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on Central Banking |
| By: | Jean Tirole (Toulouse School of Economics) |
| Abstract: | The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macro-prudential policies. |
| Keywords: | Liquidity, Contagion, Bailouts, Regulation |
| JEL: | E44 E52 G28 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.78&r=cba |
| By: | Ester Faia; Eleni Iliopulos |
| Abstract: | How should monetary policy be optimally designed in an environment with high degrees of financial globalization? To answer this question we lay down an open economy model where net lending toward the rest of the world is constrained by a collateral constraint motivated by limited enforcement. Borrowing is secured by collateral in the form of durable goods whose accumulation is subject to adjustment costs. We demonstrate that, although this economy can generate persistent current account deficits, it can also deliver a stationary equilibrium. The comparison between different monetary policy regimes (floating versus pegged) shows that the impossible trinity is reversed: a higher degree of financial globalization, by inducing more persistent and volatile current account deficits, calls for exchange rate stabilization. Finally, we study the design of optimal (Ramsey) monetary policy. In this environment the policy maker faces the additional goal of stabilizing exchange rate movements, which exacerbate fluctuations in the wedges induced by the collateral constraint. In this context optimality requires deviations from price stability and calls for exchange rate stabilization. |
| Keywords: | Monetary policy ; Globalization ; International finance ; Foreign exchange rates ; Financial stability ; International trade |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:52&r=cba |
| By: | James D. Hamilton |
| Abstract: | This paper reviews some of the literature on the macroeconomic effects of oil price shocks with a particular focus on possible nonlinearities in the relation and recent new results obtained by Kilian and Vigfusson (2009). |
| JEL: | E32 Q43 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16186&r=cba |
| By: | Jean-Paul Fitoussi (Observatoire Français des Conjonctures Économiques); Francesco Saraceno (Observatoire Français des Conjonctures Économiques) |
| Abstract: | This paper argues that although the crisis may have emerged in the financial sector, its roots are much deeper and lie in a structural change in income distribution that has been going on for the past three decades. The widespread increase of inequality depressed aggregate demand and prompted monetary policy to react by maintaining a low level of interest rate which itself allowed private debt to increase beyond sustainable levels. On the other hand the search for high-return investment by those who benefited from the increase in inequalities led to the emergence of bubbles. Net wealth became overvalued, and high asset prices gave the false impression that high levels of debt were sustainable. The crisis revealed itself when the bubbles exploded, and net wealth returned to normal level. We further argue that how the trend of increasing inequality interacted differently with policies and institutions, to yield radically different outcomes in the US and in the large European Union countries before the onset of the crisis. |
| Keywords: | Financial crisis, income inequality, US and EU comparison, household debt, aggregate demand |
| JEL: | E21 E44 E63 F41 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1013&r=cba |
| By: | Gadi Barlevy |
| Abstract: | This paper considers the design of macroeconomic policies in the face of uncertainty. In recent years, several economists have advocated that when policymakers are uncertain about the environment they face and find it difficult to assign precise probabilities to the alternative scenarios that may characterize this environment, they should design policies to be robust in the sense that they minimize the worstcase loss these policies could ever impose. I review and evaluate the objections cited by critics of this approach. I further argue that, contrary to what some have inferred, concern about worst-case scenarios does not always lead to policies that respond more aggressively to incoming news than the optimal policy would respond absent any uncertainty. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2010-04&r=cba |
| By: | Bruce I. Carlin; Shimon Kogan |
| Abstract: | We perform an experimental study of complexity to assess its effect on trading behavior, price volatility, liquidity, and trade efficiency. Subjects were asked to deduce the value of a particular asset from information they were given about the composition and price of several portfolios. Following that, subjects traded with each other anonymously in a well-defined, simple bargaining process. Portfolio problems ranged from requiring simple analysis to more complicated computation. Complexity altered subjects' bidding strategies, decreased liquidity, increased price volatility, and decreased trade efficiency. Female subjects were affected more by complexity (e.g., lower trade frequency), although they achieved higher payoffs in the complex treatment. Our analysis suggests that complexity may be a driver of volatility and liquidity in financial markets and provides novel testable empirical predictions. |
| JEL: | C92 G12 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16187&r=cba |
| By: | Efraim Benmelech; Nittai K. Bergman |
| Abstract: | This paper studies the limitations of monetary policy transmission within a credit channel frame- work. We show that, under certain circumstances, the credit channel transmission mechanism fails in that liquidity injections by the central bank into the banking sector are hoarded and not lent out. We use the term ‘credit traps’ to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. Our analysis offers a characterization of the problems created by credit traps as well as potential solutions and policy implications. Among these, the analysis shows how quantitative easing and fiscal policy acting in conjunction with monetary policy may be useful in increasing bank lending. Further, the model shows how small contractions in monetary policy or in loan supply can lead to collapses in lending, aggregate investment, and collateral prices. |
| JEL: | E44 E51 E58 G32 G33 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16200&r=cba |
| By: | Stéphanie Marie Stolz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Michael Wedow (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.) |
| Abstract: | The extensive public support measures for the financial sector have been key for the management of the current financial crisis. This paper gives a detailed description of the measures taken by central banks and governments and attempts a preliminary assessment of the effectiveness of such measures. The geographical focus of the paper is on the European Union (EU) and the United States. The crisis response in bothregions has been largely similar in terms of both tools and scope, and monetary policy actions and bank rescue measures have become increasingly intertwined. However, there are important differences, not only between the EU and the United States (e.g. with regard to the involvement of the central bank), but also within the EU (e.g. asset relief schemes). JEL Classification: E58, E61, G21, G38 |
| Keywords: | Bank rescue measures, public crisis management |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20100117&r=cba |
| By: | Rasmus Fatum; Michael Hutchison; Thomas Wu |
