nep-cba New Economics Papers
on Central Banking
Issue of 2010‒07‒03
39 papers chosen by
Alexander Mihailov
University of Reading

  1. Implementation of Monetary Policy: How Do Central Banks Set Interest Rates? By Benjamin Friedman; Kenneth Kuttner
  2. Resolving the financial crisis: are we heeding the lessons from the Nordics? By Claudio Borio; Bent Vale; Goeth von Peter
  3. Central bank co-operation and international liquidity in the financial crisis of 2008-9 By William Allen; Richhild Moessner
  4. State-dependent pricing under infrequent information: a unified framework By Marco Bonomo; Carlos Carvalho; René Garcia
  5. Inflation asymmetry, menu costs and aggregation bias – A further case for state dependent pricing By Péter Karádi; Ádám Reiff
  6. The incidence of nominal and real wage rigidity: an individual-based sectoral approach By Julián Messina; Philip Du Caju; Cláudia Filipa Duarte; Niels Lynggård Hansen; Mario Izquierdo
  7. Banking and sovereign risk in the euro area By Gerlach, Stefan; Schulz, Alexander; Wolff, Guntram B.
  8. Calvo vs. Rotemberg in a Trend Inflation World: An Empirical Investigation By Guido Ascari; Efrem Castelnuovo; Lorenza Rossi
  9. Detecting and interpreting financial stress in the euro area By Marianna Blix Grimaldi
  10. Consumer Price Behavior in Mexico Under Inflation Targeting: A Microdata Approach By Carla Ysusi
  11. Financial Stability and Monetary Policy By Martin, Christopher; Milas, C
  12. Bank of Canada Communication, Media Coverage, and Financial Market Reactions By Bernd Hayo; Matthias Neuenkirch
  13. Politique monétaire, stabilité macroéconomique et changement structurel By Jean-Luc Gaffard
  14. Inflation and Unemployment in Competitive Search Equilibrium By Mei Dong
  15. The Euro’s Trade Effect under Cross-Sectional Heterogeneity and Stochastic Resistance By Helmut Herwartz; Henning Weber
  16. Does capacity utilisation help estimating the TFP cycle? By Christophe Planas; Werner Roeger; Alessandro Rossi
  17. The role of financial market structure and the trade elasticity for monetary policy in open economies By Katrin Rabitsch
  18. The yield curve and the prediction on the business cycle: a VAR analysis for the European Union By Cinquegrana, Giuseppe; Sarno, Domenico
  19. Equilibrium yield curves under regime switching By Santiago García Verdú
  20. How Endogenous Is Money? Evidence from a New Microeconomic Estimate By David Cuberes; William R. Dougan
  21. Reduced form modeling of limit order markets By Pekka Malo; Teemu Pennanen
  22. Sveriges Riksbank's Inflation Interval Forecasts 1999-2005 By Lundholm, Michael
  23. The Federal Funds Rate and the Conduction of the International Orchestra By Antonio Ribba
  24. Sectoral money demand and the great disinflation in the US By Alessandro Calza; Andrea Zaghini
  25. The Role of Expenditure Switching in the Global Imbalance Adjustment By Wei Dong
  26. Nominal Price Shocks in Monopolistically Competitive Markets: An Experimental Analysis By Douglas D. Davis; Korenok Oleg
  27. Fiscal policy and growth: do financial crises make a difference? By António Afonso; Hans Peter Grüner; Christina Kolerus
  28. Shocks and Frictions under Right-to-Manage Wage Bargaining: A Transatlantic Perspective By Agostino Consolo; Matthias S. Hertweck
  29. Characterizing the business cycles of emerging economies By Calderon, Cesar; Fuentes, Rodrigo
  30. Bi-currency versus Single-Currency Targeting: Lessons from the Russian Experience By Sokolov, Vladimir
  31. Regional Monetary Coordination in Asia after the Global Financial Crisis: Comparison in Regional Monetary Stability between ASEAN+3 and ASEAN+3+3 By Eiji Ogawa
  32. The impact of changes in asset prices on real economic activity : a cointegration analysis for Germany By Andreas Nastansky; Hans Gerhard Strohe
  33. Global Financial Crisis and Policy Responses in Southeast Asia : Towards Prudent Macroeconomic Policies By Dr. Friska Parulian
  34. The crisis and employment in Italy By Federico Cingano; Roberto Torrini; Eliana Viviano
  35. Perception is Always Right: The CNB’s Monetary Policy in the Media By Jiri Bohm; Petr Kral; Branislav Saxa
  36. Inflação E Globalização:Análise Dos Efeitos Globais Sobre A Dinâmica Da Inflação Brasileira By Holland, Márcio; Mori, Rogério
  37. Exchange Rate Dynamics In Brazil By Holland, Márcio; Vilela Vieira, Flávio
  38. Optimal simple monetary policy rules and welfare in a DSGE Model for Hungary By Zoltán M. Jakab; Henrik Kucsera; Katalin Szilágyi; Balázs Világi
  39. Is Monetary Policy Effective in Developing Countries? Evidence from Ghana By Mustapha Ibn Boamah; Robert Ackrill; Juan Carlos Cuestas

  1. By: Benjamin Friedman (Harvard University); Kenneth Kuttner (Williams College)
    Abstract: Central banks no longer set the short-term interest rates that they use for monetary policy purposes by manipulating the supply of banking system reserves, as in conventional economics textbooks; today this process involves little or no variation in the supply of central bank liabilities. In effect, the announcement effect has displaced the liquidity effect as the fulcrum of monetary policy implementation. The chapter begins with an exposition of the traditional view of the implementation of monetary policy, and an assessment of the relationship between the quantity of reserves, appropriately defined, and the level of short-term interest rates. Event studies show no relationship between the two for the United States, the Euro-system, or Japan. Structural estimates of banks’ reserve demand, at a frequency corresponding to the required reserve maintenance period, show no interest elasticity for the U.S. or the Euro-system (but some elasticity for Japan). The chapter next develops a model of the overnight interest rate setting process incorporating several key features of current monetary policy practice, including in particular reserve averaging procedures and a commitment, either explicit or implicit, by the central bank to lend or absorb reserves in response to differences between the policy interest rate and the corresponding target. A key implication is that if reserve demand depends on the difference between current and expected future interest rates, but not on the current level per se, then the central bank can alter the market-clearing interest rate with no change in reserve supply. This implication is borne out in structural estimates of daily reserve demand and supply in the U.S.: expected future interest rates shift banks’ reserve demand, while changes in the interest rate target are associated with no discernable change in reserve supply. The chapter concludes with a discussion of the implementation of monetary policy during the recent financial crisis, and the conditions under which the interest rate and the size of the central bank’s balance sheet could function as two independent policy instruments.
