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on Central Banking |
| By: | Anand, Rahul (International Monetary Fund); Prasad, Eswar (Cornell University) |
| Abstract: | In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. In this paper, we develop a two-sector two-good closed economy new Keynesian model to study the optimal choice of price index in markets with financial frictions. Financial frictions that limit credit-constrained consumers’ access to financial markets make demand insensitive to interest rate fluctuations. The demand of credit-constrained consumers is determined by their real wage, which depends on prices in the flexible price sector. Thus, prices in the flexible price sector influence aggregate demand and, for monetary policy to have its desired effect, the central bank has to stabilize price movements in the flexible price sector. Also, in the presence of financial frictions, stabilizing core inflation is no longer equivalent to stabilizing output fluctuations. Our analysis suggests that in the presence of financial frictions a welfare-maximizing central bank should adopt flexible headline inflation targeting – a target based on headline rather than core inflation, and with some weight on the output gap. We discuss why these results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit-constrained. |
| Keywords: | inflation targeting, monetary policy framework, core inflation, headline inflation, financial frictions, liquidity constraints |
| JEL: | E31 E52 E61 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5137&r=cba |
| By: | Adams, Charles (Asian Development Bank Institute) |
| Abstract: | This paper reviews recent state interventions in financial crises and draws lessons for crisis management. A number of areas are identified where crisis management could be strengthened, including with regard to the tools and instruments used to involve the private sector in crisis resolution (with a view to reducing the recent enhanced role of official bailouts and the associated moral hazard), to allow for the orderly resolution of systemically important financial firms (to make these firms "safe to fail"), and with regard to achieving better integration with ex ante macroprudential surveillance. The paper proposes the establishment of high level systemic risk councils (SRCs) in each country with responsibility for overseeing systemic risk in both tranquil times and crisis periods and coordinating the activities of key government ministries, agencies, and the central bank. |
| Keywords: | global financial crisis; state intervention; macroprudential surveiilance; crisis resolution; prevention |
| JEL: | E01 E58 |
| Date: | 2010–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0242&r=cba |
| By: | Ilene Grabel |
| Abstract: | <p><i></i><span>The response by the IMF (and developing country national governments) to the current global financial crisis represents a moment of what I term “productive incoherence” that has displaced the constraining “neoliberal coherence” of the past several decades.<span> </span>Productive incoherence refers to the proliferation of inconsistent and even contradictory strategies and statements by the IMF that to date have not congealed into any sort of new, organized regime.<span> </span>Those who see </span>continuity at the IMF emphasize the reassertion of the IMF’s authority; the reiteration of pro-cyclical policy adjustment; and the maintenance of existing governance patterns within the institution. In contrast, evidence of discontinuity includes a world now populated by increasingly autonomous states in the South; the normalization of capital controls; and Fund conditionality programs that are inconsistent in key respects. <span> </span>In the face of this evidence, it is best to understand the current conjuncture as an “interregnum” that is pregnant with new development possibilities.</p> |
| Keywords: | Global financial crisis; policy space for development; International Monetary Fund; capital controls; neo-liberal policies and development |
| JEL: | E65 F53 O23 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp214_revised&r=cba |
| By: | D'Agostino, Antonello (Central Bank and Financial Services Authority of Ireland); Bermingham, Colin (Central Bank and Financial Services Authority of Ireland) |
