nep-cba New Economics Papers
on Central Banking
Issue of 2011‒02‒05
forty-two papers chosen by
Alexander Mihailov
University of Reading

  1. Notes on Agents' Behavioral Rules Under Adaptive Learning and Studies of Monetary Policy By Seppo Honkapohja; Kaushik Mitra; George W. Evans
  2. The Stagnation Regime of the New Keynesian Model and Current US Policy By George W. Evans
  3. Global banking and international business cycles By Robert Kollmann; Zeno Enders; Gernot J. Mueller
  4. The Great Recession: US dynamics and spillovers to the world economy By Fabio C. Bagliano; Claudio Morana
  5. Monetary Policy in Emerging Markets: A Survey By Frankel, Jeffrey
  6. Evaluating DSGE model forecasts of comovements By Edward Herbst; Frank Schorfheide
  7. Cross-country causes and consequences of the crisis: an update By Andrew K. Rose; Mark M. Spiegel
  8. A Comparison of Forecasting Procedures For Macroeconomic Series: The Contribution of Structural Break Models By Luc Bauwens; Gary Koop; Dimitris Korobilis; Jeroen Rombouts
  9. Why are target interest rate changes so persistent? By Olivier Coibion; Yuriy Gorodnichenko
  10. Price-level targeting when there is price-level drift By Gerberding, Christina; Gerke, Rafael; Hammermann, Felix
  11. Do Professional Forecasters Pay Attention to Data Releases? By Clements, Michael P
  12. The cost of inflation: a mechanism design approach By Guillaume Rocheteau
  13. Liquidity in frictional asset markets By Guillaume Rocheteau; Pierre-Olivier Weill
  14. On the coexistence of money and higher-return assets and its social role By Guillaume Rocheteau
  15. Learning About Inflation Measures for Interest Rate Rules By Marco Airaudo; Luis-Felipe Zanna
  16. Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies By Marco Airaudo; Luis-Felipe Zanna
  17. Did the Federal Reserve's MBS purchase program lower mortgage rates? By Diana Hancock; Wayne Passmore
  18. Business Cycle Synchronization Since 1880 By Michael Artis; George Chouliarakis; Pkg Harischandra
  19. Why don't people pay attention? Endogenous Sticky Information in a DSGE Model By Lena Dräger
  20. The Impact of Monetary Policy on Financial Markets in Small Open Economies: More or Less Effective During the Global Financial Crisis? By Pennings, Steven; Ramayandi, Arief; Tang, Hsiao Chink
  21. Responses to the financial crisis, treasury debt, and the impact on short-term money markets By Authors: Warren B. Hrung; Jason S. Seligman
  22. Asymmetric shocks in a currency union with monetary and fiscal handcuffs? By Christopher J. Erceg; Jesper Lindé
  23. On the link between credit procyclicality and bank competition By Vincent Bouvatier; Antonia López-Villavicencio; Valérie Mignon
  24. Monitoring the unsecured interbank money market using TARGET2 data By Ronald Heijmans; Richard Heuver; Daniëlle Walraven
  25. Interest rate risk and other determinants of post WWII U.S. government debt/GDP dynamics By George J. Hall; Thomas J. Sargent
  26. Central bank communication and the perception of monetary policy by financial market experts By Schmidt, Sandra; Nautz, Dieter
  27. Central Bank Transparency and Shocks By Daniel Laskar
  28. Time series estimates of the US new Keynesian Phillips curve with structural breaks By Rao, B. Bhaskara; Paradiso, Antonio
  29. Estimates of the US Phillips curve with the general to specific method By Rao, B. Bhaskara; Paradiso, Antonio
  30. The forecasting horizon of inflationary expectations and perceptions in the EU. Is it really 12 months? By Jonung, Lars; Lindén, Staffan
  31. Can we prevent boom-bust cycles during euro area accession? By Michał Brzoza-Brzezina; Pascal Jacquinot; Marcin Kolasa
  32. The Stability and Growth Pact: Lessons from the Great Recession By Larch, Martin; van den Noord, Paul; Jonung, Lars
  33. Exchange rate pass-through: evidence based on vector autoregression with sign restrictions By Lian An; Jian Wang
  34. Financial Spillovers Across Countries: The Case of Canada and the United States By Kimberly Beaton; Brigitte Desroches
