|
on Central Banking |
| By: | André Sapir; Mathias Dewatripont |
| Abstract: | The financial crisis exposed Europe's inadequacy in developing an effective banking resolution framework that could bring together national authorities and set guidelines for their coordination. The European Commission, through its assessment of state aid cases, managed to avoid single market distortions and mitigate moral hazard. This Policy Contribution explains why in the long-term Europe needs a single resolution authority. The authors Bruegel Senior Research Fellow André Sapir, Mathias Dewatripont, ULB and CEPR; Gregory Nguyen, National Bank of Belgium, and Peter Praet, National Bank of Belgium, show how in the short-term, the European Commission, through its state aid control discipline, can set the foundation for a new crisis resolution architecture. It can act as a substitute to improve coordination among member states and complement a European resolution authority once it is set up. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:421&r=cba |
| By: | Lawrence Christiano (Northwestern University, 633 Clark Street Evanston, IL 60208 Evanston, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We augment a standard monetary DSGE model to include a banking sector and financial markets. We fit the model to Euro Area and US data. We find that agency problems in financial contracts, liquidity constraints facing banks and shocks that alter the perception of market risk and hit financial intermediation — ‘financial factors’ in short — are prime determinants of economic fluctuations. They have been critical triggers and propagators in the recent financial crisis. Financial intermediation turns an otherwise diversifiable source of idiosyncratic economic uncertainty, the ‘risk shock’, into a systemic force. JEL Classification: E3, E22, E44, E51, E52, E58, C11, G1, G21, G3. |
| Keywords: | DSGE model, Financial frictions, Financial shocks, Bayesian estimation, Lending channel, Funding channel. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101192&r=cba |
| By: | Cúrdia, Vasco (Macroeconomic and Monetary Studies Function); Finocchiaro, Daria (Research Department, Central Bank of Sweden) |
| Abstract: | This paper analyzes to what extent changes in monetary policy regimes influence the business cycle in a small open economy and investigates the impact of policy breaks on the estimation procedure. We estimate a DSGE model on Swedish data, explicitly taking into account the monetary regime change in 1993, from exchange rate targeting to inflation targeting. The results suggest that monetary policy reacted strongly to exchange rate movements in the former, and mostly to inflation in the latter. The external sector plays an important role in the economy and the international transmission mechanism is significantly affected by the choice of exchange rate regime. A counterfactual experiment that applies the inflation targeting policy rule on the disturbances from the exchange rate targeting period suggests that such a policy would have led to higher output and employment, but also to a depreciated currency, higher inflation and a more volatile economy. We also show evidence that ignoring the break in the estimation leads to spurious results for both the parameters associated with monetary policy as well as those that are policy-independent. |
| Keywords: | Bayesian estimation; DSGE models; target zone; inflation targeting; regime change |
| JEL: | C10 C50 E50 F40 |
| Date: | 2010–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0241&r=cba |
| By: | Sandra Gomes (Bank of Portugal, Economic Research Department, Av. Almirante Reis 71, 1150-012 Lisbon, Portugal.); Pascal Jacquinot (European Central Bank, Directorate General of Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimiliano Pisani (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy.) |
| Abstract: | Building on the New Area Wide Model, we develop a 4-region macroeconomic model of the euro area and the world economy. The model (EAGLE, Euro Area and Global Economy model) is microfounded and designed for conducting quantitative policy analysis of macroeconomic interdependence across regions belonging to the euro area and between euro area regions and the world economy. Simulation analysis shows the transmission mechanism of region-specific or common shocks, originating in the euro area and abroad. JEL Classification: C53, E32, E52, F47. |
| Keywords: | Open-economy macroeconomics, DSGE models, econometric models, policy analysis. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101195&r=cba |
| By: | Guenter W. Beck (Goethe University of Frankfurt, House of Finance, Grueneburgplatz 1, 60323 Frankfurt am Main, Germany.); Volker Wieland (Goethe University of Frankfurt, House of Finance, Grueneburgplatz 1, 60323 Frankfurt am Main, Germany.) |
