|
on Central Banking |
| By: | Lars E.O. Svensson |
| Abstract: | Inflation targeting is a monetary-policy strategy that is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has been called forecast targeting, and a high degree of transparency and accountability. It was introduced in New Zealand in 1990, has been very successful in terms of stabilizing both inflation and the real economy, and has, as of 2010, been adopted by about 25 industrialized and emerging-market economies. The chapter discusses the history, macroeconomic effects, theory, practice, and future of inflation targeting. |
| JEL: | E42 E43 E47 E52 E58 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16654&r=cba |
| By: | Martin S. Feldstein |
| Abstract: | The high level of current account imbalances continues to be a major focus of international concern. In this paper I suggest why public and private actions in the United States and China are now likely to cause the current account imbalances in those countries to shrink and perhaps even to disappear in the next few years. If that happens, it will eliminate the largest current account imbalances in the global economy. The United States now has a current account deficit of about $500 billion or 3.5 percent of US GDP. China has a current account surplus of about $300 billion or 6 percent of its GDP. Although natural market forces should resolve such imbalances without the need for specific government policies, the government actions in both countries have actually contributed to their persistence and prevented market forces from correcting the problem. That may be about to change. |
| JEL: | F3 F32 F4 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16674&r=cba |
| By: | James D. Hamilton; Michael T. Owyang |
| Abstract: | This paper develops a framework for inferring common Markov-switching components in a panel data set with large cross-section and time-series dimensions. We apply the framework to studying similarities and differences across U.S. states in the timing of business cycles. We hypothesize that there exists a small number of cluster designations, with individual states in a given cluster sharing certain business cycle characteristics. We find that although oil-producing and agricultural states can sometimes experience a separate recession from the rest of the United States, for the most part, differences across states appear to be a matter of timing, with some states entering recession or recovering before others. |
| JEL: | E32 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16657&r=cba |
| By: | William A. Branch (University of California, Irvine); George W. Evans (University of Oregon Economics Department and University of St. Andrews); Bruce McGough (Oregon State University) |
| Abstract: | Incorporating adaptive learning into macroeconomics requires assumptions about how agents incorporate their forecasts into their decision-making. We develop a theory of bounded rationality that we call finite-horizon learning. This approach generalizes the two existing benchmarks in the literature: Euler equation learning, which assumes that consumption decisions are made to satisfy the one-step-ahead perceived Euler equation; and infinite-horizon learning, in which consumption today is determine optimally from an infinite-horizon optimization problem with given beliefs. In our approach, agents hold a finite forecasting/planning horizon. We find for the Ramsey model that the unique rational expectations equilibrium is E-stable at all horizons. However, transitional dynamics can differ significantly depending upon the horizon. |
| Keywords: | Planning horizon, Expectations, Learning dynamics, |
| JEL: | D84 D83 E32 C61 C62 |
| Date: | 2010–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:ore:uoecwp:2010-15&r=cba |
| By: | Bacchetta Philippe; Benhima Kenza |
| Abstract: | In the recent decade, capital outflows from emerging economies, in the form of a demand for liquid assets, have played a key role in the context of global imbalances. In this paper, we model the demand for liquid assets by firms in a dynamic open-economy macroeconomic model. We find that the implications of this model are very different from standard models, because the demand for foreign bonds is a complement to domestic investment rather than a substitute. We show that this complementarity is at work when an emerging economy is on its convergence path or when it has a higher TFP growth rate. This framework is consistent with global imbalances and with a number of stylized facts such as high corporate saving rates in high-growth, high-investment, emerging countries. |
| Keywords: | capital flows; global imbalances; working capital; credit constraints |
| JEL: | E22 F21 F41 F43 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:10.12&r=cba |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | The world macro saving fact concerns the total financial saving of the world's private sector divided by world GDP. Relative to changes before 1994, there was a huge fall in this ratio between 1995 and 2000, a huge increase between 2000 and 2003, a huge fall between 2003 and 2006, and a huge increase between 2006 and 2009. The explanation is that these fluctuations appear to be driven in large part by fluctuations in stock prices and housing prices. |
| Keywords: | Financial saving, World economy |