| Abstract: | The impact of news surprises on exchange rates depends in principle upon a number of factors including the state of the economy, institutional setting and nature of the expected policy response. These characteristics may lead to state-contingent asymmetric responses to news. In this paper we investigate the possible asymmetric response of intraday exchange rates (5-minute intraday JPY/USD) to macroeconomic news announcements during a very unusual period--Japan during 1999-2006 when the money market interest rate was effectively zero. We may think of this period as a "natural experiment" consisting of an institutional setting when interest rates may rise but not decline, thereby constraining both endogenous policy reactions to news and private market expectations. Asymmetric responses to news, to the extent that they are important in exchange rate markets as they are in equity markets, would seem particularly likely to be evident during this period. We consider several ways asymmetric responses may be manifested and linked to macroeconomic news during the zero-interest rate period. We assess whether the intraday exchange rate responds differently depending on whether the news is emanating from Japan or the U.S.; we consider the state of the business cycle; and we distinguish between "good" and "bad" news. |
| Keywords: | Foreign exchange rates ; Financial markets ; International finance |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:49&r=cba |
| By: | Kathryn M.E. Dominguez; Rasmus Fatum; Pavel Vacek |
| Abstract: | Many developing countries have increased their foreign reserve stocks dramatically in recent years, often motivated by the desire for precautionary self-insurance. One of the negative consequences of large accumulations for these countries is the risk of valuation losses. In this paper we examine the implications of systematic reserve decumulation by the Czech authorities aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not intended to influence the value of the koruna relative to the euro. Initially the timing and size of reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal installments within the day). This project examines whether these reserve sales, both during the regime of discretionary timing as well as when sales occurred every day, had unintended consequences for the domestic currency. Our findings using intraday exchange rate data and time-stamped reserve sales indicate that when decumulation occurred every daythese sales led to significant appreciation of the koruna. Overall, our results suggest that the manner in which reserve sales are carried out matters for whether reserve decumulation influences the relative value of the domestic currency. |
| Keywords: | Foreign exchange ; Monetary policy ; International economic relations |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:48&r=cba |
| By: | Ellen E. Meade; Daniel L. Thornton |
| Abstract: | The Phillips curve framework, which includes the output gap and natural rate hypothesis, plays a central role in the canonical macroeconomic model used in analyses of monetary policy. It is now well understood that real-time data must be used to evaluate historical monetary policy. We believe that it is equally important that macroeconomic models used to evaluate historical monetary policy reflect the framework that policymakers used to formulate that policy. To that end, we use the Federal Open Market Committee (FOMC) transcripts to examine the role that the Phillips curve framework played in Fed policymaking from 1982 through 2003. The FOMC?s transcripts allow us to trace the evolution in policymakers? discussion of the Phillips curve framework over time. Our analysis suggests that the Phillips curve was much less central to the formulation and implementation of US monetary policy than it is in models commonly used to evaluate that policy. |
| Keywords: | Phillips curve ; Monetary policy ; Federal Open Market Committee |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-017&r=cba |
| By: | Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz |
| Abstract: | The Federal Reserve abandoned foreign-exchange-market intervention because it conflicted with the System’s commitment to price stability. By the early 1980s, economists generally concluded that, absent a portfolio-balance channel, sterilized foreign-exchange-market intervention did not provide central banks with a mechanism for systematically influencing exchange rates independent of their monetary policies. If intervention were to have anything other than a fleeting, hit-or-miss effect on exchange rates, monetary policy had to support it. Exchange rates, however, often responded to U.S. monetary-policy initiatives, so intervention to offset or reverse those exchange-rate responses can seem a contrary policy move and can create uncertainty about the strength of the System's commitment to price stability. That the U.S. Treasury maintained primary responsibility for foreign-exchange intervention only compounded this uncertainty. In addition, many FOMC participants feared that swap drawings and warehousing could contravene the Congressional appropriations process and, therefore, potentially pose a threat to System independence, a necessary condition for monetary-policy credibility. |
| Keywords: | Banks and banking, Central ; Foreign exchange administration ; Monetary policy ; Federal Open Market Committee |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1007&r=cba |
| By: | Christopher J. Neely |
| Abstract: | The Federal Reserve's large scale asset purchases (LSAP) of agency debt, MBSs and long-term U.S. Treasuries not only reduced long-term U.S. bond yields also significantly reduced long-term foreign bond yields and the spot value of the dollar. These changes were much too large to have been generated by chance and they closely followed LSAP announcement times. These changes in U.S. and foreign bond yields are roughly consistent with a simple portfolio choice model. Likewise, the exchange rate responses to LSAP announcements are roughly consistent with a UIP-PPP based model. The success of the LSAP in reducing long-term interest rates and the value of the dollar shows that central banks are not toothless when short rates hit the zero bound. |
| Keywords: | Monetary policy ; Interest rates |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-018&r=cba |
| By: | Mario J. Crucini; Mototsugu Shintani |
| Abstract: | We propose a simple saving-based measure of the cyclical component in GDP. The measure is motivated by the prediction that the representative consumer changes savings in response to temporary deviations of income from its stochastic trend, while satisfying a present-value budget constraint. To evaluate our procedure, we employ the bivariate error correction model of Cochrane (1994) to the member countries of the G-7 and Australia. Our estimates reveal, that to a close approximation, the stochastic trend component of GDP is consumption and the transitory component is the error correction term, which justifies the use of our saving-based measure. |
| Keywords: | Business cycles ; Saving and investment ; Gross domestic product ; Consumer behavior |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:50&r=cba |
| By: | Tarishi Matsuoka (Graduate School of Economics, Kyoto University) |
| Abstract: | This paper presents a monetary model that links interbank markets to capital accumulation and growth. The purpose of this paper is to study how interbank markets affect real economic activities, and to find the monetary policy implications. The model shows that, in a stationary equilibrium, the economy with interbank markets attains higher capital stock than the economy without the markets, because of precautionary money savings. In addition, I find that inflationary policy is more desirable in the economy without well-functioning interbank markets. |