| Abstract: | In the New-Keynesian model, optimal interest rate policy under uncertainty is formulated without reference to monetary aggregates as long as certain standard assumptions on the distributions of unobservables are satisfied. The model has been criticized for failing to explain common trends in money growth and inflation, and that therefore money should be used as a cross-check in policy formulation (see Lucas (2007)). We show that the New-Keynesian model can explain such trends if one allows for the possibility of persistent central bank misperceptions. Such misperceptions motivate the search for policies that include additional robustness checks. In earlier work, we proposed an interest rate rule that is near-optimal in normal times but includes a cross-check with monetary information. In case of unusual monetary trends, interest rates are adjusted. In this paper, we show in detail how to derive the appropriate magnitude of the interest rate adjustment following a significant cross-check with monetary information, when the New-Keynesian model is the central bank’s preferred model. The cross-check is shown to be effective in offsetting persistent deviations of inflation due to central bank misperceptions. JEL Classification: E32, E41, E43, E52, E58. |
| Keywords: | monetary policy, New-Keynesian model, money, quantity theory, European Central Bank, policy under uncertainty. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101191&r=cba |
| By: | Eric Mayer (University of Wuerzburg / Department of Economics); Johann Scharler |
| Abstract: | In this paper we quantitatively evaluate the hypothesis that the Great Moderation is partly the result of a less activist monetary policy. We simulate a New Keynesian model where the central bank can only observe a noisy estimate of the output gap and fnd that the less pronounced reaction of the Federal Reserve to output gap uctuations since 1979 can account for half of the reduction in the standard deviation of GDP associated with the Great Moderation. Our simulations are consistent with the empirically documented smaller magnitude and impact of interest rate shocks since the early 1980s. |
| Keywords: | Great Moderation, New Keynesian Model, Noisy Data |
| JEL: | E32 E52 E58 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2010_07&r=cba |
| By: | Alexander Mihailov (School of Economics, University of Reading); Fabio Rumler (Economic Analysis Division, Oesterreichische Nationalbank); Johann Scharler (Department of Economics, University of Linz) |
| Abstract: | In this paper we evaluate the relative influence of external versus domestic inflation drivers in the 12 new European Union (EU) member countries. Our empirical analysis is based on the New Keynesian Phillips Curve (NKPC) derived in Gali and Monacelli (2005) for small open economies (SOE). Employing the Generalized Method of Moments (GMM), we find that the SOE NKPC is well supported in the new EU member states. We also find that the inflation process is dominated by domestic variables in the larger countries of our sample, whereas external variables are mostly relevant in the smaller countries. |
| Keywords: | New Keynesian Phillips Curve, small open economies, inflation dynamics, new EU member countries, GMM estimation |
| JEL: | C32 C52 E31 F41 P22 |
| Date: | 2010–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2010-04&r=cba |
| By: | Andrea Vaona (Department of Economics (University of Verona)) |
| Abstract: | This paper explores the influence of inflation on economic growth both theoretically and empirically. We propose to merge an endogenous growth model of learning by doing with a New Keynesian one with sticky wages. We show that the intertemporal elasticity of substitution of working time is a key parameter for the shape of the inflation-growth nexus. When it is set equal to zero, the inflation-growth nexus is weak and hump-shaped. When it is greater than zero, inflation has a sizeable and negative effect on growth. Endogenizing the length of wage contracts does not lead to inflation superneutrality in presence of a fixed cost to wage resetting. Once adopting various semiparametric and instrumental variable estimation approaches on a cross-country/time-series dataset, we show that increasing inflation reduces real economic growth, consistently with our theoretical model with a positive intertemporal elasticity of substitution of working time. |
| Keywords: | inflation, growth, wage-staggering, learning-by-doing, semi- parametric estimator |
| JEL: | E31 E51 E52 O42 C14 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:9/2010&r=cba |
| By: | Eickmeier, Sandra; Hofmann, Boris |
| 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. -- |
| Keywords: | Monetary policy,asset prices,housing,private sector balance sheets,financial crisis,factor model |
| JEL: | E52 E44 C3 E3 E43 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201007&r=cba |
| By: | J. Stephen Ferris (Department of Economics, Carleton University); J. A. Galbraith (Department of Economics, Carleton University) |
| Date: | 2010–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:10-03&r=cba |
| By: | Dupaigne, Martial; Fève, Patrick |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/2551/&r=cba |
| By: | Davide Furceri; Annabelle Mourougane |