| Abstract: | The issue of forecast aggregation is to determine whether it is better to forecast a series directly or instead construct forecasts of its components and then sum these component forecasts. Notwithstanding some underlying theoretical results, it is gener- ally accepted that forecast aggregation is an empirical issue. Empirical results in the literature often go unexplained. This leaves forecasters in the dark when confronted with the option of forecast aggregation. We take our empirical exercise a step further by considering the underlying issues in more detail. We analyse two price datasets, one for the United States and one for the Euro Area, which have distinctive dynamics and provide a guide to model choice. We also consider multiple levels of aggregation for each dataset. The models include an autoregressive model, a factor augmented autoregressive model, a large Bayesian VAR and a time-varying model with stochastic volatility. We find that once the appropriate model has been found, forecast aggrega- tion can significantly improve forecast performance. These results are robust to the choice of data transformation. |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:8/rt/10&r=cba |
| By: | Roel Beetsma; Massimo Giuliodori; Mark Walschot; Peter Wierts |
| Abstract: | Using real-time data from the annual budget over the period 1958-2009, we explore the planning and realization of fiscal policy in the Netherlands . Our key findings are the following. First, planned surpluses are on average unbiased, although they are overoptimistic during the first half of the sample and too pessimistic during the second half of the sample. The latter is the result of cautious real-time revenue estimates by the Dutch Ministry of Finance during this period. Second, real growth projections by the official Dutch forecasting agency are unbiased. This contrasts with the experience of the EU as a whole where biased growth projections represent an important source of fiscal slippage. Third, general economic conditions and the state of the public finances are important determinants of both fiscal plans and their implementation. Fourth, this is also the case for political and institutional factors. Expenditure overruns are partly related to political factors , whereas cautious revenue forecasts relate to the institutional setting. In particular, the most recent regime of the “trendbased budget policy” has worked well for fiscal discipline in the Netherlands |
| JEL: | E6 H6 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:260&r=cba |
| By: | Sophocles N. Brissimis (Bank of Greece, Economic Research Department, 21 E. Venizelos Avenue, Athens 10250, Greece.); Manthos D. Delis (University of Ioannina, Department of Economics, Ioannina 45110, Greece.) |
| Abstract: | Heterogeneity in the response of banks to a change in monetary policy is an important element in the transmission of this policy through banks. This paper examines the role of bank liquidity, capitalization and market power as internal factors influencing banks’ reaction in terms of lending and risk-taking to monetary policy impulses. The ultimate impact of a monetary policy change on bank performance is also considered. The empirical analysis, using large panel datasets for the United States and the euro area, elucidates the sources of differences in the response of banks to changes in policy interest rates by disaggregating down to the individual bank level. This is achieved by the use of a Local GMM technique that also enables us to quantify the degree of heterogeneity in the transmission mechanism. It is argued that the extensive heterogeneity in banks’ response identifies overlooked consequences of bank behavior and highlights potential monetary sources of the current financial distress. JEL Classification: E44, E52, G21, C14. |
| Keywords: | Monetary policy, Bank heterogeneity, Risk-taking, Bank performance. |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101233&r=cba |
| By: | Hajime Tomura |
| Abstract: | This paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks' balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking has both positive and negative effects on long-run economic growth and that business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements are interconnected. |
| Keywords: | Financial stability; Financial system regulation and policies |
| JEL: | E44 G21 D82 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-22&r=cba |
| By: | David-Jan Jansen; Jakob de Haan |
| Abstract: | Wordscores uses word frequencies to extract information from texts with known policy positions. Wordscores uses this information to estimate the unknown policy positions of so - called virgin texts. We apply Wordscores to the ECB President’s introductory statements following Governing Council meetings. We code policy positions of statements from the first three years of the Economic and Monetary Union (our reference texts) using various indicators of ECB communication as well as actual rate decisions. Treating introductory statements from 2002 to July 2009 as virgin texts, Wordscores is able to present a fairly accurate picture of ECB policy decisions during that period. The results also suggest changes in ECB communications occurred: using more introductory statements as reference texts improves the match between estimated positions and actual policy. Overall, we would characterize ECB communication during the first decade of EMU as internally consistent. At the same time, communication was flexible enough to adapt to changed circumstances. |
