nep-cba New Economics Papers
on Central Banking
Issue of 2010‒05‒08
twenty-one papers chosen by
Alexander Mihailov
University of Reading

  1. The development of monetary policy in the 20th century – some reflections By Otmar Issing
  2. The Barnett Critique After Three Decades: A New Keynesian Analysis By Michael T. Belongia; Peter N. Ireland
  3. Room for Manoeuvre – Monetary Policy Over the Next Eighteen Months, and the Allure of Price-Level Targeting By Philippe Bergevin; David Laidler
  4. A century of macroeconomic and monetary thought at the National Bank of Belgium By Ivo Maes
  5. Theory, General Equilibrium and Political Economy in Development Economics By Daron Acemoglu
  6. Using a DSGE model to look at the recent boom-bust cycle in the US By Marco Ratto; Werner Roeger; Jan in 't Veld-European Commission
  7. Getting rid of Keynes ? A survey of the history of macroeconomics from Keynes to Lucas and beyond By Michel De Vroey
  8. The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes By Arghyrou, Michael G; Tsoukalas, John D.
  9. Bank Runs Without Sunspots By Francisco J. Santos-Arteaga
  10. Money and Risk Aversion in a DSGE Framework: A Bayesian Application to the Euro Zone By Benchimol, Jonathan; Fourçans, André
  11. Fortune or Virtue: Time-Variant Volatilities Versus Parameter Drifting in U.S. Data By Jesús Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
  12. News versus sunspot shocks in a New Keynesian model By Karnizova, Lilia
  13. Fiscal policy under imperfect competition: A survey By Costa, Luís F.; Dixon, Huw David
  14. The Synchronization of GDP Growth in the G7 during U.S. Recessions. Is this Time Different? By Nikolaos Antonakakis; Johann Scharler
  15. Inflation, price dispersion and market integration through the lens of a monetary search model By Becker, Sascha; Nautz, Dieter
  16. Heterogeneity in money holdings across euro area countries: the role of housing By Ralph Setzer; Paul van den Noord; Guntram B. Wolff
  17. Asset Price Regulators Unite: You Have Macroeconomic Stability to Win and the Microeconomic Losses are Second-order By Ron Bird; Gordon Menzies; Peter Dixon; Maureen Rimmer
  18. Central bank liquidity and market liquidity: the role of collateral provision on the French government debt securities market. By Avouyi-Dovi, S.; Julien, I.
  19. Wage Bargaining and the Phillips Curve in Italy By Alessandra Del Boca; Michele Fratianni; Franco Spinelli; Carmine Trecroci
  20. The euro: It can't happen, It's a bad idea, It won't last. US economists on the EMU, 1989-2002 By Lars Jonung; Eoin Drea
  21. Wealth effects on consumption in financial crises: the case of Norway By Eilev S. Jansen

  1. By: Otmar Issing (Center for Financial Studies, Frankfurt am Main)
    Abstract: In this paper I outline – from a practitioner’s as well as from a researcher’s perspective – several of the key developments that took place during the last century in monetary policy. In particular, I describe how the monetary system evolved from gold standard, prevailing throughout most of the last century, to paper money and how the norm in central banking changed from pure discretion after World War II to transparency and independence. I furthermore analyze how the exchange rate regime under Bretton-Woods impacted on countries’ monetary policy and, with a focus on Europe, how European Monetary Union (EMU) emerged from the European Monetary System (EMS). I then outline today’s relatively broad consensus on monetary policy and how it developed from a learning process on the side of central banks and important contributions from research. Finally, after arguing that the ECB’s monetary policy which fruitfully combines past experience and current research is a successful and promising approach, I outline some challenges lying ahead
    Keywords: monetary policy, monetary system, European Monetary Union, ECB
    JEL: A11 B22 E42 E58 F33 N10
    Date: 2010–04
  2. By: Michael T. Belongia (University of Mississipp); Peter N. Ireland (Boston College)
    Abstract: This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of real and nominal shocks. Finally, the analysis characterizes the optimal monetary policy response to shocks that originate in an explicitly-modeled financial sector.