    Keywords: Reserve supply, reserve demand, liquidity effect, announcement effect
    JEL: E52 E58 E43
    Date: 2010–06
  2. By: Claudio Borio; Bent Vale; Goeth von Peter
    Abstract: How does the management and resolution of the current crisis compare with the response of the Nordic countries in the early 1990s, widely regarded as exemplary? We argue that, while intervention has been prompter, the measures taken so far remain less comprehensive and in-depth. In particular, the cleansing of balance sheets has proceeded more slowly, and less attention has been paid to reducing excess capacity and avoiding competitive distortions. In general, policymakers have given higher priority to sustaining aggregate demand in the short term than to encouraging adjustment in the financial sector and containing moral hazard. We argue that three factors largely explain this outcome: the more international nature of the crisis; the complexity of the instruments involved; and, hardly appreciated so far, the effect of accounting practices on the dynamics of the events, reflecting in particular the prominent role of fair value accounting (and mark to market losses) in relation to amortised cost accounting for loan books. There is a risk that the policies followed so far may delay the establishment of the basis for a sustainably profitable and less risk-prone financial sector.
    Keywords: Crisis management and resolution, principles for successful resolution, Nordic countries, fair value and amortised cost accounting, mark to market losses
    Date: 2010–06
  3. By: William Allen; Richhild Moessner
    Abstract: The financial crisis that began in August 2007 has blurred the sharp distinction between monetary and financial stability. It has also led to a revival of practical central bank co-operation. This paper explains how things have changed. The main innovation in central bank cooperation during this crisis was the emergency provision of international liquidity through bilateral central bank swap facilities, which have evolved to form interconnected swap networks. We discuss the reasons for establishing swap facilities, relate the probability of a country receiving a swap line in a currency to a measure of currency-specific liquidity shortages based on the BIS international banking statistics, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We also discuss the role and effectiveness of swap lines in relieving currency-specific liquidity shortages, the risks that central banks run in extending swap lines and the limitations to their utility in relieving liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the international liquidity policies of governments and central banks.
    Keywords: Central bank cooperation, central bank swap lines, FX swaps, international liquidity, lender of last resort
    Date: 2010–06
  4. By: Marco Bonomo; Carlos Carvalho; René Garcia
    Abstract: We characterize optimal state-dependent pricing rules under various forms of infrequent information. In all models, infrequent price changes arise from the existence of a lump-sum "menu cost." We entertain various alternatives for the source and nature of infrequent information. In two benchmark cases with continuously available information, optimal pricing rules are purely state-dependent. In contrast, in all environments with infrequent information, optimal pricing rules are both time- and state-dependent, characterized by "trigger strategies" that depend on the time elapsed since the last date when information was fully factored into the pricing decision. After considering the case in which information arrives infrequently for exogenous reasons, we address pricing problems in which gathering and processing information also entails a lump-sum cost. When the information and adjustment costs must be incurred simultaneously, the optimal pricing policy is a fixed-price time-dependent rule. When the costs are dissociated, the optimal rule features price stickiness and inattentiveness. Finally, we consider versions of the price-setting problems in which firms continuously entertain partial information. We characterize the optimal pricing rules and provide numerical solution algorithms and examples in a unified framework.
    Keywords: Pricing ; Information theory ; Macroeconomics ; Price levels
    Date: 2010
  5. By: Péter Karádi (Magyar Nemzeti Bank); Ádám Reiff (Magyar Nemzeti Bank)
    Abstract: Asymmetric inflation response to aggregate shocks is an identifying macro-prediction of state dependent pricing models with trend inflation (Ball and Mankiw, 1994). The paper uses the natural experiment of symmetric value-added tax (VAT) changes in Hungary with highly asymmetric inflation responses to provide further evidence for state-dependent pricing and for the Ball-Mankiw conjecture. The paper shows, furthermore, that while a standard menu cost model like that of Golosov and Lucas (2007) underestimates the observed asymmetry, a model of multi-product firms that takes sectoral heterogeneity explicitly into consideration can quantitatively account for the inflation asymmetry observed in the data. This aggregation bias of the standard model is the result of the strong interaction term between trend inflation and menu costs in determining asymmetry in the model, and the positive correlation between sectoral inflation rates and menu costs in the data. The paper implies that the real effects of negative monetary shocks can be substantial even in the standard Golosov and Lucas (2007) model if these additional factors are taken into consideration.