| Keywords: | overlapping generations, random relocation, inflation, interbank markets |
| JEL: | E42 E51 G21 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:704&r=cba |
| By: | Lamont K. Black; Diana Hancock; Wayne Passmore |
| Abstract: | The bank lending channel of monetary policy suggests that banks play a special role in the transmission of monetary policy. We look for this special role by examining the business strategies of banks as it relates to mortgage funding and mortgage lending. "Traditional banks" have a large supply of excess core deposits and specialize in information-intensive lending to borrowers (which is proxied here using mortgage lending in subprime communities), whereas "market-based banks" are funded with managed liabilities and mainly lend to relatively easy-to-evaluate borrowers. We predict that only "transition banks" operating between these business strategies are likely to increase their loan rate spreads substantially in response to monetary tightening. To fund ongoing mortgage originations, these banks must substitute from core deposits to managed liabilities, which have a large external finance premium due to these banks' information-intensive lending. Consistent with this prediction, we find evidence of a bank lending channel only among transition banks - they significantly reduce mortgage lending in response to monetary contractions. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-39&r=cba |
| By: | Zoltan Pozsar; Tobias Adrian; Adam Ashcraft; Hayley Boesky |
| Abstract: | The rapid growth of the market-based financial system since the mid-1980s changed the nature of financial intermediation in the United States profoundly. Within the market-based financial system, "shadow banks" are particularly important institutions. Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose finance companies, structured investment vehicles, credit hedge funds, money market mutual funds, securities lenders, and government-sponsored enterprises. ; Shadow banks are interconnected along a vertically integrated, long intermediation chain, which intermediates credit through a wide range of securitization and secured funding techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo. This intermediation chain binds shadow banks into a network, which is the shadow banking system. The shadow banking system rivals the traditional banking system in the intermediation of credit to households and businesses. Over the past decade, the shadow banking system provided sources of inexpensive funding for credit by converting opaque, risky, long-term assets into money-like and seemingly riskless short-term liabilities. Maturity and credit transformation in the shadow banking system thus contributed significantly to asset bubbles in residential and commercial real estate markets prior to the financial crisis. ; We document that the shadow banking system became severely strained during the financial crisis because, like traditional banks, shadow banks conduct credit, maturity, and liquidity transformation, but unlike traditional financial intermediaries, they lack access to public sources of liquidity, such as the Federal Reserve's discount window, or public sources of insurance, such as federal deposit insurance. The liquidity facilities of the Federal Reserve and other government agencies' guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks. Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system. |
| Keywords: | Intermediation (Finance) ; Credit ; Financial institutions ; Bank liquidity |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:458&r=cba |
| By: | Leonard I. Nakamura |
| Abstract: | This paper sets forth a discussion framework for the information requirements of systemic financial regulation. It specifically proposes a large macro-micro database for the U.S. based on an extended version of the Flow of Funds. The author argues that such a database would have been of material value to U.S. regulators in ameliorating the recent financial crisis and will be of aid in understanding the potential vulnerabilities of an innovative financial system in the future. The author also argues that the data should -- under strict confidentiality conditions -- be made available to academic researchers investigating the detection and measurement of systemic risk. |
| Keywords: | Flow of funds ; Financial crises ; Financial institutions - Law and legislation |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-22&r=cba |
| By: | Adam Gersl (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jakub Seidler (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper focuses on how to calibrate models used to stress test the most important risks in the banking system. Based on the results of a verification of the Czech National Bank’s stress testing methodology, the paper argues that stress tests should be calibrated conservatively and slightly overestimate the risks. However, to ensure that the stress test framework is conservative enough over time, a verification, i.e. comparison of the actual values of key banking sector variables – in particular the capital adequacy ratio – with predictions generated by the stress-testing models should become a standard part of the stress-testing framework. |
| Keywords: | stress testing; credit risk; bank capital |
| JEL: | E44 E47 G21 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2010_12&r=cba |
| By: | Wolters, Maik Hendrik |
| Abstract: | Monetary policy rule parameters are usually estimated at the mean of the interest rate distribution conditional on inflation and an output gap. This is an incomplete description of monetary policy reactions when the parameters are not uniform over the conditional distribution of the interest rate. I use quantile regressions to estimate parameters over the whole conditional distribution of the Federal Funds Rate. Inverse quantile regressions are applied to deal with endogeneity. Realtime data of inflation forecasts and the output gap are used. I find significant and systematic variations of parameters over the conditional distribution of the interest rate. |
| Keywords: | monetary policy rules; IV quantile regression; real-time data |
| JEL: | C14 E58 E52 |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23857&r=cba |
| By: | Bezemer, Dirk J; Gardiner, Geoffrey |
| Abstract: | This paper discusses recent UK monetary policies as instances of Galbraith’s ‘innocent frauds’, including the idea that money is a thing rather than a relationship, the fallacy of composition that what is possible for one bank is possible for all banks, and the belief that the money supply can be controlled by reserves management. The origins of the idea of QE, and its defense when it was applied in Britain, are analysed through this lens. An empirical analysis of the effect of reserves on lending is conducted; we do not find evidence that QE ‘worked’ either by a direct effect on money spending, or through an equity market effect. These findings are placed in a historical context in a comparison with earlier money control experiments in the UK. |
| Keywords: | quantitative easing; UK; innocent frauds; accounting |
| JEL: | E58 E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23961&r=cba |
| By: | Costa, Carlos Eugênio da; Luz, Vitor F. |
