble `integrates out\\\' these uncertainties using time-varying weights on the components. We provide two examples of this modelling strategy: (i) forecasting inflation with a disaggregate ensemble; and (ii) forecasting inflation with an ensemble DSGE.
    Date: 2009–08
  11. By: Kim , Insu
    Abstract: This paper investigates wage dynamics assuming the potential presence of dual wage stickiness: with respect to both the frequency as well as the size of wage adjustments. In particular, this paper proposes a structural model of wage inflation dynamics assuming that although workers adjust wage contracts at discrete time intervals, they are limited in their abilities to adjust wages as much as they might desire. The dual wage stickiness model nests the baseline model, based on Calvo-type wage stickiness, as a particular case. Empirical results favor the dual sticky wage model over the baseline model that assumes only one type of wage stickiness in several dimensions. In particular, it outperforms the baseline model in terms of goodness of fitness as well as in the ability to explain the observed reverse dynamic cross-correlation between wage inflation and real output - which the baseline model fails to capture.
    Keywords: Wage inflation, sticky wages, sticky prices, new Keynesian, hybrid.
    JEL: E32 E31 J30
    Date: 2009–10
  12. By: roman Horvath; Radovan Fiser
    Abstract: We examine the effects of the Czech National Bank communication, macroeconomic news and interest rate differential on exchange rate volatility using generalized autoregressive conditional heteroscedasticity model. Our results suggest that central bank communication has a calming effect on exchange rate volatility. The timing of central bank communication seems to matter, too, as financial markets respond more to the communication before the policy meetings than after them. Next, macroeconomic news releases are found to reduce exchange rate volatility, while interest rate differential seems to increase it.
    Keywords: central bank communication, exchange rate, GARCH
    JEL: E52 E58 F31
    Date: 2009–07–01
  13. By: Rangan Gupta (Department of Economics, University of Pretoria); Stephen M. Miller (College of Business, University of Las Vegas, Nevada); Dylan van Wyk (Department of Economics, University of Pretoria)
    Abstract: This paper considers how monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector and whether the financial market liberalization of the early 1980’s influenced those dynamics. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model over the periods 1968:01 to 1982:12 and 1989:01 to 2003:12, including 21 housing-sector variables at the national and four census regions. Overall, the 100 basis point Federal funds rate shock produces larger effects on the real house prices, both at the regional level and the national level, in the post-liberalization period when compared to the pre-liberalization era. While the precision of the estimates do not imply significant differences, the finding does offer a caution. That is, the housing market appears more sensitive to monetary policy shocks in the post-liberalization period. On the one hand, this suggests that monetary policy possesses increased leverage. On the other hand, the housing market cycle traditionally contributes an important component to the aggregate business cycle. Thus, the monetary authorities may need to exercise more care in implementing Federal funds rate adjustments going forward. In addition, contractionary monetary policy exerts a negative effect on house prices at the national level, indicating the absence of the price puzzle in small structural vector autoregressive models. The puzzle’s absence in the housing sector possibly emerges as a result of proper identification of monetary policy shocks within a data-rich environment. Finally, we find that the reaction of housing sector proves heterogeneous across regions, with the housing sector in the South driving the national data after liberalization, while before liberalization, the Middle West appears to drive the housing market. The responses in the West differ the most from the other regions.
