nep-cba New Economics Papers
on Central Banking
Issue of 2011‒01‒03
fifty-four papers chosen by
Alexander Mihailov
University of Reading

  1. Money and inflation: some critical issues By Bennett T. McCallum; Edward Nelson
  2. Eductive stability in real business cycle models By Georges W. Evans; Roger Guesnerie; Bruce McGough
  3. Real-time Forecasting of Inflation and Output Growth in the Presence of Data Revisions By Clements, Michael P.; Galvão, Ana Beatriz
  4. Why are survey forecasts superior to model forecasts? By Clements, Michael P.
  5. Optimal monetary policy in a model of money and credit By Pedro Gomis-Porqueras; Daniel R. Sanches
  6. Policy Rules Under the Monetary and the Fiscal Theories of the Price-Level By Jagjit S. Chadha
  7. The Financial Crisis: What have macroeconomists learnt? By Jagjit S. Chadha
  8. Introduction to the macroeconomic dynamics: special issues on money, credit, and liquidity By Ed Nosal; Christopher Waller; Randall Wright
  9. Summer workshop on money, banking, payments and finance: an overview By Ed Nosal; Randall Wright
  10. Monetary Policy Considerations after the Crisis: Practitioners’ Perspectives By Subir Gokarn
  11. Central bank liquidity operations during the financial market and economic crisis: observations, thoughts and questions By Pikkarainen, Pentti
  12. What Caused the Global Financial Crisis - Evidence on the Drivers of Financial Imbalances 1999 - 2007 By Erlend Nier; Ouarda Merrouche
  13. To be or not to be in monetary union: A synthesis By Clerc, L.; Dellas, H.; Loisel, O.
  14. The Domestic and International Effects of Interstate U.S. Banking By Fabio Ghironi; Viktors Stebunovs
  15. Fitting observed inflation expectations By Marco Del Negro; Stefano Eusepi
  16. Semi-Structural Models for Inflation Forecasting By Maral Kichian; Fabio Rumler; Paul Corrigan
  17. U.S. Monetary Shocks and Global Stock Prices By Luc Laeven; Hui Tong
  18. Firm entry, competitive pressures and the US inflation dynamics By Martina Cecioni
  19. ‘Lean’ versus ‘Rich’ Data Sets: Forecasting during the Great Moderation and the Great Recession By Marco J. Lombardi; Philipp Maier
  20. Monetary Policy and Excessive Bank Risk Taking By Itai Agur; Maria Demertzis
  21. How Does Monetary Policy Change? Evidence on Inflation Targeting Countries By Jaromir Baxa; Roman Horvath; Borek Vasicek
  22. Some evidence on the importance of sticky wages By Alessandro Barattieri; Susanto Basu; Peter Gottschalk
  23. Monetary Policy, Leverage, and Bank Risk-Taking By Luc Laeven; Giovanni Dell'Ariccia; Robert Marquez
  24. Inattentive professional forecasters By Andrade, P.; Le Bihan, H.
  25. Financial intermediaries, leverage ratios, and business cycles By Mimir, Yasin
  26. ECB Policy Making and the Financial Crisis By Janko Gorter; Fauve Stolwijk; Jan Jacobs; Jakob de Haan
  27. Financial Integration and the Construction of Historical Financial Data for the Euro Area By Heather M. Anderson; Mardi Dungey; Denise R Osborn; Farshid Vahid
  28. U.S. intervention and the early dollar float: 1973-1981 By Michael D Bordo; Owen F Humpage; Anna J Schwartz
  29. The Impact of Liquidity on Bank Profitability By Étienne Bordeleau; Christopher Graham
  30. The Norges Bank’s key rate projections and the news element of monetary policy: a wavelet based jump detection approach By Lars Winkelmann
  31. The Propagation of U.S. Shocks to Canada: Understanding the Role of Real-Financial Linkages By Kimberly Beaton; René Lalonde; Stephen Snudden
  32. The dynamic effects of U.S. monetary policy on state unemployment By Korobilis, Dimitris; Gilmartin, Michelle
  33. When and Why Worry About Real Exchange Rate Appreciation? The Missing Link between Dutch Disease and Growth By Sebastian Sosa; Nicolas E Magud
  34. Non-Stationary Interest Rate Differentials and the Role of Monetary Policy By Matros, Philipp; Weber, Enzo
  35. Political Economy of the Financial Crises in Japan & the United States: A Comparative Study on the Bailout of Financial Institutions By Hirofumi Takinami
  36. Is Monetary Policy in New Members States Asymmetric? By Borek Vasicek
  37. The effect of openness in a small open monetary union By Orjasniemi, Seppo
  38. Sign switching behavior of cross-county interest rate correlations: Theory and Evidence By Dong-Hyun Ahn; In Seok Baek; A. Ronald Gallant
  39. The Role of the State in Managing and Forestalling Systemic Financial Crises By Adams, Charles
  40. Commodity money with frequent search By Ezra Oberfield; Nicholas Trachter
  41. Stress testing banks' profitability: the case of French banks By Coffinet, J.; Lin, S.
  42. Information, evolution and utility By Larry Samuelson; Jeroen Swinkels
  43. Letting the anchor go: Monetary policy in neutral Norway during World War I By Monica Værholm; Lars Fredrik Øksendal
  44. Reforming China's Monetary Policy Framework to Meet Domestic Objectives By Paul Conway; Richard Herd; Thomas Chalaux
  45. Inflation Targeting and Pass-through Rate in East Asian Economies By Hiroyuki Taguchi; Woong-Ki Sohn
  46. Inflationary memory as restrictive factor of the impact of the public expense in the economic growth: lessons from high inflation Latin American countries using an innovative inflationary memory indicator By Ernesto Sheriff
  47. Nowcasting Spanish GDP growth in real time: "One and a half months earlier" By David de Antonio Liedo; Elena Fernández Muñoz
  48. Weathering the Global Storm: The Benefits of Monetary Policy Reform in the LA5 Countries By Luis Ignacio Jácome; Ali Alichi; Ivan Luis de Oliveira Lima; Jorge Iván Canales Kriljenko
  49. Prices and the Real Exchange Rate in Hong Kong: 1985-2006. By Paulina Etxeberria-Garaigort; Amaia Iza
  50. Exchange Rate Market Expectations and Central Bank Policy: The case of the Mexican Peso-US Dollar from 2005-2009 By Gustavo Abarca; José Gonzalo Rangel; Guillermo Benavides
  51. Asset Prices and Financial Frictions in Monetary Transmission: The Case of Latvia By Kristine Vitola; Ludmila Fadejeva
  52. Price Setting and Price Adjustment in Some European Union Countries: Introduction to the Special Issue By Levy, Daniel; Smets, Frank
  53. Un Análisis de Comportamiento a Nivel de Agente de la Encuesta de Expectativas de Inflación del BCU By Borraz, Fernando; Gianelli, Diego
  54. The Transmission Mechanism in Armenia: New Evidence from a Regime Switching VAR Analysis By Anke Weber; Anna R Bordon

  1. By: Bennett T. McCallum; Edward Nelson
    Abstract: We consider what, if any, relationship there is between monetary aggregates and inflation, and whether there is any substantial reason for modifying the current mainstream mode of policy analysis, which frequently does not consider monetary aggregates at all. We begin by considering the body of thought known as the "quantity theory of money." The quantity theory centers on the prediction that there will be a long-run proportionate reaction of the price level to an exogenous increase in the nominal money stock. The nominal homogeneity conditions that deliver the quantity-theory result are the same as those that deliver monetary neutrality, an important principle behind policy formulation. The quantity theory implies a ceteris paribus unitary relationship between inflation and money growth. Simulations of a New Keynesian model suggest that we should expect this relationship to be apparent in time series data, with no heavy averaging or filtering required, but with allowance needed for the phase shift in the relationship between monetary growth rates and inflation. While financial innovation can obscure the relationship between monetary growth and inflation, evidence of a money growth/inflation relationship does emerge from U.S. time series and G7 panel data. Various considerations suggest that studies of inflation and monetary policy behavior can benefit from including both interest rates and money in the empirical analysis.
