nep-cba New Economics Papers
on Central Banking
Issue of 2010‒10‒16
thirty-six papers chosen by
Alexander Mihailov
University of Reading

  1. Asset class diversification and delegation of responsibilities between central banks and sovereign wealth funds By Joshua Aizenman; Reuven Glick
  2. "Non-Self-Averaging in Macroeconomic Models: A Criticism of Modern Micro-founded Macroeconomics" By Masanao Aoki; Hiroshi Yoshikawa
  3. The Sustainability of Public Finanaces and Fiscal Policy Coordination in the EMU By Juergen von Hagen
  4. The Future for Eurozone Financial Stability Policy By Karl Whelan
  5. The EMU sovereign-debt crisis: Fundamentals, expectations and contagion By Michael G. Arghyrou; Alexandros Kontonikas
  6. The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk By Bohn, Henning
  7. Weathering the financial storm: The importance of fundamentals and flexibility By Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson
  8. Self-Fulfilling Risk Panics By Philippe Bacchetta; Cédric Tille; Eric van Wincoop
  9. Can Global Liquidity Forecast Asset Prices? By Reginald Darius
  10. Barro-Gordon Revisited: Reputational Equilibria with Inferential Expectations By Timo Henckel; Gordon D. Menzies; Nick Prokhovnik; Daniel J. Zizzo
  11. Barro-Gordon Revisited: Reputational Equilibria with Inferential Expectations By Timo Henckel; Gordon Menzies; Nicholas Prokhovnik; Daniel Zizzo
  12. New Keynesian DSGE Models and the IS-LM Paradigm By Ingrid Größl; Ulrich Fritsche
  13. NAIRU estimates for Germany: New evidence on the inflation-unemployment trade-off By Kajuth, Florian
  14. Central Bank Haircut Policy By James Chapman, Jonathan Chiu, and Miguel Molico
  15. Interbank tiering and money center banks By Ben R. Craig; Goetz von Peter
  16. Interbank tiering and money center banks By Ben Craig; Goetz von Peter
  17. The Effectiveness of Macroeconomic Commitment in Weak(er) Institutional Environments By Sophia Gollwitzer; Marc Quintyn
  18. Optimal Price Indices for Targeting Inflation Under Incomplete Markets By Rahul Anand; Eswar Prasad
  19. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Annicchiarico, Barbara; Pelloni, Alessandra; Lorenza, Rossi
  20. Investment - Specific Technology Shocks and International Business Cycles: An Empirical Assessment By Pau Rabanal; Juan F. Rubio-Ramirez; Federico S. Mandelman; Diego Vilan
  21. Is the New Keynesian Explanation of the Great Dis-Inflation Consistent with the Cross Country Data? By Matthew Doyle; Jean-Paul Lam
  22. Entry dynamics and the decline in exchange-rate pass-through By Christopher Gust; Sylvain Leduc; Robert J. Vigfusson
  23. Does Money Matter? An Empirical Investigation By Huston, Barry; McGibany, James M; Nourzad, Farrokh
  24. To Starve or not to Starve the Beast? By Michael Kumhof; Daniel Leigh; Douglas Laxton
  25. Money illusion and the long-run Phillips curve in staggered wage-setting models By Andrea Vaona
  26. Monetary Policy and Credit Cards: Evidence from a Small-Open Economy By Hakan Yilmazkuday
  27. Forecasting Private Consumption by Consumer Surveys By Christian Dreger; Konstantin A. Kholodilin
  28. New Perspectives on Depreciation Shocks as a Source of Business Cycle Fluctuations By Fransesco Furlanetto; Martin Seneca
  29. Sustainable Real Exchange Rates in the New EU Member States: What did the Great Recession Change? By Katerina Smídková; Jan Babecky; Ales Bulir
  30. The US Business Cycle Since 1950: A Post Keynesian Explanation By John Harvey
  31. Monetary Transmission in Low Income Countries By Prachi Mishra; Peter Montiel; Antonio Spilimbergo
  32. Monetary Transmission of Global Imbalances in Asian Countries By Il Houng Lee; Woon Gyu Choi
  33. China’s monetary policy and the exchange rate By Aaron Mehrotra; José R. Sánchez-Fung
  34. Price Dynamics in China By Nathaniel John Porter
  35. A DSGE model for Iceland By Martin Seneca
  36. Estimates of the Output Gap in Armenia with Applications to Monetary and Fiscal Policy By Anke Weber; Asmaa A ElGanainy

  1. By: Joshua Aizenman; Reuven Glick
    Abstract: This paper presents a model comparing the optimal degree of asset class diversification abroad by a central bank and a sovereign wealth fund. We show that if the central bank manages its foreign asset holdings in order to meet balance of payments needs, particularly in reducing the probability of sudden stops in foreign capital inflows, it will place a high weight on holding safer foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We also show how the diversification differences between the strategies of the bank and SWF is affected by the government’s delegation of responsibilities and by various parameters of the economy, such as the volatility of equity returns and the total amount of public foreign assets available for management.
