nep-cba New Economics Papers
on Central Banking
Issue of 2010‒09‒03
25 papers chosen by
Alexander Mihailov
University of Reading

  1. Central Bank Transparency: Another Look By Pierre L. Siklos
  2. Debt, Policy Uncertainty and Expectations Stabilization By Stefano Eusepi; Bruce Preston
  3. Expectations Traps and Coordination Failures: Selecting among Multiple Discretionary Equilibria By Dennis, Richard; Kirsanova, Tatiana
  4. Measuring the Output Responses to Fiscal Policy By Alan J. Auerbach; Yuriy Gorodnichenko
  5. Inflation Targeting Does Not Matter: Another Look at OECD Economies’ Output Sacrifice Ratios By Brito, Ricardo D.
  6. Monetary policy in an uncertain world: Probability models and the design of robust monetary rules. By Levine, Paul
  7. The impact of high and growing government debt on economic growth: an empirical investigation for the euro area By Cristina Checherita; Philipp Rother
  8. Sign Restrictions in Structural Vector Autoregressions: A Critical Review By Renee Fry; Adrian Pagan
  9. A note on identification patterns in DSGE models By Michal Andrle
  10. Macro Expectations, Aggregate Uncertainty, and Expected Term Premia By Christian D. Dick; Maik Schmeling; Andreas Schrimpf
  11. Is the new keynesian IS curve structural? By Livio Stracca
  12. Business cycle convergence in EMU: A first look at the second moment By Jesús Crespo-Cuaresma; Octavio Fernández-Amador
  13. What determines European real exchange rates? By Martin Berka; Michael B. Devereux
  14. Combining Non-Replicable Forecasts By Chang, C-L.; McAleer, M.J.; Franses, Ph.H.B.F.
  15. Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices By Saroj Bhattarai; Raphael Schoenle
  16. Fiscal Policy and Growth: Do Financial Crises make a Difference? By António Afonso; Hans Peter Grüner; Christina Kolerus
  17. Fiscal Policy and Growth: Do Financial Crises make a Difference? By António Afonso; Luís Costa
  18. Persistence Endogeneity Via Adjustment Costs: An Assessment based on Bayesian Estimations By Sebastian Sienknecht
  19. The Coordination Value of Monetary Exchange: Experimental Evidence By Gabriele Camera; Marco Casari
  20. Asset-Liability Management: An Overview By Yuliya Romanyuk
  21. Tax buyouts By Marco Del Negro; Fabrizio Perri; Fabiano Schivardi
  22. Inventories in ToTEM By Oleksiy Kryvtsov; Yang Zhang
  23. Floating versus managed exchange rate regime in a DSGE model of India. By Batini, Nicoletta; Gabriel, Vasco; Levine, Paul
  24. Australia-New Zealand Currency Union: A Structural Approach By Daisy McGregor
  25. Currency substitution in the economies of Central Asia: How much does it cost? By Isakova, Asel

  1. By: Pierre L. Siklos
    Abstract: This paper extends the Dincer and Eichengreen (2007) index of central bank transparency. Improvements in transparency are notable in Central and Eastern Europe, while the index has shown much smaller rises in most other parts of the world. The pattern observed by Dincer and Eichengreen, consistent with a permanent increase in central bank transparency, is also evident in the updated results. The dramatic enhancements in central bank transparency reported earlier appear to be a feature of the late 1990s and early 2000s. Whether the subsequent data reflects limits to central banks transparency or, to some extent, transparency ‘fatigue’, is unclear.
    JEL: E0 F0
    Date: 2010–08
  2. By: Stefano Eusepi; Bruce Preston
    Abstract: This paper develops a model of policy regime uncertainty and its consequences for stabilizing expectations. Because of learning dynamics, uncertainty about monetary and …scal policy is shown to restrict, relative to a rational expectations analysis, the set of policies consistent with macroeconomic stability. Anchoring expectations by communicat- ing about monetary and …scal policy enlarges the set of policies consistent with stability. However, absent anchored …scal expectations, the advantages from anchoring monetary expectations are smaller the larger is the average level of indebtedness. Finally, even when expectations are stabilized in the long run, the higher are average debt levels the more persistent will be the e¤ects of disturbances out of rational expectations equilibrium.
