nep-cba New Economics Papers
on Central Banking
Issue of 2011‒02‒26
forty-nine papers chosen by
Alexander Mihailov
University of Reading

  1. Anticipated Alternative Policy-Rate Paths in Policy Simulations By Laséen, Stefan; Svensson, Lars E.O.
  2. Exorbitant Privilege and Exorbitant Duty By Pierre-Olivier Gourinchas; Helene Rey; Nicolas Govillot
  3. Temporarily Unstable Government Debt and Inflation By Troy Davig; Eric M. Leeper
  4. Interpreting Currency Movements During the Crisis: What's the Role of Interest Rate Differentials? By Nicoletta Batini; Thomas Dowling
  5. The Great Recession: US dynamics and spillovers to the world economy By Fabio Bagliano; Claudio Morana
  7. Optimal Central Bank Lending By Andreas Schabert
  8. Exchange Rate Policy under Sovereign Default Risk By Andreas Schabert
  9. Learning About Inflation Measures for Interest Rate Rules By Luis-Felipe Zanna; Marco Airaudo
  10. Central Bank Balances and Reserve Requirements By Simon Gray
  11. Monetary Policy, Trend Inflation and Inflation Persistence By Fang Yao
  12. Real-time nowcasting of GDP: Factor model versus professional forecasters By Liebermann, Joelle
  13. Targets, Policy Lags and Sticky Prices in a Two-Equation Model of US Stabilization Policy By David Kiefer
  14. Real Output of Bank Services: What Counts Is What Banks Do, Not What They Own By Wang, J. Christina; Inklaar, Robert Christiaan
  15. Estimating monetary policy reaction functions : A discrete choice approach By Jef Boeckx
  16. Optimal Monetary and Fiscal Policies in a Search-Theoretic Model of Money and Unemployment By Pedro Gomis-Porqueras; Benoit Julien; Chengsi Wang
  17. The 2007-? financial crisis: a money market perspective By Nuno Cassola; Claudio Morana
  18. The Role of Macroeconomic Policy in Rebalancing Growth By J. Morgan, Peter
  19. The Impact of Monetary Policy on Economic Activity - Evidence from a Meta-Analysis By Masagus M. Ridhwan; Henri L.F. de Groot; Peter Nijkamp
  20. Combining Predictive Densities using Bayesian Filtering with Applications to US Economics Data By Monica Billio; Roberto Casarin; Francesco Ravazzolo; Herman K. van Dijk
  21. Globalization, the Business Cycle, and Macroeconomic Monitoring By M. Ayhan Kose; S. Boragan Aruoba; Marco Terrones; Francis X. Diebold
  22. Firm entry, inflation and the monetary transmission mechanism By Vivien Lewis; Céline Poilly
  23. Firm Entry, Inflation and the Monetary Transmission Mechanism By Vivien LEWIS; Céline POILLY
  24. Does Disagreement amongst Forecasters have Predictive Value? By Rianne Legerstee; Philip Hans Franses
  25. A new perspective to rational expectations: maximin rational expectations equilibrium By Luciano De Castro; Marialaura Pesce; Nicholas C. Yannelis
  26. Linkages between the Financial and the Real Sector of the Economy: A Literature Survey By Peter Broer; Jürgen Antony
  27. European Financial Linkages: A New Look at Imbalances By Claire Waysand; John C De Guzman; Kevin Ross
  28. Identifying the Weights in Exchange Market Pressure By Franc Klaassen
  29. Identifying the Weights in Exchange Market Pressure By Franc Klaassen
  30. The Welfare Implications of Costly Information Provision By Luca Colombo; Gianluca Femminis
  31. Estimates of the Sticky-Information Phillips Curve for the USA with the General to Specific Method By Paradiso, Antonio; Rao, B. Bhaskara; Ventura, Marco
  32. Private Information Flow and Price Discovery in the U.S. Treasury Market By George J. Jiang; Ingrid Lo
  33. The Opportunistic approach to monetary policy and financial markets By Kasai Ndahiriwe; Ruthira Naraidoo
  34. Quantitative easing in the United States after the crisis: conflicting views. By Domenica Tropeano
  35. The Effects of Housing Prices and Monetary Policy in a Currency Union By Pau Rabanal; Oriol Aspachs-Bracons
  36. What are the Effects of Monetary Policy Shocks? Evidence from Dollarized Countries By Tim Willems
  37. Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces By Markus Kirchner; Jacopo Cimadomo; Sebastian Hauptmeier
  38. The Macroeconomics of the Credit Crisis: In Search of Externalities for Macro-Prudential Supervision By Frank A.G. den Butter
  39. Pensions, Debt and Inflation Risk in a Monetary Union By Yvonne Adema
  40. Macroeconomics as a Science By Apostolos Serletis
  41. Global Stochastic Properties of Dynamic Models and their Linear Approximations By Ana Babus; Casper G. de Vries
  42. Monetary policy transmission in an emergingmarket setting By Ila Patnaik; Ajay Shah; Rudrani Bhattacharya
  43. AMU and Monetary Cooperation in Asia By Eiji Ogawa; Junko Shimizu
  44. Global Shocks and their Impact on Low-Income Countries: Lessons from theGlobal Financial Crisis By Martin Schindler; Chris Papageorgiou; Hans Weisfeld; Catherine A. Pattillo; Nicola Spatafora; Andrew Berg
  45. Inflation Perceptions and Expectations in Sweden - Are Media Reports the ‘Missing Link’? By Lena Dräger
  46. Do Financial Variables Help Predict Macroeconomic Environment? The Case of the Czech Republic By Tomas Havranek; Roman Horvath; Jakub Mateju
  47. Inflation and unemployment in Switzerland: from 1970 to 2050 By Kitov, Oleg; Kitov, Ivan
  48. An Estimated Dynamic Stochastic General Equilibrium Model of the Jordanian Economy By Tigran Poghosyan; Samya Beidas-Strom
  49. Armenia: An Assessment of the Real Exchange Rate and Competitiveness By Anke Weber; Chunfang Yang

  1. By: Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Svensson, Lars E.O. (Sveriges Riksbank)
    Abstract: This paper specifies a new convenient algorithm to construct policy projections conditional on alternative anticipated policy-rate paths in linearized dynamic stochastic general equilibrium (DSGE) models, such as Ramses, the Riksbank's main DSGE model. Such projections with anticipated policy-rate paths correspond to situations where the central bank transparently announces that it, conditional on current information, plans to implement a particular policy-rate path and where this announced plan for the policy rate is believed and then anticipated by the private sector. The main idea of the algorithm is to include among the predetermined variables (the "state" of the economy) the vector of nonzero means of future shocks to a given policy rule that is required to satisfy the given anticipated policy-rate path.
