nep-cba New Economics Papers
on Central Banking
Issue of 2011‒02‒19
fifty-one papers chosen by
Alexander Mihailov
University of Reading

  1. The Central Banker's Case for Doing More By Adam S. Posen
  2. Getting Surplus Countries to Adjust By John Williamson
  3. Currency Wars? By William R. Cline; John Williamson
  4. Estimates of Fundamental Equilibrium Exchange Rates, May 2010 By William R. Cline; John Williamson
  5. Integrating Reform of Financial Regulation with Reform of the International Monetary System By Morris Goldstein
  6. Dealing with Volatile Capital Flows By Olivier Jeanne
  7. The international monetary system after the financial crisis By Ettore Dorrucci; Julie McKay
  8. Eductive stability in real business cycle models By George W. Evans; Roger Guesnerie; Bruce Mcgough
  9. A Solution to Overoptimistic Forecasts and Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile By Frankel, Jeffrey
  10. The Macroeconomic Effects on Interest on Reserves By Peter N. Ireland
  11. Estimation and evaluation of DSGE models: progress and challenges By Frank Schorfheide
  12. Monetary policy shocks in a DSGE model with a shadow banking system By Fabio Verona; Manuel M. F. Martins; Inês Drumond
  13. Global Imbalances: Non-conventional View By Vladimir Popov
  14. Multiplicative uncertainty, central bank transparency and optimal degree of conservativeness By Dai, Meixing
  15. Systemic Risk and Network Formation in the Interbank Market By Cohen-Cole, Ethan; Patacchini, Eleonora; Zenou, Yves
  16. Is Inflation Persistence Over? By Fernando N. de Oliveira; Myrian Petrassi
  17. Price rigidity in Europe and the US: A comparative analysis using scanner data By B. VERHELST; D. VAN DEN POEL
  18. Dynamics of Output and Employment in the U.S. Economy By Deepankar Basu; Duncan K. Foley
  19. Sectoral money demand and the great disinflation in the US By Alessandro Calza; Andrea Zaghini
  20. Time Variation in U.S. Wage Dynamics By B. HOFMANN; G. PEERSMAN; R. STRAUB
  21. How Europe Can Muddle Through Its Crisis By Jacob Funk Kirkegaard
  22. In Defense of Europe's Grand Bargain By Jacob Funk Kirkegaard
  23. Une analyse temps-fréquences des cycles financiers By Christophe Boucher; Bertrand Maillet
  24. Evidence on financial globalization and crisis: capital raisings By Galina Hale
  25. Do Federal Reserve Bank Presidents Pursue Regional or National Interests? New Evidence Based on Speeches By Bernd Hayo; Matthias Neuenkirch
  26. Does the euro make a difference? Spatio-temporal transmission of global shocks to real effective exchange rates in an infinite VAR By Matthieu Bussière; Alexander Chudik; Arnaud Mehl
  27. The US stock market leads the Federal funds rate and Treasury bond yields By Kun Guo; Wei-Xing Zhou; Si-Wei Cheng; Didier Sornette
  28. FaMIDAS: A Mixed Frequency Factor Model with MIDAS structure By Cecilia Frale; Libero Monteforte
  30. Real effects of inflation uncertainty in the US By Mustafa Caglayan; Ozge Kandemir; Kostas Mouratidis
  31. Financing obstacles among euro area firms: Who suffers the most? By Annalisa Ferrando; Nicolas Griesshaber
  32. The non-monetary side of the global disinflation By Gregor Schwerhoff; Mouhamadou Sy
  33. Financial Crises and Monetary Policy: Evidence from the UK By Christopher Martin; Costas Milas
  34. On money and output in the euro area: Is money redundant? By Costas Karfakis
  35. The missing wealth of nations: Evidence from Switzerland, 1914-2010 By Gabriel Zucman
  36. Empirical Economic Model Discovery and Theory Evaluation By David F. Hendry
  37. Mathematical Models and Economic Forecasting: Some Uses and Mis-Uses of Mathematicsin Economics By David F. Hendry
  38. Model Selection in Equations with Many 'Small' Effects By Jennifer L. Castle; Jurgen A. Doornik; David F. Hendry
  39. Out-Of-Sample Comparisons of Overfit Models By Calhoun, Gray
  40. The Effectiveness of Government Expenditures during Crisis: Evidence from Regional Government Spending in Japan 1990-2000 By Markus Bruckner; Anita Tuladhar
  41. Exchange rate pass-through, domestic competition and inflation -- evidence from the 2005/08 revaluation of the Renminbi By Raphael Auer
  42. Renminbi Undervaluation, China's Surplus, and the US Trade Deficit By William R. Cline
  43. Credit constraints and distance, what room for Central banking? The French experience (1880-1913) By Guillaume Bazot
  44. How Rational are the Expected Inflation Rate in Australia? By Paradiso, Antonio; Rao, B. Bhaskara
  45. The Australian Phillips curve and more By Ivan Kitov; Oleg Kitov
  46. Forecasting Brazilian Inflation Using a Large Data Set By Francisco Marcos Rodrigues Figueiredo
  47. Un análisis de comportamiento a nivel de agente de la encuesta de expectativas de inflación del BCU By Fernando Borraz; Diego Gianelli
  48. Un modelo estructural pequeño para la economía uruguaya. By Diego Gianelli
  49. Price Setting in Retailing: the Case of Uruguay By Fernando Borraz; Leandro Zipitria
  51. Persistence of Inflationary shocks: Implications for West African Monetary Union Membership By Alagidede, Paul; Coleman, Simeon; Cuestas, Juan Carlos

  1. By: Adam S. Posen (Peterson Institute for International Economics)
    Abstract: Adam S. Posen presents his view on the role of monetary policy in the global economic recovery, in particular in the large Western countries, and whether the major central banks in the United Kingdom and beyond should be doing more in the coming months. Posen argues that monetary policy should continue to be aggressive about promoting recovery, and further quantitative easing should be undertaken. Policymakers face a clear and sustained uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver the desired sustained recovery on its own. In every major economy, actual output has fallen so much versus where trend growth would have put them, and trend growth has not been above potential for long enough as yet, that there remains a significant gap between what the economy could be producing at full employment and what it currently produces. Thus, policymakers should not settle for weak growth out of misplaced fear of inflation. If price stability is at risk over the medium term, it is on the downside. There are, however, some very serious risks if policy errors are made by tightening prematurely or even by loosening insufficiently. The risks that Posen believes the United Kingdom and other major Western countries face now are those of sustained low growth and near deflation turning into a self-fulfilling prophecy (as in Japan in the 1990s and in the United States and Europe in the 1930s) and/or of inducing a political reaction that could undermine these countries' long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy's productive capacity and by investors to avoid risk and prefer cash. These tendencies are already present, and insufficient monetary response is likely to worsen them. The combination of these risks with the potential attainable gains motivates Posen's call for additional monetary policy stimulus.
