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

  1. Optimal Target Criteria for Stabilization Policy By Mark P. Giannoni; Michael Woodford
  2. Imperfect Information and Aggregate Supply By N. Gregory Mankiw; Ricardo Reis
  3. Interpreting the Unconventional U.S. Monetary Policy of 2007-09 By Ricardo Reis
  4. How did a domestic housing slump turn into a global financial crisis? By Steven B. Kamin; Laurie Pounder DeMarco
  5. Financial statistics for the United States and the crisis: what did they get right, what did they miss, and how should they change? By Matthew J. Eichner; Donald L. Kohn; Michael G. Palumbo
  6. Learning about Risk and Return: A Simple Model of Bubbles and Crashes By William A. Branch; George W. Evans
  7. The Financial Crisis and Sizable International Reserves Depletion: From 'Fear of Floating' to the 'Fear of Losing International Reserves'? By Joshua Aizenman; Yi Sun
  8. What determines European real exchange rates? By Martin Berka; Michael B. Devereux
  9. A Thermodynamic Approach to Monetary Economics. A Revision. An application to the UK Economy 1969-2006 and the USA Economy 1966-2006 By John Bryant
  10. The Global Crisis: Why Regulators Resist Reforms By Leo F. Goodstadt
  11. The EU Financial Supervision in the Aftermath of the 2008 Crisis: an Appraisal By Georges Caravelis
  12. Fiscal deficits, debt, and monetary policy in a liquidity trap By Michael B. Devereux
  13. Real-time model uncertainty in the United States: 'Robust' policies put to the test By Robert J. Tetlow
  14. Inventories and Optimal Monetary Policy By Thomas A. Lubik; Wing Leong Teo
  15. Inventories, Inflation Dynamics and the New Keynesian Phillips Curve By Thomas A. Lubik; Wing Leong Teo
  16. Simple rules versus optimal policy: what fits? By Ida Wolden Bache; Leif Brubakk; Junior Maih
  18. Currency Internationalisation: Analytical and Policy Issues By Hans Genberg
  20. Fiscal and Monetary Policy Interaction: a simulation based analysis of a two-country New Keynesian DSGE model with heterogeneous households By Marcos Valli; Fabia A. de Carvalho
  21. Transparency and Monetary Policy with Imperfect Common Knowledge By Mauro Roca
  22. Monetary policy, housing booms and financial (im)balances By Sandra Eickmeier; Boris Hofmann
  23. Anchors for Inflation Expectations By Maria Demertzis; Massimiliano Marcellino; Nicola Viegi
  24. Bank Liquidity, Interbank markets, and Monetary Policy By Freixas, X.; Martin, A.; Skeie, D.
  25. Expectations Traps and Coordination Failures:Selecting Among Multiple Discretionary Equilibria By Richard Dennis; Tatiana Kirsanova
  26. Correlated Disturbances and U.S. Business Cycles By Vasco Curdia; Ricardo Reis
  27. Are earthquakes needed to shake economics? By Ronald Schettkat
  28. How far are we from the slippery slope? The Laffer curve revisited By Mathias Trabandt; Harald Uhlig
  29. Strategic Forecasting on the FOMC By Peter Tillmann
  30. Labor market institutions and the business cycle: Unemployment rigidities vs. real wage rigidities By Mirko Abbritti; Sebastian Weber
  31. Effects of Fiscal Stimulus in Structural Models By Michael Kumhof; Günter Coenen; Dirk Muir; Charles Freedman; Susanna Mursula; Christopher J. Erceg; Davide Furceri; René Lalonde; Jesper Lindé; Annabelle Mourougane; John Roberts; Werner Roeger; Carlos de Resende; Stephen Snudden; Mathias Trabandt; Jan in ‘t Veld; Douglas Laxton
  32. Forecast Densities for Economic Aggregates from Disaggregate Ensembles By Francesco Ravazzolo; Shaun P. Vahey
  33. Term structure forecasting using macro factors and forecast combination By Michiel De Pooter; Francesco Ravazzolo; Dick van Dijk
  34. Size, openness, and macroeconomic interdependence By Alexander Chudik; Roland Straub
  35. Medium-run macrodynamics and the consensus view of stabilization policy By Kai D. Schmid
  36. A more robust definition of multiple priors By Paolo Ghirardato; Marciano Siniscalchi
  37. Nominal and real wage rigidities. In theory and in Europe By Markus Knell
  38. The external finance premium in the euro area A useful indicator for monetary policy? By Paolo Gelain
  39. Employment, Exchange Rates and Labour Market Rigidity By Alexandre, Fernando; Bação, Pedro; Cerejeira, João; Portela, Miguel
  40. General Equilibrium Restrictions for Dynamic Factor Models By David de Antonio Liedo
  41. Did the Crisis Affect Potential Output? By Makram El-Shagi
  42. Reading the Recent Monetary History of the U.S., 1959-2007 By Jesús Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
  43. Monetary Policy Committees, Learning, and Communication By Anke Weber
  44. Price Setting in a Model with Production Chains: Evidence from Sectoral Data By Maral Shamloo
  45. Using a projection method to analyze inflation bias in a micro-founded model By Gary S. Anderson; Jinill Kim; Tack Yun
  46. Monetary Policy and Excessive Bank Risk Taking By Agur, I.; Demertzis, M.
  47. A Multiple Break Panel Approach to Estimating United States Phillips Curves By Bill Russell; Anindya Banerjee; Issam Malki; Natalia Ponomareva
  48. Are Forecast Updates Progressive? By Chia-Lin Chang; Philip Hans Franses; Michael McAleer
  49. Evaluating Macroeconomic Forecasts: A Review of Some Recent Developments By Philip Hans Franses; Michael McAleer; Rianne Legerstee
  50. Estimating The Inflation-Growth Nexus - A Smooth Transition Model By Raphael A. Espinoza; Ananthakrishnan Prasad; H. L. Leon
  51. Evolving Phillips trade-off By Luca Benati
  52. Globalization and the Output-Inflation Tradeoff: New Time Series Evidence By Eijffinger, S.C.W.; Qian, Z.
  53. All together now: Do international factors explain relative price co-movements? By Özer Karagedikli; Haroon Mumtaz; Misa Tanaka
  54. Monetary Policy and Trade Globalization By Dudley Cooke
  55. Should We Trust in Leading Indicators? Evidence from the Recent Recession By Katja Drechsel; Rolf Scheufele
  56. Sources of Unemployment Fluctuations in the USA and in the Euro Area in the Last Decade By Antonio Ribba
  57. Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions By George Athanasopoulos; Osmani Teixeira de Carvalho Guillén; João Victor Issler; Farshid Vahid
  58. Interest on excess reserves as a monetary policy instrument: the experience of foreign central banks By David Bowman; Etienne Gagnon; Mike Leahy
  59. Market power and fiscal policy in OECD countries By António Afonso; Luís F. Costa
  60. Crisis Management and Resolution for a European Banking System By Alessandro Giustiniani; Wim Fonteyne; Wouter Bossu; Alessandro Gullo; Sean Kerr; Daniel C. L. Hardy; Luis Cortavarria
  61. Financial Crisis, Global Liquidity and Monetary Exit Strategies By Ansgar Belke
  62. How Much Fiscal Backing Must the ECB Have?: The Euro Area Is Not the Philippines By Ansgar Belke
  63. Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices By Stefania D'Amico; Don H. Kim; Min Wei
  64. Macroeconomic forecasting and structural change By Antonello D’Agostino; Luca Gambetti; Domenico Giannone
  65. Banking sector output measurement in the euro area – a modified approach By Inklaar, R.; Colangelo, A.
  66. The effect of question wording on reported expectations and perceptions of inflation By Wändi Bruine de Bruin; Wilbert van der Klaauw; Julie S. Downs; Baruch Fischhoff; Giorgio Topa; Olivier Armantier
  67. Food price pass-through in the euro area The role of asymmetries and non-linearities By Gianluigi Ferrucci; Rebeca Jiménez-Rodríguez; Luca Onorante
  68. Multi-period fixed-rate loans, housing and monetary policy in small open economies By Jaromír Beneš; Kirdan Lees
  69. Gold and the U.S. Dollar: Tales from the Turmoil By Massimiliano Marzo; Paolo Zagaglia
  70. A Concise History of Exchange Rate Regimes in Latin America By Roberto Frankel; Martín Rapetti
  71. Inflation Expectations and Monetary Policy in India: An Empirical Exploration By Michael Debabrata Patra; Partha Ray
  72. Evaluating Exchange Rate Management An Application to Korea By David Parsley; Helen Popper

  1. By: Mark P. Giannoni (Columbia University - Business School); Michael Woodford (Columbia University - Department of Economics)
    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: C61 C62 E32 E52
    Date: 2010
  2. By: N. Gregory Mankiw (Harvard University - Department of Economics); Ricardo Reis (Columbia University - Department of Economics)
    Abstract: This paper surveys the research in the past decade on imperfect information models of aggregate supply and the Phillips curve. This new work has emphasized that information is dispersed and disseminates slowly across a population of agents who strategically interact in their use of information. We discuss the foundations on which models of aggregate supply rest, as well as the micro?foundations for two classes of imperfect information models: models with partial information, where agents observe economic conditions with noise, and models with delayed information, where they observe economic conditions with a lag. We derive the implications of these two classes of models for: the existence of a non?vertical aggregate supply, the persistence of the real effects of monetary policy, the difference between idiosyncratic and aggregate shocks, the dynamics of disagreement, and the role of transparency in policy. Finally, we present some of the topics on the research frontier in this area.
