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on Central Banking |
| By: | Bennett T. McCallum (Professor, Carnegie Mellon University and National Bureau of Economic Research (E-mail: bmccallum@cmu.edu)) |
| Abstract: | This paper is being prepared for the 2010 international conference of the Institute for Monetary and Economic Studies of the Bank of Japan, gThe Future of Central Banking under Globalization,h to be held May 26-27, 2010, in Tokyo. I am grateful to Marvin Goodfriend for helpful discussions. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-14&r=cba |
| By: | Jürgen von Hagen; Jean Pisani-Ferry; Jakob von Weizsäcker |
| Abstract: | Prepared for presentation at the informal ECOFIN Council meetings in Gothenberg, Sweden, on 1 Oct 2009, this paper discusses recommendations regarding exit strategies for budgetary policy, monetary policy and financial sector policy across Europe. The authors argue that bank recapitalisation and restructuring should be a matter of urgency for EU member states and that governments should set debt targets to be reached by the end of 2014. They also explain that proper incentives are necessary to ensure that an exit strategy is implemented in coordination between various institutional actors. Such a policy framework should be in place by summer 2010, the authors recommend, in order to avoid a buildup of financial instability during the process. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:bre:esslec:343&r=cba |
| By: | Franklin Allen (Professor, University of Pennsylvania(E-mail: allenf@wharton.upenn.edu)); Elena Carletti (Professor, European University Institute(E-mail: Elena.Carletti@EUI.eu)) |
| Abstract: | The financial sector is heavily regulated in order to prevent financial crises. The recent crisis showed how ineffective this regulation and other types of government intervention were in achieving this aim. We argue that the crisis was primarily caused by housing price bubbles. These occurred because of too loose monetary policies and the easy availability of credit resulting from the build up of large foreign exchange reserves by Asian central banks. A number of regulatory reforms are suggested. It is also argued that central banks need to have more checks and balances. Finally, the international financial architecture needs to be changed so that Asian countries do not feel the need to accumulate large foreign exchange reserves. |
| Keywords: | Bubbles, Monetary Policy, Global Imbalances |
| JEL: | G12 G21 G28 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-18&r=cba |
| By: | Pierpaolo Benigno (Professor, LUISS Guido Carli and EIEF (E-mail: pbenigno@luiss.it)); Ester Faia (Professor, Goethe University Frankfurt, Kiel IfW and CEPREMAP (E-mail: faia@wiwi.uni-frankfurt.de)) |
| Abstract: | An important aspect of the globalization process is the increase in interdependence among countries through the deepening of trade linkages. This process should increase competition in each destination market and change the pricing behavior of firms. We present an extension of Dornbusch (1987)fs model to analyze the extent to which globalization, interpreted as an increase in the number of foreign products in each destination market, modifies the slope and the position of the New-Keynesian aggregate-supply equation and, at the same time, affects the degree of exchange rate pass-through. We provide empirical evidence that supports the results of our model. |
| Keywords: | AS equations, Oligopolistic Competition, Inflation Dynamic |
| JEL: | E31 F41 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-17&r=cba |
| By: | Guillard, Michel; Sosa Navarro, Ramiro |
| Abstract: | The central question this paper seeks to answer is how monetary policy might affect the equilibrium behavior of default and sovereign risk premium. The paper is based on one-interest-rate model. Public debt becomes risky due to an active fiscal policy, as in Uribe (2006), reflecting the fiscal authority’s limited ability to control primary surplus. The insolvency problem is due to a string of bad luck (negative shocks affecting primary surplus). But in contrast to Uribe’s results, as the sovereign debt cost increases (which result from weak primary surplus), default becomes anticipated and reflected by a rising country risk premium and default probability. The default is defined as reneging on a contractual agreement and so the decision is set by the fiscal authority. However, conflicting objectives between fiscal and monetary authority play an important role in leading fiscal authority to default on its liabilities. The characteristic of the government policy needed to restore the equilibrium after the default is also analyzed. |
| Keywords: | Fiscal Imbalances; Inflation; Sovereign Risk; Default |
| JEL: | E52 E63 E61 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24075&r=cba |
| By: | Emine Boz; Enrique G. Mendoza |
| Abstract: | Uncertainty about the riskiness of new financial products was an important factor behind the U.S. credit crisis. We show that a boom-bust cycle in debt, asset prices and consumption characterizes the equilibrium dynamics of a model with a collateral constraint in which agents learn "by observation" the true riskiness of a new financial environment. Early realizations of states with high ability to leverage assets into debt turn agents optimistic about the persistence of a high-leverage regime. The model accounts for 69 percent of the household debt buildup and 53 percent of the rise in housing prices during 1997-2006, predicting a collapse in 2007. |
| Date: | 2010–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/164&r=cba |
| By: | Andreas Freytag (School of Economics and Business Administration, Friedrich-Schiller-University Jena); G. Pehnelt |
| Abstract: | - |
| Keywords: | - |
| JEL: | F34 O16 |
| Date: | 2010–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:02-2008&r=cba |
| By: | Christian Fahrholz (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Roman Goldbach |
| Abstract: | - |
| Keywords: | - |
| JEL: | E62 G12 G14 H30 H61 |
| Date: | 2010–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:10-2010&r=cba |
| By: | Christian Fahrholz (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Andreas Kern |
| Abstract: | In this article we inquire into the root causes of the present financial crisis by drawing on a Heckscher-Ohlin-Samuelson trade model. At the origin of the current crisis are global imbalances originating from distortions in relative prices. Due to impasses in international production, financial repression in countries that seek to suppress real appreciation has resulted in excessive capital-intensive production and an expansion of financial service sectors in flexible market economies. Moreover, financial globalization has been a vehicle for exporting real appreciation pressures from catching-up economies to mature economies, thus aggravating global imbalances. |
| Keywords: | Financial Crisis, Financial Repression, Heckscher-Ohlin-Samuelson Model |
| JEL: | E22 E44 F11 F36 F41 |
| Date: | 2010–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:05-2009&r=cba |