    Keywords: aggregation bias, inflation asymmetry, menu cost, sectoral heterogeneity, value-added tax.
    JEL: E30
    Date: 2010
  6. By: Julián Messina (World Bank, 1818 H Street, NW, Washington, DC 20433, USA.); Philip Du Caju (National Bank of Belgium, Boulevard de Berlaimont 14, 1000 Brussels, Belgium.); Cláudia Filipa Duarte (Banco de Portugal, 148, Rua do Comercio, 1101 Lisbon Codex, Portugal.); Niels Lynggård Hansen (Danmarks Nationalbank, Havnegade 5, 1093 Copenhagen K, Danmark.); Mario Izquierdo (Banco de España, Alcalá 50, 28014 Madrid, Spain.)
    Abstract: This paper presents estimates based on individual data of downward nominal and real wage rigidities for thirteen sectors in Belgium, Denmark, Spain and Portugal. Our methodology follows the approach recently developed for the International Wage Flexibility Project, whereby resistance to nominal and real wage cuts is measured through departures of observed individual wage change histograms from an estimated counterfactual wage change distribution that would have prevailed in the absence of rigidity. We evaluate the role of worker and firm characteristics in shaping wage rigidities. We also confront our estimates of wage rigidities to structural features of the labour markets studied, such as the wage bargaining level, variable pay policy and the degree of product market competition. We find that the use of firm-level collective agreements in countries with rather centralized wage formation reduces the degree of real wage rigidity. This finding suggests that some degree of decentralization within highly centralized countries allows firms to adjust wages downwards, when business conditions turn bad. JEL Classification: J31.
    Keywords: wage rigidity, wage-bargaining institutions.
    Date: 2010–06
  7. By: Gerlach, Stefan; Schulz, Alexander; Wolff, Guntram B.
    Abstract: We study the determinants of sovereign bond spreads in the euro area since the introduction of the euro. We show that an aggregate risk factor is a main driver of spreads. This factor also plays an important indirect role for risk spreads through its interaction with the size and structure of national banking sectors. When aggregate risk increases, countries with large banking sectors and low equity ratios in the banking sector experience greater widening in yield spreads, suggesting that financial markets perceive a larger risk that governments will have to rescue banks, increasing public debt and therefore sovereign risk. Moreover, government debt levels and forecasts of future fiscal deficits are also significant determinants of sovereign spreads. --
    Keywords: Sovereign bond markets,banking,liquidity,EMU
    JEL: E43 E44 G12
    Date: 2010
  8. By: Guido Ascari (Università di Pavia); Efrem Castelnuovo (Università di Padova); Lorenza Rossi (Università di Pavia)
    Abstract: This paper estimates and compares New-Keynesian DSGE monetary models of the business cycle derived under two different pricing schemes - Calvo (1983) and Rotemberg (1982) - under a positive trend inflation rate. Our empirical findings (i) support trend inflation as an empirically relevant feature of the U.S. great moderation; (ii) provide evidence in favor of the statistical superiority of the Calvo setting; (iii) support the absence of price indexation under the Calvo mechanism only. The superiority of the Calvo model (against Rotemberg) is due to the restrictions imposed by such a pricing scheme on the aggregate demand equation. The determinacy regions implied by the two estimated models indicate relevant differences in the implementable simple policy rules.
    Keywords: Calvo, Rotemberg, trend inflation, Bayesian estimations.
    JEL: L40 L62 L52
    Date: 2010–02
  9. By: Marianna Blix Grimaldi (Sveriges Riksbank, 103 37 Stockholm, Sweden.)
    Abstract: There is a need to find better models and indicators for large disruptive events, not least in order to be more prepared and mitigate their effects. In this paper we take a step in this direction and discuss the performance of a financial stress indicator with a specific focus on the euro area. As far as we know, our indicator is the first attempt to develop an indicator of financial stress with a specific focus on the euro area. It is also the first to exploit the information contained in central bank communication to help measure stress in financial markets. For use in real time, the indicator is able to efficiently extract information from an otherwise noisy signal and provide information about the level of stress in the markets. JEL Classification: E44, E50, G10.
    Keywords: Financial stress, central bank communication, logit distribution, leading indicator, behavioural finance.
    Date: 2010–06
  10. By: Carla Ysusi
    Abstract: In this paper we do a statistical analysis of the Mexican Consumer Price Index microdata set to characterize the rigidities of the price setting process in the different sectors of the Mexican economy. The microdata set goes from July 2002 to December 2009. Broadly, results show that there exists a considerable heterogeneity in the price setting behavior across different sectors and over time. Evidence was found that when big shocks affect inflation, there is a strong co-movement of the fraction of the firms that change prices with the level of inflation.