    Date: 2010
  2. By: Georges W. Evans; Roger Guesnerie; Bruce McGough
    Abstract: We re-examine issues of coordination in the standard RBC model. Can the unique rational expectations equilibrium be "educed" by rational agents who contemplate the possibility of small deviations from equilibrium? Surprisingly, we find that coordination along this line cannot be expected. Rational agents anticipating small but possibly persistent deviations have to face the existence of retroactions that necessarily invalidate any initial tentative "common knowledge" of the future. This "impossibility" theorem for eductive learning is not fully overcome when adaptive learning is incorporated into the framework.
    Date: 2010
  3. By: Clements, Michael P. (University of Warwick); Galvão, Ana Beatriz (Queen Mary University of London)
    Abstract: We show how to improve the accuracy of real-time forecasts from models that include au-toregressive terms by estimating the models on ‘lightly-revised’data instead of using data from the latest-available vintage. Forecast accuracy is improved by reorganizing the data vintages employed in the estimation of the model in such a way that the vintages used in estimation are of a similar maturity to the data in the forecast loss function. The size of the expected reductions in mean squared error depend on the characteristics of the data revision process. Empirically, we …nd RMSFE gains of 2-4% when forecasting output growth and in‡ation with AR models, and gains of the order of 8% with ADL models.
    Keywords: real-time data ; news and noise revisions ; optimal forecasts ; multi-vintage models. JEL Classification: C53
    Date: 2010
  4. By: Clements, Michael P. (University of Warwick)
    Abstract: We investigate two characteristics of survey forecasts that are shown to contribute to their superiority over purely model-based forecasts. These are that the consensus forecasts incorporate the effects of perceived changes in the long-run outlook, as well as embodying departures from the path toward the long-run expectation. Both characteristics on average tend to enhance forecast accuracy. At the level of the individual forecasts, there is scant evidence that the second characteristic enhances forecast accuracy, and the average accuracy of the individualforecasts can be improved by applying a mechanical correction. Keywords: consensus forecast, model-based forecasts, long-run expectations.
    Keywords: consensus forecast ; model-based forecasts ; long-run expectations JEL Classification: C53 ; E37
    Date: 2010
  5. By: Pedro Gomis-Porqueras; Daniel R. Sanches
    Abstract: The authors study optimal monetary policy in a model in which fiat money and private debt coexist as a means of payment. The credit system is endogenous and allows buyers to relax their cash constraints. However, it is costly for agents to publicly report their trades, which is necessary for the enforcement of private liabilities. If it is too costly for the government to obtain information regarding private transactions, then it relies on the public information generated by the private credit system. If not all private transactions are publicly reported, the government has imperfect public information to implement monetary policy. In this case, the authors show that there is no incentive-feasible policy that can implement the socially efficient allocation. Finally, they characterize the optimal policy for an economy with a low record-keeping cost and a large number of public transactions, which results in a positive long-run inflation rate.
    Keywords: Monetary policy ; Disclosure of information
    Date: 2010
  6. By: Jagjit S. Chadha
    Abstract: Price-level determination requires co-ordination of monetary and fiscal policy to ensure a unique rational expectations equilibrium (REE). This paper derives a number of implications for simple interest rate rules resulting from various fiscal strategies. We show that fiscal choices under either the monetary theory of the price-level (MTPL) and the fiscal theory of the price-level (FTPL) can challenge widely accepted principles of monetary policy. Specifically, we show that a fiscal rule that responds aggressively to output and inflation may force the monetary authorities to adopt significantly more aggressive output and inflation stabilization policy than suggested by the the Taylor Principle. We also show how when monetary policy is severely constrained, the fiscal policy maker can act to stabilise the economy. Some policy conclusions in light of the lower zero bound for monetary policy and debt stabilization are drawn.
    Keywords: Monetary and Fiscal Policy Rules; Ricardian; Non-Ricardian Fiscal Policy
    JEL: E21 E32 E52 E63
    Date: 2010–12
  7. By: Jagjit S. Chadha
    Abstract: I outline a simple roadmap for work in micro-founded models. Rather than abandoning the route to further micro-foundations and returning to ad hoc economics, the techniques we have used over the past two decades to develop micro-founded business cycle models will allow us to develop models with meaningful financial frictions and thus address once again the question of monetary and fiscal policies with active rather than passive financial sectors. Macroeconomics and finance are likely to remain bound together.
    Keywords: Future of Macroeconomics; DSGE Models; Crisis
    JEL: E42 E52 E58
    Date: 2010–12
  8. By: Ed Nosal; Christopher Waller; Randall Wright
    Abstract: We motivate and provide an overview to New Monetarist Economics. We then briefly describe the individual contributions to the Macroeconomics Dynamics special issues on money, credit and liquidity.
    Keywords: Macroeconomics - Econometric models
    Date: 2010
  9. By: Ed Nosal; Randall Wright
    Abstract: The 2010 Summer Workshop on Money, Banking, Payments and Finance met at the Federal Reserve Bank of Chicago this summer, for the second year. The following document summarizes and ties together the papers presented.
