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on Central Banking |
| By: | Paul Levine |
| Abstract: | The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies.This papers describes this trans formation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. |
| Keywords: | structureduncertainty,DSGEmodels,robustness,Bayesian estimation,interest-raterules |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2761&r=cba |
| By: | Jordi Galí; Thijs van Rens |
| Abstract: | We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity has vanished, (ii) the relative volatility of employment has risen, and (iii) the relative (and absolute) volatility of the real wage has risen. We propose an explanation for all three changes that is based on a common source: a decline in labor market frictions. We develop a simple model with labor market frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the reduction in frictions may also have contributed to the observed decline in output volatility |
| Keywords: | labor hoarding, labor market frictions, wage rigidities, effort choice |
| JEL: | E24 E32 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1641&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: | global imbalances, collateral constraints, monetary regimes |
| JEL: | E52 F1 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1639&r=cba |
| By: | S. Boragan Aruoba; Francis X. Diebold; M. Ayhan Kose; Marco E. Terrones |
| Abstract: | We propose and implement a framework for characterizing and monitoring the global business cycle. Our framework utilizes high-frequency data, allows us to account for a potentially large amount of missing observations, and is designed to facilitate the updating of global activity estimates as data are released and revisions become available. We apply the framework to the G-7 countries and study various aspects of national and global business cycles, obtaining three main results. First, our measure of the global business cycle, the common G-7 real activity factor, explains a significant amount of cross-country variation and tracks the major global cyclical events of the past forty years. Second, the common G-7 factor and the idiosyncratic country factors play different roles at different times in shaping national economic activity. Finally, the degree of G-7 business cycle synchronization among country factors has changed over time. |
| JEL: | E3 E6 F4 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16264&r=cba |
| By: | Luigi Paciello (EIEF) |
| Abstract: | The speed of inflation adjustment to aggregate technology shocks is substantially larger than to monetary policy shocks. Prices adjust very quickly to technology shocks, while they only respond sluggishly to monetary policy shocks. This evidence is hard to reconcile with existing models of stickiness in prices. I show that the difference in the speed of price adjustment to the two types of shocks arises naturally in a model where price setting firms optimally decide what to pay attention to, subject to a constraint on information flows. In my model, firms pay more attention to technology shocks than to monetary policy shocks when the former affects profits more than the latter. Furthermore, strategic complementarities in price setting generate complementarities in the optimal allocation of attention. Therefore, each firm has an incentive to acquire more information on the variables that the other firms are, on average, more informed about. These complementarities induce a powerful amplification mechanism of the difference in the speed with which prices respond to technology shocks and to monetary policy shocks. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:0816&r=cba |
| By: | Peter Spahn |
| Abstract: | Low inflation on goods markets provides no reliable precondition for asset-market stability; it might even promote the emergence of bubbles because interest rates and risk premia appear to be low. A further factor driving asset demand is easy availability of credit, which in turn roots in the banking system operating in a regime of endogenous central-bank money. A comparison of Bundesbank and ECB policies suggests that credit growth can be controlled more efficiently if rising interest rates are accompanied by some liquidity squeeze that supports the spillover of a monetary restriction to capital markets. The announcement effect of a central bank Charter including the goal of financial-market stability helps to deter private agents from excessive asset trading. |
| Keywords: | open-market policy; asset-price bubble; euro money market; ECB strategy |
| JEL: | E5 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:hoh:hohdip:323&r=cba |
| By: | Lundtofte, Frederik (Department of Economics, Lund University); Leoni, Patrick (EUROMED Management) |
| Abstract: | We analyze how a benevolent government agency would optimally release information about the growth rate of the stochastic dividend process of the financial market. We investigate the effects of the agency's signal on the agents' optimal strategies and equilibrium asset prices. In the case where all investors are rational Bayesian updaters, we show that the agency's optimal choice is to release a manipulative signal (lie) with probability one. However, if there are some nonupdating (inattentive) agents, we find cases where it is optimal for the government agency to send a revealing signal with probability one. |