| Abstract: | We study constrained efficient aggregate risk sharing and its consequence for thebehavior of macro-aggregates in a dynamic Mirrlees’s (1971) setting. Privately observedidiosyncratic productivity shocks are assumed to be independent of i.i.d. publiclyobserved aggregate shocks. Yet, private allocations display memory with respectto past aggregate shocks, when idosyncratic shocks are also i.i.d.. Under a mild restrictionon the nature of optimal allocations the result extends to more persistentidiosyncratic shocks, for all but the limit at which idiosyncratic risk disappears, andthe model collapses to a pure heterogeneity repeated Mirrlees economy identical toWerning [2007]. When preferences are iso-elastic we show that an allocation is memorylessonly if it displays a strong form of separability with respect to aggregate shocks.Separability characterizes the pure heterogeneity limit as well as the general case withlog preferences. With less than full persistence and risk aversion different from unityboth memory and non-separability characterize optimal allocations. Exploiting thefact that non-separability is associated with state-varying labor wedges, we apply abusiness cycle accounting procedure (e.g. Chari et al. [2007]) to the aggregate datagenerated by the model. We show that, whenever risk aversion is great than one ourmodel produces efficient counter-cyclical labor wedges. |
| Date: | 2010–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:706&r=cba |
| By: | Jerome Creel (Observatoire Français des Conjonctures Économiques); Paul Hubert (Observatoire Français des Conjonctures Économiques) |
| Abstract: | The literature on inflation targeting has up to now focused on its impact on macroeconomic performance or private expectations. In contrast, this paper proposes to investigate empirically whether the institutional adoption of this framework has changed the policy preferences of the central banker. We test the hypothesis that inflation targeting has constituted a switch towards a greater focus on inflation. We use three complementary methods: a structural break analysis, time-varying parameters and Markov-Switching VAR which make possible to estimate linear or nonlinear, and forward or backward looking specifications, to account for heteroskedasticity without having to assume a date break ex ante. Our main result is that inflation targeting has not led to a stronger response to inflation. We infer that the inflation targeting paradigm should not be confounded with the inflation targeting framework. |
| Keywords: | Monetary Policy; Inflation Targeting; Taylor Rule; Structural Break; Time-Varying coefficients, Markov-Switching VAR |
| JEL: | E52 E58 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1014&r=cba |
| By: | Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile); Scott Roger (IMF Institute, International Monetary Fund, Washington D.C.-USA) |
| Abstract: | This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank’s policy reaction function can improve macroeconomic performance. It is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exchange rate smoothing because of the perverse impact of exchange rate movements on activity. |
| Keywords: | Inflation targeting, monetary policy, exchange rate |
| JEL: | E42 E52 F41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv226&r=cba |
| By: | Lucotte, Yannick |
| Abstract: | Inflation targeting is a monetary policy framework which was adopted by several emerging countries over the last decade. Previous empirical studies suggest that inflation targeting has significant effects on either inflation or inflation variability in emerging targeting countries. But, by reinforcing the disinflation process and so, by reducing drastically seigniorage revenue, the adoption of this monetary policy framework could also affect the design of fiscal policy. In a recent paper, Minea and Villieu (2009a) show theoretically that inflation targeting provides an incentive for governments to improve institutional quality in order to enhance tax revenue performance. In this paper, we test this theoretical prediction by investigating whether the adoption of inflation targeting affects the fiscal effort in emerging markets economies. Using propensity score matching methodology, we evaluate the “treatment effect” of inflation targeting on fiscal mobilization in thirteen emerging countries that have adopted this monetary policy framework by the end of 2004. Our results show that, on average, inflation targeting has a significant positive effect on public revenue collection. |
| Keywords: | Inflation targeting; Public revenue; Treatment effect; Propensity score matching; Emerging countries. |
| JEL: | E62 E58 H2 |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23871&r=cba |
| By: | Weber, Enzo; Wolters, Jürgen |
| Abstract: | The expectations hypothesis of the term structure (EHT) implies cointegration between interest rates of different maturities and predicts certain values for adjustment speed. We estimate reduced-form vector error correction models of the US term structure. These are derived from a structural model combining the EHT, autocorrelated risk premia, interest rate smoothing and monetary policy feedback, which is able to capture a wide range of empirical outcomes. We explicitly test the necessary preconditions for the validity of the theoretical model. Premia persistence rises with longer-rate maturity, while the influence of the according spreads in the central bank reaction function diminishes. |
| Keywords: | Expectations Hypothesis; Risk Premium; Policy Reaction Function |
| JEL: | E43 |
| Date: | 2009–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:bay:rdwiwi:9655&r=cba |
| By: | Weber, Enzo; Wolters, Jürgen |
| Abstract: | We document two stylised facts of US short- and long-term interest rate data incompatible with the pure expectations hypothesis: Relatively slow adjustment to long-run relations and low contemporaneous correlation. We construct a small structural model which features three types of randomness: While a persistent monetary policy shock implies immediate identical reactions through the term structure, both a transitory policy shock and an autocorrelated risk premium allow for the sustained decoupling observed in the data. Indeed, we find important impacts and persistence of risk premia and a decomposition of policy shocks judging a larger part as transitory the longer the investment horizon. |
| Keywords: | Expectations Hypothesis; Risk Premium; Policy Reaction Function; Persistence; Transitory Shocks |
| JEL: | E43 C32 |
| Date: | 2010–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:bay:rdwiwi:13579&r=cba |
| By: | Carin van der Cruijsen; David-Jan Jansen; Jakob de Haan |
| Abstract: | Carin van der Cruijsen, David-Jan Jansen and Jakob de Haan Does the general public know what central banks do? Is this kind of knowledge relevant? Using a survey of Dutch households, we investigate these questions for the case of the European Central Bank (ECB). Our findings suggest that knowledge on the ECB’s objectives is far from perfect. Both a weak desire to be informed and unawareness of insufficient knowledge are barriers for improving the public's understanding of monetary policy. However, our results also show that more intensive use of information improves understanding, suggesting that the media channel may play an important and constructive role in building knowledge. Finally, we find that knowledge on monetary policy objectives contributes to an individual’s ability to form realistic inflation expectations. |
| Keywords: | monetary policy; knowledge; transparency; financial literacy; inflation expectations; ECB. |
| JEL: | D12 D84 E52 E58 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:252&r=cba |
| By: | Ceyhun Bora Durdu; Ricardo Nunes; Horacio Sapriza |
