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on Central Banking |
| By: | Davidson, James; Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School) |
| Abstract: | A Real Business Cycle model of the UK is developed to account for the behaviour of UK nonstationary macro data. The model is tested by the method of indirect inference, bootstrapping the errors to generate 95% confidence limits for a VECM representation of the data; we find the model can explain the behaviour of main variables (GDP, real exchange rate, real interest rate) but not that of detailed GDP components. We use the model to explain how `crisis' and `euphoria' are endemic in capitalist behaviour due to nonstationarity; and we draw some policy lessons. |
| Keywords: | Nonstationarity; Productivity; Real Business Cycle; Bootstrap; Indirect Inference; Banking Crisis; Banking Regulation |
| JEL: | E32 F32 F41 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2010/13&r=cba |
| By: | Candelon Bertrand; Dumitrescu Elena-Ivona; Hurlin Christophe (METEOR) |
| Abstract: | This paper proposes a new statistical framework originating from the traditional credit-scoring literature, to evaluate currency crises Early Warning Systems (EWS). Based on an assessment of the predictive power of panel logit and Markov frameworks, the panel logit model is outperforming the Markov switching specitcations. Furthermore, the introduction of forward-looking variables clearly improves the forecasting properties of the EWS. This improvement confirms the adequacy of the second generation crisis models in explaining the occurrence of crises. |
| Keywords: | macroeconomics ; |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2010046&r=cba |
| By: | Kerstin Bernoth; Burcu Erdogan |
| Abstract: | We study the determinants of sovereign bond yield spreads across 10 EMU countries between Q1/1999 and Q1/2010. We apply a semiparametric time-varying coefficient model to identify, to what extent an observed change in the yield spread is due to a shift in macroeconomic fundamentals or due to altering risk pricing. We find that at the beginning of EMU, the government debt level and the general investors' risk aversion had a significant impact on interest differentials. In the subsequent years, however, financial markets paid less attention to the fiscal position of a country and the safe haven status of Germany diminished in importance. By the end of 2006, two years before the fall of Lehman Brothers, financial markets began to grant Germany safe haven status again. One year later, when financial turmoil began, the market reaction to fiscal loosening increased considerably. The altering in risk pricing over time period confirms the need of time-varying coefficient models in this context. |
| Keywords: | sovereign bond spreads, fiscal policy, euro area, financial crisis, semiparametric time-varying coefficient model, nonparametric estimation |
| JEL: | C14 E43 E62 G12 H62 H63 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1078&r=cba |
| By: | Sarah Zubairy |
| Abstract: | This paper contributes to the debate on fiscal multipliers, in the context of a structural model. I estimate a micro-founded dynamic stochastic general equilibrium model, that features a rich fiscal policy block and a transmission mechanism for government spending shocks, using Bayesian techniques for US data. I find the multiplier for government spending to be 1.12, and the maximum impact is when the spending shock hits the economy. In addition, the estimated model predicts a positive but small response of private consumption to increased government spending. The multipliers for labor and capital tax on impact are 0.13 and 0.33, respectively. The effects of tax cuts, on the other hand, take time to build, and exceed the stimulative effects of higher spending at horizons of 12-20 quarters. The expansionary effects of tax cuts are primarily driven by the response of investment. I carry out several counterfactual exercises to show how alternative financing methods and expected monetary policy have consequences for the size of fiscal multipliers. I also simulate the impact of the American Recovery and Reinvestment Act of 2009 in the estimated model. |
| Keywords: | Fiscal policy; Economic models |
| JEL: | C11 E32 E62 H30 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-30&r=cba |
| By: | Hassan Molana; Catia Montagna; Chang Yee Kwan |
| Abstract: | In the theoretical macroeconomics literature, fiscal policy is almost uniformly taken to mean taxing and spending by a ‘benevolent government’ that exploits the potential aggregate demand externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd-out private consumption and hence typically reduce welfare. In this paper we consider the use of ‘tax-and-subsidise’ instead of ‘tax-and- spend’ policies on account of their widespread use by governments, even in the recent recession, to stimulate economic activity. Within a static general equilibrium macro-model with imperfectly competitive good markets we examine the effect of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximise welfare, rendering no intervention as a suboptimal state. We also show that, within a two-country setting, a Nash non-cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between trading partners in setting these rates is more expansionary and leads to an improvement upon the non-cooperative solution. |
