nep-cba New Economics Papers
on Central Banking
Issue of 2011‒01‒30
forty papers chosen by
Alexander Mihailov
University of Reading

  1. International Financial Contagion: the Role of Banks By Robert Kollmann; Frédéric Malherbe
  2. Credit Risk Transfers and the Macroeconomy By Ester Faia
  3. Current Account Imbalances Coming Back By Joseph E. Gagnon
  4. The Cost Channel Reconsidered: A Comment Using an Identification-Robust Approach By Vasco Gabriel; Luis Martins
  5. A Caricature (Model) of the World Economy By Ricardo J. Caballero
  6. The Implementation of Scenarios using DSGE Models By Igor Vetlov; Ricardo Mourinho Felix; Laure Frey; Tibor Hledik; Zoltan Jakab; Niki Papadopoulou; Lukas Reiss; Martin Schneider
  7. The Banking Bailout of the Subprime Crisis: Big Commitments and Small Effects? By Michele Fratianni; Francesco Marchionne
  8. The impact of the Eurosystem's covered bond purchase programme on the primary and secondary markets By John Beirne; Lars Dalitz; Jacob Ejsing; Magdalena Grothe; Simone Manganelli; Fernando Monar; Benjamin Sahel; Matjaž Sušec; Jens Tapking; Tana Vong
  9. The dynamics of real exchange rates - A reconsideration By Heinen, Florian; Kaufmann, Hendrik; Sibbertsen, Philipp
  10. International financial flows, real exchange rates and cross-border insurance By Francesca Viani
  11. "How Does Yield Curve Predict GDP Growth? A Macro-Finance Approach Revisited" By Junko Koeda
  12. Why Are Target Interest Rate Changes So Persistent? By Olivier Coibion; Yuriy Gorodnichenko
  13. Rationally Inattentive Seller: Sales and Discrete Pricing By Filip Matejka
  14. Rigid Pricing and Rationally Inattentive Consumer By Filip Matejka
  15. The confidence channel for the transmission of shocks By Fei, S.
  16. A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area By Harashima, Taiji
  17. Testing the Invariance of Expectations Models of Inflation By Nymoen, Ragnar; L. Castle, Jennifer; A. Doornik, Jurgen; F. Hendry, David
  18. Are euro area inflation rates misaligned? By Lopez, Claude; Papell, David
  19. The Crisis of the Eurozone By Dorothee Bohle
  20. The microstructure of the money market before and after the financial crisis: a network perspective By Silvia Gabrieli
  21. Optimal indexation of government bonds and monetary policy By Hatcher, Michael C.
  22. What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices? By Harrison Hong; Motohiro Yogo
  23. Estimating Inflation-at-Risk (IaR) using Extreme Value Theory (EVT) By Santos, Edward P.; Mapa, Dennis S.; Glindro, Eloisa T.
  24. Quantitative and credit easing policies at the zero lower bound on the nominal interest rate By Dai, Meixing
  25. Adaptive Forecasting of Exchange Rates with Panel Data By Leonardo Morales-Arias; Alexander Dross
  26. An empirical investigation of the nexus among money balances, commodity prices and consumer goods'prices By Grigoli, Francesco
  27. Should the optimal portfolio be region-specific? A multi-region model with monetary policy and asset price co-movements By Leung, Charles Ka Yui; Teo, Wing Leong
  28. Privately informed parties and policy divergence By Kikuchi, Kazuya
  29. Sources of Unemployment Fluctuations in the USA and in the Euro Area in the Last Decade By Antonio Ribba
  30. Fiscal Policy Options in light of Recent IMF Research By Mark Allen
  31. Voting in Small Committees By Paolo Balduzzi; Clara Graziano; Annalisa Luporini
  32. Fiscal Spending Multiplier Calculations based on Input-Output Tables – with an Application to EU Members By Toralf Pusch; A. Rannberg
  33. To devaluate or not to devalue? How East European countries responded to the outflow of capital in 1997-99 and in 2008-09 By Vladimir Popov
  34. Fondamenti teorici della rigidità salariale nell'ambito dei "Non Market clearing Models" By CAROLEO, Floro Ernesto
  35. The Fall of the Vanishing Interim Regime Hypothesis: Towards a New Paradigm of the Choice of the Exchange Rate Regimes By Michal Jurek
  36. Keynesian and Austrian Perspective on Crisis, Shock Adjustment, Exchange Rate Regime and (Long-Term) Growth. By Mathilde Maurel; Gunther Schnabl
  37. Wake up economists! - Currency-issuing central governments have no budget constraint By Lawn, Philip
  38. The development of non-monetary means of payment By Minzyuk, Larysa
  39. An Estimated DSGE Model of the Indian Economy By Vasco Gabriel; Paul Levine; Joseph Pearlman; Bo Yang
  40. Legal and Actual Central Bank Independence: A Case Study of Bank Indonesia By Haan, Jakob de; Kadek Dian Sutrisna Artha, I.