| By: | Julián Messina (World Bank); Philip Du Caju (National Bank of Belgium); Cláudia Filipa Duarte (Banco de Portugal); Niels Lynggård Hansen (Danmarks Nationalbank); Mario Izquierdo (Banco de España) |
| Abstract: | This paper presents estimates based on individual data of downward nominal and real wage rigidities for thirteen sectors in Belgium, Denmark, Spain and Portugal. Our methodology follows the approach recently developed for the International Wage Flexibility Project, whereby resistance to nominal and real wage cuts is measured through departures of observed individual wage change histograms from an estimated counterfactual wage change distribution that would have prevailed in the absence of rigidity. We evaluate the role of worker and firm characteristics in shaping wage rigidities. We also confront our estimates of wage rigidities to structural features of the labour markets studied, such as the wage bargaining level, variable pay policy and the degree of product market competition. We find that the use of firm-level collective agreements in countries with rather centralized wage formation reduces the degree of real wage rigidity. This finding suggests that some degree of decentralization within highly centralized countries allows firms to adjust wages downwards, when business conditions turn bad. |
| Keywords: | wage rigidity, wage-bargaining institutions |
| JEL: | J31 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1022&r=cba |
| By: | Guglielmo Maria Caporale (Centre for Empirical Finance, Brunel University, West London, UB8 3PH, United Kingdom.); Luca Onorante (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Paolo Paesani (University of Rome “Tor Vergata”.) |
| Abstract: | This paper estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates their linkages in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steadystate inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has increased, mainly owing to exogenous shocks. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, consistently with the idea that the ECB can achieve lower inflation uncertainty by lowering the inflation rate. JEL Classification: E31, E52, C22. |
| Keywords: | Inflation, Inflation Uncertainty, Time-Varying Parameters, GARCH Models, ECB, EMU. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101229&r=cba |
| By: | Joseph P. Byrne; Alexandros Kontonikas; Alberto Montagnoli |
| Abstract: | We present a unique empirical analysis of the properties of the New Keynesian Phillips Curve using an international dataset of aggregate and disaggregate sectoral inflation. Our results from panel time-series estimation clearly indicate that sectoral heterogeneity has important consequences for aggregate inflation behaviour. Heterogeneity helps to explain the overesti- mation of inflation persistence and underestimation of the role of marginal costs in empirical investigations of the NKPC that use aggregate data. We find that combining disaggregate information with heterogeneous-consistent estimation techniques helps to reconcile, to a large extent, the NKPC with the data. |
| Keywords: | New Keynesian Phillips Curve; Heterogeneity; Aggregation Bias. |
| JEL: | E31 E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2010_18&r=cba |
| By: | Greenslade, Jennifer (Bank of England); Parker, Miles (Bank of England) |
| Abstract: | It is important to understand how companies set prices, since price-setting behaviour plays a key role in the monetary policy transmission mechanism. Many surveys have been conducted in a range of countries to shed light on this issue by asking companies directly about how they set prices. This paper reviews the results of a new survey of the price-setting behaviour by the Bank of England of around 700 UK firms. In terms of how companies set prices, the survey evidence supported the use of the mark-up over costs form of pricing. Firms reviewed prices more frequently than actually changing them, with the median firm changing price only once per year, but the frequency with which companies changed their prices varied considerably across sectors. Over the past decade a significant number of firms had increased the frequency of price changes. Different factors influenced price rises and price falls. Higher costs – in particular, labour costs and raw materials – were the most important driver behind price rises, whereas lower demand and competitors’ prices were the main factor resulting in price falls. Nearly half of firms changed their prices within three months of an increase in costs or a fall in demand. |
| Keywords: | Price-setting; nominal rigidity; survey data |
| JEL: | D40 E30 |
| Date: | 2010–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0395&r=cba |
| By: | Bunn, Philip (Bank of England); Ellis, Colin (BVCA) |
| Abstract: | This paper examines the behaviour of individual producer prices in the United Kingdom, and uncovers a number of stylised facts about pricing behaviour. First, on average 26% of producer prices change each month, although there is considerable heterogeneity between sectors and price changes occur less frequently when measured by the average for individual products. Second, the probability of price changes is not constant over time: prices are most likely to change one, four and twelve months after they were previously set. Third, the distribution of price changes is wide, although a significant number of changes are relatively small and close to zero. Fourth, prices that change more frequently tend to do so by less. And fifth, price changes are much less persistent at the disaggregated level than aggregate inflation data imply. We find that conventional pricing theories struggle to match these results, particularly the marked heterogeneity. |
| Keywords: | Producer prices; price-setting behaviour |
| JEL: | D40 E31 |
| Date: | 2010–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0394&r=cba |
| By: | Emmanuel Dhyne (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000, Brussels, Belgium.); Martine Druant (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000, Brussels, Belgium.) |
| Abstract: | Survey results in 15 European countries for almost 15,000 firms reveal that Belgian firms react more than the average European firm to adverse shocks by reducing permanent and temporary employment. On the basis of a firm-level analysis, this paper confirms that the different reaction to shocks is significant and investigates what factors explain this difference. Although the explanatory value of the variables is limited, most of the explanatory power of the model being associated with the dummy variables coding for firm size, sector and country, the variables investigated provide valuable information. The importance of wage bargaining above the firm level, the automatic system of index-linking wages to past inflation, the limited use of flexible pay, the high share of low-skilled blue-collar workers, the labor intensive production process as well as the less stringent legislation with respect to the protection against dismissal are at the basis of the stronger employment reaction of Belgian firms. On the contrary, employment is safeguarded by the presence of many small firms and a wage cushion. JEL Classification: D21, E30, J31. |