    Keywords: Monetary policy, Housing sector dynamics, Large-Scale BVAR models
    JEL: C32 R31
    Date: 2010–03
  14. By: Rangan Gupta (University of Pretoria); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); Dylan van Wyk (University of Pretoria)
    Abstract: This paper considers how monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector and whether the financial market liberalization of the early 1980Çs influenced those dynamics. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model over the periods 1968:01 to 1982:12 and 1989:01 to 2003:12, including 21 housing-sector variables at the national and four census regions. Overall, the 100 basis point Federal funds rate shock produces larger effects on the real house prices, both at the regional level and the national level, in the post-liberalization period when compared to the pre-liberalization era. While the precision of the estimates do not imply significant differences, the finding does offer a caution. That is, the housing market appears more sensitive to monetary policy shocks in the post-liberalization period. On the one hand, this suggests that monetary policy possesses increased leverage. On the other hand, the housing market cycle traditionally contributes an important component to the aggregate business cycle. Thus, the monetary authorities may need to exercise more care in implementing Federal funds rate adjustments going forward. In addition, contractionary monetary policy exerts a negative effect on house prices at the national level, indicating the absence of the price puzzle in small structural vector autoregressive models. The puzzleÇs absence in the housing sector possibly emerges as a result of proper identification of monetary policy shocks within a data-rich environment. Finally, we find that the reaction of housing sector proves heterogeneous across regions, with the housing sector in the South driving the national data after liberalization, while before liberalization, the Middle West appears to drive the housing market. The responses in the West differ the most from the other regions.
    Keywords: Monetary policy, Housing price dynamics, Large-Scale BVAR models
    JEL: C32 R31
    Date: 2010–03
  15. By: Cerdeiro, Diego A.
    Abstract: The paper extends Bernanke and Mihov's [6] closed-economy strategy for identification of monetary policy shocks to open-economy settings, accounting for the simultaneity between interest-rate and exchange-rate innovations. The methodology allows a separate treatment of two distinct monetary policy shocks, one that operates through open market operations, and another one that takes place through interventions in the foreign exchange market. Implementation of this strategy to the case of Argentina provides the stylized facts necessary to choose among competing theoretical models of this economy. In addition to studying the effects of monetary policy innovations, the present study sheds light on the endogenous component of monetary policy. In this regard, the paper finds that, notwithstanding the relative stability of the exchange rate and the accumulation of large amounts of international reserves, the central bank in Argentina has been far from absorbing balance of payments shocks in a currency-board fashion. The growing level of international reserves can be rationalized, instead, as the monetary authority's response to terms of trade, supply and domestic currency demand shocks.
    Keywords: Currencies and Exchange Rates,Debt Markets,Economic Stabilization,Emerging Markets,Economic Theory&Research
    Date: 2010–03–01
  16. By: Jean Pisani-Ferry; André Sapir
    Abstract: The crisis in Greece presents an extraordinary test for the euro, but also an opportunity to strengthen, and apply more diligently, existing procedures governing the economic and monetary Union. This Policy Brief authored by Bruegel Director Jean Pisani-Ferry, Senior Fellow Andre Sapir and Resident Fellow Benedicta Marzinotto emphasises the need for a more nuanced understanding of the different kinds of crises affecting euro members. Using Spain and Greece as examples, this paper makes policy recommendations for both scenarios. It explains how budgetary surveillance can be strengthened to prevent crises. It says the scope of Article 143 of the Lisbon Treaty should be extended and a clear and predictable conditional assistance regime put in place for effective crises management in the euro area.
    Date: 2010–03
  17. By: Totzek, Alexander; Wohltmann, Hans-Werner
    Abstract: The aim of this paper is to solve the inconsistency problem à la Barro and Gordon within a New Keynesian model and to derive time-consistent (stable) interest rate rules of Taylor-type. We find a multiplicity of stable rules. In contrast to the Kydland/Prescott-Barro/Gordon approach, implementing a monetary rule where the cost and benefit resulting from inconsistent policy coincide - which implies a net gain of inconsistent policy behavior equal to zero - is not optimal. Instead, the solution can be improved by moving into the time-consistent area where the net gain of inconsistent policy is negative. We moreover show that under a standard calibration, the standard Taylor rule is stable in the case of a cost-push shock as well as under simultaneous supply and demand shocks. --
    Keywords: Optimal monetary policy,New Keynesian macroeconomics,Reputational equilibria,time-consistent simple rules
    JEL: A20 E52 E58
    Date: 2010
  18. By: Jingliang Xiao
    Abstract: This paper explains the theoretical framework of the Financial Applied General Equilibrium (FAGE) model as developed in Xiao (2009). FAGE is a MONASH-style dynamic CGE model for China with a detailed financial extension. In section 1, we discuss a stylized version of the financial module. Section 2 discusses the important aspects of the full version of the FAGE model, such as, the database and investment theory. .