    Keywords: Optimal monetary policy; instrument rules; policy rules; optimal policy projections
    JEL: E52 E58
    Date: 2011–01–01
  2. By: Pierre-Olivier Gourinchas (Associate Professor, Univeresity of California, Berkeley (; Helene Rey (Professor, London Business School); Nicolas Govillot (Ecole des Mines)
    Abstract: We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an gexorbitant privilegeh that significantly weakens its external constraint. In exchange for this gexorbitant privilegeh we document that the US provides insurance to the rest of the world, especially in times of global stress. This gexorbitant dutyh is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.
    Date: 2010–08
  3. By: Troy Davig; Eric M. Leeper
    Abstract: Many advanced economies are heading into an era of fiscal stress: populations are aging and governments have made substantially more promises of old-age benefits than they have made provisions to finance. This paper models the era of fiscal stress as stemming from relentlessly growing promised government transfers that initially are fully honored, being financed by new sales of government debt that bring forth higher future income taxes. As debt levels and tax rates rise, the population's tolerance for taxation declines and the probability of reaching the fiscal limit increases. At the limit a fixed tax rate is adopted, adjustments in taxes no longer stabilize debt, and some new stabilizing combination of policies must arise. We examine how, in the period before the fiscal limit, rapidly rising debt interacts with expectations of how and when policies will adjust. Temporarily explosive debt has no effect on inflation if households expect all adjustments to occur through entitlements reform, but if households believe it is possible that in the future monetary policy will shift from targeting inflation to stabilizing debt, then debt feeds directly into the path of inflation and monetary policy can no longer control inflation. News that reduces expected primary surpluses can bring future inflation into the present, well before the news shows up in fiscal measures.
    JEL: E31 E52 E62 E63
    Date: 2011–02
  4. By: Nicoletta Batini; Thomas Dowling
    Abstract: Using an adaptation of the Uncovered Interest Parity (UIP) condition, this paper analyzes the drivers behind the large, symmetric exchange rate swings observed during the financial crisis of 2008-2010. Employing a Nelson-Siegel model, we estimate yield curves and decompose the exchange rate movements into changes we attribute to monetary policy and a residual. We find that the depreciation phase of the currencies in our sample was largely dominated by safe-haven effects rather than carry trade activity or other return considerations. For some countries, however, the appreciation that began at the end of 2008 seems largely to reflect downward movement in the cumulative revisions to nominal forward differentials, suggesting carry trade.
    Keywords: Currencies , Developed countries , Economic models , Emerging markets , Exchange rate adjustments , Exchange rates , Financial crisis , Global Financial Crisis 2008-2009 , Interest rates , Monetary policy ,
    Date: 2011–01–20
  5. By: Fabio Bagliano (University of Turin and CeRP); Claudio Morana (Università del Piemonte Orientale and CeRP)
    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 transmission 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: 2010–11
  6. By: Jean Pisani-Ferry; Adam Posen
    Abstract: The response in 2008-09 to the global financial crisis was inmany ways a high water mark for transatlantic policy coordination.The major economies of the EU and the US rapidly agreedon a series of measures to limit the crisis. However, the commonapproach has since unraveled. This paper explores why the'London consensus? has not survived for much more than a year.? We identify four non-competing explanations: (a) divergence ineconomic developments, especially the productivity responseto the recession; (b) domestic political economy factors, notablythe pressure to act against unemployment in the US; (c) differencesin beliefs as regards the nature of the recovery fromthe common shock, about which there is much more supplysideoptimism in the US ; (d) institutional factors such as thelack of a central fiscal authority in the EU.? In response to this situation we suggest a critical quantum ofcoordination. Key measures include a commitment to avoidingdeliberate currency depreciation and unilateral intervention;agreement to give the IMF an enhanced monitoring role; theadoption by parliaments of medium-term fiscal plans ; and cooperationon the issue of Chinese undervaluation.
    Date: 2011–02
  7. By: Andreas Schabert (Dortmund University, and University of Amsterdam)
    Abstract: We analyze optimal monetary policy in a sticky price
    Keywords: Optimal monetary policy; central bank instruments; collateralized lending; liquidity premium; inflation
    JEL: E4 E5 E32
    Date: 2010–06–21
  8. By: Andreas Schabert (TU Dortmund University, and University of Amsterdam)
    Abstract: We examine monetary policy options for a small open economy where sovereign default might occur due to intertemporal insolvency. Under interest rate policy and floating exchange rates the equilibrium is indetermined. Under a fixed exchange rate the equilibrium is uniquely determined and independent of sovereign default.