    Keywords: Banks and banking, Central ; Sovereign wealth fund
    Date: 2010
  2. By: Masanao Aoki (Department of Economics, University of California, Los Angeles); Hiroshi Yoshikawa (Faculty of Economics, University of Tokyo)
    Abstract: When the coefficient of variation, namely the standard deviation relative to mean approaches zero as the number of economic agents becomes large, the system is called self-averaging. Otherwise, it is non-self-averaging. Most economic models take it for granted that economic system is self-averaging. However, they are based on an extremely unrealistic assumption that all the economic agents face the same probability distribution. Once this unrealistic assumption is dropped, non-self averaging naturally emerges. Using a simple stochastic growth model, this paper demonstrates that the coefficient of variation of aggregate output or GDP does not go to zero even if the number of sectors or economic agents goes to infinity. Non-self-averaging implies that even if the number of economic agents is large, dispersion can remain significant, and, therefore, that we can not legitimately focus on the means of aggregate variables. It, in turn, means that the standard microeconomic foundations based on representative agents has little value for they are meant to provide us with accurate dynamics of the means of aggregate variables. Contrary to the main stream view, micro-founded macroeconomics such as a dynamic general equilibrium model does not provide solid micro foundations.
    Date: 2010–09
  3. By: Juergen von Hagen
    Abstract: The financial crisis of 2007-2009 led to a renewed increase in government deficits and debts in many EU countries, causing a full-fledged fiscal crisis in Greece and severe fiscal pressures in other euro-area countries. This has prompted a series of proposals for improving the fiscal framework of the European Monetary Union, the Excessive Deficit Procedure and the Stability and Growth Pact. The first part of this paper reviews the main properties and developments of that framework until 2007. On that basis, it discusses the recent proposals for reform, which range from marginal improvements of the existing framework to the introduction of an explicit framework for managing fiscal crises in the member states, and the expansion of the scope of policy coordination to address macro economic imbalances and the competitiveness of the member states. We find the proposal of a mechanism for dealing with government default most useful. Attempts to suppress current account imbalances and to target national competitiveness positions would most likely result in serious economic losses and do damage to the internal market of the EU. This would increase the wedge between members and non-members of the euro area.
    Keywords: Excessive Deficit Procedure, Stability and Growth Pact, Sovereign Default, Fiscal Crises
    JEL: F42 H63 H68
    Date: 2010–10
  4. By: Karl Whelan (University College Dublin)
    Abstract: The past few months have exposed serious problems in relation to Europe’s ability to cope with financial stress. Placing the new Financial Stability funds on a permanent basis, in the form of a new European Monetary Fund will be required if Europe is to deal effectively with the serious debt problems of some Eurozone countries. However, this fund should exist to manage sovereign defaults in an orderly manner, not to prevent them altogether. Bank supervisors also need to publish regular stress tests, change their regulations on the risk weighting of sovereign debt and put new resolution procedures in place. Together, these reforms will allow Europe to deal with future sovereign debt problems without provoking a crisis.