    Date: 2010–10
  2. By: John Williamson (Peterson Institute for International Economics)
    Abstract: It has been 80 years since John Maynard Keynes first proposed a plan that would have disciplined persistent surplus countries. But the Keynes Plan, like the subsequent Volcker Plan in 1972-74, was defeated by the major surplus country of the day (the United States and Germany, respectively), and today China (not to mention Japan or Germany) exhibits no enthusiasm for new revisions of these ideas. Williamson evaluates the two earlier attempts and several new proposals now on the table. Morris Goldstein proposes using the International Monetary Fund (IMF) to discipline surplus countries. Countries showing large and persistent current account surpluses would receive a Fund mission with the purpose of judging whether the country had a misaligned exchange rate. Penalties would depend on the size and persistence of any misalignment the Fund diagnosed. Aaditya Mattoo and Arvind Subramanian propose that countries could bring a case for unfair trade through currency undervaluation to the World Trade Organization (WTO) dispute settlement system. The WTO would seek to establish the facts of the matter from the IMF. C. Fred Bergsten proposes that either a reserve currency country or the IMF itself should be able to engage in counter-intervention to push up the value of a currency that is being deliberately held down to an undervalued rate through intervention. US Secretary of the Treasury Timothy Geithner, echoing ideas of the Korean G-20 summit hosts and endorsed by Yi Gang, a vice governor of the People's Bank of China, has proposed that members of the G-20 should commit themselves to limit their current account imbalances to a maximum of 4 percent of GDP. Daniel Gros and Gary Hufbauer have advanced other ways of disciplining surplus countries, by limiting or taxing the assets that surplus countries can hold. Williamson suggests incorporating ideas from the various proposals into a feasible mechanism for disciplining surplus countries. He finds the Mattoo-Subramanian proposal most attractive for typical countries: They focus attention on the exchange rate rather than reserve holdings, seek to use the IMF in an area where it undoubtedly has expertise, but also exploit the greatest success in international cooperation in recent years, namely the dispute settlement mechanism of the WTO. To deal with the problem when a member of a monetary union--which by definition does not have an independent exchange rate--has an excessive surplus, Williamson suggests running the Goldstein proposal in parallel--perhaps operated by the European Central Bank rather than the IMF, and with the focus on the level of demand rather than the exchange rate.
    Date: 2011–01
  3. By: William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics)
    Abstract: More than a dozen countries, including Brazil, China, India, Japan, and Korea, have been intervening in the foreign exchange market to prevent their currencies from appreciating. There are fears that the second dose of quantitative easing in the United States (dubbed QE2) may worsen currency appreciation. These developments raise the prospect of a currency war, which the Group of Twenty (G-20) fears is gathering steam. Because many countries are simultaneously seeking to improve their balance of payments position, many are seeking a more competitive exchange rate. The laws of mathematics mean that some must be disappointed: A weaker exchange rate of one country implies a stronger rate of some other country or countries. Cline and Williamson argue that any agreement reached at the G-20 summit in Seoul to prevent an exchange rate war should be based on a distinction between countries with overvalued and undervalued currencies. Any accord should be designed to seek appreciation of the latter but not to debar the former from taking actions to prevent their currencies from becoming even more overvalued. Countries that are already overvalued on an effective basis--primarily floating emerging-market economies, but also Australia and New Zealand--should not be condemned for resisting further appreciation. But if a currency is substantially undervalued and the country is aggressively engaging in intervention to prevent appreciation, it is reasonable to judge that its intervention is unjustifiable. The authors show that a handful of high-surplus economies are intervening in such a fashion: China, Hong Kong, Malaysia, Singapore, Switzerland, and Taiwan. The currencies of these economies are substantially undervalued, and their current account surpluses are correspondingly excessive, pointing clearly to the desirability of currency revaluation by these countries. It would be very wrong for the G-20 to condemn all countries that are trying to prevent their exchange rates from appreciating. One needs to ask which currencies are undervalued and concentrate on preventing them from intervening and tightening capital controls.
    Date: 2010–11
  4. By: William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics)
    Abstract: This policy brief updates Cline and Williamson's estimates of fundamental equilibrium exchange rates (FEERs) to May 2010 using the data to March contained in the April issue of the International Monetary Fund's World Economic Outlook. The IMF's data are updated to May by subsequent exchange rate changes and Cline's estimates of the impact of exchange rate changes on trade flows. In addition, the assumptions about current account targets have been somewhat modified from previous years: All countries are now assumed to aim to keep current account balances within 3 percent of equilibrium, whereas formerly some countries with large net foreign assets to GDP ratios (NFA/GDP) were allowed larger targeted imbalances. The fundamental question explored is what pattern of exchange rates is consistent with satisfactory medium-term evolution of the world economy, interpreted as achieving those objectives while maintaining internal balance in each country. The big disequilibrium in the pattern of exchange rates remains the undervaluation of the renminbi and the overvaluation of the dollar. The size of this disequilibrium is, however, less than previously estimated (now 15 percent on an effective basis and 24 percent bilaterally with respect to the dollar), due to the decline in the IMF's estimate of China's prospective current account surplus. The recent depreciation of the euro, while increasing the size of Euroland's prospective surplus, does not threaten to lead to an internationally unacceptable imbalance (i.e., greater than 3 percent of GDP) and therefore does not create a case for international action to reverse the rise. The yen is no longer found to be overvalued on an effective basis, although if China revalued that would create a case for a stronger yen/dollar rate. Several of the other East Asian currencies would also need to appreciate bilaterally to avoid effective undervaluation. Of the 28 other economies covered, Hong Kong, Malaysia, Singapore, Sweden, Switzerland, and Taiwan are judged to need an effective appreciation and Australia, Brazil, New Zealand, South Africa, and Turkey to need an effective depreciation.
    Date: 2010–06
  5. By: Morris Goldstein (Peterson Institute for International Economics)
    Abstract: This paper links reform of the international financial regulatory system with reform of the international monetary system because as this recent global crisis demonstrates so vividly, the root causes can come from both the financial and monetary spheres and they can interact in variety of dangerous ways. On the financial regulatory side, I highlight three problems: developing a better tool kit for pricking asset-price bubbles before they get too large; shooting for national minima for regulatory bank capital that are at least twice as high those recently agreed as part of Basel III; and implementing a comprehensive approach to "too-big-to-fail" financial institutions that will rein-in their past excessive risktaking. On the international monetary side, I emphasize what needs to be done to discourage "beggar-thy-neighbor" exchange rate policies, including agreeing on a graduated set of penalties for countries that refuse persistently to honor their international obligations on exchange rate policy.