    Keywords: Consumer Price Index, price setting process, frequencies and magnitudes of price changes.
    JEL: C19 E31
    Date: 2010–06
  11. By: Martin, Christopher; Milas, C
    Abstract: We argue that although UK monetary policy can be described using a Taylor rule in 1992- 2007, this rule fails during the recent financial crisis. We interpret this as reflecting a change in policymakers’ preferences to give priority to stabilising the financial system. Developing a model of optimal monetary policy with preference shifts, we show this provides a superior empirical model over crisis and pre-crisis periods. We find no response of interest rates to inflation during the financial crisis, possibly implying that the UK abandoned inflation targeting during the financial crisis.
    Keywords: monetary policy; financial crisis
    Date: 2010–03–31
  12. By: Bernd Hayo (Philipps-University Marburg); Matthias Neuenkirch (Philipps-University Marburg)
    Abstract: We examine the impact of Bank of Canada communications and media reporting on them on Canadian (short- and medium-term) bond and stock market returns using a GARCH model. Communications are rather uniformly distributed over the sample period (1998–2006); however, media coverage is particularly high during phases of increased uncertainty about the future course and timing of Canadian monetary policy. Official communications exert a larger influence on the bond market, whereas media coverage is more relevant for the stock market. In general, media filtering does not play a prominent role.
    Keywords: Bank of Canada, Central Bank Communication, Financial Markets, Media Coverage, Monetary Policy
    JEL: E52 G14 G15
    Date: 2010
  13. By: Jean-Luc Gaffard (Observatoire Français des Conjonctures Économiques)
    Abstract: This paper is dedicated at reconsidering objectives and instruments of monetary policy and also at redefining a policy mix in an economy which is systematically confronted to imbalances due to changes in technology, in the composition of demand or in the distribution of income, It is motivated by the policy failures as revealed both by the poor growth performances during the two last decades in Europe and by the difficulty of elaborating a strategy to way out from the on-going crisis. A critical assessment of DGSE models, which are the theoretical basis for the monetary policy currently carried out by central banks, is the starting point for reconsidering the nature of fluctuations and giving arguments in favour of an out-of-equilibrium approach. This approach focuses on the distortions in the structure of productive capacity induced by any structural change, and shows why and how the time inconsistency between the construction and the utilization phases of the production process has a monetary and a financial counterpart that may generate a global instability. In this perspective, instruments and objectives of monetary policy must be revised, which implies that several indicators of the performance of the economy must ne taken into account, arbitrages between conflicting objectives must be carried out, and some inertia must be privileged in reaction to current price and unemployment signals.
    Keywords: Monetary Policy, Structural Change
    JEL: E32 E52 E58 E61
    Date: 2010–05
  14. By: Mei Dong
    Abstract: Using a monetary search model, Rocheteau, Rupert and Wright (2007) show that the relationship between inflation and unemployment can be positive or negative depending on the primitives of the model. The key features are indivisible labor, nonseparable preferences and bargaining. Their results are derived only for a special case of the bargaining solution, take-it-or-leave-it offer by buyers. Instead of bargaining, this paper considers competitive search (price posting with directed search). I show that the results in Rocheteau, Rupert and Wright (2007) can be generalized in an environment where both buyers and sellers have nonseparable preferences. In addition, the relationship between inflation and unemployment is robust to allowing free entry by sellers, which cannot be studied in Rocheteau, Rupert and Wright (2007).
    Keywords: Inflation: costs and benefits
    JEL: E40 E52 E12 E13
    Date: 2010
  15. By: Helmut Herwartz; Henning Weber
    Abstract: This paper investigates if the euro's effect on euro-area trade differs across trade sectors and across country pairs, and to what degree heterogeneity matters for estimating the aggregate euro effect. Time-varying latent variables, which are specific to each sector in each country pair, control for omitted trade costs and mismeasured resistance terms. Parameter heterogeneity and time-varying latent variables are both strongly supported by the data. Due to decreasing trade costs, aggregate exports within the euro area increase between 2000 and 2002 by 15 to 25 percent compared with aggregate exports between European economies which are not members of the euro area. Adjustment within individual sectors is rapid whereas aggregate adjustment is more spread out and gradual since different sectors adjust at distinct times
    Keywords: Euro's trade effect, parameter heterogeneity, smooth-transition model
    JEL: C31 C33 F13 F15 F33 F42
    Date: 2010–06
  16. By: Christophe Planas; Werner Roeger; Alessandro Rossi
    Abstract: In the production function approach, accurate output gap assessment requires a careful evaluation of the TFP cycle. In this paper we propose a bivariate model that links TFP to capacity utilization and we show that this model improves the TFP trend-cycle decomposition upon univariate and Hodrick-Prescott filtering. In particular, we show that estimates of the TFP cycle that load information about capacity utilization are less revised than univariate and HP estimates, both with 2009 and real-time TFPdata vintages. We obtain this evidence for twelve pre-enlargement EU countries.
