nep-cba New Economics Papers
on Central Banking
Issue of 2010‒07‒10
forty-one papers chosen by
Alexander Mihailov
University of Reading

  1. Calling Recessions in Real Time By James D. Hamilton
  2. Financial Conditions Indexes: A Fresh Look after the Financial Crisis By Jan Hatzius; Peter Hooper; Frederic S. Mishkin; Kermit L. Schoenholtz; Mark W. Watson
  3. Euro area governance: What went wrong in the euro area? How to repair it? By Jean Pisani-Ferry
  4. European Debt Crisis and Fiscal Exit Strategies By Catherine Mathieu; Henri Sterdyniak
  5. Consumption-Based Asset Pricing with Higher Cumulants By Ian Martin
  6. Alan Greenspan, the quants and stochastic optimal control By Stein, Jerome L.
  7. Self-Fulfilling Risk Panics By Philippe Bacchetta; Cédric Tille; Eric van Wincoop
  8. Monetary policy and country risk By Kuhl Teles, Vladimir; P. Andrade, Joaquim
  9. Global imbalances before and after the global crisis By Serven, Luis; Nguyen, Ha
  10. Identifying VARs through Heterogeneity: An Application to Bank Runs By De Graeve, Ferre; Karas, Alexei
  11. Equilibrium asset prices and the wealth distribution with inattentive consumers By Finocchiaro, Daria
  12. Managing Markets for Toxic Assets By Christopher L. House; Yusufcan Masatlioglu
  13. Interbank overnight interest rates - gains from systemic importance By Q. Farooq Akram; Casper Christophersen
  14. Wholesalers and Retailers in U.S. Trade (Long Version) By Andrew B. Bernard; J. Bradford Jensen; Stephen Redding; Peter K. Schott
  15. Monetary equilibrium with decentralized trade and learning By Araujo, Luis; Camargo, Braz
  16. Money versus memory By Araujo, Luis; Camargo, Braz
  17. Policy analysis in real time using IMF's monetary model By Q. Farooq Akram
  18. Expectations-driven cycles in the housing market By Luisa Lambertini; Caterina Mendicino; Maria Teresa Punzi
  19. Liquidity Risk, Credit Risk and the Overnight Interest Rate Spread: A Stochastic Volatility Modelling Approach By John Beirne; Guglielmo Maria Caporale; Nicola Spagnolo
  20. Financial Crisis, Global Liquidity and Monetary Exit Strategies By Ansgar Belke
  21. How Much Fiscal Backing Must the ECB Have? – The Euro Area is not the Philippines By Ansgar Belke
  22. "The Great Crisis and the American Response" By James K. Galbraith
  23. Micro-based estimates of heterogeneous pricing rules: the united states vs. The euro area By Luis J. Álvarez; Pablo Burriel
  24. Real-time Optimal Monetary Policy with Undistinguishable Model Parameters and Shock Processes Uncertainty By Alessandro Flamini; Costas Milas
  25. Currency Unions in Prospect and Retrospect By J. M. C. Santos Silva; Silvana Tenreyro
  26. Optimal Monetary Policy with Non-Zero Net Foreign Wealth By Mykhaylova, Olena
  27. Public wages in the euro area - towards securing stability and competitiveness By Fédéric Holm-Hadulla; Kishore Kamath; Ana Lamo; Javier J. Pérez; Ludger Schuknecht
  28. Depression Econometrics: A FAVAR Model of Monetary Policy During the Great Depression By Pooyan Amir Ahmadi; Albrecht Ritschl
  29. Crisis? What Crisis? Currency vs. Banking in the Financial Crisis of 1931 By Albrecht Ritschl; Samad Salferaz
  30. Search-Theoretic Money, Capital and International Exchange Rate Fluctuations By Gomis-Porqueras, Pere; Kam, Timothy; Lee, Junsang
  31. Monetary Policy and Commodity Prices: an endogenous analysis using an SVAR approach By Luz Adriana Flórez
  32. Regionality Revisited: An Examination of the Direction of Spread of Currency Crisis By Amil Dasgupta; Leon-Gonzalez; Roberto; Anja Shortland
  33. Does Inflation Targeting Improve Fiscal Discipline? An Empirical Investigation By Rene TAPSOBA
  34. Energy markets and the euro area macroeconomy By Rolf Strauch; Aidan Meyler; Roland Beck; Agostino Consolo; Riccardo Costantini; Michael Fidora; Luca Gattini; Bettina Landau; Ana Lima; David Lodge; Marco Lombardi; Ricardo Mestre; Matthias Mohr; Moreno Roma; Frauke Skudelny; Michal Slavik; Michel Soudan; Martin Spitzer; Melina Vasardani; Vanessa Baugnet; David Cornille; Christin Hartmann; Ulf Slopek; Derry O’Brien; Laura Weymes; Zacharias Bragoudakis; Pinelopi Zioutou; Ángel Estrada; María de los Llanos Matea; Noelia Jiménez; Anton Nakov; Galo Nuño; Erwan Gautier; Delphine Irac; Nicolas Maggiar; Ivan Faiella; Fabrizio Venditti; Lena Cleanthous; Muriel Bouchet; Amela Hubic; Brian Micallef; Guido Schotten; Andreas Breitenfellner; João Amador; Monika Tepina; Mikulas Car; Milan Donoval
  35. Clothes for the Emperor or Can Graduate Schools Learn From Undergraduate Macroeconomics? By Manfred Gärtner; Florian Jung
  36. The impact of the global economic and financial crisis on central, eastern and south-eastern Europe - A stock-taking exercise By Fédéric Holm-Hadulla; Sándor Gardó; Reiner Martin
  37. Pluralism in economics: from epistemology to hermeneutics By Gala, Paulo; Araújo Fernandes, Danilo; Stuhlberger Wjuniski, Bernardo; Marques Corrêa, Taís
  38. The econometric modeling of social Preferences By Andrea Conte; Peter G. Moffatt
  39. The Credibility Revolution in Empirical Economics: How Better Research Design is taking the Con out of Econometrics By Joshua D. Angrist; Jörn-Steffen Pischke
  40. Business Cycles, Consumption and Risk-Sharing: How Different Is China? By Chadwick C. Curtis; Nelson Mark
  41. Türkiye’de Piyasa Göstergelerinden Para Politikasý Beklentilerinin Olculmesi (Measuring Market Based Monetary Policy Expectations in Turkey) By Harun Alp; Hakan Kara; Gursu Keles; Refet Gurkaynak; Musa Orak

  1. By: James D. Hamilton
    Abstract: This paper surveys efforts to automate the dating of business cycle turning points. Doing this on a real time, out-of-sample basis is a bigger challenge than many academics might presume due to factors such as data revisions and changes in economic relationships over time. The paper stresses the value of both simulated real-time analysis-- looking at what the inference of a proposed model would have been using data as they were actually released at the time-- and actual real-time analysis, in which a researcher stakes his or her reputation on publicly using the model to generate out-of-sample, real-time predictions. The immediate publication capabilities of the internet make the latter a realistic option for researchers today, and many are taking advantage of it. The paper reviews a number of approaches to dating business cycle turning points and emphasizes the fundamental trade-off between parsimony-- trying to keep the model as simple and robust as possible-- and making full use of available information. Different approaches have different advantages, and the paper concludes that there may be gains from combining the best features of several different approaches.