    Keywords: financial regulation, IMF surveillance, too-big-to-fail, asset-price bubbles
    JEL: F3 F33 G28 G38
    Date: 2011–02
  6. By: Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: The tools and mechanisms with which emerging-market countries insure themselves against volatile capital flows are in a state of flux. Most emerging-market countries had accumulated an unprecedented level of international reserves before the 2008 global financial crisis. The crisis itself led to a large increase in International Monetary Fund (IMF) resources and the introduction of a new lending facility, the Flexible Credit Line. Meanwhile, some progress was made toward transforming the Chiang Mai Initiative into an Asian Monetary Fund, and the Greek debt crisis even prompted calls for the creation of a European Monetary Fund. How have emerging-market countries dealt with capital flow volatility in the current crisis? What is the appropriate level of reserves for emerging-market countries? How can international crisis-lending and liquidity-provision arrangements be improved? What role can financial regulation and capital controls play in dealing with volatile capital flows? Olivier Jeanne discusses these and other important questions that are useful to keep in mind when thinking about the reform of international liquidity provision for emerging-market countries to deal with volatile capital flows. Jeanne concludes that the IMF and the international community should make more efforts to establish normative rules for the appropriate level of prudential reserves in emerging-market and developing countries and actively develop with its members a code of good practice for prudential capital controls.
    Date: 2010–07
  7. By: Ettore Dorrucci (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Julie McKay (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: The main strength of today’s international monetary system – its flexibility and adaptability to the different needs of its users – can also become its weakness, as it may contribute to unsustainable growth models and imbalances. The global financial crisis has shown that the system cannot afford a benign neglect of the global public good of external stability, and that multilateral institutions and fora such as the IMF and the G20 need to take the initiative to set incentives for systemically important economies to address real and financial imbalances which impair stability. We draw this core conclusion from a systematic review of the literature on the current international monetary system, in particular its functioning and vulnerabilities prior to the global financial crisis. Drawing from this analysis, we assess the existing and potential avenues, driven partly by policy initiatives and partly by market forces, through which the system may be improved. JEL Classification: F02, F21, F31, F32, F33, F34, F53, F55, F59, G15
    Keywords: International monetary system, international liquidity, financial globalisation, global imbalances, capital flows, exchange rates, foreign reserves, surveillance, global financial safety net, savings glut, Triffin dilemma, International Monetary Fund, Special Drawing Rights, G20
    Date: 2011–02
  8. By: George W. Evans (Université d'Oregon - University of Oregon, University of St. Andrews - University of St. Andrews); Roger Guesnerie (CDF - Collège de France - Collège de France, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Bruce Mcgough (Oregon State University - Oregon State University)
    Abstract: We re-examine issues of coordination in the standard RBC model. Can the unique rational expectations equilibrium be “educed” by rational agents who contemplate the possibility of small deviations from equilibrium? Surprisingly, we find that coordination along this line cannot be expected. Rational agents anticipating small but possibly persistent deviations have to face the existence of retroactions that necessarily invalidate any initial tentative “common knowledge” of the future. This "impossibility" theorem for eductive learning is not fully overcome when adaptive learning is incorporated into the framework.
    Keywords: standard RBC model ; coordination
    Date: 2010–12
  9. By: Frankel, Jeffrey (Harvard Kennedy School)
    Abstract: Historically, many countries have suffered a pattern of procyclical fiscal policy: spending too much in booms and then forced to cut back in recessions, thereby exacerbating the business cycle. This problem has especially plagued Latin American commodity-producers. Since 2000, fiscal policy in Chile has been governed by a structural budget rule that has succeeded in implementing countercyclical fiscal policy. The key innovation is that the two most important estimates of the structural versus cyclical components of the budget - trend output and the 10-year price of copper - are made by expert panels and thus insulated from the political process. Chile's fiscal institutions could usefully be emulated everywhere, but especially in other commodity-exporting countries. This paper finds statistical support for a series of hypotheses regarding forecasts by official agencies that have responsibility for formulating the budget. 1) Official forecasts of budgets and GDP in a 33-country sample are overly optimistic on average. 2) The bias toward over-optimism is stronger the longer the horizon 3) The bias is greater among European governments that are politically subject to the budget rules in the Stability and Growth Pact (SGP). 4) The bias is greater at the extremes of the business cycle, particularly in booms. 5) In most countries, the real growth rate is the key macroeconomic input for budget forecasting. In Chile it is the price of copper. 6) Real copper prices mean-revert in the long run, but this is not always readily perceived. 7) Chile's official forecasts are not overly optimistic on average. 8) Chile has apparently avoided the problem of official forecasts that unrealistically extrapolate in boom times. The conclusion: official forecasts, if not insulated from politics, tend to be overly optimistic, and the problem can be worse when the government is formally subject to budget rules. The key innovation that has allowed Chile in general to achieve countercyclical fiscal policy, and in particular to run surpluses in booms, is not just a structural budget rule in itself, but a regime that entrusts to panels of independent experts the responsibility for estimating the extent to which contemporaneous copper prices and GDP have departed from their long-run trends.
    JEL: E62 F41 H50 O54 Q33
    Date: 2011–02
  10. By: Peter N. Ireland (Boston College)
    Abstract: This paper uses a New Keynesian model with banks and deposits, calibrated to match the US economy, to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require important adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish and households' portfolio shifts increase banks' demand for reserves when short-term interest rates rise. Money and monetary policy remain linked in the long run, however, since policy actions that change the price level must change the supply of reserves proportionately.
    Keywords: banking, reserves, interest, central banking
    JEL: E31 E32 E51 E52 E58
    Date: 2011–02–01
  11. By: Frank Schorfheide
    Abstract: Estimated dynamic stochastic equilibrium (DSGE) models are now widely used for empirical research in macroeconomics as well as for quantitative policy analysis and forecasting at central banks around the world. This paper reviews recent advances in the estimation and evaluation of DSGE models, discusses current challenges, and provides avenues for future research.
    Keywords: Econometric models ; Stochastic analysis
    Date: 2011
  12. By: Fabio Verona (Universidade do Porto, Faculdade de Economia and CEF.UP); Manuel M. F. Martins (Universidade do Porto, Faculdade de Economia and CEF.UP); Inês Drumond (Universidade do Porto, Faculdade de Economia and CEF.UP, and GPEARI-MFAP)
    Abstract: This paper is motivated by the recent financial crisis and addresses whether a “too low for too long” interest rate policy may generate a boom-bust cycle. We suggest a model in which a microfounded shadow banking sector is included in an otherwise state-of-the-art DSGE model. When faced with perverse incentives, financial intermediaries within the shadow banking sector can divert a fraction of stockholders’ profits for their own benefits and extend credit at a discounted rate. The model predicts that long periods of accommodative monetary policy do create the preconditions for, but do not cause per se, a boom-bust cycle. Rather, it is the combination of a persistent monetary ease with microeconomic distortions in the financial system that causes a boom-bust.