| JEL: | E21 E44 F41 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1776&r=cba |
| By: | Hess Chung; Jean-Philippe Laforte; David Reifschneider; John C. Williams |
| Abstract: | Before the recent recession, the consensus among researchers was that the zero lower bound (ZLB) probably would not pose a significant problem for monetary policy as long as a central bank aimed for an inflation rate of about 2 percent; some have even argued that an appreciably lower target inflation rate would pose no problems. This paper reexamines this consensus in the wake of the financial crisis, which has seen policy rates at their effective lower bound for more than two years in the United States and Japan and near zero in many other countries. We conduct our analysis using a set of structural and time series statistical models. We find that the decline in economic activity and interest rates in the United States has generally been well outside forecast confidence bands of many empirical macroeconomic models. In contrast, the decline in inflation has been less surprising. We identify a number of factors that help to account for the degree to which models were surprised by recent events. First, uncertainty about model parameters and latent variables, which were typically ignored in past research, significantly increases the probability of hitting the ZLB. Second, models that are based primarily on the Great Moderation period severely understate the incidence and severity of ZLB events. Third, the propagation mechanisms and shocks embedded in standard DSGE models appear to be insufficient to generate sustained periods of policy being stuck at the ZLB, such as we now observe. We conclude that past estimates of the incidence and effects of the ZLB were too low and suggest a need for a general reexamination of the empirical adequacy of standard models. In addition to this statistical analysis, we show that the ZLB probably had a first-order impact on macroeconomic outcomes in the United States. Finally, we analyze the use of asset purchases as an alternative monetary policy tool when short-term interest rates are constrained by the ZLB, and find that the Federal Reserve's asset purchases have been effective at mitigating the economic costs of the ZLB. In particular, model simulations indicate that the past and projected expansion of the Federal Reserve's securities holdings since late 2008 will lower the unemployment rate, relative to what it would have been absent the purchases, by 1-1/2 percentage points by 2012. In addition, we find that the asset purchases have probably prevented the U.S. economy from falling into deflation. |
| Keywords: | Inflation (Finance) ; Macroeconomics - Econometric models |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2011-01&r=cba |
| By: | Daniel F. Waggoner; Tao Zha |
| Abstract: | We confront model misspecifications in macroeconomics by proposing an analytic framework for merging multiple models. This framework allows us to address uncertainty about models and parameters simultaneously and trace out the historical periods in which one model dominates other models. We apply the framework to a richly parameterized dynamic stochastic general equilibrium (DSGE) model and a corresponding Bayesian vector autoregressive model. The merged model, fitting the data better than both individual models, substantially alters economic inferences about the DSGE parameters and the implied impulse responses. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2010-18&r=cba |
| By: | Takushi Kurozumi; Willem Van Zandweghe |
| Abstract: | This paper examines implications of incorporating labor market search and matching frictions into a sticky price model for determinacy and E-stability of rational expectations equilibrium (REE) under interest rate policy. When labor adjustment takes place solely at the extensive margin, forecast-based policy that meets the Taylor principle is likely to induce indeterminacy and E-instability, regardless of whether it is strictly or flexibly inflation targeting. When labor adjustment takes place at both the extensive and intensive margins, the strictly inflation-forecast targeting policy remains likely to induce indeterminacy, but it generates a unique E-stable fundamental REE as long as the Taylor principle is satisfied. These results suggest that introducing the search and matching frictions alter determinacy properties of the strictly inflation-forecast targeting policy, but not its E-stability properties in the presence of the intensive margin of labor. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-14&r=cba |
| By: | Takushi Kurozumi; Willem Van Zandweghe |
| Abstract: | In a sticky price model with investment spending, recent research shows that inflation-forecast targeting interest rate policy makes determinacy of equilibrium essentially impossible. We examine a necessary and sufficient condition for determinacy under interest rate policy that responds to a weighted average of an inflation forecast and current inflation. This condition demonstrates that the average-inflation targeting policy ensures determinacy as long as both the response to average inflation and the relative weight of current inflation are large enough. We also find that interest rate policy which responds solely to past inflation guarantees determinacy when its response satisfies the Taylor principle and is not large. These results still hold even when wages and hours worked are determined by Nash bargaining. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-15&r=cba |