    JEL: D8 E1 E3
    Date: 2010
  3. By: Ricardo Reis (Columbia University - Department of Economics)
    Abstract: This paper reviews the unconventional U.S. monetary policy responses to the financial and real crises of 2007-09, divided into three groups: interest rate policy, quantitative policy, and credit policy. To interpret interest rate policy, it compares the Federal Reserve's actions with the literature on optimal policy in a liquidity trap. This comparison suggests that policy has been in the direction indicated by theory, but it has not gone far enough. To interpret quantitative policy, the paper reviews the determination of inflation under different policy regimes. The main danger for inflation from current actions is that the Federal Reserve may lose its policy independence; a beneficial side effect of the crisis is that the Friedman rule can be implemented by paying interest on reserves. To interpret credit policy, the paper presents a new model of capital market imperfections with different financial institutions and a role for securitization , leveraging, and mark-to-market accounting. The model suggests that providing credit to traders in securities markets is a more effective response than extending credit to the originators of loans.
    Date: 2010
  4. By: Steven B. Kamin; Laurie Pounder DeMarco
    Abstract: The global financial crisis clearly started with problems in the U.S. subprime sector and spread across the world from there. But was the direct exposure of foreigners to the U.S. financial system a key driver of the crisis, or did other factors account for its rapid contagion across the world? To answer this question, we assessed whether countries that held large amounts of U.S. mortgage-backed securities (MBS) and were highly dependent on dollar funding experienced a greater degree of financial distress during the crisis. We found little evidence of such "direct contagion" from the United States to abroad. Although CDS spreads generally rose higher and bank stocks generally fell lower in countries with more exposure to U.S. MBS and greater dollar funding needs, these correlations were not robust, and they fail to explain the lion's share of the deterioration in asset prices that took place during the crisis. Accordingly, channels of "indirect contagion" may have played a more important role in the global spread of the crisis: a generalized run on global financial institutions, given the opacity of their balance sheets; excessive dependence on short-term funding; vicious cycles of mark-to-market losses driving fire sales of MBS; the realization that financial firms around the world were pursuing similar (flawed) business models; and global swings in risk aversion. The U.S. subprime crisis, rather than being a fundamental driver of the global crisis, may have been merely a trigger for a global bank run and for disillusionment with a risky business model that already had spread around the world.
    Date: 2010
  5. By: Matthew J. Eichner; Donald L. Kohn; Michael G. Palumbo
    Abstract: Although the instruments and transactions most closely associated with the financial crisis of 2008 and 2009 were novel, the underlying themes that played out in the crisis were familiar from previous episodes: Competitive dynamics resulted in excessive leverage and risk-taking by large, interconnected firms, in heavy reliance on short-term sources of funding to finance long-term and ultimately terribly illiquid positions, and in common exposures being shared by many major financial institutions. Understandably, in the wake of the crisis, financial supervisors and policymakers want to obtain better and earlier indications regarding these critical, and apparently recurring, core vulnerabilities in the financial system. Indeed, gaps in data and analysis, in a sense, defined the shadows in which the "shadow banking system" associated with the buildup in financial risks grew. We agree that more comprehensive real-time data is necessary, but we also emphasize that collecting more data is only part of the process of developing early warning systems. More fundamental, in our view, is the need to use data in a different way--in a way that integrates the ongoing analysis of macro data to identify areas of interest with the development of highly specialized information to illuminate those areas, including the relevant instruments and transactional forms. In this paper, we describe why we are concerned that specifying this second stage generically and prior to processing the first-stage signals will not be fruitful: We can easily imagine specifying ex ante a program of data collection that would look for vulnerabilities in the wrong place, particularly if the actual act of looking by macro- or microprudential supervisors causes the locus of activity to shift into a new shadow somewhere else--something we argue occurred during the buildup of risks ahead of this crisis.
    Date: 2010
  6. By: William A. Branch; George W. Evans
    Abstract: This paper demonstrates that an asset pricing model with least-squares learning can lead to bubbles and crashes as endogenous responses to the fundamentals driving asset prices. When agents are risk-averse they need to make forecasts of the conditional variance of a stock¡¯s return. Recursive updating of both the conditional variance and the expected return implies several mechanisms through which learning impacts stock prices. Extended periods of excess volatility, bubbles and crashes arise with a frequency that depends on the extent to which past data is discounted. A central role is played by changes over time in agents¡¯ estimates of risk.
    Keywords: Risk, Asset Pricing, Bubbles, Adaptive Learning.
    JEL: G12 G14 D82 D83
    Date: 2010–04
  7. By: Joshua Aizenman (University of California at Santa Cruz ,Hong Kong Institute for Monetary Research); Yi Sun (University of California at Santa Cruz)
    Abstract: In this paper we study the degree to which emerging markets (EMs) adjusted to the global liquidity crisis by drawing down their international reserves (IR). Overall, we find a mixed and complex picture. Intriguingly, only about half of the EMs depleted their IR as part of the adjustment mechanism. To gain further insight, we compare the pre-crisis demand for IR of countries that experienced sizable IR depletion, to that of countries that did not, and find different patterns between the two groups. Trade related factors (such as trade openness, primary goods export ratio, especially large oil export) seem to play a significant role in accounting for the pre-crisis IR/GDP level of countries that experienced a sizable IR depletion during the first phase of the crisis. Our findings suggest that countries that internalized their large exposure to trade shocks before the crisis, used their IR as a buffer stock in the first phase of the crisis. Their reserves losses followed an inverted logistical curve. After a rapid initial depletion of reserves, within seven months they reached a markedly declining rate of IR depletion, losing not more than one-third of their pre-crisis IR. On the contrary, in the case of countries that refrained from a sizable IR depletion during the first phase of the crisis, financial factors seem more important than trade factors in explaining the initial IR/GDP level. Our results indicate that the adjustment of EMs was constrained more by their fear of losing IR than by their fear of floating.
    Keywords: Trade Shocks, Deleveraging, International Reserves, Emerging Markets
    JEL: F15 F21 F32 F43
    Date: 2009–12
  8. 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 nondiminishing deviation from PPP at all levels of aggregation, even among euro zone 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.
    Keywords: Foreign exchange rates ; Prices ; Econometric models ; Gross domestic product ; International trade ; Purchasing power parity
    Date: 2010
  9. By: John Bryant (Vocat International)
    Abstract: This paper develops further monetary aspects of a model, first set out as part of a paper by the author published in 2007, concerning the application of thermodynamic principles to economics. The model is backed up by statistical analysis of quarterly data of the UK and USA economies. The model sets out relationships between price, output volume, velocity of circulation and money supply, and develops an equation to measure entropy gain in an economic system, linked to interest rates. This paper was first released in August 2008, but has now been revised to reflect current thinking
    Keywords: Monetary, thermodynamics, economics, entropy, interest rates
    Date: 2010–02
  10. By: Leo F. Goodstadt (Hong Kong Institute for Monetary Research, Trinity College, University of Dublin, The University of Hong Kong)
    Abstract: An Anglo-American regulatory ¡¥culture¡¦ became associated with 30 years of worldwide economic reforms, global growth and monetary stability. American and British officials identified major sources of instability in their own financial markets before 2007 but remained non-interventionist, invoking the concepts of virtuous markets and moral hazard. They also ignored the policy defects revealed by past crises. Despite record banking losses and fiscal imbalances during the global crisis, their current resistance to regulatory reforms is supported by a powerful political and business consensus.
    Keywords: Non-Interventionism, Basel, Virtuous Markets, Moral Hazard, Regulatory Culture
    Date: 2009–11
  11. By: Georges Caravelis
    Abstract: We appraise the new EU supervisory architecture presented by the Commission in a package of five 'draft legislative acts'. Two would establish a European Systemic Risk Board (ESRB) to undertake macro-prudential issues. Three would establish the system of European Supervisory Authorities (ESAs): Banking, Securities and Insurance.. . The theoretical case for this package of 'draft legislative acts' has been made by the High-Level Group on Financial Supervision in the EU. The ' package ' has been examined by the ECOFIN of 2 December 2009, which agreed on a 'general approach'; it has introduced changes to the Commission's three draft legislative acts concerning the European Supervisory Authorities (ESAs). We examine the theoretical approach underlying the draft legislative acts, which is based on the State theory of money. We find it incomplete in the case of the ESRB because the mission of ECB in 'mitigating system risks within the financial system' cannot be attained without real powers and tools; it is in essence a Macro-economic phenomenon.. . We also arrive at another conclusion relating to the three proposals on the ESAs. The theoretical underpinning of the three is based on the premise of 'regulating for the sake of regulation'. Today's evolution of the EU cannot allow Authorities over-passing the Treaty competence. Nor could the ESAs attain their objective of 'setting the common rules for supervising national entities'. Thus the conception of the EU system of financial supervision is deficient, in need of repair.. . We propose an alternative approach to the new EU supervisory architecture consisting of three elements. First, we restate the case for the Central Banks in order to assume responsibility for the 'last resort of managing risk', and endowed with real power. Second, the role of the national central banks (NCBs) in 'micro-supervision' is substantial enhanced. Third, a structure for the budgetary burden is proposed by the establishment of the 'European Fund for Financial Stability' (EFFS)..