| Abstract: | This paper builds a model of sovereign debt in which default risk, interest rates, and debt depend not only on current fundamentals but also on news about future fundamentals. News shocks affect equilibrium outcomes because they contain information about the future ability of the government to repay its debt. First, in the model with news shocks not all defaults occur in bad times, bringing the model closer to the data. Second, the news shocks help account for key differences between emerging markets and developed economies: as the precision of the news improves the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt more in line with the characteristics of developed economies. Finally, the model also captures the hump-shaped relationship between default rates and the precision of news obtained from the data. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:997&r=cba |
| By: | Giovanni Olivei; Silvana Tenreyro |
| Abstract: | Systematic differences in the timing of wage setting decisions among industrialized countries provide an ideal framework to study the importance of wage rigidity in the transmission of monetary policy. The Japanese Shunto presents the best-known case of bunching in wage setting decisions: From February to May, most firms set wages that remain in place until the following year; wage rigidity, thus, is relatively higher immediately after the Shunto. Similarly, in the United States, a large fraction of firms adjust wages in the last quarter of the calendar year. In contrast, wage agreements in Germany are well spread within the year, implying a relatively uniform degree of rigidity. We exploit variation in the timing of wage setting decisions within the year in Japan, the United States, Germany, the United Kingdom, and France to investigate the effects of monetary policy under different degrees of effective wage rigidity. Our findings lend support to the long-held, though scarcely tested, view that wage rigidity plays a key role in the transmission of monetary policy. |
| Keywords: | Monetary policy ; Wages |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:10-8&r=cba |
| By: | Barattieri, Alessandro (Boston College); Basu, Susanto (Boston College); Gottschalk, Peter T. (Boston College) |
| Abstract: | Nominal wage stickiness is an important component of recent medium-scale structural macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996-1999. The SIPP provides high-frequency information on wages, employment and demographic characteristics for a large and representative sample of the US population. The main results of the analysis are as follows. 1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. 2) The frequency of wage adjustment does not display significant seasonal patterns. 3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations 4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. 5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate. |
| Keywords: | wage stickiness, micro-level evidence, measurement error |
| JEL: | E24 E32 J30 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5039&r=cba |
| By: | Meixing DAI |
| Abstract: | In a model with imperfect money, credit and reserve markets, we examine if an inflation-targeting central bank using the funds rate operating procedure to indirectly control market interest rates also needs a monetary aggregate as policy instrument. We show that if private agents use information extracted from money and financial markets to form inflation expectations and if the access to liquidity is subject to non-price rationing, the central bank can use a narrow monetary aggregate and the discount interest rate as independent policy instruments to reinforce the credibility of its announcements and the role of inflation target as nominal anchor for inflation expectations. This study shows how a monetary policy strategy combining inflation targeting and monetary targeting can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. Friedman’s k-percent money growth rule, generating dynamic instability, and two alternative stabilizing feedback monetary targeting rules are examined. |
| Keywords: | Imperfect financial markets, non-price rationing, inflation targeting, monetary targeting, macroeconomic stability, Friedman’s k-percent rule, feedback money growth rules, two-pillar strategy. |
| JEL: | E44 E52 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2010-19&r=cba |
| By: | Christophe Bellégo; Laurent Ferrara |
| Abstract: | Dimension reduction of large data sets has been recently the topic of interest of many research papers dealing with macroeconomic modelling. Especially dynamic factor models have been proved to be useful for GDP nowcasting or short-term forecasting. In this paper, we put forward an innovative factor-augmented probit model in order to analyze the business cycle. Factor estimation is carried either by standard statistical methods or by allowing a richer dynamic behaviour. An application is provided on euro area data in order to point out the ability of the model to detect recessions over the period 1974-2008. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2010-14&r=cba |
| By: | Berg, Tim Oliver |
| Abstract: | I use a Bayesian vector autoregressive (VAR) model to investigate the impact of monetary and technology shocks on the euro area stock market in 1987-2005. I find an important role for technology shocks, but not monetary shocks, in explaining variations in real stock prices. The identification method is flexible enough to study the effects of technology news shocks. The responses are consistent with the idea that news on technology improvements have an immediate impact on stock prices. These findings are robust to several modelling choices, including the productivity measure, omitted variables, and the identifying restrictions. |
| Keywords: | monetary policy; technology shocks; news; stock prices; Bayesian VAR |
| JEL: | G1 E52 E44 O33 |
| Date: | 2010–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23973&r=cba |
| By: | Paresh Kumar Narayan; Stephan Popp |
| Abstract: | The goal of this paper is to test the consumption based CAPM. To achieve this goal, we propose a new test capable of examining the unit root null hypothesis in cases of non-trending data. We fi…nd that the real interest rate series and the consumption growth rate series for Australia, Canada, Denmark, France, Italy, the USA, the UK, and Norway are non-stationary. This …finding is consistent with the expectations of the consumption based CAPM. |
| Date: | 2010–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:dkn:econwp:eco_2010_09&r=cba |
| By: | Berg, Tim Oliver |
| Abstract: | This paper explores the relation between stock prices and the current account for 17 OECD countries in 1980-2007. I use a panel vector autoregression (VAR) to compare the effects of stock price shocks to those originating from monetary policy and exchange rates. While monetary policy shocks have little effects, shocks to stock prices and exchange rates have sizeable effects. A 10% contraction in stock prices improves the current account by 0.3% after two years. Hence I find a channel, in addition to the traditional exchange rate channel, through which external balance for an OECD country with a current account imbalance can be restored. |
| Keywords: | current account fluctuations; stock prices; panel VAR |
| JEL: | F32 E44 C33 |
| Date: | 2010–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23976&r=cba |
| By: | Gilbert Koenig; Irem Zeyneloglu |
| Abstract: | The paper offers a survey of recent research on fiscal policy in both deterministic and stochastic models of the New Open Economy Macroeconomics (NOEM) initiated by Obstfeld and Rogoff (1995, 2002b). The survey includes a comparison of the implications of the deterministic benchmark model to the empirical evidence obtained in recent studies. It provides a detailed discussion of the recent extensions induced by the gap between theoretical and empirical implications. These extensions revise the traditionally studied aspects of fiscal issues such as the transmission channels of fiscal policy by introducing production specialization at the international level or by diversifying the pricing decisions of firms. They also cover current economic issues such as the effect of financial globalization on fiscal policy efficiency and the implication of a reduction in public employment in order to cut taxes. After presenting the basic features of a benchmark stochastic NOEM model for fiscal policy, the paper discusses the recent developments the gains from international fiscal policy cooperation with respect to gains from fiscal stabilization. |