| Keywords: | fiscal policy, international trade, monopolistic competition, Nash equilibrium, policy coordination, welfare |
| JEL: | E6 F1 H2 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:dun:dpaper:247&r=cba |
| By: | Ian Lienert |
| Abstract: | Fiscal Responsibility Laws (FRLs) appear to be more popular in middle-income countries than advanced countries, even though their success is limited. The reasons why few advanced countries have a FRL include: the existing legal framework for the budget system is adequate; supranational rules and political agreements in EU countries; failed attempts to include quantitative fiscal rules in laws; lack of consensus or interest in attaining the goals of FRL-type legislation; and lack of need for a law to regulate fiscal transparency, accountability and macro-fiscal stabilization. Without commitment to fiscal discipline, adoption of a FRL may not contribute to attaining fiscal consolidation goals. |
| Keywords: | Budgetary policy , Cross country analysis , Debt sustainability , Developed countries , Financial management , Fiscal policy , Fiscal stability , Fiscal transparency , Governance , Legislation , Public finance , Transparency , |
| Date: | 2010–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/254&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), managemen t 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. *Prepared for the policy panel at the 55th Economic Conference of the Federal Reserve Bank of Boston, "Revisiting Monetary Policy in a Low Inflation Environment," October 14-16, 2010. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2010cf775&r=cba |
| By: | Kazuo Ueda (Faculty of Economics, University of Tokyo,) |
| Abstract: | This paper compares the three recent episodes of boom and bust cycles in asset prices: Japan in the late 1980s to the 1990s; the U.S. since the mid 1990s; and China during the last decade. Although we have not yet seen a collapse of Chinese property prices, the increases so far are comparable to those in the other two episodes and seem to warrant a careful comparative study. I first examine the behavior of asset prices, especially, property prices in the three cases and point out some similarities. I then go on to discuss some backgrounds for the behavior of asset prices. I emphasize the role played by extremely easy monetary policy for generating bubble like asset price behaviors in the three cases. Monetary policy was shown to be easier than standard policy rules like the Taylor rule indicates. The reason for easy monetary policies is investigated. In the U.S. case the monetary authority was concerned over the risk of deflation in the early to mid 2000s. The experiences of Japan and China are quite similar in that the authorities of both countries were seriously concerned with possible deflationary effects of exchange rate appreciation on the economy. Japan let the exchange rate appreciate, while China has resisted a large scale intervention. It is shown, however, that the behavior of real exchange rates has not been that different. Implications of such a finding for the future of the Chinese economy are also discussed. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2010cf774&r=cba |
| By: | Thierry Tressel |
| Abstract: | The financial crisis has highlighted the importance of various channels of financial contagion across countries. This paper first presents stylized facts of international banking activities during the crisis. It then describes a simple model of financial contagion based on bank balance sheet identities and behavioral assumptions of deleveraging. Cascade effects can be triggered by bank losses or contractions of interbank lending activities. As a result of shocks on assets or on liabilities of banks, a global deleveraging of international banking activities can occur. Simple simulations are presented to illustrate the use of the model and the relative importance of contagion channels, relying on bank losses of advanced countries’ banking systems during the financial crisis to calibrate the shock. The outcome of the simulations is compared with the deleveraging observed during the crisis suggesting that leverage is a major determinant of financial contagion. |
| Keywords: | Banks , Cross country analysis , Economic models , External shocks , Global Financial Crisis 2008-2009 , Globalization , International banking , |
| Date: | 2010–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/236&r=cba |
| By: | Scott Davis |