    JEL: E52 D83 D84
    Date: 2010–07
  3. By: Dennis, Richard; Kirsanova, Tatiana
    Abstract: Discretionary policymakers cannot manage private-sector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. To utilize the explanatory power of models with multiple equilibria it is …first necessary to understand how an economy arrives to a particular equilibrium. In this paper, we employ notions of learnability, self-enforceability, and properness to motivate and develop a suite of equilibrium selection criteria. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our equilibrium selection methods. Importantly, unless the Pareto-preferred equilibrium is learnable by private agents, we …find little reason to expect coordination on that equilibrium.
    Keywords: Discretionary policymaking; multiple equilibria; coordination; equilibrium selection
    JEL: E52 E61 C62 C73
    Date: 2010–08–25
  4. By: Alan J. Auerbach; Yuriy Gorodnichenko
    Abstract: A key issue in current research and policy is the size of fiscal multipliers when the economy is in recession. Using a variety of methods and data sources, we provide three insights. First, using regime-switching models, we estimate effects of tax and spending policies that can vary over the business cycle; we find large differences in the size of fiscal multipliers in recessions and expansions with fiscal policy being considerably more effective in recessions than in expansions. Second, we estimate multipliers for more disaggregate spending variables which behave differently in relation to aggregate fiscal policy shocks, with military spending having the largest multiplier. Third, we show that controlling for predictable components of fiscal shocks tends to increase the size of the multipliers.
    JEL: E32 E62
    Date: 2010–08
  5. By: Brito, Ricardo D.
    Date: 2010–10
  6. By: Levine, Paul (University of Surrey)
    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 transformation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. In particular by treating DSGE models estimated by Bayesian-Maximum-Likelihood methods I argue that they can be considered as probability models in the sense described by Sims (2007) and be used for risk-assessment and policy design. This is true for any one model, but with a range of models on offer it is possible also to design interest rate rules that are simple and robust across the rival models and across the distribution of parameter estimates for each of these rivals as in Levine et al. (2008). After making models better in a number of important dimensions, a possible road ahead is to consider rival models as being distinguished by the model of expectations. This would avoid becoming `a prisoner of a single system' at least with respect to expectations formation where, as I argue, there is relatively less consensus on the appropriate modelling strategy.
    Keywords: Structured uncertainty, DSGE models, Robustness, Bayesian estimation, Interest-rate rules
    JEL: E52 E37 E58
    Date: 2010–07
  7. By: Cristina Checherita (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Philipp Rother (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the average impact of government debt on per-capita GDP growth in twelve euro area countries over a period of about 40 years starting in 1970. It finds a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70-80% of GDP, which calls for even more prudent indebtedness policies. At the same time, there is evidence that the annual change of the public debt ratio and the budget deficit-to-GDP ratio are negatively and linearly associated with per-capita GDP growth. The channels through which government debt (level or change) is found to have an impact on the economic growth rate are: (i) private saving; (ii) public investment; (iii) total factor productivity (TFP) and (iv) sovereign long-term nominal and real interest rates. From a policy perspective, the results provide additional arguments for debt reduction to support longer-term economic growth prospects. JEL Classification: H63, O40, E62, E43.
    Keywords: Public debt, economic growth, fiscal policy, sovereign long-term interest rates.
    Date: 2010–08
  8. By: Renee Fry; Adrian Pagan
    Abstract: Structural Vector Autoregressions (SVARs) have become one of the major ways of extracting information about the macro economy. One might cite three major uses of them in macro-econometric research. 1. For quantifying impulse responses to macroeconomic shocks. 2. For measuring the degree of uncertainty about the impulse responses or other quantities formed from them. 3. For deciding on the contribution of different shocks to fluctuations and forecast errors through variance decompositions. To determine this information a VAR is first fitted to summarize the data and then a structural VAR (SVAR) is proposed whose structural equation errors are taken to be the economic shocks. The parameters of these structural equations are then estimated by utilizing the information in the VAR. The VAR is a reduced form which summarizes the data; the SVAR provides an interpretation of the data. As for any set of structural equations, recovery of the structural equation parameters (shocks) requires the use of identification restrictions that reduce the number of "free" parameters in the structural equations to the number that can be recovered from the information in the reduced form.