    JEL: E32
    Date: 2010–07
  2. By: Jan Hatzius; Peter Hooper; Frederic S. Mishkin; Kermit L. Schoenholtz; Mark W. Watson
    Abstract: This paper explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes. Third, we control for past GDP growth and inflation and thus focus on the predictive power of financial conditions for future economic activity. During most of the past two decades for which comparisons are possible, including the last five years, our FCI shows a tighter link with future economic activity than existing indexes, although some of this undoubtedly reflects the fact that we selected the variables partly based on our observation of the recent financial crisis. As of the end of 2009, our FCI showed financial conditions at somewhat worse-than-normal levels. The main reason is that various quantitative credit measures (especially issuance of asset backed securities) remained unusually weak for an economy that had resumed expanding. Thus, our analysis is consistent with an ongoing modest drag from financial conditions on economic growth in 2010.
    JEL: E17 E44 E5
    Date: 2010–07
  3. By: Jean Pisani-Ferry
    Abstract: Bruegel Director Jean Pisani-Ferry focuses on the institutional response to the euro area crisis with the Van Rompuy Task Force being set up to reform economic governance. The task force is due to present its progress report shortly and the author examines two basic questions in this context? what went wrong in the euro area (and the lessons learnt from this) and consequently what are the three choices for reforming governance. He explains why implementation of existing rules need to be strengthened and why the Van Rompuy Task Force should revisit the fundamental principles on which the EMU is founded and resist the temptation to solely address divergences. 
    Date: 2010–06
  4. By: Catherine Mathieu (Observatoire Français des Conjonctures Économiques); Henri Sterdyniak (Observatoire Français des Conjonctures Économiques)
    Date: 2010–06
  5. By: Ian Martin
    Abstract: I extend the Epstein-Zin-lognormal consumption-based asset-pricing model to allow for general i.i.d. consumption growth. Information about the higher moments--equivalently, cumulants--of consumption growth is encoded in the cumulant-generating function. I apply the framework to economies with rare disasters, and argue that the importance of such disasters is a double-edged sword: parameters that govern the frequency and sizes of rare disasters are critically important for asset pricing, but extremely hard to calibrate. I show how to sidestep this issue by using observable asset prices to make inferences that are robust to the details of the underlying consumption process.
    JEL: E44 G10
    Date: 2010–07
  6. By: Stein, Jerome L.
    Abstract: Alan Greenspan's paper (March 2010) presents his retrospective view of the crisis. His theme has several parts. First, the housing price bubble, its subsequent collapse and the financial crisis were not predicted either by the market, the FED, the IMF or the regulators in the years leading to the current crisis. Second, financial intermediation tried to function on too thin layer of capital - high leverage - owing to a misreading of the degree of risk embodied in ever more complex financial products and markets. Third, the breakdown was unpredictable and inevitable, given the 'excessive' leverage - or low capital - of the financial intermediaries. The proposed legislation for the 'reform' of the financial system requires that the FED "identify, measure, manage and mitigate risks to the financial stability of the United States". The focus is upon capital requirements or debt ratios. The 'Quants' ignored systemic risk and just focused upon risk transfer in very liquid markets. The FED, IMF, Treasury and the 'Quants'/market lacked the appropriate tools of analysis to answer the following questions: what is an optimal leverage or capital requirement that balances the expected growth against risk? What are theoretically founded early warning signals of a crisis? The author explains why the application of stochastic optimal control (SOC)/dynamic risk management is an effective approach to determine the optimal degree of leverage, the optimum and excessive risk and the probability of a debt crisis. The theoretically derived early warning signal of a crisis is the excess debt ratio, equal to the difference between the actual and optimal ratio. The excess debt starting from 2004-05 indicated that a crisis was most likely. This SOC analysis should be used by those charged with surveillance of financial markets. --
    Keywords: Stochastic optimal control,warning signals of crisis,optimal leverage and debt ratios
    JEL: C61 G11 G12 G14
    Date: 2010
  7. By: Philippe Bacchetta; Cédric Tille; Eric van Wincoop
    Abstract: Recent crises have seen very large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics based on self-fulfilling shifts in risk made possible by a negative link between the current asset price and risk about the future asset price. This link implies that risk about tomorrow's asset price depends on uncertainty about risk tomorrow. This dynamic mapping of risk into itself gives rise to the possibility of multiple equilibria and self-fulfilling shifts in risk. We show that this can generate risk panics. The impact of the panic is larger when the shift from a low to a high risk equilibrium takes place in an environment of weak fundamentals. The sharp increase in risk leads to a large drop in the asset price, decreased leverage and reduced market liquidity. We show that the model can account well for the developments during the recent financial crisis.