  1. By: Robert Kollmann; Frédéric Malherbe
    Abstract: This paper provides an overview of recent theories of international financial contagion, with a focus on models in which the balance sheet constraints of global banks (and other financial institutions) are the key of international transmission.
    Keywords: global financial crisis; international financial contagion; international financial multiplier; global banks; bank balance sheets; capital ratio; leverage ratio; international interbank market; asset prices; credit losses; bank runs
    Date: 2011–01
  2. By: Ester Faia
    Abstract: The recent financial crisis has highlighted the limits of the “originate to distribute“ model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and in.ation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk
    Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare
    JEL: E3 E5 G3
    Date: 2011–01
  3. By: Joseph E. Gagnon (Peterson Institute for International Economics)
    Abstract: This paper finds statistically robust and economically important effects of fiscal policy, external financial policy, net foreign assets, and oil prices on current account balances. The statistical model builds upon and improves previous explanations of current account balances in the academic literature. A key advance is that the model captures the effect of external financial policies, including exchange rate policies, through data on net official financial flows. Based on current and expected future policies, current account imbalances in major G-20 economies are likely to widen much more in the next five years than projected by the International Monetary Fund (IMF). This paper concludes with a discussion of appropriate policies to prevent widening imbalances.
    Keywords: exchange rate, G-20, official financial flows, sterilized intervention
    Date: 2011–01
  4. By: Vasco Gabriel (University of Surrey and NIPE-UM, Portugal); Luis Martins (UNIDE, ISCTE-LUI, Portugal)
    Abstract: We re-examine the empirical relevance of the cost channel of monetary policy (e.g. Ravenna and Walsh, 2006), employing recently developed moment-conditions inference methods, including identiÂ…cation-robust procedures. Using US data, our results suggest that the cost channel effect is poorly identiÂ…ed and we are thus unable to corroborate the previous results in the literature
    Keywords: Cost channel, Phillips curve, GMM, Generalized Empirical Likelihood, Weak IdentiÂ…cation
    JEL: C22 E31 E32
    Date: 2010–09
  5. By: Ricardo J. Caballero
    Date: 2011–01–17
  6. By: Igor Vetlov (Bank of Lithuania); Ricardo Mourinho Felix; Laure Frey; Tibor Hledik; Zoltan Jakab; Niki Papadopoulou (Central Bank of Cyprus); Lukas Reiss; Martin Schneider
    Abstract: The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the design of a broad range of scenarios and can tackle a large range of issues, while at the same time offering an appealing structural interpretation of the scenario specification and simulation results. This paper provides illustrations of some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, as well as treatment of monetary and fiscal policy rules.
    Keywords: Business fluctuations, monetary policy, fiscal policy, forecasting and simulation
    JEL: E32 E52 E62 E37
    Date: 2010–12
  7. By: Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Francesco Marchionne (Universita Politecnica delle Marche)
    Abstract: This paper examines government policies aimed at rescuing banks from the effects of the financial crisis of 2008-2009. Governments responded to the crisis by guaranteeing bank assets and liabilities and by injecting fresh capital into troubled institutions. We employ event study methodology to estimate the benefits of government interventions on banks. Announcements directed at the banking system as a whole were associated with positive cumulative abnormal returns whereas announcements directed at specific banks with negative ones. The effects of foreign general announcements spilled over across different areas and were perceived by home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements produced effects that were consistent with other banks being crowded out for government resources. Multiple specific announcements exacerbated the extent of banks’ moral hazard. Results were sensitive to the information environment. Findings are consistent with the hypothesis that individual institutions were reluctant to seek public assistance.
    Keywords: announcement, bank, event study, financial crisis, rescue plan
    JEL: G21 N20
    Date: 2010–12
  8. By: John Beirne (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Lars Dalitz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Jacob Ejsing (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Magdalena Grothe (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Simone Manganelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Fernando Monar (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Benjamin Sahel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Matjaž Sušec (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Jens Tapking (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Tana Vong (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper provides an assessment of the impact of the covered bond purchase programme (hereafter referred to as the CBPP) relative to its policy objectives. The analysis presented on the impact of the CBPP on both the primary and secondary bond markets indicates that the Programme has been an effective policy instrument. It has contributed to: (i) a decline in money market term rates, (ii) an easing of funding conditions for credit institutions and enterprises, (iii) encouraging credit institutions to maintain and expand their lending to clients, and (iv) improving market liquidity in important segments of the private debt securities market. The paper also provides an overview of the investment strategy of the the Eurosystem with regard to the CBPP portfolio. JEL Classification: G12, G14, G21
    Keywords: covered bonds, liquidity, primary market, secondary market
    Date: 2011–01
  9. By: Heinen, Florian; Kaufmann, Hendrik; Sibbertsen, Philipp
    Abstract: While it is widely agreed that Purchasing Power Parity (PPP) holds as a long-run concept the specific dynamic driving the process is largely build upon a priori economic belief rather than a thorough statistical modeling procedure. The two prevailing time series models, i.e. the exponential smooth transition autoregressive (ESTAR) model and the Markov switching autoregressive (MSAR) model, are both able to support the PPP as a long-run concept. However, the dynamic behavior of real exchange rates implied by these two models is very different and leads to different economic interpretations. In this paper we approach this problem by offering a bootstrap based testing procedure to discriminate between these two rival models. We further study the small sample performance of the test. In an application we analyze several major real exchange rates to shed light on the question which model best describes these processes. This allows us to draw a conclusion about the driving forces of real exchange rates.