    Date: 2010–07
  9. By: Michal Andrle (Czech National Bank, Monetary and Statistics Dept., Macroeconomic Forecasting Division.)
    Abstract: This paper comments on selected aspects of identification issues of DSGE models. It suggests the singular value decomposition (SVD) as a useful tool for detecting local weak and non- identification. This decomposition is useful for checking rank conditions of identification, identification strength, and it also offers parameter space ‘identification patterns’. With respect to other methods of identification the singular value decomposition is particularly easy to apply and offers an intuitive interpretation. We suggest a simple algorithm for analyzing identification and an algorithm for finding a set of the most identifiable set of parameters. We also demonstrate that the use of bivariate and multiple correlation coefficients of parameters provides only limited check of identification problems. JEL Classification: F31, F41.
    Keywords: DSGE, identification, information matrix, rank, singular value decomposition.
    Date: 2010–08
  10. By: Christian D. Dick (Centre for European Economic Research (ZEW) Mannheim); Maik Schmeling (Department of Economics, Leibniz Universität Hannover); Andreas Schrimpf (Aarhus University and CREATES)
    Abstract: Based on individual expectations from the Survey of Professional Forecasters, we construct a realtime proxy for expected term premium changes on long-term bonds. We empirically investigate the relation of these bond term premium expectations with expectations about key macroeconomic variables as well as aggregate macroeconomic uncertainty at the level of individual forecasters. We find that expected term premia are (i) time-varying and reasonably persistent, (ii) strongly related to expectations about future output growth, and (iii) positively affected by uncertainty about future output growth and in ation rates. Expectations about real macroeconomic variables seem to matter more than expectations about nominal factors. Additional findings on term structure factors suggest that the level and slope factor capture information related to uncertainty about real and nominal macroeconomic prospects, and that curvature is related to subjective term premium expectations themselves. Finally, an aggregate measure of forecasters' term premium expectations has predictive power for bond excess returns over horizons of up to one year.
    Keywords: Bond Yields, Expectations Hypothesis, Time-varying Risk Premia, Term Premia, Aggregate Uncertainty
    JEL: E43 E44 G12
    Date: 2010–08–27
  11. By: Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: There is already a small literature emphasising the empirical failure of the New Keynesian IS curve, but it is not yet known if this failure reflects empirical problems associated with small samples or is rather a structural weakness of the underlying model. To address this question, in this paper I estimate the New Keynesian IS curve for output and consumption and several possible extensions on panel data from 22 OECD countries over 40 years of data. I also evaluate whether the key parameters of the IS curve change according to countries' economic and financial structure. The main finding is that output and consumption are mainly forward looking, and this is a very robust feature of the data. At the same time, I find little evidence in favour of the traditional specification where the real interest rate enters with a negative sign due to intertemporal substitution; on the contrary, it is typically either insignificant or wrongly signed. Overall, I conclude that the New Keynesian IS curve, at least in its most common formulations, is not structural and is overwhelmingly rejected by the data. JEL Classification: E21, E44, E52.
    Keywords: IS curve, New Keynesian model, panel data, Instrumental variables.
    Date: 2010–08
  12. By: Jesús Crespo-Cuaresma; Octavio Fernández-Amador
    Abstract: We propose the analysis of the dynamics of the standard deviation of business cycles across euro area countries in order to evaluate the patterns of cyclical convergence in the European Monetary Union for the period 1960-2008. We identify significant business cycle divergence taking place in the mid-eighties, followed by a persistent convergence period spanning most of the nineties. This convergent episode finishes roughly with the birth of the European Monetary Union. A hypothetical euro area including all the new members of the recent enlargements does not imply a sizeable decrease in the optimality of the currency union. Finally, the European synchronization differential with respect to other developed economies seems to have been diluted within a global cycle since 2004.
    Keywords: Business cycles, business cycle convergence, European Monetary Union.
    JEL: E32 E63 F02
    Date: 2010–08
  13. By: Martin Berka; Michael B. Devereux
    Abstract: We study a newly constructed panel data set of relative prices of a large number of consumer goods among 31 European countries. We ¯nd that there is a substantial and non-diminishing deviation from PPP at all levels of aggregation, even among eurozone members. However, real exchange rates are very closely tied to relative GDP per capita within Europe, both across countries and over time. This relationship is highly robust at all levels of aggregation. We construct a simple two-sector endowment economy model of real exchange rate determination. Simulating the model using the historical relative GDP per capita for each country, we ¯nd that for most (but not all) countries there is a very close fit between the actual and simulated real exchange rate.