    Keywords: dynamic CGE, financial market, monetary policy
    JEL: C68 D58 E44 E52 E62 F31
    Date: 2010–03
  19. By: Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
    Abstract: This paper examines the interactions between money, interest rates, goods and commodity prices at a global level. For this purpose, we aggregate data for major OECD countries and follow the Johansen/Juselius cointegrated VAR approach. Our empirical model supports the view that, when controlling for interest rate changes and thus different monetary policy stances, money (defi ned as a global liquidity aggregate) is still a key factor to determine the long-run homogeneity of commodity prices and goods prices movements. The cointegrated VAR model fi ts with the data for the analysed period from the 1970s until 2008 very well. Our empirical results appear to be overall robust since they pass inter alia a series of recursive tests and are stable for varying compositions of the commodity indices. The empirical evidence is in line with theoretical considerations. The inclusion of commodity prices helps to identify a signifi cant monetary transmission process from global liquidity to other macro variables such as goods prices. We fi nd further support of the conjecture that monetary aggregates convey useful information about variables such as commodity prices which matter for aggregate demand and thus infl ation. Given this clear empirical pattern it appears justifi ed to argue that global liquidity merits attention in the same way as the worldwide level of interest rates received in the recent debate about the world savings and liquidity glut as one of the main drivers of the current fi nancial crisis, if not possibly more.
    Keywords: Commodity prices; cointegration; CVAR analysis; global liquidity; infl ation; international spillovers
    JEL: E31 E52 C32 F42
    Date: 2010–02
  20. By: Philip Hans Franses (Erasmus School of Economics, Erasmus University Rotterdam); Michael McAleer (Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute); Rianne Legerstee (Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute)
    Abstract: Macroeconomic forecasts are frequently produced, published, discussed and used. The formal evaluation of such forecasts has a long research history. Recently, a new angle to the evaluation of forecasts has been addressed, and in this review we analyse some recent developments from that perspective. The literature on forecast evaluation predominantly assumes that macroeconomic forecasts are generated from econometric models. In practice, however, most macroeconomic forecasts, such as those from the IMF, World Bank, OECD, Federal Reserve Board, Federal Open Market Committee (FOMC) and the ECB, are based on econometric model forecasts as well as on human intuition. This seemingly inevitable combination renders most of these forecasts biased and, as such, their evaluation becomes non-standard. In this review, we consider the evaluation of two forecasts in which: (i) the two forecasts are generated from two distinct econometric models; (ii) one forecast is generated from an econometric model and the other is obtained as a combination of a model, the other forecast, and intuition; and (iii) the two forecasts are generated from two distinct combinations of different models and intuition. It is shown that alternative tools are needed to compare and evaluate the forecasts in each of these three situations. These alternative techniques are illustrated by comparing the forecasts from the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth.
    Date: 2010–03
  21. By: Carstensen, Kai; Wohlrabe, Klaus; Ziegler, Christina
    Abstract: In this paper we assess the information content of seven widely cited early indicators for the euro area with respect to forecasting area-wide industrial production. To this end, we use various tests that are designed to compare competing forecast models. In addition to the standard Diebold-Mariano test, we employ tests that account for specific problems typically encountered in forecast exercises. Specifically, we pay attention to nested model structures, we alleviate the problem of data snooping arising from multiple pairwise testing, and we analyze the structural stability in the relative forecast performance of one indicator compared to a benchmark model. Moreover, we consider loss functions that overweight forecast errors in booms and recessions to check whether a specific indicator that appears to be a good choice on average is also preferable in times of economic stress. We find that on average three indicators have superior forecast ability, namely the EuroCoin indicator, the OECD composite leading indicator, and the FAZ-Euro indicator published by the Frankfurter Allgemeine Zeitung. If one is interested in one-month forecasts only, the business climate indicator of the European Commission yields the smallest errors. However, the results are not completely invariant against the choice of the loss function. Moreover, rolling local tests reveal that the indicators are particularly useful in times of unusual changes in industrial production while the simple autoregressive benchmark is difficult to beat during time of average production growth.