    JEL: C11 E23 E32
    Date: 2010–05
  17. By: Katrin Rabitsch (Central European University, Magyar Nemzeti Bank)
    Abstract: The degree of international risk sharing matters for how monetary policy should optimally be conducted in an open economy. This is because risk sharing affects the way in which monetary policy is affected by terms of trade considerations. In a standard two-country model with monopolistic competition and nominal rigidities I consider different assumptions on international financial markets – complete markets, financial autarky and a bond economy – and a large region for the crucial parameter of the trade elasticity. There are three main results: one, the prescription of (producer) price stability as the optimal policy is obtained only as a special case, while in general it is optimal to deviate from a strictly zero inflation rate. Two, while gains from international policy coordination are generally small, they become potentially substantial when international risk sharing is poor and wealth effects from shocks across countries are large. And, three, when international financial markets are incomplete, there are also (sometimes considerable) gains over the flexible price allocation achievable.
    Keywords: monetary policy, risk sharing, price stability, policy coordination, financial market structure, trade elasticity.
    JEL: E52 E58 F42
    Date: 2010
  18. By: Cinquegrana, Giuseppe; Sarno, Domenico
    Abstract: The literature on the yield curve deals with the capacity to predict the future inflation and the future real growth from the term structure of the interest rates. The aim of the paper is to verify this predictive power of the yield curve for the European Union at 16 countries in the 1995-2008 years. With this regard we propose two VAR models. The former is derived from the standard approach, the later is an extended version considering explicitly the macroeconomic effects of the risk premium. We propose the estimates of the models and their out-of-sample forecasts through both the European Union GDP (Gross Domestic Product) quarterly series and the European Union IPI (Industrial Production Index) monthly series. We show that the our extended model performs better than the standard model and that the out-of-sample forecasts of the IPI monthly series are better than ones of the GDP quarterly series. Moreover the out-of-sample exercises seems us very useful because they show the crowding out arising from Lehman Brother’s unexpected crash and the becoming next fine tuning process.
    Keywords: yield curve; monetary policy; business cycle; risk premium; real growth
    JEL: E43 E52 E44 E47
    Date: 2010–01
  19. By: Santiago García Verdú
    Abstract: This paper studies how inflation as a macroeconomic indicator affects nominal bond prices. I consider an economy with a representative agent with Epstein- Zin preferences. Regime switching affects the state-space capturing inflation and consumption growth. Thus, the agent is concerned about the intertemporal distribution of risk, which is affected by the persistence of the variables and the regimes. Regime switching allows for structural changes in the volatility of unexpected shocks. To the extent that inflationary unexpected shocks indicate lower consumption growth, nominal bond holders need to be compensated for these shocks. It follows that a switch in the regime state affecting the covariance of inflation and consumption growth can be interpreted as a change in the price of risk. I find coefficients of risk aversion from 40 to 90, and subjective discount factors above 0.99, depending on the exact specification of the model. The model yields have on average a positive slope, a consistent Principal Components decomposition, and predictability as in Cochrane and Piazzesi (2002).
    Keywords: Consumption-based Asset Pricing, Regime Switching, Recursive Preferences, Yield Curve, Term Structure of Interest Rates.
    JEL: G12 E42 E43 E44 E31
    Date: 2010–06
  20. By: David Cuberes (Dpto. Fundamentos del Análisis Económico); William R. Dougan (Clemson University)
    Abstract: This paper uses microeconomic data on firms' money demand and investment in physical capital for the period 1983-2006 to estimate the extent to which variation in the U.S. money supply is an endogenous response to variation in firms' demand for liquidity. We estimate a simple model in which each firm's desired money balances in any period depend on that firm's current transactions, current investment, and its planned future investment, as well as aggregate variables such as interest rates and common policy forecasts. Calculations based on our estimates suggest that only a very small fraction of the variability in the aggregate stock of money represents an endogenous response to autonomous changes in firms' investment plans.
    Keywords: Money demand, money supply, endogenous money, monetary neutrality
    JEL: E41 E51
    Date: 2010–03
  21. By: Pekka Malo; Teemu Pennanen
    Abstract: This paper proposes a parametric approach for stochastic modeling of limit order markets. The models are obtained by augmenting classical perfectly liquid market models by few additional risk factors that describe liquidity properties of the order book. The resulting models are easy to calibrate and to analyze using standard techniques for multivariate stochastic processes. Despite their simplicity, the models are able to capture several properties that have been found in microstructural analysis of limit order markets. Calibration of a continuous-time three-factor model to Copenhagen Stock Exchange data exhibits e.g.\ mean reversion in liquidity as well as the so called crowding out effect which influences subsequent mid-price moves. Our dynamic models are well suited also for analyzing market resiliency after liquidity shocks.
    Date: 2010–06
  22. By: Lundholm, Michael (Dept. of Economics, Stockholm University)
    Abstract: Are Sveriges Riksbank's inflation (CPI and KPIX) interval forecasts calibrated in the sense that the intervals cover realised inflation with the stated ex ante coverage probabilities 50, 75 and 90 percent? In total 150 interval forecast 1999:Q2-2005:Q2 are assessed for CPI and KPIX. The main result is that the forecast uncertainty is understated, but there are substantial differences between individual forecast origins and inflation measures.
    Keywords: Inflation; forecast; interval forecast; forecast uncertainty
    JEL: C53 E31 E37
    Date: 2010–06–23
  23. By: Antonio Ribba
    Abstract: In the first ten years of EMU, monetary policy choices of the European Central Bank (ECB) in setting the short-term interest rate have followed, systematically, monetary policy decisions made by the Federal Reserve System (Fed). For, despite the presence of variable lags with respect to Fed decisions, turning points of European short-term interest rates have been largely anticipated by movements in the federal funds rate. In this paper we show that, in the context of a bivariate cointegrated system, a clear long-run US dominance emerges. Moreover, the structural analysis reveals that a permanent increase in the federal funds rate causes a permanent one-for-one movement in the eonia rate.