    Date: 2010–09–30
  5. By: Michael G. Arghyrou; Alexandros Kontonikas
    Abstract: We offer a detailed empirical investigation of the European sovereign debt crisis based on the theoretical model by Arghyrou and Tsoukalas (2010). We find evidence of a marked shift in market pricing behaviour from a ‘convergence-trade’ model before August 2007 to one driven by macro-fundamentals and international risk thereafter. The majority of EMU countries have experienced contagion from Greece. There is no evidence of significant speculation effects originating from CDS markets. Finally, the escalation of the Greek debt crisis since November 2009 is confirmed as the result of an unfavourable shift in countryspecific market expectations. Our findings highlight the necessity of structural, competitiveness-inducing reforms in periphery EMU countries and institutional reforms at the EMU level enhancing intra-EMU economic monitoring and policy co-ordination.
    Keywords: euro-area, crisis, spreads, fundamentals, expectations, contagion, speculation.
    JEL: E43 E44 F30 G12
    Date: 2010–09
  6. By: Bohn, Henning
    Abstract: The rapidly growing federal government debt has become a concern for policy makers and the public. Yet the U.S. government has seemingly unbounded access to credit at low interest rates. Historically, Treasury yields have been below the growth rate of the economy. The paper examines the ramifications of debt financing at low interest rates. Given the short maturity of U.S. public debt – over $2.5 trillion maturing in 2010 – investor expectations are critical. Excessive debts justify reasonable doubts about solvency and monetary stability and thus undermine a financing strategy built on the perception that U.S. debt is safe.
    Keywords: government debt, budget deficits
    Date: 2010–04–01
  7. By: Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson
    Abstract: The recent global financial tsunami has had economic consequences that have not been witnessed since the Great Depression. But while some countries suffered a particularly large contraction in economic activity on top of a system-wide banking and currency collapse, others came off relatively lightly. In this paper, we attempt to explain this cross-country variation in post-crisis experience, using a wide variety of pre-crisis explanatory variables in a sample of 46 medium-to-high income countries. We find that domestic macroeconomic imbalances and vulnerabilities were crucial for determining the incidence and severity of the crisis. In particular, we find that the pre-crisis rate of inflation captures factors which are important in explaining the post-crisis experience. Our results also suggest an important role for financial factors. In particular, we find that large banking systems tended to be associated with a deeper and more protracted consumption contraction and a higher risk of a systemic banking or currency crisis. Our results suggest that greater exchange rate flexibility coincided with a smaller and shorter contraction, but at the same time increased the risk of a banking and currency crisis. Countries with exchange rate pegs outside EMU were hit particularly hard, while inflation targeting seemed to mitigate the crisis. Finally, we find some evidence suggesting a role for international real linkages and institutional factors. Our key results are robust to various alterations in the empirical setup and we are able to explain a significant share of the cross-country variation in the depth and duration of the crisis and provide quite sharp predictions of the incidence of banking and currency crises. This suggests that country-specific initial conditions played an important role in determining the economic impact of the crisis and, in particular, that countries with sound fundamentals and flexible economic frameworks were better able to weather the financial storm.
    Date: 2010–10
  8. By: Philippe Bacchetta; Cédric Tille; Eric van Wincoop
    Abstract: Recent crises have seen very large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics based on self-fulfilling shifts in risk made possible by a negative link between the current asset price and risk about the future asset price. This link implies that risk about tomorrow's asset price depends on uncertainty about risk tomorrow. This dynamic mapping of risk into itself gives rise to the possibility of multiple equilibria and self-fulfilling shifts in risk. We show that this can generate risk panics. The impact of the panic is larger when the shift from a low to a high risk equilibrium takes place in an environment of weak fundamentals. The sharp increase in risk leads to a large drop in the asset price, decreased leverage and reduced market liquidity. We show that the model can account well for the developments during the recent financial crisis.