    Keywords: Nonlinearities, Markov switching, Smooth transition, Specification testing, Real exchange rates
    JEL: C12 C15 C22 C52 F31
    Date: 2011–01
  10. By: Francesca Viani (Banco de España)
    Abstract: Whether cross-border financial market integration has raised global insurance, is still a controversial issue in the literature. If this is so, what should we observe in the data? The insurance literature emphasizes that efficient risk-sharing requires financial markets to channel resources to countries that have been made temporarily poorer by some negative conjuncture, net of physical capital accumulation. This standard condition, which provides the basis for virtually every test of international insurance, is however derived focusing on only one of the two channels of cross-border insurance, the financial flows channel, implicitly assuming no interaction between this and the other channel, international relative price fluctuations. This paper shows that testable conditions can only be derived theoretically placing the interaction between prices and financial flows centerstage in the analysis. Using a two-country general equilibrium model with endogenous portfolio diversification, I show that financial flows and relative prices can be either complements or substitutes in providing insurance. In the case of complementarity, financial inflows raise the international price of a country's output. This implies the standard condition. In the case of substitutability prices and flows transfer purchasing power in opposite directions. This implies a different condition: efficient financial markets are required to channel resources "upstream", from relatively poorer to relatively richer countries. The conditions for substitutability appear to be quantitatively and empirically plausible.
    Keywords: International financial flows, risk-sharing, terms of trade
    JEL: F3 F4 G1
    Date: 2011–01
  11. By: Junko Koeda (Faculty of Economics, University of Tokyo)
    Abstract: This note analyzes the yield-curve predictability for GDP growth by modifying the time-series property of the interest rate process in Ang, Piazzesi, and Wei (2006). When interest rates have a unit root and term spreads are stationary, the short rate's forecasting role changes, and the combined information from the short rate and term spread intuitively reveals the relationship between the shift of yield curves and GDP growth.
    Date: 2011–01
  12. By: Olivier Coibion; Yuriy Gorodnichenko
    Abstract: We investigate the source of the high persistence in the Federal Funds Rate relative to the predictions of simple Taylor rules. While much of the literature assumes that this reflects interest-smoothing on the part of monetary policy-makers, an alternative explanation is that it represents persistent monetary policy shocks. Applying real-time data of the Federal Reserve’s macroeconomic forecasts, we document that the empirical evidence strongly favors the interest-smoothing explanation. This result obtains in nested specifications with higher order interest smoothing and persistent shocks, a feature missing in previous work. We also show that policy inertia is present in response to economic fluctuations not driven by exogenous monetary policy shocks. Finally, we argue that the predictability of future interest rates by Greenbook forecasts supports the policy inertia interpretation of historical monetary policy actions.
    JEL: E4 E5 E6
    Date: 2011–01
  13. By: Filip Matejka
    Abstract: This paper presents a model of a rationally inattentive seller responding to shocks to unit input cost. The model generates price series imultaneously exhibiting all three of the following features that can be found in the data. 1) Prices change frequently. 2) Responses of prices to aggregate variables are delayed. 3) Prices move back and forth between a few rigid values. Discrete pricing arises even if the unit input cost varies in a continuous range. Results of the model also agree with the evidence that reductions in price, e.g. sales, are usually short-lasting and that the highest price in a sample tends to be the most quoted price. Discrete and asymmetric pricing is a seller's optimal response to his limited information capacity. Moreover, the model provides rationale for faster responses to aggregate shocks in industries with more volatile idiosyncratic shocks as well as for a steeper Philip's curve in less stable aggregate conditions.
    Keywords: Rational inattention; nominal rigidity; sales
    JEL: D8 E3
    Date: 2010–03
  14. By: Filip Matejka
    Abstract: This paper proposes a mechanism leading to rigid pricing as an optimal strategy. It applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity. The consumer needs to process information about prices, while the seller is perfectly attentive. It turns out that the seller chooses to price discretely even for a continuous range of unit input costs, i.e. charges a finite set of different prices only. The price usually stays constant when unit input cost changes only a little. The seller does so to provide the consumer with easily observable prices and thus stimulate her to consume more. In the model's dynamic version, this mechanism implies that prices respond to cost shocks with a delay.