    Keywords: Payment systems
    Date: 2010
  10. By: Subir Gokarn
    Abstract: Economic stability can be seen as an essential component of any strategy for inclusive development. To the extent that central banks play a role in providing that stability, the experience of the crisis has led to considerable thinking and debate on its implications for central bank mandates, strategies and instruments in the quest for maintaining stability. A lot of this is being articulated by central bankers around the world, as they try and distill the lessons of the crisis into what they should be doing more or less of, or differently and how they should go about fulfilling possibly changed objectives. These issues have been explored in this talk. These issues, reflected in recent articulations by a cross-section of central bankers and use this as a backdrop for our own thinking on how to deal with challenges to macroeconomic stability. [Plenary Lecture at the conference “Economic Policies for Inclusive Development†organized by Ministry of Finance, Government of India and National Institute of Public Finance and Policy at New Delhi.]
    Keywords: monetary policy, financial stability, central bank, macroeconomic stability, finance, policy,
    Date: 2010
  11. By: Pikkarainen, Pentti (Financial Markets, Ministry of Finance)
    Abstract: The paper concentrates on illustrating and assessing central banks’ liquidity operations during the crisis that started in August 2007. In addition to the ECB, the central banks of Sweden, Switzerland, the United Kingdom, Australia, Japan, Canada and the United States are analyzed. During the crisis the liquidity operations of central banks have converged. In many cases, central bank balance sheets have undergone extremely strong growth. The actions by central banks raise a number of questions concerning exit from the measures taken, the impact of the measures, central banks’ risks and their governance structure.
    Keywords: central banks; liquidity operations; balance sheets
    JEL: E32 E52 E58
    Date: 2010–12–22
  12. By: Erlend Nier; Ouarda Merrouche
    Abstract: This paper investigates empirically the drivers of financial imbalances ahead of the global financial crisis. Three factors may have contributed to the build-up of financial imbalances: (i) rising global imbalances (capital flows), (ii) monetary policy that might have been too loose, (iii) inadequate supervision and regulation. Panel data regressions are performed for OECD countries from 1999 to 2007, so as to shed light on the relative importance of these factors, as well as the extent to which these factors might have interacted in fuelling the build-up. We find that the build-up of financial imbalances was driven by capital inflows and an associated compression of the spread between long and short rates. The effect of capital inflows on the build-up is amplified where the supervisory and regulatory environment was relatively weak. We find that, by contrast, differences in monetary policy cannot account for differences across countries in the build-up of financial imbalances ahead of the crisis.
    Keywords: Balance of trade , Bank credit , Bank regulations , Bank supervision , Capital flows , Capital inflows , Cross country analysis , Current account balances , Financial crisis , Financial sector , Global Financial Crisis 2008-2009 , Monetary policy ,
    Date: 2010–12–20
  13. By: Clerc, L.; Dellas, H.; Loisel, O.
    Abstract: Monetary union can benefit countries suffering from policy credibility problems if it eliminates the inflation bias and also allows for more efficient management of certain shocks. But it also carries costs as some stabilization may be feasible even in the absence of credibility, and this may be more than what an individual country can hope for in a monetary union. In this paper, we combine the stabilization and credibility branches of the currency union literature and construct a simple welfare criterion that can be used to evaluate alternative monetary arrangements. We produce examples where monetary union may be welfare improving even for low-modest levels of inflation bias (2-3%) as long as business cycles are not too a-synchronized across countries.
    Keywords: Currency union, credibility, stabilization, inflation bias.
    JEL: E4 E5 F4
    Date: 2010
  14. By: Fabio Ghironi (Boston College); Viktors Stebunovs (Board of Governors of the Federal Reserve System)
    Abstract: This paper studies the domestic and international effects of the transition to an interstate banking system implemented by the U.S. since the late 1970s in a dynamic, stochastic, general equilibrium model with endogenous producer entry. Interstate banking reduces the degree of local monopoly power of financial intermediaries. We show that the an economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account deficit. The rest of the world experiences a long-run increase in GDP and consumption. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Bank market integration thus contributes to a moderation of firm-level and aggregate output volatility. In turn, trade and financial ties between the two countries in our model allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. The results of the model are consistent with features of the U.S. and international business cycle after the U.S. began its transition to interstate banking.
    Keywords: Business cycle volatility; Current account; Deregulation; Interstate banking; Producer entry; Real exchange rate
    JEL: E32 F32 F41 G21
    Date: 2010–12–17
  15. By: Marco Del Negro; Stefano Eusepi
    Abstract: This paper provides evidence on the extent to which inflation expectations generated by a standard Christiano et al. (2005)/Smets and Wouters (2003)–type DSGE model are in line with what is observed in the data. We consider three variants of this model that differ in terms of the behavior of, and the public’s information on, the central banks’ inflation target, allegedly a key determinant of inflation expectations. We find that: 1) time-variation in the inflation target is needed to capture the evolution of expectations during the post-Volcker period; 2) the variant where agents have imperfect information is strongly rejected by the data; 3) inflation expectations appear to contain information that is not present in the other series used in estimation; and 4) none of the models fully captures the dynamics of this variable.
    Keywords: Banks and banking, Central ; Inflation (Finance) ; Inflation targeting ; Bayesian statistical decision theory
    Date: 2010
  16. By: Maral Kichian; Fabio Rumler; Paul Corrigan
    Abstract: We propose alternative single-equation semi-structural models for forecasting inflation in Canada, whereby structural New Keynesian models are combined with time-series features in the data. Several marginal cost measures are used, including one that in addition to unit labour cost also integrates relative price shocks known to play an important role in open-economies. Structural estimation and testing is conducted using identification-robust methods that are valid whatever the identification status of the econometric model. We find that our semi-structural models perform better than various strictly structural and conventional time series models. In the latter case, forecasting performance is significantly better, both in the short run and in the medium run.
    Keywords: Inflation and prices; Econometric and statistical methods
    JEL: C13 C53 E31
    Date: 2010
  17. By: Luc Laeven; Hui Tong
    Abstract: This paper studies how U.S. monetary policy affects global stock prices. We find that global stock prices respond strongly to changes in U.S. interest rate policy, with stock prices increasing (decreasing) following unexpected monetary loosening (tightening). This impact is more pronounced for sectors that depend on external financing, and for countries that are more integrated with the global financial market. These findings suggest that financial frictions play an important role in the transmission of monetary policy, and that U.S. monetary policy influences global capital allocation.
    Keywords: Corporate sector , Cross country analysis , Economic models , Interest rate policy , International capital markets , Monetary policy , Monetary transmission mechanism , Stock prices , United States ,
    Date: 2010–12–06
  18. By: Martina Cecioni (Bank of Italy)
    Abstract: This paper studies the effect of competitive pressures on inflation dynamics. To this end it derives and estimates a New Keynesian Phillips curve in a model with endogenous firm entry. The number of active firms is inversely related to their market power. By taking into account the number of competitors, the pass-through of real marginal cost on inflation is separately identifiable from the effect of endogenous desired markup fluctuations. Estimates with US data suggest that the effect of real marginal cost on inflation is stronger than that found in the empirical test of the standard model. The estimated elasticity of the desired markup with respect to the number of firms implies that an increase of 10% in the number of active firms would lower annual inflation by 1.4% in the short run.