| Keywords: | survey, wage rigidity, cost-push shocks, demand shock, wage bargaining institutions, indexation. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101224&r=cba |
| By: | Emmanuel Dhyne (National Bank of Belgium, Research Department; Université de Mons); Martine Druant (National Bank of Belgium, Research Department) |
| Abstract: | Survey results in 15 European countries for almost 15,000 firms reveal that Belgian firms react more than the average European firm to adverse shocks by reducing permanent and temporary employment. On the basis of a firm-level analysis, this paper confirms that the different reaction to shocks is significant and investigates what factors explain this difference. Although the explanatory value of the variables is limited, most of the explanatory power of the model being associated with the dummy variables coding for firm size, sector and country, the variables investigated provide valuable information. The importance of wage bargaining above the firm level, the automatic system of index-linking wages to past inflation, the limited use of flexible pay, the high share of low-skilled blue-collar workers, the labor intensive production process as well as the less stringent legislation with respect to the protection against dismissal are at the basis of the stronger employment reaction of Belgian firms. On the contrary, employment is safeguarded by the presence of many small firms and a wage cushion |
| Keywords: | survey, wage rigidity, cost-push shocks, demand shock, wage bargaining institutions, indexation |
| JEL: | D21 E30 J31 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201007-19&r=cba |
| By: | Ippei Fujiwara (Director, Financial Markets Department, Bank of Japan (E-mail: ippei.fujiwara@boj.or.jp)); Tomoyuki Nakajima (Associate Professor, Institute of Economic Research, Kyoto University (E-mail: nakajima@kier.kyoto-u.ac.jp)); Nao Sudo (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp)); Yuki Teranishi (Deputy Director, Financial Systems and Bank Examination Department, Bank of Japan (E-mail: yuuki.teranishi@boj.or.jp)) |
| Abstract: | In this paper we consider a two-country New Open Economy Macroeconomics model, and analyze the optimal monetary policy when countries cooperate in the face of a "global liquidity trap" -- i.e., a situation where the two countries are simultaneously caught in liquidity traps. The notable features of the optimal policy in the face of a global liquidity trap are history dependence and international dependence. The optimality of history dependent policy is confirmed as in local liquidity trap. A new feature of monetary policy in global liquidity trap is whether or not a country's nominal interest rate is hitting the zero bound affects the target inflation rate of the other country. The direction of the effect depends on whether goods produced in the two countries are Edgeworth complements or substitutes. We also compare several classes of simple interest-rate rules. Our finding is that targeting the price level yields higher welfare than targeting the inflation rate, and that it is desirable to let the policy rate of each country respond not only to its own price level and output gap, but also to those in the other country. |
| Keywords: | Zero Interest Rate Policy, Two-country Model, International Spillover, Monetary Policy Coordination |
| JEL: | E52 E58 F41 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-11&r=cba |
| By: | Kozo Ueda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp)) |
| Abstract: | Optimal commitment policy under the zero lower bound entails a high degree of complexity and time-inconsistency in a stochastic economy. This paper proposes a time-invariant duration policy that mitigates those problems and facilitates policy implementation and communication while retaining effectiveness in inflation stabilization. Under the time- invariant duration policy, a central bank commits itself to maintaining low interest rates for some duration even after adverse shocks disappear, but unlike the optimal commitment policy, the duration is independent of the ex post spell of the adverse shocks. Consequently, the time- inconsistency problem does not increase even if the ex post spell of the adverse shocks lengthens, and policy rates are expressed in an extremely simple, explicit form. Simulation results suggest that the time-invariant duration policy performs virtually as effectively as the optimal commitment policy in stabilizing inflation, and far better than a discretionary policy and simple interest rate rules with or without inertia. |
| Keywords: | Zero lower bound on nominal interest rates, optimal monetary policy, liquidity trap, time-inconsistency |
| JEL: | E31 E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-12&r=cba |
| By: | Luisa Lambertini; Caterina Mendicino; Maria Tereza Punzi |
| 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 find 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 findings. Moreover, expectations of either a future reduction in the policy rate or a temporary increase in the central bank's inflation target that are not fulfilled 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.<br> |
| JEL: | E32 E44 E52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201004&r=cba |
| By: | Ethan Cohen-Cole (Robert H Smith School of Business, 4420 Van Munching Hall, University of Maryland, College Park, MD 20742, USA.); Jonathan Morse (Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, MA, USA.) |
| Abstract: | From the onset of the 2007-2009 crisis, the Federal Reserve and the European Central Bank have aggressively lowered interest rates. Both sets of changes are at odds with an anti-inflationary stance of monetary policy; indeed, as the crisis began in August 2007 inflation expectations were high and rising, particularly in the United States. We have two additions to the literature. One, we present a model economy with a leveraged and regulated financial sector. Two, we find optimal Taylor rules for our economy that are consistent with a strong pro-inflationary reaction during financial crisis while maintaining a standard output-inflation mandate. We have three interpretations of our results. One, because the Federal Reserve has partial control over bank regulation it can exercise regulatory lenience. Two, the Fed’s stronger output orientation means that it will potentially respond more quickly when faced with constrained banks. Three, our results support procyclical capital regulation. JEL Classification: E52, E58, G18, G28. |
| Keywords: | monetary policy, capital regulation, crisis. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101222&r=cba |