    Keywords: Monetary policy; Identification; Structural Cointegrated VARs
    JEL: C32 E5
    Date: 2010–06
  24. By: Alessandro Calza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Andrea Zaghini (Banca d’Italia, Research Department, Via Nazionale 91, I-00184 Rome, Italy.)
    Abstract: Estimates of the welfare costs of inflation based on Bailey (1956) are typically computed using aggregate money demand models. Yet, the behavior of money demand may vary across sectors. Thus, the impact on welfare of inflation regime shifts may differ between households and …firms. We speci…cally investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. For this purpose, we estimate different functional speci…fications of money demand for US households and non-…financial …firms using flow-of-fund data covering four decades. We fi…nd that the bene…fits were signi…cant for both sectors. JEL Classification: E31, E41.
    Keywords: welfare cost of inflation, flow of funds data, demand for money.
    Date: 2010–06
  25. By: Wei Dong
    Abstract: In theory, nominal exchange rate movements can lead to “expenditure switching” when they generate changes in the relative prices of goods across countries. This paper explores whether the expenditure-switching role of exchange rates has changed in the current episode of significant global imbalances. We develop a multi-sector two-country model for the United States and the G6 countries, with the rest of the world captured by exogenous price and demand shocks, and estimate the model over two sub-samples, which cover the periods before and after the early 1990s. Our results indicate that both U.S. imports and exports have become much less responsive to exchange rate movements in recent years, mainly due to changes in firms’ pricing behavior and the increased size of distribution margins. These findings suggest that the exchange rate would have to move by a much larger amount now than in the 1970s and 1980s to reduce the U.S. trade deficit by a given amount.
    Keywords: Exchange rates; International topics
    JEL: F3 F4
    Date: 2010
  26. By: Douglas D. Davis (Department of Economics, VCU School of Business); Korenok Oleg (Department of Economics, VCU School of Business)
    Abstract: We report a price-setting market experiment conducted to examine the capacity of price and information frictions to explain real responses to nominal price shocks. As predicted by the standard dynamic models of adjustment in monopolistically competitive markets, we find that both price and information frictions impede the response to a nominal shock. Results deviate from predictions, however, in that the observed adjustment delays far exceed predicted levels. We suggest that another factor - bounded rationality – exerts a predominating effect. A variant of the standard analysis in which a subset of agents price adaptively better organizes our results.
    Keywords: Market Experiments, Price Rigidities, Information Rigidities, Bounded Rationality
    JEL: C9 E42 E47
    Date: 2010–06
  27. By: António Afonso (European Central Bank, Directorate General Economics, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Hans Peter Grüner (University of Mannheim, D-68131 Mannheim, Germany.); Christina Kolerus (University of Mannheim, D-68131 Mannheim, Germany.)
    Abstract: In this paper we assess to what extent in the existence of a financial crisis, government spending can contribute to mitigate economic downturns in the short run and whether such impact differs in crisis and non crisis times. We use panel analysis for a set of OECD and non-OECD countries for the period 1981-2007. The fiscal multiplier for the full sample for instrumented regular and crisis spending is about 0.6-0.8 considering the sample average government spending share of GDP of about one third. Altogether, we cannot reject the hypothesis that crisis spending and regular spending have the same impact using a variation of controls, sub-samples and specifications. JEL Classification: C23, E62, E44, F43, H50.
    Keywords: fiscal policy, financial crisis, growth, OECD, EU, panel analysis.
    Date: 2010–06
  28. By: Agostino Consolo; Matthias S. Hertweck (University of Basel)
    Abstract: This paper introduces staggered right-to-manage wage bargaining into a New <br />Keynesian business cycle model. Our key result is that the model is able to gener- <br />ate persistent responses in output, inflation, and total labor input to both neutral <br />technology and monetary policy shocks. Furthermore, we compare the model’s dy- <br />namic behavior when calibrated to the US and to an European economy. We find <br />that the degree of price rigidity explains most of the differences in response to a <br />monetary policy shock. When the economy is hit by a neutral technology shock, <br />both price and wage rigidities turn out to be important. <br /><br />
    Keywords: Business Cycles, Labor Market Search, Wage Bargaining, Inflation
    JEL: E24 E31 E32 J64
    Date: 2010
  29. By: Calderon, Cesar; Fuentes, Rodrigo
    Abstract: Using the dating algorithm by Harding and Pagan (2002) on a quarterly database for 23 emerging market economies (EMEs) and 12 developed countries over the period 1980.Q1 - 2006.Q2, the authors proceed to characterize and compare the business cycle features of these two groups. They first find that recessions are deeper and more frequent among EMEs (especially, among LAC countries) and that expansions are more sizable and longer (especially, among East Asian countries). After this characterization, this paper explores the linkages between the cost of recessions (as measured by the average annual rate of output loss in the peak-to-trough phase of the cycle) and several country-specific factors. The main findings are: (a) adverse terms of trade shocks raises the cost of recessions in countries with a more open trade regime, deeper financial markets and, surprisingly, a more diversified output structure. (b) U.S. interest rate shocks seem to have a significant impact on the cost of recessions in East Asian countries. (c) Recessions tend to be deeper if they coincide witha sudden stop, but the effect tends to be mitigated in countries with deeper domestic credit markets. (d) Countries with stronger institutions tend to have less costly recessions.