    Date: 2010–05
  14. By: Chang, C-L.; McAleer, M.J.; Franses, Ph.H.B.F.
    Abstract: Macro-economic forecasts are often based on the interaction between econometric models and experts. A forecast that is based only on an econometric model is replicable and may be unbiased, whereas a forecast that is not based only on an econometric model, but also incorporates an expert’s touch, is non-replicable and is typically biased. In this paper we propose a methodology to analyze the qualities of combined non-replicable forecasts. One part of the methodology seeks to retrieve a replicable component from the non-replicable forecasts, and compares this component against the actual data. A second part modifies the estimation routine due to the assumption that the difference between a replicable and a non-replicable forecast involves a measurement error. An empirical example to forecast economic fundamentals for Taiwan shows the relevance of the methodological approach.
    Keywords: combined forecasts;efficient estimation;generated regressors;replicable forecasts;non-replicable forecasts;expert’s intuition;C22;E27;E37
    Date: 2010–07–28
  15. By: Saroj Bhattarai (Pennsylvania State University); Raphael Schoenle (Brandeis University)
    Abstract: In this paper, we establish three new facts about price-setting by multi-product firms and contribute a model that can match our findings. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchro- nization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multi-product firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend in ation, the model matches the empiricalfindings.
    Keywords: Multi-product firms; Number of Goods; State-dependent pricing; U.S. Producer prices
    JEL: E30 E31 L11
    Date: 2010–07
  16. By: António Afonso; Hans Peter Grüner; Christina Kolerus
    Abstract: In this paper we assess to what extent in the existence of a financial crisis, government spending can contribute to mitigate economic downturns in the short run and whether such impact differs in crisis and non crisis times. We use panel analysis for a set of OECD and non-OECD countries for the period 1981-2007. The fiscal multiplier for the full sample for instrumented regular and crisis spending is about 0.6-0.8 considering the sample average government spending share of GDP of about one third. Altogether, we cannot reject the hypothesis that crisis spending and regular spending have the same impact using a variation of controls, sub-samples and specifications.
    Keywords: fiscal policy, financial crisis, growth, OECD, EU, panel analysis.
    JEL: C23 E62 E44 F43 H50
    Date: 2010–06
  17. By: António Afonso; Luís Costa
    Abstract: We compute average mark-ups as a measure of market power throughout time and study their interaction with fiscal policy and macroeconomic variables in a VAR framework. From impulse-response functions the results, with annual data for a set of 14 OECD countries covering the period 1970-2007, show that the mark-up (i) depicts a pro-cyclical behaviour with productivity shocks and (ii) a mostly counter-cyclical behaviour with fiscal spending shocks. We also use a Panel Vector Auto-Regression analysis, increasing the efficiency in the estimations, which confirms the country-specific results.
    Keywords: Fiscal Policy; Mark-up; VAR; Panel VAR.
    JEL: D4 E6 E3 H6
    Date: 2010–06
  18. By: Sebastian Sienknecht (School of Economics and Business Administration, Friedrich Schiller University Jena)
    Abstract: This paper estimates a dynamic stochastic general equilibrium (DSGE) model for the European Monetary Union by using Bayesian techniques. A salient feature of the model is an extension of the typically postulated quadratic cost structure for the monopolistic choice of price variables. As shown in Sienknecht (2010a), the enlargement of the original formulation by Rotemberg (1983) and Hairault and Portier (1993) leads to structurally more sophisticated inflation schedules than in the staggering environment by Calvo (1983) with rule-of-thumb setters. In particular, a desired lagged inflation term always arises toghether with a two-period-ahead expectational expression. The two terms are directly linked by a novel structural parameter. We confront the relationships obtained by Sienknecht (2010a) against European data and compare their data description performance against the widespread extension of the Calvo setting with rule-of-thumb behavior.
    Keywords: Bayesian, Simulation, Indexation, Model Comparison
    JEL: C11 C15 E31 E32
    Date: 2010–08–24
  19. By: Gabriele Camera; Marco Casari
    Abstract: A new behavioral foundation is uncovered for why money promotes impersonal exchange. In an experiment, subjects could cooperate by intertemporally exchanging goods with anonymous opponents met at random. Indefinite repetition supported multiple equilibria, from full defection to the efficient outcome. Introducing the possibility to hold and exchange intrinsically worthless tickets affected outcomes and cooperation patterns. Tickets resembled fiat money, which emerged as a tool for equilibrium selection in the economy. Monetary exchange facilitated coordination on cooperation and redistributed surplus from defectors to cooperators. Treatments where subjects could develop a reputation revealed a limited record-keeping role for monetary exchange.