| Abstract: | Recessions that are accompanied by financial crises tend to be more severe and are followed by slower recoveries than ordinary recessions. This paper introduces a new Keynesian model with financial frictions on both the demand and supply side of the credit markets that can explain this empirical finding. Following a shock that leads to a decline in economic activity, an adverse feedback loop arises where falling profits and asset values lead to increased defaults in the real sector, and these increased defaults lead to increased loan losses in the banking sector. Following this increase in loan losses, financial frictions in the banking sector imply that the banking sector itself may face difficulty obtaining funds. This disruption in the intermediation process leads to a further decline in output and asset prices in the real sector. In simulations of the model it is found that this feedback loop operating through the balance sheets of financial intermediaries can lead to as much as a 20 percent increase in business cycle volatility, and impulse response analysis shows that in the presence of financial frictions the path back to the steady state after a shock is much slower. |
| Keywords: | Business cycles - Econometric models ; Financial markets ; International finance ; Financial crises ; Recessions |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:66&r=cba |
| By: | Sascha S. Becker; Dieter Nautz |
| Abstract: | Monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and, thus, on the level of market integration. For less integrated markets, the inflation-price dispersion nexus is predicted to be asymmetrically V-shaped which results in an optimal inflation rate above zero. For highly integrated markets with low search costs, however, the impact of inflation on price dispersion should only be small. Using price data of the European Union member states, this paper is the first that tests and confirms these predictions of monetary search theory. |
| Keywords: | Inflation, Relative price variability, Monetary search, Market integration |
| JEL: | C23 D40 E31 F40 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-058&r=cba |
| By: | Raphael Auer; Kathrin Degen; Andreas M. Fischer |
| Abstract: | What is the impact of import competition from other low-wage countries (LWCs) on inflationary pressure in Western Europe? This paper seeks to understand whether labor-intensive exports from emerging Europe, Asia, and other global regions have a uniform impact on producer prices in Germany, France, Italy, Sweden, and the United Kingdom. In a panel covering 110 (4-digit) NACE industries from 1995 to 2008, IV estimates predict that LWC import competition is associated with strong price effects. More specifically, when Chinese exporters capture 1 percent of European market share, producer prices decrease about 2 percent. In contrast, no effect is present for import competition from low-wage countries in Central and Eastern Europe. |
| Keywords: | International trade - Econometric models ; Labor market ; Inflation (Finance) - Euro area ; Globalization |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:65&r=cba |
| By: | Gadi Barlevy; Jonas D. M. Fisher |
| Abstract: | We describe a rational expectations model in which speculative bubbles in house prices can emerge. Within this model both speculators and their lenders use interest-only mortgages (IOs) rather than traditional mortgages when there is a bubble. Absent a bubble, there is no tendency for IOs to be used. These insights are used to assess the extent to which house prices in US cities were driven by speculative bubbles over the period 2000-2008. We find that IOs were used sparingly in cities where elastic housing supply precludes speculation from arising. In cities with inelastic supply, where speculation is possible, there was heavy use of IOs, but only in cities that had boom-bust cycles. Peak IO usage predicts rapid appreciations that cannot be explained by standard correlates and this variable is more robustly correlated with rapid appreciations than other mortgage characteristics, including sub-prime, securitization and leverage. Where IOs were popular, their use does not appear to have been a response to houses becoming more expensive. Indeed, their use anticipated future appreciation. Finally, consistent with the reason why lenders prefer IOs, these mortgages are more likely to be repaid earlier or foreclose. Combined with our model, this evidence suggests that speculative bubbles were an important factor driving prices in cities with boom-bust cycles.> |
| Keywords: | Mortgage loans ; Mortgage-backed securities ; Housing - Prices |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2010-12&r=cba |
| By: | Gary Koop (University of Strathclyde; The Rimini Centre for Economic Analysis (RCEA)) |