    Keywords: Exchange rate peg; interest rate policy; equilibrium determination; sovereign default; public debt
    JEL: E52 E63 F31 F41
    Date: 2011–02–11
  9. By: Luis-Felipe Zanna; Marco Airaudo
    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: Economic models , Inflation , Inflation rates , Price stabilization , Stabilization measures ,
    Date: 2010–12–22
  10. By: Simon Gray
    Abstract: Most central banks oblige depository institutions to hold minimum reserves against their liabilities, predominantly in the form of balances at the central bank. The role of these reserve requirements has evolved significantly over time. The overlay of changing purposes and practices has the result that it is not always fully clear what the current purpose of reserve requirements is, and this necessarily complicates thinking about how a reserve regime should be structured. This paper describes three main purposes for reserve requirements - prudential, monetary control and liquidity management - and suggests best practice for the structure of a reserves regime. Finally, the paper illustrates current practices using a 2010 IMF survey of 121 central banks.
    Keywords: Central bank policy , Central banks , Commercial banks , Depositories , Liquidity management , Reserve requirements ,
    Date: 2011–02–16
  11. By: Fang Yao
    Abstract: This paper presents a new mechanism through which monetary policy rules affect inflation persistence. When assuming that price reset hazard functions are not constant, backward- looking dynamics emerge in the NKPC. This new mechanism makes the traditional demand channel of monetary transmission have a long-lasting effect on inflation dynamics. The Calvo model fails to convey this insight, because its constant hazard function leads those important backward-looking dynamics to be canceled out. I first analytically show how it works in a simple setup, and then solve a log-linearized model numerically around positive trend inflation. With realistic calibration of trend inflation and the monetary policy rule, the model can account for the pattern of changes in inflation persistence observed in the post-wwii U.S. data. In addition, with increasing hazard functions, the "Taylor principle" is sufficient to guarantee the determinate equilibrium even under extremely high trend inflation.
    Keywords: Intrinsic inflation persistence, Hazard function, Trend inflation, Monetary policy, New Keynesian Phillips curve
    JEL: E31 E52
    Date: 2011–02
  12. By: Liebermann, Joelle
    Abstract: This paper performs a fully real-time nowcasting (forecasting) exercise of US real gross domestic product (GDP) growth using Giannone, Reichlin and Small (2008) factor model framework which enables one to handle unbalanced datasets as available in real-time. To this end, we have constructed a novel real-time database of vintages from October 2000 to June 2010 for a rich panel of US variables, and can hence reproduce, for any given day in that range, the exact information that was available to a real-time forecaster. We track the daily evolution throughout the current and next quarter of the model nowcasting performance. Analogously to Giannone et al. (2008) pseudo real-time results, we find that the precision of the nowcasts increases with information releases. Furthermore, the Survey of Professional Forecasters (SPF) does not carry additional information with respect to the model best specification, suggesting that the often cited superiority of the SPF, attributable to judgment, is weak over our sample. Then, as one moves forward along the real-time data flow, the continuous updating of the model provides a more precise estimate of current quarter GDP growth and the SPF becomes stale compared to all the model specifications. These results are robust to the recent recession period.
    Keywords: Real-time data; Nowcasting; Forecasting; Factor model
    JEL: C53 E52 C33
    Date: 2010–12
  13. By: David Kiefer
    Abstract: Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy. One equation is a monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by a Phillips curve PC. Central banks attempt to implement these objectives by setting interest rates along an IS curve. They label this the IS-PC-MR model. Observing that governments have more tools than just the interest rate, we drop the IS equation, simplifying their model to 2 equations. Adding a random walk model of the unobserved potential growth, we develop their PC-MR model into a state space specification of the short-run political economy. This is an appropriate econometric method because it incorporates recursive forecasts of unobservable state variables based on contemporaneous information measured with real-time data. Our results are generally consistent with US economic history. One qualification is that governments are more likely to target growth rates than output gaps. Another is that policy affects outcomes after a single lag. This assumption fits the data better than an alternative double-lag timing: one lag for output, plus a second for inflation has been proposed. We also infer that inflation expectations are more likely to be backward rather than forward looking.
    Keywords: new Keynesian stabilization, policy targets, microfoundations, real-time data
    JEL: E3 E6
    Date: 2011
  14. By: Wang, J. Christina; Inklaar, Robert Christiaan (Groningen University)
    Abstract: The measurement of bank output, a difficult and contentious issue, has become even more important in the aftermath of the devastating financial crisis of recent years. In this paper, we argue that models of banks as processors of information and transactions imply a quantity measure of bank service output based on transaction counts instead of balances of loans and deposits. Compiling new and comparable output measures for the United States and a range of European countries, we show that our counts?based output series exhibit significantly different growth patterns than our balances?based output series over the years 1997 to 2009. Since the U.S. official statistics rely on counts while European statistics rely on balances, this implies a potentially considerable bias in the estimate of bank output growth in Europe vis?à?vis that in the United States.
    Date: 2011
  15. By: Jef Boeckx (National Bank of Belgium, Research Department)
    Abstract: I propose a discrete choice method for estimating monetary policy reaction functions based on research by Hu and Phillips (2004). This method distinguishes between determining the underlying desired rate which drives policy rate changes and actually implementing interest rate changes. The method is applied to ECB rate setting between 1999 and 2010 by estimating a forward-looking Taylor rule on a monthly basis using real-time data drawn from the Survey of Professional Forecasters. All parameters are estimated significantly and with the expected sign. Including the period of financial turmoil in the sample delivers a less aggressive policy rule as the ECB was constrained by the lower bound on nominal interest rates. The ECB's non-standard measures helped to circumvent that constraint on monetary policy, however. For the pre-turmoil sample, the discrete choice model's estimated desired policy rate is more aggressive and less gradual than least squares estimates of the same rule specification. This is explained by the fact that the discrete choice model takes account of the fact that central banks change interest rates by discrete amounts. An advantage of using discrete choice models is that probabilities are attached to the different outcomes of every interest rate setting meeting. These probabilities correlate fairly well with the probabilities derived from surveys among commercial bank economists.
