|
on Central Banking |
| By: | Charles Goodhart |
| Abstract: | Although Central Banks have pursued the same objectives throughout their existence, primarily price and financial stability, the interpretation of their role in doing so has varied. We identify three stable epochs, when such interpretations had stabilised, ie 1. The Victorian era, 1840s to 1914; 2. The decades of government control, 1930s to 1960s; 3. The triumph of the markets, 1980s to 2007. Each epoch was followed by a confused inter-regnum, searching for a new consensual blueprint. The final such epoch concluded with a crisis, when it became apparent that macro-economic stability, the Great Moderation, plus (efficient) markets could not guarantee financial stability. So the search is now on for additional macro-prudential (counter-cyclical) instruments. The use of such instruments will need to be associated with controlled variations in systemic liquidity, and in the balance sheet of the Central Bank. Such control over its own balance sheet is the core, central function of any Central Bank, even more so than its role in setting short-term interest rates, which latter could be delegated. We end by surveying how relationships between Central Banks and governments may change over the next period. |
| Keywords: | central banks, financial stability, financial regulation, bank taxes |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:326&r=cba |
| By: | John Vickers |
| Abstract: | The establishment of independent authorities for monetary policy and for competition policy was part of the institutional consensus of the Great Moderation. The paper contrasts how policy has operated in the two spheres, especially as regards the role of law. It then discusses the application of competition policy to banks before and during the crisis, and relationships between competition and financial stability. Finally, the paper considers whether the financial crisis - which has led, at least temporarily, to unorthodox and less independent monetary and competition policies - has undermined the long-term case for independence. The conclusion is that it has not. While regulation of the financial system clearly requires fundamental reform, sound money and markets free from threats to competition remain fundamental to long-run prosperity; those ends are best pursued by focused and independent monetary and competition policies. |
| Keywords: | central bank independence, monetary policy, competition law, merger policy, financial stability, banks |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:331&r=cba |
| By: | Jan Willem van den End |
| Abstract: | This paper presents a macro stress-testing model for liquidity risks of banks, incorporating the proposed Basel III liquidity regulation, unconventional monetary policy and credit supply effects. First and second round (feedback) effects of shocks are simulated by a Monte Carlo approach. Banks react according to the Basel III standards, endogenising liquidity risk. The model shows how banks’ reactions interact with extended refinancing operations and asset purchases by the central bank. The results indicate that Basel III limits liquidity tail risk, in particular if it leads to a higher quality of liquid asset holdings. The flip side of increased bond holdings is that monetary policy conducted through asset purchases gets more influence on banks relative to refinancing operations. |
| Keywords: | banking; financial stability; stress-tests; liquidity risk |
| JEL: | C15 E44 G21 G32 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:269&r=cba |
| By: | Michael D. Bordo; John S. Landon-Lane |
| Abstract: | This paper compares the recent global crisis and recession to earlier international financial crises and recessions. Based on existing chronologies of banking, currency and debt crises we identify clusters of crises. We use an identification of extreme events and a weighting scheme based on real GDP relative to the U.S. to identify global financial crises since 1880. For banking crises we identify five global ones since 1880: 1890-91, 1907-08, 1913-14, 1931-32, 2007-2008. In terms of global incidence the recent crisis is fourth in ranking and comparable to 1907-08. We also calculate output losses during the recessions associated with global financial crises and again the recent crisis is similar in severity to 1907-08 and is fourth in ranking. On both dimensions the recent crisis is a pale shadow of the Great depression. The relatively mild experience of the recent crisis may reflect institutional and policy learning. |
| JEL: | E30 N20 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16589&r=cba |
| By: | Ross Levine |
| Abstract: | There was a systemic failure of financial regulation: senior policymakers repeatedly enacted and implemented policies that destabilised the global financial system. They maintained these policies even as they learned of the consequences of their policies during the decade before the crisis. The crisis does not primarily reflect an absence of regulatory power, unclear lines of regulatory authority, capital account imbalances, or a lack of information by regulators. Rather, it represents the unwillingness of the policy apparatus to adapt to a dynamic, innovating financial system. A new institution is proposed to improve the design, implementation and modification of financial regulations. |
| Keywords: | financial institutions, regulation, policy, financial crisis |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:329&r=cba |
| By: | Harold James |
| Abstract: | The paper examines the exercise, the efficiency, and the legitimacy of the monetary policy-making process. The goal of central bank autonomy in recent times is the outcome of a demand for price stability. The realisation of autonomy is also a consequence of the fragmentation of national decision making, in federal systems but also in regional and international monetary arrangements. Economic and financial crisis changes the political economy, and produces a transition from seeing the central bank as producing a general or universalisable good (price stability) to interpreting monetary policy as fundamentally a tool for redistributive or factional policies. The latter will only work in the framework of national policy. |
| Keywords: | central bank independence, central bank governance, monetary policy financial crisis |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:327&r=cba |
| By: | Richhild Moessner; William A Allen |