    Keywords: Theory of money; European Supervisory Authorities, de Larosière report; financial supervision; money externalities; European Central Bank; National Central Banks; European Steering Committee of Vice-Governors of NCBs; credit rating agencies; European Fiscal Authority; European Fund for Financial Stability; financial transaction tax; natural monopoly
    Date: 2010–01–29
  12. By: Michael B. Devereux
    Abstract: The macroeconomic response to the economic crisis has revived old debates about the usefulness of monetary and fiscal policy in fighting recessions. Without the ability to further lower interest rates, policy authorities in many countries have turned to expansionary fiscal policies. Recent literature argues that government spending may be very effective in such environments. But a critical element of the stimulus packages in all countries was the use of deficit financing and tax reductions. This paper explores the role of government debt and deficits in an economy constrained by the zero bound on nominal interest rates. Given that the liquidity trap is generated by a large increase in the desire to save on the part of the private sector, the wealth effects of government deficits can provide a critical macroeconomic response to this. Government spending financed by deficits may be far more expansionary than that financed by tax increases in such an environment. In a liquidity trap, tax cuts may be much more effective than during normal times. Finally, monetary policies aimed at directly increasing monetary aggregates may be effective, even if interest rates are unchanged.
    Keywords: Fiscal policy ; Recessions ; Deficit financing ; Debts, Public ; Government spending policy ; Monetary policy ; Taxation ; Liquidity (Economics)
    Date: 2010
  13. By: Robert J. Tetlow
    Abstract: I study 46 vintages of FRB/US, the principal macro model used by Federal Reserve Board staff for forecasting and policy analysis, as measures of real-time model uncertainty. I also study the implications of model uncertainty for the robustness of commonly applied, simple monetary policy rules. I first document that model uncertainty poses substantial challenges for policymakers in that key model properties differ in important ways across model vintages. Then I show that the parameterization of optimized simple policy rule--rules that are intended to be robust with respect to model uncertainty--also differ substantially across model vintages. Included in the set of rules are rules that eschew feedback on the output gap, rules that target nominal income growth, and rules that allow for time variation in the equilibrium real interest rate. I find that many rules, which previous research has shown to be robust in artificial economies, would have failed to provide adequate stabilization in the real-time, real-world environment seen by the Fed staff. However, I do identify certain policy rules that would have performed relatively well, and I characterize the key features of those rules to draw more general lessons about the design of monetary policy under model uncertainty.
    Date: 2010
  14. By: Thomas A. Lubik; Wing Leong Teo
    Abstract: We introduce inventories into a standard New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to study the effect on the design of optimal monetary policy. The possibility of inventory investment changes the transmission mechanism in the model by decoupling production from final consumption. This allows for a higher degree of consumption smoothing since firms can add excess production to their inventory holdings. We consider both Ramsey optimal monetary policy and a monetary policy that maximizes consumer welfare over a set of simple interest rate feedback rules. We find that in contrast to a model without inventories, Ramsey-optimal monetary policy in a model with inventories deviates from complete inflation stabilization. In the standard model, nominal price rigidity is a deadweight loss on the economy, which an optimizing policymaker attempts to remove. With inventories, a planner can reduce consumption volatility and raise welfare by accumulating inventories and letting prices change as an equilibrating mechanism. We find also find that the application of simple rules comes very close to replicating Ramsey optimal outcomes.
    JEL: E24 E32 J64
    Date: 2010–02
  15. By: Thomas A. Lubik; Wing Leong Teo
    Abstract: We introduce inventories into an otherwise standard New Keynesian model and study the implications for ination dynamics. Inventory holdings are motivated as a means to generate sales for demand-constrained …rms. We derive various representa- tions of the New Keynesian Phillips curve with inventories and show that one of these speci…cations is observationally equivalent to the standard model with respect to the behavior of ination when the models cross-equation restrictions are imposed. How- ever, the driving variable in the New Keynesian Phillips curve - real marginal cost - is unobservable and has to be proxied by, for instance, unit labor costs. An alternative approach is to impute marginal cost by using the models optimality conditions. We show that the stock-sales ratio is linked to marginal cost. We also estimate these various speci…cations of the New Keynesian Phillips curve using GMM. We …nd that predictive power of the inventory-speci…cation at best approaches that of the standard model, but does not improve upon it. We conclude that inventories do not play a role in explaining ination dynamics within our New Keynesian Phillips curve framework.
    JEL: E24 E32 J64
    Date: 2010–04
  16. By: Ida Wolden Bache (Norges Bank (Central Bank of Norway)); Leif Brubakk (Norges Bank (Central Bank of Norway)); Junior Maih (Norges Bank (Central Bank of Norway))
    Abstract: We estimate a small open-economy DSGE model for Norway with two specifications of monetary policy: a simple instrument rule and optimal policy based on an intertemporal loss function. The empirical fit of the model with optimal policy is as good as the model with a simple rule. This result is robust to allowing for misspecification following the DSGE-VAR approach proposed by Del Negro and Schorfheide (2004). The interest rate forecasts from the DSGE-VARs are close to Norges Bank's official forecasts since 2005. One interpretation is that the DSGE-VAR approximates the judgment imposed by the policymakers in the forecasting process.
    Keywords: DSGE models, forecasting, optimal monetary policy
    JEL: C53 E52
    Date: 2010–04–07
    Abstract: We examine the sources of macroeconomic economic fluctuations by es- timating a variety of medium-scale DSGE models within a unified framework that incorporates regime switching both in shock variances and in the inflation target. Our general framework includes a number of different model features studied in the liter- ature. We propose an efficient methodology for estimating regime-switching DSGE models. The model that best fits the U.S. time-series data is the one with synchro- nized shifts in shock variances across two regimes and the fit does not rely on strong nominal rigidities. We find little evidence of changes in the inflation target. We identify three types of shocks that account for most of macroeconomic fluctuations: shocks to total factor productivity, wage markup, and the capital depreciation rate.
    Date: 2010–04
  18. By: Hans Genberg (Bank for International Settlements)
    Abstract: Interest in currency internationalisation among policy makers as well as the general public has intensified in recent years. One reason is a view that the global impact of the recent financial crisis has been intensified because of the dominant role of the US dollar in the international financial system. According to this view the system would be less prone to instability if international trade in goods and assets were denominated in a greater variety of currencies and if international reserve holdings were more diversified. Another reason is the perception that having an international currency is associated with significant benefits for the issuing national authorities. This raises the question whether there is a case for policy intervention by national authorities to promote the international use of their currency. This paper addresses this issue. It argues that authorities should not focus their primary attention on climbing the currency internationalization charts. Instead they should consider the pros and cons of policies and institutional changes that may pave the way for the private adoption of the currency in international transactions. The reason is that full internationalization of a currency will not come about unless a certain number of pre-requisites are met. Arguably the most important is that there be no restrictions on cross-border transfers of funds and no restrictions on third party use of the currency in contracts and settlements of trade in goods or assets, and no restriction on including assets denominated in the currency in private or official portfolios. In short, full internationalization of a currency requires full capital account liberalisation. Although there are gains from currency internationalisation, it is an open question whether public policy should attempt to promote it beyond establishing preconditions such as full capital account liberalisation, a deep and dynamic domestic financial market, a well-respected legal framework for contract enforcement, and stable and predictable macro and micro economic policies.
    Date: 2009–10
    Abstract: We develop a new method for deriving minimal state variable (MSV) equilibria of a general class of Markov switching rational expectations models and a new algorithm for computing these equilibria. We compare our approach to pre- viously known algorithms, and we demonstrate that ours is both efficient and more reliable than previous methods in the sense that it is able to find MSV equilibria that previously known algorithms cannot. Further, our algorithm can find all possi- ble MSV equilibria in models where there are multiple MSV equilibria. This feature is essential if one is interested in using a likelihood based approach to estimation.
    Date: 2010–04
  20. By: Marcos Valli; Fabia A. de Carvalho
    Abstract: This paper models a fiscal policy that pursues primary balance targets to stabilize the debt-to-GDP ratio in an open and heterogeneous economy where firms combine public and private capital to produce their goods. The model extends the European NAWM presented in Coenen et. al. (2008) and Christoffel et. al. (2008) by broadening the scope for fiscal policy implementation and allowing for heterogeneity in labor skills. The domestic economy is also assumed to follow a forward looking Taylor-rule consistent with an inflation targeting regime. We correct the NAWM specification of the final-goods price indices, the recursive representation of the wage setting rule, and the wage distortion index. We calibrate the model for Brazil to analyze some implications of monetary and fiscal policy interaction and explore some of the implications of fiscal policy in this class of DSGE models.