    Keywords: money, cooperation, information, trust, folk theorem, repeated games
    JEL: C90 C70 D80
    Date: 2010–08
  20. By: Yuliya Romanyuk
    Abstract: Relevant literature on asset-liability management (ALM) is reviewed and different ALM approaches are discussed that may be of interest to the Bank of Canada for the purpose of modelling the Exchange Fund Account (EFA). The author describes the general idea behind ALM, its pros and cons, risk measures and strategies, as well as some applications. Particular attention is paid to central bank reserves management. Ideas and suggestions are offered for future research on the ALM framework for the EFA.
    Keywords: Foreign reserves management
    JEL: G11
    Date: 2010
  21. By: Marco Del Negro; Fabrizio Perri; Fabiano Schivardi
    Abstract: The paper studies a fiscal policy instrument that can reduce fiscal distortions, without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each individual citizen, whereby the citizen can choose to pay a fixed price up front in exchange for a given reduction in her tax rate for a prespecified period of time. We consider a dynamic overlapping-generations economy, calibrated to match several features of the U.S. income and wealth distribution, and show that, under simple pricing, the introduction of the buyout is revenue neutral and at the same time can benefit a significant fraction of the population and lead to sizable increases in labor supply, income, consumption, and welfare.
    Keywords: Fiscal policy ; Taxation ; Contracts
    Date: 2010
  22. By: Oleksiy Kryvtsov; Yang Zhang
    Abstract: ToTEM – the Bank of Canada’s principal projection and policy-analysis model for the Canadian economy – is extended to include inventories. In the model, firms accumulate inventories of finished goods for their role in facilitating the demand for goods. The model is successful in matching procyclical and volatile inventory investment behaviour. The authors show that the convex cost of stock adjustment is key to the model’s ability to match the inventory data quantitatively.
    Keywords: Economic models; Business fluctuations and cycles
    JEL: E31 E32
    Date: 2010
  23. By: Batini, Nicoletta (IMF and University of Surrey); Gabriel, Vasco (University of Surrey); Levine, Paul (University of Surrey)
    Abstract: We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic inflation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely.
    Keywords: DSGE model, Indian economy, Monetary interest rate rules, Floating versus managed exchange rate, Financial frictions
    JEL: E52 E37 E58
    Date: 2010–04
  24. By: Daisy McGregor (School of Economics, University of Adelaide)
    Abstract: This paper compares an Australia-New Zealand currency union to a purely fl oating exchange rate regime in the context of a structural, two-country open economy model. Micro-foundations support policy assessment by facilitating direct calculation of household welfare. Analysis focuses on changing business cycle volatilities; the role of risk is not considered. At benchmark calibration currency union is welfare reducing for both Australia and New Zealand. Sensitivity analyses reveal these results to be qualitatively robust over alternative degrees of shock correlation and shock transmission.
    Keywords: currency union, welfare analysis, exchange rate regime, Australia, New Zealand
    JEL: F22 F33 F41 F42
    Date: 2010–08
  25. By: Isakova, Asel (BOFIT)
    Abstract: Underdeveloped financial markets and periods of high inflation have stimulated dollarization and currency substitution in the economies of Central Asia. Some authors argue that the latter can pose serious obstacles for the effective conduct of monetary policy and can affect households’ welfare.This study uses a model with money-in-the-utility function to estimate the elasticity of substitution between domestic and foreign currencies in three economies of Central Asia - Kazakhstan, the Kyrgyz Republic and Tajikistan. Utility derived from holding money balances is represented by a CES function with money holdings denominated in two currencies. The residents are assumed to diversify their monetary holdings due to instability of the domestic currency. The steady state analysis reveals that though currency substitution decreases governments’ seigniorage revenue, holding foreign money can be welfare generating if domestic currency depreciates vis-à-vis the currencies in which households’ foreign balances holdings are denominated. De-dollarization can only be achieved through further macroeconomic stabilization that will bring price and exchange rate stability. Financial sector development will also decrease currency substitution through the provision of reliable financial instruments and the gaining of public confidence.
    Keywords: currency substitution; dollarization; monetary policy; seigniorage; welfare; transition
    JEL: E41 E58 P20
    Date: 2010–07–26

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