| Keywords: | central bank communication; ECB; consistency; content analysis |
| JEL: | E52 E58 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:259&r=cba |
| By: | Aurelien Eyquen; Gunes Kamber (Reserve Bank of New Zealand) |
| Abstract: | We show that internationalised production, modelled as trade in intermediate goods, brings the dynamics of a small open economy closer to that observed in the data. We build a stylized new-Keynesian small open economy model and we show that when production is internationalised, movements of international relative prices affect the economy through an additional channel, denoted as the “cost channel”. Both qualitatively and quantitatively, this channel (i) increases the share of output variance explained by foreign shocks, consistent with empirical evidence, (ii) implies that the exchange rate pass-through is closer to estimated values, and (iii) increases the international correlation of output relative to that of consumption. |
| JEL: | E30 F41 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2010/04&r=cba |
| By: | Martin M. Andreasen (Bank of England and CREATES) |
| Abstract: | This paper introduces a Quasi Maximum Likelihood (QML) approach based on the Cen- tral Difference Kalman Filter (CDKF) to estimate non-linear DSGE models with potentially non-Gaussian shocks. We argue that this estimator can be expected to be consistent and asymptotically normal for DSGE models solved up to third order. A Monte Carlo study shows that this QML estimator is basically unbiased and normally distributed infi?nite samples for DSGE models solved using a second order or a third order approximation. These results hold even when structural shocks are Gaussian, Laplace distributed, or display stochastic volatility. |
| Keywords: | Non-linear filtering, Non-Gaussian shocks, Quasi Maximum Likelihood, Stochastic volatility, Third order perturbation. |
| JEL: | C13 C15 E10 E32 |
| Date: | 2010–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2010-30&r=cba |
| By: | Francesca D'Auria; Cécile Denis; Karel Havik; Kieran Mc Morrow; Christophe Planas; Rafal Raciborski; Werner Roger; Alessandro Rossi |
| Abstract: | Summary for non-specialistsAs a result of the financial crisis, cyclically corrected indicators have taken on a greater degree of significance and are firmly back at the forefront of economic policy making. This heightened level of policy interest not only reflects the anxiousness of policy makers to avoid the well-documented mistakes made in assessing the supply side impact of historical crises but is also linked with the primary role of such indicators in calculating cyclically adjusted budget balances & in designing successful "exit strategies" from the current crisis (and especially the requirement to unwind the large increases in EU public debt). |
| Keywords: | Macro-economic coordination fiscal policy and public finances structural policies growth and jobs stability and convergence programmes excessive deficit procedure Production function methodology potential growth output gaps |
| JEL: | C10 E60 O10 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0420&r=cba |
| By: | Stüber, Heiko (IAB, Nürnberg); Beissinger, Thomas (University of Hohenheim) |
| Abstract: | Focusing on the compression of wage cuts, many empirical studies find a high degree of downward nominal wage rigidity (DNWR). However, the resulting macroeconomic effects seem to be surprisingly weak. This contradiction can be explained within an intertemporal framework in which DNWR not only prevents nominal wage cuts but also induces firms to compress wage increases. We analyze whether a compression of wage increases occurs when DNWR is binding by applying Unconditional Quantile Regression and Seemingly Unrelated Regression to a data set comprising more than 169 million wage changes. We find evidence for a compression of wage increases and only very small effects of DNWR on average real wage growth. The results indicate that DNWR does not provide a strong argument against low inflation targets. |
| Keywords: | downward nominal wage rigidity, wage stickiness, wage compression, unconditional quantile regression |
| JEL: | E24 E31 J31 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5126&r=cba |
| By: | Stüber, Heiko (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Beissinger, Thomas |