| By: | Boris Hofmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gert Peersman (Ghent University, Sint-Pietersnieuwstraat 25, B-9000 Ghent, Belgium.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper explores time variation in the dynamic effects of technology shocks on U.S. output, prices, interest rates as well as real and nominal wages. The results indicate considerable time variation in U.S. wage dynamics that can be linked to the monetary policy regime. Before and after the "Great Inflation", nominal wages moved in the same direction as the (required) adjustment of real wages, and in the opposite direction of the price response. During the "Great Inflation", technology shocks in contrast triggered wage-price spirals, moving nominal wages and prices in the same direction at longer horizons, thus counteracting the required adjustment of real wages, amplifying the ultimate repercussions on prices and hence increasing inflation volatility. Using a standard DSGE model, we show that these stylized facts, in particular the estimated magnitudes, can only be explained by assuming a high degree of wage indexation in conjunction with a weak reaction of monetary policy to inflation during the "Great Inflation", and low indexation together with aggressive inflation stabilization of monetary policy before and after this period. This means that the monetary policy regime is not only captured by the parameters of the monetary policy rule, but importantly also by the degree of wage indexation and resultant second round effects in the labor market. Accordingly, the degree of wage indexation is not structural in the sense of Lucas (1976). JEL Classification: C32, E24, E31, E42, E52. |
| Keywords: | technology shocks, second-round effects, Great Inflation. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101230&r=cba |
| By: | Sandra Gomes; P. Jacquinot; M. Pisani |
| Abstract: | Building on the New Area Wide Model, we develop a 4-region macroeconomic model of the euro area and the world economy. The model (EAGLE, Euro Area and Global Economy model) is microfounded and designed for conducting quantitative policy analysis of macroeconomic interdependence across regions belonging to the euro area and between euro area regions and the world economy. Simulation analysis shows the transmission mechanism of region-specific or common shocks, originating in the euro area and abroad. |
| JEL: | C53 E32 E52 F47 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201006&r=cba |
| By: | José Manuel Belbute (Universidade de Évora, Departamento de Economia e CEFAGE-UE) |
| Abstract: | The purpose of this paper is to measure the degree of persistence of the overall, core, food and energy Harmonized Indexes of Consumer Prices for the European Monetary Zone (HICP-EAs) and to identify its implications for decision-making in the private sector and in public policy. Using a non-parametric approach, our results demonstrate the presence of a statistically significant level of persistence in four HICP-EAs: headline, core, food and energy. Moreover, contrary to popular belief, the core index does not reflect permanent price changes. We also find evidence that the food and energy price indexes are more volatile and more persistent than the other two price indexes. Our results also show a reduction in persistence for both the headline and the core price indexes after the implementation of the single monetary policy, but not for food and energy. These results have important implications for both the private sector and for policymakers who use the core as a reference price index for their decision-making because the use of this index can lead to an erroneous perception of price movements |
| Keywords: | Harmonized Index of Consumption Prices, Core Inflation, Euro Area, Persistence |
| JEL: | C14 C22 E31 E52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:evo:wpecon:3_2010&r=cba |
| By: | Nutahara, Kengo |
| Abstract: | A news-driven business cycle is a positive comovement of consumption, output, labor, and investment from the news about the future. We show that nominal rigidities, especially sticky prices, can cause it in an estimated medium-scale DSGE economy. |
| Keywords: | nominal rigidities ; news-driven business cycles |
| JEL: | E32 E21 |
| Date: | 2010–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24112&r=cba |
| By: | Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Angela Maddaloni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Any empirical analysis of the credit channel faces a key identification challenge: changes in credit supply and demand are difficult to disentangle. To address this issue, we use the detailed answers from the US and the confidential and unique Euro area bank lending surveys. Embedding this information within a standard VAR model, we find that: (1) the credit channel is active through the balance-sheets of households, firms and banks; (2) the credit channel amplifies the impact of a monetary policy shock on GDP and inflation; (3) for business loans, the impact through the (supply) bank lending channel is higher than through the demand and balance-sheet channels. For household loans the demand channel is the strongest; (4) during the crisis, credit supply restrictions to firms in the Euro area and tighter standards for mortgage loans in the US contributed significantly to the reduction in GDP. JEL Classification: E32, E44, E5, G01, G21. |
| Keywords: | Non-financial borrower balance-sheet channel, Bank lending channel, Credit channel, Credit crunch, Lending standards, Monetary policy. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101228&r=cba |
| By: | Dixon, Huw (Cardiff Business School); Pourpourides, Panayiotis M. (Cardiff Business School) |
| Abstract: | We show a simple way to introduce monopolistic competition in a general equilibrium model where prices are fully flexible, the velocity of money is variable and cash-in-advance (CIA) constraints occasionally bind. We establish the conditions under which money has real effects and demonstrate that an equilibrium that occurs at a binding CIA constraint is welfare inferior to any equilibrium that occurs at a non-binding CIA constraint with the same level of technology. We argue that even though the probability of a binding CIA constraint can be increasing with money supply, under certain conditions, expansionary money supply is welfare improving. |
| Keywords: | general equilibrium; monopolistic competition |
| JEL: | D43 E31 E41 E51 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2010/6&r=cba |
| By: | Isabel Marques Gameiro; João Sousa |
| Abstract: | This paper uses a VAR approach to study the transmission of monetary policy shocks in Portugal, focusing in particular on the financial decisions of households, corporations (financial/non-financial), the government and the rest of the world. We confirm that, in many ways, households and firms react in a similar way as found in other countries, with evidence that the monetary policy shock has a contractionary effect on economic activity and increases the financing needs of households and non-financial corporations. We also find evidence that the financial sector plays an important role, supplying the necessary funds to these sectors. We do not find much evidence of a significant systematic behaviour of the government or the rest of the world. |
| JEL: | E52 G11 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201014&r=cba |
| By: | Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Banco de España); Pilar Poncela (Universidad autónoma de Madrid) |