    Keywords: financial panics and sunspot-like equilibria
    JEL: E44 G11 G12
    Date: 2010–06
  9. By: Reginald Darius
    Abstract: During the period leading up to the global financial crisis many asset classes registered rapid price increases. This coincided with a significant rise in global liquidity. This paper attempts to determine the extent to which the rise in asset prices was influenced by developments in global liquidity. We confirm that global liquidity had a significant impact on the buildup in house prices; however, the impact on equity prices was limited. In contrast to common perception, we find that the impact of global liquidity declined during the period of the Great Moderation. The paper also examines spillovers from global liquidity to domestic variables and concludes that domestic factors generally played a more significant role in house price appreciation relative to global factors. This contradicts the hypothesis of weakened potency of domestic monetary policy in the presence of increased international liquidity.
    Keywords: Asset prices , Economic growth , Forecasting models , Inflation , International liquidity , Price increases , Real estate prices , Spillovers ,
    Date: 2010–08–25
  10. By: Timo Henckel; Gordon D. Menzies; Nick Prokhovnik; Daniel J. Zizzo
    Abstract: We incorporate inferential expectations into the Barro-Gordon model (1983a) of time inconsistency and consider reputational equilibria. The range of sustainable equilibria shrinks as the private sector becomes more belief-conservative.
    JEL: E52 E61
    Date: 2010–10
  11. By: Timo Henckel (Australian National University); Gordon Menzies (University of Technology, Sydney); Nicholas Prokhovnik (University of Technology, Sydney); Daniel Zizzo (School of Economics, University of East Anglia)
    Abstract: We incorporate inferential expectations into the Barro-Gordon model (1983a) of time inconsistency and consider reputational equilibria. The range of sustainable equilibria shrinks as the private sector becomes more belief-conservative.
    Keywords: credibility; time inconsistency; reputation; inferential expectations
    JEL: E52 E61
    Date: 2010–10–04
  12. By: Ingrid Größl (University of Hamburg); Ulrich Fritsche (University of Hamburg)
    Abstract: New Keynesian DSGE models propose a dynamic and expectational version of the old IS-LM paradigm. Acknowledging that the Taylor rule as a substitute for the LM-curve has its merits we show that standard DSGE models do not model how the central bank achieves its targets. In filling this gap we make evident that models neglecting a store-of-value function of money but still assuming a Taylor rule are inconsistent. Our major point concerns the-so called new Keynesian IS-curve. We prove that DSGE models which typically rest on the assumption of representative agents are unable to derive the IS-curve. This implies that these models lack the capability to analyse the role of savings as a a gap in aggregate demand. By assuming overlapping generations we make evident how this shortcoming can be avoided. We also show how OLG models add a richer dynamics to the standard DSGE approach.
    Date: 2010
  13. By: Kajuth, Florian
    Abstract: The paper estimates the NAIRU from a Phillips curve relationship in the state-space framework. To identify the inflation-unemployment trade-off we account for a time-varying inflation trend to control for the part of inflation that is not affected by the cyclical component of unemployment. In addition we use shifts in the relative volatility of shocks to unemployment and inflation to address the simultaneity problem in Phillips curve estimations. Applying the method of Rigobon and Sack (2003) allows for a data driven identification of the contemporaneous coefficients on the unemployment gap in the Phillips curve and yields more precise estimates of the structural coefficients in the Phillips curve. This tightens the economic relation on the basis of which the NAIRU is derived. --
    Keywords: non-accelerating inflation rate of unemployment,state-space estimation,identification through heteroskedasticity,trend inflation
    JEL: E24 E31 E32
    Date: 2010
  14. By: James Chapman, Jonathan Chiu, and Miguel Molico
    Abstract: We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Setting a haircut therefore involves balancing the trade-off between relaxing the liquidity constraints of agents on one hand, and increasing potential inflation risk and distorting the portfolio choices of agents on the other. We argue that the optimal haircut is higher when the central bank is unable to lend exclusively to agents who actually need liquidity. Finally, for an unexpected drop in the haircut, the central bank can be more aggressive than when setting a permanent level of the haircut.