| Keywords: | Social welfare; information; forecasting; asset pricing; inattention |
| JEL: | D80 G11 G12 |
| Date: | 2010–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2010_008&r=cba |
| By: | Christopher Reicher; Johannes Utlaut |
| Abstract: | We estimate a seven-variable-VAR for the U.S. economy on postwar data using long-run restrictions, taking changes in long-run interest rates and inflation expectations into account. We find a strong connection between oil prices and long-run nominal interest rates which has lasted throughout the entire postwar period. We find that a simple off-the-shelf theoretical model of oil prices and monetary policy, where oil prices are flexible and other prices are sticky, in fact predicts a strong relationship if inflation and oil prices were driven by monetary policy. The observed magnitude of this relationship is still a bit of a puzzle, but this finding does call into question the identification techniques commonly used to identify oil shocks |
| Keywords: | Oil shocks, interest rates, inflation |
| JEL: | E31 E58 N50 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1637&r=cba |
| By: | Paul Bergin; Ching-Yi Lin |
| Abstract: | A currency union's ability to increase international trade is one of the most debated questions in international macroeconomics. This paper studies the dynamics of these trade effects. First, an empirical study of the European Monetary Union finds that the extensive margin of trade (entry of new firms or goods) responds several years ahead of overall trade volume. This implies that the intensive margin (previously traded goods) falls in the run-up to EMU. The paper's theoretical contribution is to study the announcement of a future monetary union as a news shock to trade costs in the context of a dynamic stochastic general equilibrium trade model. Early entry of new firms in anticipation is explainable as a rational forward-looking response under certain conditions, where essential elements include sunk costs of exporting and heterogeneity among firms of a type known before entry. The findings help identify which types of trading frictions are reduced by a currency union. The important role of expectations also indicates that continued gains from EMU depend upon long-term credibility of the union. |
| JEL: | F41 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16259&r=cba |
| By: | Ligthart, J.E.; Werner, S.E.V. (Tilburg University, Center for Economic Research) |
| Abstract: | We present a new approach to study empirically the effect of the introduction of the euro on currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice depends on the characteristics of both the currency and the country. We use unique quarterly panel data of Norwegian imports from OECD countries for the 1996{2006 period. One of the key findings is that the eurozone countries in trade with Norway have substantially increased their share of home currency invoicing after the introduction of the euro. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The econometric analysis shows a significant effect of euro introduction above and beyond the determinants of currency invoicing (i.e., ination rate, ination volatility, foreign exchange market size, and product composition). However, the rise in producer currency invoicing by eurozone countries is primarily caused by a drop in ination volatility. |
| Keywords: | euro;invoicing currency;exchange rate risk;ination;ination risk;vehicle currencies;compositional multinomial logit |
| JEL: | F14 F15 F31 F33 F36 E31 C25 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201048&r=cba |
| By: | Kolsrud, Dag (Statistics Norway); Nymoen, Ragnar (Dept. of Economics, University of Oslo) |
| Abstract: | We derive aggregate supply (AS) relationships for an intermediate-run macro model. The wage-price spiral provides the conceptual framework for a synthesis of different contesting theoretical and empirical perspectives on the AS curve: the Phillips curve model (PCM) and the wage-price equilibrium correction model (WPECM). The generalized AS curve is grafted into a small macro model. We analyze stability conditions, steady states, and dynamic solutions, using a combination of algebra and simulations. The specification of the AS curve, as a PCM or a WPECM, is shown to be important for all aspects of the model’s solution, but within each model also the detailed parameterization is of qualitative importance. For example, endogenous cyclical fluctuations are typical for both nominal and real variables, e.g. inflation and unemployment. |
| Keywords: | AS-AD; cycles; dynamics; equilibrium correction; macroeconomics; nominal rigidity; Phillips curve; unemployment; wage-price spiral |
| JEL: | E24 E30 J50 |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2010_006&r=cba |
| By: | Stephanie Seguino; James Heintz |