| Abstract: | We compare the banking crises in 2008-09 and in the Great Depression, and analyse differences in the policy response to the two crises in light of the prevailing international monetary systems. The scale of the 2008-09 banking crisis, as measured by falls in international short-term indebtedness and total bank deposits, was smaller than that of 1931. However, central bank liquidity provision was larger in 2008-09 than in 1931, when it had been constrained in many countries by the gold standard. Liquidity shortages destroyed the international monetary system in 1931. By contrast, central bank liquidity could be, and was, provided much more freely in the flexible exchange rate environment of 2008-9. The amount of liquidity provided was 5 ½ - 7 ½ times as much as in 1931. This forestalled a general loss of confidence in the banking system. Drawing on historical experience, central banks, led by the Federal Reserve, established swap facilities quickly and flexibly to provide international liquidity, in some cases setting no upper limit to the amount that could be borrowed. |
| Keywords: | banking crisis, international monetary system, Great Depression, central bank liquidity |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:333&r=cba |
| By: | V. V. Chari; Patrick J. Kehoe |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:506439000000000084&r=cba |
| By: | Marta Bańbura (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Domenico Giannone (Université libre de Bruxelles, ECARES, Avenue Roosevelt CP 114 Brussels, Belgium and CEPR.); Lucrezia Reichlin (London Business School and CEPR.) |
| Abstract: | We define nowcasting as the prediction of the present, the very near future and the very recent past. Crucial in this process is to use timely monthly information in order to nowcast key economic variables, such as e.g. GDP, that are typically collected at low frequency and published with long delays. Until recently, nowcasting had received very little attention by the academic literature, although it was routinely conducted in policy institutions either through a judgemental process or on the basis of simple models. We argue that the nowcasting process goes beyond the simple production of an early estimate as it essentially requires the assessment of the impact of new data on the subsequent forecast revisions for the target variable. We design a statistical model which produces a sequence of nowcasts in relation to the real time releases of various economic data. The methodology allows to process a large amount of information, as it is traditionally done by practitioners using judgement, but it does it in a fully automatic way. In particular, it provides an explicit link between the news in consecutive data releases and the resulting forecast revisions. To illustrate our ideas, we study the nowcast of euro area GDP in the fourth quarter of 2008. JEL Classification: E52, C53, C33. |
| Keywords: | Nowcasting, News, Factor Model, Forecasting. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101275&r=cba |
| By: | Anthony Garratt; James Mitchell; Shaun P. Vahey; Elizabeth C. Wakerly |
| Abstract: | We examine the effectiveness of recursive-weight and equal-weight combination strategies for forecasting using many time-varying models of the relationship be- tween inflation and the output gap. The forecast densities for inflation reflect the uncertainty across models using many statistical measures of the output gap, and allow for time-variation in the ensemble Phillips curves. Using real-time data for the US, Australia, New Zealand and Norway, we find that the recursive-weight strategy performs well, consistently giving well-calibrated forecast densities. The equal-weight strategy generates poorly-calibrated forecast densities for the US and Australian samples. There is little difference between the two strategies for our New Zealand and Norwegian data. We also find that the ensemble modelling approach performs more consistently with real-time data than with revised data in all four countries. |
| JEL: | C32 C53 E37 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2010-34&r=cba |
| By: | Alessio De Vincenzo (Banca d'Italia); Maria Alessandra Freni (Banca d'Italia); Andrea Generale (Banca d'Italia); Sergio Nicoletti Altimari (Banca d'Italia); Mario Quagliariello (Banca d'Italia) |
| Abstract: | The financial crisis that began in 2007 has revealed a need for a new supervisory and regulatory approach aimed at strengthening the system and containing the risk of future financial and economic disruptions. Three ingredients are needed to ensure financial stability: robust analysis, better regulation, and international cooperation. First, financial stability analysis must be improved to take full account of the different sources of systemic risk. Data coverage of the balance sheets of both non-bank financial institutions and the non-financial sectors should be increased. Moreover, to address the problems raised by the interconnections among financial institutions more granular and timely information on their exposures is needed. There must be further integration of macro- and micro-information and an upgrading of financial stability models. The second ingredient is the design of robust regulatory measures. Under the auspices of the G20 and the Financial Stability Board, the Basel Committee on Banking Supervision recently put forward substantial proposals on capital and liquidity. They will result in more robust capital base, lower leverage, less cyclical capital rules and better control of liquidity risk. Finally, the third ingredient is strong international cooperation. Ensuring more effective exchanges of information among supervisors in different jurisdictions and successful common actions is key in preserving financial integration, while avoiding negative cross-border spill-overs. Better resolution regimes are part of the efforts to ensure that the crisis of one institution does not impair the ability of the financial markets to provide essential services to the economy. |
| Keywords: | financial crisis, international cooperation, macroprudential analysis, procyclicality, prudential regulation, stress tests |
| JEL: | G18 G28 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_76_10&r=cba |
| By: | Giuseppe Ferrero (Bank of Italy, Economics and International Relations); Alessandro Secchi (Bank of Italy, Economics and International Relations) |