    Keywords: Rational inattention; nominal rigidity
    JEL: D8 E3
    Date: 2010–04
  15. By: Fei, S.
    Abstract: It is widely known that agents confidence is closely linked to macroeconomic cycles. A confidence channel may therefore have a significant impact in accelerating and amplifying the transmission of shocks accross borders. We endeavor to find empirical proof of the existence of a confidence channel between G7 countries (and Spain). This paper centers around the concept of a contagion of confidence from “large countries” to “small countries”. I apply instrumental-variable regressions to OECD standardized Consumers and Business Confidence measures, in order to investigate the relationship between the confidence series of all G7 countries, and Spain. Macroeconomic variables are included in these regressions to control for domestic causes of confidence changes. We find that, even after having controlled for domestic macroeconomic causes of confidence level variations, the level of confidence of agents in large countries does have an influence on the level of confidence of agents in smaller countries.
    Keywords: confidence channel, contagion, confidence shock.
    JEL: E32
    Date: 2011
  16. By: Harashima, Taiji
    Abstract: This paper examines the mechanism of persistent inflation differentials, current account imbalances, and fiscal deficits in the euro area by constructing a multi-country model in which the optimization behaviors of governments as well as those of households, firms, and the European Central Bank are explicitly incorporated. The model indicates that governments can temporarily adhere to their own intrinsic preferences because fiscal policies are not unified in the euro area. This behavior generates problems, such as inflation differentials, and the stability and growth pact does not appear to be sufficiently effective in preventing such deviations. The results in this paper imply that the balance between national sovereignty and economic stability should be shifted more to the side of stability and that the euro area has to become more politically unified. In addition, the inflation differentials provide clear evidence that inflation acceleration is not caused by monetary policies but by government behavior because monetary policies are unified in the euro area whereas fiscal policies are not.
    Keywords: The euro; Monetary union; Inflation; Inflation differential; Current account imbalance; Fiscal deficit; Time preference; The European Central Bank; The stability and growth pact
    JEL: E58 E63 F33 O52 N14
    Date: 2011–01–18
  17. By: Nymoen, Ragnar (Dept. of Economics, University of Oslo); L. Castle, Jennifer (Magdalen college, Oxford); A. Doornik, Jurgen (Nuffield College, Oxford); F. Hendry, David (University of Oxford)
    Abstract: The new-Keynesian Phillips curve (NKPC) includes expected future inflation to explain current inflation. Such models are estimated by replacing the expected value by the future outcome, using InstrumentalVariables or Generalized Method of Momentsmethods. However, the underlying theory does not allow for various non-stationarities–although crises, breaks and regimes shifts are relatively common. We analytically investigate the consequences for NKPC estimation of breaks in data processes, then apply the new technique of impulse-indicator saturation to salient published studies to check their viability. The coefficient of the future value becomes insignificant after modelling breaks.
    Keywords: New-Keynesian Phillips curve; Inflation expectations; Structural breaks; Impulse-indicator saturation.
    JEL: C22 C51
    Date: 2010–11–11
  18. By: Lopez, Claude; Papell, David
    Abstract: We study the behavior of inflation rates among Euro countries. More specifically, we are interested in testing whether and when group convergence dictated by the Maastricht treaty occurs, and we assess the impact of events such as the advent of the Euro and the 2008 financial crisis. Due to the small size of the estimation sample, we propose a new procedure that increases the power of panel unit root tests when used to study group-wise convergence. Applying this new procedure to Euro Area inflation, we find strong and lasting evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency. Furthermore, while we find divergence among some of the Euro countries prior to the 2008 financial crisis, the convergence is strengthened after the crisis for all countries except Greece.
    Keywords: groupwise convergence; inflation; euro; 2008 crisis
    JEL: C32 E31
    Date: 2010
  19. By: Dorothee Bohle
    Abstract: An important tension had been underlying the first decade of the European Monetary Union. On the one hand, governments had embraced a revolutionary prospect when designing its institutions. They called on market forces and supranational institutions to limit popular democracy and scale back the interventionist state. On the other hand, they were unprepared to live up to this prospect. Hence the accumulation of large economic imbalances and their culmination in the Greek crisis and the instability of the Union’s periphery. These developments have given governments pause. With breathtaking speed, elites have agreed on the need for austerity. But it is difficult to see how the current attempt to return to the spirit of Maastricht would fare any better than before. Permanent austerity is fraught with economic irresponsibility and political risks. Europe therefore needs a new political debate about how much it wants to allow markets to determine the fate of its citizens and countries.
    Keywords: EMU; legitimacy
    Date: 2010–10–15
  20. By: Silvia Gabrieli (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper provides an in depth microstructure analysis of the euro money market by taking a network perspective. Banks are the nodes of the networks; unsecured overnight loans form the links connecting the nodes. Daily interbank networks verify the same stylised facts documented for many real complex systems: they are highly sparse, far from being complete, exhibit the small world property and a power-law distribution of degree (the number of counterparties each bank establishes credit relationships with). On the other hand, the tendency of banks to cluster, i.e. to form groups where ties are relatively denser, is much lower than in other real networks. The time patterns of some network statistics provide interesting insights into the evolution of the potential for financial contagion; the partition of the network into smaller connected subnetworks documents a move against market integration; heterogeneous developments across banks of different size offer insights into banks’ behaviour. An analysis of banks’ prominence in the market is undertaken using centrality measures: the various indicators suggest that the biggest banks are also the most connected before the onset of the crisis; however, medium/small and very small banks’ centralities increase progressively after August 2007 as these banks increase their “influence” as liquidity providers. The rich set of measures described in this paper represents a key input for future research.