| Keywords: | New Open Economy Macroeconomics, fiscal policy, stochastic and deterministic general equilibrium models. |
| JEL: | E62 E63 F41 F42 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2010-18&r=cba |
| By: | Michelle L. Barnes; N. Aaron Pancost |
| Abstract: | Refet Gürkaynak, Brian Sack, and Eric Swanson (2005) provide empirical evidence that long forward nominal rates are overly sensitive to monetary policy shocks, and that this is consistent with a model where long-term inflation expectations are not anchored because agents must infer the central bank's inflation target from noisy interest rate movements. Using the same data, methodology, and model, we show that their empirical results are neither persistent nor robust to small changes in sample period or methodology. In addition, their theoretical results rely mainly on an ad hoc law of motion for the inflation target-imperfect information about the target plays only a small role in un-anchoring expectations in their model. |
| Keywords: | Interest rates ; Monetary policy |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:10-7&r=cba |
| By: | Fabio Tramontana (Department of Economics, University of Ancona, Italy.); Mauro Gallegati (Department of Economics, University of Ancona, Italy.) |
| Abstract: | The application in Economics of methods and tools originally thought for other disciplines is not new. In this paper we show how the compartmental approach, typical of Biology, Medicine, Chemistry, etc., can be used as a tool to represent the heterogeneity of the agents and introduce it into the dynamic models. We also show that in some cases the subdivision of the agents into compartments can be useful for the government in order to obtain some results more efficiently. |
| Keywords: | Compartmental systems, Heterogeneous agents, Fiscal policy. |
| JEL: | C60 E0 E1 E12 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:10_11&r=cba |
| By: | Paulo Vila Maior (Faculty of Humanities and Social Sciences) |
| Abstract: | As part of an ongoing research, this paper focus on European monetary integration depicting to what extent existing theories and theoretical approaches fit with the ontology and subsequent developments of Economic and Monetary Union (EMU). A special emphasis goes to the Stability and Growth Pact (SGP) as a crucial ingredient of European monetary integration, particularly for the political turmoil it produced in recent years. On a previous conference (UACES Annual Conference 2007: Exchanging Ideas on Europe: Common Values and External Policies, Portsmouth, UK, 3-5 September 2007), EMU and the SGP were assessed through the lens of neofunctionalism, liberal intergovernmentalism, supranational governance, new institutionalism and the fusion thesis. This paper turns to the federal theory and the rational choice theory. Some argue that the power of ideas (the monetarist school) and national governments’ adjustment to a new international setting provide the broad explanation of the move towards EMU. Others claim that the project of European monetary integration was independent from such exogenous inputs, understanding the step towards EMU as part of the dynamism encapsulated by European integration. I test these contrasting perceptions against the explanatory power of federal theory and rational choice. The analysis of the SGP (in both the original version and after the November 2005 reform) follows the same methodology. The rationale behind the paper is twofold. On the one hand, whether EMU and the SGP fit into one of the theories under examination, and whether the corresponding mapping is telling of theoretical prevalence or dissemination. On the other hand, whether the SGP (and subsequent reform) converges or diverges with EMU’s theoretical matrix. |
| Keywords: | European integration theories, Economic and Monetary Union, Liberal intergovernmentalism, Neofunctionalism, Supranational governance, Institutionalism |
| JEL: | O19 E32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ufp:wpaper:1419&r=cba |
| By: | Jerger, Jürgen; Röhe, Oke |
| Abstract: | In this paper, we estimate a New Keynesian DSGE model developed by Ireland (2003) on French, German and Spanish data with the aim to explore the macroeconomic consequences of EMU. In order to validate the results from the DSGE model, we amend this analysis by stability tests of monetary policy reaction functions for these countries. We find that (a) the DSGE structure is well suited for the characterization of key macroeconomic features of the three economies; (b) significant efficiency gains were realized in terms of lower adjustment cost of prices and the capital stock; (c) the behavior of monetary policy did not change in Germany, unlike in France and Spain. Specifically, the impact of inflation on interest rates increased considerably in the two latter countries. |
| Keywords: | DSGE; Monetary Policy; EMU |
| JEL: | E31 E32 E52 |
| Date: | 2009–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:bay:rdwiwi:9641&r=cba |
| By: | Wilhem Hankel; Andreas Hauskrecht (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Bryan Stuart |
| Abstract: | In contrast to Robert Mundell's Optimum Currency Area theory and his recommendation of forming a monetary union, the economic fundamentals of Euro area member countries have not harmonized. The opposite holds: the Euro core countries - most of all Germany, but also the Netherlands and Finland - increased productivity growth while limiting nominal wage growth. However, Mediterranean countries - particularly Greece, but also Spain, Portugal, and Italy - have dramatically lost international competitiveness. Although the overall balance of payments for the Euro area at large is almost balanced, internal disequilibria are skyrocketing and default risk premiums and tensions within the Euro area are rising, thus jeopardizing the stability of the monetary union. The findings confirm that a common currency without fiscal union is inherently unstable. The international financial and economic crisis has merely triggered events which highlight this instability. The paper discusses three possible scenarios for the future of the Euro: a laissez faire approach, a bailout, and finally an exit strategy for the Mediterranean countries, or an organized exit by a group of core countries led by Germany, forming their own smaller monetary union. |
| Keywords: | Optimum currency areas, monetary union, risk spreads, central banking, exchange rates, fiscal policy |
| JEL: | E42 E63 F15 F33 F34 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2010-05&r=cba |
| By: | Zsolt Darvas |
| Abstract: | Drawing comparisons between the fiscal architecture and situation in the US and the European Union, Bruegel Research Fellow Zsolt Darvas answers three questions in this Policy Contribution- Why has the euro been hit so hard? How would a more federal European fiscal union closer to the US model have helped? How do the euro area's fiscal architecture reform plans stand up in light of the US example? He concludes that a higher level of fiscal federation is not inevitable for the viability of the euro area, but current European fiscal reform proposals carry political risk and their implementation could be deficient or lack credibility. Introduction of a Eurobond covering up to 60 percent of member states? GDP would be a much more preferable solution. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:438&r=cba |