  35. Financial innumeracy: Consumers cannot deal with interest rates By Franses, Ph.H.B.F.; Vlam, A.
  36. Monetary Policy Rules and Financial Stress: Does Financial Instability Matter for Monetary By Jaromír Baxa; Roman Horváth; Borek Vasicek
  37. Did doubling reserve requirements cause the recession of 1937-1938? a microeconomic approach By Charles W. Calomiris; Joseph R. Mason; David C. Wheelock
  38. Chinese monetary policy and the dollar peg By Reade, J. James; Volz, Ulrich
  39. MOSES: Model of Swedish Economic Studies By Gunnar Bårdsen, Ard den Reijer, Patrik Jonasson and Ragnar Nymoen
  40. MUSE: Monetary Union and Slovak Economy model By Matus Senaj; Milan Vyskrabka; Juraj Zeman
  41. The Interaction between Monetary and Fiscal Policies in Turkey: An Estimated New Keynesian DSGE Model By Cem Cebi
  42. Determinants of the Exchange Rate in Colombia under Inflation Targeting By Fredy Alejandro Gamboa Estrada

  1. By: Seppo Honkapohja; Kaushik Mitra; George W. Evans
    Abstract: These notes try to clarify some discussions on the formulation of individual intertemporal behavior under adaptive learning in representative agent models. First, we discuss two suggested approaches and related issues in the context of a simple consumption-saving model. Second, we show that the analysis of learning in the NewKeynesian monetary policy model based on "Euler equations" provides a consistent and valid approach.
    Keywords: Euler equation, NewKeynesian, Adaptive learning
    JEL: E4 E5 E6 E52 E58
    Date: 2011–01
  2. By: George W. Evans
    Abstract: In Evans, Guse, and Honkapohja (2008) the intended steady state is locally but not globally stable under adaptive learning, and unstable deflationary paths can arise after large pessimistic shocks to expectations. In the current paper a modified model is presented that includes a locally stable stagnation regime as a possible outcome arising from large expectation shocks. Policy implications are examined. Sufficiently large temporary increases in government spending can dislodge the economy from the stagnation regime and restore the natural stabilizing dynamics. More specific policy proposals are presented and discussed.
    Keywords: Stagnation, fiscal and monetary policy, deflation trap
    JEL: E63 E52 E58
    Date: 2011–01
  3. By: Robert Kollmann; Zeno Enders; Gernot J. Mueller
    Abstract: This paper incorporates a global bank into a two-country business-cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007–09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the U.S. and the euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.
    Keywords: Equity ; Bank capital ; Productivity ; Default (Finance) ; Loans
    Date: 2011
  4. By: Fabio C. Bagliano; Claudio Morana
    Abstract: The paper aims at assessing the mechanics of the Great Recession, considering both its domestic propagation within the US, as well as its spillovers to advanced and emerging economies. A total of 50 countries has been investigated by means of a large-scale open economy macroeconometric model, providing an accurate assessment of the international macro/finance interface over the whole 1980-2009 period. It is found that a boom-bust credit cycle interpretation of the crisis is consistent with the empirical evidence. Moreover, concerning the real effects of the crisis within the US, stronger evidence of an asset prices channel, rather than a liquidity channel, has been detected. The results also support the effectiveness of the expansionary fiscal/monetary policy mix implemented by the Fed and the US government. Concerning the spillovers to the world economy, it is found that while the financial shock has spilled over to foreign countries through US housing and stock price dynamics, as well as excess liquidity creation, the trade channel likely is the key trasmission mechanism of the real shock.
    Keywords: Great Recession, financial crisis, economic crisis, boombust, credit cycle, international business cycle, factor vector autoregressive models
    JEL: C22 E32 F36
    Date: 2010–12
  5. By: Frankel, Jeffrey (Harvard Kennedy School)
    Abstract: The characteristics that distinguish most developing countries, compared to large industrialized countries, include: greater exposure to supply shocks in general and trade volatility in particular, procyclicality of both domestic fiscal policy and international finance, lower credibility with respect to both price stability and default risk, and other imperfect institutions. These characteristics warrant appropriate models. Models of dynamic inconsistency in monetary policy and the need for central bank independence and commitment to nominal targets apply even more strongly to developing countries. But because most developing countries are price-takers on world markets, the small open economy model, with nontraded goods, is often more useful than the two-country two-good model. Contractionary effects of devaluation are also far more important for developing countries, particularly the balance sheet effects that arise from currency mismatch. The exchange rate was the favored nominal anchor for monetary policy in inflation stabilizations of the late 1980s and early 1990s. After the currency crises of 1994-2001, the conventional wisdom anointed Inflation Targeting as the preferred monetary regime in place of exchange rate targets. But events associated with the global crisis of 2007-09 have revealed limitations to the choice of CPI for the role of price index. The participation of emerging markets in global finance is a major reason why they have by now earned their own large body of research, but it also means that they remain highly prone to problems of asymmetric information, illiquidity, default risk, moral hazard and imperfect institutions. Many of the models designed to fit emerging market countries were built around such financial market imperfections; few economists thought this inappropriate. With the global crisis of 2007-09, the tables have turned: economists should now consider drawing on the models of emerging market crises to try to understand the unexpected imperfections and failures of advanced-country financial markets.