    Keywords: monetary policy; DSGE model; shadow banking system; boom-bust
    JEL: E32 E44 E52 G24
    Date: 2011–02
  13. By: Vladimir Popov (New Economic School, Moscow)
    Abstract: Maintaining today’s global imbalances would help to overcome the major disproportion of our times – income gap between developed and developing countries. This gap was widening for 500 years and only now, in the recent 50 years, there are some signs that this gap is starting to decrease. The chances to close this gap sooner rather than later would be better, if the West would go into debt, allowing developing countries to have trade surpluses that would help them develop faster. Previously, in 16-20th century, it was the West that was developing faster, accumulating surpluses in trade with “the rest” and using these surpluses to buy assets in developing countries, while “the rest” were going into debt. Now it is time for “the rest” to accumulate assets and for the West to go into debt.
    Date: 2010–05
  14. By: Dai, Meixing
    Abstract: This paper extends the results of Kobayashi (2003) and Ciccarone and Marchetti (2009) by considering the optimal choice of central bank conservativeness. It is shown that the government can choose a sufficiently populist but opaque central banker so that higher multiplicative uncertainty improves the social welfare only when the society is very conservative.
    Keywords: Multiplicative uncertainty; optimal degree of conservativeness; Brainard conservatism; central bank transparency.
    JEL: E58 E52
    Date: 2010–06
  15. By: Cohen-Cole, Ethan (University of Maryland); Patacchini, Eleonora (University of Roma La Sapienza); Zenou, Yves (Dept. of Economics, Stockholm University)
    Abstract: We propose a novel mechanism to facilitate understanding of systemic risk in financial markets. The literature on systemic risk has focused on two mechanisms, common shocks and domino-like sequential default. Our approach is a formal model that provides an intellectual combination of the two by looking at how shocks propagate through a network of interconnected banks. Transmission in our model is not based on default. Instead, we provide a simple microfoundation of banks’ profitability based on classic competition incentives. As competitors lending quantities change, both for closely connected ones and the whole market, banks adjust their own lending decisions as a result, generating a ‘transmission’ of shocks through the system. We provide a unique equilibrium characterization of a static model, and embed this model into a full dynamic model of network formation with n agents. Because we have an explicit characterization of equilibrium behavior, we have a tractable way to bring the model to the data. Indeed, our measures of systemic risk capture the propagation of shocks in a wide variety of contexts; that is, it can explain the pattern of behavior both in good times as well as in crisis.
    Keywords: Financial networks; interbank lending; interconnections; network centrality; spatial autoregressive models
    JEL: C21 G10
    Date: 2011–02–11
  16. By: Fernando N. de Oliveira; Myrian Petrassi
    Abstract: We analyze inflation persistence in several industrial and emerging countries in the recent past by estimating reduced-form models of inflation dynamics. We select a very representative group of 23 industrial and 17 emerging economies. Our sample period is comprised of quarterly data and starts in the first quarter of 1995. Our results show that inflation persistence is low and stable for all countries in our sample. It seems to be lower in industrial relative to emerging countries. Finally, even countries that have had “hyperinflation” experience in the recent past showed low levels of inflation persistence, albeit apparently higher than the other countries in our sample.
    Date: 2010–12
    Abstract: This paper uses scanner data from two large retailers to offer new insights into the extent of price rigidity in Europe and the US. Recent empirical research in this field has made extensive use of monthly data to study price stickiness and to control for the impact of temporary sales. We show that the use of monthly data is potentially highly misleading. We employ scanner data in (bi)weekly frequency and highlight the importance of high frequency data in studying price rigidity. Regular prices show roughly the same degree of flexibility in Europe and the US, in line with recent empirical research, when we study monthly price series derived from our high frequency scanner data. This finding collapses, however, when the original scanner datasets in higher base frequency are examined. Regular prices are then far more flexible in the US than in Europe. This result is robust to the type of sales filter that we apply and the statistic used to capture price rigidity.
    Keywords: price setting, scanner data, frequency of price change, sales filtering
    JEL: C33 D4 E3 L66
    Date: 2010–11
  18. By: Deepankar Basu; Duncan K. Foley
    Abstract: This paper investigates the changing relationship between employment and real output in the U.S. economy from 1948 to 2010 both at the aggregate level and at some major industry-grouping levels of disaggregation. Real output is conventionally measured as value added corrected for price inflation, but there are some industries in which no independent measure of value added is possible and existing statistics depend on imputing value added to equal income. Indexes of output that exclude these imputations are closely correlated with employment over the whole period, and remain more closely correlated during the current business cycle. This analysis offers insights into deeper structural changes that have taken place in the U.S. economy over the past few decades in a context marked by the following three factors: (i) the service (especially the financial) sector has grown in importance, (ii) the economy has become more globalized, and (iii) the policy orientation has increasingly become neoliberal. We demonstrate an economically significant reduction in the coefficient relating employment growth to output growth over the business cycles since 1985. Some of this change is due to sectoral shifts toward services, but an important part of it reflects a reduction in the coefficient for the goods and material value-adding sectors.
    Keywords: Okun's Law; Kaldor-Verdoorn Eect; Global restructuring; measurement of real output
    JEL: E12 E20
    Date: 2011
  19. By: Alessandro Calza (European Central Bank); Andrea Zaghini (Bank of Italy)
    Abstract: Estimates of the welfare costs of inflation based on Bailey's (1956) methodology are typically computed on the basis of aggregate money demand models. Yet, the behavior of money demand is likely to vary across sectors. As a result, the impact on welfare of changes in the inflation regime may differ between households and firms. We specifically investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. In order to do so, we estimate different functional specifications of sectoral money demand models for US households and non-financial firms using flow of funds data covering four decades. We find that the benefits were significant for both households and firms.
    Keywords: welfare cost of inflation, flow of funds data, demand for money
    JEL: E41 C22
    Date: 2011–01
    Abstract: This paper explores time variation in the dynamic effects of technology shocks on U.S. output, prices, interest rates as well as real and nominal wages. The results indicate considerable time variation in U.S. wage dynamics that can be linked to the monetary policy regime. Before and after the "Great Inflation", nominal wages moved in the same direction as the (required) adjustment of real wages, and in the opposite direction of the price response. During the "Great Inflation", technology shocks in contrast triggered wage-price spirals, moving nominal wages and prices in the same direction at longer horizons, thus counteracting the required adjustment of real wages, amplifying the ultimate repercussions on prices and hence increasing inflation volatility. Using a standard DSGE model, we show that these stylized facts, in particular the estimated magnitudes, can only be explained by assuming a high degree of wage indexation in conjunction with a weak reaction of monetary policy to inflation during the "Great Inflation", and low indexation together with aggressive inflation stabilization of monetary policy before and after this period. This means that the monetary policy regime is not only captured by the parameters of the monetary policy rule, but importantly also by the degree of wage indexation and resultant second round effects in the labor market. Accordingly, the degree of wage indexation is not structural in the sense of Lucas (1976).
