|
on Central Banking |
| By: | Charles Wyplosz (Asian Development Bank Institute) |
| Abstract: | This paper contrasts the United States (US) and European situations during the crisis and examines how much of the crisis has been imported by Europe from the US. The paper argues that Europe never had a chance to avoid contagion from the US. It also documents the relatively limited reaction of both monetary and fiscal authorities. Muted fiscal policy actions may well be a consequence of the Stability and Growth Pact despite its having been de facto suspended. While the European Central Bank (ECB) intervened promptly and massively to attempt to maintain liquidity in the money market, it has been slow in dealing with the upcoming recession. The concluding remarks consider the differences that the monetary union has made and their relevance. |
| Keywords: | US, Europe, financial crisis, fiscal policy, European Central Bank |
| JEL: | E42 E58 E61 F32 F33 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:2325&r=cba |
| By: | Sandra Gomes; P. Jacquinot; Ricardo Mestre; João Sousa |
| Abstract: | The purpose of this paper is to analyse whether fiscal policies can alleviate the effects of the zero lower bound (ZLB) on interest rates and if they should be coordinated internationally. The analysis is carried out using EAGLE, a DSGE model of the global economy. We consider that the fiscal shocks are temporary and that fscal policy retains full credibility at all times. In this setup we find significant non-linearities in a ZLB situation that amplify the<br>effects of fiscal shocks compared to the non-ZLB case. International coordination is helpful but does not play a major role in the results. |
| JEL: | E52 E62 E63 F42 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201018&r=cba |
| By: | Fabio Canova; Filippo Ferroni |
| Abstract: | We investigate the relationship between monetary policy and inflation dynamics in the US using a medium scale structural model. The specification is estimated with Bayesian techniques and fits the data reasonably well. Policy shocks account for a part of the decline in inflation volatility; they have been less effective in triggering inflation responses over time and qualitatively account for the rise and fall in the level of inflation. A number of structural parameter variations contribute to these patterns. |
| Keywords: | New Keynesian model, Bayesian methods, Monetary policy, Inflation dynamics. |
| JEL: | E52 E47 C53 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1241&r=cba |
| By: | Benedetto Molinari (Department of Economics, Universidad Pablo de Olavide) |
| Abstract: | This paper provides a novel single equation estimator of the Sticky Information Phillips Curve (SIPC), which permits to estimate the exact model without any approximation or truncation. In detail, information stickiness is estimated by employing a GMM estimator that matches the theoretical with the actual covariances between current inflation and the lagged exogenous shocks that affect firms’ pricing decisions, which are considered the moments that measure inflation persistence. The main result of the paper is to show that the SIPC model can match inflation persistence only at the cost of mispredicting the variance of inflation, which is a novel finding in the empirical literature on the SIPC. |
| Keywords: | Sticky Information, Inflation Persistence, two-stage GMM estimator |
| JEL: | E31 C51 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:10.09&r=cba |
| By: | Bernardino Adão; Isabel Horta Correia |
| Abstract: | It is believed that a shock, common to a set of countries with identical fundamentals, has identical outcomes across countries. We show that in general, when specialization in production is such that a common shock creates a missing role for labor mobility across countries, the terms of trade of any country reacts to the shock. This is the case even if state contingent assets can be traded across countries. The transmission mechanism of a monetary shock in a monetary union has in this case an additional channel, the terms of trade. We also show that the country outcomes are significantly different, when compared with the effect of the shock on the union’s aggregate. Monetary shocks<br>impose cycles with higher volatility in "poor" countries relatively o<br>the volatility of "richer" ones. |
| JEL: | E31 E41 E58 E62 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201019&r=cba |
| By: | De Paoli, Bianca (Bank of England); Küçük-Tuğer, Hande (Centre for Economic Performance, London School of Economics); Søndergaard, Jens (Fixed Income Research, Global Markets EMEA, Nomura International plc) |
| Abstract: | Using an endogenous portfolio choice model, this paper examines how different monetary policy regimes can lead to different foreign currency positions by changing the cyclical properties of the nominal exchange rate. We find that strict inflation-targeting regimes are associated with a short position in foreign currency, while the opposite is true for non inflation targeting regimes. We also explore how these different external positions affect the international transmission of monetary shocks through the valuation channel. When central banks follow inflation-targeting Taylor-type rules, valuation effects of monetary expansions are beggar-thy-self, but they are beggar-thy-neighbour in a money growth targeting regime (or when monetary policy puts weight on output stabilisation). |