    Keywords: Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Banks&Banking Reform
    Date: 2010–06–01
  30. By: Sokolov, Vladimir (BOFIT)
    Abstract: This paper examines the impacts of the 2005 shift in Russian exchange rate policies from single-currency to bi-currency basket targeting on domestic interest rates and sovereign risk premium dynamics. The policy shift disconnected domestic interest rates from US dollar-denominated interest rates, replacing them with a growing positive relationship with the dual-currency basket (USD-EUR) adopted by the Central Bank of Russia, as well as a synthetic interest rate composed of the US dollar LIBOR and the euro LIBOR. The paper also considers the insulating properties of Russian basket targeting policies during the recent global liquidity crisis. I present evidence that the Russian MosIBOR rate was negatively related to the US dollar LIBOR rate and positively related to the synthetic USD-EUR rate during the "decoupling" stage of the crisis. Even with the steep quantitative easing of the US Fed during this period, the finding suggests the Russian money market was more in sync with the monetary policies of the euro area. The central conclusion here is that, in conditions of managed floating exchange rate policies and liberalized capital accounts, the relationship between a country's domestic interest rates and their foreign counterparts depends on the de facto operating target of the central bank of this country, whether it is a single currency or a basket.
    Keywords: exchange rate policy; basket targeting; sovereign CDS; decoupling
    JEL: F31 F33
    Date: 2010–06–15
  31. By: Eiji Ogawa
    Abstract: This paper analyzes how much deviation we have among Asian currencies, which include the Indian rupee, the Australian dollar, and the New Zealand dollar, given that we are discussing East Asian Community based on ASEAN+3 (Japan, China, and South Korea)+3 (India, Australia, and New Zealand). We investigate whether the instability or deviation of intra-regional exchange rates would increase when the additional three countries (India, Australia, and New Zealand) join the ASEAN+3. Contribution of each currency to the weighted average of AMU-wide Deviation Indicators shows that movements in the Japanese yen have contributed to those in the weighted average of the AMU-wide Deviation Indicators over time during the sample period from January 2000 to January 2010. Moreover, we use concepts of β and σ convergences in the context of economic growth to statistically analyze convergence or divergence for the ASEAN+3+3 currencies. The addition of the Indian rupee into the ASEAN+3 currencies makes the regional currencies unstable before and during the global financial crisis. Moreover, comparison between ASEAN+3+3 and ASEAN+3+Indian currencies shows that the addition of only the Indian rupee is relatively more stable than the addition of the Australian dollar and the New Zealand dollar as well as the Indian rupee since September 2008. It is worthy to consider that India will join the Chiang Mai Initiative to manage currency crises while the monetary authorities will conduct surveillance over stability of the intra-regional exchange rates in the near future.
    Date: 2010–06
  32. By: Andreas Nastansky; Hans Gerhard Strohe
    Abstract: This paper reviews theoretical and empirical evidence of asset price movements impact on the real economic activity. A key channel is the wealth effect on consumption. Fluctuations in stock prices and housing prices influence the households wealth and could have important impacts on households consumption. In addition, stock prices may affect corporate sector investments and property prices may affect building activity. Here, the method of cointegration is used to estimate the wealth effect and the investment effect in aggregate time series for Germany after the Reunification in 1990. Moreover, we discuss the role of asset prices in the monetary policy strategy of the ECB.
    Keywords: Stock Prices, Property Prices, Consumption, Investment, Central Banking Policy
    JEL: E58 E22 E21 C32
    Date: 2010–06
  33. By: Dr. Friska Parulian (Associate Researcher, Economic Research Institute for ASEAN and East Asia (ERIA))
    Abstract: The global fi nancial crisis hit the Southeast Asian economies through fi nancial and real sectors by the combination of lower global demand and tighter credit demand effect. The challenge for policymakers in this region is not just to prevent the escalation of the crisis and to mitigate the downturn, but also to ensure a good starting position once the rebound sets in. Policymakers should avoid taking on an excessive level of debt or creating the conditions for an infl ationary bubble by the current reaction to the global slowdown. A prudent counter-cyclical policy is necessary, and we should not ignore the medium and long-term sustainability.
    Date: 2009–07–01
  34. By: Federico Cingano (Banca d'Italia); Roberto Torrini (Banca d'Italia); Eliana Viviano (Banca d'Italia)
    Abstract: The fall in employment and the increase in unemployment rates in Italy in 2009 were fairly modest, given the sharp drop in GDP and compared with the recession of the early 1990s. This work shows that these data should be interpreted with caution, however. Firstly, employment trends as measured by Italian labour force survey may understate the decline in total employment if, as seems plausible, a lag exists between the entry of immigrants into the country and their registration. Secondly, the rise in the unemployment rate has been curbed by extensive recourse to temporary income support schemes to reduce working hours (such as the Cassa integrazione guadagni or Wage Supplementation Fund) in the northern regions, and by the sharp drop in participation in the South (the discouragement effect). The results of the Bank of Italy’s Survey of Industrial and Service Firms conducted in September 2009 show that the largest employment cuts occurred in the firms most exposed to international markets. Based on estimated labour input elasticity and on the available GDP forecast for 2010-11, we calculate that Italian employment is likely to remain well below its pre-crisis level in the coming quarters.