| Abstract: | This paper examines the effects of fiscal policy on output in the euro area. For this purpose we develop a DSGE Fiscal Model with endogenous government bond yields to assess the impact of different fiscal policy shocks on output, its components and on government debt. The simulations suggest that fiscal policy is effective in supporting activity, especially in the short term. In particular, the largest fiscal multipliers are found for an increase in public investment, public consumption and a cut in the wage tax. The results are robust to different parameter calibrations and are economically significant. Amongst the different structural parameters, the share of liquidity constrained households and price persistence are found to be the ones which affect the most fiscal multipliers.<P>Les effets de la politique budgétaire sur la production : une analyse à partir d’un modèle DSGE<BR>Ce papier examine les effets de la politique budgétaire sur l?activité dans la zone euro. À cette fin, nous avons développé un modèle budgétaire DSGE dans lequel les rendements des obligations d?État sont endogènes et nous examinons l?effet de différents chocs budgétaires sur le PIB et ses composantes et sur la dette publique. Les simulations indiquent que la politique budgétaire permet de soutenir l?activité, en particulier sur le court terme. Plus précisément, les multiplicateurs budgétaires les plus larges sont associés à une augmentation de l?investissement public, de la consommation publique ainsi qu?à une baisse du taux d?imposition sur les salaires. Les résultats sont robustes à différentes valeurs des paramètres structuraux du modèle et sont économiquement significatifs. Parmi les différents paramètres structurels, la part des ménages qui rencontrent des contraintes de liquidité et les inerties au niveau des prix sont les paramètres qui affectent le plus les multiplicateurs fiscaux. |
| Keywords: | fiscal policy, debt sustainability, output, DSGE, politique budgétaire, soutenabilité de dette, activité, DSGE |
| JEL: | E62 H10 |
| Date: | 2010–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:770-en&r=cba |
| By: | Matthias Hartmann; Helmut Herwartz |
| Abstract: | We study the impact of the introduction of the European Monetary Union on inflation uncertainty. Two groups of economies, one consisting of three European Union members which are not part of the EMU and one of six OECD member economies, are used as control groups to contrast the effects of monetary unification against the counterfactual of keeping the status quo. We find that the monetary unification provides a significant payoff in terms of lower inflation uncertainty in comparison with the OECD. Regarding the difficulty of quantifying the latent inflation uncertainty, results are found to be robust over a set of four alternative estimates of inflation risk processes. |
| Keywords: | Monetary policy regimes,euro introduction,inflation uncertainty,uncertainty measures,Did the introduction of the euro impact on infla,Hartmann,Herwartz,European Economy. Economic Papers |
| JEL: | C53 E31 E42 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0396&r=cba |
| By: | Holinski Nils; Kool Clemens; Muysken Joan (METEOR) |
| Abstract: | In this paper we document the growing dispersion of external and internal balances between countries in the North and South of the Euro area over the time period 1992 to 2007. We find a persistent divergence process that seems to have started with the introduction of the common currency and has its roots in the savings and investment behavior of private sectors. We dismiss the common argument in the literature that imbalances are the temporary outcome of an overall European economic convergence process and argue that future research should place greater emphasis on country heterogeneity in behavior to fully understand economic developments in the Euro area and to derive policy implications. |
| Keywords: | macroeconomics ; |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2010026&r=cba |
| By: | Imbs, J.; Mumtaz, H.; Ravn, M.O.; Rey, H. |
| Abstract: | We use a unique dataset on television prices across European countries and regions to investigate the sources of differences in price levels. Our findings are as follows: (i) Quality is a crucial determinant of price differences. Even in an integrated economic zone as Europe, rich economies tend to consume higher quality goods. This effect accounts for the lion’s share of international price dispersion. (ii) Sizable international price differentials subsist even for the same television sets. The average bilateral price difference is as high as 80 euros, or 8% of the average TV price in our sample. (iii) EMU countries display lower price dispersion than non-EMU countries. (iv) absolute price differentials and relative price volatility are positively correlated with exchange rate volatility, but not with conventional measures of transport costs. (v) Importantly we show brand premia are sizable. They differ markedly across borders, in a way that does not correlate with transport costs, nor exchange rate movements. Taken together, the evidence is consistent firms exploiting market power through brand values to price discriminate across borders. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ner:ucllon:http://eprints.ucl.ac.uk/18846/&r=cba |
| By: | Chang, C-L.; Franses, Ph.H.B.F.; McAleer, M.J. |
| 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 |
| Date: | 2010–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureir:1765019358&r=cba |