    JEL: E00 E50 F41 O16
    Date: 2011–01
  6. By: Edward Herbst; Frank Schorfheide
    Abstract: This paper develops and applies tools to assess multivariate aspects of Bayesian Dynamic Stochastic General Equilibrium (DSGE) model forecasts and their ability to predict comovements among key macroeconomic variables. The authors construct posterior predictive checks to evaluate the calibration of conditional and unconditional density forecasts, in addition to checks for root-mean-squared errors and event probabilities associated with these forecasts. The checks are implemented on a three-equation DSGE model as well as the Smets and Wouters (2007) model using real-time data. They find that the additional features incorporated into the Smets-Wouters model do not lead to a uniform improvement in the quality of density forecasts and prediction of comovements of output, inflation, and interest rates.
    Keywords: Econometric models ; Forecasting
    Date: 2011
  7. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: We update Rose and Spiegel (2010a, b) and search for simple quantitative models of macroeconomic and financial indicators of the "Great Recession" of 2008-09. We use a cross-country approach and examine a number of potential causes that have been found to be successful indicators of crisis intensity by other scholars. We check a number of different indicators of crisis intensity, and a variety of different country samples. While countries with higher income and looser credit market regulation seemed to suffer worse crises, we find few clear reliable indicators in the pre-crisis data of the incidence of the Great Recession. Countries with current account surpluses seemed better insulated from slowdowns.
    Keywords: Financial crises ; Econometric models
    Date: 2011
  8. By: Luc Bauwens; Gary Koop; Dimitris Korobilis; Jeroen Rombouts
    Abstract: This paper compares the forecasting performance of different models which have been proposed for forecasting in the presence of structural breaks. These models differ in their treatment of the break process, the parameters defining the model which applies in each regime and the out-of-sample probability of a break occurring. In an extensive empirical evaluation involving many important macroeconomic time series, we demonstrate the presence of structural breaks and their importance for forecasting in the vast majority of cases. However, we find no single forecasting model consistently works best in the presence of structural breaks. In many cases, the formal modeling of the break process is important in achieving good forecast performance. However, there are also many cases where simple, rolling OLS forecasts perform well. <P>
    Keywords: Forecasting, change-points, Markov switching, Bayesian inference.,
    JEL: C11 C22 C53
    Date: 2011–01–01
  9. By: Olivier Coibion (Department of Economics, College of William and Mary); Yuriy Gorodnichenko (Department of Economics, University of California, Berkeley)
    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 interestsmoothing 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.
    Keywords: Taylor rules, interest rate smoothing, monetary policy shocks.
    JEL: E3 E4 E5
    Date: 2011–01–23
  10. By: Gerberding, Christina; Gerke, Rafael; Hammermann, Felix
    Abstract: Recent research has shown that optimal monetary policy may display considerable price-level drift. Proponents of price-level targeting have argued that the costs of eliminating the price-level drift may be reduced if the central bank responds flexibly by returning the price level only gradually to the target path (Gaspar et al., 2010). We revisit this argument in two variants of the New Keynesian model. We show that in a two-sector version of the model which allows for changes in relative prices across sectors, the costs of stabilisation under price-level targeting remain much higher than under inflation targeting for all policy-relevant horizons. Our conclusion is that extending the policy horizon is not a panacea to reduce the costs of eliminating pricelevel drift. --
    Keywords: price-level targeting,optimal monetary policy,commitment
    JEL: E58 E42 E31
    Date: 2010
  11. By: Clements, Michael P (University of Warwick)
    Abstract: We present a novel approach to assessing the attentiveness of professional forecasters to news about the macroeconomy. We find evidence that professional forecasters, taken as a group, do not always update their estimates of the current state of the economy to re‡ect the latest releases of revised estimates of key data. Key words: Professional forecasters ; data revisions; inattention JEL classification: C53
    Date: 2011
  12. By: Guillaume Rocheteau
    Abstract: I apply mechanism design to quantify the cost of inflation that can be attributed to monetary frictions alone. In an environment with pairwise meetings, the money demand that is consistent with a constrained-efficient allocation takes the form of a continuous correspondence that can fit the data over the period 1900-2006. For such parameterizations, the cost of moderate inflation is zero. This result is robust to different assumptions regarding the observability of money holdings, the introduction of match-specific heterogeneity, and endogeneous participation decisions.