| Abstract: | This paper is motivated by the recent interest in the use of Bayesian VARs for forecasting, even in cases where the number of dependent variables is large. In such cases, factor methods have been traditionally used but recent work using a particular prior suggests that Bayesian VAR methods can forecast better. In this paper, we consider a range of alternative priors which have been used with small VARs, discuss the issues which arise when they are used with medium and large VARs and examine their forecast performance using a US macroeconomic data set containing 168 variables. We ?nd that Bayesian VARs do tend to forecast better than factor methods and provide an extensive comparison of the strengths and weaknesses of various approaches. Our empirical results show the importance of using forecast metrics which use the entire predictive density, instead of using only point forecasts. |
| Keywords: | Bayesian, Minnesota prior, stochastic search variable selection, predictive likelihood |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:43_10&r=cba |
| By: | Pierpaolo Benigno; Paolo Surico; Luca Antonio Ricci |
| Abstract: | We propose a theory of low-frequency movements in unemployment based on asymmetric real wage rigidities. The theory generates two main predictions: long-run unemployment increases with (i) a fall in long-run productivity growth and (ii) a rise in the variance of productivity growth. Evidence based on U.S. time series and on an international panel strongly supports these predictions. The empirical specifications featuring the variance of productivity growth can account for two U.S. episodes which a linear model based only on long-run productivity growth cannot fully explain. These are the decline in long-run unemployment over the 1980s and its rise during the late 2000s. |
| Keywords: | Business cycles , Economic models , Labor markets , Productivity , Time series , Unemployment , United States , Wage adjustments , Wages , |
| Date: | 2010–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/259&r=cba |
| By: | Natal, Jean-Marc (Swiss National Bank) |
| Abstract: | How should monetary authorities react to an oil price shock? The New Keynesian literature has concluded that ensuring perfect price stability is optimal. Yet, the contrast between theory and practice is striking: Inflation targeting central banks typically favor a longer run approach to price stability. The first contribution of this paper is to show that because oil cost shares vary with oil prices, policies that perfectly stabilize prices entail large welfare costs, which explains the reluctance of policymakers to enforce them. The policy trade-off faced by monetary authorities is meaningful because oil (energy) is an input to both production and consumption. Welfare-based optimal policies rely on unobservables, which makes them hard to implement and communicate. The second contribution of this paper is thus to analytically derive a simple interest rate rule that mimics the optimal plan in all dimensions but that only depends on observables: core inflation and the growth rates of output and oil prices. It turns out that optimal policy is hard on core inflation but cushions the economy against the real consequences of an oil price shock by reacting strongly to output growth and negatively to oil price changes. Following a Taylor rule or perfectly stabilizing prices during an oil price shock are very costly alternatives. |
| Keywords: | optimal monetary policy; oil shocks; divine coincidence; simple rules |
| JEL: | E32 E52 E58 |
| Date: | 2010–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2010_015&r=cba |
| By: | Trung T Bui; Tamim Bayoumi |
| Abstract: | The 2008 crisis underscored the interconnectedness of the international business cycle, with U.S. shocks leading to the largest global slowdown since the 1930s. We estimate spillover effects across major advanced country regions in a structural VAR (SVAR) using pre-crisis data. Our new method freely estimates the contemporaneous correlation matrix for underlying shocks in the VAR and (uniquely, to our knowledge) the associated uncertainty. Our results suggest that the international business cycle is largely driven by U.S. financial shocks with a significant impact from global shocks, mainly reflecting commodity prices. Other advanced economic regions play a much smaller and regional role in growth spillovers. Our findings are consistent with the emerging evidence on the current crisis |
| Keywords: | Business cycles , Developed countries , Economic growth , Economic models , International financial system , Spillovers , United States , |
| Date: | 2010–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/239&r=cba |
| By: | Chiara Forlati (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland); Luisa Lambertini (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland) |