| By: | Jacques Bouhga-Hagbe; S. M. Ali Abbas; Ricardo Velloso; Antonio J. Fatas; Paolo Mauro |
| Abstract: | This paper examines the relationship between fiscal policy and the current account, drawing on a larger country sample than in previous studies and using panel regressions, vector autoregressions, and an analysis of large fiscal and external adjustments. On average, a strengthening in the fiscal balance by 1 percentage point of GDP is associated with a current account improvement of 0.2–0.3 percentage point of GDP. This association is as strong in emerging and low-income countries as it is in advanced economies; and significantly higher when output is above potential. |
| Keywords: | Cross country analysis , Current account , Economic models , Exchange rates , Fiscal policy , Nonoil developing countries , Oil exporting countries , |
| Date: | 2010–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/121&r=cba |
| By: | Murtaza H. Syed; Hiromi Yamaoka |
| Abstract: | In responding to the global crisis, central banks in several advanced economies ventured beyond traditional monetary policy. A variety of unorthodox measures, including purchases of public and private assets, have significantly enlarged their balance sheets. As recoveries take hold, focus will increasingly shift from countering the Great Recession to orchestrating an exit and returning to a more normal monetary framework. Five years ago, as its economy recovered from a severe financial crisis, Japan attempted just such an exit. This note revisits the Bank of Japan’s experience and draws potential lessons for managing an orderly exit today, with a focus on technical aspects, practicalities, and communication strategies. While the nature of the assets acquired during the present crisis could pose additional complications, parts of Japan’s arsenal—communication, flexibility, a sufficient set of policy tools and a strategy for using them, safeguards against potential losses, the revival of risk appetite through decisive restructuring of balance sheets, and refinements to the monetary framework upon exit—also could be important this time around. |
| Keywords: | Asset management , Central bank policy , Economic recovery , Financial crisis , Interest rate increases , Japan , Liquidity management , Monetary measures , Monetary policy , |
| Date: | 2010–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/114&r=cba |
| By: | Anna Naszodi (Magyar Nemzeti Bank, 1054 Szabadság tér 8/9, 1850 Budapest, Hungary.) |
| Abstract: | This paper proposes a new test for the asset pricing model of the exchange rate. It examines whether the way market analysts generate their forecasts is closer to the one implied by the asset pricing model, or to any of those implied by some alternative models. The asset pricing model is supported by the test since it has significantly better out-ofsample fit on survey data than simpler models including the random walk. The traditional test based on forecasting ability is applied as well. The asset pricing model proves to have better forecast accuracy in case of some exchange rates and forecast horizons than the random walk. JEL Classification: F31, F36, G13. |
| Keywords: | asset pricing exchange rate model, present value model of exchange rate, survey data. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101200&r=cba |
| By: | Luis Ignacio Jácome; Åke Lönnberg |
| Abstract: | This paper identifies key aspects that countries willing to officially dollarize must necessarily address. Based on country experiences, it discusses the critical institutional bases that are necessary to unilaterally introduce a new legal tender, describes the relevant operational issues to smooth the transition toward the use of the new currency, and identifies key structural reforms that are necessary to favor the sustainability over time of this monetary regime. The paper is aimed at providing preliminary guidance to policy makers and practitioners adopting official dollarization. The paper does not take a position on how appropriate this monetary arrangement is. Experiences from adopting dollarization in Ecuador, El Salvador, Kosovo, Montenegro, and Timor-Leste are illustrated briefly. |
| Keywords: | Bank reforms , Bank supervision , Central bank legislation , Central bank role , Central banks , Cross country analysis , Dollarization , Exchange rate policy , Fiscal reforms , Governance , Labor market reforms , Monetary policy , Trade policy , |
| Date: | 2010–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/106&r=cba |
| By: | James Forder |
| Abstract: | The idea of the ‘L-shaped aggregate supply curve’, supposedly a feature of primitive macroeconomic models, is in fact a reasonable reconstruction of a well developed way of thinking that specifically denied a relation between wage change and aggregate employment. Neither that approach nor the idea of cost-push inflation to which it is related need be crude or superficial. Although the ideas in question were swept away by the Phillips curve, they have much merit and their reintroduction to mainstream macroeconomics might pay large dividends. |
| Keywords: | Phillips curve, Wage determination, Keynesianism |
| JEL: | B22 E24 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:486&r=cba |