| Abstract: | We study the impact of the publication of central banks’ macroeconomic projections on the dynamic properties of an economy where (i) private agents have incomplete information and form their expectations using recursive learning algorithms; (ii) the short-term nominal interest rate is set as a linear function of the deviations of inflation and real output from their target level; and (iii) the central bank, ignoring the exact mechanism used by private agents to form expectations, assumes that it can be reasonably approximated by perfect rationality and releases macroeconomic projections consistent with this assumption. The set of macroeconomic projections released by the central bank crucially affects the results in terms of stability of the equilibrium and speed of convergence of the learning process. In particular, while the publication of inflation and output gap projections enlarges the set of interest rate rules associated with stable equilibria and helps agents to learn faster, the announcement of the interest rate path exerts the opposite effect. In the latter case, in order to stabilize expectations and to speed up the learning process the response of the policy instrument to inflation should be stronger than when there is no announcement. |
| Keywords: | Monetary policy, Transparency, Interest rates, Learning, Speed of convergence |
| JEL: | E58 E52 E43 D83 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_782_10&r=cba |
| By: | Leonardo Morales-Arias; Guilherme V. Moura |
| Abstract: | This article proposes a multivariate model of inflation with conditionally heteroskedastic common and country-specific components. The model is estimated in one-step via Quasi-Maximum Likelihood for the G7 countries for the period Q1-1960 to Q4-2009. It is found that various model specifications considered fit well the first and second order dynamics of inflation in the G7. The estimated volatility of the common inflation component captures the international effects of the ‘Great Moderation’ and of the ‘Great Recession’. The model also shows promising capabilities for forecasting inflation in several countries |
| Keywords: | Global inflation, conditional heteroskedasticity, inflation forecasting |
| JEL: | E31 E37 F41 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1666&r=cba |
| By: | Roman Horvath; Jakub Mateju |
| Abstract: | This paper aims to contribute to a better understanding on how inflation targets are set. For this reason, we first gather evidence from official central bank and government publications and from a questionnaire sent to central banks on how inflation targets are set; we then estimate the determinants of the level of inflation target in 19 inflation targeting countries using unbalanced panel interval regressions (to deal with the issue that targets are typically set as a range rather than as a point). Inflation targets are found to reflect macroeconomic fundamentals. Higher level as well as higher variability of inflation are associated with higher target. The setting of the inflation target is also found to have an important international dimension, as higher world inflation is positively correlated with inflation targets. Rapidly growing countries exhibit higher inflation targets. Our results also suggest that the larger width of inflation target is set in a more volatile macroeconomic environment. We find that central bank credibility is negatively associated with the level of inflation target, suggesting that less credible central banks are likely to recognize the risks related to anchoring inflation expectations at low levels. On the other hand, government party orientation does not matter even in less independent central banks. |
| Keywords: | inflation targeting; central bank; inflation; credibility; independence; |
| JEL: | E31 E42 E52 E58 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp426&r=cba |
| By: | Luca Fanelli (luca.fanelli@unibo.it) |
| Abstract: | This paper proposes a testing strategy for the null hypothesis that a multivariate linear rational expectations (LRE) model has a unique stable solution (determinacy) against the alternative of multiple stable solutions (indeterminacy). Under a proper set of identification restrictions, determinacy is investigated by a misspecification-type approach in which the result of the overidentifying restrictions test obtained from the estimation of the LRE model through a version of generalized method of moments is combined with the result of a likelihood-based test for the cross-equation restrictions that the LRE places on its finite order reduced form under determinacy. This approach (i) circumvents the nonstandard inferential problem that a purely likelihood-based approach implies because of the presence of nuisance parameters that appear under the alternative but not under the null, (ii) does not involve inequality parametric restrictions and nonstandard asymptotic distributions, and (iii) gives rise to a joint test which is consistent against indeterminacy almost everywhere in the space of nuisance parameters, i.e. except for a point of zero measure which gives rise to minimum state variable solutions, and is also consistent against the dynamic misspecification of the LRE model. Monte Carlo simulations show that the testing strategy delivers reasonable size coverage and power in finite samples. An empirical illustration focuses on the determinacy/indeterminacy of a New Keynesian monetary business cycle model for the US. |
| Keywords: | Determinatezza, Indeterminatezza, Massima verosimiglianza, Metodo generalizzato dei momenti, Modello lineare con aspettative, Identificazione, Variabili Strumentali, VAR,VARMA Determinacy, Generalized method of moments, Indeterminacy, LRE model, Identification, Instrumental Variables, Maximum Likelihood, VAR, VARMA |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bot:quadip:100&r=cba |
| By: | J. Stephen Ferris (Department of Economics, Carleton University) |
| Date: | 2010–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:10-10&r=cba |
| By: | Nguyen, Quoc Hung |
| Abstract: | This paper explores the idea that fear of floating can be justified as an optimal discretionary monetary policy in a dollarized emerging economy. Specifically, I consider a small open economy in which intermediate goods importers borrow in foreign currency and face a credit constraint. In this economy, exchange rate depreciation not only worsens importers' net-worth but also increases the financing amount in domestic currency, therefore exaggerating their borrowing finance premium. Besides, because of high exchange rate pass-through into import prices, fluctuations in the exchange rate also have strong impacts on domestic prices and production. These effects, together, magnify the macroeconomic consequences of the floating exchange rate policy in response to external shocks. The paper shows that the floating exchange rate regime is dominated by the fixed exchange rate regime in the role of cushioning shocks and in welfare terms. |