| Keywords: | Portfolio choice; international transmission of shocks; monetary policy |
| JEL: | F31 F41 |
| Date: | 2010–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0403&r=cba |
| By: | Yongseung Jung |
| Abstract: | This paper sets up a canonical new Keynesian small open economy model with nominal price rigidities to explore the impact of habit persistence and exchange rate pass-through on the welfare ranking of alternative monetary policy rules. It identifies three factors that can affect the welfare ranking: the degree of habit persistence, the degree of exchange rate pass-through, and labor supply elasticity. In contrast to the findings of De Paoli (2009a, 2009b), the analysis reveals a reversal in the welfare ranking of alternative monetary policy rules for unitary intertemporal and intratemporal elasticities of substitution, depending on the asset market structures of small open economies with external habit. The paper also finds that exchange rate pegging outperforms domestic producer price index inflation targeting at high degrees of intratemporal elasticity of substitution and external habit, regardless of asset market structures. Finally, the paper finds that exchange rate pegging outperforms domestic or consumer price index inflation targeting if the exchange rate is misaligned. |
| Keywords: | Keynesian, economy, monetary policy, market structures, consumer price index |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:3104&r=cba |
| By: | Yongseung Jung (Asian Development Bank Institute) |
| Abstract: | This paper sets up a canonical new Keynesian small open economy model with nominal price rigidities to explore the impact of habit persistence and exchange rate pass-through on the welfare ranking of alternative monetary policy rules. It identifies three factors that can affect the welfare ranking: the degree of habit persistence, the degree of exchange rate pass-through, and labor supply elasticity. In contrast to the findings of De Paoli (2009a, 2009b), the analysis reveals a reversal in the welfare ranking of alternative monetary policy rules for unitary intertemporal and intratemporal elasticities of substitution, depending on the asset market structures of small open economies with external habit. The paper also finds that exchange rate pegging outperforms domestic producer price index inflation targeting at high degrees of intratemporal elasticity of substitution and external habit, regardless of asset market structures. Finally, the paper finds that exchange rate pegging outperforms domestic or consumer price index inflation targeting if the exchange rate is misaligned. |
| Keywords: | Keynesian small open economy model, exchange rate, labour elasticity |
| JEL: | E52 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2311&r=cba |
| By: | Jung, Yongseung (Asian Development Bank Institute) |
| Abstract: | This paper sets up a canonical new Keynesian small open economy model with nominal price rigidities to explore the impact of habit persistence and exchange rate pass-through on the welfare ranking of alternative monetary policy rules. It identifies three factors that can affect the welfare ranking: the degree of habit persistence, the degree of exchange rate pass-through, and labor supply elasticity. In contrast to the findings of De Paoli (2009a, 2009b), the analysis reveals a reversal in the welfare ranking of alternative monetary policy rules for unitary intertemporal and intratemporal elasticities of substitution, depending on the asset market structures of small open economies with external habit. The paper also finds that exchange rate pegging outperforms domestic producer price index inflation targeting at high degrees of intratemporal elasticity of substitution and external habit, regardless of asset market structures. Finally, the paper finds that exchange rate pegging outperforms domestic or consumer price index inflation targeting if the exchange rate is misaligned. |
| Keywords: | asset market structures; exchange rate peg; monetary policy rules |
| JEL: | E52 F41 |
| Date: | 2010–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0252&r=cba |
| By: | Pedro, Gomis-Porqueras; Benoit, Julien; Chengsi, Wang |
| Abstract: | In this paper we study the optimal monetary and fiscal policies of a general equilibrium model of unemployment and money with search frictions both in labor and goods markets as in Berentsen, Menzio and Wright (2010). We abstract from revenue-raising motives to focus on the welfare-enhancing properties of optimal policies. We show that some of the inefficiencies in the Berentsen, Menzio and Wright (2010) framework can be restored with appropriate fiscal policies. In particular, when lump sum monetary transfers are possible, a production subsidy financed by money printing can increase output in the decentralized market and a vacancy subsidy financed by a dividend tax even when the Hosios’ rule does not hold. |
| Keywords: | Search and matching; Fiscal polices;Money; Unemployment; Efficiency |
| JEL: | E52 E63 |
| Date: | 2010–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26262&r=cba |