    Keywords: monetary policy reaction functions, discrete choice models, interest rate setting, ECB
    JEL: C25 E52 E58
    Date: 2011–02
  16. By: Pedro Gomis-Porqueras (School of Economics, Australian National University); Benoit Julien (School of Economics, University of New South Wales); Chengsi Wang (School of Economics, University of New South Wales)
    Abstract: In this paper we study the optimal monetary and fiscal policies of a general equilibrium model of unemployment and money with search frictions both in labor and goods markets as in Berentsen, Menzio and Wright (2010). We abstract from revenue-raising motives to focus on the welfare-enhancing properties of optimal policies. We show that some of the inefficiencies in the Berentsen, Menzio and Wright (2010) framework can be restored with appropriate fiscal policies. In particular, when lump sum monetary transfers are possible, a production subsidy financed by money printing can increase output in the decentralized market and a vacancy subsidy financed by a dividend tax even when the Hosios’ rule does not hold.
    Keywords: Search and matching; Fiscal polices; Money; Unemployment; Efficiency
    JEL: E52 E63
    Date: 2010–11
  17. By: Nuno Cassola (ECB); Claudio Morana (Università del Piemonte Orientale and CeRP)
    Abstract: The evolution of the spreads between unsecured money market rates of various maturities and central banks’ key policy rates has been subject to considerable debate and controversy in relation to the worldwide financial market turbulence that started in August 2007. Our contribution to the ongoing debate on the dynamics of money market spreads is empirical and methodological, motivated by the “shocking” evidence of non-stationary behaviour of money market spreads. In fact, in our view, empirical work assessing the effectiveness of central bank policies has largely overlooked the complexity of the market environment and its implications for the statistical properties of the data. Thus, our main goal is to carefully document both the economic and statistical “fingerprint” of money market turbulence, in the framework of a new econometric framework, carefully accounting for the persistence properties of the data.
    Keywords: money market interest rates, euro area, sub-prime credit crisis, credit risk, liquidity risk, long memory, structural change, fractionally integrated heteroskedastic factor vector autoregressive model
    JEL: C32 E43 E50 E58 G15
    Date: 2010–11
  18. By: J. Morgan, Peter (Asian Development Bank Institute)
    Abstract: The aftermath of the global financial crisis of 2007–2009 has called the export-led growth model of Asian economies into question. This paper describes the contribution that macroeconomic policy can make to promote a rebalancing of growth away from dependence on exports to developed economies to a more sustainable pattern of growth centered on domestic and regional demand. This represents a significant departure from the traditional uses of macroeconomic policy to stabilize the economic cycle and achieve stable and low inflation. The evidence suggests that macroeconomic policy can successfully contribute to growth rebalancing. Policy measures not only can affect aggregate demand directly, but can also affect it indirectly via their “microeconomic” impacts on private sector behavior. Although in the long-term fiscal policy should be balanced to maintain government debt stability and avoid crowding out of private investment, there may be substantial scope to expand monetary and fiscal policy in the medium-term to offset the deflationary effects of an appreciating currency during periods of current account reversal. Previous experience suggests that most of the needed stimulus can be provided by monetary policy, with only a supplementary role to be played by fiscal policy. Moreover, Asian economies with large current account surpluses tend to have sufficient fiscal space.
    Keywords: economic growth rebalancing; macroeconomic policy; sustainable economic growth
    JEL: E21 E52 E58 E62 E64 F31 F32 H50 H55 I38
    Date: 2011–02–17
  19. By: Masagus M. Ridhwan (VU University Amsterdam, Bank Indonesia); Henri L.F. de Groot (VU University Amsterdam); Peter Nijkamp (VU University Amsterdam)
    Abstract: This paper presents the findings a meta-analysis identifying the causes of variation in the impact of monetary policies on economic development. The sample of observations included in our meta-analysis is drawn from primary studies that uniformly employ Vector Autoregressive (VAR) models. Our findings reveal that capital intensity, financial deepening, the inflation rate, and economic size are important in explaining the variation in outcomes across regions and over time. Differences in the type of models used in the primary studies also significantly contribute to the explanation of the variation in study outcomes.
    Keywords: Monetary policy; Economic development; Meta-analysis
    JEL: E52 R11
    Date: 2010–04–21
  20. By: Monica Billio (University Ca'Foscari di Venezia); Roberto Casarin (University Ca'Foscari di Venezia); Francesco Ravazzolo (Norges Bank); Herman K. van Dijk (Erasmus University Rotterdam)
    Abstract: Using a Bayesian framework this paper provides a multivariate combination approach to prediction based on a distributional state space representation of predictive densities from alternative models. In the proposed approach the model set can be incomplete. Several multivariate time-varying combination strategies are introduced. In particular, a weight dynamics driven by the past performance of the predictive densities is considered and the use of learning mechanisms. The approach is assessed using statistical and utility-based performance measures for evaluating density forecasts of US macroeconomic time series and of surveys of stock market prices.
    Keywords: Density Forecast Combination; Survey Forecast; Bayesian Filtering; Sequential Monte Carlo
    JEL: C11 C15 C53 E37
    Date: 2011–01–06
  21. By: M. Ayhan Kose; S. Boragan Aruoba; Marco Terrones; Francis X. Diebold
    Abstract: We propose and implement a framework for characterizing and monitoring the global business cycle. Our framework utilizes high-frequency data, allows us to account for a potentially large amount of missing observations, and is designed to facilitate the updating of global activity estimates as data are released and revisions become available. We apply the framework to the G-7 countries and study various aspects of national and global business cycles, obtaining three main results. First, our measure of the global business cycle, the common G-7 real activity factor, explains a significant amount of cross-country variation and tracks the major global cyclical events of the past forty years. Second, the common G-7 factor and the idiosyncratic country factors play different roles at different times in shaping national economic activity. Finally, the degree of G-7 business cycle synchronization among country factors has changed over time.