| Keywords: | Developing countries, Foreign exchange, Exchange control, Liability Dollarization, Fear of Floating, Imported Goods |
| JEL: | F31 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper247&r=cba |
| By: | Lena Dräger (University of Hamburg, Deutchland, and KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | Building on the models of sticky information, we endogenize the probability of obtaining new information by introducing a switching mechanism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and time-varying. While central results of sticky information models are retained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for the determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to inflation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule. |
| Keywords: | Endogenous sticky information, heterogeneous expectations, DSGE models |
| JEL: | E31 E52 E61 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:10-260&r=cba |
| By: | Etienne Farvaque (Faculty of Economic and Social Sciences, University of Lille I); Norimichi Matsueda (School of Economics, Kwansei Gakuin University) |
| Abstract: | External shocks, be they political or economic, can pose a significant threat to the sustainability of a monetary union. This paper focuses on the openness of a monetary union, and examines how the degrees and characteristics of the sensitivities of its member nations towards external shocks affect the sustainability of the commitment which each of its members made when joining the union. Furthermore, we discuss the sustainability of the prospective monetary union among the Gulf Cooperation Council countries in the light of obtained insights. |
| Keywords: | Monetary Union, Optimum Currency Areas, External Shocks, Gulf Cooperation Council |
| JEL: | E58 E61 F33 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:66&r=cba |
| By: | Sirchenko, Andrei |
| Abstract: | This paper provides empirical evidence in favor of prompter and more detailed release of Monetary Policy Council's voting records, not published by National Bank of Poland before subsequent MPC meeting. The study shows that voting records, if they were available, could improve predictability of upcoming policy decisions. They reveal strong and robust predictive content as a supplementary factor after controlling for MPC policy bias and responses to inflation, real activity, exchange rates and financial market information. The voting patterns contain information not embedded in the market expectations of future policy, as revealed by the spreads and moves in the market interest rates, and even explicit forecasts of the next policy decision, made by market analysts in Reuters surveys before each policymaking meeting. Moreover, the direction of dissent explains the direction of private sector forecast bias. These findings are based on real-time data and voting patterns only, without knowledge of policymakers' names attached to each vote |
| Keywords: | monetary policy, interest rate, predictability, voting, real-time data |
| Date: | 2010–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:1672194&r=cba |
| By: | Michael Hudson |
| Abstract: | The Federal Reserve's quantitative easing is presented as injecting $600 billion into "the economy." But instead of getting banks lending to Americans again—households and firms—the money is going abroad, through arbitrage interest-rate speculation, currency speculation, and capital flight. No wonder foreign economies are protesting, as their currencies are being pushed up. |
| Keywords: | Exchange Rates; Asset-price Inflation; Monetary Policy |
| JEL: | E50 E58 F34 F42 G12 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_639&r=cba |
| By: | Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Gernot J. Muller (University of Bonn, Department of Economics - Bonn Universität - University of Bonn) |
| Abstract: | In this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. In a first step, we identify government spending shocks within a vector autoregression model. We find that i) government spending increases output and induces a simultaneous decline of investment and the current account, but does not affect consumption; ii) the responses of output and investment are smaller in more open economies, while current account deficits tend to be larger. We find the predictions of the model to be broadly in line with the evidence, once we allow for habit formation in consumption. Specifically, habits are crucial for government spending to induce a simultaneous decline in investment and the current account. |
| Keywords: | Investment; Current Account; Habit Formation; Fiscal Policy. |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00544484_v1&r=cba |
| By: | Peter Stella |
| Abstract: | The response of leading central banks to the current financial crisis has raised the magnitude of the financial and governance risks they face. An evaluation of the financial strength of a number of those banks suggests that they are in little danger of being forced by financial losses to alter their policies. Governance risks cannot be dismissed so lightly. In engaging extensively in unorthodox policies - bearing similarities to fiscal policy - a number of central banks have risked a critical examination of their governance structures and thereby potentially jeopardised their monetary policy independence. In order to forestall this risk to monetary policy, it is argued that unconventional policies be placed under a separate governance structure that would allow them to be brought under greater political control and accountability while preserving the operational independence of monetary policy. |
| Keywords: | monetary policy, central banking |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:330&r=cba |
| By: | António Afonso (European Central Bank, Directorate General Economics, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Manuel M.F. Martins (University of Porto, Faculty of Economics, Cef.up – Centre for Economics and Finance at the University of Porto, Rua Dr Roberto Frias, s/n 4200 464 Porto Portugal.) |