| By: | Zsolt Darvas; Jean Pisani-Ferry |
| Abstract: | The 'currency war', as it has become known, has three aspects: 1) the inflexible pegs of undervalued currencies; 2) recent attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a 'beggar-thy-neighbour' policy as long as the Fed’s policy is geared towards price stability. Current US inflationary expectations are at historically low levels. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures. The euro’s exchange rate has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before. |
| Keywords: | currency war, quantitative easing, currency intervention, international monetary system |
| JEL: | E52 E58 F31 F33 |
| Date: | 2010–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:mkg:wpaper:1006&r=cba |
| By: | Nicolas Groshenny (Reserve Bank of New Zealand) |
| Abstract: | To what extent did deviations from the Taylor rule between 2002 and 2006 help to promote price stability and maximum sustainable employment? To address that question, this paper estimates a New Keynesian model with unemployment and performs a counterfactual experiment where monetary policy strictly follows a Taylor rule over the period 2002:Q1 - 2006:Q4 The paper finds that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8 percent would have been as high as 80 percent, while the probability of an inflation rate above 1 percent would have been close to zero. |
| JEL: | E32 C51 C52 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2010/14&r=cba |
| By: | Rupert de Vincent-Humphreys (Bank of England, Threadneedle Street, London EC2R 8AH, United Kingdom.); Josep Maria Puigvert Gutiérrez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper presents a set of probability density functions for Euribor outturns in three months’ time, estimated from the prices of options on Euribor futures. It is the first official and freely available dataset to span the complete history of Euribor futures options, thus comprising over ten years of daily data, from 13 January 1999 onwards. Time series of the statistical moments of these option-implied probability density functions are documented until April 2010. Particular attention is given to how these probability density functions, and their associated summary statistics, reacted to the unfolding financial crisis between 2007 and 2009. In doing so, it shows how option-implied probability density functions could be used to contribute to monetary policy and financial stability analysis. JEL Classification: C13, C14, G12, G13. |
| Keywords: | financial market, probability density functions, options, financial crisis. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101281&r=cba |
| By: | Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Cornelia Holthausen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper studies the relationship between the size of the banking sector’s refinancing needs vis-à-vis the central bank and auction rates in its open market operations in times of financial market stress. In a theoretical model, it is found that marginal rates at central bank auctions may increase if the share of troubled banks becomes too high relative to the total size of the banking sector’s refinancing needs. An empirical analysis then aims at determining the size of open market operations needed to absorb large stress levels in interbank money markets and hence contain central bank auction rates. Finally, the paper analyses effects of the composition of open market operations of different maturities on auction rates. It is found that a too high share of longer-term refinancing induces a rise in auction rates which is undesirable. Therefore, the analysis suggests that there is a lower bound for the amount of liquidity provided through short-term operations. JEL Classification: G01, G10, G21. |
| Keywords: | central bank, money market, open market operations, financial crisis. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101282&r=cba |
| By: | Ramon Moreno |
| Abstract: | Recurrent capital inflows pose important challenges for authorities in emerging market economies seeking to preserve financial stability. Raising interest rates to dampen imbalances that could arise from capital flows can also attract more capital inflows and accentuate appreciation pressures. For this reason authorities have used a number of instruments to mitigate the effects of capital flows, all with financial stability implications. Many of these instruments (eg reserve requirements) may have been used for other purposes but the global financial crisis has raised interest in examining them from a financial stability, or "macroprudential" perspective. This paper reviews some of these instruments, drawing in part on material provided by central banks to the BIS. The instruments include foreign exchange market intervention and foreign reserve accumulation; measures to strengthen bank balance sheets and capital and measures to maintain the quality of credit or to ifnluence credit growth or allocation, and capital controls. Certain implementation issues are also discussed, including signals to respond to, timing of prudential measures and procyclicality and effectiveness and calibration. An unresolved question is how the instruments described are to be used in conjunction with interest rate policy. Over the medium term, these instruments raise concerns because they may impair the development of the financial system. |