| Abstract: | This paper develops a DSGE model with housing, risky mortgages and endogenous default. Housing investment is subject to idiosyncratic risk and some mortgages are defaulted in equilibrium. An unanticipated increase in the standard deviation of housing investment produces a credit crunch where delinquencies and mortgage interest rates increase, lending is curtailed, and aggregate demand for non-durable goods falls. The economy experiences a recession as a consequence of the credit crunch. The paper compares economies that differ only in the riskiness of housing investment. Economies with lower risk are characterized by lower steady-state mortgage default rates and higher loan-to-value and leverage ratios. The macroeconomic effects of an unanticipated increase in housing investment risk are amplified in high-leverage economies. Monetary policy plays an important role in the transmission of housing investment risk, as inertial interest rate rules generate deeper output contractions. |
| Keywords: | Housing, Mortgage default, Mortgage Risk |
| JEL: | E32 E44 R31 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cif:wpaper:201002&r=cba |
| By: | Caitlin Ann Greatrex (Iona College, Department of Economics); Erick W. Rengifo (Fordham University, Department of Economics) |
| Abstract: | This paper adds to the literature on the financial markets’ reaction to government interventions during the 2007-2009 financial crisis by analyzing the response of US firms’ credit default swap spreads to key government actions. We find that the government measures taken to stabilize both the financial sector and the overall economy were generally well-received by CDS market participants, reducing perceived credit risk across a broad cross-section of firms. Financial firms responded most favorably to financial sector policies and interest rate cuts, with announcement date abnormal CDS spread changes of -5 and -2 percent, respectively. Non-financial firms responded most favorably to conventional fiscal and monetary policy tools with spread reductions of approximately one percent upon announcement of these measures. In a cross-sectional regression analysis, we find that size, recent performance, profitability, and stock returns are key factors in explaining the financial sectors response to government actions. |
| JEL: | G14 G18 G28 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2010-12&r=cba |
| By: | Scott Hendry; Alison Madeley |
| Abstract: | This paper uses Latent Semantic Analysis to extract information from Bank of Canada communication statements and investigates what type of information affects returns and volatility in short-term as well as long-term interest rate markets over the 2002-2008 period. Discussions about geopolitical risk and other external shocks, major domestic shocks (SARS and BSE), the balance of risks to the economic projection, and various forward looking statements are found to significantly affect market returns and volatility, especially for short-term markets. This effect is over and above that from the information contained in any policy interest rate surprise. |
| Keywords: | Financial markets; Monetary policy implementation |
| JEL: | G14 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-31&r=cba |
| By: | Matthew Greenwood-Nimmo (Leeds University Business School); Yongcheol Shin (Leeds University Business School) |
| Abstract: | The existing empirical literature on Taylor-type interest rate rules has failed to achieve a robust consensus. Indeed, the relatively common finding that the Taylor principle does not hold has fueled a degree of controversy in the field. We attribute these mixed estimation results to a raft of empirical issues from which many existing studies suffer, including bias, inconsistency, endogeneity and a failure to adequately account for the combination of persistent and stationary variables. We propose a new method of combining I(0) and I(1) series in a system setting based on the long-run structural approach of Garratt, Lee, Pesaran and Shin (2006). The application of this method to a long sample of US data provides modest support for the operation of a Taylor-type rule, albeit with considerable inertia. We argue that estimation across rolling windows may better reflect shifts in the underlying preferences of the monetary policymakers at the Federal Reserve. Such rolling estimation provides substantial evidence that the inflation and output preferences of the Fed have varied through time, presumably reflecting the prevailing economic and political conditions, its chairmanship, and the composition of the Federal Open Market Committee. Our most significant finding is that the Taylor Principle was robustly upheld under Volcker, often upheld pre-Volcker but rarely observed post-Volcker over any horizon. |
| Keywords: | System Estimation with Mixed I(0) and I(1) Variables, Long-Run Structural Modelling, Rolling Estimation, Taylor Rule |
| JEL: | C13 C51 E58 N10 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:16-2010&r=cba |
| By: | Shu-Chun S. Yang; Nora Traum |