| By: | Joshua C.C. Chan; Garry Koop; Roberto Leon Gonzales; Rodney W. Strachan |
| Abstract: | Abstract: Time varying parameter (TVP) models have enjoyed an increasing popularity in empirical macroeconomics. However, TVP models are parameter-rich and risk over-fitting unless the dimension of the model is small. Motivated by this worry, this paper proposes several Time Varying dimension (TVD) models where the dimension of the model can change over time, allowing for the model to automatically choose a more parsimonious TVP representation, or to switch between different parsimonious representations. Our TVD models all fall in the category of dynamic mixture models. We discuss the properties of these models and present methods for Bayesian inference. An application involving US in.ation forecasting illustrates and compares the different TVD models. We find our TVD approaches exhibit better forecasting performance than several standard benchmarks and shrink towards parsimonious specifications. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2010-523&r=cba |
| By: | Rachel Male (Queen Mary, University of London) |
| Abstract: | Identifying business cycle stylised facts is essential as these often form the basis for the construction and validation of theoretical business cycle models. Furthermore, understanding the cyclical patterns in economic activity, and their causes, is important to the decisions of both policymakers and market participants. Previous analyses of developing country stylised facts have tended to feature only small samples, for example the seminal paper by Agénor <i>et al.</i> (2000) considers just twelve middle-income economies. Consequently, unlike for the industrialised countries, there is not a consistent set of developing country business cycle stylised facts. Motivated by importance of these business cycle statistics, this paper makes an important contribution to the literature by extending and generalising the developing country stylised facts for a sample of thirty-two developing countries. In particular, it is found that real interest rates are, on average, weakly procyclical in developing countries, not countercyclical as previously reported; this holds only for the Latin American economies. There is evidence that money leads the cycle in numerous developing economies, and thus that monetary shocks are an important source of business cycle fluctuations. However domestic credit, which is thought to fulfil an important role in determining investment, and hence economic activity, in developing economies, is found to lag, rather than lead, the cycle, thus implying that fluctuations in output influence credit rather than credit influencing the business cycle. A final key empirical finding is that developing country business cycles are characterised by significantly persistent output fluctuations; however, the magnitude of this persistence is somewhat lower than for the developed countries. Furthermore, prices and nominal wages are found to be significantly persistent in almost all of the developing countries. This finding is particularly important, because it justifies the use of theoretical models with staggered prices and wages for the modelling of developing country business cycles. |
| Keywords: | Business cycle, Developing economies, Stylised facts, Volatility, Persistence, Cross-correlations |
| JEL: | E31 E32 E52 F41 O50 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp664&r=cba |
| By: | Inci Ötker; Charles Freedman |
| Abstract: | This is the fifth chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." It examines whether certain conditions have to be met before emerging economies can adopt an inflation-targeting regime and provides some empirical evidence on the matter. The issues analyzed are the priority of inflation targeting over other goals, the absence of fiscal dominance, central bank independence, the degree of control over the policy interest rate, a sound methodology for forecasting, and the soundness of financial institutions and markets, and resilience to changes in exchange rates and interest rates. |
| Keywords: | Central bank autonomy , Emerging markets , Exchange rates , Fiscal policy , Inflation targeting , Interest rate policy , Monetary policy , |
| Date: | 2010–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/113&r=cba |
| By: | Reitz, Stefan; Ruelke, Jan C.; Taylor, Mark P. |
| Abstract: | This paper applies nonlinear econometric models to empirically investigate the effectiveness of the Reserve Bank of Australia (RBA) exchange rate policy. First, results from a STARTZ model are provided revealing nonlinear mean reversion of the Australian dollar exchange rate in the sense that mean reversion increases with the degree of exchange rate misalignment. Second, a STR-GARCH model suggests that RBA interventions account for this result by strengthening foreign exchange traders' confidence in fundamental analysis. This in line with the so-called coordination channel of intervention effectiveness. -- |
| Keywords: | Foreign exchange intervention,market microstructure,smooth transition,nonlinear mean reversion |
| JEL: | C10 F31 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201008&r=cba |