| Keywords: | capital flows, monetary policy, macroprudential |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:336&r=cba |
| By: | Edward S. Knotek II |
| Abstract: | Macroeconomic models often generate nominal price rigidity via menu costs. This paper provides empirical evidence that treating menu costs as a structural explanation for sticky prices may be spurious. Using supermarket scanner data, I note two empirical facts: (1) price points, embodied in nine-ending prices, account for more than 60 percent of prices; (2) at the conclusion of sales, post-sale prices return to their pre-sale levels nearly 90 percent of the time. I construct a model that nests roles for menu costs and price points and estimate model variants via simulated method of moments. Excluding the two facts yields a statistically and economically significant role for menu costs in generating price rigidity. Incorporating the two facts yields an incentive to set nine-ending prices two orders of magnitude larger than the menu costs in this model. In this setting, the price point model can match the two stylized facts, but menu costs are effectively irrelevant as a source of price rigidity. The choice of a mechanism for price rigidity matters for aggregate dynamics. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-18&r=cba |
| By: | Christopher D. Carroll (Department of Economics, Johns Hopkins University, Baltimore, MD, USA.); Misuzu Otsuka (Organisation for Economic Co-operation and Development, Paris, France.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper presents a simple new method for measuring `wealth effects' on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption `habits') to distinguish between immediate and eventual wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration-based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector. JEL Classification: E21, E32, C22. |
| Keywords: | Housing Wealth, Wealth Eect, Consumption Dynamics, Asset Prices. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101283&r=cba |
| By: | Alexander Chudik (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper analyses and compares the role that the tightening in liquidity conditions and the collapse in risk appetite played for the global transmission of the financial crisis. Dealing with identification and the large dimensionality of the empirical exercise with a Global VAR approach, the findings highlight the diversity of the transmission process. While liquidity shocks have had a more severe impact on advanced economies, it was mainly the decline in risk appetite that affected emerging market economies. The tightening of financial conditions was a key transmission channel for advanced economies, whereas for emerging markets it was mainly the real side of the economy that suffered. Moreover, there are some striking differences also within types of economies, with Europe being more adversely affected by the fall in risk appetite than other advanced economies. JEL Classification: E44, F3, C5. |
| Keywords: | Liquidity, risk, financial crisis, global transmission, global VAR (GVAR), shocks, modelling, US, advanced economies, emerging market economies. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111285&r=cba |
| By: | Zainab Jehan; Abdul Rashid |
| Abstract: | This study empirically investigates how shocks to monetary policy measures (short-term nominal interest rate and broad money supply) affect economic aggregates: output growth, price levels and nominal exchange rate. The study is carried out for Pakistan using quarterly data covering the period from 1980 to 2009. In doing this, Johansen’s (1988) co integration technique and vector error correction model are applied to explore the long-run relationship among the variables. We find significant evidence on the existence of a long-run stable relationship between our monetary measures and economic aggregates. The impulse response functions (IRFs) are computed to examine the response of each macroeconomic variable to a standard deviation shock to monetary measures. The IRF graphs reveal a price puzzle in closed as well as in open economy model. However, an initial appreciation of exchange rate is observed, indicating the overshooting hypothesis phenomenon for Pakistan. |
| Keywords: | Monetary Policy, Economic Aggregates, VECM, Impulse Response Function. |
| JEL: | C3 E4 E5 |
| Date: | 2011–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2011_01&r=cba |
| By: | Marco Buchmann (European Central Bank, DG Financial Stability, Financial Stability Assessment Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper aims at providing a detailed analysis of the leading indicator properties of corporate bond spreads for real economic activity in the euro area. In- and out-of-sample predictive content of corporate bond spreads are examined along three dimensions: the bonds’ quality, their term to maturity, as well as the forecast horizon at which one intends to predict a change in real activity. Numerous alternative leading indicators capturing macroeconomic and financial conditions are included in the analysis. Along with standard time series forecast models, the Least Angle Regression (LAR) technique is used to build multivariate models recursively. Models built via LAR can be used to produce forecasts and allow one to analyze how the composition and the number of relevant model variables evolve over time. Corporate bond spreads turn out to be valuable predictors for real activity, in particular at forecast horizons beyond one year; Medium risk bond spreads with maturities between 5 and 10 years appear particularly rich in content. The spreads also belong to the group of indicators that implied the highest probability of a recession occurring from a pre-crisis perspective. JEL Classification: E32, E37, E44, G32. |