    Keywords: crisis, employment,unemployment
    JEL: E24 J20 J60
    Date: 2010–06
  35. By: Jiri Bohm; Petr Kral; Branislav Saxa
    Abstract: In this paper we analyze the favorableness and extent of the media coverage of the CNB’s monetary policy decisions in the period of 2002–2007. We identify the factors explaining the variance in these two dimensions using an extensive set of articles published in the four most relevant Czech daily broadsheets immediately after monetary policy meetings. We take account of parameters of the CNB’s actual monetary policy decisions and related communication as well as variables characterizing the general economic environment that prevailed at the times of the individual meetings. The most appealing results are that those CNB’s decisions that surprise financial markets are − if needed − not negatively perceived by the media and that the media welcomes interest rate changes. Therefore, from the media coverage point of view, there is no need for too much smoothing. Simultaneously, our analyses shed some light on how the media tends to report on (economic) events in general.
    Keywords: Communication, media, monetary policy, newspapers.
    JEL: E52 E58
    Date: 2009–12
  36. By: Holland, Márcio; Mori, Rogério
    Abstract: This work discusses and tests the hypothesis that global factors changed the parameters of the domestic inflationprocess, yet, whether the output gap has lost its importance in the definition of the Phillips curve, causing it flatter. As aconsequence, it is tightly associated with the decisions of the central bank in controlling inflation with interest rules. Weshow sound estimates that the Phillips curve is really flatter in the Brazilian case, as can be seen in the reduction of thevalues of the coefficients of the output gap by 40 per cent, when the equations are controlled by foreign output gap.Empirical evidence is confirmed also by the preponderant role played by the exchange rate misalignment in theBrazilian inflation process, far than the monetary rule. It doesn’t necessarily imply that the work of the central bankers isnow less important, but they are likely facilitated by the more global integration, under conditions of internationalcushion liquidity and growth.
    Date: 2010–06–17
  37. By: Holland, Márcio; Vilela Vieira, Flávio
    Abstract: The paper aims to investigate on empirical and theoretical grounds the Brazilian exchange rate dynamics under floatingexchange rates. The empirical analysis examines the short and long term behavior of the exchange rate, interest rate(domestic and foreign) and country risk using econometric techniques such as variance decomposition, Grangercausality, cointegration tests, error correction models, and a GARCH model to estimate the exchange rate volatility. Theempirical findings suggest that one can argue in favor of a certain degree of endogeneity of the exchange rate and thatflexible rates have not been able to insulate the Brazilian economy in the same patterns predicted by literature due to itsown specificities (managed floating with the use of international reserves and domestic interest rates set according toinflation target) and to externally determined variables such as the country risk. Another important outcome is the lackof a closer association of domestic and foreign interest rates since the new exchange regime has been adopted. That is,from January 1999 to May 2004, the US monetary policy has no significant impact on the Brazilian exchange ratedynamics, which has been essentially endogenous primarily when we consider the fiscal dominance expressed by theprobability of default.
    Date: 2010–06–16
  38. By: Zoltán M. Jakab (Office of Fiscal Council); Henrik Kucsera (Magyar Nemzeti Bank); Katalin Szilágyi (Magyar Nemzeti Bank); Balázs Világi (Magyar Nemzeti Bank)
    Abstract: We explore the properties of welfare-maximizing monetary policy in a medium-scale DSGE model for Hungary. In order to make our results operational from a policymaker’s perspective, we approximate the optimal policy rule with a set of simple rules reacting only to observable variables. Our results suggest that “science of monetary policy” that is found robust in simple models, holds in this medium-scaled setting as well. That is, the welfare-maximizing policy that aims to eliminate distortions associated with nominal rigidities can be approximated by a simple inflation targeting rule. Adding exchange rate into the feedback rule only marginally improves the stabilization properties of the policy rule. However, a rule reacting to wage inflation can be significantly welfare-improving. These results may suggest that in our medium-sized model the distortions associated with sticky wage setting have at least as important welfare implications as those related to the price stickiness in product markets.
    Keywords: monetary policy, central banking, policy design.
    JEL: E52 E58 E61
    Date: 2010
  39. By: Mustapha Ibn Boamah; Robert Ackrill; Juan Carlos Cuestas
    Abstract: The central bank of Ghana officially adopted an explicit inflating targeting monetary policy in May 2007 following its operational independence in March 2002. This paper explores monetary policy rules and conduct in Ghana. The paper uses time series estimations of Taylor-type reactions functions to characterise monetary policy conduct. The long-run interest rate response to inflation, output gap, and other inflation precursors from estimated reaction functions is compared with Taylor’s reference values. We conclude monetary policy was largely ineffective in controlling inflation. The paper suggests possible reasons for the non effectiveness of monetary policy and offers policy recommendations for long-term inflation control.
    Keywords: Central bank, Ghana, Inflation targeting, Monetary Policy
    JEL: E52 E58 E61
    Date: 2010–06

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