| Abstract: | "Focusing on the compression of wage cuts, many empirical studies find a high degree of downward nominal wage rigidity (DNWR). However, the resulting macroeconomic effects seem to be surprisingly weak. This contradiction can be explained within an intertemporal framework in which DNWR not only prevents nominal wage cuts but also induces firms to compress wage increases. We analyze whether a compression of wage increases occurs when DNWR is binding by applying Unconditional Quantile Regression and Seemingly Unrelated Regression to a data set comprising more than 169 million wage changes. We find evidence for a compression of wage increases and only very small effects of DNWR on average real wage growth. The results indicate that DNWR does not provide a strong argument against low inflation targets." (author's abstract, IAB-Doku) ((en)) |
| JEL: | E24 E31 J31 |
| Date: | 2010–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:iab:iabdpa:201016&r=cba |
| By: | Sá, P. |
| Abstract: | This article reviews the main sources of data on the geographic composition of countries' external balance sheets, covering both international and country-specific sources. It examines the determinants of bilateral financial assets and liabilities and discusses how gravity models, traditionally used in the trade literature, have been applied to explain bilateral financial links. A new dataset is used to derive some stylized facts on how bilateral financial links look like, how they have evolved over time and how they compare with trade links. The role that cross-border financial links play in the international transmission of shocks is discussed, with reference to the 2007-2009 financial crisis. |
| Keywords: | Bilateral financial links, international financial network |
| JEL: | F21 |
| Date: | 2010–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1038&r=cba |
| By: | Nabil Aflouk (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | Since the mid-1990s, the world imbalances have increased significantly with a large US current deficit facing Asian surpluses, mainly Chinese. Since 2007, a partial reduction of these imbalances has been obtained, largely thanks to production's decreases, without large exchange rate adjustments. The Asian surpluses have remained important. The objective of this paper is to examine the exchange rate misalignments (ERM) of the main emerging countries in Asia and Latin America since the 1980s, so as to shed light on the 2000s by a long term analysis and compare with the industrialized countries' case. Our results confirm that ERM have been reduced since the mid-2000s at the world level, but the dollar remained overvalued against the East Asian countries, except the yen. Chinese, Indian and Brazilian exchange rate policies have been much contrasted since the 1980s. The Indian rupee has been more often overvalued while a more balance situation prevailed in Brazil only since the 2000s. The Latin American countries have faced wider and more dispersed ERM and current imbalances than East Asian countries. But Argentina, Chile and Uruguay benefits now of undervalued currencies while Mexico is closer to equilibrium. |
| Keywords: | Equilibrium Exchange Rate, Current Account Balance, Macroeconomic Balance, Emerging Countries |
| Date: | 2010–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00484808_v3&r=cba |
| By: | Bandiera, Luca; Cuaresma, Jesus Crespo; Vincelette, Gallina A. |
| Abstract: | This paper uses model averaging techniques to identify robust predictors of sovereign default episodes on a pooled database for 46 emerging economies over the period 1980-2004. Sovereign default episodes are defined according to Standard&Poor’s or by non-concessional International Monetary Fund loans in excess of 100 percent of the country’s quota. The authors find that, in addition to the level of indebtedness, the quality of policies and institutions is the best predictor of default episodes in emerging market countries with relatively low levels of external debt. For emerging market countries with a higher level of debt, macroeconomic stability plays a robust role in explaining differences in default probabilities. The paper provides evidence that model averaging can improve out-of-sample prediction of sovereign defaults, and draws policy conclusions for the current crisis based on the results. |
| Keywords: | Debt Markets,External Debt,Bankruptcy and Resolution of Financial Distress,Economic Theory&Research,Currencies and Exchange Rates |
| Date: | 2010–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5401&r=cba |
| By: | Salvador Barrios; Sven Langedijk; Lucio Pench |