    Keywords: weighted loss; leading indicators; euro area; forecasting
    JEL: C32 C53 E32
    Date: 2010–03
  22. By: Nikita Perevalov; Philipp Maier
    Abstract: The good forecasting performance of factor models has been well documented in the literature. While many studies focus on a very limited set of variables (typically GDP and inflation), this study evaluates forecasting performance at disaggregated levels to examine the source of the improved forecasting accuracy, relative to a simple autoregressive model. We use the latest revision of over 100 U.S. time series over the period 1974-2009 (monthly and quarterly data). We employ restrictions derived from national accounting identities to derive jointly consistent forecasts for the different components of U.S. GDP. In line with previous studies, we find that our factor model yields vastly improved forecasts for U.S. GDP, relative to simple autoregressive benchmark models, but we also conclude that the gains in terms of forecasting accuracy differ substantially between GDP components. As a rule of thumb, the largest improvements in terms of forecasting accuracy are found for relatively more volatile series, with the greatest gains coming from improvements of the forecasts for investment and trade. Consumption forecasts, in contrast, perform only marginally better than a simple AR benchmark model. In addition, we show that for most GDP components, an unrestricted, direct forecast outperforms forecasts subject to national accounting identity restrictions. In contrast, GDP itself is best forecasted as the sum of individual forecasts for GDP components, but the improvement over a direct, unconstrained factor forecast is small.
    Keywords: Econometric and statistical methods; International topics
    JEL: C50 C53 E37 E47
    Date: 2010
  23. By: Peter B. Dixon; Maureen T. Rimmer
    Abstract: Computable general equilibrium models can be used to generate detailed forecasts of output growth for commodities/industries. The main objective is to provide realistic baselines from which to calculate the effects of policy changes. In this paper, we assess a CGE forecasting method that has been applied in policy analyses in the U.S. and Australia. Using data available up to 1998, we apply the method with the USAGE model to generate "genuine forecasts" for 500 U.S. commodities/industries for the period 1998 to 2005. We then compare these forecasts with actual outcomes and with alternate forecasts derived as extrapolated trends from 1992 to 1998.
    Keywords: CGE validation Forecasting U S CGE
    JEL: C68 E37 F14
    Date: 2009–05
  24. By: Torsten Schmidt; Helmut Hofer; Klaus Weyerstrass
    Abstract: Government agencies and other national and international institutions are asked to perform forecasts over the medium term. In particular, the EU Stability and Growth Pact contains the obligation to formulate stability programmes over four years, covering a general economic outlook as well as the projected development of public fi nances. However, the current practice of performing medium-term economic projections is unsatisfactory from a methodological point of view as the applied methodology has been developed for short-run forecasting and it is questionable whether these methods are useful for the medium term. In particular, currently medium-term projections are mostly based on the neoclassical Solow growth model with an aggregate production function with labour, capital, and exogenous technological progress. It might be argued, however, that for medium-run projections endogenous growth models might be better suited. In this paper we give an overview of currently used methods for medium-term macroeconomic projections. Then we analyse the performance of medium-term forecasts for Austria to illustrate the strengths and weaknesses of the typical approach. In particular, the fi ve-year projections of real GDP growth, infl ation and the unemployment rate are investigated. Finally, we describe some approaches to improve medium-run projections.