    Keywords: Business cycles , Cross country analysis , Globalization , Group of seven ,
    Date: 2011–02–01
  22. By: Vivien Lewis (Postdoctoral Fellow of the Fund for Scientific Research - Flanders (FWO); Institute for Monetary and Financial Stability (Department of Money and Macroeconomics), Goethe University Frankfurt; House of Finance, Frankfurt am Main, Germany); Céline Poilly (Université catholique de Louvain, Department of Economics)
    Abstract: This paper estimates a business cycle model with endogenous firm entry by matching impulse responses to a monetary policy shock in US data. Our VAR includes net business formation, profits and markups. We evaluate two channels through which entry may influence the monetary transmission process. Through the competition effect, the arrival of new entrants makes the demand for existing goods more elastic, and thus lowers desired markups and prices. Through the variety effect, increased firm and product entry raises consumption utility and thereby lowers the cost of living. This implies higher markups and, through the New Keynesian Phillips Curve, lower inflation. While the proposed model does a good job at matching the observed dynamics, it generates insufficient volatility of markups and profits. Estimates of standard parameters are largely unaffected by the introduction of firm entry. Our results lend support to the variety effect; however, we find no evidence for the competition effect.
    Keywords: entry, inflation, monetary transmission, monetary policy, extensive margin
    JEL: E32 E52
    Date: 2011–02
  23. By: Vivien LEWIS (Ghent University and Goethe University Frankfurt, IMFS); Céline POILLY (UNIVERSITE CATHOLIQUE DE LOUVAIN, IMMAQ, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper estimates a business cycle model with endogenous firm entry by matching impulse responses to a monetary policy shock in US data. Our VAR includes net business formation, profits and markups. We evaluate two channels through which entry may influence the monetary transmission process. Through the competition effect, the arrival of new entrants makes the demand for existing goods more elastic, and thus lowers desired markups and prices. Through the variety effect, increased firm and product entry raises consumption utility and thereby lowers the cost of living. This implies higher markups and, through the New Keynesian Phillips Curve, lower inflation. While the proposed model does a good job at matching the observed dynamics, it generates insufficient volatility of markups and profits. Estimates of standard parameters are largely unaffected by the introduction of firm entry. Our results lend support to the variety effect; however, we find no evidence for the competition effect.
    Keywords: entry, inflation, monetary transmission, monetary policy, extensive margin
    JEL: E32 E52
    Date: 2011–02–08
  24. By: Rianne Legerstee (Erasmus University Rotterdam); Philip Hans Franses (Erasmus University Rotterdam)
    Abstract: Forecasts from various experts are often used in macroeconomic forecasting models. Usually the focus is on the mean or median of the survey data. In the present study we adopt a different perspective on the survey data as we examine the predictive power of disagreement amongst forecasters. The premise is that this variable could signal upcoming structural or temporal changes in an economic process or in the predictive power of the survey forecasts. In our empirical work, we examine a variety of macroeconomic variables, and we use different measurements for the degree of disagreement, together with measures for location of the survey data and autoregressive components. Forecasts from simple linear models and forecasts from Markov regime-switching models with constant and with time-varying transition probabilities are constructed in real-time and compared on forecast accuracy. We find that disagreement has predictive power indeed and that this variable can be used to improve forecasts when used in Markov regime-switching models.
    Keywords: model forecasts; expert forecasts; survey forecasts; Markov regime-switching models; disagreement; time series
    JEL: C53
    Date: 2010–09–03
  25. By: Luciano De Castro; Marialaura Pesce; Nicholas C. Yannelis
    Date: 2011
  26. By: Peter Broer; Jürgen Antony
    Abstract: This document reviews the literature on the relationship between financial markets and the real economy. In the light of the recent financial crises, we focus on channels that are likely to be important in times of financial stress.
    JEL: E44 E37 F40
    Date: 2010–12
  27. By: Claire Waysand; John C De Guzman; Kevin Ross
    Abstract: We document external investment positions among European Union countries at the start of the financial crisis through the creation of a new database comprising bilateral external financial asset and liabilities, excluding reserve assets and derivatives. While there are some gaps in the data, the overall coverage of reported bilateral net international investment positions (IIPs) appears satisfactory. The dataset provides a richer picture of financial linkages, enabling us to map the financing of Euro area imbalances. Creditor and debtor positions vis-à-vis the rest of the EU have tended to increase between 2000 and 2008, with capital flowing largely from wealthier to catching-up economies. This has in particular resulted in an increased interdependency among Euro Area economies.
    Keywords: Balance of payments , Cross country analysis , Current account balances , Data collection , Databases , Economic integration , Euro Area , Europe ,
    Date: 2010–12–21
  28. By: Franc Klaassen (University of Amsterdam)
    Abstract: Exchange market pressure (EMP) measures the pressure on a currency
    Keywords: currency crisis models; ERM crisis; exchange rate regime; instrumental variables; monetary policy; persistence
    JEL: E42 E58 F31 F33
    Date: 2011–02–11
  29. By: Franc Klaassen (University of Amsterdam)
    Abstract: Exchange market pressure (EMP) measures the pressure on a currency to depreciate. It adds to the actual depreciation a weighted combination of policy instruments used to ward off depreciation, such as interest rates and foreign exchange interventions, where the weights are their effectiveness. The key difficulty in the literature is how to identify these weights. We exploit the persistence of pressure and add instruments based on currency crisis theories to identify the weights, and we propose a simple IV regression to estimate them. An application to the European Monetary System crisis in 1992-1993 shows that a one percentage point higher interest rate wards off a depreciation of about 0.2 percent.