    Keywords: Inflation (Finance) - Mathematical models ; Demand for money ; Monetary theory
    Date: 2011
  13. By: Guillaume Rocheteau; Pierre-Olivier Weill
    Abstract: On November 14-15, 2008, the Federal Reserve Bank of Cleveland hosted a conference on “Liquidity in Frictional Asset Markets.” In this paper we review the literature on asset markets with trading frictions in both finance and monetary theory using a simple search-theoretic model, and we discuss the papers presented at the conference in the context of this literature. We will show the diversity of topics covered in this literature, e.g., the dynamics of housing and credit markets, the functioning of payment systems, optimal monetary policy and the cost of inflation, the role of banks, the effect of informational frictions on asset trading.
    Keywords: Liquidity (Economics)
    Date: 2011
  14. By: Guillaume Rocheteau
    Abstract: This paper adopts mechanism design to tackle the central issue in monetary theory, namely, the coexistence of money and higher-return assets. I describe an economy with pairwise meetings, where fiat money and risk-free capital compete as means of payment. Whenever fiat money has an essential role, any constrained-efficient allocation is such that capital commands a higher rate of return than fiat money.
    Keywords: Monetary theory
    Date: 2011
  15. By: Marco Airaudo; Luis-Felipe Zanna
    Abstract: Empirical evidence suggests that goods are highly heterogeneous with respect to the degree of price rigidity. We develop a DSGE model featuring heterogeneous nominal rigidities across two sectors to study the equilibrium determinacy and stability under adaptive learning for interest rate rules that respond to inflation measures differing in their degree of price stickiness. We find that rules responding to headline inflation measures that assign a positive weight to the inflation of the sector with low price stickiness are more prone to generate macroeconomic instability than rules that respond exclusively to the inflation of the sector with high price stickiness. By this we mean that they are more prone to induce non-learnable fundamental-driven equilibria, learnable self-fulfilling expectations equilibria, and equilibria where fluctuations are unbounded. We discuss how our results depend on the elasticity of substitution across goods, the degree of heterogeneity in price rigidity, as well as on the timing of the rule.
    Keywords: Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy; Multiple Sectors
    JEL: C62 D83 E32 E52
    Date: 2010
  16. By: Marco Airaudo; Luis-Felipe Zanna
    Abstract: In this paper we present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to changes in inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on particular characteristics of open economies, including the degree of trade openness and the degree of exchange rate pass-through into import prices. For instance, in our model, we find that a rule that responds to expected future inflation is more prone to induce endogenous cyclical and chaotic dynamics the more open the economy and the higher the degree of exchange rate pass-through.
    Keywords: Small Open Economy; Interest Rate Rules; Taylor Rules; Multiple Equilibria; Chaos; Endogenous Fluctuations
    JEL: E32 E52 F41
    Date: 2010
  17. By: Diana Hancock; Wayne Passmore
    Abstract: We employ empirical pricing models for mortgage-backed security (MBS) yields and for mortgage rates to measure deviations from normal market functioning in order to assess how the Federal Reserve MBS purchase program--a 16 month program announced on November 25, 2008 and completed on March 31, 2010--affected risk premiums that were embedded in mortgage and swap markets. Our pricing models suggest that the announcement of the program, which signaled strong and credible government backing for mortgage markets in particular and for the financial system more generally, reduced mortgage rates by about 85 basis points between November 25 and December 31, 2008, even though no MBS had (yet) been purchased by the Federal Reserve ; Once the Federal Reserve's MBS program started purchasing MBS, we estimate that the abnormal risk premiums embedded mortgage rates decreased roughly 50 basis points. However, observed mortgage rates declined only slightly because of generally rising interest rates. ; After May 27, 2009 fairly normal pricing conditions existed in U.S. primary and secondary mortgage markets; that is, the relationship between mortgage rates and its determinants was similar to that observed prior to the financial crisis. After the end of the Federal Reserve's MBS purchase program on March 31, 2010, mortgage rates and interest rates more generally were significantly less than they had been at the beginning. ; In sum, we estimate that the Federal Reserve's MBS purchase program removed substantial risk premiums embedded in mortgage rates because of the financial crisis. The Federal Reserve also re-established a robust secondary mortgage market, which meant that the marginal mortgage borrower was funded by the capital markets and not directly by the banks during the financial crisis-had bank funding been the only source of funds, primary mortgage rates would have been much higher. ; Lastly, many observers have attributed part of the Federal Reserve's effect from purchasing MBS to portfolio rebalancing. We find that if portfolio rebalancing had a substantial effect, it may have had its greatest importance only after the Federal Reserve's purchases ended, but while the Federal Reserve held a substantial portion of the stock of outstanding MBS.