    Keywords: Econometric models; macroeconomic forecasts; aggregate production function; Austria
    JEL: C53 E32 E37 E66
    Date: 2010–03
  25. By: Paul J.J. Welfens (Europäisches Institut für Internationale WIrtschaftsbeziehungen (EIIW))
    Abstract: The price dynamics of oil and other non-renewables is a complex field of theoretical and empirical analysis. The Analysis takes the Hotelling rule as an analytical point of departure - basically relevant for the supply-side dynamics - and also considers resources demand, which is assumed to negatively depend on the price of oil and positively on net real wealth of the private sector (wealth and real income are, of course, related to each other through the interest rate). The net wealth variable is of particular interest in the approach presented, which emphasizes, that pricing of non-renewable resources should be considered in the context of portfolio analysis and the role of wealth, respectively. The fairly standard assumption, that the change in the price of natural resources per unit of time is a positive function of the excess demand in the oil market, implies a differential equation, which shows how crucial the role of oil inflation expectations are. If those expectations are below a critical level, there will be stable long run oil price. If, however, the expected oil inflation rate exceeds the critical value, there will be an ongoing increase of the oil price. From this perspective, it is clear that the long run price developments of natural (non-renewable) resources are strongly shaped by global expectation dynamics. To the extent that global real demand shocks or restrictive shifts in monetary or credit expansion dynamics occur, oil inflation expectations could switch from the range of above the critical inflation expectations to below such range, which then amounts to a price regime shift. Such a shift obviously has occurred during the transatlantic banking crisis and the following global recession. A somewhat alternative short-term analytical approach considers oil pricing in the context of a broader portfolio model - thus, oil and several standard financial assets are considered. Policy makers should consider both volatility issues and the challenges of sustainable growth.
    Keywords: Hotelling rule, price dynamic, oil, non-renewables resource
    JEL: G11 O40
    Date: 2009–05
  26. By: Sokic, Alexandre
    Abstract: The paper emerges from the failure of the traditional models of hyperinflation with rational expectations or perfect foresight. Using the insights from two standard optimizing monetary settings the paper shows that the possibility of perfect foresight monetary hyperinflation paths depends robustly on the essentiality of money. We show that the popular semilogarithmic form of the demand for money is not appropriate to analyse monetary hyperinflation with perfect foresight. We propose a simple test of money essentiality for the appropriate specification of the demand for money equation in empirical studies of hyperinflation.
    Keywords: monetary hyperinflation; inflation tax; money essentiality
    JEL: E31 E41
    Date: 2010–03–19
  27. By: L. Marattin; S. Salotti
    Abstract: The ongoing massive fiscal policy stimulus triggered increasing concerns on the potential impact on interest rate levels, as economic theory predicts. Particularly, the deterioration of some EMU countries’ fiscal positions has been putting at risk Eurozone’ financial stability. In this paper, we estimate a Panel VAR (PVAR) model on the EMU area employing annual data from 1970 to 2008 in order to assess the qualitative and quantitative impact of public debt on interest rates Our results show that prior to the introduction of the Euro an increase in public debt led to positive and significant effect on long-term nominal interest rates, with a stronger effect for high-debt countries. After the introduction of the single currency, the effect vanishes (in line with Bernoth 2004). We interpret this result as a confirmation of the crucial role of the monetary union in weakening the automatic risk-premium-based channel between debt shocks and returns on government bond.
    JEL: E62 G12
    Date: 2010–02
  28. By: Gloede, Oliver; Menkhoff, Lukas
    Abstract: The external imbalances in Europe have led the Europzone into a crisis. Out of three goals in international monetary policy, only two can be realized at the same time. By joining a monetary union a country has implicitly decided about these two goals. In order to stay competitive, wages and prices have to adjust to the targeted inflation rate of the common currency. This failed largely in Greek and other Southern-European countries. Thus, ending the Greek-European crisis requires a solution for this structural problem. According to the monetary union's present arrangements, full adjustment has to be taken by the Southern-European memeber states.