| Abstract: | We study fiscal behaviour and the sovereign yield curve in the U.S. and Germany in the period 1981:I-2009:IV. The latent factors, level, slope and curvature, obtained with the Kalman filter, are used in a VAR with macro and fiscal variables, controlling for financial stress conditions. In the U.S., fiscal shocks have generated (i) an immediate response of the short-end of the yield curve, associated with the monetary policy reaction, lasting between 6 and 8 quarters, and (ii) an immediate response of the longend of the yield curve, lasting 3 years, with an implied elasticity of about 80% for the government debt ratio shock and about 48% for the budget balance shock. In Germany, fiscal shocks entail no significant reactions of the latent factors and no response of the monetary policy interest rate. In particular, while (i) budget balance shocks created no response from the yield curve shape, (ii) surprise increases in the debt ratio caused some increase in the short-end and the long-end of the yield curve in the following 2nd and 3rd quarters. JEL Classification: E43, E44, E62, G15, H60. |
| Keywords: | yield curve, fiscal policy, financial markets. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101276&r=cba |
| By: | Margaret Bray |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:205&r=cba |
| By: | James Jordan |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:234&r=cba |
| By: | D. Fudenberg; C. Harris |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:496&r=cba |
| By: | Hu, Xue; Whang, Yu-Jung; Zhang, Qiaoxi |
| Abstract: | In the classic Arrow-Debreu model, the existence of money is not accommodated. However, using trading post market segmentation and requiring budget balance in each pair-wise transaction the model can converge to monetary equilibrium. Uniqueness of the common medium of exchange (commodity money) follows from scale economy in transaction costs. Also, this paper shows that existence and convergence to monetary equilibrium are totally different concept. In Full Double Coincidence of Wants situation, where previous market information helps households judging which good has highest saleableness, convergence takes place more easily than in Absence of Double Coincidence of Wants situation. This paper investigates the emergence of commodity money as the result of a tatonnement adjustment in a trading post economy. The convergence process models Menger‟s concept of saleableness – the most liquid good becomes the common medium of exchange. A computational approach is adopted to illustrate the monetary convergence as a result of decentralized adjustment process by utility maximizing households in the economy. Starting from an arbitrary initial economy, the analysis constructs a mapping from a compact economy space to monetary equilibrium or non-monetary equilibrium. By varying the transaction costs parameters and the household endowments, the paper successfully identifies the regions of parameter space where convergence to monetary equilibrium occurs as a result of decentralized adjustment process. The reasons for non-convergence are also investigated. |
| Keywords: | trading post |
| Date: | 2010–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:1679757&r=cba |
| By: | D. Canning |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:490&r=cba |
| By: | Ed Hopkins |
| Date: | 2010–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:506439000000000346&r=cba |
| By: | Sandy Grossman |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:230&r=cba |
| By: | Gianluca Cubadda (Faculty of Economics, University of Rome "Tor Vergata"); Barbara Guardabascio (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | This paper considers methods for forecasting macroeconomic time series in a framework where the number of predictors, N, is too large to apply traditional regression models but not su¢ciently large to resort to statistical inference based on double asymptotics. Our interest is motivated by a body of empirical research suggesting that popular data-rich prediction methods perform best when N ranges from 20 to 50. In order to accomplish our goal, we examine the conditions under which partial least squares and principal component regression provide consistent estimates of a stable autoregressive distributed lag model as only the number of observations, T, diverges. We show both by simulations and empirical applications that the proposed methods compare well to models that are widely used in macroeconomic forecasting. |
| Keywords: | Partial least squares; principal component regression; dynamic factor models; data-rich forecasting methods; dimension-reduction techniques. |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:176&r=cba |
| By: | Drew Fudenberg; David Kreps |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:415&r=cba |
| By: | F. Forges |
| Date: | 2010–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:516&r=cba |
| By: | M. Rabin |
| Date: | 2010–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:539&r=cba |
| By: | James Bullard; John Duffy |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:550&r=cba |
| By: | Nancy Stokey |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:1393&r=cba |
| By: | K. Narendra; M. Thatcher |
| Date: | 2010–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:481&r=cba |
| By: | J. Jordan |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:573&r=cba |
| By: | V. Crawford; J. Sobel |
| Date: | 2010–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:544&r=cba |
| By: | L. W. McKenzie |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:1388&r=cba |
| By: | Antonio Cabrales; Olivier Gossner; Roberto Serrano |
| Date: | 2010–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:661465000000000355&r=cba |
| By: | K. Miyasawa |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:419&r=cba |
| By: | Albert Marcet; Tom Sargent |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:240&r=cba |
| By: | T.H. Chung |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:564&r=cba |
| By: | Michele Piccione; Ariel Rubinstein |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:506439000000000108&r=cba |