| Abstract: | We show that an extension of the Markov-switching dynamic factor models that accounts for the specificities of the day to day monitoring of economic developments such as ragged edges, mixed frequencies and data revisions is a good tool to forecast the Euro area recessions in real time. We provide examples that show the nonlinear nature of the relations between data revisions, point forecasts and forecast uncertainty. According to our empirical results, we think that the real time probabilities of recession are an appropriate statistic to capture what the press call green shoots. |
| Keywords: | Business Cycles, Output Growth, Time Series |
| JEL: | E32 C22 E27 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1026&r=cba |
| By: | Carlos Robalo Marques (Banco de Portugal, Research Department, Portugal.); Fernando Martins (Banco de Portugal, Research Department, Portugal.); Pedro Portugal (Banco de Portugal, Research Department, Portugal.) |
| Abstract: | This paper brings together empirical research on price and wage dynamics for the Portuguese economy based both on micro and macro data. As regards firms' pricing behaviour the most noticeable finding is that prices in Portugal are somewhat less flexible than in the United States but more flexible than in the Euro Area. Regarding firms' wage setting practices, we uncover evidence favouring the hypothesis of aggregate and disaggregate wage flexibility. Despite the existence of mandatory minimum wages, the presence of binding wage floors and the general use of extension mechanisms, the firms still retain some ability to circumvent collective agreements via the mechanism of the wage cushion. The evidence also suggests that Portuguese wages behave in a fashion consistent with the wage curve literature, but the responsiveness of real wages to unemployment changes may have declined over the last decade. JEL Classification: C42, D40, E31, J30. |
| Keywords: | Survey data, wage and price rigidities, persistence, wage cushion. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101225&r=cba |
| By: | D. Filiz Unsal; Gülçin Özkan |
| Abstract: | This paper develops a two-country DSGE model to investigate the transmission of a global financial crisis to a small open economy. We find that economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than sudden stop episodes of domestic origin. Moreover, in contrast to the existing literature, our results suggest that the greater a country's trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows. |
| Date: | 2010–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/158&r=cba |
| By: | Sebnem Kalemli-Ozcan (University of Houston, Department of Economics, Houston, TX, 77204, USA.); Elias Papaioannou (Dartmouth College, 6106 Rockefeller Hall, 319 Silsby Hanover, NH 03755, USA.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We identify the effect of financial integration on international business cycle synchronization, by utilizing a confidential database on banks’ bilateral exposure and employing a country-pair panel instrumental variables approach. Countries that become more integrated over time have less synchronized growth patterns, conditional on global shocks and country-pair factors. To account for reverse causality and measurement error, we exploit variation in the transposition dates of financial legislation. We find that increases in financial integration stemming from regulatory harmonization policies are followed by more divergent cycles. Our results contrast with those of the previous studies which suffer from the standard identification problems. JEL Classification: E32, F15, F36, G21, G28, O16. |
| Keywords: | Banking Integration, Co-movement, Fluctuations, Financial Legislation. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101221&r=cba |
| By: | Vítor Gaspar; Garry Schinasi |
| Abstract: | Within the context of the Global Crisis, this paper examines the ongoing policy challenges in establishing a European framework for financial regulation and supervision. We do so taking into account the evidence provided during the crisis of pervasive spillover effects and cross-country interdependence. The paper applies game-theoretic models as tools to think about the cross-country aspects of European financial integration over time. Specifically, the paper applies the economic theory of alliances of Olson and Zechauser (1966) and the private provision of public goods of Bergstrom, Blume and Varian (1986). We contrast the non-cooperative Nash equilibrium allocation with cooperative (Coase) outcomes. The latter can be expected to obtain under zero transaction costs. We follow Coase in taking zero transaction costs as a benchmark to examine the factors that may favor (or hinder) cooperation in specific circumstances. We consider the importance of iterated interactions through the theory of repeated games, case studies, and experimental evidence to identify factors favoring or hindering successful cooperation. The total number of participants, time, foresight, multiple equilibria, leadership, the magnitude and volatility of gains and losses, imperfect and asymmetric information, decision and bargaining costs, monitoring, and enforcement are all important factors. In the paper we stress the importance of an institutional approach that minimizes obstacles to reaching cooperative outcomes. We highlight the need for effective procedures to deal with systemic risk, an agreed set of rules underpinning the single European financial market (e.g. state aid rules and a single rule book), and effective restructuring, resolution and crisis management mechanisms. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:o201001&r=cba |
| By: | Roberto Chang; Luis Catão |
| Abstract: | The large swings in world food prices in recent years renew interest in the question of how monetary policy in small open economies should react to such imported price shocks. We examine this issue in a canonical open economy setting with sticky prices and where food plays a distinctive role in utility. We show how world food price shocks affect natural output and other aggregates, and derive a second order approximation to welfare. Numerical calibrations show broad CPI targeting to be welfare-superior to alternative policy rules once the variance of food price shocks is sufficiently large as in real world data. |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/161&r=cba |
| By: | Miguel de Carvalho; António Rua |