| Abstract: | A New Keynesian model allowing for an active monetary and passive fiscal policy (AMPF) regime and a passive monetary and active fiscal policy (PMAF) regime is fit to various U.S. samples from 1955 to 2007. Data in the pre-Volcker periods strongly prefer an AMPF regime, but the estimation is not very informative about whether the inflation coefficient in the interest rate rule exceeds one in pre-Volcker samples. Also, whether a government spending increase yields positive consumption in a PMAF regime depends on price stickiness. An income tax cut can yield a negative labor response if monetary policy aggressively stabilizes output. |
| Keywords: | Data analysis , Economic models , Fiscal policy , Monetary policy , United States , |
| Date: | 2010–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/243&r=cba |
| By: | Conrad, Christian; Karanasos, Menelaos |
| Abstract: | This paper employs an augmented version of the UECCC GARCH specification proposed in Conrad and Karanasos (2010) which allows for lagged in-mean effects, level effects as well as asymmetries in the conditional variances. In this unified framework we examine the twelve potential intertemporal relationships between inflation, growth and their respective uncertainties using US data. We find that high inflation is detrimental to output growth both directly and indirectly via the nominal uncertainty. Output growth boosts inflation but mainly indirectly through a reduction in real uncertainty. Our findings highlight that macroeconomic performance affects nominal and real uncertainty in many ways and that the bidirectional relation between inflation and growth works to a large extend indirectly via the uncertainty channel. |
| Keywords: | Bivariate GARCH process; volatility feedback; inflation uncertainty; output variability |
| JEL: | E31 C51 C32 |
| Date: | 2010–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0507&r=cba |
| By: | Andreas Steiner (Universitaet Osnabrueck) |
| Abstract: | Central banks’ international reserves have increased significantly in the recent past. While this accumulation has been widely perceived as precautionary savings to prevent financial crises, rising reserves might also endanger monetary and financial stability. This paper sheds new light on the implications for financial stability and assesses the consequences for monetary policy on theoretical and empirical grounds. Our estimation results show that the accumulation of reserves raises the inflation rate, both on the global and the individual-country level. |
| Keywords: | International Reserves, Inflation, Panel Data Analysis |
| JEL: | E31 E58 F31 C23 |
| Date: | 2010–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:iee:wpaper:wp0084&r=cba |
| By: | Andreas Steiner (Universitaet Osnabrueck) |
| Abstract: | Foreign exchange holdings by central banks have increased significantly in the recent past. This article explains this development as a result of the liberalization of international capital markets. First, central banks accumulate reserves in order to protect the economy from potentially detrimental effects of sudden stops of capital flows and flow reversals. Second, central banks use the accumulation of reserves as a substitute for capital controls. Changes in the level of reserves are a form to manage net capital inflows. They permit the central bank to preserve some leeway for an independent monetary and financial policy despite the classic policy trilemma. The empirical analysis of a large panel data set supports the hypothesis that the accumulation of reserves is the consequence of a “fear of capital mobility” suffered by central banks. |
| Keywords: | International Reserves, Capital Mobility, Macroeconomic Trilemma |
| JEL: | E58 F31 |
| Date: | 2010–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:iee:wpaper:wp0085&r=cba |
| By: | Mohamed El Hedi Arouri (LEO, University of Orleans and EDHEC Business School Rue de Blois - BP 6739, 45067 Orléans Cedex 2, France); Fredj Jawadi (Amiens School of Management and EconomiX-CNRS 18, place Saint Michel, 80000 Amiens cedex, France); Khuong Nguyen Duc (Professor of Finance, ISC Paris School of Management 22 Boulevard du Fort de Vaux, 75848 Paris cedex 17, France) |
| Abstract: | In this paper we examine the dynamic linkages of international monetary markets over the 2004 - 2009 period using daily short-term interbank interest rates of three of the most advanced countries (France, United Kingdom and United States). Empirical results from vector error-correction models (VECM) and smooth transition error-correction models (STECM) indicate strong evidence of nonlinear and heterogeneous causalities between the three interest rates considered. We also find that exogenous shifts in the US short-term interest rate led those in France and in the UK within a horizon of one to two days. Finally, the national interest rate nexus appears to nonlinearly converge towards a steady state or a common long-run equilibrium because it is subject to structural change beyond a certain interest rate threshold. Our findings have important implications for the actions of leading central banks (ECB, Bank of England, and US Fed) since the behavior of short-term interest rates can be viewed as an indicator of the degree of central banks’ policy interdependence. |