| By: | Ippei Fujiwara; Kozo Ueda |
| Abstract: | We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies. |
| Keywords: | International liquidity ; Liquidity (Economics) ; Fiscal policy ; Monetary policy |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:51&r=cba |
| By: | Stan du Plessis (Department of Economics, University of Stellenbosch) |
| Abstract: | Monetary authorities have been implicated in the financial crisis of 2007-2008. John Muellbauer, for example, has blamed what he thought was initially inadequate policy responses by central banks to the crisis on their models, which are, in his words, “overdue for the scrap heap”. This paper investigates the role of monetary policy models in the crisis and finds that (i) it is likely that monetary policy contributed to the financial crisis and (ii) that an inappropriately narrow suite of models made this mistake easier. The core models currently used at prominent central banks were not designed to discover emergent financial fragility. In that respect John Muellbauer is right. But the implications drawn here are less dramatic than his: while the representative agent approach to microfoundations now seems indefensible, other aspects of modern macroeconomics are not similarly suspect. The case made here is rather for expanding the suite of models used in the regular deliberations of monetary authorities, with new models that give explicit roles to the financial sector, to money and to the process of exchange. Recommending a suite of models for policy making entails no methodological innovation. That is what central banks do; though, of course, how they do it is open to improvement. The methodological innovation is the inclusion of a model that would be sensitive to financial fragility, a sensitivity that was absent in the run-up to the current financial crisis. |
| Keywords: | Monetary policy, financial crisis, methodology of policy models |
| JEL: | B40 E13 E44 E52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers117&r=cba |
| By: | Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Wildo Gonzalez (Banco Central de Chile) |
| Abstract: | We estimate how the monetary policy works in small open economies with inflation target. To do so, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of representative small open economies (including Australia, Chile, Colombia, Peru and New Zealand) presents strong differences due to shocks from the international financial markets (risk premium shocks, mainly) that explain mostly the variability of the real exchange rate, which has important reallocation effects in the short run. By using the allocations of the Ramsey problem as benchmark, this article shows that if the central banks in small open economies want to reduce the observed volatility of the inflation rate and the output gap, more exchange rate intervention is necessary in order to reduce the volatility produced by risk premium shocks. |
| Keywords: | Small open economies economy models; monetary policy rules; exchange rates; Bayesian econometrics, Risk premium shocks, Ramsey problem. |
| JEL: | C32 E52 F41 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv248&r=cba |
| By: | Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Wildo Gonzalez (Banco Central de Chile) |
| Abstract: | We estimate how monetary policy works in small open economies. To do so, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of small open economies (including Australia, Chile, Colombia, Peru and New Zealand) is rather similar to that observed in developed countries. Nevertheless, our results also indicate that there are strong differences due to shocks from the international financial markets (risk premium shocks, mainly) that explain mostly the variability of the real exchange rate, which has important reallocation effects in the short run. In addition, we find that in practice central banks do not face any trade-off responding to these shocks through changes in the interest rate. This result is consistent with the fact that in each country under study, the exchange rate must be included in the policy reaction function. |
| Keywords: | small open economy models; monetary policy rules; exchange rates; Bayesian econometrics |
| JEL: | C32 E52 F41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv228&r=cba |
| By: | Salas, Jorge (Central Bank of Peru) |
| Abstract: | I describe a simple new-keynesian macroeconomic model for a small open and partially dollarized economy, which closely resembles the Quarterly Projection Model (QPM) developed at the Central Bank of Peru (Vega et al. (2009)). Then I use Bayesian techniques and quarterly data from Peru to estimate a large group of parameters. The empirical findings provide support for some of the parameters values imposed in the original QPM. In contrast, I find that another group of coefficients – e.g., the weights on the forward-looking components in the aggregate demand and the Phillips curve equations, among several others – should be modified to be more consistent with the data. Furthermore, the results validate the operation of different channels of monetary policy transmission, such as the traditional interest rate channel and the exchange rate channel. I also find evidence that in the most recent part of the sample (2004 onwards), the expectations channel has become more prominent, as implied by the estimated values of the forward-looking parameters in the aggregate demand and the Phillips curve equations. |
| Keywords: | Monetary Policy; Partial Dollarization; Bayesian Estimation |
| JEL: | E52 E58 F41 C11 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2010-007&r=cba |
| By: | Ekaterina Sprenger (Osteuropa-Institut, Regensburg (Institut for East European Studies)); Volkhart Vincentz |
| Abstract: | Central and Eastern European Countries have been severely affected by the 2008 financial crisis. Several ways of contagion of the financial turmoil worked at different strengths in the different coun-tries. Although the disparities of the effects of the financial crisis are rather large, there are a number of common explanatory features. Mechanisms of transmission of the global financial crisis to the CEECs and its effects on these countries are discussed in this paper. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ost:memopp:48&r=cba |
| By: | Battilossi, Stefano; Escario, Regina; Foreman-Peck, James (Cardiff Business School) |
| Abstract: | Was Spanish fiscal policy destabilizing? We estimate policy reaction functions and test the impact of fiscal shocks on growth volatility over the period 1950-1998. We find that a transition from pro-cyclical to countercyclical fiscal policy occurred in the late years of the Franco regime, contributing to the stabilization of the growth pattern. The timing of the shift, between the late 1960s and early 1970s, was not determined by a single policy change, but rather by gradual pressure from economic liberalization, the external constraint imposed by a fixed exchange rate regime and the modernization of fiscal policy instruments. The aggressiveness of fiscal shocks also decreased over time, thus contributing to the progressive stabilization of output growth. There appears to be little necessity to appeal to a 'Great Moderation' of monetary policy to understand the greater stability of the Spanish economy from the 1980s |
| Keywords: | fiscal reaction function; fiscal shocks; SVAR; growth volatility |
| JEL: | E32 E62 N14 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2010/5&r=cba |
| By: | Mohsin S. Khan (Peterson Institute for International Economics) |