| Abstract: | The statistical modelling of extreme values has recently received substantial attention in a broad spectrum of sciences. Given that in a wide variety of scenarios, one is mostly concerned with explaining tail events (say, an economic recession) than central ones, the need to rely on statistical methods well qualified for modelling extremes arises. Unfortunately, several classical tools regularly applied in the analysis of central events, are simply innapropriate for the analysis of extreme values. In particular, Pearson correlation is not a proper measure for assessing the level of agreement of two variables when one is concerned with tail events. This paper explores the comovement of the economic activity of several OECD countries during periods of large positive and negative growth (right and left tails, respectively). Extremal measures are here applied as means to assess the degree of cross-country tail dependence of output growth rates. Our main empirical findings are: (i) the comovement is much stronger in left tails than in right tails; (ii) asymptotic independence is claimed by the data; (iii) the dependence in the tails is considerably stronger than the one arising from a Gaussian dependence model. In addition, our results suggest that, among the typical determinants for explaining international output growth synchronization, only economic specialization similarity seems to play a role at extreme events.<br> |
| JEL: | C40 C50 E32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201008&r=cba |
| By: | Francis Vitek |
| Abstract: | This paper develops a panel unobserved components model of the monetary transmission mechanism in the world economy, disaggregated into twenty national economies along the lines of the Group of Twenty. This structural macroeconometric model features extensive linkages between the real and financial sectors, both within and across economies. A variety of monetary policy analysis and forecasting applications of the estimated model are demonstrated, based on a Bayesian framework for conditioning on judgment. |
| Date: | 2010–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/152&r=cba |
| By: | Matthieu Bussière (Banque de France, 31 rue Croix des petits champs, 75001 Paris, France.); Sweta C. Saxena (International Monetary Fund (IMF), 700 19th Street, N.W., Washington DC 20431, USA.); Camilo E. Tovar (Bank for International Settlements (BIS), Centralbahnplatz 2, CH - 4002 Basel, Switzerland.) |
| Abstract: | The impact of currency collapses (i.e. large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies for the period 1960-2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (i.e. ceteris paribus) we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction, and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, i.e. one-time events induce exchange rate and output dynamics that differ from consecutive episodes. JEL Classification: E32, F31, F41, F43. |
| Keywords: | currency crisis, nominal devaluations, nominal depreciations, exchange rates, real output growth, recovery from crises. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101226&r=cba |
| By: | Jukka Pihlman; Han van der Hoorn |
| Abstract: | A decade-long diversification of official reserves into riskier investments came to an abrupt end at the beginning of the global financial crisis, when many central bank reserve managers started to withdraw their deposits from the banking sector in an apparent flight to quality and safety. We estimate that reserve managers pulled around US$500 billion of deposits and other investments from the banking sector. Although clearly not the main cause, this procyclical investment behavior is likely to have contributed to the funding problems of the banking sector, which required offsetting measures by other central banks such as the Federal Reserve and Eurosystem central banks. The behavior highlights a potential conflict between the reserve management and financial stability mandates of central banks. This paper analyzes reserve managers’ actions during the crisis and draws some lessons for strategic asset allocation of reserves going forward. |
| Date: | 2010–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/150&r=cba |
| By: | Davide Furceri (OECD and University of Palermo); Aleksandra Zdzienicka (Université de Lyon, Lyon, F-69003, France; CNRS, GATE Lyon St Etienne, UMR 5824, 93, chemin des Mouilles, Ecully, F-69130, France; ENS-LSH, Lyon, France) |
| Abstract: | The aim of this work is to assess the short and medium term impact of banking crises on developing economies. Using an unbalanced panel of 159 countries from 1970 to 2006, the paper shows that banking crises produce significant output losses, both in the short and in the medium term. The effect depends on structural and policy variables. Output losses are larger for relatively more wealthy economies, characterized by a higher level of financial deepening and larger current account imbalances. Flexible exchange rates, fiscal and monetary policy have been found to be efficient tools to attenuate the effect of the crises. Among banking intervention policies, liquidity support resulted to be the one associated with lower output losses. |
| Keywords: | Output Losses, Financial Crisis |
| JEL: | G1 E6 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1014&r=cba |
| By: | Naohisa Hirakata (Deputy Director and Economist, Research and Statistics Department, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp)); Nao Sudo (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp)); Kozo Ueda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp)) |
| Abstract: | Recent financial turmoil and existing empirical evidence suggest that adverse shocks to the financial intermediary (FI) sector cause substantial economic downturns. The quantitative significance of these shocks to the U.S. business cycle, however, has not received much attention up to now. To determine the importance of these shocks, we estimate a sticky-price dynamic stochastic general equilibrium model with what we describe as chained credit contracts. In this model, credit- constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. Using Bayesian estimation, we extract the shocks to the FIs' net worth. The shocks are cyclical, typically negative during a recession, such as the one that began in 2007. Their effects are persistent, lowering economic activity for several quarters after the recessionary trough. According to the variance decomposition, shocks to the FI sector are a main source of the spread variations, explaining 39% of the FIs' borrowing spread and 23% of the entrepreneurial borrowing spread. At the same time, these shocks play an important but not dominant role for investment, accounting for 15% of its variations. |
| Keywords: | Monetary Policy, Financial Accelerators, Financial Intermediaries, Chained Credit Contracts |
| JEL: | E31 E44 E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-13&r=cba |
| By: | Kozo Ueda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp)) |
| Abstract: | This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking cross-border borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country affect the other, yielding business cycle synchronization on both the real and financial sides. It also suggests that the FIs' globalization, net worth shock, and credit constraints are key to understanding the recent financial crisis. |
| Keywords: | Financial accelerator, financial intermediaries, correlation ( quantity) puzzle, business cycle synchronization, contagion, monetary policy |
| JEL: | E22 E32 E44 E52 F41 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-16&r=cba |