    Keywords: Payment, clearing, and settlement systems; Central bank research; Monetary policy implementation; Financial system regulation and policies; Financial services
    JEL: E40 E50
    Date: 2010
  15. By: Ben R. Craig; Goetz von Peter
    Abstract: This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for tting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Econometrically, bank-specific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.
    Keywords: Interbank market ; Banks and banking, Central - Germany
    Date: 2010
  16. By: Ben Craig; Goetz von Peter
    Abstract: This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for fitting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Econometrically, bank-specific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.
    Keywords: interbank markets, intermediation, networks, tiering, core and periphery, market structure
    Date: 2010–10
  17. By: Sophia Gollwitzer; Marc Quintyn
    Abstract: This paper analyzes the institutional conditions affecting the establishment and effectiveness of independent central banks and of budgetary institutions. It draws on the recent theory developed by North, Wallis and Weingast on the transition from a closed and fragile state to an open economic and political environment. The paper presents a composite indicator allowing for the identification of a country’s position along this transition path. The findings suggest that (i) while the establishment of autonomous central banks seems to be relatively independent from the broader institutional framework, sound budgetary institutions tend to be established in countries with higher levels of rule of law for the elites, and (ii) while central bank independence is effective in reducing inflation irrespective of a country’s position along the transition path, budget institutions seem to be most effective as a disciplining device in weak institutional environments.
    Keywords: Budgetary policy , Central bank autonomy , Central banks , Developed countries , Governance , Low-income developing countries , Political economy ,
    Date: 2010–08–23
  18. By: Rahul Anand; Eswar Prasad
    Abstract: In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We develop a two-sector two-good new-Keynesian model to study the optimal choice of price index in markets with financial frictions. We find that, in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting a target for headline CPI inflation with some weight on the output gap. 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: Consumer price indexes , Consumption , Demand , Economic models , Emerging markets , Food production , Inflation , Inflation targeting , Monetary policy , Price elasticity , Welfare ,
    Date: 2010–09–02
  19. By: Annicchiarico, Barbara; Pelloni, Alessandra; Lorenza, Rossi
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii)the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth; volatility; business cycle; monetary policy
    JEL: O42 E32 E52
    Date: 2010–08
  20. By: Pau Rabanal; Juan F. Rubio-Ramirez; Federico S. Mandelman; Diego Vilan
    Abstract: In this paper, we first introduce investment-specific technology (IST) shocks to an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses the "quantity", "international comovement", "Backus-Smith", and "price" puzzles. Second, we use OECD data for the relative price of investment to build and estimate these IST processes across the U.S and a "rest of the world" aggregate, showing that they are cointegrated and well represented by a vector error correction model (VECM). Finally, we demonstrate that when we fit such estimated IST processes in the model instead of the calibrated ones, the shocks are actually not as powerful to explain any of the four montioned puzzles.
    Keywords: Business cycles , Consumption , Cross country analysis , Demand , Economic models , External shocks , International trade , Investment , Productivity , United States ,
    Date: 2010–09–09
  21. By: Matthew Doyle (Department of Economics, University of Waterloo); Jean-Paul Lam (Department of Economics, University of Waterloo)
    Abstract: A leading explanation of long run U.S. inflation trends attributes both the fall of inflation in the 1980s and the subsequent years of low and stable inflation to well run monetary policy pinning down inflationary expectations. Most other OECD economies experienced a similar rise and fall of inflation, as well as subsequent low and stable inflation over the same period. This observation has been under-explored in the literature. In this paper we exploit the international dimension of the fall of inflation to investigate the hypothesis that good monetary policy is responsible for recent inflation outcomes. Our results suggest that this theory is not compatible with the cross country data.