    Keywords: Network analysis; Network centrality indicators; Money market; Financial crisis
    JEL: D85 G10 G21
    Date: 2011–01–19
  21. By: Hatcher, Michael C. (Cardiff Business School)
    Abstract: Using an overlapping generations model in which the young save for old age using indexed and nominal government bonds, this paper investigates how optimal indexation is influenced by monetary policy. In order to do so, two monetary policies with markedly different long run implications are examined: inflation targeting and price-level targeting. Optimal indexation differs significantly under the two regimes. Under inflation targeting, long-term inflation uncertainty is substantial due to base-level drift in the price level. Nominal bonds are thus a poor store of value and optimal indexation is relatively high (76 per cent). With price-level targeting, by contrast, long-term inflation uncertainty is minimal because the price level is trend-stationary. This makes nominal bonds a better store of value compared to indexed bonds, reducing optimal indexation somewhat (26 per cent). Importantly for these results, the model captures two imperfections of indexation (indexation bias and lagged indexation) that are calibrated to the UK case.
    Keywords: optimal indexation; government bonds; inflation targeting; price-level targeting
    JEL: E52 E58
    Date: 2011–01
  22. By: Harrison Hong; Motohiro Yogo
    Abstract: Open interest, or the amount of contracts outstanding in futures markets, has remarkable power to forecast commodity, currency, bond, and stock prices. Changes in open interest are highly pro-cyclical and predict asset-price fluctuations better than a number of alternative variables including past prices. In commodity markets, rising open interest predicts rising commodity prices, falling bond prices, and a rising short rate. In currency markets, rising open interest predicts appreciation of foreign currencies relative to the U.S. dollar. In bond and stock markets, rising open interest predicts falling bond prices and rising stock prices, respectively. We offer a theoretical explanation of our empirical findings. Open interest is a more informative signal of future economic activity and inflation than past prices because of hedging demand and downward-sloping demand curves in futures markets.
    JEL: E31 E37 F31 G12 G13
    Date: 2011–01
  23. By: Santos, Edward P.; Mapa, Dennis S.; Glindro, Eloisa T.
    Abstract: The Bangko Sentral ng Pilipinas (BSP) has the primary responsibility of maintaining stable prices conducive to a balanced and sustainable economic growth. The year 2008 posed a challenge to the BSP’s monetary policy making as inflation hit an official 17-year high of 12.5 percent in August after 10 months of continuous acceleration. The alarming double-digit inflation rate was attributed to rising fuel and food prices, particularly the price of rice. A high inflation rate has impact on poverty since inflation affects the poor more than the rich. From a macroeconomic perspective, high level of inflation is not conducive to economic growth. This paper proposes a method of estimating Inflation-at-Risk (IaR) similar to the Value-at-Risk (VaR) used to estimate risk in the financial market. The IaR represents the maximum inflation over a target horizon for a given low pre-specified probability. It can serve as an early warning system that can be used by the BSP to identify whether the level of inflation is extreme enough to be considered an imminent threat to its inflation objective. The extreme value theory (EVT), which deals with the frequency and magnitude of very low probability events, is used as the basis for building a model in estimating the IaR. The estimates of the IaR using the peaks-over-threshold (POT) model suggest that the while the inflation rate experienced in 2008 can not be considered as an extreme value, it was very near the estimated 90 percent IaR.
    Keywords: Inflation-at-Risk (IaR); Extreme Value Theory (EVT); Peaks-over-Threshold (POT)
    JEL: E31 C52 C01
    Date: 2011–01
  24. By: Dai, Meixing
    Abstract: Using a New-Keynesian model extended to include credit, money and reserve markets, we examine the dynamics of inflation and output gap under some monetary policy options adopted when the economy is hit by large negative real, financial and monetary shocks. Relaxing the assumption that market interest rates are perfectly controlled by the central bank using the funds rate operating procedure, we have shown that the equilibrium at the zero lower bound on the nominal discount rate is stable (or cyclically stable, depending on monetary and financial parameters) and constitutes a liquidity trap, making the central bank’s communication skills useless in the crisis management. While the quantitative easing policy allows attenuating the effects of crisis, it is not always sufficient to restore the normal equilibrium. Nevertheless, quantitative and credit easing policies coupled with the zero discount rate policy could stabilize the economy and make central bank’s communication potentially credible during the crisis.
    Keywords: Zero lower bound (ZLB) on the nominal interest rate; zero interest rate policy; liquidity trap; quantitative easing policy; credit easing policy; dynamic stability.