| By: | Michael Graff (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | From a theoretical perspective, the output gap is probably the most comprehensive and convincing concept to describe the cyclical position of an economy. Unfortunately, for practical purposes, the concept depends on the determination of potential output, which is an inherently unobservable variable. In this paper, we examine whether the real-time estimates of the output gap as published by the OECD can be improved by referring to measures of physical capital capacity utilisation from business tendency surveys. These data relate directly to the stress on the current capacity to produce goods and services and are not revised. Our real-time panel data set comprises 22 countries at an annual frequency with data vintages from 1995 to 2009. We show that the real-time output gaps are informationally inefficient in the sense that survey data available in real time can help produce estimates that are significantly closer to later releases of output gap estimates. |
| Keywords: | Output gap, capacity utilization, real-time analysis, survey data |
| JEL: | D24 E32 E37 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:10-269&r=cba |
| By: | James Forder |
| Abstract: | Samuelson and Solow published a widely read paper in the May issue of the American Economic Review of 1960. It discussed the causes of inflation, the Phillips curve, and related matters. Discussion of their paper frequently says that it presented the Phillips curve as a stable, exploitable relation, and hence played an important role in the development of inflationary policy. This is hardly so. Sometimes authors notice this, but they nevertheless say it was misread as advocating inflationary policy and hence played the same role in policy development. Close attention to what was said about it in the relevant period – the 1960s – reveals that it was not then seen as advocating inflationary policy at all. This raises a strange puzzle as to why it was that, rather suddenly, it came to be incorrectly said that Samuelson and Solow had been interpreted as being inflationist when they neither were that, nor had been interpreted in that way. |
| JEL: | B22 B23 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:516&r=cba |
| By: | Véronique Genre (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Geoff Kenny (European Central Bank, DG Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Aidan Meyler (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Allan Timmermann (Rady School of Management and Department of Economics, University of California, San Diego, USA.) |
| Abstract: | In this paper, we explore the potential gains from alternative combinations of the surveyed forecasts in the ECB Survey of Professional Forecasters. Our analysis encompasses a variety of methods including statistical combinations based on principal components analysis and trimmed means, performance-based weighting, least squares estimates of optimal weights as well as Bayesian shrinkage. We provide a pseudo real–time out-of-sample performance evaluation of these alternative combinations and check the sensitivity of the results to possible data-snooping bias. The latter robustness check is also informed using a novel real time meta selection procedure which is not subject to the data-snooping critique. For GDP growth and the unemployment rate, only few of the forecast combination schemes are able to outperform the simple equal-weighted average forecast. Conversely, for the inflation rate there is stronger evidence that more refined combinations can lead to improvement over this benchmark. In particular, for this variable, the relative improvement appears significant even controlling for data snooping bias. JEL Classification: C22, C53. |
| Keywords: | forecast combination, forecast evaluation, data snooping, real-time data, Survey of Professional Forecasters. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101277&r=cba |
| By: | Chia-Lin Chang; Philip Hans Franses; Michael McAleer (University of Canterbury) |
| Abstract: | Macroeconomic forecasts are often based on the interaction between econometric models and experts. A forecast that is based only on an econometric model is replicable and may be unbiased, whereas a forecast that is not based only on an econometric model, but also incorporates an expert’s touch, is non-replicable and is typically biased. In this paper we propose a methodology to analyze the qualities of combined non-replicable forecasts. One part of the methodology seeks to retrieve a replicable component from the non-replicable forecasts, and compares this component against the actual data. A second part modifies the estimation routine due to the assumption that the difference between a replicable and a non-replicable forecast involves a measurement error. An empirical example to forecast economic fundamentals for Taiwan shows the relevance of the methodological approach. |
| Keywords: | Combined forecasts; efficient estimation; generated regressors; replicable forecasts; non-replicable forecasts; expert’s intuition |
| JEL: | C53 C22 E27 E37 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:10/74&r=cba |
| By: | Chia-Lin Chang (Department of Applied Economics, Department of Finance, National Chung Hsing University); Philip Hans Franses (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam); Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University) |
| Abstract: | Macroeconomic forecasts are often based on the interaction between econometric models and experts. A forecast that is based only on an econometric model is replicable and may be unbiased, whereas a forecast that is not based only on an econometric model, but also incorporates an expert’s touch, is non-replicable and is typically biased. In this paper we propose a methodology to analyze the qualities of combined non-replicable forecasts. One part of the methodology seeks to retrieve a replicable component from the non-replicable forecasts, and compares this component against the actual data. A second part modifies the estimation routine due to the assumption that the difference between a replicable and a non-replicable forecast involves a measurement error. An empirical example to forecast economic fundamentals for Taiwan shows the relevance of the methodological approach. |
| Keywords: | Combined forecasts, efficient estimation, generated regressors, replicable forecasts, non-replicable forecasts, expert’s intuition. |
| JEL: | C53 C22 E27 E37 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:744&r=cba |
| By: | Hideyuki Takamizawa |