    JEL: E42 E50
    Date: 2010–10
  22. By: Christopher Gust; Sylvain Leduc; Robert J. Vigfusson
    Abstract: The degree of exchange-rate pass-through to import prices is low. An average passthrough estimate for the 1980s would be roughly 50 percent for the United States implying that, following a 10 percent depreciation of the dollar, a foreign exporter selling to the U.S. market would raise its price in the United States by 5 percent. Moreover, substantial evidence indicates that the degree of pass-through has since declined to about 30 percent. ; Gust, Leduc, and Vigfusson (2010) demonstrate that, in the presence of pricing complementarity, trade integration spurred by lower costs for importers can account for a significant portion of the decline in pass-through. In our framework, pass-through declines solely because of markup adjustments along the intensive margin. ; In this paper, we model how the entry and exit decisions of exporting firms affect passthrough. This is particularly important since the decline in pass-through has occurred as a greater concentration of foreign firms are exporting to the United States. ; We find that the effect of entry on pass-through is quantitatively small and is more than offset by the adjustment of markups that arise only along the intensive margin. Even though entry has a relatively small impact on pass-through, it nevertheless plays an important role in accounting for the secular rise in imports relative to GDP. In particular, our model suggests that over 3/4 of the rise in the U.S. import share since the early 1980s is due to trade in new goods. ; Thus, a key insight of this paper is that adjustment of markups that occur along the intensive margin are quantitatively more important in accounting for secular changes in pass-through than adjustments that occur along the extensive margin.
    Date: 2010
  23. By: Huston, Barry (Department of Economics Marquette University); McGibany, James M (Department of Economics Marquette University); Nourzad, Farrokh (Department of Economics Marquette University)
    Abstract: This paper uses a simultaneous-equations model of the new consensus macroeconomic model to examine whether the inclusion of the money stock in the aggregate demand function improves the statistical fit of the model. The results indicate that the consensus model is accurate for the U.S. in that the inclusion of money does not increase the predictive power of the model. However, the results reveal that the estimated coefficients are more robust when money is included as an instrumental variable in the simultaneous equations consensus model.
    Keywords: consensus macro model, monetary policy, Phillips Curve, Taylor Rule, Economics
    JEL: C30 C52 E32
    Date: 2010–09
  24. By: Michael Kumhof; Daniel Leigh; Douglas Laxton
    Abstract: For thirty years prominent voices have advocated a policy of starving the beast cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.
    Keywords: Budget deficits , Cross country analysis , Economic models , Fiscal analysis , Fiscal policy , Government expenditures , Tax policy , Tax reductions , United States , Welfare ,
    Date: 2010–09–02
  25. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: We consider the effect of money illusion - defined referring to Stevens' ratio estimation function - on the long-run Phillips curve in an otherwise standard New Keynesian model of sticky wages. We show that if agents under-perceive real economic variables, negative money non-superneutralities will become more severe. On the contrary, if agents over-perceive real variables, positive money superneutralities will arise.
    Keywords: Phillips curve, inflation, nominal inertia, monetary policy, dynamic general equilibrium, money illusion, Stevens' ratio estimation function
    JEL: E3 E20 E40 E50
    Date: 2010–09
  26. By: Hakan Yilmazkuday (Department of Economics, Temple University)
    Abstract: This paper uses a unique monthly data set that covers overall credit card usage in a small-open economy, Turkey, to investigate a possible credit channel of monetary policy transmission through credit cards. A reduced-form vector autoregression analysis is employed where the forecast error variance decompositions are calculated for three-year windows over the period 2002-2009. It is shown that, during the recent financial crisis that has started in 2007, the monetary policy of Turkey has shifted toward focusing on output volatility and interest-rate smoothing through setting short-term interest rates, while the inflation rate has been mostly affected by exchange rate movements and inflation inertia. Credit cards usage has an increasing effect on inflation rates through time, requiring more policy emphasis on the credit channel through credit cards. When the effects of the credit view and the money view are compared, the former seems to be more effective on the real side of the economy independent of the level of inflation.