| Abstract: | Summary for non-specialistsThe global financial crisis has led to a sharp deterioration of EU countries' public finances. Views are split regarding the most appropriate consolidation strategy to follow, in particular considering: the timing of fiscal consolidation in relation to the path of economic recovery reflecting (a) the trade-off between consolidation and stabilisation; (b) fiscal consolidation in the context of a distressed banking system where the credit channel is hampered and without which economic recovery can hardly take place, (c) the absence of exchange rate adjustment in the euro area which could make it more difficult for countries with competitiveness problems to achieve successful fiscal consolidation. The existing literature on fiscal consolidations provides only partial evidence on these issues.In this paper our objective is to focus on the above points of discussion drawing on EU (and non-EU OECD) experiences during the period 1970-2008. We estimate econometrically the determinants of successful fiscal consolidations and show that: (i) in presence of a systemic financial crisis, the repair of the banking sector is a pre-condition for a fiscal consolidation to succeed in reducing debt levels (ii) even after the banking sector is repaired, fiscal consolidations are usually less successful than in absence of financial crises, although more vigorous fiscal consolidations (i.e. cold shower) tend to yield higher results (iii) current debt dynamics in the EU are very unfavourable and in some cases, coupled with rising debt servicing costs and much deteriorated growth outlook warranting differentiated consolidation strategies across EU countries (iv) We do not find conclusive evidence in support of exchange rates (including real exchange rate) depreciation/devaluation as enhancing the success of fiscal consolidation as their effect appear to be low and insignificant. |
| Keywords: | Fiscal consolidation financial crisis debt barrios langedijk pench |
| JEL: | H3 H6 E44 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0418&r=cba |
| By: | Martin Larch |
| Abstract: | Summary for non-specialistsA bias towards running deficits is an entrenched feature of fiscal policy making in most developed economies.Our paper examines whether this tendency is in any way associated with the personal distribution of income of a country. It takes inspiration from theoretical work according to which distributional conflicts may give rise to deficit spending or to delayed fiscal adjustment. Although these theories have been around for years the empirical literature on the determinants of fiscal performance has so far paid little or no attention to the possible role played by different degrees of income inequality.Our results suggest that this neglect was not justified. Using cross-country data we find evidence that a more unequal distribution of income can weigh on a country's fiscal performance. These findings can be relevant in the aftermath of the post-2007 global financial and economic crisis in particular when designing fiscal exist strategies. The success and sustainability of such strategies may inter alia depend on their distributional implications. |
| Keywords: | Income distribution fiscal performance Gini coefficient panel regression Larch BEPA |
| JEL: | D31 E62 E6 G23 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0414&r=cba |
| By: | Jan Zilinsky (MIT, Department of Economics) |
| Abstract: | This paper finds that public debt and a range of other economic variables are surprisingly weakly correlated with sovereign spreads in EU countries. Democratic capital, on the other hand, was a powerful predictor of spread heights between 2003 and 2007, while its relevance disappeared in late 2008, when only credit ratings were correlated with the investors' estimate of default probabilities. These results suggests that (1) institutional characteristics may sometimes play a central role in determining borrowing costs and (2) investors attach different weights to relevant variables depending on global macroeconomic conditions. |
| Keywords: | Public debt, Democratic capital, Long-term interest rates, Monetary unions, Financial crises |
| JEL: | H6 F5 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:svk:wpaper:1006&r=cba |
| By: | Lucjan T. Orlowski |
| Abstract: | Summary for non-specialistsThis study draws attention to the proliferation of tail risks in financial markets prior to and during the course of the recent global financial crisis. It examines the level of tail risks in selected equity, interbank lending and foreign exchange markets in selected EU Member States in relation to the United States. The extent of tail risks is assessed by applying general error distribution (GED) parameterization in GARCH volatility tests of the examined variables. The empirical tests prove that tail risks were pronounced across all of the examined European financial markets throughout the crisis. They were also significant prior to the crisis outbreak. The analyzed interbank lending markets exhibited more extreme volatility outbursts than the equity and foreign exchange markets. Several countercyclical monetary and macroprudential policies aimed at abating tail risks are identified and discussed. Flexible capital adequacy and contingent capital requirements for financial institutions are advocated. |