    Keywords: Barnet critique, Divisia, liquidity, aggregation
    JEL: C43 E32 E41 E52
    Date: 2010–05–01
  3. By: Philippe Bergevin (C.D. Howe Institute); David Laidler (C.D. Howe Institute)
    Abstract: Moving to price-level targeting from inflation-rate targeting could be a sound option for the Bank of Canada after 2011, when its current agreement with the Minister of Finance is up for renewal. However, the authors say the viability of that option rests on whether the Bank can maintain its credibility in monetary policy over the coming months, as it seeks a balance between providing support to the still fragile economic recovery and avoiding a resurgence of inflation above its 2 percent inflation target.
    Keywords: Monetary Policy, Bank of Canada, price-level targeting, inflation-rate targeting, exchange rate
    JEL: E58 E52 E31 E42
    Date: 2010–04
  4. By: Ivo Maes (National Bank of Belgium, Research Department; Université catholique de Louvain, Robert Triffin Chair; HUBrussel; ICHEC Brussels Management School)
    Abstract: "A century of macroeconomic and monetary thought at the National Bank of Belgium" traces the history of economic research at the National Bank of Belgium, from the early decades of the 20th century to its present functioning in the Eurosystem. The study also goes into the major economic policy debates, as well as the specific lines of macroeconomic and monetary thinking at the National Bank of Belgium. The focus is very much on the role of the Research Department in policymaking and its dialogue (and debates) with the academic community
    Keywords: National Bank of Belgium, central banking, monetary theory, economic research
    JEL: A11 B22 E42 E58 N10
    Date: 2010–04
  5. By: Daron Acemoglu
    Abstract: I discuss the role of economic theory in empirical work in development economics with special emphasis on general equilibrium and political economy considerations. I argue that economic theory plays (should play) a central role in formulating models, estimates of which can be used for counterfactual and policy analysis. I discuss why counterfactual analysis based on microdata that ignores general equilibrium and political economy issues may lead to misleading conclusions. I illustrate the main arguments using examples from recent work in development economics and political economy.
    JEL: B41 D50 O10 O12 P48
    Date: 2010–04
  6. By: Marco Ratto; Werner Roeger; Jan in 't Veld-European Commission
    Abstract: This paper presents a DSGE model with residential investment and credit-constrained households estimated with US data over the period 1980Q1-2008Q4. In order to better understand speculative movements of house prices, we model land as an exhaustible resource, implying that house prices have asset market characteristics.We conduct an event study for the US over the period 1999Q1-2008Q4 which has been characterised by a housing boom and bust and examine which shocks have contributed to the evolution of GDP and its components over this period. We devote special attention to the contribution of non-fundamental shocks to asset prices over this episode.
    Keywords: Using a DSGE model to look at the recent boom-bu DSGE model Housing Credit constraint collateral Bubbles Shocks Ratto Roeger in 't Veld European Economy. Economic Papers
    JEL: C51 E21 E22 E52
    Date: 2010–01
  7. By: Michel De Vroey (University of Louvain)
    Abstract: The aim of this paper is to recount the ebbs and flows of Keynesianism over the history of macroeconomics. The bulk of the paper consists of a discussion of the main episodes of the unfolding of macroeconomics (Keynesian macroeconomics, monetarism, new classical macroeconomics, real business cycle models and new neoclassical synthesis models) against the background of a distinction between Keynesianism as a ‘moderately conservative’ (Keynes’s words) vision about the working of the market system and as a conceptual apparatus. Particular attention is given to the contrast between Keynesian and Lucasian macroeconomics. The paper ends with a few remarks about the impact of the present crisis on the development of macroeconomic theory