    Keywords: technology shocks, second-round effects, Great Inflation
    JEL: C32 E24 E31 E42 E52
    Date: 2010–11
  21. By: Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: Europe's financial market contagion is infecting systemically important eurozone members, causing a rise in demands that European policymakers make greater strides toward solutions. While Jacob Funk Kirkegaard believes that the European Union will do "whatever it takes" to save the euro and the eurozone, he argues that powerful political constraints prevent EU leaders from making optimal decisions. Europe can get through the current crisis by producing a compromise among member states in the form of a permanent European Stability Mechanism (ESM) with an option to issue a conditional Eurobond, which would aid eurozone members suffering asymmetric economic shocks in return for taking domestic reforms to return to a sustainable fiscal path. An ESM with a conditional Eurobond option offers a less clear-cut solution than a full fiscal union, a straightforward Eurobond, European Central Bank money-printing, or a breakup of the eurozone.
    Date: 2010–12
  22. By: Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: The current European economic crisis is principally fiscal in nature. During the weekend of May 8-9, 2010, European leaders crafted a very important and constructive political "grand bargain" between EU member states and the European Central Bank (ECB) with far reaching, positive implications for the credibility of the European Union's fiscal policy framework and the long-term sustainability of European government finances. There is no chance that the eurozone will break up as a result of the current economic crisis and in the long term from the effects of the grand bargain. Leaving the euro will come at catastrophic cost to any nation that tries to do so out of economic weakness. If Greece is ultimately forced to default on its debts, it is certain the Greek government would want to do it within the eurozone. As such, a Greek default poses no risk to the composition of the eurozone, which considering that a German departure is equally unlikely is a secure monetary union. Kirkegaard suggests a set of required next steps for Europe: (1) European governments must immediately begin to address the lingering uncertainties surrounding the capital adequacy of the eurozone banking system; (2) it is crucial that eurozone governments, particularly among the Southern members, deliver expeditiously on the austerity and not least structural reform commitments recently made; and (3) the eurozone should consider introducing a potential "carrot" for members that successfully manage to put their government finances on a sustainable path. This carrot could come in the form of a future common "Maastricht bond," similar to the often suggested "eurobond," but open only to eurozone member s that actually adhere to the Maastricht Treaty debt stock criteria of a maximum level of government debt of 60 percent over an entire business cycle. A successfully launched pan-European Maastricht bond, backed by the credibility of years of painfully endured austerity measures across a sufficient number of participating member states, could achieve a scale and market depth not far off today's US treasury market. A Maastricht bond could consequently pose the first serious threat to an increasingly fragile US treasury market as the "global safe haven" asset.
    Date: 2010–06
  23. By: Christophe Boucher (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, A.A.Advisors-QCG - ABN AMRO); Bertrand Maillet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, A.A.Advisors-QCG - ABN AMRO, EIF - Europlace Institute of Finance)
    Abstract: Cet article s'intéresse aux fluctuations des cours boursiers aux Etats-Unis à différentes échelles temporelles. Nous examinons dans quelle mesure les variations à différentes fréquences du ratio cours-bénéfice s'expliquent par des révisions des bénéfices et/ou des rendements espérés. Nous montrons que les mouvement conjoncturels du ratio cours-bénéfice permettent de prévoir les rendements réels des actions. L'information contenue dans ces fluctuations apparaît même supérieure aux autres variables prédictives identifiées dans la littérature. Ces fluctuations conjoncturelles du ratio cours-bénéfice sont extraites à l'aide d'une analyse par ondelettes qui permet de décomposer une série temporelle à différents niveaux de résolution.
    Keywords: Cycles financiers, prévision, ondelettes.
    Date: 2011–01
  24. By: Galina Hale
    Abstract: Financial globalization opened international capital markets to investors and firms all over the world. Foreign capital raisings by firms have increased substantially since the early 1990s in terms of equity as well as debt. I review the literature on the determinants and patterns of cross-border capital raisings and their effects on developments of domestic markets, highlighting the differences between mature and emerging economies. I focus on the effects the introduction of the euro had on European and global capital markets by bringing into existence a currency area comparable in size to that of the United States. Finally, I discuss the effects of financial crises on foreign capital raisings and review capital raisings during the 2007-09 global financial crisis.
    Keywords: Globalization ; Capital market
    Date: 2011
  25. By: Bernd Hayo (Philipps-University Marburg); Matthias Neuenkirch (Philipps-University Marburg)
    Abstract: In this paper, we analyze the determinants of speeches by Federal Reserve (Fed) officials over the period January 1998 to September 2009. Econometrically, we use a probit model with regional and national macroeconomic variables to explain the subjectively coded content of these speeches. Our results are, first, that Fed Governors and presidents follow a Taylor rule when expressing their opinions: a rise in expected inflation (unemployment) makes a hawkish speech more (less) likely. Second, the content of speeches by Fed presidents is affected by both regional and national macroeconomic variables. Third, speeches by nonvoting presidents are more focused on regional economic development than are those by voting presidents. Finally, voting presidents and Governors are less backward-looking in their wording than are nonvoting presidents.
    Keywords: Central Bank Communication, Disagreement, Federal Reserve Bank, Monetary Policy, Regional Representation, Speeches
    JEL: D72 E52 E58
    Date: 2011
  26. By: Matthieu Bussière (Banque de France, 31 rue Croix des petits champs – 75001 Paris, France.); Alexander Chudik (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides evidence on whether the creation of the euro has changed the way global turbulences affect euro area and other economies. Specifically, it considers the impact of global shocks on the competitiveness of individual euro area countries and assesses whether their responses to such shocks have converged, as well as to what pattern. Technically, the paper applies a newly developed methodology based on infinite VAR theory featuring a dominant unit to a large set of over 60 countries' real effective exchange rates, including those of the individual euro area economies, and compares impulse response functions to the estimated systems before and after EMU with respect to three types of shocks: a global US dollar shock, generalised impulse response function shocks and a global shock to risk aversion. Our results show that the way euro area countries' real effective exchange rates adjust to these shocks has converged indeed, albeit to a pattern that depends crucially on the nature of the shock. This result is noteworthy given the apparent divergence in competitiveness indicators of these countries in the first ten years of EMU, which suggests that this diverging pattern is unlikely to be due to global external shocks with asymmetric effects but rather to other factors, such as country-specific domestic shocks. JEL Classification: C21, C23.
    Keywords: Euro, Real Effective Exchange Rates, Weak and Strong Cross Sectional Dependence, High-Dimensional VAR, Identification of Shocks.