| Keywords: | international monetary market relationships, short-term interest rates, VECMs and STECMs |
| JEL: | B22 C52 E63 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:1410&r=cba |
| By: | Romain Ranciere; Aaron Tornell; Athanasios Vamvakidis |
| Abstract: | This paper constructs a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers. This measure explicitly takes into account the indirect exchange rate risk that banks undertake when they lend to borrowers that will not be able to repay in the event of a sharp depreciation. Such systemic risk taking is not captured by indicators that are based only on banks’ balance sheet data. The new measure is constructed for 10 emerging European economies and for a broader sample that includes 19 additional emerging economies, for the period 1998 - 2008. Comparisons with previous currency mismatch measures that do not adjust for unhedged foreign currency borrowing illustrate the advantages of the new approach. In particular, the new measure flagged the indirect currency mismatch vulnerabilities that were building up in a number of emerging economies before the recent global crisis. Measuring currency mismatch more accurately can help country authorities in their efforts to address vulnerabilities at the right time, avoiding hurting growth prospects. |
| Keywords: | Banking sector , Cross country analysis , Currencies , Economic models , Emerging markets , Europe , External borrowing , Financial crisis , Fiscal risk , Loans , Sovereign debt , Time series , |
| Date: | 2010–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/263&r=cba |
| By: | Deokwoo Nam; Jian Wang |
| Abstract: | In this paper, we find that expected (news) and unexpected (contemporaneous) components of productivity changes have opposite effects on the U.S. real exchange rate. Following Barsky and Sims' (2010) identification method, we decompose US total factor productivity (TFP) into news and contemporaneous productivity changes. The US real exchange rate appreciates following a favorable news shock to TFP, while it depreciates in response to a positive contemporaneous shock. In addition, the identified news TFP shocks play a much more important role than the identified contemporaneous TFP shocks in driving the US real exchange rate. These findings provide empirical guidance to important international macroeconomic issues, such as the international transmission of productivity shocks and the modeling of exchange rate volatility. |
| Keywords: | Business cycles ; Foreign exchange rates ; Productivity |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:64&r=cba |
| By: | Marco Guerrazzi |
| Abstract: | In this paper, I explore the out-of-equilibrium macro-economic dynamic behaviour of the Farmer’s (2010d) ME-NA model. Specifically, preserving the assumption that microeconomic adjustments are instantaneous, I build a dynamic model in continuous time that describes the macro-economic adjustments of the value of output and the interest rate. Within this framework, I show that the model economy has a unique stationary solution whose dynamics is locally stable. Moreover, simulating the model economy under the baseline calibration, I show that the adjustments towards the steady-state equilibrium occur through endogenous convergent oscillations while the most promising way out from a finance-induced recession combines a fiscal expansion with interventions aimed at altering the trade-off between holding risky and safe assets. |
| Keywords: | Old Keynesian Economics, ME-NA Schedules, Short-Run Macroeconomic Fluctuations. |
| JEL: | E12 E32 E62 |
| Date: | 2010–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2010/106&r=cba |
| By: | Andrés Alvarez; Vincent Bignon |
| Abstract: | This paper shows that modern monetary theory can be better understood through the differences between Menger and Walras. Since the 1980s attempts to establish coherent microfoundations for monetary exchange have brought Menger's theory of the origin of money to the forefront and sent walrasian methods to the backstage. However, during the first decade of the XXIth century models inspired on mengerian monetary theory, mainly represented by the search monetary approach, are trying to reintroduce neowalrasian elements. This paper aims at clarifying the main theoretical implications of this movement, through an analysis of the Menger‐Walras divide on money. This divide allows us to show new proof of the deep theoretical differences among the so‐called marginalist authors and of the richness of this historical period as a source for modern economics. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2010-25&r=cba |