    Keywords: Keynes, Lucas, history of macroeconomics
    JEL: B
    Date: 2010–04
  8. By: Arghyrou, Michael G (Cardiff Business School); Tsoukalas, John D.
    Abstract: We use insights from the literature on currency crises to offer an analytical treatment of the crisis in the market for Greek government bonds. We argue that the crisis itself and its escalating nature are very likely to be the result of: (a) steady deterioration of Greek macroeconomic fundamentals over 2001-2009 to levels inconsistent with longterm EMU participation; and (b) a double shift in markets. expectations, from a regime of credible commitment to future EMU participation under an implicit EMU/German guarantee of Greek fiscal liabilities, to a regime of non-credible EMU commitment without fiscal guarantees, respectively occurring in November 2009 and February/March 2010. We argue that the risk of contagion to other periphery EMU countries is significant; and that without extensive structural reforms the sustainability of the EMU is in question.
    Keywords: Currency crises; bonds market; expectations; fiscal guarantees; contagion
    JEL: F31 F33 F34 F41 F42 F50
    Date: 2010–04
  9. By: Francisco J. Santos-Arteaga (Universidad Complutense de Madrid,Instituto Complutense de Estudios Internacionales (ICEI))
    Abstract: The literature on bank runs reduces all coordination mechanisms triggering attacks on banks to exogenous sunspots. We present a general equilibrium version of these models where the uncertainty faced by depositors is modeled explicitly, such that bank runs arise as optimal equilibrium outcomes corresponding to Bayesian coordination games played by rational agents before depositing. Differentials in information sets between the bank and its depositors lead to rational self-contained equilibrium runs. The coexistence of different beliefs in equilibrium jointly with the self-fulfilling nature of the attacks follow from Adam Smith's invisible hand principle. The runs obtained do not violate the revelation principle.
    Keywords: Bank runs, Self-contained attacks, Bayesian coordination games, Revelation principle, Invisible hand principle, Pánicos bancarios, Ataques autocontenidos, Juegos de coordinación Bayesianos, Principio de revelación, Principios de la mano invisible.
    Date: 2010
  10. By: Benchimol, Jonathan (CES, University Paris 1 Panthéon-Sorbonne and Department of Economics, ESSEC Business School); Fourçans, André (ESSEC Business School, Department of Economics)
    Abstract: In this paper, we set up and test a model of the Euro zone, with a special emphasis on the role of money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. By using bayesian estimation techniques, we shed light on the determinants of output and inflation, but also of the interest rate, real money balances, flexible-price output and flexible-price real money balances variances. The role of money is investigated further. We find that its impact on output depends on the degree of agents’ risk aversion, increases with this degree, and becomes significant when risk aversion is high enough. The direct impact of the money variable on inflation variability is essentially minor whatever the risk aversion level, the interest rate (monetary policy) being the overwhelming explanatory factor.
    Keywords: Bayesian Estimation; DSGE Model; Euro Area; Money
    JEL: E31 E51 E58
    Date: 2010–04
  11. 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: This paper compares the role of stochastic volatility versus changes in monetary policy rules in accounting for the time-varying volatility of U.S. aggregate data. Of special interest to us is understanding the sources of the great moderation of business cycle fluctuations that the U.S. economy experienced between 1984 and 2007. To explore this issue, we build a medium-scale dynamic stochastic general equilibrium (DSGE) model with both stochastic volatility and parameter drifting in the Taylor rule and we estimate it non-linearly using U.S. data and Bayesian methods. Methodologically, we show how to confront such a rich model with the data by exploiting the structure of the high-order approximation to the decision rules that characterize the equilibrium of the economy. Our main empirical findings are: 1) even after controlling for stochastic volatility (and there is a fair amount of it), there is overwhelming evidence of changes in monetary policy during the analyzed period; 2) however, these changes in monetary policy mattered little for the great moderation; 3) most of the great performance of the U.S. economy during the 1990s was a result of good shocks; and 4) the response of monetary policy to inflation under Burns, Miller, and Greenspan was similar, while it was much higher under Volcker.