    Keywords: currency crisis models; ERM crisis; exchange rate regimes; instrumental variables; monetary policy; persistence
    JEL: E42 E58 F31 F33
    Date: 2011–02–11
  30. By: Luca Colombo (DISCE, Università Cattolica); Gianluca Femminis (DISCE, Università Cattolica)
    Abstract: We study information acquisition in a framework characterized by strategic complementarity or substitutability. Agents’ actions are based on costly public and private signals, the precisions of which are set by a policy maker and by private agents, respectively. The policy maker – acting as a von Stackelberg leader – takes into account that an increase in the precision of public information reduces the incentives for private information acquisition. The precisions of both the public and private information available to each agent are shown to depend crucially on the degree of strategic complementarity or substitutability. We explore the welfare and policy implications of our results in economies with beauty contests, price setting complementarities, and negative externalities entailing strategic substitutability.
    Keywords: Incomplete information, strategic complementarity, strategic substitutability, welfare
    JEL: C72 D62 D83 E50
    Date: 2011–01
  31. By: Paradiso, Antonio; Rao, B. Bhaskara; Ventura, Marco
    Abstract: This paper tests for the time series properties of the variables in the sticky information Phillips curve and estimates it for the US with the general to specific method (GETS). Our results show that the estimates of the stickiness parameter range from 0.25 to 0.42.
    Keywords: Sticky information Phillips curve; General to specific method; Stickiness parameter
    JEL: E3
    Date: 2011–02–12
  32. By: George J. Jiang; Ingrid Lo
    Abstract: Existing studies show that U.S. Treasury bond price changes are mainly driven by public information shocks, as manifested in macroeconomic news announcements and events. The literature also shows that heterogeneous private information contributes significantly to price discovery for U.S. Treasury securities. In this paper, we use high frequency transaction data for 2-, 5-, and 10-year Treasury notes and employ a Markov switching model to identify intraday private information flow in the U.S. Treasury market. We show that the probability of private information flow (PPIF) identified in our model effectively captures permanent price effects in U.S. Treasury securities. In addition, our results show that public information shocks and heterogeneous private information are the main factors of bond price discovery on announcement days, whereas private information and liquidity shocks play more important roles in bond price variation on non-announcement days. Most interestingly, our results show that the role of heterogeneous private information is more prominent when public information shocks are either high or low. Furthermore, we show that heterogeneous private information flow is followed by low trading volume, low total market depth and hidden depth. The pattern is more pronounced on non-announcement days.
    Keywords: Financial markets; Market structure and pricing
    JEL: G12 G14
    Date: 2011
  33. By: Kasai Ndahiriwe (Department of Economics, University of Pretoria); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: We test the concept of the Opportunistic Approach to monetary policy in South Africa post 2000 inflation targeting regime. Our findings support the two features of the opportunistic approach. First, we find that the models that include an intermediate target that reflects the recent history of inflation rather than simple inflation target improve the fit of the models. Second, the data supports the view that the South African Reserve Bank (SARB) behaves with some degree of nonresponsiveness when inflation is within the zone of discretion but react aggressively otherwise. Recursive estimates from our preferred model reveal that overall there has been a subdued reaction to inflation, output and financial conditions amidst the increased economic uncertainty of the 2007- 2009 financial crisis.
    Keywords: monetary policy, opportunistic approach, intermediate inflation, financial conditions
    JEL: C51 C52 C53 E52 E58
    Date: 2011–02
  34. By: Domenica Tropeano (University of Macerata)
    Abstract: <p>The paper deals with the conflicting interpretations of the monetary policy carried out by the Federal Reserve during and after the financial crisis of 2007-08. That policy has been labelled as quantitative easing. The first interpretation of that policy is that the central bank will continue to flood the market with money to cause inflation or at least inflationary expectations. A depreciation would eventually do the same job too. Another interpretation, partially based on Minsky's theory of investment, is that easy monetary policy carried out beyond the lender-of-last-resort intervention might have the aim of sustaining the price of investment and validating firms' plans. In other words, it would be complementary to fiscal policy with the aim of sustaining profits and investment. The problem is that the Kaleckian model Minsky was using hardly corresponds to the present situation of the U.S. economy. The interpretation here proposed is that the aim of monetary policy is the recovery of financial asset prices to sustain banks profits and to restore the value of household wealth. This design might be considered as successful if we look at the recent data. But those signals are not encouraging if we look at long term sustainability of policies. The recovery of stock prices has encouraged speculation on anything possible by the big banks. Moreover the recovery of financial asset prices in<br />contrast to the slow motion of housing prices might increase the already high inequality in wealth distribution.</p>
    Date: 2011–02
  35. By: Pau Rabanal; Oriol Aspachs-Bracons
    Abstract: The recent boom-and-bust cycle in housing prices has refreshed the debate on the drivers of housing cycles as well as the appropriate policy response. We analyze the case of Spain, where housing prices have soared since it joined the EMU. We present evidence based on a VAR model, and we calibrate a New Keynesian model of a currency area with durable goods to explain it. We find that labor market rigidities provide stronger amplification effects to all type of shocks than financial frictions do. Finally, we show that when the central bank reacts to house prices, the non-durable sector suffers an important contraction. As a result, the boom-and-bust cycle would not have been avoided if Spain had remained outside the EMU during the 1996-2007 period.
    Keywords: Demand , Economic models , European Economic and Monetary Union , External shocks , Housing , Housing prices , Interest rates , Labor markets , Monetary policy , Spain ,
    Date: 2011–01–07
  36. By: Tim Willems (University of Amsterdam)
    Abstract: Traditional ways of analyzing the effects of monetary policy shocks via structural vector autoregressions require the use of unrealistic identifying assumptions: they either do not allow for a response of output and prices on impact of the shock, or they exclude contemporaneous values of these variables from the monetary authority's information set. This paper relaxes these incredible restrictions by exploiting a convenient natural setting, namely the fact that we can use data from dollarized countries. The fact that non-monetary US shocks do not seem to be transmitted to these countries, has the additional advantage that it makes the exercise less vulnerable to potential misidentification of the US monetary policy shock. The results obtained in this way suggest that prices fall quite rapidly after a monetary contraction. Consistent with this finding, the effects of monetary policy shocks on output seem to be small.