    Date: 2010–04
  21. By: Mauro Roca
    Abstract: Is it desirable that central banks be more transparent in the communication of sensible information when agents have diverse private information? In practice, there exists some consensus about the benefits of acting in this way. However, other studies warn that increasing the precision of public information may raise the volatility of some aggregate variables - in particular, the price level - due to the disproportionate influence that it exerts on agents' decisions, and that this, in turn, will have negative effects on welfare. This paper studies the welfare effects of varying levels of transparency in a model of price-setting under monopolistic competition and imperfect common knowledge. Our results indicate that more precise public information never leads to a reduction of welfare in this framework. We find that the beneficial effects of decreased imperfect common knowledge due to a more precise common signal always compensates the potential rise in aggregate volatility. Moreover, we show that, in contrast to what has previously been assumed, the variability of the aggregate price level has no detrimental welfare effects in this model.
    Keywords: Announcements , Central banks , Economic models , Monetary policy , Private sector , Public information , Transparency ,
    Date: 2010–04–06
  22. By: Sandra Eickmeier (Deutsche Bundesbank, Economic Research Center, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.); Boris Hofmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper uses a factor-augmented vector autoregressive model (FAVAR) estimated on U.S. data in order to analyze monetary transmission via private sector balance sheets, credit risk spreads and asset markets in an integrated setup and to explore the role of monetary policy in the three imbalances that were observed prior to the global financial crisis: high house price inflation, strong private debt growth and low credit risk spreads. The results suggest that (i) monetary policy shocks have a highly significant and persistent effect on house prices, real estate wealth and private sector debt as well as a strong short-lived effect on risk spreads in the money and mortgage markets; (ii) monetary policy shocks have contributed discernibly, but at a late stage to the unsustainable developments in house and credit markets that were observable between 2001 and 2006; (iii) financial shocks have influenced the path of policy rates prior to the crisis, and the feedback effects of financial shocks via lower policy rates on property and credit markets are found to have probably been considerable. JEL Classification: E52, E44, C3, E3, E43.
    Keywords: Monetary policy, asset prices, housing, private sector balance sheets, financial crisis, factor model.
    Date: 2010–04
  23. By: Maria Demertzis; Massimiliano Marcellino; Nicola Viegi
    Abstract: We identify credible monetary policy with first, a disconnect between inflation and inflation expectations and second, the anchoring of the latter at the inflation target announced by the monetary authorities. We test empirically whether this is the case for a number of countries that have an explicit inflation target and therefore include the Euro Area. We find that for the last 10 year period, the two series are less dependent on each other and that announcing inflation targets help anchor expectations at the right level. Keywords: Inflation Targets, Measures of Credibility.
    Keywords: Inflation Targets; measures of Credibility.
    JEL: E52 E58
    Date: 2009–11
  24. By: Freixas, X.; Martin, A.; Skeie, D. (Tilburg University, Center for Economic Research)
    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 di¤erent implications for optimal policy by the central bank. We show that, when confronted with a distribu- tional 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 mon- etary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two di¤erent instruments, interest rates and liquidity injection, are therefore required to cope with the two di¤erent 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
  25. By: Richard Dennis; Tatiana Kirsanova
    Abstract: Discretionary policymakers cannot manage private-sector expectations and cannot co- ordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. In order to utilize the explanatory power of models with multiple equilibria it is necessary to understand how an economy arrives to a particular equilibrium. In this paper, we employ notions of robust- ness, learnability, and the potential for policy errors to motivate and develop a suite of equilibrium selection criteria. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our equilibrium selection methods. Impor- tantly, although the Pareto-preferred equilibrium is invariably an equilibrium identi?ed by standard numerical iterative solution methods, unless it is learnable by private agents, we ?nd little reason to expect coordination on that equilibrium.
    JEL: E52 E61 C62 C73
    Date: 2010–01
  26. By: Vasco Curdia (Federal Reserve Bank of New York); Ricardo Reis (Columbia University - Department of Economics)
    Abstract: The dynamic stochastic general equilibrium (DSGE) models that are used to study business cycles typically assume that exogenous disturbances are independent autoregressions of order one. This paper relaxes this tight and arbitrary restriction, by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. Our first contribution is a new Bayesian econometric method that uses conjugate conditionals to make the estimation of DSGE models with correlated disturbances feasible and quick. Our second contribution is a re-examination of U.S. business cycles. We find that allowing for correlated disturbances resolves some conflicts between estimates from DSGE models and those from vector autoregressions, and that a key missing ingredient in the models is countercyclical fiscal policy. According to our estimates, government spending and technology disturbances play a larger role in the business cycle than previously ascribed, while changes in markups are less important.
    JEL: E30 E10
    Date: 2010
  27. By: Ronald Schettkat (Schumpeter School University of Wuppertal)
    Abstract: The current crisis is like an earthquake for the theoretical foundations of economic policies, which have guided governments and central banks for the last few decades. The efficient market hypothesis and its application to labor markets –“natural rate theory”- dominated interpretations of economic trends and policy prescriptions since the 1970s. Public policy, public institutions, and regulations were generally regarded as distortions of the otherwise well functioning markets. Economic trends were filtered through the lens of the “natural rate theory,” focusing on labor market institutions only and putting blinds on macroeconomic influences. Therefore, the recipe was a reshaping of institutional arrangements intended to allow markets to operate more freely, i.e. to bring the real world closer to the idealized theoretical model. This paper confronts the economic trends with the interpretations of the “natural rate theory” and argues that they hardly fitting the facts. The paper argues that monetary policy gained importance in the 1970s and enforced deflationary policies – which, in turn reduced growth, especially in upswings – and allowed employment to recover to its initial pre-recession levels. Deflationary bias was also guiding the design of major EU institutions, reducing potential and actual growth.</FONT>
    Keywords: Economic crisis, efficient market hypothesis, natural rate theory, deflationary bias
    JEL: E00 E24 E58 E6 J3
    Date: 2010–04
  28. By: Mathias Trabandt (Fiscal Policies Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Harald Uhlig (Department of Economics, University of Chicago, 1126 East 59th Street, Chicago, IL 60637, USA.)
    Abstract: We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring ”constant Frisch elasticity” (CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation. JEL Classification: E0, E60, H0.
    Keywords: Laffer curve, incentives, dynamic scoring, US and EU-14 economy.
    Date: 2010–04
  29. By: Peter Tillmann (Justus Liebig University Gießen)
    Abstract: The Federal Open Market Committee (FOMC) of the Federal Reserve consists of voting- and non-voting members. Apart from deciding about interest rate policy, members individually formulate regular inflation forecasts. This paper uncovers systematic differences in individual inflation forecasts submitted by voting and non-voting members. Based on a data set with individual forecasts recently made available it is shown that non-voters systematically overpredict inflation relative to the consensus forecast if they favor tighter policy and underpredict inflation if the favor looser policy. These findings are consistent with non-voting member following strategic motives in forecasting, i.e. non-voting members use their forecast to influence policy deliberation.
    Keywords: inflation forecast, forecast errors, monetary policy, monetary committee, Federal Reserve
    JEL: E43 E52
    Date: 2010
  30. By: Mirko Abbritti (Universidad de Navarra, Graduate Institute of International Studies.); Sebastian Weber (Graduate Institute of International Studies.)
    Abstract: This paper investigates the importance of labor market institutions for inflation and unemployment dynamics. Using the New Keynesian framework we argue that labor market institutions should be divided into those institutions that cause Unemployment Rigidities (UR) and those that cause Real Wage Rigidities (RWR). The two types of institutions have opposite effects and their interaction is crucial for the dynamics of inflation and unemployment. We estimate a panel VAR with deterministically varying coefficients and find that there is a profound difference in the responses of unemployment and inflation to shocks under different constellations of the labor market. JEL Classification: E32, E24, E52.
    Keywords: Labor Market Search, Real Wage Rigidity, Unemployment, Business Cycle, Monetary Policy.
    Date: 2010–04
  31. By: Michael Kumhof; Günter Coenen; Dirk Muir; Charles Freedman; Susanna Mursula; Christopher J. Erceg; Davide Furceri; René Lalonde; Jesper Lindé; Annabelle Mourougane; John Roberts; Werner Roeger; Carlos de Resende; Stephen Snudden; Mathias Trabandt; Jan in ‘t Veld; Douglas Laxton
    Abstract: The paper assesses, using seven structural models used heavily by policymaking institutions, the effectiveness of temporary fiscal stimulus. Models can, more easily than empirical studies, account for differences between fiscal instruments, for differences between structural characteristics of the economy, and for monetary-fiscal policy interactions. Findings are: (i) There is substantial agreement across models on the sizes of fiscal multipliers. (ii) The sizes of spending and targeted transfers multipliers are large. (iii) Fiscal policy is most effective if it has some persistence and if monetary policy accommodates it. (iv) The perception of permanent fiscal stimulus leads to significantly lower initial multipliers.