    Keywords: International monetary policy; trilemma; European Monetary Union; Greek; Spain
    JEL: F33
    Date: 2010–03–23
  29. By: Juan Ignacio Aldasoro; Václav Žďárek
    Abstract: In this paper, we present evidence on the statistical features of observed dispersion in HICP inflation rates in the Euro area. Our descriptive exercise shows that there is still a remarkable dispersion of HICP inflation rates across the member countries. We find that most of dispersion originates in the non-traded categories of the HICP. This suggests that the main source of dispersion in countries' headline inflation rates is in those components of the HICP where non-traded goods (services, (public) goods with regulated and administered prices) are more intensely represented. We then examine the determinants of inflation differentials in a panel of the states of the Euro area in 1999–2007 using alternative classifications of this group and three different datasets. The evidence presented shows that output gaps and a proxy for price level convergence were statistically significant. On the other hand, some determinants that were found significant in previous studies (for example Honohan and Lane, 2003, 2004; ECB, 2003) has no impact on inflation in our expanded time span (e.g. exchange rate movements) The dispersion of HICP inflation is expected to increase in the coming years as the new EU member states will join the Euro area. There are some risks for these countries connected with the common monetary policy, which is adjusted more to the conditions of stabilized advanced economies forming the core of the Euro area. This creates potential problems for the EU common monetary policy (ECB), in particular negative (positive) interest rates, their repercussions on investment processes, consumption and the possibility of creating asset bubbles.
    Keywords: inflation differentials, price convergence, exchange rate, panel data
    JEL: C23 E31 F15 F41
    Date: 2009–04–01
  30. By: Ansgar Belke; Barbara von Schnurbein
    Abstract: We analyze the ECB Governing Council’s voting procedures. The literature has by now discussed numerous aspects of the rotation model but does not account for many institutional aspects of the voting procedure of the GC. Using the randomization scheme based on the multilinear extension (MLE) of games, we try to close three of these gaps. First, we integrate specifi c preferences of national central bank presidents, i.e. their desired interest rates. Second, we address the agenda-setting power of the ECB president. Third, we do not simulate an average of the decisions but look at every relevant point in time separately.
    Keywords: Euro area; European Central Bank; monetary policy; rotation; voting rights
    JEL: D72 D78 E58
    Date: 2010–03
  31. By: Ansgar Belke; Jens Klose
    Abstract: We assess diff erences that emerge in Taylor rule estimations for the Fed and the ECB before and after the start of the subprime crisis. For this purpose, we apply an explicit estimate of the equilibrium real interest rate and of potential output in order to account for variations within these variables over time. We argue that measures of money and credit growth, interest rate spreads and asset price infl ation should be added to the classical Taylor rule because these variables are proxies of a change in the equilibrium interest rate and are, thus, also likely to have played a major role in setting policy rates during the crisis. Our empirical results gained from a state-space model and GMM estimations reveal that, as far as the Fed is concerned, the impact of consumer price infl ation, and money and credit growth turns negative during the crisis while the sign of the asset price infl ation coeffi cient turns positive. Thus we are able to establish signifi cant diff erences in the parameters of the reaction functions of the Fed before and after the start of the subprime crisis. In case of the ECB, there is no evidence of a change in signs. Instead, the positive reaction to credit growth, consumer and house price infl ation becomes even stronger than before. Moreover we fi nd evidence of a less inertial policy of both the Fed and the ECB during the crisis.