    Keywords: Monetary policy effects; Price puzzle; Structural VARs; Identification; Block exogeneity
    JEL: E52 E31 C32
    Date: 2010–10–01
  37. By: Markus Kirchner (University of Amsterdam); Jacopo Cimadomo (European Central Bank); Sebastian Hauptmeier (European Central Bank)
    Abstract: This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers.
    Keywords: Government spending shocks; Fiscal transmission mechanism; Structural change; Bayesian analysis; Structural vector autoregressions; Time-varying parameter models
    JEL: C32 E62 H30 H50
    Date: 2010–02–12
  38. By: Frank A.G. den Butter (VU University Amsterdam)
    Abstract: In the analysis of the credit crisis of 2007-2010 a clear distinction should be made between (i) the initial shock; (ii) the propagation and amplification of the initial shock to the systemic crisis of the financial markets; and (iii) the transmission of the credit crisis to the real economic sector causing a major cyclical downturn now known as the great recession. This paper argues that banking supervision failed to anticipate and repair the market failure that caused the huge amplification of the relatively small initial shock. As the repair of market failure is the only sound economic argument for regulation, banking supervisors should now focus on the externalities that caused the amplification of the shock and use that knowledge for adequate macro-prudential supervision in the future. Macro-economic models can be helpful in this search for externalities. The character and timing of future shocks are unpredictable, but contagion in the propagation mechanisms should be mitigated as much as possible.
    Keywords: credit crisis; externalities; macro-prudential supervision; contagion; fallacy of composition
    JEL: E42 E58 G38
    Date: 2010–05–17
  39. By: Yvonne Adema (Erasmus University Rotterdam, and Netspar)
    Abstract: This paper investigates the international spillovers of government debt and the associated risk of inflation within a monetary union when countries have different pension systems. I use a stochastic two-country two-period overlapping-generations model, where one country has PAYG pensions and the other country has funded pensions. The paper shows that the PAYG country can shift part of its long-term debt burden to the funded country. Moreover, the PAYG country gains from unexpected inflation at the cost of the funded country. In response to these conflicting interests about inflation, inflation risk may rise with the level of debt in the PAYG country. Higher inflation risk harms both countries. Actually, in contrast to the debt burden, the PAYG country cannot share the negative effects of a rise in inflation risk with the funded country. The scenarios analysed might be especially relevant for the years to come.
    Keywords: spillovers; pensions; debt; inflation
    JEL: E31 F41 G11 G12 H55 H63
    Date: 2010–10–29
  40. By: Apostolos Serletis
    Abstract: This is a Foreword to William A. Barnett, “Getting it Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy,†The MIT Press (forthcoming, 2011).
    Keywords: Monetary statistics, Monetary aggregation, Financial crisis, Great recession
    JEL: C3 C13 C51
    Date: 2011–02–17
  41. By: Ana Babus (University of Cambridge); Casper G. de Vries (Erasmus University Rotterdam)
    Abstract: The dynamic properties of micro based stochastic macro models are often analyzed through a linearization around the associated deterministic steady state. Recent literature has investigated the error made by such a deterministic approximation. Complementary to this literature we investigate how the linearization affects the stochastic properties of the original model. We consider a simple real business cycle model with noisy learning by doing. The solution has a stationary distribution that exhibits moment failure and has an unbounded support. The linear approximation, however, yields a stationary distribution with possibly a bounded support and all moments
    Keywords: Linearization; ARCH process; Real business cycles model; Stochastic difference equation
    JEL: C22 C62 E32
    Date: 2010–08–26
  42. By: Ila Patnaik; Ajay Shah; Rudrani Bhattacharya
    Abstract: Some emerging economies have a relatively ineffective monetary policy transmission owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchangerate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.
    Keywords: Economic models , Emerging markets , Exchange rates , Monetary policy , Monetary transmission mechanism ,
    Date: 2011–01–06
  43. By: Eiji Ogawa; Junko Shimizu
    Abstract: Regional monetary and financial cooperation among the monetary authorities of Asian countries have been further strengthening through the recent global financial crisis in 2007-2008. Finance Ministers and Central Bank Governors of the ASEAN Members States, People’s Republic of China (PRC), Japan and Korea (ASEAN plus three) and the monetary authority of Hong Kong, China announced that the Chiang Mai Initiative Multilateralization (CMIM) agreement came into effect on March 24, 2010. They also reached agreement on establishing a surveillance office, which is called an ASEAN plus three Macroeconomic Research Office (AMRO) and would ensure technical details of regional surveillance. The regional monetary cooperation in Asia has been discussed for years. For example, Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU), which is a common currency basket computed as a weighted average of the thirteen ASEAN plus three currencies, and AMU Deviation Indicators (AMU DIs), which indicates deviation of each Asian currency in terms of the AMU compared with the benchmark rate. The AMU and the AMU DIs are considered as both surveillance measures under the Chiang Mai Initiative and coordinated exchange rate policies among Asian countries. In this paper, we show that monitoring the AMU and the AMU DIs plays an important role in the regional surveillance process under the CMIM. By using daily and monthly data of AMU and AMU DIs in the period between January 2000 to June 2010, which are available in a website of the Research Institute of Economy, Trade, and Industry (RIETI), we examine their usefulness as a surveillance indicator. Our studies of AMU and AMU DIs confirm as follows: First, an AMU peg system stabilizes Nominal Effective Exchange Rate (NEER) of each Asian country. Second, the AMU and the AMU DIs could warn overvaluation or undervaluation for each of Asia currencies. Third, trade imbalances within the region have been growing as the AMU DIs have been widening. Forth, the AMU DIs could predict huge capital inflows and outflows for the Asian country. The above fact-findings support usefulness of using the AMU and the AMU DIs as surveillance indicators for monetary cooperation in Asia.