    JEL: E44 G11 G12
    Date: 2010–07
  8. By: Kuhl Teles, Vladimir; P. Andrade, Joaquim
    Abstract: This article develops an econometric model in order to study country risk behavior forsix emerging economies (Argentina, Mexico, Russia, Thailand, Korea and Indonesia),by expanding the Country Beta Risk Model of Harvey and Zhou (1993), Erb et. al.(1996a, 1996b) and Gangemi et. al. (2000). Toward this end, we have analyzed theimpact of macroeconomic variables, especially monetary policy, upon country risk,by way of a time varying parameter approach. The results indicate an inefficient andunstable effect of monetary policy upon country risk in periods of crisis. However, thiseffect is stable in other periods, and the Favero-Giavazzi effect is not verified for alleconomies, with an opposite effect being observed in many cases.
    Date: 2010–06–29
  9. By: Serven, Luis; Nguyen, Ha
    Abstract: This paper surveys the academic and policy debate on the roots of global imbalances, their role in the inception of the global crisis, and their prospects in its aftermath. The conventional view holds that global imbalances result primarily from unsustainably high demand for goods in the United States and other rich countries, and that their impending correction must involve major United States trade adjustment and dollar depreciation -- although recent literature argues that their extent may be dampened by financial adjustment effects. In contrast, an alternative view portrays global imbalances as the equilibrium result of asymmetries in world asset demand and supply. Absent changes in the deep determinants of these, global imbalances can persist. International capital flow patterns before and during the crisis lend support to the equilibrium view. The paper also examines different hypotheses proposed in the literature on the role of global imbalances in the generation and propagation of the financial crisis. On the whole, the evidence suggests that global imbalances were not among the major causes of the crisis. Lastly, the paper assesses alternative scenarios about the future of global imbalances, considering in particular their potential consequences for developing countries, and the policy measures that these might adopt to enhance their growth prospects in a changing global equilibrium.
    Keywords: Currencies and Exchange Rates,Debt Markets,Emerging Markets,Economic Theory&Research,Investment and Investment Climate
    Date: 2010–06–01
  10. By: De Graeve, Ferre (Research Department, Central Bank of Sweden); Karas, Alexei (Roosevelt Academy)
    Abstract: We propose to incorporate cross-sectional heterogeneity into structural VARs. Heterogeneity provides an additional dimension along which one can identify structural shocks and perform hypothesis tests. We provide an application to bank runs, based on microeconomic deposit market data. We impose identification restrictions both in the cross-section (across insured and non-insured banks) and across variables (as in macro SVARs). We thus (i) identify bank runs, (ii) quantify the contribution of competing theories, and, (iii) evaluate policies such as deposit insurance. The application suggests substantial promise for the approach and has strong policy implications.
    Keywords: Identification; SVAR; panel-VAR; Heterogeneity; Bank run
    JEL: C30 E50 G21
    Date: 2010–07–01
  11. By: Finocchiaro, Daria (Research Department, Central Bank of Sweden)
    Abstract: This paper studies the effects of heterogeneity in planning propensity on wealth inequality and asset prices. I consider an economy populated by "attentive" and "inattentive" agents. Attentive agents plan their consumption period by period, while inattentive agents plan every other period. Infrequent planning increases uncertainty concerning future income or future asset returns. In general equilibrium, inattentive consumers trade at unfavorable prices. If the only source of uncertainty is future income, inattentive consumers will still accumulate more wealth. In contrast, in a version of the model driven by uncertain asset returns, infrequent planning produces the opposite result: inattentive investors accumulate less wealth, in line with empirical evidence. Moreover, asset prices are much more volatile than in a representative agent model with full attention, because changes in asset prices must induce attentive consumers to voluntarily bear the burden of adjusting to aggregate shocks.
    Keywords: Inattentiveness; Infrequent Planning; Heterogeneous Agents
    JEL: D52 D80 D91 E21
    Date: 2010–05–01
  12. By: Christopher L. House; Yusufcan Masatlioglu
    Abstract: We present a model in which banks trade toxic assets to raise funds for investment. The toxic assets generate an adverse selection problem and, as a consequence, the interbank asset market provides insufficient liquidity to finance investment. While the best investments are fully funded, socially efficient projects with modest payoffs are not. Investment is inefficiently low because acquiring funding requires banks to sell high-quality assets for less than their "fair" value. We then consider whether equity injections and asset purchases can improve market outcomes. Equity injections do not improve liquidity and may be counterproductive as a policy for increasing investment. By allowing banks to fund investments without having to sell high-quality assets, equity injections reduce the number of high-quality assets traded and further contaminate the interbank market. Paradoxically, if equity injections are directed to firms with the greatest liquidity needs, the contamination effect causes investment to fall. In contrast, asset purchase programs, like the Public-Private Investment Program, often have favorable impacts on liquidity, investment and welfare.
    JEL: D53 D82 E22 E44 E5 G18
    Date: 2010–07
  13. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Casper Christophersen (Norges Bank (Central Bank of Norway))
    Abstract: We study overnight interbank interest rates paid by banks in Norway over the period 2006-2009. We observe large variations in interest rates across banks and over time. During the financial crisis, the interest rates are found to be substantially below indicative quotes of interest rates provided by major banks. Our econometric model attributes the interest rate variation partly to differences in banks' characteristics including relative size and connectedness, implying favorable terms for banks of systemic importance. Moreover, interest rates are found to depend not only on overall liquidity in the interbank market, but possibly on its distribution among banks as well, suggesting exploitation of market power by banks with surplus liquidity. There is also evidence of stronger effects on interest rates of systemic importance, credit ratings and liquidity demand and supply since the start of the current financial crisis.