    Keywords: inflation dynamics, markups, firm entry
    JEL: E31
    Date: 2010–09
  19. By: Marco J. Lombardi; Philipp Maier
    Abstract: We evaluate forecasts for the euro area in data-rich and ‘data-lean’ environments by comparing three different approaches: a simple PMI model based on Purchasing Managers’ Indices (PMIs), a dynamic factor model with euro area data, and a dynamic factor model with data from the euro plus data from national economies (pseudo-real time data). We estimate backcasts, nowcasts and forecasts for GDP, components of GDP, and GDP of all individual euro area members, and examine forecasts for the ‘Great Moderation’ (2000-2007) and the ‘Great Recession’ (2008-2009) separately. All models consistently beat naïve AR benchmarks. More data does not necessarily improve forecasting accuracy: For the factor model, adding monthly indicators from national economies can lead to more uneven forecasting accuracy, notably when forecasting components of euro area GDP during the Great Recession. This suggests that the merits of national data may reside in better estimation of heterogeneity across GDP components, rather than in improving headline GDP forecasts for individual euro area countries. Comparing factor models to the much simpler PMI model, we find that the dynamic factor model dominates the latter during the Great Moderation. However, during the Great Recession, the PMI model has the advantage that survey-based measures respond faster to changes in the outlook, whereas factor models are more sluggish in adjusting. Consequently, the dynamic factor model has relatively more difficulties beating the PMI model, with relatively large errors in forecasting some countries or components of euro area GDP.
    Keywords: Econometric and statistical methods; International topics
    JEL: C50 C53 E37 E47
    Date: 2010
  20. By: Itai Agur; Maria Demertzis
    Abstract: This paper shows that a rate hike has countervailing effects on banks’ risk appetite. It reduces risk when the debt burden of the banking sector is modest. We model a regulator whose trade-off between bank risk and credit supply is derived from a welfare function. We show that the regulator cannot optimally neutralize the welfare effects that the interest rate has through bank incentives. The larger the correlation between banks’ projects, the more important the role for monetary policy. In a dynamic setting, not internalizing bank risk leads a monetary authority to keep rates low for too long after a negative shock.
    Keywords: Monetary policy; Financial stability; Maturity mismatch; Leverage; Regulation
    JEL: E43 E52 E61 G21 G28
    Date: 2010–12
  21. By: Jaromir Baxa; Roman Horvath; Borek Vasicek
    Abstract: We examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) applying moment-based estimator at time-varying parameter model with endogenous regressors. Using this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually pointing to the importance of applying time-varying estimation framework. Second, the interest rate smoothing parameter is much lower that what previous time-invariant estimates of policy rules typically report. External factors matter for all countries, albeit the importance of exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates on inflation is particularly strong during the periods, when central bankers want to break the record of high inflation such as in the U.K. or in Australia at the beginning of 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting suggesting the positive effect of this regime on anchoring inflation expectations. This result is supported by our finding that inflation persistence as well as policy neutral rate typically decreased after the adoption of inflation targeting.
    Keywords: Endogenous regressors, inflation targeting, monetary policy, Taylor rule, time-varying parameter model.
    JEL: E43 E52 E58
    Date: 2010–11
  22. By: Alessandro Barattieri; Susanto Basu; Peter Gottschalk
    Abstract: Nominal wage stickiness is an important component of recent medium-scale macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996–1999. The SIPP provides high-frequency information on wages, employment, and demographic characteristics for a large and representative sample of the U.S. population. The main results of the analysis are as follows: (1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. (2) The frequency of wage adjustment does not display significant seasonal patterns. (3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations. (4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. (5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate.
    Keywords: Wages
    Date: 2010
  23. By: Luc Laeven; Giovanni Dell'Ariccia; Robert Marquez
    Abstract: We provide a theoretical foundation for the claim that prolonged periods of easy monetary conditions increase bank risk taking. The net effect of a monetary policy change on bank monitoring (an inverse measure of risk taking) depends on the balance of three forces: interest rate pass-through, risk shifting, and leverage. When banks can adjust their capital structures, a monetary easing leads to greater leverage and lower monitoring. However, if a bank's capital structure is fixed, the balance depends on the degree of bank capitalization: when facing a policy rate cut, well capitalized banks decrease monitoring, while highly levered banks increase it. Further, the balance of these effects depends on the structure and contestability of the banking industry, and is therefore likely to vary across countries and over time.
    Keywords: Banks , Capital , Central bank policy , Credit risk , Economic models , Financial intermediation , Monetary policy , Risk management ,
    Date: 2010–12–03
  24. By: Andrade, P.; Le Bihan, H.
    Abstract: We use the ECB Survey of Professional Forecasters to characterize the dynamics of expectations at the micro level. We find that forecasters (i) have predictable forecast errors; (ii) disagree; (iii) fail to systematically update their forecasts in the wake of new information; (iv) disagree even when updating; and (v) differ in their frequency of updating and forecast performances. We argue that these micro data facts are qualitatively in line with recent models in which expectations are formed by inattentive agents. However building and estimating an expectation model that features two types of inattention, namely sticky information à la Mankiw-Reis and noisy information à la Sims, we cannot quantitatively generate the error and disagreement that are observed in the SPF data. The rejection is mainly due to the fact that professionals relatively agree on very sluggish forecasts.
    Keywords: imperfect information, inattention, forecast errors, disagreement, business cycle.
    JEL: D84 E3 E37
    Date: 2010
  25. By: Mimir, Yasin
    Abstract: I document cyclical properties of aggregate measures of liabilities, equity, and leverage ratio in the U.S. financial sector and those of credit spread. I find that (i) liabilities and equity are procyclical, leverage ratio is acyclical, and credit spread is countercyclical, (ii) financial variables are three to ten times more volatile than output, and (iii) financial variables lead the business cycle. I present a dynamic stochastic general equilibrium model with profit maximizing banks where bank equity mitigates a moral hazard problem between banks and their depositors. The driving sources of business cycles are shocks to bank equity as well as standard productivity shocks. The model generates real and financial fluctuations consistent with the U.S. data. The model also delivers some policy prescriptions about capital adequacy requirements of banks.