| Keywords: | Corporate bond spreads, point and density forecasting, automatic model building, least angle regression. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111286&r=cba |
| By: | Michael Kirker (Reserve Bank of New Zealand) |
| Abstract: | I develop a new estimate of core inflation for New Zealand and Australia based on a dynamic factor model. By using an over-identification restriction, the factors of the model are classified as tradable and nontradable factors. This innovation allows us to examine the relative contributions of tradable and nontradable prices towards core inflation. The results show that core inflation in both countries is primarily driven by the nontradable factor. The nontradable factor also explains significantly more of the variance in headline inflation relative to the tradable factor. Finally, both the tradable and nontradable factors show similar profiles across both countries suggesting common drivers. |
| JEL: | C11 E31 E52 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2010/13&r=cba |
| By: | Christopher J. Neely; Paul A. Weller |
| Abstract: | This article introduces the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency. Technicians view their craft, the study of price patterns, as exploiting traders’ psychological regularities. The literature on technical analysis has established that simple technical trading rules on dollar exchange rates provided 15 years of positive, risk-adjusted returns during the 1970s and 80s before those returns were extinguished. More recently, more complex and less studied rules have produced more modest returns for a similar length of time. Conventional explanations that rely on risk adjustment and/or central bank intervention are not plausible justifications for the observed excess returns from following simple technical trading rules. Psychological biases, however, could contribute to the profitability of these rules. We view the observed pattern of excess returns to technical trading rules as being consistent with an adaptive markets view of the world.> |
| Keywords: | Foreign exchange rates |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-001&r=cba |
| By: | Jan Brůha (Czech National Bank, Na P?íkop? 28, 115 03 Praha 1, Czech Republic.); Beatrice Pierluigi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roberta Serafini (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | A small labour market model for the six largest euro area countries (Germany, France, Italy, Spain, the Netherlands, Belgium) is estimated in a state-space framework. The model entails, in the long run, four driving forces: a trend labour force component, a trend labour productivity component, a long-run inflation rate and a trend hours worked component. The short run dynamics is governed by a VAR model including six shocks. The state-space framework is convenient for the decomposition of endogenous variables in trends and cycles, for shock decomposition, for incorporating external judgement, and for running conditional projections. The forecast performance of the model is rather satisfactory. The model is used to carry out a policy experiment with the objective of investigating whether euro area countries differ in the labour market adjustment to a reduction in labour costs. Results suggest that, following the 2008-09 recession, moderate wage growth would significantly help delivering a more job-intense recovery. JEL Classification: C51, C53, E17, J21. |
| Keywords: | Labor market, Forecasting, Kalman filter. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111284&r=cba |
| By: | Matthew N. Luzzetti; Lee E. Ohanian |
| Abstract: | This paper studies why the General Theory had so much impact on the economics profession through the 1960s, why that impact began to wane in the 1970s, and why many economic policymakers cling to many of the tenets of the General Theory. We discuss three key elements along these lines, including the fact macroeconomic time series through the 1960s seemed to conform qualitatively to patterns discussed in the General Theory, that econometric developments in the area of simultaneous equations made advanced the General Theory to a quantitative enterprise, and that the General Theory was published during the Great Depression, when there was a search for alternative frameworks for understanding economic crises. |
| JEL: | E12 E32 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16631&r=cba |
| By: | Claude Diebolt (BETA/CNRS, Université de Strasbourg, France.); Antoine Parent; Jamel Trabelsi |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:afc:wpaper:10-11&r=cba |
| By: | Claude Diebolt (BETA/CNRS, Université de Strasbourg, France.); Antoine Parent; Jamel Trabelsi |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:afc:wpaper:10-07&r=cba |