    Date: 2011–02
  27. By: Kun Guo (CAS); Wei-Xing Zhou (ECUST); Si-Wei Cheng (CAS); Didier Sornette (ETH Zurich)
    Abstract: Using a recently introduced method to quantify the time varying lead-lag dependencies between pairs of economic time series (the thermal optimal path method), we test two fundamental tenets of the theory of fixed income: (i) the stock market variations and the yield changes should be anti-correlated; (ii) the change in central bank rates, as a proxy of the monetary policy of the central bank, should be a predictor of the future stock market direction. Using both monthly and weekly data, we found very similar lead-lag dependence between the S&P500 stock market index and the yields of bonds inside two groups: bond yields of short-term maturities (Federal funds rate (FFR), 3M, 6M, 1Y, 2Y, and 3Y) and bond yields of long-term maturities (5Y, 7Y, 10Y, and 20Y). In all cases, we observe the opposite of (i) and (ii). First, the stock market and yields move in the same direction. Second, the stock market leads the yields, including and especially the FFR. Moreover, we find that the short-term yields in the first group lead the long-term yields in the second group before the financial crisis that started mid-2007 and the inverse relationship holds afterwards. These results suggest that the Federal Reserve is increasingly mindful of the stock market behavior, seen at key to the recovery and health of the economy. Long-term investors seem also to have been more reactive and mindful of the signals provided by the financial stock markets than the Federal Reserve itself after the start of the financial crisis. The lead of the S&P500 stock market index over the bond yields of all maturities is confirmed by the traditional lagged cross-correlation analysis.
    Date: 2011–02
  28. By: Cecilia Frale (MEF-Ministry of the Economy and Finance-Italy, Treasury Department); Libero Monteforte (Bank of Italy and MEF-Ministry of the Economy and Finance-Italy, Treasury Department)
    Abstract: In this paper a dynamic factor model with mixed frequency is proposed (FaMIDAS), where the past observations of high frequency indicators are used following the MIDAS approach. This structure is able to represent with richer dynamics the information content of the economic indicators and produces smoothed factors and forecasts. In addition, the Kalman filter is applied, which is particularly suited for dealing with unbalanced data set and revisions in the preliminary data. In the empirical application for the Italian quarterly GDP the short-term forecasting performance is evaluated against other mixed frequency models in a pseudo-real time experiment, also allowing for pooled forecast from factor models.
    Keywords: mixed frequency models, dynamic factor models, MIDAS,forecasting.
    JEL: E32 E37 C53
    Date: 2011–01
  29. By: Pippenger, John
    Abstract: A complete solution to the forward-bias puzzle should provide an econometric solution and an economic explanation for that solution. A complete solution should also explain the closely related failure of uncovered interest parity. In addition it should explain some related anomalies. One such anomaly is that variances for changes in exchange rates are over 100 times larger than variances for interest rate differentials and forward premiums. My econometric solution is that the relevant test equations omit two variables that covered interest parity implies should be included. For my data, the missing variables explain the failure of uncovered interest parity and the forward-bias puzzle. The missing variables also explain why the variance for changes in exchange rates is over 100 times larger than the variance for both interest rate differentials and forward premiums. My economic explanation is that, in general, forward rates do not equal expected future spot rates.
    Keywords: exchange rates; forward bias; covered interest parity; uncovered interest parity; arbitrage
    Date: 2011–01–24
  30. By: Mustafa Caglayan; Ozge Kandemir; Kostas Mouratidis (Department of Economics, The University of Sheffield)
    Abstract: We empirically investigate the effects of inflation uncertainty on output growth for the US using both monthly and quarterly data over 1985-2009. Employing a Markov regime switching approach to model output dynamics, we show that inflation uncertainty obtained from a Markov regime switching GARCH model exerts a negative and regime dependant impact on output growth. In particular, we show that the negative impact of inflation uncertainty on output growth is almost 4.5 times higher during the low growth regime than that during the high growth regime. We verify the robustness of our findings using quarterly data
    Keywords: Growth, inflation uncertainty, Markov-switching modeling, Markov-switching GARCH
    JEL: E31 E32
    Date: 2011–02
  31. By: Annalisa Ferrando (European Central Bank, DG-Economics, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Nicolas Griesshaber (Berlin Graduate School of Social Sciences (BGSS), Unter den Linden 6, 10099 Berlin, Germany.)
    Abstract: In this study we investigate the determinants of financing obstacles using survey data on a sample of around 5000 firms from the euro area countries. This completely new survey – started at the end of 2009 - gives us the opportunity to test whether firm characteristics such as size, age, economic branch, financial autonomy and ownership are valid predictors of financing obstacles also during the recent financial crisis. Our results show that only age and ownership are robust explanatory variables for firms’ perceived financing obstacles while mixed results are found for size and economic branches. JEL Classification: E22, G30, G10, O16, K40.
    Keywords: Financial Crisis, Financing Constraints, Small and Medium-Sized Enterprises, Survey Data.
    Date: 2011–02
  32. By: Gregor Schwerhoff (BGSE - Bonn Graduate School of Economics - BGSE); Mouhamadou Sy (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: The dramatic decline in inflation across the world over the last 20 years has been largely credited to improved monetary policy. The universal nature of the phenomenon and its simultaneity with globalization however indicate that there might also be a “real” side to it. We build a model based on Melitz (2003) in which falling transport cost lead to greater openness, higher productivity and lower inflation. Following a decline in transport cost openness increases and firm selection eliminates the least productive domestic firms. The consequent increase in average productivity leads to falling relative prices for goods. A cash-in-advance constraint allows to analyse how falling relative prices can lead to lower inflation. Using a dataset of macroeconomic variables for 107 countries from all world regions we are able to show that openness-induced productivity growth leads to a significant decline in inflation world wide.
    Keywords: globalization ; openness ; productivity ; disinflation
    Date: 2010–10
  33. By: Christopher Martin (Department of Economics, University of Bath, UK); Costas Milas (Economics Group, Keele Management School, UK; The Rimini Centre for Economic Analysis (RCEA), Italy; Erastinis, Greece)
    Abstract: We analyse UK monetary policy using monthly data for 1992-2010. We have two main findings. First, the Taylor rule breaks down after 2007 as the estimated response to inflation falls markedly and becomes insignificant. Second, policy is best described as a weighted average of a “financial crisis” regime in which policy rates respond strongly to financial stress and a “no-crisis” Taylor rule regime. Our analysis provides a clear explanation for the deep cuts in policy rates beginning in late 2008 and highlights the dilemma faced by policymakers in 2010-11.
    Keywords: monetary policy, financial crisis
    JEL: C51 C52 E52 E58
    Date: 2011–02
  34. By: Costas Karfakis (Department of Economics, University of Macedonia)
    Abstract: The relationship between money and output in the euro area is tested in the context of a two-equation model. An interesting aspect of the empirical analysis is the evidence that the real M3 has a correctly signed and statistically significant impact on business cycle fluctuations, given the real interest rate and foreign output. This finding supports the argument made by proponents of monetarism that the effects of monetary policy actions on the real economy are not fully captured by the short-term real interest rate.