| By: | Byron Ganges (Department of Economics, University of Hawaii at Manoa) |
| Abstract: | Recovery has begun in the United States and global economies. The US recovery is likely to be anemic by historical standards, raising the possibility that additional stimulus may be desirable. The President and Democrats in Congress have called for a “jobs bill,†and the Federal Reserve has demonstrated that it has a flexible toolkit for providing additional liquidity if deemed appropriate. The possible need for such stimulus will come up against the reality of an expanding public debt on the one hand, and inflationary concerns on the other. In this paper, I use simulations of the IHS Global Insight Model to assess the potential impact on the recovery path of alternative macro policies. |
| Keywords: | United States (US) recession and recovery; fiscal and monetary policy; econometric model forecast simulation; IHS Global Insight model. |
| JEL: | E37 E63 C53 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:hae:wpaper:2010-03&r=cba |
| By: | Liu, Philip (International Monetary Fund); Theodoridis, Konstantinos (Bank of England) |
| Abstract: | The identification of reduced-form VAR model had been the subject of numerous debates in the literature. Different sets of identifying assumptions can lead to very different conclusions in the policy debate. This paper proposes a theoretically consistent identification strategy using restrictions implied by a DSGE model. Monte Carlo simulations suggest the proposed identification strategy is successful in recovering the true structural shocks from the data. In the face of misspecified model restrictions, the data tend to push the identified VAR responses away from the misspecified model and closer to the true data generating process. |
| Keywords: | VAR identification; model misspecification; DSGE model |
| JEL: | E52 F41 |
| Date: | 2010–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0402&r=cba |
| By: | Baumeister, Christiane (Bank of Canada); Liu, Philip (International Monetary Fund); Mumtaz, Haroon (Bank of England) |
| Abstract: | This paper re-examines the evolution of the US monetary transmission mechanism using an empirical framework that incorporates substantially more information than the standard tri-variate VAR model used in most previous studies. In particular, we employ an extended version of a factor-augmented VAR, where we introduce time variation in the coefficients and stochastic volatilities in the variances of the shocks. Our formulation has two substantive advantages over earlier work: (i) the additional information summarised by the common factors that are extracted from a large panel of aggregate and disaggregate variables improves the identification of the monetary policy shocks since the factors capture more accurately the amount of information analysed by the monetary authority, (ii) we are able to estimate the time-varying effects of monetary policy surprises on macroeconomic aggregates and disaggregate prices and quantities of personal consumption expenditures. Our main results indicate that time variation is a dominant feature of key macroeconomic variables and their components. In analysing the temporal evolution of disaggregate dynamics, we uncover a considerable amount of heterogeneity in sectoral price responses which suggests that monetary policy actions exert an important, and potentially long-lasting, influence on relative prices in the US economy. |
| Keywords: | FAVAR; time-varying parameters; monetary transmission |
| JEL: | E30 E32 |
| Date: | 2010–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0401&r=cba |
| By: | Shinji Takagi (Asian Development Bank Institute) |
| Abstract: | The paper examines the recent European crisis management programs of the International Monetary Fund (IMF) to see how the lessons of Asia were applied. Compared to the Asian programs of 1997, the European programs of 2008 were better funded and their structural conditionality more focused. Other than these, the overall thrust of the programs was similar: fiscal and monetary tightening, coupled with banking reforms. The real difference, however, was not so much about content but about philosophy. Relative to the Asian programs, the European programs were characterized by more emphasis on ownership, greater collaboration among stakeholders, more realistic assumptions and greater transparency about the risks and the logic of policy actions, and more built-in flexibility of targets and policy options. This approach to crisis management, foreshadowing the major reform of conditionality in March 2009, incorporated the changes that had been made since the Asian crisis in the IMF’s policies and procedures to manage capital account crises more effectively. Despite these recent changes in the way the IMF does its business, Asia appears to remain unengaged. The lesson Asia should draw from Europe is that it should build a strong regional institution to complement, and catalyze the involvement of, the IMF. Only then can the lessons learned in Asia over 10 years ago be applied back in Asia to benefit its own people. |
| Keywords: | IMF, European crisis management programs, Asia |
| JEL: | E65 F33 F53 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2322&r=cba |