    Keywords: Interbank money market, Interest rates, Systemic importance
    JEL: G21 E42 E43 E58
    Date: 2010–06–30
  14. By: Andrew B. Bernard; J. Bradford Jensen; Stephen Redding; Peter K. Schott
    Abstract: International trade models typically assume that producers in one country trade directly with final consumers in another. In reality, of course, trade can involve long chains of potentially independent actors who move goods through wholesale and retail distribution networks. These networks likely affect the magnitude and nature of trade frictions and hence both the pattern of trade and its welfare gains. To promote further understanding of the means by which goods move across borders, this paper examines the extent to which U.S. exports and imports flow through wholesalers and retailers versus .producing and consuming firms.
    Keywords: Wholesaler, retailer, intermediary, international trade
    JEL: F10 F14
    Date: 2010–02
  15. By: Araujo, Luis; Camargo, Braz
    Abstract: This paper analyzes the stability of monetary regimes in an economy where fiat money isendogenously created by the government, information about its value is imperfect, and learningis decentralized. We show that monetary stability depends crucially on the speed of informationtransmission in the economy. Our model generates a dynamic on the acceptability of fiat moneythat resembles historical accounts of the rise and eventual collapse of overissued paper money.It also provides an explanation of the fact that, despite its obvious advantages, the widespreaduse of fiat money is only a recent development.
    Date: 2010–06–25
  16. By: Araujo, Luis; Camargo, Braz
    Abstract: A well–established fact in monetary theory is that a key ingredient for the essentialityof money is its role as a form of memory. In this paper we study a notion ofmemory that includes information about an agent’s past actions and trading opportunitiesbut, in contrast to Kocherlakota (1998), does not include information aboutthe past actions and trading opportunities of an agent’s past partners. We first showthat the first–best can be achieved with memory even if it only includes informationabout an agent’s very recent past. Thus, money can fail to be essential even if memoryis minimal. We then establish, more interestingly, that if information about tradingopportunities is not part of an agent’s record, then money can be better than memory.This shows that the societal benefit of money lies not only on being a record of pastactions, but also on being a record of past trading opportunities, a fact that has beenoverlooked by the monetary literature.
    Date: 2010–06–25
  17. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway))
    Abstract: We investigate to what extent estimated relationships of the IMF’s monetary model and their policy implications are sample dependent. This model constitutes the core of the IMF’s financial programming models for developing and emerging economies. We observe that estimates of the model’s key parameters and model-based measures of macroeconomic disequilibria are highly dependent on data vintage employed. Changes in parameter estimates solely due to data revisions are found to be much smaller than those owing to parameter instability, which may be due to model misspecification. Moreover, instability in parameter estimates contributes to more uncertainty in evaluations of macroeconomic excesses than data revisions. It is shown that analyses based on a version of the model in difference form are more robust across data vintages than those based on the model with variables in levels. Well specified models that take into account known data revisions may also have relatively stable parameter estimates and hence more robust policy implications.
    Keywords: Real time data, Data and model uncertainty, IMF, Financial programming
    JEL: C51 E41 E47 F17
    Date: 2010–06–21
  18. By: Luisa Lambertini (College of Management); Caterina Mendicino (Banco de Portugal); Maria Teresa Punzi (Banco de Portugal)
    Abstract: This paper analyzes housing market boom-bust cycles driven by changes in households’ expectations. We explore the role of expectations not only on productivity but on several other shocks that originate in the housing market, the credit market and the conduct of monetary policy. We f nd that, in the presence of nominal rigidities, expectations on both the conduct of monetary policy and future productivity can generate housing market boom-bust cycles in accordance with the empirical f ndings. Moreover, expectations of either a future reduction in the policy rate or a temporary increase in the central bank’s inf ation target that are not fulf lled generate a macroeconomic recession. Increased access to credit generates a boom-bust cycle in most variables only if it is expected to be reversed in the near future.
    Keywords: boom-bust cycles, credit frictions, housing market
    JEL: E32 E44 E52
    Date: 2010–07
  19. By: John Beirne; Guglielmo Maria Caporale; Nicola Spagnolo
    Abstract: In this paper we model the volatility of the spread between the overnight interest rate and the central bank policy rate (the policy spread) for the euro area and the UK during the two main phases of the financial crisis that began in late 2007. During the crisis, the policy spread exhibited signs of volatility, owing to the breakdown in interbank market activity. The determinants of this volatility are assessed using Stochastic Volatility models to gauge the role played by liquidity risk, credit risk (financial and sovereign), and interest rate expectations. Our results suggest that liquidity risk is the main determinant of the volatility of the policy spread, but also that private bank credit risk has become more apparent in the post-Lehman collapse phase of the crisis for the euro area as financial CDS premia rose due to possible default fears. In addition, the ECB appears to have been more effective in addressing liquidity risk since the onset of the crisis, and this may be related to its greater direct access to a broader range of counterparties and its acceptance of a broader range of eligible collateral. The main implication is that, in crisis times, a sufficiently flexible operational framework for monetary policy implementation produces the most timely response to market tensions.
    Keywords: Overnight Interest Rate Spread, Liquidity Risk, Credit Risk, Stochastic Volatility
    JEL: C32 E52 E58
    Date: 2010
  20. By: Ansgar Belke
    Abstract: We develop a roadmap of how the ECB should further reduce the volume of money (money supply) and roll back credit easing in order to prevent inflation. The exits should be step-by-step rather than one-off . Communicating about the exit strategy must be an integral part of the exit strategy. Price stability should take precedence in all decisions. Due to vagabonding global liquidity, there is a strong case for globally coordinating monetary exit strategies. Given unsurmountable practical problems of coordinating exit with asymmetric country interests, however, the ECB should go ahead – perhaps joint with some Far Eastern economies. Coordination of monetary and fiscal exit would undermine ECB independence and is also technically out of reach within the euro area.