    Keywords: Credit Cards, Monetary Policy, Credit Channel, Vector Autoregression, Turkey
    JEL: E44 E50 E60 C32
    Date: 2010–09
  27. By: Christian Dreger; Konstantin A. Kholodilin
    Abstract: Survey-based indicators such as the consumer confidence are widely seen as leading indicators for economic activity, especially for the future path of private consumption. Although they receive high attention in the media, their forecasting power appears to be very limited. Therefore, this paper takes a fresh look on the survey data, which serve as a basis for the consumer confidence indicator (CCI) reported by the EU Commission for the euro area and individual member states. Different pooling methods are considered to exploit the information embedded in the consumer survey. Quantitative forecasts are based on Mixed Data Sampling (MIDAS) and bridge equations. While the CCI does not outperform an autoregressive benchmark for the majority of countries, the new indicators increase the forecasting performance. The gains over the CCI are striking for Italy and the entire euro area (20 percent). For Germany and France the gains seem to be lower, but are nevertheless substantial (10 to 15 percent). The best performing indicator should be built upon pre-selection methods, while data-driven aggregation methods should be preferred to determine the weights of the individual ingredients.
    Keywords: Consumer confidence, consumption, nowcasting, mixed frequency data
    JEL: E21 C22
    Date: 2010
  28. By: Fransesco Furlanetto; Martin Seneca
    Abstract: In this paper we study the transmission for capital depreciation shocks. The existing literature in the Real Business Cycle tradition has concluded that these shocks are irrelevant for business cycle fluctuations. We show that these shocks are a potentially important drivers of aggregate fluctuations in a New Keynesian model. Nominal rigidities and some persistence in the shock process are the key ingredients to generate co-movement across real variables.
    Date: 2010–07
  29. By: Katerina Smídková; Jan Babecky; Ales Bulir
    Abstract: The Great Recession affected export and import patterns in our sample countries, and these changes, coupled with a more volatile external environment, have profound impact on our estimates of real exchange rate misalignments and projections of sustainable real exchange rates. We find that real misalignments in several countries with pegged exchange rates and excessive external liabilities widened relative to earlier estimates. While countries with balanced net trade positions are expected to continue to experience appreciation during 2010-2014, several currencies are likely to require real depreciation to maintain sustainable net external debt. Our estimates point to somewhat larger disequilibria than those of IMF country teams, however, any estimates of equilibrium exchange rates are subject to sizable uncertainty.
    Keywords: Bilateral trade , Currencies , Economic models , Economic recession , European Economic and Monetary Union , Exchange rate regimes , Exports , Foreign direct investment , Imports , Price elasticity , Real effective exchange rates ,
    Date: 2010–08–30
  30. By: John Harvey (Department of Economics, Texas Christian University)
    Abstract: That the economy goes through periods of expansion and recession is obvious. Whether or not this represents endogenously-generated cycles or simply stochastic variation around a trend is, however, a matter of debate. Among mainstream economists, the latter is the predominant position. For Post Keynesians, however, business cycles are a manifestation of the systemic instability inherent to the capitalist system. Endogenous fluctuations in investment spending lie at the heart of the shift from expansion to recession and while various shocks and government policies can, of course, have an impact, they are unnecessary to create the patterns we see. This paper offers evidence in support of the Post Keynesian position by tracing the US business cycle since 1950. With a combination of quantitative and qualitative evidence, it is demonstrated that, from the Korean War cycle to our current financial crisis, the central factor has been the rise and fall in investment. The complete story cannot be told without reference to fiscal and monetary policy, oil shocks, strikes, and so on–but most of it can.