| By: | Iris Biefang Frisancho-Mariscal (University of the West of England, Bristol); Peter Howells (University of the West of England, Bristol) |
| Abstract: | One of the most striking features of the financial crisis that began in the autumn of 2007 has been the associated upheaval in conventional interest rate spreads. In the UK, this is most frequently symbolised by the widening (and increased volatility) of the spread between 3-month Libor and the Bank of England’s policy rate. This paper uses a vector error correction model to look at the way in which the recent crisis has affected a wide range of interest rate spreads. We look for changes in the coefficient on the policy rate (the ‘pass-through’) and at changes in the speed of adjustment to changes in the policy rate, since both are important for policy. We find, as others have done, that the conventional behaviour of almost all spreads is swept away after August 2007. By developing a model which incorporates measures of counterparty and liquidity risk, we show that market rates are now subject to additional influences, but except for secured loans, still incorporate the effects of changes in the policy rate much as they did before the crisis. This contrasts with the widely-held view that the relationship between policy and money market rates in particular has been severely disrupted by the crisis. For secured loans, however, there is evidence that the mark-up has risen while at the same time the policy pass-through has fallen since August 2007. The same applies to deposit rates, albeit to a lesser extent, with the result that the sharp reduction in policy rate since the end of 2007 has had a larger effect on deposit than loan rates. |
| Keywords: | intrest rates; risk; VAR; Financial crisis |
| JEL: | E43 E52 E58 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:1016&r=cba |
| By: | Quaas, Georg; Klein, Mathias |
| Abstract: | The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is a major concept in (monetary) economics in predicting changes in the inflation rate. As the inflation neutral unemployment rate is an unobserved and, in the long run, a changing variable, several questions arise about its adequate estimation. The following study determines four different possible NAIRU-curves for the German economy during the period of 1973Q1-2010Q2 by the use of a State-Space-Model. With the help of the Ordinary-Least-Square (OLS) and the Maximum-Likelihood (ML) method, these curves are implemented and utilized in regression models which are trimmed to satisfactorily explain inflation changes. It turns out that besides the NAIRU, several other variables like the changes in the unemployment rate or the labor productivity are necessary to forecast changes in the inflation rate accurately. Among the four regression models, the one applying the NAIRU with the lowest variance and with a high theoretic plausibility has the worst record, while the equation with a NAIRU fluctuating more than the unemployment rate explains the inflation rate best. |
| Keywords: | Non-Accelerating Inflation Rate of Unemployment; NAIRU |
| JEL: | E32 E31 E24 |
| Date: | 2010–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26176&r=cba |
| By: | Luciana Barbosa; Sónia Costa |
| Abstract: | This paper aims to identify the determinants behind the different evolution of sovereign bond yields in euro area countries for the period of the current crisis. Up to the time of the collapse of Lehman Brothers, global risk premium was the main driver of spreads. Afterwards, the relevance of idiosyncratic factors increased. Although liquidity premiums played a larger role in the months following September 2008, as the financial crisis spilled over into a strongly deteriorating macroeconomic environment, the importance of country credit risk factors increased. In the first five months of 2010, heterogeneity in sovereign credit risk premiums and a further increase in global risk aversion were, to a large extent, the determining factors behind the evolution of spreads. |
| JEL: | E43 G12 G15 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201022&r=cba |
| By: | Matthias Neuenkirch (Philipps University Marburg); |
| Abstract: | In this paper, we study the influence of central bank transparency and informal central bank communication on the money market adjustment process between two interest rate decisions. The sample covers nine major central banks for the period from January 1999 to July 2007. We find, first, that both transparency and communication facilitate understanding upcoming interest rate decisions. Second, transparency, as measured by various subcategories of the Eijffinger and Geraats (2006) index, leads to better anticipation of monetary policy. Provision of information on (unanticipated) macroeconomic disturbances and explicit prioritization of central bank objectives are the most important of these subcategories. Finally, there is no unique optimal design for central banks as (i) a very high degree of transparency, (ii) frequent communication on an informal basis, (iii) gradualism in target rate changes, or (iv) a high frequency of interest rate decisions all contribute to sound understanding regarding future interest rate decisions. |
| Keywords: | Central Bank Communication, Central Bank Transparency, Financial Market Expectations, Interest Rate Decision, Monetary Policy, Money Market |