    Keywords: Exit strategies; international policy coordination and transmission; open market operations; unorthodox monetary policy
    JEL: E52 E58 F42 E63
    Date: 2010–04
  21. By: Ansgar Belke
    Abstract: The ECB has accepted increasing amounts of rubbish collateral since the crisis started leading to exposure to serious private sector credit risk (i.e. default risk) on its collateralised lending and reverse operations (“repo”). This has led some commentators to argue that the ECB needs “fiscal back-up” to cover any potential losses to be able to continue pursuing price stability. This Brief argues that fiscal backing is not necessary for the ECB for three reasons. Firstly, the ECB balance sheet risk is small compared to the FED and BoE as it neither increased its quasi-fi scal operations as much as the Fed or the BoE nor did it engage to a very large extent in outright bond purchases during the financial crisis. Secondly, the ECB’s specific accounting principles of repo operations provide for more clarity and earlier recognition of losses. Thirdly, the ECB can draw on substantial reserves of the euro area national banks.
    Keywords: Central bank independence, central bank capital, counterparty risk, repurchase agreements, collateral, fiscal backing, liquidity, haircuts
    JEL: G32 E42 E51 E58
    Date: 2010–04
  22. By: James K. Galbraith
    Abstract: The global abatement of the inflationary climate of the past three decades, combined with continuing financial instability, helped to promote the worldwide holding of U.S. dollar reserves as a cushion against financial instability outside the United States, with the result that, for the United States itself, this was a period of remarkable price stability and reasonably stable economic expansion. For the most part, the economics profession viewed these events as a story of central bank credibility, fiscal probity, and accelerating technological change coupled with changing demands on the labor market, creating a model of self-stabilizing free markets and hands-off policy makers motivated by doing the right thing - what Senior Scholar James K. Galbraith calls "the grand illusion of the Great Moderation." A dissenting line of criticism focused on the stagnation of real wages, the growth of deficits in trade and the current account, and the search for new markets. This view implied that a crisis would occur, but that it would result from a rejection of U.S. financial hegemony and a crash of the dollar, with the euro and the European Union (EU) the ostensible beneficiaries. A third line of argument was articulated by two figures with substantially different perspectives on the Keynesian tradition: Wynne Godley and Hyman P. Minsky. Galbraith discusses the approaches of these Levy distinguished scholars, including Godley’s correlation of government surpluses and private debt accumulation and Minsky's financial stability hypothesis, as well as their influence on the responses of the larger economic community. Galbraith himself argues the fundamental illusion of viewing the U.S. economy through the free-market prism of deregulation, privatization, and a benevolent government operating mainly through monetary stabilization. The real sources of American economic power, he says, lie with those who manage and control the public-private sectors - especially the public institutions in those sectors - and who often have a political agenda in hand. Galbraith calls this the predator state: a state that is not intent upon restructuring the rules in any idealistic way but upon using the existing institutions as a device for political patronage on a grand scale. And it is closely aligned with deregulation.
    Date: 2010–06
  23. By: Luis J. Álvarez (Banco de España); Pablo Burriel (Banco de España)
    Abstract: This paper presents US and euro area estimates for a fully heterogeneous model, in which there is a continuum of f rms setting prices with a constant probability of adjustment, which may differ from f rm to f rm. The estimated model accurately matches the empirical distribution function of individual price durations for the US and the euro area. Incorporating these micro based pricing rules into a DSGE model, we f nd that nominal shocks have a greater real impact in the fully heterogeneous economy than in the standard Calvo model. We also f nd that nominal and real shocks bring about a reallocation of resources among sectors. Monetary policy is found to have a greater real impact in the euro area than in the United States.
    Keywords: price setting, heterogeneity, DSGE, Calvo model
    JEL: C40 D40 E30
    Date: 2010–06
  24. By: Alessandro Flamini (Department of Economics, The University of Sheffield); Costas Milas
    Abstract: This paper studies optimal real-time monetary policy when the central bank takes the exogenous volatility of the output gap and inflation as proxy of the undistinguishable uncertainty on the exogenous disturbances and the parameters of its model. The paper shows that when the exogenous volatility surrounding a specific state variable increases, the optimal policy response to that variable should increase too, while the optimal response to the remaining state variables should attenuate or be unaffected. In this way the central bank moves preemptively to reduce the risk of large deviations of the economy from the steady state that would deteriorate the distribution forecasts of the output gap and inflation. When an empirical test is carried out on the US economy the model predictions tend to be consistent with the data.
    Keywords: Multiplicative uncertainty, Markov jump linear quadratic systems, optimal monetary policy
    JEL: C51 C52 E52 E58
    Date: 2010–06
  25. By: J. M. C. Santos Silva; Silvana Tenreyro
    Abstract: We critically review the recent literature on currency unions, and discuss the methodologicalchallenges posed by the empirical assessment of their costs and benefits. In the process, weprovide evidence on the economic effects of the euro. In particular, and in contrast withestimates of the trade effect of other currency unions, we find that the impact of the euro ontrade has been close to zero. After reviewing the costs and benefits, we conclude with someopen questions on normative and positive aspects of the theory of currency unions,emphasizing the need for a unified welfare-based framework to weigh their costs and gains.
    Keywords: Currency union, Integration, Exchange Rage, Trade
    JEL: F00 F02 F15 F31 F42
    Date: 2010–06
  26. By: Mykhaylova, Olena
    Abstract: I study the impact of net foreign wealth on the optimal monetary policy of an open economy in a two-country DSGE model with incomplete markets, sticky prices and deviations from the Law of One Price. I find that by optimally manipulating monetary policy, central banks can affect the timing of interest receipts (or payments) and therefore increase the risk-sharing role of the internationally traded asset. In particular, debtor nations find it optimal to allow their currency to float relatively more freely than do creditor nations. In order to maximize consumer welfare, in most specifications of the model central bank should target a weighted average of CPI inflation and changes in the nominal exchange rate.