    Keywords: regional monetary cooperation, common currency basket, Asian Monetary Unit
    Date: 2010–10
  44. By: Martin Schindler; Chris Papageorgiou; Hans Weisfeld; Catherine A. Pattillo; Nicola Spatafora; Andrew Berg
    Abstract: This paper investigates the short-run effects of the 2007-09 global financial crisis on growth in (mainly non-fuel exporting) low-income countries (LICs). Four conclusions stand out. First, for many individual LICs, 2009 was not extraordinarily calamitous; however, aggregate LIC output declined sharply because LICs were unusually synchronized. Second, the growth declines are on average well explained by the decline in export demand. Third, if the external environment facing LICs improves as forecast, their growth should rebound sharply. Finally, and contrary to received wisdom, there are few robust relationships between the cross-country growth variation and the policy and structural environment; the main exceptions are reserve coverage and labor-market flexibility.
    Keywords: Cross country analysis , Economic growth , Economic models , External shocks , Financial crisis , Global Financial Crisis 2008-2009 , Low-income developing countries ,
    Date: 2011–02–02
  45. By: Lena Dräger (University of Hamburg, Deutchland, and KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Using quantitative survey data from the Swedish Consumer Tendency Survey as well as a unique data set on media reports about inflation, we analyze the formation process of inflation perceptions and expectations as well as interrelations between the variables. Throughout the analysis, the role of media reports about inflation is emphasized and results for the low inflation period January 1998 to December 2007 are compared to those including the high inflation year 2008. Rejecting rationality, we find that perceptions, but not expectations, are affected asymmetrically by news, where media effects are generally stronger in times of high and volatile inflation. For the low inflation sample period, inflation expectations are more affected by shocks to perceptions than vice versa, but Granger causality runs from expectations to perceptions. Including more volatile inflation, we find more feed-back between the variables and a strong media effect especially on perceptions.
    Keywords: Inflation expectations, inflation perceptions, media reports
    JEL: C32 E31 E37
    Date: 2011–02
  46. By: Tomas Havranek; Roman Horvath; Jakub Mateju
    Abstract: In this paper, we 1) examine the interactions of financial variables and the macroeconomy within the block-restriction vector autoregression model and 2) evaluate to what extent the financial variables improve the forecasts of GDP growth and inflation. For this reason, various financial variables are examined, including those unexplored in previous literature, such as the share of liquid assets in the banking industry and the loan loss provision rate. Our results suggest that financial variables have a systematic and statistically significant effect on macroeconomic fluctuations. In terms of forecast evaluation, financial variables in general seem to improve the forecast of macroeconomic variables, but the predictive performance of individual financial variables varies over time, in particular during the 2008–2009 crisis.
    Keywords: Forecasting, macroeconomic and financial linkages, vector autoregressions.
    JEL: E44 E58 E47
    Date: 2010–12
  47. By: Kitov, Oleg; Kitov, Ivan
    Abstract: An empirical model is presented linking inflation and unemployment rate to the change in the level of labour force in Switzerland. The involved variables are found to be cointegrated and we estimate lagged linear deterministic relationships using the method of cumulative curves, a simplified version of the 1D Boundary Elements Method. The model yields very accurate predictions of the inflation rate on a three year horizon. The results are coherent with the models estimated previously for the US, Japan, France and other developed countries and provide additional validation of our quantitative framework based solely on labour force. Finally, given the importance of inflation forecasts for the Swiss monetary policy, we present a prediction extended into 2050 based on official projections of the labour force level.
    Keywords: Inflation; Unemployment; Labour force; Forecasting; Switzerland
    JEL: J21 E6 E3
    Date: 2011–02–14
  48. By: Tigran Poghosyan; Samya Beidas-Strom
    Abstract: This paper presents and estimates a small open economy dynamic stochastic general-equilibrium model (DSGE) for the Jordanian economy. The model features nominal and real rigidities, imperfect competition and habit formation in the consumer’s utility function. Oil imports are explicitly modeled in the consumption basket and domestic production. Bayesian estimation methods are employed on quarterly Jordanian data. The model’s properties are described by impulse response analysis of identified structural shocks pertinent to the economy. These properties assess the effectiveness of the pegged exchange rate regime in minimizing inflation and output trade-offs. The estimates of the structural parameters fall within plausible ranges, and simulation results suggest that while the peg amplifies output, consumption and (price and wage) inflation volatility, it offers a relatively low risk premium.
    Keywords: Income , Monetary policy , Exchange rate depreciation , Exchange rate appreciation , Economic models , External shocks , Demand , Oil prices , Price adjustments , Wage policy , Consumption , Exchange rate policy ,
    Date: 2011–02–02
  49. By: Anke Weber; Chunfang Yang
    Abstract: This paper uses a range of different methodologies to estimate the equilibrium real exchange rate in Armenia with both single-country and panel estimation techniques. We estimate a country specific autoregressive distributed lag model and then proceed with the estimation of a cointegrated panel consisting of transition economies in Europe and Central Asia. This addresses cross section dependence by using common correlated effects estimators. While our analysis focuses on Armenia, the methods are applicable to a large number of transition economies, and the paper thus provides an overview of methods that can be used to assess a country’s equilibrium exchange rate.
    Keywords: Armenia , Economic models , Exchange rate assessments , Export prices , Global competitiveness , Real effective exchange rates ,
    Date: 2011–01–27

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