    Date: 2011
  18. By: Michael Artis; George Chouliarakis; Pkg Harischandra
    Abstract: This paper studies the international business cycle behaviour across 25 advanced and emerging market economies for which 125 years of annual GDP data are available. The picture that emerges is more fragmented than the one drawn by studies that focused on a narrower set of advanced market economies. The paper offers evidence in favour of a secular increase in international business cycle synchronization within a group of European and a group of English-speaking economies that started during 1950-1973 and accelerated since 1973. Yet, in other regions of the world, country-specific shocks are still the dominant forces of business cycle dynamics.
    Date: 2011
  19. By: Lena Dräger (University of Hamburg and ETH Zurich)
    Abstract: Building on the models of sticky information, we endogenize the probability of obtaining new information by introducing a switching mechanism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and time-varying. While central results of sticky information models are retained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to inflation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule.
    Keywords: Endogenous sticky information, heterogeneous expectations, DSGE models.
    JEL: E31 E52 E61
    Date: 2010–12
  20. By: Pennings, Steven (Department of Economics); Ramayandi, Arief (Asian Development Bank); Tang, Hsiao Chink (Asian Development Bank)
    Abstract: This paper estimates the impact of monetary policy on exchange rates and stock markets for eight small open economies: Australia, Canada, the Republic of Korea, New Zealand, the United Kingdom, Indonesia, Malaysia and Thailand. On average across these countries, a one percentage point surprise rise in official interest rates leads to a 1% appreciation of the exchange rate and a 1% fall in stock market indices. The effect on exchange rates is notably weaker in the non-Organization for Economic Cooperation and Development (OECD) countries with a managed float. For the OECD countries, there is no robust evidence of a change in the effect of policy during the global financial crisis. For the non-OECD countries, there is some evidence of a stronger effect of policy on stock markets during the crisis, although further research is needed to investigate whether this is a result of measurement issues.
    Keywords: Monetary policy effectiveness; exchange rate; stock prices; crisis; Asian economies
    JEL: E44 E52 G14
    Date: 2011–01–01
  21. By: Authors: Warren B. Hrung; Jason S. Seligman
    Abstract: Several programs have been introduced by U.S. fiscal and monetary authorities in response to the financial crisis. We examine the responses involving Treasury debt—the Term Securities Lending Facility (TSLF), the Supplemental Financing Program, increases in Treasury issuance, and open market operations—and their impacts on the overnight Treasury general collateral repo rate, a key money market rate. Our contribution is to consider each policy in light of the others, both to help guide policy responses to future crises and to emphasize policy interactions. Only the TSLF was designed to directly address stresses in short-term money markets by temporarily changing the supply of Treasury collateral in the marketplace. We find that the TSLF is uniquely effective relative to other policies and that, while changes in Treasury collateral do affect repo rates, the impacts are not equivalent across sources of Treasury collateral.
    Keywords: Treasury bonds ; Repurchase agreements ; Money market ; Open market operations
    Date: 2011
  22. By: Christopher J. Erceg; Jesper Lindé
    Abstract: This paper investigates the impact of the asymmetric shocks within a currency union in a framework that takes account of the zero bound constraint on policy rates, and also allows for constraints on fiscal policy. In this environment, we document that the usual optimal currency argument showing that the effects of shocks are mitigated to the extent that they are common across member states can be reversed. Countries can be worse off when their neighbors experience similar shocks, including policy-driven reductions in government spending.
    Date: 2010
  23. By: Vincent Bouvatier; Antonia López-Villavicencio; Valérie Mignon
    Abstract: This paper investigates the relationship between bank competition and credit procyclicality for 17 OECD countries on the 1986-2009 period. We account for heterogeneity among countries in terms of bank competition through the use of a hierarchical clustering methodology. We then estimate panel VAR models for the identified sub-groups of economies to investigate whether credit procyclicality is more important when the degree of bank competition is high. Our findings show that while credit significantly responds to shocks to GDP, the degree of bank competition is not essential in assessing the procyclicality of credit for OECD countries.
    Keywords: Credit cycle, economic cycle, bank competition, financial stability, panel VAR.
    JEL: C33 E32 E51 G21
    Date: 2011
  24. By: Ronald Heijmans; Richard Heuver; Daniëlle Walraven
    Abstract: We investigate the euro unsecured interbank money market during the current financial crisis. To identify the loans traded in this market and settled in TARGET2, we extend the algorithm developed by Furfine (1999) and adapt it to the European interbank loan market with maturity up to one year. This paper solves the problem of systematic errors which occur when you only look at overnight loans (as the Furfine algorithm does). These errors especially occur in times of (very) low interest rates. The algorithm allows us to track the actual interest rates rather than quoted interest rates on liquidity trading by participants of the Dutch part of the euro large value payment system (TARGET2-NL). The algorithm enables us to constitute the Dutch part of the EONIA, making it possible to compare the interest rates developments in the Dutch market to the European average ones. Based on the new algorithm, we develop a policy tool to monitor the interbank money market, both at macro level (whole market) and individual bank level (Money Market Monitoring Dashboard).