| Abstract: | <p>This paper explores the distributional effects of contractionary monetary policy by race and gender in the U.S. from 1979-2008 using state-level panel data. We hypothesize that women and Blacks, as groups with less power and lower status in the social hierarchy, fare worse in the competition over jobs, resulting in a disproportionate rise in female and Black unemployment rates relative to White males. We also investigate the possibility that Blacks bear a greater burden of joblessness than females as Black population density rises. Results indicate the costs of fighting inflation are unevenly distributed amongst workers, weighing more heavily on Black females and Black males, followed by White females, and lastly, White males.<br /><br /></p> |
| Keywords: | Monetary policy, stratification, race, gender, unemployment |
| JEL: | E24 E52 J7 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp230&r=cba |
| By: | Gerhard Rünstler (WIFO) |
| Abstract: | Forecasts from dynamic factor models potentially benefit from refining the data set by eliminating uninformative series. The paper proposes to use forecast weights as provided by the factor model itself for this purpose. Monte Carlo simulations and an empirical application to forecasting euro area, German, and French GDP growth from unbalanced monthly data suggest that both forecast weights and least angle regressions result in improved forecasts. Overall, forecast weights provide yet more robust results. |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2010:i:376&r=cba |
| By: | Sonsoles Gallego (Banco de España); Sándor Gardó (Oesterreichische Nationalbank); Reiner Martin (European Central Bank); Luis Molina (Banco de España); José María Serena (Banco de España) |
| Abstract: | This paper reviews the impact of the global economic and financial crisis on two distinct emerging market regions: Central, Eastern and Southeastern Europe (CESEE) and Latin America. Similar to other emerging economies, both regions were initially surprisingly resilient as the crisis gathered momentum. They were, however, both strongly affected by the sharp retrenchment in capital inflows and the collapse of global demand that followed the demise of Lehman Brothers in September 2008. Notwithstanding differences in the channels of transmission and the intensity of the propagation, the short-term outcome in 2009 was one of the deepest recessions in decades. As both regions differ in several important respects, the question arises how structural and institutional features as well as policies before and during the crisis have affected the transmission of global events to the two regions under review. |
| Keywords: | Financial crisis, Central, Eastern and Southeastern Europe, Latin America |
| JEL: | F15 F32 G15 G18 H30 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1002&r=cba |
| By: | Simon van Norden |
| Abstract: | For more than a decade, debates over the impact of new information technologies on trend productivity growth rates have played a key role in the formulation of monetary policy in many countries, including the United States and Canada. However, the question of whether the trend growth rate of aggregate productivity has changed significantly is rarely examined formally. This paper examines the latest aggregate labour productivity data for Canada using a new testing approach specifically designed to detect recent changes in trends. In addition to showing the strength of the evidence for changes in long-run trends, it considers the effect that data revision and changing sample period has had on inference about structural changes. In an appendix, it investigates how large such changes must be before they can be detected and to what degree detection tends to lag the structural change. Evidence of a decline in the trend rate of labour productivity growth in Canada since 1990 is mixed. In particular, conclusions vary considerably from year to year as data are revised and as the accumulation of observations after purported breaks changes initial perceptions. The instability of test results suggest that policymakers need to use extreme caution in interpreting claims of changes in labour productivity trends and highlight the uncertainty that they face. <P>Pour plus d’une décennie, les débats sur l’impact des technologies de l’information sur les taux de croissance tendanciel de la productivité ont joué un rôle clé dans la formulation de la politique monétaire dans de nombreux pays, y compris les États-Unis et le Canada. Toutefois, la question de savoir si le taux de croissance tendanciel de la productivité globale a changé considérablement est rarement examinée formellement. Cet article examine les données les plus récentes de productivité du travail pour le Canada en utilisant une approche de nouveaux tests spécialement conçus pour détecter les changements récents dans les tendances. En plus de démontrer la force de la preuve aux changements des tendances à long terme, il considère l’effet que la révision des données et la variation des périodes d’échantillonnage a eu sur l’inférence au sujet des changements structurels. Dans un appendice, il examine la taille que les changements doivent avoir avant de pouvoir être détectés et dans quelle mesure la détection a tendance à entraîner des changements structurels. L’évidence pour une baisse du taux de croissance tendanciel de la productivité du travail au Canada depuis 1990 est mitigée. En particulier, les conclusions varient considérablement d’une année à l’autre à cause de la révision des données et l’accumulation d’observations. L’instabilité des résultats des tests indique que les décideurs doivent faire preuve de prudence extrême dans l’interprétation des changements dans les tendances de la productivité au travail et mettre en évidence l’incertitude à laquelle ils sont confrontés. |