    Keywords: Budget deficits , Cross country analysis , Economic forecasting , Economic models , Europe , Fiscal policy , Government expenditures , Monetary policy , Public debt , Stabilization measures , Taxes , United States ,
    Date: 2010–03–22
  32. By: Francesco Ravazzolo; 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 inflation 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.
    JEL: C11 C32 C53 E37 E52
    Date: 2010–04
  33. By: Michiel De Pooter; Francesco Ravazzolo; Dick van Dijk
    Abstract: We examine the importance of incorporating macroeconomic information and, in particular, accounting for model uncertainty when forecasting the term structure of U.S. interest rates. We start off by analyzing and comparing the forecast performance of several individual term structure models. Our results confirm and extend results found in previous literature that adding macroeconomic information, through factors extracted from a large number of individual series, tends to improve interest rate forecasts. We then show, however, that the predictive power of individual models varies over time significantly. Models with macro factors are the more accurate in and around recession periods. Models without macro factors do particularly well in low-volatility subperiods such as the late 1990s. We demonstrate that this problem of model uncertainty can be mitigated by combining individual model forecasts. Combining forecasts leads to encouraging gains in predictability, especially for longer-dated maturities, and importantly, these gains are consistent over time.
    Date: 2010
  34. By: Alexander Chudik (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.)
    Abstract: The curse of dimensionality, a problem associated with analyzing the interaction of a relatively large number of endogenous macroeconomic variables, is a prevailing issue in the open economy macro literature. The most common practise to mitigate this problem is to apply the so-called Small Open Economy Framework (SOEF). In this paper, we aim to review under which conditions the SOEF is a justifiable approximation and how severe the consequences of violation of key conditions might be. Thereby, we use a multicountry general equilibrium model as a laboratory. First, we derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large N asymptotics. Second, we show that the SOEF is a valid approximation only for economies (i) that have a diversified foreign trade structure and if (ii) there is no globally dominant economy in the system. Third, we illustrate that macroeconomic interdependence is primarily related to the degree of trade diversification, and not to the extent of trade openness. Furthermore, we provide some evidence on the pattern of global macroeconomic interdependence by calculating probability impulse response functions in our calibrated multicountry model using data for 153 economies. JEL Classification: F41.
    Keywords: DSGE models, Open Economy Macroeconomics, Weak and Strong Cross Section Dependence, Factor models.
    Date: 2010–04
  35. By: Kai D. Schmid
    Abstract: Policy implications of the present consensus view of stabilization policy depend on specific assumptions with regard to the equilibrium level of production. Thereby, the interpretation of equilibrium output rests on a separation of supply-side and demandside adjustment to macroeconomic shocks promoting a dichotomy of short-term and long-term macrodynamics. In contrast to this, there are several channels that promote procyclical stimulus of aggregate demand and a changing factor utilization to the accumulation and efficiency of an economy’s productive capacity. Medium-run macrodynamics call for a rather endogenous explanation of production capacity and challenge the uniqueness of long-term equilibria.
    Keywords: Monetary policy, medium-run macrodynamics, long-term nonneutrality, capacity utilization.
    JEL: E2 E3 E5
    Date: 2010–04
  36. By: Paolo Ghirardato; Marciano Siniscalchi
    Abstract: This paper provides a multiple-priors representation of ambiguous beliefs à la Ghirardato, Maccheroni, and Marinacci (2004) and Nehring (2002) for any preference that is (i) monotonic, (ii) Bernoullian, i.e. admits an affine utility representation when restricted to constant acts, and (iii) suitably continuous. Monotonicity is the main substantive assumption: we do not require either Certainty Independence or Uncertainty Aversion. We characterize the set of ambiguous beliefs in terms of Clarke-Rockafellar differentials. This allows us to provide an explicit calculation of the set of priors for several recent decision models: multiplier preferences, the smooth ambiguity model, the vector expected utility model, as well as confidence function, variational, general "uncertainty-averse" preferences, and mean-dispersion preferences.
    Keywords: Multiple Priors; Upper and Lower Probabilities; Ambiguity; Monotonic Preferences
    JEL: D81
    Date: 2010
  37. By: Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria.)
    Abstract: In this paper I study the relation between real wage rigidity (RWR) and nominal price and wage rigidity. I show that in a standard DSGE model RWR is mainly affected by the interaction of the two nominal rigidities and not by other structural parameters. The degree of RWR is, however, considerably influenced by the modelling assumption about the structure of wage contracts (Calvo vs. Taylor) and about other institutional characteristics of wage-setting (clustering of contracts, heterogeneous contract length, indexation). I use survey evidence on price- and wage-setting for 15 European countries to calculate the degrees of RWR implied by the theoretical model. The average levels of RWR are broadly in line with empirical estimates based on macroeconomic data. In order to be able to also match the observed cross-country variation in RWR it is, however, essential to move beyond the country-specific durations of price and wages and to take more institutional details into account. JEL Classification: E31, E32, E24, J51.
    Keywords: Inflation Persistence, Real Wage Rigidity, Nominal Wage Rigidity, DSGE models, Staggered Contracts.
    Date: 2010–04
  38. By: Paolo Gelain (School of Economics and Finance – University of St Andrews – Castlecliffe, The Scores, Fife, United Kingdom, KY1 9AL,)
    Abstract: In this paper I estimate a New Keynesian Dynamic Stochastic General Equilibrium model for the Euro Area, which closely follows the structure of the model developed by Smets and Wouters (2003, 2005, 2007), with the addition of the so-called financial accelerator mechanism developed in Bernanke, Gertler and Gilchrist (1999). The main aim is to obtain a time series for the unobserved external finance premium that entrepreneurs pay on their loans, with the further aim of providing a dynamic analysis of it. Results confirm in general what was recently found for the US by De Graeve (2008), namely that (1) the model incorporating financial frictions can generate a series for the premium, without using any financial macroeconomic aggregates, that is highly correlated with available proxies for it, (2) the estimated premium is not necessarily counter-cyclical (this depends on the shock considered). Nevertheless, although in addition the model with financial frictions better describes Euro Area data than the model without them, the former is not satisfactory in many other respects. For instance, the accelerator effect turns out to be statistically not significant. However, this does not impede financial frictions from remaining a key ingredient to model. In fact, I found that the estimated premium is a very powerful predictor of inflation. It overcomes, in terms of the Mean Squared Forecast Error, the traditional output gap measure in a Phillips curve specification. JEL Classification: E4, E5, E37.
    Keywords: NK DSGE, Euro Area External Finance Premium, Financial Accelerator, Bayesian Estimation, Inflation Forecast
    Date: 2010–04
  39. By: Alexandre, Fernando (University of Minho); Bação, Pedro (University of Coimbra); Cerejeira, João (University of Minho); Portela, Miguel (University of Minho)
    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: 2010–04
  40. By: David de Antonio Liedo (Banco de España)
    Abstract: This paper proposes the use of dynamic factor models as an alternative to the VAR-based tools for the empirical validation of dynamic stochastic general equilibrium (DSGE) theories. Along the lines of Giannone et al. (2006), we use the state-space parameterisation of the factor models proposed by Forni et al. (2007) as a competitive benchmark that is able to capture weak statistical restrictions that DSGE models impose on the data. Beyond the weak restrictions, which are given by the number of shocks and the number of state variables, the behavioural restrictions embedded in the utility and production functions of the model economy contribute to achieve further parsimony. Such parsimony reduces the number of parameters to be estimated, potentially helping the general equilibrium environment improve forecast accuracy. In turn, the DSGE model is considered to be misspecified when it is outperformed by the state-space representation that only incorporates the weak restrictions.
    Keywords: dynamic and static rank, factor models, DSGE models, forecasting
    JEL: E32 E37 C52
    Date: 2010–04
  41. By: Makram El-Shagi
    Abstract: Conventional Phillips-curve models that are used to estimate the output gap detect a substantial decline in potential output due to the present crisis. Using a multivariate state space model, we show that this result does not hold if the long run role of excess liquidity (that we estimate endogeneously) for inflation is taken into account.
    Keywords: output gap, liquidity, state space models
    JEL: E3 E4
    Date: 2010–04
  42. By: Jesús Fernández-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerrón-Quintana (Federal Reserve Bank of Philadelphia); Juan F. Rubio-Ramírez (Department of Economics, Duke University)
    Abstract: In this paper we report the results of the estimation of a rich dynamic stochastic general equilibrium (DSGE) model of the U.S. economy with both stochastic volatility and parameter drifting in the Taylor rule. We use the results of this estimation to examine the recent monetary history of the U.S. and to interpret, through this lens, the sources of the rise and fall of the great American inflation from the late 1960s to the early 1980s and of the great moderation of business cycle fluctuations between 1984 and 2007. Our main findings are that while there is strong evidence of changes in monetary policy during Volcker’s tenure at the Fed, those changes contributed little to the great moderation. Instead, changes in the volatility of structural shocks account for most of it. Also, while we find that monetary policy was different under Volcker, we do not find much evidence of a big difference in monetary policy among Burns, Miller, and Greenspan. The difference in aggregate outcomes across these periods is attributed to the time- varying volatility of shocks. The history for inflation is more nuanced, as a more vigorous stand against it would have reduced inflation in the 1970s, but not completely eliminated it. In addition, we find that volatile shocks (especially those related to aggregate demand) were important contributors to the great American inflation.