| By: | Stephen Quinn; William Roberds |
| Abstract: | We investigate a fiat money system introduced by the Bank of Amsterdam in 1683. Using data from the Amsterdam Municipal Archives, we partially reconstruct changes in the bank's balance sheet from 1666 through 1702. Our calculations show that the Bank of Amsterdam, founded in 1609, was engaged in two archetypal central bank activities—lending and open market operations—both before and after its adoption of a fiat standard. After 1683, the bank was able to conduct more regular and aggressive policy interventions, from a virtually nonexistent capital base. The bank's successful experimentation with a fiat standard foreshadows later developments in the history of central banking. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2010-17&r=cba |
| By: | Andrew Coleman; Özer Karagedikli (Reserve Bank of New Zealand) |
| Abstract: | We conduct an event study that examines how the New Zealand - US (NZ/US) and the Australia - US (AU/US) exchange rates responds to the release of Australian macroeconomic news including the CPI, GDP, trade balance, and monetary policy decisions. We use two different measures of the unanticipated component of the news announcements. First, we use the difference between the actual value of the data and a survey of market participants' expectations of that data announcement. Second, we use the immediate response of the AU/US exchange rate to the news announcement.Our study has three main conclusions: 1) We show that the effects of the macro news in one country can also transmit to another country via the non-bilateral exchange rate (probably in anticipation of future spill-over effects). 2) Combined with results that show that the AU/US exchange rate responds by very little to New Zealand news, the results suggest that the low variation in the New Zealand - Australia cross rate is because both currencies respond in a similar fashion to Australian (but not New Zealand) macroeconomic data. 3) We highlight the problems associated with the events studies in which the surprises are calculated from a market price and propose a new estimator that overcomes this problem. |
| JEL: | C11 C13 C53 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2010/10&r=cba |
| By: | Lahura, Erick (Banco Central de Reserva del Perú) |
| Abstract: | In recent years the theoretical and empirical literature has shown a tendency to discard the use of money in monetary policy. This paper provides an empirical evaluation of the relevance of monetary aggregates in the conduct of monetary policy in Peru, a small open and partially dollarized economy. Based on recursive analysis of vector error correction models and allowing for structural breaks, we find that M3 is the only monetary aggregate that helps forecast inflation in Peru and therefore can be useful in monetary policy. There is no clear evidence about the usefulness of any other narrower monetary aggregate either as a potential monetary policy instrument or as an information variable. |
| Keywords: | cointegration, dollarization, Granger causality, monetary aggregates, monetary policy, structural change, weak and strong exogeneity |
| JEL: | C32 E52 E58 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2010-019&r=cba |
| By: | Carrera, Cesar (Banco Central de Reserva del Perú) |
| Abstract: | In the past ten years the Peruvian economy has experienced important structural changes regarding monetary policy. This document focuses on the bank lending channel as part of the transmission process to macroeconomic activity in the Peruvian economy based on Bernanke, Gertler, and Gilchrist (1996) flight-to-quality argument. The purpose of this work is to identify the bank lending channel (using bank level data), and test its relevance for understanding the transmission to economic activity by comparing monetary policy effects under two scenarios; with and without a bank lending channel (using structural autoregressive vectors). As in Gambacorta (2005), I consider a sample period in which a policy variable can capture the monetary policy stance of the central bank. For the case of Peru, I conclude that the bank lending channel has operated but this channel is not important for identifying the transmission process from monetary policy to macroeconomic activity. |
| Keywords: | Monetary policy transmission, Bank lending channel, flight-to-quality, panel of banks |
| JEL: | C22 C23 E44 E51 E52 E58 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2010-021&r=cba |
| By: | Alfred Guender; Bevan Cook (Reserve Bank of New Zealand) |
| Abstract: | The close integration of Australian and New Zealand financial markets and the similarity of the monetary policy regimes provide the perfect backdrop for testing the empirical relevance of uncovered interest rate parity (UIP) in Oceania. We find that changes in the bilateral exchange rate have become more sensitive to the short-term interest differential over time. Most important, after the introduction of the Official Cash Rate regime in New Zealand, the responsiveness of the exchange rate has accelerated to such an extent that it is incompatible with UIP. Evidence on UIP over longer horizons is mixed with a 10-year horizon since 1990 providing the strongest support for the theory. |
| JEL: | F31 F36 E52 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2010/12&r=cba |