| JEL: | E52 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201028&r=cba |
| By: | Ali Dib |
| Abstract: | The author develops a dynamic stochastic general-equilibrium model with an active banking sector, a financial accelerator, and financial frictions in the interbank and bank capital markets. He investigates the importance of banking sector frictions on business cycle fluctuations and assesses the role of a regulatory capital requirement in propagating the effects of shocks in the real economy. Bank capital is introduced to satisfy the regulatory capital requirement, and serves as collateral for borrowing in the interbank market. Financial frictions are introduced by assuming asymmetric information between lenders and borrowers that creates moral hazard and adverse selection problems in the interbank and bank capital markets, respectively. Highly leveraged banks are vulnerable and therefore pay higher costs when raising funds. The author finds that financial frictions in the interbank and bank capital markets amplify and propagate the effects of shocks; however, the capital requirement attenuates the real impacts of aggregate shocks (including financial shocks), reduces macroeconomic volatilities, and stabilizes the economy. |
| Keywords: | Economic models; Business fluctuations and cycles; Financial markets; Financial stability |
| JEL: | E32 E44 G1 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-26&r=cba |
| By: | Isabel Horta Correia |
| Abstract: | <br>The decline of capital taxation is associated with efficiency gains.<br>We show that, when agents are heterogeneous, equity concerns can change the policy recommendation driven by efficiency. Given the empirical evidence on the roots of heterogeneity inside each country, either in developing or developed economies, the elimination of capital taxation would lead always to a decline in inequality and to an increase of welfare of the poorest, in a small open economy acting unilaterally. On the contrary for a group of open economies following the same policy, the opposite occurs: with the elimination of capital taxation inequality worsens and it hurts the poorest of each country. Therefore globalization can be important to support a positive tax on capital. |
| JEL: | D63 E62 F42 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201020&r=cba |
| By: | Lambertini, Luisa; Mendicino, Caterina; Punzi, Maria Teresa |
| Abstract: | This paper analyzes housing market boom-bust cycles driven by changes in households' expectations. We explore the role of expectations not only on productivity but on several other shocks originated in the housing market, the credit market, the production sector and the conduct of monetary policy. We find that expectations related to different sectors of the economy can generate booms in the housing market in accordance with the empirical findings. However, only expectations of future expansionary monetary policy that are not fulfilled can also generate a macroeconomic recession. Regarding the credit market, increased access to credit generates boom-bust cycles only if it is expected to be reversed in the near future. Moreover, economies with higher access to credit are characterized by higher volatility of consumption and indebtedness but, not necessarily, of real GDP. |
| Keywords: | Boom-Bust Cycles, Credit Frictions, Housing Market |
| JEL: | E32 E52 E44 |
| Date: | 2010–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26128&r=cba |
| By: | Shu-Ling Chen; John D. Jackson; Hyeongwoo Kim; Pramesti Resiandini |
| Abstract: | This paper examines common forces driving the prices of 51 highly tradable commodities. We demonstrate that highly persistent movements of these prices are mostly due to the first common component, which is closely related to the US nominal exchange rate. In particular, our simple factor-based model outperforms the random walk model in out-of-sample forecast for the US exchange rate. The second common factor and de-factored idiosyncratic components are consistent with stationarity, implying short-lived deviations from the equilibrium price dynamics. In concert, these results provide an intriguing resolution to the apparent inconsistency arising from stable markets with nonstationary prices. |
| Keywords: | Commodity Prices, US Nominal Exchange Rate, PANIC, Cross-Section Dependence, Out-of-Sample Forecast |
| JEL: | C53 F31 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2010-05&r=cba |
| By: | Ragot, X. |
| Abstract: | The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption levels. This is a puzzle for theories which directly link money demand to consumption. This paper shows that the joint distribution of money and financial assets can be explained in an heterogeneous agent model where both a cash-in-advance constraint and financial adjustment costs, as in the Baumol-Tobin literature, are introduced. Studying each friction in turn, I find that the financial friction explains 85% of total money demand. Classification-JEL: E40, E50. |
| Keywords: | Money Demand, Money Distribution, Heterogeneous Agents. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:300&r=cba |
| By: | Pierdzioch, Christian; Schäfer, Dirk; Stadtmann, Georg |