    JEL: E43 E51 E58 E52 E44
    Date: 2011
  25. By: Leonardo Morales-Arias (University of Kiel); Alexander Dross
    Abstract: This article investigates the statistical and economic implications of adaptive forecasting of exchange rates with panel data and alternative predictors. The candidate exchange rate predictors are drawn from (i) macroeconomic 'fundamentals', (ii) return/volatility of asset markets and (iii) cyclical and confidence indices. Exchange rate forecasts at various horizons are obtained from each of the potential predictors using single market, mean group and pooled estimates by means of rolling window and recursive forecasting schemes. The capabilities of single predictors and of adaptive techniques for combining the generated exchange rate forecasts are subsequently examined by means of statistical and economic performance measures. The forward premium and a predictor based on a Taylor rule yield the most promising forecasting results out of the macro 'fundamentals' considered. For recursive forecasting, confidence indices and volatility in-mean yield more accurate forecasts than most of the macro 'fundamentals'. Adaptive forecast combinations techniques improve forecasting precision and lead to better market timing than most single predictors at higher horizons.
    Keywords: exchange rate forecasting; panel data; forecast combinations; market timing
    JEL: C20 F31 G12
    Date: 2010–10–01
  26. By: Grigoli, Francesco
    Abstract: This paper aims to identify the nexus between the excess of liquidity in the United States and commodity prices over the 1983-2006 period. In particular, it assesses whether commodity prices react more powerfully than consumer goods'prices to changes in real money balances. Within a cointegrated vector autoregressive framework, the author investigates whether consumer prices and commodity prices react to excess liquidity, and if the different price elasticities of supply for goods and commodities allow for differences in the dynamic paths of price adjustment to a liquidity shock. The results show a positive relationship between real money and real commodity prices and provide empirical evidence for a stronger response of commodity prices with respect to consumer goods'prices. This could imply that, if the magnitude of the reaction is due the fact that consumer goods'prices are slower to react, then their long-run value can be predicted with the help of commodity prices. The findings support the view that the latter should be considered as a valid monetary indicator.
    Keywords: Markets and Market Access,Emerging Markets,Economic Theory&Research,Commodities,E-Business
    Date: 2011–01–01
  27. By: Leung, Charles Ka Yui; Teo, Wing Leong
    Abstract: A multi-region, dynamic stochastic general equilibrium (MRDSGE) model is built to show that differences in the price elasticity of housing supply can be related to stylized facts on regional differences in (1) house price level, (2) house price volatility, (3) monetary policy propagation mechanism and (4) household asset portfolio. In addition, regional house prices are found to move more closely with regional fundamentals than with the national GDP. The correlation between the national stock price and the regional housing price also vary significantly across regions, which suggests that optimal portfolio should be region specific.
    Keywords: regional economic difference; monetary policy; housing market; region-specific portfolio
    JEL: R10 E32 E52
    Date: 2010–12
  28. By: Kikuchi, Kazuya
    Abstract: This paper presents a Downsian model of political competition in which parties have incomplete but richer information than voters on policy effects. Each party can observe a private signal of the policy effects, while voters cannot. In this setting, voters infer the policy effects from the party platforms. In this political game with private information, we show that there exist weak perfect Bayesian equilibria (WPBEs) at which the parties play different strategies, and thus, announce different platforms even when their signals coincide. This result is in contrast with the conclusion of the Median Voter Theorem in the classical Downsian model. Our equilibrium analysis suggests similarity between the set of WPBEs in this model and the set of uniformly perfect equilibria of Harsanyi and Selten (1988) in the model with completely informed parties which we studied in a previous paper (Kikuchi, 2010).
    Date: 2011–01
  29. By: Antonio Ribba
    Abstract: The aim of this paper is to investigate the role played by macroeconomic shocks in shaping unemployment fluctuations, both in the USA and in the Euro area, in the recent, European Monetary Union, period. The task is accomplished by estimating a VAR model which jointly considers US and European variables. We identify the structural disturbances through sign restrictions on the dynamic response of variables. Our results show that there are real effects of monetary policy shocks and of non-monetary policy, financial shocks in both economic areas. Moreover, a significant role is also exerted by business cycle, adverse aggregate demand shocks. We provide an estimation of the relative importance of the identified structural shocks in explaining the variability of inflation and unemployment. Not surprisingly, in the last decade an important role has been played by financial shocks.
    Keywords: Structural VARs; Euro Area; Monetary Policy; Unemployment
    JEL: C32 E40
    Date: 2010–04
  30. By: Mark Allen
    Abstract: The financial crisis and recession have left a legacy of unusually large fiscal deficits and growing sovereign debt levels in most advanced economies. The paper uses recent research from the IMF to throw light on two questions: how much fiscal space is available to advanced countries before they will be compelled to tighten fiscal policy; and how likely are some countries in this group to default? The paper presents work of Ostry et al. which defines and measures fiscal space. Fiscal space is defined as the room the government has to borrow before it hits a debt limit, the level of debt to GDP at which the debt dynamics become unstable, unless the government undertakes exceptional fiscal action. The debt limit is a function of the past behaviour of the government in responding to fiscal deficits, and fiscal space depends both on the past policy record as well as the current level of debt. The analysis indicates that all advanced countries except Greece, Japan, Portugal and Spain, probably still have some fiscal space. On the likelihood of default, the paper presents work by Cottarelli et al. The paper concludes that the amount of fiscal adjustment needed to avert unsustainable debt dynamics for a number of countries, while large, is not unprecedented, and in any case would not be much reduced by default. The high spreads that have appeared on sovereign debt markets are a poor indicator of subsequent default. And the structure of debt makes default much less likely than in the cases of those (predominantly emerging markets) that have defaulted in the recent past.