    Keywords: DSGE models, Stochastic volatility, Parameter drifting, Bayesian methods.
    JEL: E10 E30 C11
    Date: 2010–04–15
  43. By: Anke Weber
    Abstract: This paper considers optimal communication by monetary policy committees in a model of imperfect knowledge and learning. The main policy implications are that there may be costs to central bank communication if the public is perpetually learning about the committee's decision-making process and policy preferences. When committee members have heterogeneous policy preferences, welfare is greater under majority voting than under consensus decision-making. Furthermore, central bank communication under majority voting is more likely to be beneficial in this case. It is also shown that a chairman with stable policy preferences who carries significant weight in the monetary policy decision-making process is welfare enhancing.
    Keywords: Announcements , Central banks , Economic models , Monetary policy , Private sector , Public information ,
    Date: 2010–04–02
  44. By: Maral Shamloo
    Abstract: Reconciling the high frequency of price changes at the micro level and their apparent rigidity at the aggregate level has been the subject of considerable debate in macroeconomics recently. In this paper I show that incorporating production chains in a standard New- Keynesian model replicates two stylized facts about the data. First, sectoral prices respond with significantly different speeds to aggregate shocks. Meanwhile, the responses to sectorspecific shocks are similar. Second, the standard price setting models are unable to quantitatively match the amount of monetary non-neutrality observed in the data. I argue, First, that the input-output linkages in production generate different responses to aggregate shocks across sectors. Second, calibrating this model to the US data can create five times more monetary non-neutrality in response to nominal shocks compared to an equivalent homogeneous economy with intermediate inputs. Finally, the model implies that upstream industries respond faster to aggregate shocks compared to downstream industries. I show that this prediction is supported by the data.
    Keywords: Economic models , External shocks , Monetary policy , Price adjustments , Price structures , Production ,
    Date: 2010–03–31
  45. By: Gary S. Anderson; Jinill Kim; Tack Yun
    Abstract: Since Kydland and Prescott (1977) and Barro and Gordon (1983), most studies of the problem of the inflation bias associated with discretionary monetary policy have assumed a quadratic loss function. We depart from the conventional linear-quadratic approach to the problem in favor of a projection method approach. We investigate the size of the inflation bias that arises in a microfounded nonlinear environment with Calvo price setting. The inflation bias is found to lie between 1% and 6% for a reasonable range of parameter values, when the bias is defined as the steady-state deviation of the discretionary inflation rate from the optimal inflation rate under commitment.
    Date: 2010
  46. By: Agur, I.; Demertzis, M. (Tilburg University, Center for Economic Research)
    Abstract: If monetary policy is to aim at financial stability, how would it change? To analyze this question, this paper develops a general-form model with endogenous bank risk profiles. Policy rates affect both bank incentives to search for yield and the cost of wholesale funding. Financial stability objectives are then shown to make a monetary authority more conservative and more aggressive. Conservative as it sets higher rates on average. And aggressive because, in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. Keeping cuts short is crucial as bank risk responds primarily to stable low rates. Within the short span, cuts then must be deep to achieve standard objectives.
    Keywords: Monetary policy;Financial stability
    JEL: E52 G21
    Date: 2010
  47. By: Bill Russell; Anindya Banerjee; Issam Malki; Natalia Ponomareva
    Abstract: Phillips curves are often estimated without due attention to the underlying time series properties of the data. In particular, the consequences of inflation having discrete breaks in mean have not been studied adequately. We show by means of simulations and a detailed empirical example based on United States data that not taking account of breaks may lead to biased and therefore spurious estimates of Phillips curves. We suggest a method to account for the breaks in mean inflation and obtain meaningful and unbiased estimates of the short- and long-run Phillips curves in the United States.
    Keywords: Phillips curve, inflation, panel data, non-stationery data, breaks
    JEL: C22 C23 E31
    Date: 2010–04
  48. By: Chia-Lin Chang; Philip Hans Franses; Michael McAleer (University of Canterbury)
    Abstract: Macro-economic forecasts typically involve both a model component, which is replicable, as well as intuition, which is non-replicable. Intuition is expert knowledge possessed by a forecaster. If forecast updates are progressive, forecast updates should become more accurate, on average, as the actual value is approached. Otherwise, forecast updates would be neutral. The paper proposes a methodology to test whether forecast updates are progressive and whether econometric models are useful in updating forecasts. The data set for the empirical analysis are for Taiwan, where we have three decades of quarterly data available of forecasts and updates of the inflation rate and real GDP growth rate. The actual series for both the inflation rate and the real GDP growth rate are always released by the government one quarter after the release of the revised forecast, and the actual values are not revised after they have been released. Our empirical results suggest that the forecast updates for Taiwan are progressive, and can be explained predominantly by intuition. Additionally, the one-, two- and three-quarter forecast errors are predictable using publicly available information for both the inflation rate and real GDP growth rate, which suggests that the forecasts can be improved.
    Keywords: Macro-economic forecasts; econometric models; intuition; initial forecast; primary forecast; revised forecast; actual value; progressive forecast updates; forecast errors
    JEL: C53 C22 E27 E37
    Date: 2010–04–01
  49. By: Philip Hans Franses; Michael McAleer (University of Canterbury); Rianne Legerstee
    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.
    Keywords: Macroeconomic forecasts; econometric models; human intuition; biased forecasts; forecast performance; forecast evaluation; forecast comparison
    JEL: C22 C51 C52 C53 E27 E37
    Date: 2010–03–01
  50. By: Raphael A. Espinoza; Ananthakrishnan Prasad; H. L. Leon
    Abstract: Motivated by the global inflation episode of 2007-08 and concern that high levels of inflation could undermine growth, this paper uses a panel of 165 countries and data for 1960-2007 to revisit the nexus between inflation and growth. We use a smooth transition model to investigate the speed at which inflation beyond a threshold becomes harmful to growth, an important consideration in the policy response to rising inflation as the world economy recovers. We estimate that for all country groups (except for advanced countries) inflation above a threshold of about 10 percent quickly becomes harmful to growth, suggesting the need for a prompt policy response to inflation at or above the relevant threshold. For the advanced economies, the threshold is much lower. For oil exporting countries, the estimates are less robust, possibly reflecting heterogeneity among oil producers, but the effect of higher inflation for oil producers is found to be stronger.
    Keywords: Cross country analysis , Developed countries , Economic growth , Economic models , Emerging markets , Inflation , Monetary policy , Oil exporting countries , Production growth ,
    Date: 2010–03–24
  51. By: Luca Benati (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We characterise the evolution of the U.S. unemployment-inflation trade-off since the late XIX century era via a Bayesian time-varying parameters structural VAR. The Great Inflation episode appears as historically unique along several dimensions. In particular, the shape of the ‘Phillips loop’–which is defined in terms of the impulse-response functions of inflation and unemployment’s deviations from equilibrium–was, during those years, clearly out of line with respect to the rest of the sample period for all structural innovations except money demand shocks. During the Great Depression, on the other hand, the Phillips trade-off did not exhibit any peculiar qualitative feature, so that, when seen through these lenses, the 1930s only stand out because of the sheer size of the macroeconomic fluctuation. The historical evolution of the Phillips trade-off exhibits virtually no connection with the evolution of the extent of trade openness of the U.S. economy. Although, by itself, this does not rule out a possible impact of globalisation on the slope of the trade-off in recent years, it clearly suggests that, historically, the evolution of the trade-off has been dominated by factors other than trade openness. JEL Classification:
    Keywords: Phillips trade-off, Lucas critique, Bayesian VARs, time-varying parameters, stochastic volatility, identified VARs, Great Inflation, Great Depression, globalisation.
    Date: 2010–04
  52. By: Eijffinger, S.C.W.; Qian, Z. (Tilburg University, Center for Economic Research)
    Abstract: Recent cross-country studies on the globalization and output-inflation tradeoff correlation find openness has no significant effect on OECD countries. Those studies assume parameter constancy across countries. In this paper, we argue that this assumption does not hold for major industrialized countries. Using individual time series analysis, we find the effect of openness on the output-inflation trade off differ in sign and size across countries. In contrast to previous cross-country studies, we find globalization has significantly changed some major industrialized countries’ output inflation tradeoff. This has important implications for future theoretical and empirical research.