| Abstract: | In diesem Beitrag wird analysiert, ob Wechselkursprognosen Anhaltspunkte dafür liefern, dass Prognostiker ein so genanntes Herdenverhalten zeigen. Auf der Basis unterschiedlicher theoretischer Modellansätze wird skizziert, warum Prognostiker einen Anreiz haben könnten, einem Herdentrieb zu folgen. In einer empirischen Untersuchung werden Prognosen für die Wechselkurse des Japanischen Yen, des Schweizer Franken, der Deutschen Mark und des Euros - gemessen jeweils gegenüber dem U.S.-Dollar - eingesetzt, um empirisch auf Herdenverhalten zu testen. Die Ergebnisse deuten darauf hin, dass nicht Herdenverhalten, sondern Anti-Herding vorzuherrschen scheint. Die Prognostiker scheinen daher im Hinblick auf ihre Prognosen 'Produktdifferenzierung' zu betreiben. -- We analyze whether exchange-rate forecasters herd. To this end, we lay out two widely studied theoretical models of forecaster herding. The models illustrate why forecasters may herd. We then empirically analyze whether forecasts of the Yen/Dollar, Swiss franc/Dollar, German mark/Dollar, and Euro/Dollar exchange rates provide evidence of herding. Our results do not yield evidence of herding. On the contrary, we find strong evidence of anti-herding. Anti-herding could indicate that forecasters adhere to a strategy of 'forecast differentation'. |
| Keywords: | Wechselkurse,Wechselkursprognosen,Herdenverhalten |
| JEL: | F31 D84 C33 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:euvwdp:287&r=cba |
| By: | Manuel Coutinho Pereira; Artur Silva Lopes |
| Abstract: | To investigate time heterogeneity in the e¤ects of fiscal policy in the U.S., we use a non-recursive, Blanchard and Perotti-like structural VAR with time-varying parameters, estimated through Bayesian simulation over the 1965:2-2009:2 period. Our evidence suggests that fiscal policy has lost some capacity to stimulate output but that this trend is more pronounced for taxes net of transfers than for government expenditure, whose e¤ectiveness<br>declines only slightly. Fiscal multipliers keep conventional signs throughout. An investigation of changes in ?scal policy conduct indicates an increase in the countercyclical activism of net taxes over time, which appears to have reached a maximum during the 2008-09 recession. |
| JEL: | C11 E32 E62 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201021&r=cba |
| By: | F. Gerard Adams (Department of Economics University of Pennsylvania (emeritus)); Byron Ganges (Department of Economics University of Hawaii at Manoa) |
| Abstract: | Recent dissatisfaction with the impact of expenditure stimulus on economic activity in the United States, along with the results of academic research, have once again raised questions about the effectiveness of fiscal stimulus policies and about whether stimulus to a recessionary economy should be in the form of tax cuts or expenditure increases. This paper considers alternative methods for evaluating the impacts of stimulus policy strategies. We discuss conceptual challenges involved in effectiveness measurement, and we review alternative empirical approaches applied in recent studies. We then present our own estimates of policy multipliers based on simulations of the IHS Global Insight model of the US economy. Based on this review and analysis, we address the question of why recent US stimulus programs have not been more effective. |
| Keywords: | United States (US) recession and recovery; fiscal and monetary policy; tax and expenditure multipliers; econometric model forecast simulation. |
| JEL: | E37 E62 E65 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:hae:wpaper:2010-10&r=cba |
| By: | Kazuo Ueda (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper offers a brief summary of non-traditional monetary policy measures adopted by the Bank of Japan (BOJ) during the last two decades, especially the period between 1998-2006, when the so-called Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) were put in place. The paper begins with a typology of policies usable at low interest and inflation rates. They are: strategy (i), management of expectations about future policy rates; strategy (ii), targeted asset purchases; and strategy (iii), QE. Alternatively, QE may be decomposed into a pure attempt to inflate the central bank balance sheet, QE0, purchases of assets in dysfunctional markets, QE1 and purchases of assets to generate portfolio rebalancing, QE2. Strategy (ii), when non-sterilized, is either QE1 or QE2. Using this typology, I review the measures adopted by the BOJ and discuss evidence on the effectiveness of the measures. The broad conclusion is that strategies (i) and (ii) have affected interest rates, while no clear evidence exists so far of the effectiveness of strategy (iii), or QE0. Strategy (ii) has been effective especially in containing risk/liquidity premiums in dysfunctional money markets; that is, QE1 has been effective. The effectiveness of QE2, however, is unclear. The strategies, however, have failed to bring the economy out of the deflation trap so far. I discuss some possible reasons for this and also implications for the current U.S. situation. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf235&r=cba |
| By: | Miguel de Carvalho (Ecole Polytechnique Federale de Lausanne, Institute of Mathematics); Paulo Julio (Gabinete de Estrategia e Estudos, Ministry of Economy, Innovation, and Development) |