    Keywords: fiscal sustainability, debt dynamics, advanced economies, fiscal adjustment, public debt
    JEL: F34 H60 H62 H63
    Date: 2011–01
  31. By: Paolo Balduzzi (Università Cattolica Milano); Clara Graziano (Università degli Studi di Udine); Annalisa Luporini (Università degli Studi di Firenze, Dipartimento di Scienze Economiche)
    Abstract: We analyze the voting behavior of a small committee that has to approve or reject a proposal whose return is uncertain. Members have heterogenous preferences: some members want to maximize the expected value while other members have a bias toward project approval and ignore their private information. We analyze different voting games when information is costless and communication is not possible, and we provide insights on the optimal composition of these committees. Our main result is that the presence of biased members can improve the voting outcome by simplifying the strategies of unbiased members. Thus, committees with heterogeneous members can function at least as well as homogeneous committees and in some cases they perform better. In particular, when value-maximizing members hold 51% of votes, the socially optimal equilibrium becomes unique.
    Keywords: Voting, Small committees.
    JEL: D71 D72
    Date: 2011
  32. By: Toralf Pusch; A. Rannberg
    Abstract: Fiscal spending multiplier calculations have been revived in the aftermath of the global financial crisis. Much of the current literature is based on VAR estimation methods and DSGE models. The aim of this paper is not a further deepening of this literature but rather to implement a calculation method of multipliers which is suitable for open economies like EU member states. To this end, Input-Output tables are used as by this means the import intake of domestic demand components can be isolated in order to get an appropriate base for the calculation of the relevant import quotas. The difference of this method is substantial – on average the calculated multipliers are 15% higher than the conventional GDP fiscal spending multiplier for EU members. Multipliers for specific spending categories are comparably high, ranging between 1.4 and 1.8 for many members of the EU. GDP drops due to budget consolidation might therefore be substantial if monetary policy is not able to react in an expansionary manner.
    Keywords: fiscal spending multiplier calculation, Input-Output calculus, income- expenditure model, European Union, stimulus, consolidation
    JEL: B22 C67 E12 E62
    Date: 2011–11
  33. By: Vladimir Popov (New Economic School, Moscow)
    Abstract: If there is a negative terms of trade or financial shock leading to the deterioration in the balance of payments, there are two basic options for a country that has limited foreign exchange reserves. First, a country can maintain a fixed exchange rate (or even a currency board) and wait until the reduction of foreign exchange reserves leads to the reduction of money supply: this will drive domestic prices down and stimulate exports, raise interest rates and stimulate the inflow of capital, and finally will correct the balance of payments. Second, the country can allow the devaluation of national currency – flexible exchange rate will automatically bring the balance of payments back into the equilibrium. Because national prices are less flexible than exchange rates, the first type of adjustment is associated with the greater reduction of output. The empirical evidence on East European countries and other transition economies for 1998-99 period (outflow of capital after the 1997 Asian and 1998 Russian currency crises and slowdown of output growth rates) suggests that the second type of policy response (devaluation) was associated with smaller loss of output than the first type (monetary contraction). 2008-09 developments provide additional evidence for this hypothesis.
    Date: 2011–01
  34. By: CAROLEO, Floro Ernesto (Dipartimento di Studi Economici - Università degli Studi di Napoli Parthenope)
    Abstract: The paper analyses the labour market in a framework of New Keynesian Economics (NKE). The aim of the NKE is to provide micro foundations to the main result of the Keynesian model, that is the rigidity of prices and wages as well as the presence of non market clearing equilibria. In the first part it is shown how rigidity determines involuntary unemployment having distinct characteristics and policy implications weather it comes from price rigidity in the good market (keynesian unemployment) or from wage rigidity in the labour market (classical unemployment). In the second part two labour market models are developed: the insider-outsider model and the efficiency wage model. These tray to meet the objection that non market clearing equilibria do not derive from a rational behaviour of economic agents in the labour market. It can be demonstrated, on the contrary, that involuntary unemployment is consistent with the first postulate of the neoclassical model that is the identity between the real wage and labour marginal productivity (expressed in efficiency units), even if the second postulate, the identity between marginal utility of wage and the marginal disutility of leisure time, can be rejected.