    Keywords: Optimal monetary policy; welfare; open economy; net foreign wealth.
    JEL: F34 F32 E52 E44
    Date: 2010–07–01
  27. By: Fédéric Holm-Hadulla (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Kishore Kamath (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Ana Lamo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Javier J. Pérez (Banco de España, Alcalá 50, E-28014 Madrid, Spain); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper examines the role of government wages in ensuring macroeconomic stability and competitiveness in the euro area. Recent empirical evidence suggests that government wage expenditure is subject to a pro-cyclical bias in most euro area countries and at the euro area aggregate level. Moreover, the evidence points to a strong positive correlation and co-movement between public and private wages in the short to medium term, both directly and indirectly via the price level, in most euro area countries. In a number of countries this interrelation between public and private wages coincided with strong public wage growth and competitiveness losses. These findings underpin the need for prudent public wage policies supported by strong domestic fiscal frameworks and appropriate wage-setting institutions in order to enhance economic stability and competitiveness in Economic and Monetary Union. JEL Classification: E62, E63, J45, H11, H50
    Keywords: government wage expenditure, fiscal cyclicality, competitiveness
    Date: 2010–06
  28. By: Pooyan Amir Ahmadi; Albrecht Ritschl
    Abstract: The prominent role of monetary policy in the U.S. interwar depression has been conventional wisdomsince Friedman and Schwartz (1963). This paper presents evidence on both the surprise and thesystematic components of monetary policy between 1929 and 1933. Doubts surrounding GDPestimates for the 1920s would call into question conventional VAR techniques. We therefore adoptthe FAVAR methodology of Bernanke, Boivin, and Eliasz (2005), aggregating a large number of timeseries into a few factors and inserting these into a monetary policy VAR. We work in a Bayesianframework and apply MCMC methods to obtain the posteriors. Employing the generalized signrestriction approach toward identification of Amir Ahmadi and Uhlig (2008), we find the effects ofmonetary policy shocks to have been moderate. To analyze the systematic policy component, we backout the monetary policy reaction function and its response to aggregate supply and demand shocks.Results broadly confirm the Friedman/Schwartz view about restrictive monetary policy, but indicateonly moderate effects. We further analyze systematic policy through conditional forecasts of key timeseries at critical junctures, taken with and without the policy instrument. Effects are again quitemoderate. Our results caution against a predominantly monetary interpretation of the GreatDepression.
    Keywords: Great Depression, monetary policy, Friedman/Schwartz hypothesis, Bayesian FAVAR,Dynamic factor model, Gibbs sampling
    JEL: N12 E37 E47 E52 C11 C53
    Date: 2010–01
  29. By: Albrecht Ritschl; Samad Salferaz
    Abstract: This paper examines the role of currency and banking in the German financial crisis of 1931for both Germany and the U.S. We specify a structural dynamic factor model to identifyfinancial and monetary factors separately for each of the two economies. We find thatmonetary transmission through the Gold Standard played only a minor role in causing andpropagating the crisis, while financial distress was important. We also find evidence of crisispropagation from Germany to the U.S. via the banking channel. Banking distress in botheconomies was apparently not endogenous to monetary policy. Results confirm Bernanke's(1983) conjecture that an independent, non-monetary financial channel of crisis propagationwas operative in the Great Depression.
    Keywords: Great Depression, 1931 financial crisis, international business cycle transmission,Bayesian factor analysis, currency, banking
    JEL: N12 N13 E37 E47 C53
    Date: 2010–05
  30. By: Gomis-Porqueras, Pere; Kam, Timothy; Lee, Junsang
    Abstract: In this paper we develop a two-country global monetary economy where a monetary equilibrium exists because of fundamentaldecentralized trade frictions ? a Lagos-Wright search and matching friction. In the decentralized markets (DM), the terms of trade can be determined either by bargaining or by competitive price taking (baseline model). We show that the baseline model is capable of generating quite realistic real and nominal exchange rate volatility observed in the data, without relying on more ad-hoc sticky price assumptions commonly used in the international macroeconomics literature. The key mechanism lies in the role of search and matching frictions and a primitive technological assumption ? that capital is also a complementary input to production in the DM. This creates an internal propagation mechanism by modifying asset-pricing relations and relative price dynamics in the model.
    Keywords: Search-theoretic Money, Open Economy, Real Exchange Rate Puzzle
    JEL: E31 E32 E43 E44
    Date: 2010–06
  31. By: Luz Adriana Flórez
    Abstract: This work analyzes the relationship between real interest rates and commodity prices. According to Frankel’s hypothesis (1986-2006): “low real interest rates lead to high real commodity prices”. However, some empirical evidence suggests that commodity prices can predict monetary policy. In this way, there is an endogeneity between commodity prices and monetary policy. Using Frankel’s model we include a Taylor rule equation in this theoretical model, which let us analyze the endogeneity problem. In order to find empirical support of this model, we estimate SVAR and, using quarterly data from 1962:Q1 to 2009:Q1, we find that the overshooting of commodity prices to 1% increase of real interest rate can be a minimum of 2.86% and a maximum of 5.97% depending on the chosen model. The increase of real interest rate given a 1% increase in commodity prices is positive and significant but of small magnitude (0.20% - 0.05%).
    Date: 2010–06–27
  32. By: Amil Dasgupta; Leon-Gonzalez; Roberto; Anja Shortland
    Abstract: What determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the "ground-zero" country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models which allows us to take into account the uncertainty regarding the appropriate set of regressors. We find that institutional similarity to the ground-zero country plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favour of the "wake up call" hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods.