| Abstract: | We use several popular tests to test the validity of the Purchasing Power Parity (PPP) hypothesis. In particular, we analyze four classes of tests { standard univariate unit root tests, co-integration, panel unit root tests and unit root tests for nonlinear frameworks {, for a dataset consisting of 20 bilateral exchange rates. Through this approach, we ascertain the eectiveness of each methodology in assessing the validity of PPP. Overall, our results suggest little evidence to support PPP. Among the conducted tests, the panel analysis of nonstationarity idiosyncratic and common components provides the richest insights by disentangling the possible sources of non-stationarity of real exchange rates. The relevance of using price indexes with dierent characteristics is also pinpointed. |
| Keywords: | PPP; Real exchange rate; Unit roots; Co-integration; Panel; Nonlinear models; Cross-sectional dependence |
| JEL: | F31 F41 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0024&r=cba |
| By: | Hernán Rincón; Jorge Toro |
| Abstract: | Capital controls and intervention in the foreign exchange market are two controversial policy options that many countries have adopted in the past in order to influence the exchange rate and moderate capital flows. Colombia has a long record in the use of these policies with mixed results and often non negligible costs. The objective of this paper is to evaluate for the case of Colombia the effectiveness of capital controls and central bank intervention for depreciating the exchange rate, reducing its volatility, and moderating the exchange rate vulnerability to external shocks. The paper uses high frequency data from 1993 to 2010, and a GARCH model of the peso/US dollar exchange rate return. The main findings indicate that neither capital controls nor central bank intervention used separately were successful for depreciating the exchange rate. On the contrary, they augmented its volatility. Nonetheless, when both policies were used simultaneously, a statistical significant effect was obtained by which the interaction of capital control and intervention in the foreign exchange market were effective to produce a daily average depreciation of the exchange rate, without increasing its volatility. This result however should be taken with caution given the special economic circumstances that characterized 2008, when most of this interaction happened. |
| Date: | 2010–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:007622&r=cba |
| By: | Marcelo Delajara |
| Abstract: | Using various statistical measures we estimate the degree of comovement and cyclical synchronization of formal employment across Mexican states. As a measure of formal employment we use the number of workers with permanent contracts registered at the Instituto Mexicano del Seguro Social in each state between July 1997 and April 2009. We find that Mexican states are highly heterogeneous with respect to the degree of employment comovement and the association between the state and national employment. Only in 11 of the 32 states we find that fluctuations in state employment are highly synchronized between them and with national employment. These states are located in the northern border with the United States, in the center west and in the center of the country. Additionally, we find evidence of employment comovement, albeit much weaker, in 4 states located in the vicinity of Mexico City. In the rest of the states, employment fluctuations are unrelated to national employment or other states' employment fluctuations. |
| Keywords: | Employment, cycles, comovement, states, regions, Mexico. |
| JEL: | E32 R11 R23 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2010-13&r=cba |
| By: | B. Dupoyet; H. R. Fiebig; D. P. Musgrove |
| Abstract: | We explore a simple lattice field model intended to describe statistical properties of high frequency financial markets. The model is relevant in the cross-disciplinary area of econophysics. Its signature feature is the emergence of a self-organized critical state. This implies scale invariance of the model, without tuning parameters. Prominent results of our simulation are time series of gains, prices, volatility, and gains frequency distributions, which all compare favorably to features of historical market data. Applying a standard GARCH(1,1) fit to the lattice model gives results that are almost indistinguishable from historical NASDAQ data. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1010.4831&r=cba |
| By: | L'OEILLET, Guillaume; LICHERON, Julien |
| Abstract: | Monetary policy is usually perceived as an important transmission channel in the negative relationship between oil prices and economic performance. It may also constitute a short-term explanation of the non-linearity in this relationship, since Central Bankers may be more sensitive to the potential inflationary threats entailed by high oil price increases than to small increases or decreases. In this paper, we use an extended Taylor rule to investigate the role of oil prices in the ECB monetary policy strategy. A contemporaneous reaction function is estimated using both a GMM framework and an Ordered Probit model, and several oil indicators are constructed and tested. The main results suggest that oil prices play a key role in the ECB interest-rate setting, since it appears as a relevant indicator of future inflation. However, the ECB seems to react asymmetrically: only oil price increases influence its decision setting, not oil prices decreases. Monetary policy may thus transmit and amplify the asymmetry in the relationship between oil prices and activity in the euro area. Further investigations suggest that a preference for price stability provides an important explanation of this asymmetric behaviour of the ECB. |