    Keywords: payment systems; financial stability; experiment; decision making
    JEL: E42 E44
    Date: 2011–01
  25. By: George J. Hall (Department of Economics, Brandeis University); Thomas J. Sargent (Department of Economics, New York University)
    Abstract: This paper uses a sequence of government budget constraints to motivate estimates of returns on the U.S. Federal government debt. Our estimates differ conceptually and quantitatively from the interest payments reported by the U.S. government. We use our estimates to account for contributions to the evolution of the debt-GDP ratio made by inflation, growth, and nominal returns paid on debts of different maturities.
    Keywords: Holding period returns, capital gains, inflation, growth, debt- GDP ratio, government budget constraint
    Date: 2010–11
  26. By: Schmidt, Sandra; Nautz, Dieter
    Abstract: This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's interest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis. --
    Keywords: Central bank communication,Interest rate forecasts,Survey expectations,Panel random coefficient model
    JEL: E47 E52 E58 C23
    Date: 2010
  27. By: Daniel Laskar (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: According to the literature, in an expectations-augmented Phillips curve model, opacity is always preferred to transparency on central bank forecasts. By modelling the private sector's behavior explicitly, we show that transparency reduces the shocks. Consequently, transparency can be preferred.
    Keywords: central bank, transparency, Phillips curve, shocks.
    Date: 2010–05
  28. By: Rao, B. Bhaskara; Paradiso, Antonio
    Abstract: This paper uses recent US data to estimate the new Keynesian Phillips curve (NKPC) with three modifications. Firstly, the variables in the NKPC are found to be nonstationary. Therefore, it is estimated with the time series methods and the cointegrating equations are tested for structural breaks. Secondly, inflationary expectations are proxied with the survey data. Thirdly, unlike in the hybrid NKPC, the effects of the lagged inflation rates are introduced into the dynamic adjustment equations. This offers an opportunity to estimate these dynamic effects with a more general specification instead of the restricted partial adjustment mechanism underlying the hybrid NKPC. Our NKPC, with these changes, is consistent with its underlying micro foundations and forward looking expectations. The results of our NKPC can explain the dynamics of the US inflation rate as well as any other alternative model.
    Keywords: US New Keynesian Phillips Curve; Forward looking expectations; Survey data; Wage share; Cointegration
    JEL: E31
    Date: 2011–01–20
  29. By: Rao, B. Bhaskara; Paradiso, Antonio
    Abstract: This paper distinguishes between the long run and short run Phillips curve (PC) and uses the micro theory based specification, with forward looking expectations, for the long run PC. The long run and the implied short run dynamic equations are estimated in one step with the general to specific method (GETS). Our approach has two distinct advantages. Firstly, classical estimation methods can be used, irrespective of the stationarity properties of the variables. Secondly, instead of arbitrarily adding the lagged inflation rate to the theory based long run PC to capture persistence in inflation, our approach shows that persistence effects can also be captured through the dynamic adjustment equations. This has an added advantage because it offers a more flexible lag structure to estimate dynamic adjustments compared to the partial adjustment process in the hybrid NKPC.
    Keywords: US New Keynesian Phillips Curve; Forward looking expectations; Alternative measures of the Driving Forces; GETS
    JEL: E31 B22 C22
    Date: 2011–01–16
  30. By: Jonung, Lars (School of Economics and Management); Lindén, Staffan (Directorate-General Economic and Financial Affairs)
    Abstract: The standard way today to obtain measures of inflationary expectations is to use questionnaires to ask a representative group of respondents about their beliefs of the future rate of inflation during the coming 12 months. This type of data on inflationary expectations as well as on inflationary perceptions has been collected in a unified way on an EU-wide basis for several years. By now, probably the largest database on inflationary expectations has been built up in this way. We use this database to explore the forecasting horizons implicitly used by the respondents to questions about the expected rate of inflation during the coming 12 months. The analysis covers all EU member states that have relevant data. We examine the forecast errors, the mean error and the RMSEs, to study if the forecast horizon is truly 12 months as implied by the questionnaires. Our working hypothesis is that the forecast error has a U-shaped pattern, reaching its lowest value on the 12-month horizon. We also study the "backcast" error for inflationary perceptions in a similar way. Our exploratory study reveals large differences across countries. For most countries, we get the expected U-shaped outcome for the forecast errors. The horizon implicitly used by respondents when answering the questions is not related to the explicit time horizon of the questionnaire. On average respondents use the same horizon when answering both questions, e.g. when respondents use a 12-month forecast horizon answering to the question on future inflation, they use the same forward looking horizon when answering to the question on past inflation. We suggest possible explanations for the differences observed.