    Keywords: Financial contagion, exchange rate, institutions, Bayesian model averaging
    JEL: F31 F32 C11
    Date: 2010
  33. By: Rene TAPSOBA (Centre d'Etudes et de Recherches sur le Développement International)
    Abstract: Based on panel data of 58 countries, of which 22 Inflation Targeters and 36 non Inflation Targeters, over the period 1980-2003, this paper highlights the effect of Inflation Targeting – IT- on Fiscal Discipline –FD-. We make four contributions to the literature. Firstly, by applying the 2SLS on the data, we estimate the effect of IT on central government FD as measured by Structural Primary Fiscal Balances. Secondly, we found that the effect of IT on FD takes place only on the Developing Countries sub-sample. Thirdly, the positive effect of IT on FD is stronger when the Central Bank –CB- adopts "Partial" IT rather than Full-Fledged IT –FFIT-. Fourthly, the positive effect of IT on FD is heterogeneous: it is conditional to the degree of CB independence, the level of financial deepening, the instability in the terms of trade and the length of exposure to IT -the effect is not immediate but cumulative over time-. Our results are robust to alternative specifications - using Propensity Score Matching Method, "System GMM" estimator, LAD estimator and applying 2SLS on annual data rather than triennial averages data- Our results could contribute importantly to the debate about the relevance of IT adoption by Developing Countries -due to their bad fiscal stances-.The results suggest that these countries could successfully adopt IT and improve their fiscal stances, provided that they adopt it gradually, establish flexible framework allowing them to react temporally to short-term external shocks and accompanies it with a greater independence of their CB and a deepening of their financial systems.
    Keywords: Inflation Targeting, Fiscal Discipline, Central Bank, Monetary Policy, Fiscal Policy, Public Debt Monetization, Developing Countries.
    JEL: E63 E62 E58 E52
    Date: 2010
  34. By: Rolf Strauch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Aidan Meyler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Agostino Consolo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Riccardo Costantini; Michael Fidora (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Luca Gattini (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Bettina Landau (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Ana Lima (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); David Lodge (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Marco Lombardi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Matthias Mohr (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Moreno Roma (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Frauke Skudelny (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Michal Slavik (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Michel Soudan (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Martin Spitzer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Melina Vasardani (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Vanessa Baugnet (National Bank of Belgium, boulevard de Berlaimont 14, 1000 Brussels, Belgium.); David Cornille (National Bank of Belgium, boulevard de Berlaimont 14, 1000 Brussels, Belgium.); Christin Hartmann (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.); Ulf Slopek (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.); Derry O’Brien (Central Bank and Financial Services Authority of Ireland,Dame Street, Dublin 2, Ireland.); Laura Weymes (Central Bank and Financial Services Authority of Ireland,Dame Street, Dublin 2, Ireland.); Zacharias Bragoudakis (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Pinelopi Zioutou (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Ángel Estrada (Banco de España, Alcalá 50, E-28014 Madrid, España.); María de los Llanos Matea (Banco de España, Alcalá 50, E-28014 Madrid, España.); Noelia Jiménez (Banco de España, Alcalá 50, E-28014 Madrid, España.); Anton Nakov (Banco de España, Alcalá 50, E-28014 Madrid, España.); Galo Nuño (Banco de España, Alcalá 50, E-28014 Madrid, España.); Erwan Gautier (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Delphine Irac (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Nicolas Maggiar (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Ivan Faiella (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Fabrizio Venditti (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Lena Cleanthous (Central Bank of Cyprus, 80, KENNEDY AVENUE, CY-1076 NICOSIA, Cyrpus); Muriel Bouchet (Banque centrale du Luxembourg; 2, boulevard Royal; L-2983 Luxembourg, Luxembourg.); Amela Hubic (Banque centrale du Luxembourg; 2, boulevard Royal; L-2983 Luxembourg, Luxembourg.); Brian Micallef (Central Bank of Malta, Pjazza Kastilja, Valletta, VLT 1060, MALTA.); Guido Schotten (De Nederlandsche Bank, Westeinde 1, 1017 ZN Amsterdam, the Netherlands.); Andreas Breitenfellner (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria.); João Amador (Banco de Portugal, Av. Almirante Reis, 71 – 8°, 1150-012 Lisboa, Portugal.); Monika Tepina (BANK OF SLOVENIA, Slovenska 35, 1505 Ljubljana, Slovenija); Mikulas Car (Narodna banka Slovenska, Imricha Karvasa 1, 813 25 Bratislava); Milan Donoval (Narodna banka Slovenska, Imricha Karvasa 1, 813 25 Bratislava)
    Abstract: This report aims to analyse euro area energy markets and the impact of energy price changes on the macroeconomy from a monetary policy perspective. The core task of the report is to analyse the impact of energy price developments on output and consumer prices. Nevertheless, understanding the link between energy price fluctuations, inflationary pressures and the role of monetary policy in reacting to such pressure requires a deeper look at the structure of the economy. Energy prices have presented a challenge for the Eurosystem, as the volatility of the energy component of consumer prices has been high since the creation of EMU. At the same time, a look back into the past may not necessarily be very informative for gauging the likely impact of energy price changes on overall inflation in the future. For instance, the reaction of HICP inflation to energy price fluctuations seems to have been more muted during the past decade than in earlier periods such as the 1970s. JEL Classification: E20, E30, E50, Q43
    Keywords: energy, pass-through, inflation, macroeconomy, monetary policy
    Date: 2010–06
  35. By: Manfred Gärtner; Florian Jung
    Abstract: The current crisis is not only one of financial markets, but also of macroeconomics. Leading scholars call for a paradigm shift away from dynamic general equilibrium models, though some argue that the profession's arsenal already contains the tools and historical lessons needed to deal with such crises. Taking this view to the limit, this note demonstrates that the workhorse models of undergraduate macroeconomics not only permit a refined view and classification of financial crises. These models also identify scenarios under which either policymakers would be ill advised to follow conventional prescriptions, or full-scale depressions loom that cannot be fought by means of fiscal or monetary policy alone.