    Keywords: Banks; Financial Fluctuations; Credit Frictions; Bank Equity; Real Fluctuations
    JEL: E32 E44 E10 E20
    Date: 2010–09–01
  26. By: Janko Gorter; Fauve Stolwijk; Jan Jacobs; Jakob de Haan
    Abstract: We estimate Taylor rule models for the euro area using Consensus Economics forecasts of inflation and output growth for the period 1998.6-2010.8. We first examine whether the recent financial crisis has affected ECB policies. Our results indicate that the ECB puts stronger emphasis on maintaining price stability than earlier point estimates suggested. Next, we analyse whether economic developments in individual euro area countries affect ECB decisions. Despite the diverging economic developments in the countries in the euro area, notably during the recent financial crisis, we do not find support for the view that policy decisions have been influenced by regional developments.
    Keywords: Taylor rule; ECB; regional influence; real time data
    JEL: C22 E52
    Date: 2010–12
  27. By: Heather M. Anderson; Mardi Dungey; Denise R Osborn; Farshid Vahid
    Abstract: Time series analysis for the Euro Area requires the availability of sufficiently long historical data series, but the appropriate construction methodology has received little attention. The benchmark dataset, developed by the European Central Bank for use in its Area Wide Model (AWM), is based on fixed-weight aggregation across countries with historically distinct monetary policies and financial markets of varying international importance. This paper proposes a new methodology for producing back-dated financial series for the Euro Area, that is based on the time-varying distance of periphery countries from core countries with respect to monetary integration. Historical decompositions of the residuals of vector autoregressive models of the Euro Area economy are then used to explore and compare the monetary policy implications of using the new methodology versus the use of AWM fixed weight series.
    Date: 2010
  28. By: Michael D Bordo; Owen F Humpage; Anna J Schwartz
    Abstract: The dollar’s depreciation during the early floating rate period, 1973–1981, was a symptom of the Great Inflation. In that environment, sterilized foreign exchange interventions were ineffective in halting the dollar’s decline, but they showed a limited ability to smooth dollar movements. Only after the Volcker FOMC changed its monetary-policy approach and demonstrated a willingness to maintain a disinflationary stance despite severe economic weakness and high unemployment did the dollar begin a sustained appreciation. Also contributing to the ineffectiveness of the interventions was the Desk’s method of operation. The small, covert interventions, particularly prior to 1977, seemed inconsistent with an expectations channel of influence, and financing intervention with short-term borrowed funds seemed inconsistent with a portfolio-balance channel of influence. The Desk never clearly articulated an intervention transmission mechanism. The episode indicated the shortcomings of sterilized intervention and led to their cessation in April 1981.
    Keywords: Banks and banking, Central ; Foreign exchange administration ; Monetary policy ; Federal Open Market Committee
    Date: 2010
  29. By: Étienne Bordeleau; Christopher Graham
    Abstract: The recent crisis has underlined the importance of sound bank liquidity management. In response, regulators are devising new liquidity standards with the aim of making the financial system more stable and resilient. In this paper, the authors analyse the impact of liquid asset holdings on bank profitability for a sample of large U.S. and Canadian banks. Results suggest that profitability is improved for banks that hold some liquid assets, however, there is a point at which holding further liquid assets diminishes a banks’ profitability, all else equal. Moreover, empirical evidence also suggests that this relationship varies depending on a bank’s business model and the state of the economy. These results are particularly relevant as policymakers devise new standards establishing an appropriate level of liquidity for banks. While it is generally agreed upon that banks undervalued liquidity prior to the recent financial crisis, one must also consider the tradeoff between resilience to liquidity shocks and the cost of holding lower-yielding liquid assets as the latter may impact banks’ ability to generate revenues, increase capital and extend credit.
    Keywords: Financial system regulation and policies; Financial institutions; Financial stability
    JEL: G21 G32 G33
    Date: 2010
  30. By: Lars Winkelmann
    Abstract: This paper investigates the information content of the Norges Bank’s key rate projections. Wavelet spectrum estimates provide the basis for estimating jump probabilities of short- and long-term interest rates on monetary policy announcement days before and after the introduction of key rate projections. The behavior of short-term interest rates reveals that key rate projections have only little effects on market’s forecasting ability of current target rate changes. In contrast, longer-term interest rates indicate that the announcement of key rate projections has significantly reduced market participants’ revisions of the expected future policy path. Therefore, the announcement of key rate projections further improves central bank communication.
    Keywords: Central bank communication, interest rate projections, wavelets, jump probabilities
    JEL: E52 E58 C14
    Date: 2010–12
  31. By: Kimberly Beaton; René Lalonde; Stephen Snudden
    Abstract: This paper examines the transmission of U.S. real and financial shocks to Canada and, in particular, the role of financial frictions in affecting the transmission of these shocks. These questions are addressed within the Bank of Canada's Global Economy Model (de Resende et al. forthcoming), a dynamic stochastic general-equilibrium model with an active banking sector and a detailed role for financial frictions. We find that U.S. financial shocks, as well as real shocks, have important effects on the Canadian economy. Moreover, financial frictions on both the demand and supply sides of credit amplify the first round impact of all types of U.S. shocks on the U.S. economy, as well as the second round impact on Canada. Real-financial linkages also increase the persistence of the Canadian response to U.S. shocks. We find that the interaction between the endogenous response of commodity prices and U.S. financial frictions plays an important role in the propagation of U.S. shocks to the Canadian economy. Finally, real-financial linkages also help to generate the positive cross correlation between domestic demand in the United States and Canada observed in the data, which is difficult to explain with a model where the transmission of shocks between countries is only based only on trade.
    Keywords: Business fluctuations and cycles; Economic models; International topics
    JEL: E21 E27 E32 F36 F40
    Date: 2010
  32. By: Korobilis, Dimitris; Gilmartin, Michelle
    Abstract: This paper studies the transmission of monetary shocks to state unemployment rates, within a novel structural factor-augmented VAR framework with a time-varying propagation mechanism. We find evidence of large heterogeneity over time in the responses of state unemployment rates to monetary policy shocks, which do not necessarily comply with the response of the national unemployment rate. We also find evidence of heterogeneity over the spatial dimension, although geographical proximity seems to play an important role in the transmission of monetary shocks.
    Keywords: regional unemployment; structural VAR; factor model; monetary policy
    JEL: C32 E52 R11 C11
    Date: 2010–12
  33. By: Sebastian Sosa; Nicolas E Magud
    Abstract: We review the literature on Dutch disease, and document that shocks that trigger foreign exchange inflows (such as natural resource booms, surges in foreign aid, remittances, or capital inflows) appreciate the real exchange rate, generate factor reallocation, and reduce manufacturing output and net exports. We also observe that real exchange rate misalignment due to overvaluation and higher volatility of the real exchange rate lower growth. Regarding the effect of undervaluation of the exchange rate on economic growth, the evidence is mixed and inconclusive. However, there is no evidence in the literature that Dutch disease reduces overall economic growth. Policy responses should aim at adequately managing the boom and the risks associated with it.