    Keywords: Inflationary expectations; inflationary perceptions; forecasting error; forecasting horizon; EU; euro
    JEL: C33 E31 E32 E37 E58
    Date: 2011–01–26
  31. By: Michał Brzoza-Brzezina (National Bank of Poland, Economic Institute); Pascal Jacquinot (European Central Bank); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    Abstract: Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and worsened the current account balance. Over time inflation deteriorated external competitiveness and lowered domestic demand, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. While all these policies can be used to cool down the output boom, exchange rate revaluation seems the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare.
    Keywords: boom-bust cycles, euro area accession, dynamic general equilibrium models
    JEL: E52 E58 E63
    Date: 2011
  32. By: Larch, Martin (Directorate General for Economic and Financial Affairs, European Commission); van den Noord, Paul (Organisation for Economic Co-operation and Development (OECD)); Jonung, Lars (School of Economics and Management)
    Abstract: While current instruments of EU economic policy coordination helped stave off a full-scale depression, the post-2007 global financial and economic crisis has revealed a number of weaknesses in the Stability and Growth Pact, the EU framework for fiscal surveillance and fiscal policy coordination. This paper provides a diagnosis of how the SGP faired ahead and during the present crisis and offers a first comprehensive review of the ongoing academic and policy debate, including an account of the reform proposals adopted by the Commission on 29 September 2010. In our view, the current system of EU rules is unbalanced. It consists of (i) very specific provisions on how to conduct fiscal policy making in normal times with no effective enforcement mechanisms, and of (ii) no or extremely tight provisions for really bad economic times, like the Great Recession. A two-pronged approach as outlined in this report is needed to revive the Pact: tighter enforcement, coupled with broader macroeconomic surveillance, in good times and an open window for exceptionally bad times, including a crisis resolution mechanism at the EU level.
    Keywords: Stability and Growth Pact; EU; Europe; the euro; Great Recession; fiscal sovereignty
    JEL: E62 E63 H60
    Date: 2011–01–27
  33. By: Lian An; Jian Wang
    Abstract: We estimate exchange rate pass-through (PT) into import, producer and consumer price indexes for nine OECD countries, using a method proposed by Uhlig (2005). In a Vector Autoregression (VAR) model, we identify the exchange rate shock by imposing restrictions on the signs of impulse responses for a small subset of variables. These restrictions are consistent with a large class of theoretical models and previous empirical findings. We find that exchange rate PT is less than one at both short and long horizons. Among three price indexes, exchange rate PT is greatest for import price index and smallest for consumer price index. In addition, greater exchange rate PT is found in an economy which has a smaller size, higher import share, more persistent exchange rate, more volatile monetary policy, higher inflation rate, and less volatile aggregate demand.
    Keywords: Vector autoregression ; Price indexes ; Consumer price indexes
    Date: 2011
  34. By: Kimberly Beaton; Brigitte Desroches
    Abstract: The authors investigate financial spillovers across countries with an emphasis on the effect of shocks to financial conditions in the United States on financial conditions and economic activity in Canada. These questions are addressed within a global vector autoregression model. The framework links individual country vector autoregression models in which the domestic variables are related to the country-specific foreign variables. The authors' results highlight the importance of financial variables in the transmission of shocks to real activity and financial conditions in the United States to Canada. First, they show that shocks to U.S. output are transmitted quickly to Canada, with important implications for financial conditions. Second, they show that the most important source of financial transmission between the United States and Canada is through shocks to U.S. equity prices. Financial transmission through movements in the quantity of U.S. credit is also important for Canada.
    Keywords: Business fluctuations and cycles; Economic models; Financial stability; International topics
    JEL: E27 E32 F36 F40
    Date: 2011
  35. By: Franses, Ph.H.B.F.; Vlam, A.
    Abstract: Consumers often have to make decisions involving computations with interest rates. It is well known from the literature that computations with percentages and thus with interest rates amount to a difficult task. We survey a large group of consumers, and we find that questions on interest rates are answered correctly in about 20% of the cases, which in our setting amounts to a random choice. Additional to the available literature, we also document that consumers are too optimistic in the sense that they believe loans are paid off sooner than is true, which provides empirical evidence of self-serving bias. We further find that optimism can be reduced by increasing the monthly payments. The results are robust to corrections for general numeracy.