    Keywords: Teaching macroeconomics, lessons, graduate, undergraduate, financial crisis, liquidity trap, risk premium
    JEL: A20 E63 F01
    Date: 2010–06
  36. By: Fédéric Holm-Hadulla (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Sándor Gardó (Oesterreichische Nationalbank, Foreign Research Division, Otto-Wagner-Platz 3, A - 1090 Wien, Austria); Reiner Martin (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: The paper first reviews the main drivers of the growth and real convergence process in central, eastern and south-eastern Europe (CESEE) since 2000 and assesses the key macro-financial strengths and vulnerabilities of the region at the beginning of the global economic and financial crisis. The main part of the paper reviews financial and real economic developments in these countries since the crisis started to impact the CESEE region. The paper finds that developments have been rather heterogeneous in the region. CESEE countries with the largest economic imbalances tended to be most affected. National and international support measures appear to have helped to stabilise financial markets, and parent banks of foreign bank subsidiaries in CESEE were committed to sustaining their exposure to the region. The degree to which CESEE governments were able to use policy instruments to counter the real effects of the crisis is rather heterogeneous, depending inter alia on the exchange rate regime in place and the initial fiscal positions. JEL Classification: F15, F32, G01, G15, G18, H40
    Keywords: Financial crisis, vulnerability indicators, central, eastern and south-eastern Europe
    Date: 2010–06
  37. By: Gala, Paulo; Araújo Fernandes, Danilo; Stuhlberger Wjuniski, Bernardo; Marques Corrêa, Taís
    Abstract: The objective of this paper is to bring elements from the philosophical movement ofhermeneutics and pragmatism to the discussion on methodology in economics, with aspecific concern on the theory of truth. Our aim is to present the concept of thehermeneutic space, developed by the philosopher Richard Rorty, as a rational justificationfor pluralism in economics. We consider the hermeneutic space an interesting conceptwhich should allow us to overcome the void left by the incapacity of epistemologicaltheories to explain the evolution of sciences. It defends the idea that our culture, values andways of interpreting things are what build the sciences, not any closed epistemologicalmethod. In this sense, pluralism is nothing more than letting the hermeneutic space work,without epistemological barriers, and understanding that this is desirable for the futuredevelopment of economics as a science. This approach differs from all othermethodological justifications for pluralism because it does not rely on any epistemologicalmethod, but assumes that the hermeneutic space can entirely fulfill the gap created by them.
    Date: 2010–06–07
  38. By: Andrea Conte (Strategic Interaction Group, Max-Planck-Institut für Okonomik, Jena, Germany); Peter G. Moffatt (School of Economics, University of East Anglia, Norwich, UK)
    Abstract: Experimental data on social preferences present a number of features that need to be incorporated in econometric modelling. We explore a variety of econometric modelling approaches to the analysis of such data. The approaches under consideration are: the random utility approach (in which it is assumed that each possible action yields a utility with a deterministic and a stochastic component, and that the individual selects the action yielding the highest utility); the random behavioural approach (which assumes that the individual computes the maximum of a deterministic utility function, and that computational error causes their observed behaviour to depart stochastically from this optimum); and the random preference approach (in which all variation in behaviour is attributed to stochastic variation in the parameters of the deterministic component of utility). These approaches are applied in various ways to an experiment on fairness conducted by Cappelen et al. (2007). At least two of the models that we estimate succeed in capturing the key features of the data set.
    Keywords: Econometric modelling and estimation, model evaluation, individual behaviour, fairness
    JEL: C51 C52 C91 D63
    Date: 2010–06–29
  39. By: Joshua D. Angrist; Jörn-Steffen Pischke
    Abstract: This essay reviews progress in empirical economics since Leamer's (1983) critique. Leamerhighlighted the benefits of sensitivity analysis, a procedure in which researchers show howtheir results change with changes in specification or functional form. Sensitivity analysis hashad a salutary but not a revolutionary effect on econometric practice. As we see it, thecredibility revolution in empirical work can be traced to the rise of a design-based approachthat emphasizes the identification of causal effects. Design-based studies typically featureeither real or natural experiments and are distinguished by their prima facie credibility and bythe attention investigators devote to making the case for a causal interpretation of the findingstheir designs generate. Design-based studies are most often found in the microeconomicfields of Development, Education, Environment, Labor, Health, and Public Finance, but arestill rare in Industrial Organization and Macroeconomics. We explain why IO and Macrowould do well to embrace a design-based approach. Finally, we respond to the charge that thedesign-based revolution has overreached.
    Keywords: research design, natural experiment, quasi-experiment, structural models
    JEL: C01
    Date: 2010–05
  40. By: Chadwick C. Curtis; Nelson Mark
    Abstract: Can standard business-cycle methodology be applied to China? In this chapter, we address this question by examining the macroeconomic time series and identifying dimensions in which China differs from economies (such as Canada and the U.S.) that are typically the subject of business-cycle research. We show that naively applying the standard business-cycle tools to China is no more ridiculous than applying it to Canada, although the dimensions along which the model struggles is different. For China, the model cannot account for the low level of consumption (or high saving) as a proportion of income observed in the data. An examination of provincial level consumption data suggests that the absence of channels for intranational consumption risk sharing may be an important reason why the business-cycle model has trouble accounting for Chinese consumption and saving behavior.
    JEL: E21 E32 F41
    Date: 2010–07
  41. By: Harun Alp; Hakan Kara; Gursu Keles; Refet Gurkaynak; Musa Orak
    Date: 2010

This nep-cba issue is ©2010 by Alexander Mihailov. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.