    Keywords: Capital inflows , Commodity price fluctuations , Economic growth , Exchange rate appreciation , External shocks , Fiscal policy , Monetary policy , Real effective exchange rates ,
    Date: 2010–12–01
  34. By: Matros, Philipp; Weber, Enzo
    Abstract: The present work deals with a frequently detected failure of the uncovered interest rate parity (UIP) - the absence of bivariate cointegration between domestic and foreign interest rates. We explain non-stationarity of the interest differential via central bank reactions to exchange rate variations. Thereby, the exchange rate in levels introduces an additional stochastic trend into the system. Trivariate cointegration between the interest rates and the exchange rate accounts for the missing stationarity property of the interest differential. We apply the concept to the case of Turkey and Europe, where we can validate the theoretical considerations by multivariate time series techniques.
    Keywords: Uncovered Interest Rate Parity; Monetary Policy Rules; Cointegration; Vector-Error Correction Model
    JEL: E44 F31 C32
    Date: 2010–12–21
  35. By: Hirofumi Takinami (Policy Research Institute)
    Abstract: Currently, the United States is suffering from a financial crisis. Japan also struggled with a financial crisis from the late 1990's to the early 2000's. What implications can be drawn from these crisis experiences of the two largest economies in the world? This paper examines, from the viewpoint of political economy, which elements are crucial in the use of bailout of financial institutions as a means to address financial crises. By analyzing these crises through the balance sheet of financial institutions at stake under the political economic condition of the advanced democratic countries, it became clear that taxpayers'/ opinion leaders’ understanding and market sentiment are the keystones for a successful bailout of financial institutions. This observation leads to the two central arguments of this paper as the implications of the Japanese and US crises: (1) There is a "learning effect" of Japanese financial crisis, which helped the US take quick move in addressing its crisis, an effect which should be crystallized into economics textbooks in case of future financial crises, and (2) It is significantly important that direct and swift actions are taken by the national leader and his/her secretarial organizations so that the ‘bully pulpit’ is effectively utilized to overcome financial crisis.
    Keywords: financial crisis, Japan, bailout
    JEL: G18
    Date: 2010
  36. By: Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: Estimated Taylor rules became popular as a description of monetary policy conduct. There are numerous reasons why real monetary policy can be asymmetric and estimated Taylor rule nonlinear. This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary and Poland), which apply an inflation targeting regime. Two different empirical frameworks are used: (i) a Generalized Method of Moments (GMM) estimation of models that allow discrimination between the sources of potential policy asymmetry but are conditioned by specific underlying relations (Dolado et al., 2004, 2005; Surico, 2007a,b); and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes (Hansen, 2000; Caner and Hansen, 2004). We find generally little evidence for asymmetric policy driven by nonlinearities in economic systems, some evidence for asymmetric preferences and some interesting evidence on policy switches driven by the intensity of financial distress in the economy.
    Keywords: monetary policy, inflation targeting, nonlinear Taylor rules, threshold estimation
    JEL: C32 E52 E58
    Date: 2010–12
  37. By: Orjasniemi, Seppo (Bank of Finland Research)
    Abstract: In this paper we build a dynamic stochastic general equilibrium model of a small open monetary union with optimal monetary and fiscal policy, to study the transmission of country specific shocks and associated exchange rate fluctuations. We show that movements of the monetary union’s exchange rate stabilize the output fluctuations inside the monetary union, reducing the need for fiscal stabilization. We also show that, under the optimal policy, fluctuations in the exchange rate and the union-wide aggregates are affected by the differences in the degree of nominal rigidities among the monetary union member countries.
    Keywords: monetary union; monetary policy; fiscal policy; exchange rate
    JEL: E52 E62 F41
    Date: 2010–12–02
  38. By: Dong-Hyun Ahn; In Seok Baek; A. Ronald Gallant
    Abstract: This paper considers the well established empirical fact that conditional correlations among cross-country interest rates switch signs. Switching implies an alternation of coupling and decoupling of global bond markets over time. This evidence is robust to alternative estimation schemes. Here we use a seminonparametric (SNP) model with a BEKK-GARCH variance function to estimate conditional second moments both to confirm these results and to provide auxiliary models for structural estimation of term structure models. Using an extensive historical analysis, we find that major driving forces behind the sign-switching behavior of conditional correlations between the Eurodollar rate and the Euroyen rate are synchronization and dis-synchronization of business cycles and coordination and discoordination of monetary policies triggered by international policies and financial market crashes. Especially, we find that the two interest rates are more likely to couple when both the U.S. and Japan slip into a recesion while the likelihood of decoupling is highest when both economies are in expansion. We also explore whether proposed International Affine Term Structure Models (IATSMs) and International Quadratic Term Structure Models (IQTSMs) are able to reproduce the sign-switching behavior of conditional correlations among crosscountry interest rates. We find that a small subset of the IATSMs can generate sign-switching behavior but only by forgoing their ability to describe other features such as the positivity of nominal interest rates, heteroskedasticity in volatility, and correlations among underlying state variables. In contrast, the IQTSMs are able to generate it without limiting their ability to describe other dynamic features. Using the MCMC-Efficient Method of Moments (EMM), we test the empirical performance of the models in reproducing the sign-switching behavior of conditional correlations. The result suggests that the IATSMs conclusively fail to capture it while the IQTSMs are relatively successful but fail to reproduce ephemeral ones.
    Date: 2010
  39. By: Adams, Charles
    Abstract: This paper reviews recent state interventions in financial crises and draws lessons for crisis management. A number of areas are identified where crisis management could be strengthened, including with regard to the tools and instruments used to involve the private sector in crisis resolution (with a view to reducing the recent enhanced role of official bailouts and the associated moral hazard), to allow for the orderly resolution of systemically important financial firms (to make these firms “safe to fail”), and with regard to achieving better integration with ex ante macroprudential surveillance. The paper proposes the establishment of high level systemic risk councils (SRCs) in each country with responsibility for overseeing systemic risk in both tranquil times and crisis periods and coordinating the activities of key government ministries, agencies, and the central bank.
    Date: 2010–08
  40. By: Ezra Oberfield; Nicholas Trachter
    Abstract: A prominent feature of the Kiyotaki and Wright (1989) model of commodity money is the multiplicity of dynamic equilibria. We show that the frequency of search is strongly related to the extent of multiplicity. To isolate the role of frequency of search in generating multiplicity, we (i) vary the frequency of search without changing the frequency of finding a trading partner and (ii) focus on symmetric dynamic equilibria, a class for which we can sharply characterize several features of the set of equilibria. For any finite frequency of search this class retains much of the multiplicity. For each frequency we characterize the full set of equilibrium payoffs, strategies played and dynamic paths of the state variables. Indexed by any of these features, the set of equilibria converges uniformly to a unique equilibrium in the continuous search limit. We conclude that when search is frequent, the seemingly exotic dynamics are irrelevant.