| By: | Markus Kirchner (Tinbergen Institute, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands.); Jacopo Cimadomo (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Sebastian Hauptmeier (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers. JEL Classification: C32, E62, H30, H50. |
| Keywords: | Government spending shocks, Fiscal transmission mechanism, Structural change, Structural vector autoregressions, Time-varying parameter models. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101219&r=cba |
| By: | Mark Weisbrot; Juan Antonio Montecino |
| Abstract: | This paper looks at the planned austerity measures in Spain, the rationale for the spending cuts and tax increases, likely outcomes for future debt-to-GDP ratios, and the probable results of alternative policies. |
| Keywords: | IMF, Spain, EU, European Central Bank, deficit spending, budget deficits, fiscal policy, monetary policy |
| JEL: | O O5 O52 E E5 E52 E58 E6 E62 E63 E65 E66 F F1 F3 F4 F5 F32 F33 F34 F36 F37 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2010-18&r=cba |
| By: | Davide Furceri (OECD and University of Palermo); Aleksandra Zdzienicka (Université de Lyon, Lyon, F-69003, France; CNRS, GATE Lyon St Etienne, UMR 5824, 93, chemin des Mouilles, Ecully, F-69130, France; ENS-LSH, Lyon, France) |
| Abstract: | The aim of this paper is to assess the consequences of banking crises on public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises produce a significant and long-lasting increase in government debt. The effect is a function of the severity of the crisis. In particular, we find that for severe crises, comparable to the most recent one in terms of output losses, banking crises are followed by a medium-term increase of about 37 percentage points in the government gross debt-to-GDP ratio. We also find that the debt ratio increased more in smaller countries, with worse initial fiscal positions and with a lower quality of institutions (in terms of political stability and democracy). The increase in government debt is also a function of the size of the fiscal stimulus to counter the economic downturns and varies with the type of banking intervention policy, with liquidity support to banks associated with a larger increase in public debt. |
| Keywords: | Output Growth, Financial Crisis, CEECs |
| JEL: | G1 E6 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1015&r=cba |
| By: | Anna Ilyina; Anastasia Guscina; Herman Kamil |
| Abstract: | This paper explores the link between the cyclical patterns of macroeconomic and policy variables and the currency composition of domestic sovereign debt in emerging market countries. The empirical analysis is anchored in an equilibrium model, in which the dollarization of sovereign debt arises as a result of the optimal portfolio choices by risk-averse investors, and of a sovereign debt manager who takes fiscal policy as given. The model predicts that in countries where the exchange rate is countercyclical (i.e., the exchange rate depreciates during recessions), a more procyclical fiscal policy (i.e., expansionary in good times and contractionary in bad times) would lead, on average, to a more dollarized domestic sovereign debt. The empirical analysis using the Jeanne-Guscina EM Debt database (2006) on the currency structure of the central government debt in 22 emerging market countries over 1980 - 2005, supports these predictions. |
| Date: | 2010–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/168&r=cba |
| By: | Michael Kumhof; Kevin Clinton; Susanna Mursula; Douglas Laxton |
| Abstract: | The paper evaluates the costs and benefits of fiscal consolidation using simulations based on the IMFs global DSGE model GIMF. Over the longer run, well-targeted permanent reductions in budget deficits lead to a considerable increase in both the growth rate and the level of output. The gains may be enhanced by shifting some of the tax burden from incomes to consumption. In the short run, credibility plays a crucial role in determining the size of initial output loses. Global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits. |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/163&r=cba |
| By: | Gaël Giraud (Centre d'Economie de la Sorbonne - Paris School of Economics); Dimitrios P. Tsomocos (Saïd Business School University) |
| Abstract: | We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a "veil" and trade vanishes. Typically, there is a peicewise globally unique trade-ant-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run, and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub-optimal) liquidity trap where monetary policy is ineffective ; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households' expectations, and the quantity of circulating money. |
| Keywords: | Bank, money, price-quantity dynamics, inside money, outside money, rational expectations, liquidity, double auction, limit-price orders, inflation, bounded rationality. |
| JEL: | D50 D83 E12 E24 E30 E40 E41 E50 E58 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10061&r=cba |
| By: | Gaël Giraud (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Dimitrios P. Tsomocos (Saïd Business School University - University of Oxford) |
| Abstract: | We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a "veil" and trade vanishes. Typically, there is a peicewise globally unique trade-ant-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run, and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub-optimal) liquidity trap where monetary policy is ineffective ; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households' expectations, and the quantity of circulating money. |
| Keywords: | Bank ; money ; price-quantity dynamics ; inside money ; outside money ; rational expectations ; liquidity ; double auction ; limit-price orders ; inflation ; bounded rationality |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00505141_v1&r=cba |
| By: | Miguel de Carvalho; Paulo C. Rodrigues; António Rua |
| Abstract: | The monitoring of economic developments is an exercise of considerable importance forpolicy makers, namely, central banks and fiscal authorities as well as for other economic agents such as financial intermediaries, firms and households. However, the assessment of the business cycle is not an easy endeavor as the cyclical component is not an observable variable. In this paper we resort to singular spectrum analysis in order to disentangle the US GDP into several underlying components of interest. The business cycle indicator yielded through this method is shown to bear a resemblance with band-pass filtered output. As the end-of-sample behavior is typically a thorny issue in business cycle assessment, a real-time estimation exercise is here conducted to assess the reliability of the several filters. The obtained results suggest that the business cycle indicator proposed herein possesses a better revision performance than other filters commonly applied in the literature. |
| JEL: | C50 E32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201009&r=cba |
| By: | Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Patrick Rakotomarolahy (Centre d'Economie de la Sorbonne) |