    Keywords: business cycle, Keynes, Post Keynesian
    JEL: E12 E13 E32
    Date: 2010–08
  31. By: Prachi Mishra; Peter Montiel; Antonio Spilimbergo
    Abstract: This paper reviews monetary transmission mechanisms in low-income countries (LICs) to identify aspects of the channels that may operate differently in LICs relative to advanced and emerging economies. Given the weak institutional frameworks, reduced role of securities markets, imperfect competition in the banking sector and the resulting high cost of bank lending to private firms, the traditional channels (interest rate, bank lending, and asset price) are impaired in LICs. The exchange rate channel is also undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.
    Date: 2010–10–01
  32. By: Il Houng Lee; Woon Gyu Choi
    Abstract: The paper explores the linkages between the global and domestic monetary gaps, and estimates the effects of monetary gaps on output growth, inflation, and net saving rates using panel data for 20 Asian countries for 1980-2008. We find a significant pass-through of the global monetary gap to domestic monetary gaps, which in turn affect output growth and inflation, in individual emerging market and developing countries in Asia. Notably, we provide evidence that the global monetary condition is partly responsible for the current account surplus in Asia. We also draw implications for monetary policy coordination for global rebalancing.
    Keywords: Asia , Balance of trade , Capital flows , Economic integration , Economic models , Export competitiveness , Globalization , Inflation , Monetary policy , Production growth , Reserves , Savings ,
    Date: 2010–09–15
  33. By: Aaron Mehrotra; José R. Sánchez-Fung
    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: Monetary policy - China ; Foreign exchange
    Date: 2010
  34. By: Nathaniel John Porter
    Abstract: Chinese inflation, particularly non-food inflation, has been surprisingly modest in recent years. We find that supply factors, including those captured through upstream foreign commodity and producer prices, have been important drivers of non-food inflation, as has foreign demand for Chinese goods. Domestic demand and monetary conditions seem less important, possibly reflecting a large domestic output gap generated by many years of high investment. Inflation varies systemically within China, with richer (and urban) provinces having lower, more stable, inflation, but this urban inflation also influence that in lower-income provinces. Higher Mainland food inflation also raises inflation in non-Mainland China.
    Date: 2010–09–29
  35. By: Martin Seneca
    Abstract: This paper presents a dynamic stochastic general equilibrium (DSGE) model for a small open economy fitted to Icelandic data. The model has been developed at the Central Bank of Iceland as a tool for policy analysis and forecasting purposes in support of inflation targeting. As the existing macroeconometric model at the Central Bank, the model is a dynamic quarterly model. But it differs by being fully founded on well-defined microeconomic decision problems of agents in the economy. This allows for a structural interpretation of shocks to the economy. The model features endogenous capital accumulation subject to investment adjustment costs, variable capacity utilisation, habit formation in consumption, monopolistic competition in goods and labour markets, as well as sticky prices and wages. The home economy engages freely in international trade, while international financial intermediation is subject to endogenous costs. Monetary policy is conducted by an inflation targeting central bank. The model is fitted to Icelandic data for the sample period 1991-2005 through a combination of calibration and formal Bayesian estimation. The paper presents the estimation results, and it discusses the model's properties. Finally, first applications are shown to illustrate the model's potential in guiding monetary policy.
    Date: 2010–09
  36. By: Anke Weber; Asmaa A ElGanainy
    Abstract: This paper employs several econometric techniques to estimate the Armenian output gap. The findings indicate that the output gap is significantly positive in 2007 and 2008 and decreased dramatically in 2009. The paper uses these results to estimate a New Keynesian Phillips curve for Armenia, suggesting a significant role of the output gap and inflation expectations in determining current inflation. Finally, the underlying fiscal stance over the period 2000-09 is assessed by estimating the cyclically-adjusted fiscal balance. Most of Armenia’s fiscal deficit is found to be structural. Fiscal policy, while providing counter-cyclical support in 2009, has been largely pro-cyclical in the past.
    Keywords: Armenia , Business cycles , Economic growth , Economic models , Fiscal policy , Inflation , Monetary policy , Production , Time series ,
    Date: 2010–08–26

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