    Keywords: Output gap, real money, real interest rate, simultaneous equations methods.
    JEL: E32 E51 E52 E58
    Date: 2011–01
  35. By: Gabriel Zucman (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper draws on direct evidence from Swiss banks and on systematic inconsistencies in international accounts across countries to document the level of unrecorded wealth in tax havens, its nature and its evolution. I find that 8% of global household net financial wealth is held in tax havens, of which one third in Switzerland. The bulk of offshore assets are invested in equities, in particular mutual fund shares. For this reason, 20% of all cross-border equities have no identifiable owner in international statistics across the world. Taking into account tax havens alters dramatically the picture of global imbalances: with minimal assumptions, it is possible to turn the world's second largest debtor, the eurozone, into a net creditor. With stronger assumptions, the largest debtor, the U.S., can be made a balanced economy. Europeans are richer than we think, because a significant part of their wealth has historically been held where domestic national accountants and tax authorities cannot see it.
    Keywords: tax havens ; external assets ; wealth distribution ; tax evasion
    Date: 2011–02
  36. By: David F. Hendry
    Abstract: Economies are so high dimensional and non-constant that many features of models cannot be derived by prior reasoning, intrinsically involving empirical discovery and requiring theory evaluation. Despite important differences, discovery and evaluation in economics are similar to those of science. Fitting a pre-specified equation limits discovery, but automatic methods can formulate much more general models with many variables, long lag lengths and non-linearities, allowing for outliers, data contamination, and parameter shifts; select congruent parsimonious-encompassing models even with more candidate variables than observations, while embedding the theory; then rigorously evaluate selected models to ascertain their viability.
    Keywords: Empirical discovery, theory evaluation, model selection, Autometrics
    JEL: B40
    Date: 2011
  37. By: David F. Hendry
    Abstract: We consider three ‘cases studies’ of the uses and mis-uses of mathematics in economics and econometrics. The first concerns economic forecasting, where a mathematical analysis is essential, and is independent of the specific forecasting model and how the process being forecast behaves. The second concerns model selection with more candidate variables than the number of observations. Again, an understanding of the properties of extended general-to-specific procedures is impossible without advanced mathematical analysis. The third concerns inter-temporal optimization and the formation of ‘rational expectations’, where misleading results follow from present mathematical approaches for realistic economies. The appropriate mathematics remains to be developed, and may end ‘problem specific’ rather than generic.
    Keywords: Economic forecasting, structural breaks, model selections, expectations, impulse-indicator saturation, mathematical analyses
    JEL: C02 C22
    Date: 2011
  38. By: Jennifer L. Castle; Jurgen A. Doornik; David F. Hendry
    Abstract: General unrestricted models (GUMs) may include important individual determinants, many small relevant effects, and irrelevant variables. Automatic model selection procedures can handle perfect collinearity and more candidate variables than observations, allowing substantial dimension reduction from GUMs with salient regressors, lags, non-linear transformations, and multiple location shifts, together with all the principal components representing ‘factor’ structures, which can also capture small influences that selection may not retain individually. High dimensional GUMs and even the final model can implicitly include more variables than observations entering via ‘factors’. We simulate selection in several special cases to illustrate.
    Keywords: Model selection, high dimensionality, principal components, non-linearity, Monte Carlos
    JEL: C51 C22
    Date: 2011
  39. By: Calhoun, Gray
    Abstract: This paper uses dimension asymptotics to study why overfit linear regression models should be compared out-of-sample; we let the number of predictors used by the larger model increase with the number of observations so that their ratio remains uniformly positive. Under this limit theory, the naive Diebold-Mariano-West out-of-sample test can test hypotheses about a key quantity for evaluating forecasting models---a time series analogue to the generalization error---as long as the out-of-sample period is small relative to the total sample size. Moreover, tests that are designed to reject if the larger model is true, such as the usual in-sample Wald and LM tests and also Clark and McCracken's (2001, 2005a), McCracken's (2007) and Clark and West's (2006, 2007) out-of-sample statistics, will choose the larger model too often when the smaller model is more accurate.
    Keywords: Generalization Error; Forecasting; ModelSelection; t-test; Dimension Asymptotics
    JEL: C01 C12 C22 C52 C53
    Date: 2011–02–10
  40. By: Markus Bruckner (School of Economics, University of Adelaide); Anita Tuladhar (International Monetary Fund)
    Abstract: We use a rich dataset of regional government expenditures for Japan during the 1990-2000 period to estimate from within-prefecture variation the multiplier of government investment and government consumption expenditures. Our main finding is that government spending did not have multipliers effects that are on average larger than one. Government investment had a positive and significant effect on output that was quantitatively larger than the effect of government consumption expenditures. Government personnel expenditures and transfers to households had significant negative output effects while transfers to firms produced positive multiplier effects that were significantly larger than one. Our findings are consistent with macro model that emphasize the supplyside effects of fiscal policy during times of financial crisis.
    Keywords: fiscal policy, fiscal multipliers
    JEL: E62 H30
    Date: 2011–02
  41. By: Raphael Auer
    Abstract: How important is the effect of exchange rate fluctuations on the competitive environment faced by domestic firms and the prices they charge? To answer this question, this paper examines the 17 percent appreciation of the yuan against the U.S. dollar from 2005 to 2008. In a monthly panel covering 110 sectors, a 1 percent appreciation of the Yuan increases U.S. import prices by roughly 0.8 percent. It is then shown that import prices, in turn, pass through into producer prices at an average rate of roughly 0.7, implying that a 1 percent Yuan appreciation increases the average U.S. producer price of tradable goods by 0.8 percent*0.7=0.56 percent. In contrast, exchange rate movements of other trade partners have much smaller effects on import prices and hardly any effect on producer prices. The paper next demonstrates that the pass through response into import prices is heterogeneous across sectors with different characteristics such as traded-input intensity or the shape of demand for the sector's goods. In contrast, the rate at which import prices pass through into domestic producer prices is found to be homogenous across the sectors. Finally, the insights of the analysis are employed to simulate the inflationary effect of a Yuan revaluation. For example, the relative price shock caused by a 25 percent appreciation of the Yuan spread evenly over 10 months is equivalent to a temporary increase of the U.S. PPI inflation rate by over five percentage points. Because such an appreciation would also influence the overall skewness of the distribution of price changes at the sectoral level, it would likely also impact U.S. equilibrium inflation.