    Keywords: Money ; Markov processes
    Date: 2010
  41. By: Coffinet, J.; Lin, S.
    Abstract: We build a stress testing framework to evaluate the sensitivity of banks’ profitability to plausible but severe adverse macroeconomic shocks. Specifically, we test the resilience of French banks using supervisory data over the period 1993-2009. First, we identify the macroeconomic and financial variables (GDP growth, interest rate maturity spread, stock market’s volatility) and bank-specific variables (size, capital ratio, ratio of non interest income to assets) that significantly affect French banks’ profitability. Second, our macroeconomic stress testing exercises based on a simulation of macroeconomic variables show that French banks’ profitability is resilient to major adverse macroeconomic scenarios. Specifically, our findings highlight that even severe recessions would leave the French banking system profitable.
    Keywords: bank profitability, dynamic panel estimation, stress test.
    JEL: C23 G21 L2
    Date: 2010
  42. By: Larry Samuelson; Jeroen Swinkels
    Date: 2010–12–17
  43. By: Monica Værholm (Department of Economics. Norwegian School of Economics and Business Administration); Lars Fredrik Øksendal (Department of Economics. Norwegian School of Economics and Business Administration)
    Abstract: For later generations, August 1914 has become a watershed in monetary history. In a matter of days, the belligerent and neutral countries of Europe alike suspended the gold standard. The international monetary regime that had served the world economy for close to four decades was no more. Everywhere domestic fiat money became the order of the day. Even more importantly, the war brought a fundamental change in the priorities of monetary policy: National objectives triumphed over monetary stability.
    Date: 2010–12–21
  44. By: Paul Conway; Richard Herd; Thomas Chalaux
    Abstract: As a result of reforms and financial sector development, the People’s Bank of China (PBoC) now exerts significant control over money market interest rates. With money market conditions increasingly influencing effective commercial lending rates, the PBoC is also able to affect the cost of credit without recourse to its benchmark commercial bank rates. Furthermore, interest rates are an important determinant of investment spending in China, via the user cost of capital, and aggregate economic activity influences inflation. Hence, greater use of interest rates in implementing monetary policy would enhance macroeconomic stabilisation while avoiding a number of drawbacks of the current quantity-based approach. In addition, increased flexibility in the exchange rate would enhance its role in offsetting macroeconomic shocks and allow the PBoC more scope to tailor monetary policy to domestic macroeconomic conditions. Concurrently, changes in the PBoC’s policy stance should be predicated on informed judgments based on the monitoring of a set of indicators in conjunction with a flexible inflation objective as the nominal anchor. This paper relates to the 2010 OECD Economic Review of China (<P>Poursuivre la réforme de la politique monétaire pour accomplir les objectifs domestiques<BR>Suite à diverses réformes et au développement du secteur financier, la Banque Populaire de Chine (BPdC) contrôle désormais de façon significative les taux d’intérêt du marché monétaire. Les conditions du marché monétaire influençant de plus en plus les taux effectifs des prêts commerciaux, la BPdC est également en mesure d’influencer le coût du crédit sans recourir à ses taux d’intérêt commerciaux de référence. De plus, les taux d’intérêt sont un déterminant important de l’investissement en Chine, via le coût du capital, et l’activité exerce une influence sur l’inflation. Par conséquent, une utilisation plus active des taux d’intérêt dans la conduite de la politique monétaire contribuerait à la stabilisation macroéconomique tout en évitant certains des inconvénients de l’approche actuelle par les quantités. En outre, une plus grande flexibilité du taux de change renforcerait son rôle dans l’amortissement des chocs macroéconomiques et donnerait une plus grande latitude à la BPdC pour ajuster la politique monétaire en fonction des conditions macroéconomiques internes. Dans le même temps, les changements de politique monétaire devraient résulter d’une évaluation empirique basée sur le suivi d’une série d’indicateurs dans le cadre d’un ancrage nominal sous la forme d’un objectif d’inflation flexible. Ce document se rapporte à l’Étude économique de la Chine de l’OCDE, 2009, (
    Keywords: regulation, macroeconomic policies, China, Money, réglementation, politique macro-économique, Chine, Monnaie
    JEL: E4 E5 E6 K2 L5
    Date: 2010–12–16
  45. By: Hiroyuki Taguchi; Woong-Ki Sohn (Policy Research Institute)
    Abstract: This article sets out to assess the performance of inflation targeting (IT) frameworks from the perspective of the pass-through effect of external price shocks into consumer price inflation, focusing on the four East Asian economies which have adopted IT, during the period of 1990-2009. We first examine their monetary policy rules to identify the IT implementation, and then investigate the linkage between inflation-responsive rules and pass-through rates, as suggested by Gagnon and Ihrig (2004). Our main findings are as follows. First, under the IT adoption, Korea has taken an inflation responsive rule in a forward-looking manner, while Indonesia and Thailand have adopted the rule in a backward-looking manner. Second, only Korea has lost pass-through under IT adoption, thereby showing the clear linkage between inflation-responsive rules and the loss of pass-through. Third, the sensitivity test of inflation expectations to import price shocks in Korea also supports this linkage. These findings imply that IT adoption, if conducted in a forward-looking manner, can be a resisting power against external price shocks, even in small, open, emerging market economies, as tested under the latest global financial crisis in Korea.
    Keywords: inflation targeting, pass-through, East Asian emerging market economies, policy reaction function, inflation expectations
    JEL: E52 F31 F41
    Date: 2010
  46. By: Ernesto Sheriff (Universidad Privada Boliviana)
    Abstract: A new inflationary memory indicator was developed and applied here. A panel was built with the selected countries considering the economic growth as dependent variable in function of the convergence hypothesis, the inflation rate, the public expense and, the recursive variance of the inflation (VARINF) as inflationary memory indicator. The expected results of the panel were that the inflation and their variability affect the growth negatively neutralizing the possible effects that it could have the public expense on the same one. Five Latin American countries with experiences of high inflation were included (Argentina, Brazil, Bolivia, Peru and Nicaragua).
    Keywords: Inflationary memory, economic growth, Latin America
    JEL: E31 E65 D87 N16
    Date: 2010–11
  47. By: David de Antonio Liedo (Banco de España); Elena Fernández Muñoz (Banco de España)
    Abstract: The sharp decline in economic activity registered in Spain over 2008 and 2009 has no precedents in recent history. After ten prosperous years with an average GDP growth of 3.7%, the current recession places non-judgemental forecasting models under stress. This paper evaluates the Spanish GDP nowcasting performance of combinations of small and medium-sized linear dynamic regressions with priors originating in the Bayesian VAR literature. Our forecasting procedure can be considered a timely and simple approximation to the mix of accounting tools, models and judgement used by the statistical agencies to construct aggregate GDP figures. The real time forecast evaluation conducted over the most severe phase of the recession shows that our method yields reliable real GDP growth predictions almost one and a half months before the official figures are published.