| Abstract: | Since the 1990s there have been a number of major changes in the design and conduct of monetary policy. In a globalized environment, there is less time to adjust to shocks and greater need to achieve closer convergence of economic performance among trading partners. As a result, a number of developing countries have adopted exchange rate regimes with more flexibility, and thereby greater scope for monetary policy. Notable examples include a number of sub-Saharan African countries moving from fixed exchange-rate regimes to more flexible regimes and the adoption of formal or informal inflation targeting regimes by some of these countries. These changes have triggered considerable debate on how monetary policy should be conducted and the effects it has on the real economy. Mohsin Khan discusses the conventional objectives, targets, and instruments of monetary policy, including an analysis of the monetary transmission process. This paper examines the problems of dynamic inconsistency and inflationary bias, where governments deviate from their stated or target inflation level in order to obtain short-run output gains. Most economists now agree that any rules-based regime permits a margin for discretion, and they reject the idea that rules and discretion are mutually exclusive. As policymakers in many countries throughout the world have gravitated toward an approach based more on rules than on full discretion, a key issue is choosing an appropriate policy target, or nominal anchor. Khan discusses nominal anchors and current monetary frameworks before moving on to analyze the output effects of monetary policy. He looks at the relationship between the growth of GDP and different monetary aggregates in 20 sub-Saharan African economies and finds empirical support for the hypothesis that credit growth is more closely linked than is money growth to the growth of real GDP in these countries. |
| Keywords: | Monetary policy, Africa |
| JEL: | E52 N17 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp10-11&r=cba |
| By: | Dale F. Gray (International Monetary Fund, Washington D.C.-USA); Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Leonardo Luna (Transelec, Chile); Jorge Restrepo (Banco Central de Chile) |
| Abstract: | This article analyzes whether market-based financial stability indicators (FSIs) should be included in monetary policy models and, if so, how.1 Since the economy and interest rates affect financial sector credit risk, and the financial sector affects the economy, this article builds a model of financial sector vulnerability and integrates it into a macroeconomic framework, typically used for monetary policy analysis. More specifically, should the central bank explicitly include the financial stability indicator in its monetary policy (interest rate) reaction function? This is the most important question to be answered in this article. The alternative would be to react only indirectly to financial risk by reacting to inflation and gross domestic product (GDP) gaps, since they already include the effect that financial factors have on the economy. |
| Keywords: | financial sector risk, monetary policy models |
| JEL: | E32 E61 E62 E63 F41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv229&r=cba |
| By: | Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Virginia Simoncelli (ILADES-Georgetown University, Universidad Alberto Hurtado) |
| Abstract: | This work develops an empirical study of the credit channel in Chile. We found that the interest rate has a positive effect in the long run credit supply. Nevertheless, the disequilibrium in the short run credit supply has a significant negative effect on economic activity. This is most marked when the central bank is carried out a contractive monetary policy. Thus, all this evidence supports the fact that the central bank should implement a monetary policy beyond the control of the interest rate i.e. non conventional monetary policies to affect directly the liquidity restriction on the banking system to avoid a collapse of the economy in crisis times. |
| Keywords: | Credit Channel; Cointegration; Vector Error Correction Model (VECM). |
| JEL: | E44 E58 G21 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv230&r=cba |
| By: | Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado) |
| Abstract: | The objective of this article is to determine if the Phillips curve is a relevant tool to conduct monetary policy in African countries wishing to adopt an inflation-targeting regime. I choose Nigeria as a case of study because it is in the early stage of the implementation of this regime. I estimate a medium-sized model for monetary policy analysis. The model reflects a synthesis between the New Keynesian and the Real Business Cycle (RBC) approaches. Then I estimate the model by using Bayesian econometric technique in order to overcome the shortage of data availability. The study concludes that there is evidence that central banks can control the inflation rate through a Phillips curve, a Taylor rule that includes the exchange rate, and the sterilization of the resources from oil exports. Nevertheless, there are limits to the stabilization program. The same evidence suggests that it is important to implement a credible inflation-targeting regime to reduce inflation gradually, instead of abrupt stabilization attempts with high costs in lost output. |
| Keywords: | Monetary policy, Phillips curve, inflation-target regime. |
| JEL: | E31 E52 E58 O23 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv250&r=cba |
| By: | Abdul Karim, Zulkefly |
| Abstract: | This paper investigates the effect of monetary policy shocks (domestic and international monetary policy) on Malaysian firm-level equity returns in a dynamic panel data framework. After controlling for a variety of other stock return determinants, I find that firm stock returns have responded negatively to monetary policy shocks. Moreover, the effect of domestic monetary policy shocks on stock returns is also heterogeneous fashion, which is small firm equity is significantly affected by monetary policy, whereas large firm equity is not significantly affected. The effect of domestic monetary policy is also heterogeneous by firm’s nature of business, which is only industrial product is significantly affected by monetary policy, whereas others sub-sector economy are not affected. The effect of international monetary policy upon firm-level stock returns is also heterogeneous, which is significantly affected the large firm equity, whereas insignificantly affected the small firm equity. The industrial product and property firm stock returns are also significantly affected by international monetary policy; whereas, others sub-sector are not significantly affected. The equity return of financially constraint firm is also significantly more affected upon domestic monetary policy than less-constraint firm. However, international monetary policy is insignificantly influenced the financially constraints firm; whereas, the stock returns of less-constraint firm is significantly affected. This finding stated that the relevance of international risk factor (in particular international monetary policy) in influencing the firm-level stock returns. Therefore, domestic monetary authority has to consider the development in international monetary policy in formulating their monetary policy. In the meantime, the monetary authority has to observe the development in domestic stock market, which is can be influenced by monetary policy in order to take advantage of the effect of stock market to economy activity. |
| Keywords: | Monetary policy shocks; firm’s stock return; dynamic panel data; augmented multifactor model |
| JEL: | G12 C23 E52 |
| Date: | 2009–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23953&r=cba |