    Keywords: Imports - Prices ; International trade ; Labor market ; Macroeconomics ; Price levels
    Date: 2011
  42. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: The impact of China's exchange rate on both its current account balance and the US-China bilateral trade balance is considerable. A 1 percent rise in the real effective exchange rate would cause a reduction in China's current account surplus of 0.30 to 0.45 percent of GDP. A 10 percent real effective appreciation would bring China's current account surplus down by roughly $170 billion to $250 billion annually with a corresponding improvement in the US current account balance ranging from $22 billion to $63 billion annually. William R. Cline also warns that the increasing trend for China's current account surplus, combined with the negative trend for the US deficit, indicate that adjustments accomplished through exchange rate correction at any one time will have a tendency to erode unless the renminbi successively appreciates by around 2 percent annually to reflect its rapid productivity growth. Special Chinese efforts to shift the economy away from external to domestic demand are important complements of exchange rate adjustment, without which the long-term trend toward a rising trade surplus could cause excess demand to grow and increase inflationary pressures on the economy.
    Date: 2010–08
  43. By: Guillaume Bazot (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: Although a relative consensus is emerging about the economic effects of credit development, many controversies remain as to the role of the central bank in that development. This paper addresses the process of credit allocation by the central bank as observed on a spatial basis. It examines how and why improved geographical access to the central bank contributes to credit development by looking at the Fench experience in the ‘classical period' (1880-1913). In an environment of emerging, but highly prudent, deposit banks and the absence of a centralised money market, Banque de Fance branches had enough supply and demand to generate a network. Access to “central loans” hence reduced liquidity constraints and encouraged local banks and firms to lend. We shape the proof in two stages. First, a simple banking model presents our intuition and the mechanisms at work. Second, we take a new data set on the development of credit by French geographic area (département) to test our hypothesis using panel econometric tools. The results show the Banque de France branches having a strong and robust impact on credit development.
    Keywords: credit constraint ; distance ; soft information ; succursales of the Banque de France ; credit development
    Date: 2010–11
  44. By: Paradiso, Antonio; Rao, B. Bhaskara
    Abstract: This paper uses the methodology of Pearce (1979) and Bhagestani and Noori (2008) to show that the expected rate of inflation by the market participants in Australia is more rational than the household survey forecasts by the Melbourne Institute.
    Keywords: ARIMA Forecasts; Expected Inflation Rate; Survey data; Australia.
    JEL: C12 C2 E3
    Date: 2011–02–08
  45. By: Ivan Kitov; Oleg Kitov
    Abstract: A quantitative model is presented linking the rate of inflation and unemployment to the change in the level of labor force. The link between the involved variables is a linear one with all coefficients of individual and generalized models obtained empirically. To achieve the best fit between measured and predicted time series cumulative curves are used as a simplified version of the 1-D boundary elements method. All models for Australia are similar to those obtained for the US, France, Japan and other developed countries and thus validate the concept and related quantitative model.
    Date: 2011–02
  46. By: Francisco Marcos Rodrigues Figueiredo
    Abstract: The objective of this paper is to verify if exploiting the large data set available to the Central Bank of Brazil, makes it possible to obtain forecast models that are serious competitors to models typically used by the monetary authorities for forecasting inflation. Some empirical issues such as the optimal number of variables to extract the factors are also addressed. I find that the best performance of the data rich models is usually for 6-step ahead forecasts. Furthermore, the factor model with targeted predictors presents the best results among other data-rich approaches, whereas PLS forecasts show a relative poor performance.
    Date: 2010–12
  47. By: Fernando Borraz (Banco Central del Uruguay y Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Diego Gianelli (Banco Central del Uruguay)
    Abstract: Inflation expectations are key unobservable variables for decision-making, especially in managing monetary policy. Understand how to formulate them, if they are rational or adaptive is vital. This study answers these questions through a panel data analysis of the micro data from the inflation expectation survey of the Central Bank of Uruguay. The main findings indicate: i) a low predictive power of the analysts surveyed in the 12-month horizon; ii) a convergence of the individual forecasts to the released monthly median iii) an overweight of the inflation target ceiling and the dynamics of the inflation, and iv) a underweight of monetary policy instruments. With respect to the evidence of rationality, we find the partial use of available information and in some cases, there is a systematic bias.
    Keywords: inflation expectations, rationality, forecast error
    JEL: D85 E31 E5
    Date: 2011–01
  48. By: Diego Gianelli (Banco Central del Uruguay)
    Abstract: The Central Bank of Uruguay started to an interest rate instrument for monetary policy in September 2009. This paper develops a Small Structural Model for the Uruguayan economy which contributes to the understanding of the channels through which monetary policy operates under a flexible inflation targeting regime. The model is built in an open economy framework with partial dollarization and quasi-rational expectations. We calibrate the model parameter using quarterly data and present the dynamic response to several structural shocks. The results are consistent with the underlying New Keynesian theory, as well as with previews figures shown in works for countries with similar structural characteristics. Given the small sample size available for some series the empirical results of this model should be considered preliminary.
    Keywords: Small Structural Model; Monetary Policy
    JEL: C15 C51 C60 E12 E17 E52
    Date: 2010–12
  49. By: Fernando Borraz (Banco Central del Uruguay y Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Leandro Zipitria (Universidad de Montevideo and Universidad de San Andrés)
    Abstract: We use a rich and unique dataset of 20 million daily prices in groceries and supermarkets across the country to analyze stylized facts of the behaviour of consumer prices. Our findings are as follows: i) The median duration of prices is little over 2 months. Therefore, retail prices in Uruguay are less sticky than in the US but stickier than in the UK. ii) We do not find evidence of a seasonal pattern in the likelihood of price adjustments. iii) The frequency of price adjustment varies positively with expected inflation for the food and personal care product categories. However, in the alcohol and soft drink categories we find that firms increase the percentage points of the adjustment and not its frequency. iv) The probability of price change in the first day of the month is seven times higher than in any another day. v) The probability of a price change is not constant over time.
    Keywords: Retail; micro data; prices; price volatility; sticky prices.
    JEL: E31 D40 L16 L81
    Date: 2011–01
  50. By: Partha Sen (Department of Economics, Delhi School of Economics, Delhi, India)
    Date: 2010–12
  51. By: Alagidede, Paul; Coleman, Simeon; Cuestas, Juan Carlos
    Abstract: Plans are far advanced to form a second monetary union, the West African Monetary Zone (WAMZ), in Africa. While much attention is being placed on convergence criteria and preparedness of the five aspiring member states, less attention is being placed on how the dynamics of inflation in individual countries are (dis)similar. This paper aims to stimulate debate on the long term sustainability of the union by examining the dynamics of inflation within these countries. Using Fractional Integration (FI) methods, we establish that some significant differences exist among the countries. Shocks to inflation in Sierra Leone are non mean reverting; results for The Gambia, Ghana and Guinea-Bissau suggest some inflation persistence, despite being mean reverting. Some policy implications are discussed and possible outstanding policy questions are raised.
    Keywords: Monetary unions; West Africa; stationarity; fractional integration; Inflationary shocks
    Date: 2010–10

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