    Keywords: openness;output-inflation tradeoff;Phillips curve;time inconsistency theory
    JEL: E31 E58 F10 F30 F41
    Date: 2010
  53. By: Özer Karagedikli; Haroon Mumtaz; Misa Tanaka (Reserve Bank of New Zealand)
    Abstract: Recent research has found evidence of increasing co-movement in CPI inflation rates across industrialised countries. This paper considers whether this increased international co-movement in inflation rates can be attributed to greater global integration of product markets. To examine this question, we use a data set of 28 matched product category price indices for 14 advanced economies for 1998Q1 - 2008Q2, 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 co-movement 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.
    JEL: E30 E52
    Date: 2010–03
  54. By: Dudley Cooke (Trinity College Dublin ,Hong Kong Institute for Monetary Research)
    Abstract: I develop a two country general equilibrium model with heterogeneous price-setting firms to understand how shocks to monetary policy and aggregate labor productivity impact trade integration, which I capture through the (inverse) average productivity of exporting firms. A contractionary domestic monetary policy shock raises the average productivity of domestic exporting firms but lowers the average productivity of foreign exporting firms. The magnitude of these changes is greater when governments target domestic price inflation as opposed to consumer price inflation. A positive shock to domestic labor productivity generates positive - although quantitatively small - changes in the average productivity of all exporting firms when consumer price inflation is targeted. When domestic price inflation is targeted, the same shock causes a fall in the average productivity of domestic exporting firms, and a far larger rise in the productivity of foreign exporting firms.
    Keywords: Monetary Policy, Heterogeneous Firms, Trade Globalization
    JEL: E31 E52 F41
    Date: 2010–02
  55. By: Katja Drechsel; Rolf Scheufele
    Abstract: The paper analyzes leading indicators for GDP and industrial production in Germany. We focus on the performance of single and pooled leading indicators during the pre-crisis and crisis period using various weighting schemes. Pairwise and joint significant tests are used to evaluate single indicator as well as forecast combination methods. In addition, we use an end-of-sample instability test to investigate the stability of forecasting models during the recent financial crisis. We find in general that only a small number of single indicator models were performing well before the crisis. Pooling can substantially increase the reliability of leading indicator forecasts. During the crisis the relative performance of many leading indicator models increased. At short horizons, survey indicators perform best, while at longer horizons financial indicators, such as term spreads and risk spreads, improve relative to the benchmark.
    Keywords: Leading Indicators, Forecast Evaluation, Forecast Pooling, Structural Breaks
    JEL: E37 C22 C53
    Date: 2010–04
  56. By: Antonio Ribba
    Abstract: The aim of this paper is to investigate the role played by macroeconomic shocks in shaping unemployment fluctuations, both in the USA and in the Euro area, in the recent, European Monetary Union, period. The task is accomplished by estimating a VAR model which jointly considers US and European variables. We identify the structural disturbances through sign restrictions on the dynamic response of variables. Our results show that there are real effects of monetary policy shocks and of non-monetary policy, financial shocks in both economic areas. Moreover, a significant role is also exerted by business cycle, adverse aggregate demand shocks. We provide an estimation of the relative importance of the identified structural shocks in explaining the variability of inflation and unemployment. Not surprisingly, in the last decade an important role has been played by financial shocks.
    Keywords: Structural VARs; Euro Area; Monetary Policy; Unemployment
    JEL: C32 E40
    Date: 2010–04
  57. By: George Athanasopoulos; Osmani Teixeira de Carvalho Guillén; João Victor Issler; Farshid Vahid
    Abstract: We study the joint determination of the lag length, the dimension of the cointegrating space and the rank of the matrix of short-run parameters of a vector autoregressive (VAR) model using model selection criteria. We consider model selection criteria which have data-dependent penalties as well as the traditional ones. We suggest a new two-step model selection procedure which is a hybrid of traditional criteria and criteria with data-dependant penalties and we prove its consistency. Our Monte Carlo simulations measure the improvements in forecasting accuracy that can arise from the joint determination of lag-length and rank using our proposed procedure, relative to an unrestricted VAR or a cointegrated VAR estimated by the commonly used procedure of selecting the lag-length only and then testing for cointegration. Two empirical applications forecasting Brazilian inflation and U.S. macroeconomic aggregates growth rates respectively show the usefulness of the model-selection strategy proposed here. The gains in different measures of forecasting accuracy are substantial, especially for short horizons.
    Date: 2010–04
  58. By: David Bowman; Etienne Gagnon; Mike Leahy
    Abstract: This paper reviews the experience of eight major foreign central banks with policy interest rates comparable to the interest rate on excess reserves paid by the Federal Reserve. We pursue two main lines of inquiry: 1) To what extent have these policy interest rates been lower bounds for short-term market rates, and 2) to what extent has tightening that included increasing these policy rates been achieved without reliance on reductions in reserves or other deposits held at the central bank? The foreign experience suggests that policy rate floors can be effective lower bounds for market rates, although incomplete access to central bank accounts and interest on them weakens this result. In addition, the foreign experience suggests that tightening by increasing the interest rate paid on central bank balances can help reduce or eliminate the need to drain balances. These results are consistent with theoretical results that show that tightening without draining is possible, irrespective of whether excess reserves are large or small.
    Date: 2010
  59. By: António Afonso (ISEG (School of Economics and Management), Technical University of Lisbon, Rua do Quelhas 6, 1200-781 Lisboa, Portugal.); Luís F. Costa (ISEG (School of Economics and Management), Technical University of Lisbon, Rua do Quelhas 6, 1200-781 Lisboa, Portugal.)
    Abstract: We compute average mark-ups as a measure of market power throughout time and study their interaction with fiscal policy and macroeconomic variables in a VAR framework. From impulse-response functions the results, with annual data for a set of 14 OECD countries covering the period 1970-2007, show that the mark-up (i) depicts a pro-cyclical behaviour with productivity shocks and (ii) a mildly counter-cyclical behaviour with fiscal spending shocks. We also use a Panel Vector Auto-Regression analysis, increasing the efficiency in the estimations, which confirms the countryspecific results. JEL Classification: D4, E0, E3, H6.
    Keywords: Fiscal Policy, Mark-up, VAR, Panel VAR.
    Date: 2010–04
  60. By: Alessandro Giustiniani; Wim Fonteyne; Wouter Bossu; Alessandro Gullo; Sean Kerr; Daniel C. L. Hardy; Luis Cortavarria
    Abstract: This paper proposes an integrated crisis management and resolution framework for the EU's single banking market. It comprises a European Resolution Authority (ERA), armed with the mandate and the tools to deal cost-effectively with failing systemic cross-border banks, and is designed to address many fundamental operational and incentive problems. It also seeks to reduce moral hazard and better protect countries against the risk of twin fiscal-financial crises by detaching banks from government budgets. The ERA would be most effective if it were twinned or combined with a European Deposit Insurance and Resolution Fund.
    Keywords: Bank reforms , Bank resolution , Bank supervision , Banking crisis , Banking systems , Economic integration , European Monetary System , Financial crisis , Financial stability , Global Financial Crisis 2008-2009 , Risk management ,
    Date: 2010–03–19
  61. By: Ansgar Belke
    Abstract: We develop a roadmap of how the ECB should further reduce the volume of money (money supply) and roll back credit easing in order to prevent inflation. The exits should be step-by-step rather than one-off. Communicating about the exit strategy must be an integral part of the exit strategy. Price stability should take precedence in all decisions. Due to vagabonding global liquidity, there is a strong case for globally coordinating monetary exit strategies. Given unsurmountable practical problems of coordinating exit with asymmetric country interests, however, the ECB should go ahead - perhaps joint with some Far Eastern economies. Coordination of monetary and fiscal exit would undermine ECB independence and is also technically out of reach within the euro area.
    Keywords: Exit strategies, international policy coordination and transmission, open market operations, unorthodox monetary policy
    JEL: E52 E58 F42 E63
    Date: 2010
  62. By: Ansgar Belke
    Abstract: The ECB has accepted increasing amounts of rubbish collateral since the crisis started leading to exposure to serious private sector credit risk (i.e. default risk) on its collateralised lending and reverse operations ("repo"). This has led some commentators to argue that the ECB needs "fiscal back-up" to cover any potential losses to be able to continue pursuing price stability. This Brief argues that fiscal backing is not necessary for the ECB for three reasons. Firstly, the ECB balance sheet risk is small compared to the FED and BoE as it neither increased its quasi-fiscal operations as much as the Fed or the BoE nor did it engage to a very large extent in outright bond purchases during the financial crisis. Secondly, the ECB's specific accounting principles of repo operations provide for more clarity and earlier recognition of losses. Thirdly, the ECB can draw on substantial reserves of the euro area national banks.