    Keywords: DSGE models, Stochastic volatility, Parameter drifting, Bayesian methods
    JEL: E10 E30 C11
    Date: 2010–04–15
  12. By: Karnizova, Lilia
    Abstract: Separately, news and sunspot shocks have been shown empirically to be determinants of changes in expectations. This paper considers both of them together in a simple New Keynesian monetary business cycle model. A full set of rational expectations solutions is derived analytically. The analytical characterization allows an explicit comparison of news about future monetary policy and sunspots. The key distinction between the shocks lies in their relation to the realized policy shock. If monetary policy is 'passive', both types of shocks affect model dynamics through forecast errors. The effect of the news on forecast errors is not unique, and the dynamics induced by news and sunspot shocks can be observationally equivalent. If monetary policy is 'active', the sunspots are irrelevant, and the model responses to the news shocks are unique. In both cases, news shocks strengthen the endogenous propagation of the model, since anticipation of future changes prolongs agents' reaction. --
    Keywords: News shocks,sunspots,expectations,monetary policy,indeterminacy
    JEL: E32 E47 E52
    Date: 2010
  13. By: Costa, Luís F.; Dixon, Huw David
    Abstract: This paper surveys the link between imperfect competition and the effects of fiscal policy on output, employment and welfare. We examine static and dynamic models, with and without entry under a variety of assumptions using a common analytical framework. We find that in general there is a robust relationship between the fiscal multiplier and welfare, the tantalizing possibility of Pareto improving fiscal policy is much more elusive. In general, the mechanisms are supply side, and so welfare improving policy, whilst possible, is not a general result. --
    Keywords: Fiscal policy,imperfect competition
    JEL: E62
    Date: 2010
  14. By: Nikolaos Antonakakis; Johann Scharler
    Abstract: Using the dynamic conditional correlation (DCC) model due to Engle (2002), we estimate time varying correlations of quarterly real GDP growth among the G7 countries. In general, we find that rathe heterogeneous patterns of international synchronization exist during U.S. recessions. During the 2007 - 2009 recession, however, international co-movement increased substantially.
    Keywords: Dynamic conditional correlation, Business cycle synchronization, Recession
    JEL: E3 E32 F4 F41
    Date: 2010–04
  15. By: Becker, Sascha; Nautz, Dieter
    Abstract: Recent monetary search models emphasize that the real effects of inflation via its impact on price dispersion depend on the level of search costs and, thus, on the level of market integration. For less integrated markets, the inflation-price dispersion nexus is predicted to be asymmetrically V-shaped which implies an optimal inflation rate above zero. For highly integrated markets, however, theory suggests that the impact of inflation on price dispersion disappears. Employing price data of the European Union member states, this paper is the first that empirically tests these implications of monetary search theory. --
    Keywords: Inflation,Relative price variability,Monetary search models,European market integration
    JEL: E31 C23
    Date: 2010
  16. By: Ralph Setzer; Paul van den Noord; Guntram B. Wolff
    Abstract: In this paper we examine why monetary aggregates of euro area Member States have developed differently since the inception of the euro. We derive a money demand equation that incorporates housing wealth and collateral as well as substitution effects on real money holdings. Empirically, we show that cross-country differences in real balances are determined not only by income differences, a standard determinant of money demand, but also by house price developments.Higher house prices and higher user costs of housing are both associated with larger money holdings. Country-specific money holdings are also connected with structural features of the housing market.