| Abstract: | This paper attempts to predict the volatility of interest rates through dynamic term structure models. For this attempt, the models are improved, based on the three-factor Gaussian model, to have level-dependent volatilities supported by data. The empirical results show that the predictive power of the proposed models is higher than that of the affine models. Compared with time-series models, it is low for the four-week forecasting horizon but can be comparable for middle to long term rates by extending the horizon up to 32 weeks. The combination of these two different types of forecasts can lead to higher predictive power. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:tsu:tewpjp:2010-008&r=cba |
| By: | Barry Eichengreen; Marc Flandreau |
| Abstract: | This paper provides new evidence on the rise of the dollar as an international currency, focusing on its role in the conduct of trade and the provision of trade credit. We show that the shift to the dollar occurred much earlier than conventionally supposed: during and immediately after World War I. Not just market forces but also policy support - the Fed in its role as market maker - was important for the dollar's overtaking of sterling as the leading international currency. On balance, this experience challenges the popular notion of international currency status as being determined mainly by market size. It suggests that the popular image of strongly increasing returns and pervasive network externalities leaving room for only one monetary technology is misleading. |
| Keywords: | foreign exchange reserves, network externalities, path dependency, money markets |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:328&r=cba |
| By: | Yusho Kagraoka (Musashi University - Musashi University); Zakaria Moussa (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | A key issue in current research about quantitative easing monetary policy (QEMP) is the ability of this strategy to impact the term structure of interest rates. Using a dynamic model for the yield curve with time-varying-parameters to the Japanese data, we provide three insights. First, the expectations hypothesis of the term structure of interest rates is generally supported even during the QEMP period. Second, the estimation results reveal that the contribution of macroeconomic variables on the variation of the yield curve is relatively small, especially during the QEMP period. As for the feed-back effect, the yield curve factors contribute only marginally to inflation variation. However, they account for more relevant part of output gap dynamics. Third, the monetary policy shock has a significant effect on yield curve level factor only during the high interest rates periods. However, the decline in the level factor during the QEMP period, while insignificant, indicates a strengthening credibility of the Bank of Japan and thus the effectiveness of its policy. |
| Keywords: | Quantitative Easing Policy; Macro-finance model; Time-varying-parameter VAR; Japan; Expectation channel |
| Date: | 2010–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00543010_v1&r=cba |
| By: | Lucotte, Yannick |
| Abstract: | Over the last decade, a growing number of emerging countries has adopted inflation targeting as monetary policy framework. In a recent paper, Freedman and Laxton (2009) ask the question “Why Inflation Targeting?”. This paper empirically investigates this question by analyzing a large set of institutional and political factors potentially associated with a country’s choice of adopting IT. Using panel data on a sample of thirty inflation targeting and non-inflation emerging countries, for the period 1980-2006, our results suggest that central bank independence, policy-makers’ incentives, and characteristics of political system play an important role in the choice of IT, while the level of financial development and political stability do not seem to matter. Empirical findings are confirmed by extensive robustness tests. |
| Keywords: | Inflation targeting; central bank independence; financial development; political institutions; emerging countries |
| JEL: | E58 E52 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27118&r=cba |
| By: | Emanuel Kohlscheen |
| Abstract: | This note shows that the unbiasedness and the weak rationality hypotheses are not rejected for the inflation forecasts surveyed by the Central Bank when the forecast horizon is one month. However, as in other countries, a clear pattern of auto-correlation of forecast errors is found. Furthermore, increases (decreases) in inflation are systematically associated with underestimations (overestimations) of inflation in the following month. This is true for both, the full sample of forecasters and the sample that is restricted to the 5 institutions with best forecasting performance, suggesting that models in which past realizations of inflation have greater weight in the formation of average expectations are more accurate than the assumption of rational expectations. Models aimed at explaining how expectations are formed should be able to explain these stylized facts as well as the hysteresis of forecasts. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:227&r=cba |
| By: | Hiroyuki Taguchi; Chizuru Kato (Policy Research Institute) |
| Abstract: | This paper aims at assessing the performance of the inflation targeting framework from the quantitative perspective of the money and inflation relationship, focusing on the four East Asian economies, i.e. Korea, Indonesia, Thailand and the Philippines, who adopted the inflation targeting framework soon after the 1997-98 Asian currency crisis. Our estimation results told us that the inflation targeting framework in the sample economies, except for the Philippines, has functioned well as an anchor to curb inflation, in the sense that the framework speeds up price adjustment against money supply compared with their previous regime of pegged exchange rates. We interpret the speeding-up of price adjustment under inflation targeting framework in such a way that the framework may have been able to curb inflation through stabilizing inflationary expectations. We also found that the well-functioning inflation targeting framework was consistent with another estimation outcome: that of enhanced monetary autonomy under the post-crisis floating exchange rate regime. |
| Keywords: | inflation targeting framework, East Asian emerging market economy, money-inflation relationship, co-integration test, error correction estimation |
| JEL: | E52 F33 C23 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2421&r=cba |