| Keywords: | Oil prices ; Monetary policy ; Taylor rule ; Asymmetry ; ECB. |
| JEL: | E0 E58 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26203&r=cba |
| By: | Klaus Regling; Servaas Deroose; Reinhard Felke; Paul Kutos (Asian Development Bank Institute) |
| Abstract: | The first decade of economic and monetary union in Europe (EMU) has been a huge success. EMU has significantly benefited its member countries and accelerated the European integration process. Imbalances within EMU—differences in growth, inflation, competitiveness, current account and budget balances—have, however, increased in the last 10 years and, with their economic implications, have become more evident in the global economic crisis. The euro has served as a shield during the crisis, and arguments that the crisis would lead to a breakup of the monetary union are neither new nor convincing. But there are lessons to be learned. Policies should be better coordinated among EMU members and structural reforms accelerated, the framework for the supervision of financial markets strengthened, and external representation streamlined. The crisis has also made the euro more attractive, and most EU countries that are not yet members of EMU are expected to join during the next decade. |
| Keywords: | Europe monetary union, economic integration, financial crisis, reform |
| JEL: | E6 F15 F3 F42 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:govern:2317&r=cba |
| By: | David Colander |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:1039&r=cba |
| By: | David Colander |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:1037&r=cba |
| By: | Nelson F. Souza Sobrinho |
| Abstract: | This paper offers additional insights on the relationship between interest rates and business cycles in Brazil. First, I document that Brazilian interest rates are very volatile, counter-cyclical and positively correlated with net exports, as observed in other emerging economies. Next, I present a dynamic general equilibrium model in which firms face working capital constraints and labor supply is independent of consumption. This parsimonious model, appropriately calibrated to the Brazilian economy, predicts that interest rate shocks can explain about one third of output fluctuations and generates business cycle regularities consistent with the Brazilian data. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:218&r=cba |
| By: | Carlos Capistrán; Gabriel López-Moctezuma |
| Abstract: | We analyze forecasts of inflation and GDP growth contained in Banco de México's Survey of Professional Forecasters for the period 1995-2009. The forecasts are for the current and the following year, comprising an unbalanced three-dimensional panel with multiple individual forecasters, target years, and forecast horizons. The fixed-event nature of the forecasts enables us to examine efficiency by looking at the revision process. The panel structure allows us to control for aggregate shocks and to construct a measure of the news that impacted expectations in the period under study. The results suggest that respondents seem to rely for longer than appears to be optimal on their previous forecasts, and that they do not seem to use past information in an efficient manner. In turn, this means there are areas of opportunity to improve the accuracy of the forecasts, for instance, by taking into account the positive autocorrelation found in forecast revisions. |
| Keywords: | Evaluating forecasts, Inflation forecasting, Macroeconomic forecasting, Panel data, Surveys. |
| JEL: | C23 C53 E37 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2010-11&r=cba |
| By: | Saten Kumar (Department of Business Economics, Auckland University of Technology); Don J. Webber (Department of Business Economics, Auckland University of Technology and Department of Economics, UWE, Bristol); Scott Fargher (Department of Business Economics, Auckland University of Technology) |
| Abstract: | This paper presents an empirical investigation into the level and stability of money demand (M1) in Nigeria between 1960 and 2008. In addition to estimating the canonical specification, alternative specifications are presented that include additional variables to proxy for the cost of holding money. Results suggest that the canonical specification is well-determined, the money demand relationship went through a regime shift in 1986 which slightly improved the scale economies of money demand, and money demand is stable. These findings imply that Nigeria could effectively use the supply of money as an instrument of monetary policy. |
| Keywords: | Money demand; Structural breaks; Cointegration; Monetary policy |
| JEL: | E41 C22 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:1015&r=cba |