| Keywords: | Productivity growth, detrending, breakpoints, structural change, data revision , croissance de la productivité, changements structurels, révision des données |
| Date: | 2010–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2010s-30&r=cba |
| By: | Bouthevillain, C.; Dufrénot, G. |
| Abstract: | This paper shows that the impact of changes in budgetary variables on major macroeconomic variables varies in sign and magnitude in times of crisis and non-crisis in France. We find that these nonlinearities are both frequent (as they exist on all behaviors analyzed: real GDP, private consumption, business investment and private employment) and significant. For this, we estimate time-varying probability Markov-switching models (TVPMS) in order to take into account two budgetary regimes, on the one side periods of severe recessions or depressions (crises), and, on the other side "normal" periods (expansions or moderate recessions). These two regimes are identified endogenously, so that we do not need to preliminary separate episodes of huge contractions and expansions of the business cycle. Further, we are able to identify the variables influencing the probability of a switch between regimes. Searching for nonlinear fiscal impacts in the form of regime-switching effects, we assume temporary variations in the budgetary variables, both on the revenue side (taxes on consumption, on firm's profit, lump sum transfers) and on the expenditure side (traditional public boosts of aggregate demand, transfers, and subsidies). Our results show that if one considers the aggregate GDP, public expenditure has a stronger impact during crisis and the expenditure multiplier is greater than the tax multiplier. Also, when households are sensitive to the unemployment situation, tax cuts do not increase consumption spending, while transfers are playing a significant role. On the firms side, our results show that direct taxes changes induce a (stimulus) effect in the investment rate only during non-crisis periods. A rise in subsidies has a negative influence during crises. Finally, the estimates suggest that employment policies should be asymmetric: fiscal measures aiming at reducing unit labor costs could be efficient in good times, while an increase in public employment is preferable during crisis. |
| Keywords: | Markov-Switching Models, Fiscal Policy, Crisis. |
| JEL: | C51 E62 H50 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:286&r=cba |
| By: | Avouyi-Dovi, S.; Fougère, D.; Gautier, E. |
| Abstract: | We highlight different stylized facts concerning wage stickiness. First, in France, the typical duration of a wage agreement is one year. Consequently, a Taylor (1980) -type model appears to reproduce appropriately the distribution of agreement durations. Some 30 percent of settlements stipulate several predetermined wage changes during the year following the date of signature of the agreement. The frequency of wage agreements is highly seasonal, but the dates at which agreements take effect are more staggered. The date at which the national minimum wage level is revised each year has a significant impact on the timetable of wage agreements, both at the firm- and at the industry-levels. Wage increases negotiated at these two levels mainly depend on the inflation regime, the firm profitability and the proportion of minimum-wage workers in the same industry. |
| Keywords: | Wage Stickiness, Wage Bargaining, Minimum Wage, Downward nominal Wage Rigidity. |
| JEL: | J31 J50 E30 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:287&r=cba |
| By: | Beja Jr, Edsel |
| Abstract: | Analysis of World Values Survey 2000 data for the Philippines finds that lower income Filipinos are more likely than the upper income ones to support inflation targeting. The same can be said of older, healthier, and employed Filipinos but not of the educated and financially satisfied ones. Given the profile of people who preferred inflation targeting, the shift from monetary targeting to inflation targeting is deemed a pro-poor policy shift. Further analyses find that, in 2000, at least 53.1% of Filipino households preferred inflation targeting; in other words, the preference of Filipino society in 2000 was in line with the preference of the Bangko Sentral ng Pilipinas for inflation targeting. |
| Keywords: | Inflation targeting; central bank policy; Philippines; Filipino preference |
| JEL: | E31 D12 B00 C80 |
| Date: | 2010–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24382&r=cba |