| Abstract: | An empirical forecast accuracy comparison of the non-parametric method, known as multivariate Nearest Neighbor method, with parametric VAR modelling is conducted on the euro area GDP. Using both methods for nowcasting and forecasting the GDP, through the estimation of economic indicators plugged in the bridge equations, we get more accurate forecasts when using nearest neighbor method. We prove also the asymptotic normality of the multivariate k-nearest neighbor regression estimator for dependent time series, providing confidence intervals for point forecast in time series. |
| Keywords: | Forecast, economic indicators, GDP, Euro area, VAR, multivariate k-nearest neighbor regression, asymptotic normality. |
| JEL: | C22 C53 E32 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10065&r=cba |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Patrick Rakotomarolahy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | An empirical forecast accuracy comparison of the non-parametric method, known as multivariate Nearest Neighbor method, with parametric VAR modelling is conducted on the euro area GDP. Using both methods for nowcasting and forecasting the GDP, through the estimation of economic indicators plugged in the bridge equations, we get more accurate forecasts when using nearest neighbor method. We prove also the asymptotic normality of the multivariate k-nearest neighbor regression estimator for dependent time series, providing confidence intervals for point forecast in time series. |
| Keywords: | Forecast, economic indicators, GDP, Euro area, VAR, multivariate k-nearest neighbor regression, asymptotic normality. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00505165_v1&r=cba |
| By: | Donald P. Morgan; Stavros Peristiani; Vanessa Savino |
| Abstract: | We investigate whether the “stress test,” the extraordinary examination of the nineteen largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced the information demanded by the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital gaps before the stress test results were revealed, but that the market was informed by the size of the gap; given our proxy for the expected gap, banks with larger capital gaps experienced more negative abnormal returns. Our findings suggest that the stress test helped quell the financial panic by producing vital information about banks. Our findings also contribute to the academic literature on bank opacity and the value of government monitoring of banks. |
| Keywords: | Bank capital ; Bank examination ; Bank holding companies |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:460&r=cba |
| By: | Yannick Lucotte (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans) |
| 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 |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00505140_v1&r=cba |
| By: | Li L. Ong; Martin Cihák |
| Abstract: | The global financial crisis revealed weaknesses in the stress testing exercises performed on financial institutions and systems around the world. These failures were most evident in the area of liquidity risk, where now-obvious vulnerabilities were left largely undetected, with stress tests having largely focused on solvency risk. This paper uses publicly available data from a now-defunct bank in Iceland, where liquidity shocks were immense, to demonstrate how a combination of stress tests of the various risks would have provided a clearer picture of existing vulnerablities. We show that, ultimately, stress test models do not necessarily need to be complex or overly sophisticated. Basic stress tests, using appropriate assumptions and shocks, could reveal key areas of risk to inform contingency planning. The liquidity stress test templates used in this paper are included. |
| Date: | 2010–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/156&r=cba |
| By: | Jon Baldvin Hannibalsson |
| Abstract: | - |
| Keywords: | - |
| JEL: | F32 F41 |
| Date: | 2010–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:03-2009&r=cba |
| By: | Jan Gottschalk; Rafael Portillo; Luis-Felipe Zanna; Andrew Berg |
| Abstract: | We develop a model to analyze the macroeconomic effects of a scaling-up of aid and assess the implications of different policy responses. The model features key structural characteristics of low-income countries, including varying degrees of public investment efficiency and a learning-by-doing (LBD) externality that captures Dutch disease effects. On the policy front, it distinguishes between spending the aid, which is controlled by the fiscal authority, and absorbing the aid - financing a higher current account deficit - which is influenced by the central bank's reserve accumulation policies. We calibrate the model to Uganda and run several experiments. We find that a policy mix that results in full spending and absorption of aid can generate temporary demand and real exchange rate appreciation pressures, but also have a positive effect on real GDP in the medium term, through higher public capital. Full spending with partial absorption, on the other hand, may stem appreciation pressures but can also induce adverse medium-term real GDP effects, through private sector crowding out. When aid is very inefficiently invested and there are strong LBD externalities, aid can be harmful, and partial absorption policies may be justified. But in this case, a welfare improving solution is to defer spending or - even better if possible - raise its efficiency. |
| Date: | 2010–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/160&r=cba |
| By: | Burcu Aydin |
| Abstract: | This paper provides an exchange rate assessment for sub-Saharan African economies by using methodologies similar to those developed by the International Monetary Fund’s Consultative Group on Exchange Rate Issues. As in the World Economic Outlook (IMF, 2009a), the unbalanced panel dataset covers 182 countries from 1973 to 2014. We apply four methodologies to assess the fundamental exchange rate: macroeconomic balance, equilibrium real exchange rate, external sustainability, and purchasing power parity. Results show that the impact of macroeconomic fundamentals on the equilibrium real exchange rate is different for sub-Saharan African economies than for advanced and less advanced economies. |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/162&r=cba |
| By: | Xavier Debrun; Paul R. Masson; Catherine A. Pattillo |
| Abstract: | This paper develops a full-fledged cost-benefit analysis of monetary integration, and applies it to the currency unions actively pursued in Africa. The benefits of monetary union come from a more credible monetary policy, while the costs derive from real shock asymmetries and fiscal disparities. The model is calibrated using African data. Simulations indicate that the proposed EAC, ECOWAS, and SADC monetary unions bring about net benefits to some potential members, but modest net gains and sometimes net losses for others. Strengthening domestic macroeconomic frameworks is shown to provide some of the same improvements as monetary integration, reducing the latter’s relative attractiveness. |
| Date: | 2010–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/157&r=cba |