    Keywords: european union eu setzer wolff van den Noord euro area money heterogeneity money holdings
    JEL: E41 E51 E52
    Date: 2010–02
  17. By: Ron Bird (School of Finance and Economics, University of Technology, Sydney); Gordon Menzies (School of Finance and Economics, University of Technology, Sydney); Peter Dixon (Centre for Policy Studies, Monash University); Maureen Rimmer (Centre for Policy Studies, Monash University)
    Abstract: The Global Financial Crisis (GFC) has rekindled debate about the desirability of governmental interference in asset markets – either through the operation of policy levers, or, through the chosen institutional setup. In this paper we quantify economic costs due to mispricing of real assets in the USAGE model of the United States. The microeconomic costs of misallocated capital are second-order small. The model suggests that regulators (or central banks) who restrain the volatility of asset prices do so without incurring large economic costs.
    Keywords: financial crises; macroeconomic modeling; real assets
    JEL: C50 F41
    Date: 2010–04–01
  18. By: Avouyi-Dovi, S.; Julien, I.
    Abstract: We examine the effects of collateral provision as a potential channel between funding liquidity tensions and the scarcity of market liquidity. This channel consists in transferring the credit risk associated with refinancing operations between financial institutions to market participants that bear new liquidity risk on the market associated with collateral. In particular, we address the issue of the liquidity of the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. We use a time-varying transition probability (TVTP) VAR model considering both the monetary policy cycle and the cycle of French treasury auctions. We highlight the existence of a specific regime in which monetary policy neutrality is not verified on the market for French bonds. Moreover, the existence of conventional and unconventional regimes leads to asymmetries in monetary policy implementation.
    Keywords: Monetary policy, collateral, liquidity, volatility, French bond market.
    JEL: G10 C22 C53
    Date: 2010
  19. By: Alessandra Del Boca (University of Brescia); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR); Franco Spinelli (University of Brescia); Carmine Trecroci (University of Brescia)
    Abstract: The theme of this paper is whether there was a textbook-like Phillips Curve in post-WWII Italy. We estimate a standard model of the relationship between inflation and the level of real economic activity over the 1949-1998 period and find no evidence of a significant and positive feedback from output to prices. We also estimate similar models for the UK and the US and compare them with the Italian experience. Italy stands out as sharply different from the two Anglo-Saxon countries. We attribute this difference, among other factors, to the role of wage coordination and indexation mechanisms. In particular, the scala mobile, the rigid indexation mechanism aimed at protecting wages from inflation contributed to the persistent inflation bias that Italy experienced almost until its entry into the EMU.
    Keywords: Italy, Phillips Curve, inflation, ndexation, wage bargaining
    JEL: E31 E32 J50 N10
    Date: 2010–04
  20. By: Lars Jonung; Eoin Drea
    Abstract: This study of approximately 170 publications shows (a) that US academic economists concentrated on the question "Is the EMU a good or bad thing?", usually adopting the paradigm of optimum currency areas as their main analytical vehicle, (b) that they displayed considerable scepticism towards the single currency, (c) that economists within the Federal Reserve System had a less analytical and a more pragmatic approach to the single currency than US academic economists, and (e) that US economists adjusted their views and analytical approach as European monetary unification progressed. In particular, the traditional optimum currency approach was gradually put into question.
    Keywords: The euro, optimum currency area, ECB, EMU, Federal Reserve System, monetary unification, Europe, United States, Jonung, Drea
    JEL: B22 E E5 F02 F33 F41
    Date: 2009–12
  21. By: Eilev S. Jansen (Statistics Norway)
    Abstract: A dynamic consumption function, where consumption in the long run is determined by households’ disposable income and wealth, has been superior to the Euler equation in explaining the development of Norwegian aggregate consumption over several decades. This period covers the years of financial deregulation in the mid 1980s, the banking crisis around 1990 following the deregulation and the current international financial crisis. In the current version, long run consumption is homogeneous in income and wealth and there is also a significant effect from after-tax real interest rates. A change in the correlation pattern between real interest rates and wealth, which is related to a change in the monetary policy regime, is the reason why both variables need to be included in the long run relationship in order to explain the development over the past four years.
    Keywords: financial crisis; consumption; wealth effects; interest rates; savings rate.
    JEL: C51 C52 C53 E21
    Date: 2010–04

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