    Keywords: labour market; keynesian unemployment; efficiency wage model
    JEL: J41 J64
    Date: 2011–01–18
  35. By: Michal Jurek (The Poznan University of Economics, Banking Department)
    Abstract: This paper verifies strong and weak versions of the vanishing interim regime hypothesis (so-called bipolar view). It is shown herein that the strong as well as weak version of this hypothesis can be discredited. Empirical observations support the bipolar view only for the advanced countries, but not for emerging and developing ones. On the contrary – the number of interim regimes, used by emerging and developing countries more than doubled in the 1999–2008 period. Results of the logistic regression analysis also challenge a bipolar view. Moreover, they provide a strong support for the view that the probability of the use of interim regimes in emerging and developing countries significantly differs in various regions of the world. This can be treated as an evidence of the existence of other factors that influence these countries’ choices concerning exchange rate regimes, partly resulting from differences in institutional fundamentals and different economic structures as well as macroeconomic policy stabilization programs.
    Keywords: bipolar view, exchange rate regimes, monetary policy
    JEL: E42 E52 F31
    Date: 2010
  36. By: Mathilde Maurel (Centre d'Economie de la Sorbonne); Gunther Schnabl (Université de Leipzig)
    Abstract: The 2010 European debt crisis has revived the discussion concerning the optimum adjustment strategy in the face of asymmetric shocks. Whereas Mundell's (1961) seminal theory on optimum currency areas suggests depreciation in the face of crisis, the most recent emergence of competitive depreciations, competitive interest rate cuts or currency wars questions the exchange rate as an adjustment tool to asymmetric economic development. This paper approaches the question from a theoretical perspective by confronting exchange rate based adjustment with crisis adjustment via price and wage cuts. Econometric estimations yield a negative impact of exchange rate flexibility/ volatility on growth, which is found to be particularly strong for countries with asymmetric business cycles and during recessions. Based on these findings we support a further enlargement of the European Monetary Union and recommend more exchange rate stability for the rest of the world.
    Keywords: Exchange rate regime, crisis, shock adjustment, theory of optimum currency areas, Mundell, Schumpeter, Hayek, competitive depreciations, currency war.
    JEL: F31 F32
    Date: 2011–01
  37. By: Lawn, Philip
    Abstract: Abstract: Despite what mainstream economists preach, currency-issuing central governments have no budget constraint. It is therefore incumbent upon them to use their unique spending and taxing powers to achieve the broader goal of sustainable development. Their failure to do so has meant that nations have fallen well short of realising their full potential. Rather than accept the neo-liberal myth that ‘small government is best’, the citizens of a nation should welcome the central-government’s responsible use of their unique spending and taxing powers to provide sufficient public goods and critical infrastructure, achieve and maintain full employment, resolve critical social and environmental concerns, and meet the requirements of an aging population. Should central governments fail in their responsibility to prudently use their unique powers, public disapproval is best registered through the ballot box, not through degenerative debates that distort the facts about the operation of a modern, fiat-currency economy.
    Keywords: Keywords: Central governments; government budgets; fiscal and monetary policy; sustainable development
    JEL: E62 B50
    Date: 2011–01–05
  38. By: Minzyuk, Larysa
    Abstract: This paper develops a model to investigate the private enforcement of non-monetary inter-firm payments in Russia during the 1990s. Since acceptability of means of payment can have a self-reinforcing nature, the dominance of non-monetary means of payment over money in Russia might have been a result of the driving forces of the demonetiziation equilibrium. We propose a very simple search model to explore acceptability of means of payment different from legal tender - fiat money, commodity money, and trade credit. In each case, we show that monetization through the proposed means of payment is always a possible trade pattern.
    Keywords: privately created means of payment; fiat money; commodity money; reputations; Russia
    JEL: D83 E00
    Date: 2010
  39. By: Vasco Gabriel (University of Surrey); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); Bo Yang (University of Surrey and London Metropolitan University)
    Abstract: We develop a closed-economy DSGE model of the Indian economy and estimate it by Bayesian Maximum Likelihood methods using Dynare. We build up in stages to a model with a number of features important for emerging economies in general and the Indian economy in particular: a large proportion of credit-constrained consumers, a financial accelerator facing domestic firms seeking to finance their investment, and an informal sector. The simulation properties of the estimated model are examined under a generalized inflation targeting Taylor-type interest rate rule with forward and backward-looking components. We find that, in terms of model posterior probabilities and standard moments criteria, inclusion of the above financial frictions and an informal sector significantly improves the model fit.
    Keywords: Indian economy, DSGE model, Bayesian estimation, monetary interest rate rules, financial frictions
    JEL: E52 E37 E58
    Date: 2010–09
  40. By: Haan, Jakob de; Kadek Dian Sutrisna Artha, I. (Groningen University)
    Abstract: Indicators of central bank independence (CBI) based on the interpretation central bank laws in place may not capture the actual independence of the central bank. This paper develops an indicator of actual independence of the Bank Indonesia (BI), the central bank of Indonesia, for the period 1953-2008 and compares it with a new legal CBI indicator based on Cukierman (1992). The indicator of actual independence captures institutional and economic factors that affect CBI. We find that before 1999, legal and actual independence of BI diverged substantially. After a new central bank law was enacted, the legal independence of BI increased and converged to actual independence.
    Date: 2010

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