| By: | Konstantins Benkovskis; Ludmila Fadejeva; Krista Kalnberzina |
| Abstract: | The question of price stickiness remains one of the most important in macroeconomics, as price flexibility partly determines how long it takes for inflation and real economic variables to return to their potential levels after a shock. To get a better understanding of price change frequency and size, the empirical work on price stickiness based on microdata from surveys on prices of individual products from individual outlets is needed. The main goal of this study is to provide descriptive evidence on the degree of nominal rigidity of consumer prices in Latvia at aggregate and disaggregate levels. To achieve this goal, we use the micro database on consumer prices provided by the CSB. The main finding of the paper is that during 2003–2009 Latvia's consumer prices were flexible. The average duration of a price spell was 3.5 months, and every month on average 28.7% of consumer prices were changed. |
| Keywords: | price setting behaviour, Latvia's consumer prices, frequency of price change, duration, size of price change, sales, time-dependent pricing, state-dependent pricing |
| JEL: | D40 E31 |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:dpaper:201001&r=cba |
| By: | Basher, Syed Abul; Elsamadisy, Elsayed Mousa |
| Abstract: | Applying nonstationary panel data econometric methods, this paper analyzes the major sources and transmission of inflation in the Gulf Cooperation Council (GCC) countries over the 1980-2008 period. We argue that, in GCC countries, money is essentially demand determined, so that the high collinearity between money and aggregate demand indicators such as non-hydrocarbon output is expected and should be dealt with accordingly. Several important results emerge from the analysis. First, the money supply stands out as a significant determinant of inflation both in short- and long-run. Both foreign prices and the nominal effective exchange rate are shown to be more successful in explaining inflation in the long-run than the short-run. The half-life of the speed of adjustment reveals that it takes about 2.9 years for 50% of a shock to the long-run equilibrium to dissipate. An implication of our results is the case it makes for more sovereign monetary policies in GCC countries. |
| Keywords: | Inflation; Monetary policy; Fiscal policy; Exchange rates; Oil price; Panel data. |
| JEL: | C32 E31 H30 E50 C33 |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27348&r=cba |
| By: | Durevall, Dick (Department of Economics, School of Business, Economics and Law, Göteborg University); Loening, Josef L. (World Bank); Birru, Yohannes A. (National Bank of Ethiopia) |
| Abstract: | During the global food crisis, Ethiopia experienced an unprecedented increase in inflation, among the highest in Africa. Using monthly data over the past decade, we estimate models of inflation to identify the importance of the factors contributing to CPI inflation and three of its major components: cereal prices, food prices, and non-food prices. Our main finding is that movements in international food and goods prices, measured in domestic currency, determined the long-run evolution of domestic prices. In the short run, agricultural supply shocks affected food inflation, causing large deviations from long-run price trends. Monetary policy seems to have accommodated price shocks, but money supply growth affected short-run non-food price inflation. Our results suggest that when analyzing inflation in developing economies with a large food share in consumer prices, world food prices and domestic agricultural production should be considered. Omitting these factors can lead to biased results and misguide policy decisions.<p> |
| Keywords: | Ethiopia; Exchange rate; Food prices; Inflation; Money demand |
| JEL: | E31 E37 O55 Q17 |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0478&r=cba |
| By: | Wasim Shahid Malik; Ahsan ul HaqSatti; Ghulam Saghir (Pakistan Institute of Development Economics) |
| Abstract: | Since the introduction of rational expectations in the literature, most of the research focus in the area of macroeconomics has been investigating micro foundations of macroeconomic theory and transmission channels of policy. In 1990s, macroeconomists started working on macro models incorporating the assumption of nominal rigidity with explicit modeling of optimal behaviour of individuals and firms. More recently, these models gained empirical support by looking at both aggregate as well as at firm-level data. In this regard, limited studies are available that focus on developing countries. For Pakistan, there has been little focus on micro level studies in the field of macro or monetary economics, so our study attempts to fill this gap. Besides capturing price setting behaviour, the potential effects of changes in financial cost on the overall pricing and production decisions have also been investigated. It is important to note that this study is different from others throughout carried in different countries in the sense that instead of sending questionnaires by mail, data are collected by enumerators and field supervisors. It was found that Pakistani firms perceive to be in competitive environment they operate in. Most of the clients of the firms are regular and firms’ relationship with the customers is long-term. The large majority of firms use current information when reviewing prices. Around 70 percent of firms use either a state-dependent pricing rule or combination of both time-dependent and state-dependent rules. Pakistani firms revise and change their prices usually in the months of June and July. Moreover, costs of raw materials, cost of energy and inflation are the main determinants of price increase while the competitors’ price, raw materials costs and demand changes are responsible for price decrease. When it comes to the main causes of price stickiness, implicit contract with the customers is at the top, while explicit fixed term contract of prices on the second. Further it was observed that most of the firms change their wages once in a year. About half of the firms index their workers’ wages with inflation and past inflation rate is usually used for the purpose. Labour productivity and changes in inflation rate are found to be the main causes of wage change. |
| Keywords: | Price Setting Behaviour, Effectiveness of Monetary Policy, Wage and Price Contracts |
| JEL: | E24 E31 E52 E61 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2412&r=cba |