    Keywords: Central bank independence, central bank capital, counterparty risk, repurchase agreements, collateral, fiscal backing, liquidity, haircuts
    JEL: G32 E42 E51 E58 E63
    Date: 2010
  63. By: Stefania D'Amico; Don H. Kim; Min Wei
    Abstract: TIPS breakeven inflation rate, defined as the difference between nominal and TIPS yields of comparable maturities, is potentially useful as a real-time measure of market inflation expectations. In this paper, we provide evidence that a fairly large TIPS liquidity premium existed until recently, using a multifactor no-arbitrage term structure model estimated with nominal and TIPS yields, inflation and survey forecasts of interest rates. Ignoring the TIPS liquidity premiums leads to counterintuitive implications for inflation expectations and inflation risk premium, and produces large pricing errors for TIPS. In contrast, models incorporating a TIPS liquidity factor generate much better fit for these variables and reveal a TIPS liquidity premium that was until recently quite large (~1%) but has come down in recent years, consistent with the common perception that TIPS market grew and liquidity conditions improved. Our results indicate that after taking proper account of the liquidity conditions in the TIPS market, the movement in TIPS breakeven inflation rate can provide useful information for identifying real yields, expected inflation and inflation risk premium.
    Date: 2010
  64. By: Antonello D’Agostino (Central Bank and Financial Services Authority of Ireland – Economic Analysis and Research Department, PO Box 559 – Dame Street, Dublin 2, Ireland.); Luca Gambetti (Office B3.174, Departament d’Economia i Historia Economica, Edifici B, Universitat Autonoma de Barcelona, Bellaterra 08193, Barcelona, Spain.); Domenico Giannone (ECARES Université Libre de Bruxelles, 50, Avenue Roosevelt CP 114 Brussels, Belgium.)
    Abstract: The aim of this paper is to assess whether explicitly modeling structural change increases the accuracy of macroeconomic forecasts. We produce real time out-of-sample forecasts for inflation, the unemployment rate and the interest rate using a Time-Varying Coefficients VAR with Stochastic Volatility (TV-VAR) for the US. The model generates accurate predictions for the three variables. In particular for inflation the TV-VAR outperforms, in terms of mean square forecast error, all the competing models: fixed coefficients VARs, Time-Varying ARs and the na¨ıve random walk model. These results are also shown to hold over the most recent period in which it has been hard to forecast inflation. JEL Classification: C32, E37, E47.
    Keywords: Forecasting, Inflation, Stochastic Volatility, Time Varying Vector Autoregression.
    Date: 2010–04
  65. By: Inklaar, R.; Colangelo, A. (Groningen University)
    Abstract: Banks do not charge explicit fees for many of the services they provide but the service payment is bundled with the offered interest rates. This output therefore has to be imputed using estimates of the opportunity cost of funds. We argue that rather than using the single short-term, low-risk interest rate as in current official statistics, reference rates should more closely match the risk characteristics of loans and deposits. For the euro area, imputed bank output is, on average, 24 to 40 percent lower than according to current methodology. This implies an average downward adjustment of euro area GDP (at current prices) between 0.16 and 0.27 percent.
    Date: 2010
  66. By: Wändi Bruine de Bruin; Wilbert van der Klaauw; Julie S. Downs; Baruch Fischhoff; Giorgio Topa; Olivier Armantier
    Abstract: Public expectations and perceptions of inflation may affect economic decisions, and have subsequent effects on actual inflation. The Michigan Survey of Consumers uses questions about "prices in general" to measure expected and perceived inflation. Median responses track official measure of inflation, showing some tendency toward overestimation and considerable disagreement between respondents. Possibly, responses reflect how much respondents thought of salient personal experiences with specific prices when being asked about "prices in general." Here, we randomly assigned respondents to questions about "prices in general," as well as "the rate of inflation" and "price you pay." Reported expectations and perceptions were higher and more dispersed for "prices in general" than for "the rate of inflation," with "prices you pay" and "prices in general" showing similar responses patterns. Compared to questions about "the rate of inflation," questions about "prices in general" and "prices you pay" focused respondents relatively more on personal price experiences--and elicited expectations that were more strongly correlate to the expected price increases for food and transportation, which were relatively large and likely salient, but not to the expected price increases for housing, which were relatively small and likely less salient. Our results have implications for survey measures of inflation expectations.
    Keywords: Inflation (Finance) ; Consumer surveys ; Prices
    Date: 2010
  67. By: Gianluigi Ferrucci (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.); Rebeca Jiménez-Rodríguez (Department of Economics, University of Salamanca, Campus Miguel de Unamuno, E-37007, Salamanca, Spain.); Luca Onorante (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.)
    Abstract: In this paper we analyse the pass-through of a commodity price shock along the food price chain in the euro area. Unlike the existing literature, which mainly focuses on food commodity prices quoted in international markets, we use a novel database that accounts for the role of the Common Agricultural Policy in the European Union. We model several departures from the linear pass-through benchmark and compare alternative specifications with aggregate and disaggregate food data. Overall, when the appropriate dataset and methodology are used, it is possible to identify a significant and longlasting food price pass-through. The results of our regressions are applied to the strong increase in food prices in the 2007-08 period; a simple decomposition exercise shows that commodity prices are the main determinant of the increase in producer and consumer prices, thus solving the pass-through puzzle highlighted in the existing literature for the euro area. JEL Classification: C32, C53, E3, Q17.
    Keywords: food commodity prices, inflation, non-linearities, pass-through.
    Date: 2010–04
  68. By: Jaromír Beneš; Kirdan Lees (Reserve Bank of New Zealand)
    Abstract: We investigate the implications of the existence of multi-period fixed-rate loans for the behaviour of a small open economy exposed to finance shocks and housing boom-and-bust cycles. To this end, we propose a simple and analytically tractable method of incorporating multi-period debt into an otherwise standard consumer problem. Our simulations show that multi-period fixed-rate contracts can help insulate the economy from the adverse effects of particular shocks. This insulating mechanism is particularly effective for countries with high debt positions exposed to foreign exchange fluctuations, or countries operating a fixed exchange rate regime.
    JEL: E5 E44 E52
    Date: 2010–03
  69. By: Massimiliano Marzo (Department of Economics, Università di Bologna and Rimini Centre for Economic Analysis); Paolo Zagaglia (Department of Economics, Università di Bologna and Rimini Centre for Economic Analysis)
    Abstract: We investigate how the relation between gold prices and the U.S. Dollar has been affected by the recent turmoil in financial markets. We use spot prices of gold and spot bilateral exchange rates against the Euro and the British Pound to study the pattern of volatility spillovers. We estimate the bivariate structural GARCH models proposed by Spargoli e Zagaglia (2008) to gauge the causal relations between volatility changes in the two assets. We also apply the tests for change of co-dependence of Cappiello, Gerard and Manganelli (2005). We document the ability of gold to generate stable comovements with the Dollar exchange rate that have survived the recent phases of market disruption. Our findings also show that exogenous increases in market uncertainty have tended to produce reactions of gold prices that are more stable than those of the U.S. Dollar.
    Keywords: gold, exchange rates; GARCH, quantile regressions
    JEL: C22 F31 F33
    Date: 2010–01
  70. By: Roberto Frankel; Martín Rapetti
    Abstract: This paper analyzes the experience of the major Latin American countries including Argentina, Brazil, Mexico, Colombia, Chile, Peru and others in the post-World-War period, up to the crisis caused by the collapse of the U.S. housing bubble. The authors provide a detailed historical analysis that takes into account the most important economic events that helped determine exchange rate policy, and evaluates the strengths and weaknesses of the various exchange rate regimes, and their impact on outcomes including economic growth and inflation.
    Keywords: capital controls, capital flows
    JEL: O5 O55 F F3 F31 F33
    Date: 2010–04
  71. By: Michael Debabrata Patra; Partha Ray
    Abstract: This paper pursues a computationally intensive approach to generate future inflation, followed by an exploration of the determinants of inflation expectations by estimating a new Keynesian type Phillips curve that takes into account country-specific characteristics, the stance of monetary and fiscal policies, marginal costs and exogenous supply shocks. The empirical results indicate that high and climbing inflation could easily seep into people’s anticipation of future inflation and linger. There is a reputational bonus for monetary policy to act against inflation now rather than going for cold turkey when societal compulsions reach a critical mass.
    Keywords: Central bank policy , Economic models , Fiscal policy , India , Inflation , Inflation targeting , Monetary policy , Price increases , Supply-side policy ,
    Date: 2010–04–01
  72. By: David Parsley (Vanderbilt University, Hong Kong Institute for Monetary Research); Helen Popper (Santa Clara University, Hong Kong Institute for Monetary Research)
    Abstract: This paper uses data-rich estimation techniques to study monetary policy in an open economy. We apply the techniques to a small, forward-looking model and explore the importance of the exchange rate in the monetary policy rule. This approach allows us to discern whether a monetary authority targets the exchange rate per se, or instead simply responds to the exchange rate in order to achieve its other objectives. The approach also removes a downward bias on the estimate of the extent of inflation targeting. We find that this bias is important in the case of Korea, a de jure inflation targeter. In contrast to previous studies, our findings suggest that the Bank of Korea actively targets inflation, not the exchange rate. Apparently, the exchange rate has been only indirectly important in Korea's monetary policy.
    Keywords: Exchange Rates, Exchange Rate Management, Monetary Policy Rule, Inflation Targeting, Exchange Rate Regimes, Exchange Rate Classification, Factor Instrumental Variables
    JEL: F3 F4
    Date: 2009–09

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