    Keywords: financial innumeracy;percentages;interest rates;numeracy;D14;D91
    Date: 2011–01–24
  36. By: Jaromír Baxa (Institute of Economic Studies, Charles University, Prague and Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic); Roman Horváth (Czech National Bank and Institute of Economic Studies, Charles University, Prague); Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: We examine whether and how main central banks responded to episodes of financial stress over the last three decades. We employ a new methodology for monetary policy rules estimation, which allows for time-varying response coefficients as well as corrects for endogeneity. This flexible framework applied to the U.S., U.K., Australia, Canada and Sweden together with a new financial stress dataset developed by the International Monetary Fund allows not only testing whether the central banks responded to financial stress but also detects the periods and type of stress that were the most worrying for monetary authorities and to quantify the intensity of policy response. Our findings suggest that central banks often change policy rates: mainly decreasing it in the face of high financial stress. However, the size of a policy response varies substantially over time as well as across countries, with the 2008-2009 financial crisis being the period of the most severe and generalized response. With regards to the specific components of financial stress, most central banks seemed to respond to stock market stress and bank stress, while exchange rate stress is found to drive the reaction of central banks only in more open economies.
    Keywords: financial stress, Taylor rule, monetary policy, time-varying parameter model, endogenous regressors.
    JEL: E43 E52 E58
    Date: 2011–01
  37. By: Charles W. Calomiris; Joseph R. Mason; David C. Wheelock
    Abstract: In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy. Using microeconomic data to gauge the fundamental reserve demands of Fed member banks, we find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier. To the extent that increases in reserve demand occurred from 1935 to 1937, they reflected fundamental changes in the determinants of reserve demand and not changes in reserve requirements.>
    Keywords: Money supply ; Bank reserves ; Recessions
    Date: 2011
  38. By: Reade, J. James; Volz, Ulrich
    Abstract: This paper investigates to what extent Chinese monetary policy is constrained by the dollar peg. To this end, we use a cointegration framework to examine whether Chinese interest rates are driven by the Fed's policy. In a second step, we estimate a monetary model for China, in which we include also other monetary policy tools besides the central bank interest rate, namely reserve requirement ratios and open market operations. Our results suggest China has been relatively successful in isolating its monetary policy from the US policy and that the interest rate tool has not been effectively made use of. We therefore conclude that by employing capital controls and relying on other instruments than the interest rate China has been able to exert relatively autonomous monetary policy. --
    Keywords: Chinese monetary policy,monetary independence,cointegration
    JEL: C32 E52 F33
    Date: 2010
  39. By: Gunnar Bårdsen, Ard den Reijer, Patrik Jonasson and Ragnar Nymoen (Department of Economics, Norwegian University of Science and Technology)
    Abstract: MOSES is an aggregate econometric model for Sweden, estimated on quarterly data, and intended for short-term forecasting and policy simulations. After a presentation of qualitative model properties, the econometric methodology is summarized. The model properties, within sample simulations, and examples of dynamic simulation (model forecasts) for the period 2009q2-2012q4 are presented. We address practical issues relating to operational use and maintenance of a macro model of this type. The detailed econometric equations are reported in an appendix.
    Date: 2011–01–28
  40. By: Matus Senaj (National Bank of Slovakia, Research Departmen); Milan Vyskrabka (National Bank of Slovakia, Monetary Policy Department); Juraj Zeman (National Bank of Slovakia, Research Department)
    Abstract: In this paper, the Bayesian method together with the calibration approach is used to parameterise the DSGE model. We present a medium-scale two-country model. Parameters controlling the steady state of the model are calibrated in order to match the ratios of a few selected variables to their empirical counterparts. The remaining parameters are estimated via Bayesian method. Since Slovakia has been a euro area member country for only two years, the model allows switching from an autonomous monetary policy regime to a monetary union regime. This feature enables us to parameterise the model in the case of independent monetary policy and consequently to simulate the impacts of various structural shocks on the Slovak economy as a part of the monetary union. At the end of the paper, we present the impulse-response functions of the model to selected structural shocks.
    Keywords: two-country model, Bayesian methods
    JEL: C11 C51
    Date: 2010–12
  41. By: Cem Cebi
    Date: 2011
  42. By: Fredy Alejandro Gamboa Estrada
    Abstract: This research studies the forecasting performance of conventional and more recent exchange rate models in Colombia. The purpose is to explain which have been the main exchange rate determinants under an Inflation Targeting regime and a completely floating exchange rate scheme. Compared to similar studies, this paper includes conventional specifications and Taylor rule approaches that assume exogenous and endogenous monetary policy respectively. Based on the Johansen multivariate cointegration methodology, the results provide evidence for the existence of cointegration in all specifications except in the Sticky-Price Monetary Model and the Taylor Rule model that includes the real exchange rate. In addition, out of sample forecasting performance is analyzed in order to compare if all specifications outperform the drift less random walk model. All models outperform the random walk at one month horizon. However, the Flexible Price Monetary Model and the Uncovered Interest Parity Condition have superior predictive power for longer horizons.
    Date: 2011–01–23

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