| Keywords: | Global financial crisis equity markets foreign exchange markets monetary policies macroprudential policies Orlowski |
| JEL: | E44 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0416&r=cba |
| By: | Mario Cerrato; Alexander Kadow; Ronald MacDonald |
| Abstract: | The so-called German Dominance Hypothesis (GDH) claimed that Bundesbank policies were transmitted into other European Monetary System (EMS) interest rates during the pre-euro era. We reformulate this hypothesis for the Central and Eastern European (CEE) countries that are on the verge of accessing the eurozone. We test this "Euro Dominance Hypothesis (EDH)" in a novel way using a global vector autoregressive (GVAR) approach that combines country-specic error correction models in a global system. We find that euro area monetary policies are transmitted into CEE interest rates which provides evidence for monetary integration between the eurozone and CEE countries. Our framework also allows for introducing global monetary shocks to provide empirical evidence regarding the eects of the recent nancial crisis on monetary integration in Europe. |
| Keywords: | German Dominance Hypothesis, Global VAR, Central and Eastern Europe, monetary integration, European integration. |
| JEL: | E58 F36 G15 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2010_21&r=cba |
| By: | Arturo J. Galindo, Alejandro Izquierdo, and Liliana Rojas-Suarez |
| Abstract: | This paper explores the impact of international financial integration on credit markets in Latin America. Using a cross-country dataset covering 17 Latin American countries between 1996 and 2008, the authors find that financial integration amplifies the impact of international financial shocks on aggregate credit and interestrate fluctuations. Despite this pernicious effect, the net impact of integration on deepening credit markets is positive and dominates for the large majority of states of nature. The paper also uses a detailed bank-level dataset covering more than 500 banks in Latin America for a similar time period to explore the role of financial integration—captured through the participation of foreign banks—in propagating external shocks. The authors find that interest rates charged and loans supplied by foreign-owned banks respond more to external financial shocks than those supplied by domestically owned banks. However, this result does not hold for all foreign banks: Spanish banks in the sample behave more like domestic banks and do not amplify the impact of foreign shocks on credit and interest rates. Important policy recommendations to avoid foreign banks’ amplification of external financial shocks include the establishment of ring-fencing mechanisms, the development of early-warning systems, and the incorporation for agreements between domestic and foreign supervisors. |
| Keywords: | foreign banks, credit, interest rates, financial shocks |
| JEL: | F36 G0 G21 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:203&r=cba |
| By: | Ponomarenko, Alexey A. (BOFIT); Vlasov, Sergey A. (BOFIT) |
| Abstract: | This study examines the expanding role of fiscal policy at a time of financial crisis. It analyses the stimulative fiscal measures of the Russian government in 2008-2010 and compares these with simi-lar actions taken in other countries. The risks and limitations associated with the development and implementation of the measures are analyzed. The macroeconomic effects of the fiscal policy measures are estimated using a structural vector autoregressive (SVAR) model, the fiscal multip-liers are calculated, and factors influencing multiplier size are examined. |
| Keywords: | fiscal stimulus; fiscal sustainability; SVAR; fiscal multiplier; financial crisis; Russia |
| JEL: | E62 H30 H60 |
| Date: | 2010–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2010_012&r=cba |
| By: | Mehrotra, Aaron (BOFIT); Sánchez-Fung, José R. (BOFIT) |
| Abstract: | The paper models monetary policy in China using a hybrid McCallum-Taylor empirical reaction function. The feedback rule allows for reactions to inflation and output gaps, and to developments in a trade-weighted exchange rate gap measure. The investigation finds that monetary policy in China has, on average, accommodated inflationary developments. But exchange rate shocks do not significantly affect monetary policy behavior, and there is no evidence of a structural break in the estimated reaction function at the end of the strict dollar peg in July 2005. The paper also runs an exercise incorporating survey-based inflation expectations into the policy reaction function and meets with some success. |
| Keywords: | exchange rate; hybrid McCallum-Taylor monetary policy reaction function; SVAR; survey-based inflation expectations; China |
| JEL: | E42 E52 |
| Date: | 2010–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2010_010&r=cba |