    Keywords: Subprime crisis; Federal Reserve; European Central Bank; equilibrium real interest rate; Taylor rule
    JEL: E43 E52 E58
    Date: 2010–02
  32. By: Ansgar Belke; Robert Czudaj
    Abstract: In this paper we present an empirically stable euro area money demand model. Using a sample period until 2009:2 shows that the current fi nancial and economic crisis that started in 2007 does not appear to have any noticeable impact on the stability of the euro area money demand function. We also compare single equation methods like the ARDL approach, FM-OLS, CCR and DOLS with the commonly used cointegrated Johansen VAR framework and show that the former are under certain circumstances more appropriate than the latter. What is more, they deliver results that are more in line with the economic theory. Hence, FMOLS, CCR and DOLS are useful in estimating standard money demand as well, although they have only been rarely applied for this purpose in previous studies.
    Keywords: ARDL model; cointegration; euro area; fi nancial crisis; money demand
    JEL: C12 C22 C32 E41 E43 E58
    Date: 2010–03
  33. By: Borek Vasicek
    Abstract: This paper has three objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authorities of 12 new EU members. Using estimation of an augmented Taylor rule, we find that this setting was not always consistent with the official monetary policy. Second, we seek to shed light on the inflation process of these countries. To this end, we carry out an estimation of an open economy Philips curve (PC). Our main finding is that inflation rates were not only driven by backward persistency but also held a forward-looking component. Finally, we assess the viability of existing monetary arrangements for price stability. The analysis of the conditional inflation variance obtained from GARCH estimation of PC is used for this purpose. We conclude that inflation targeting is preferable to an exchange rate peg because it allowed decreasing the inflation rate and anchored its volatility.
    Keywords: open emerging economies, CEE countries, monetary policy rules, open economy Phillips curve, conditional inflation variance
    JEL: E31 E52 E58 P24
    Date: 2009–09–01
  34. By: Borek Vasicek
    Abstract: The paper seeks to shed light on inflation dynamics of four new EU member states (the Czech Republic, Hungary, Poland and Slovakia). To this end, the New Keynesian Phillips curve augmented for open economies is estimated and additional statistical tests applied. We find the following. (1) The claim of New Keynesians that the real marginal cost is the main inflation-forcing variable is fragile. (2) Inflation seems to be driven by external factors. (3) Although inflation holds forward-looking component, the backward-looking one is substantial. An intuitive explanation for higher inflation persistence may be rather adaptive than rational price setting of local firms.
    Keywords: Inflation dynamics, New Keynesian Phillips curve, CEE countries, GMM estimation
    JEL: C32 E31
    Date: 2009–10–01
  35. By: Shannon Mudd; Neven Valev
    Abstract: Survey data from Bulgaria show that people who had experienced a loss during a banking crisis are significantly more likely to expect a new crisis. This result holds despite 12 years between the earlier crisis and the survey, and the dramatically improved performance of the financial sector and the economy in the meantime. However, we find that earlier experiences affect expectations only for less informed individuals. Individuals who are more informed about the economy are unaffected by their prior experiences.
    Keywords: banking crisis, trust, expectations
    JEL: G2 D8
    Date: 2009–09–01
  36. By: Kalina Dimitrova; Luca Fantacci
    Abstract: The Bulgarian monetary system was established, immediately after independence. Having experienced it already under Ottoman rule, newly independent Bulgaria adopted the bimetallic standard. Without being a member of the Latin Monetary Union, it tried broadly to follow the principles of the convention, yet with some exceptions, the most important of which concerned the limit on silver coinage. The absence of such a clause in Bulgaria turned out to be crucial since the financial needs of the recently established state triggered excessive silver coinage which resulted in a persistent agio - a positive and variable difference between the legal and the commercial value of silver coins. The interference of fiscal authorities obstructed the Bulgarian National Bank's ability to manage money in circulation and to secure the monetary stability required by economic development). The attempts of the Bulgarian monetary authorities to eliminate the agio were unsuccessful until they acquired the right to issue silver-backed banknotes. Soon after that, in 1906, Bulgaria introduced a short-lived typical Gold standard.
    Keywords: financial stability, monetary autonomy, fiscal interference, Bulgaria
    JEL: E42 E51 E63
    Date: 2010–02–01

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