    Keywords: Minnesota priors, mixed estimation, forecasting
    JEL: C32 C53 E37
    Date: 2010–12
  48. By: Luis Ignacio Jácome; Ali Alichi; Ivan Luis de Oliveira Lima; Jorge Iván Canales Kriljenko
    Abstract: This paper highlights that central banks from Brazil, Chile, Colombia, Mexico, and Peru (the LA5 countries) reaped the benefits of what they sowed in successfully weathering the global crisis. The adoption of far-reaching institutional, policy, and operational reforms during the last two decades enabled central banks to build credibility about their commitment with the objective of price stability. Thus, when the 2007 - 08 supply shock and the financial crisis hit the world, the LA5 central banks reacted swiftly and effectively based on a flexible policy framework and with the support of strong macroeconomic and financial foundations. Building on the experience of the LA5 central banks and complementing with recommendations from the IMF’s technical advice, the paper provides several suggestions for countries seeking to strengthen the effectiveness of monetary policy.
    Date: 2010–12–17
  49. By: Paulina Etxeberria-Garaigort (Department of Foundations of Economic Analysis II, University of the Basque Country); Amaia Iza (Department of Foundations of Economic Analysis II, University of the Basque Country)
    Abstract: This paper seeks to quantify to the extent to which price dynamics in Hong Kong are due to the Balassa-Samuelson hypothesis. From 1985 to 1998, the CPI in Hong Kong increased spectacularly, yet there was dramatic deflation from 1998 to 2006. This dynamics was mainly driven by the price pattern of the nontradable goods and services. We find that, the Balassa-Samuelson hypothesis seems to be a good explanation for the inflation differentials between Hong Kong and the US from 1985 to 1998. However, in the 1998-2006 period, we find that the Balassa-Samuelson hypothesis cannot explain the inflation di¤erentials between Hong Kong and the US. On the one hand, there is a significant deviation from the PPP in the price of tradable goods between both countries. On the other hand, the internal transmission of the Balassa-Samuelson hypothesis does not hold for either country.
    Keywords: Real Exchange Rate (RER), Balassa-Samuelson hypothesis, In‡ation
    JEL: E13 E32 F41
    Date: 2010–12–28
  50. By: Gustavo Abarca; José Gonzalo Rangel; Guillermo Benavides
    Abstract: We examine two approaches characterized by different tail features to extract market expectations on the Mexican peso-US dollar exchange rate. Expectations are gauged by risk-neutral densities. The methods used to estimate these densities are the Volatility Function Technique (VFT) and the Generalized Extreme Value (GEV) approach. We compare these methods in the context of monetary policy announcements in Mexico and the US. Once the surprise component of the announcements is considered, our results indicate that, although both VFT and GEV suggest similar dynamics at the center of the distribution, these two methods show significantly different patterns in the tails. Our empirical evidence shows that the GEV model captures better the extreme values.
    Keywords: Exchange rates, monetary policy, risk-neutral densities
    JEL: C14 E44 E58 F31
    Date: 2010–12
  51. By: Kristine Vitola; Ludmila Fadejeva
    Abstract: The purpose of this paper is to quantify the role of financial frictions in Latvia's monetary transmission. Our model extends M. Iacoviello (9) framework along three dimensions. First, we introduce open-economy features by allowing imports of foreign consumer goods and borrowing from abroad. Second, we relax the assumption of fixed housing stock, allowing for investment. Finally, we assume a risk premium on foreign borrowing, which depends on net foreign asset position. We estimate the model by Bayesian approach and compare impulse responses to shocks under various scenarios. In addition to the baseline scenario, we explore the importance of tighter borrowing constraints and higher foreign risk premium elasticity in the model dynamics. Our findings show that tighter credit constraints weaken the transmission of shocks to housing demand and consumption. In the case of foreign interest rate and risk premium shocks, higher risk premium elasticity lessens the effect of monetary transmission on the domestic economy through higher cost of external funds.
    Keywords: financial frictions, monetary transmission, asset prices, DSGE model, Bayesian approach
    JEL: C11 E32 E44 E52 R21
    Date: 2010–12–23
  52. By: Levy, Daniel; Smets, Frank
    Abstract: This introductory essay briefly summarizes the eleven empirical studies of price setting and price adjustment that are included in this special issue. The studies, which use data from several European countries, were conducted as part of the European Central Bank’s Inflation Persistence Network.
    Keywords: Price Rigidity; Price Flexibility; Cost of Price Adjustment; Menu Cost; Managerial and Customer Cost of Price Adjustment; Pricing; Price System; Price Setting; New Keynesian Economics; Store-Level Data; Micro-Level Data; Product-Level Data
    JEL: D21 L11 E12 E31 D40 L16 E58 E52 E50 M30 M20
    Date: 2010–02–11
  53. By: Borraz, Fernando; Gianelli, Diego
    Abstract: Inflation expectations are key unobservable variables for decision-making, especially in managing monetary policy. Understand how to formulate them, if they are rational or adaptive is vital. This study answers these questions through a panel data analysis of the micro data from the inflation expectation survey of the Central Bank of Uruguay. The main findings indicate: i) a low predictive power of the analysts surveyed in the 12-month horizon; ii) a convergence of the individual forecasts to the released monthly median iii) an overweight of the inflation target ceiling and the dynamics of the inflation, and iv) a underweight of monetary policy instruments. With respect to the evidence of rationality, we find the partial use of available information and in some cases, there is a systematic bias.
    Keywords: inflation expectations; rationality; forecast errors
    JEL: E31 E58 D85
    Date: 2010–12–27
  54. By: Anke Weber; Anna R Bordon
    Abstract: The introduction of inflation targeting in 2006, together with important economic developments such as dedollarization, marked the beginning of a new macroeconomic framework in Armenia, which is likely to have changed the effectiveness of monetary policy. This paper is the first attempt to analyze whether the transmission mechanism in Armenia has been subject to a structural break by employing a Markov-Switching VAR framework. Results support the existence of such a structural break around the time inflation targeting was introduced and reduced levels of dollarization were observed. Results from introducing a threshold variable into this framework furthermore show that reduced levels of dollarization are an important determinant of the effectiveness of monetary policy.
    Keywords: Armenia , Dollarization , Economic models , Exchange rate policy , Inflation targeting , Monetary policy , Monetary transmission mechanism ,
    Date: 2010–11–30

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