nep-cba New Economics Papers
on Central Banking
Issue of 2011‒03‒12
fifty-two papers chosen by
Alexander Mihailov
University of Reading

  1. Expectations Traps and Monetary Policy with Limited Commitment By Christoph Himmels; Tatiana Kirsanova
  2. Comparing the delegation of monetary and fiscal policy By Simon Wren-Lewis
  3. The Role of Independent Fiscal Policy Institutions By Calmfors, Lars
  4. What Should Fiscal Councils Do? By Calmfors, Lars; Wren-Lewis, Simon
  5. What should fiscal councils do? By Lars Calmfors; Simon Wren-Lewis
  6. The Swedish Fiscal Policy Council By Calmfors, Lars
  7. THE SWEDISH FISCAL POLICY COUNCIL – Experiences and Lessons By Calmfors, Lars
  8. Fiscal Policy Coordination in Europe By Calmfors, Lars
  9. A Macroprudential Perspective in Central Banking By Shigenori Shiratsuka
  10. Capital Regulation, Monetary Policy and Financial Stability By Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
  11. Expected fiscal policy and interest rates in open economy By Salvatore Dell’Erba, Sergio Sola
  12. On Not Evaluating Economic Models by Forecast Outcomes By Jennifer L. Castle; David F. Hendry
  13. Can We Predict Recessions? By Don Harding; Adrian Pagan
  14. When is Quantitative Easing effective? By Markus Hoermann; Andreas Schabert
  15. Monopolistic competition in general equilibrium: Beyond the CES By Evgeny Zhelobodko; Sergey Kokovin; Mathieu Parenti; Jacques-François Thisse
  16. A Comprehensive Approach to the Euro-Area Debt Crisis By Zsolt Darvas; Jean Pisani-Ferry; André Sapir
  17. The Margins of Labour Cost Adjustment: Survey Evidence from European Firms By Jan Babecky; Philip Du Caju; Theodora Kosma; Martina Lawless; Julian Messina; Tairi Room
  18. The Role of Monetary Policy Uncertainty in the Term Structure of Interest Rates By Junko Koeda; Ryo Kato
  19. The Term Structure of Interest Rates in Small Open Economy DSGE Model By Aleš Maršál
  20. Measuring disagreement in UK consumer and central bank inflation forecasts By Richhild Moessner; Feng Zhu; Colin Ellis
  21. Estimating a High-Frequency New-Keynesian Phillips Curve By Steffen Ahrens; Stephen Sacht
  22. Measuring Uncertainty and Disagreement in the European Survey and Professional Forecasters By Cristina Conflitti
  23. Money and risk aversion in a DSGE framework By Jonathan Benchimol; André Fourçans
  24. The Macroeconomic Effects of Large Exchange Rate Appreciations By Marcus Kappler; Helmut Reisen; Moritz Schularick; Edouard Turkisch
  25. Choosing between time and state dependence: micro evidence on firms' price-reviewing strategies By Daniel A. Dias; Carlos Robalo Marques; Fernando Martins
  26. Belief Dispersion and Order Submission Strategies in the Foreign Exchange Market By Ingrid Lo; Stephen Sapp
  27. Communication Matters: U.S. Monetary Policy and Commodity Price Volatility By Bernd Hayo; Ali M. Kutan; Matthias Neuenkirch
  28. Le ciblage d’inflation : un essai de comparaison internationale By Zied Ftiti; Jean-François Goux
  29. Le ciblage d'inflation : un essai de comparaison internationale By Zied Ftiti; Jean-François Goux
  30. Optimal inflation and firms' productivity dynamics By Henning Weber
  31. Why are some prices stickier than others? Firm-data evidence on price adjustment lags By Daniel A. Dias; Carlos Robalo Marques; Fernando Martins; Joao M.C. Santos Silva
  32. Inventories, Markups and Real Rigidities in Sticky Price Models of the Canadian Economy By Oleksiy Kryvtsov; Virgiliu Midrigan
  33. Financial Crises and Assets as Media of Exchange By KOBAYASHI Keiichiro
  34. A Bad-Asset Theory of Financial Crises By KOBAYASHI Keiichiro
  35. A Financial Crisis in a Monetary Economy By KOBAYASHI Keiichiro
  36. The long term equilibrium interest rate and risk premiums under uncertainty By Aase, Knut K.
  37. How does public information on central bank intervention strategies affect exchange rate volatility ? the case of Peru By Mundaca, B. Gabriela
  38. Risk Management of Risk under the Basel Accord: Forecasting Value-at-Risk of VIX Futures By Michael McAleer; Juan-Ángel Jiménez-Martín; Chia-Lin Chang; Teodosio Pérez-Amaral
  39. BASEL III: Long-term impact on economic performance and fluctuations By Paolo Angelini; Laurent Clerc; Vasco Cúrdia; Leonardo Gambacorta; Andrea Gerali; Alberto Locarno; Roberto Motto; Werner Roeger; Skander Van den Heuvel; Jan Vlcek
  40. The Financial Crisis from a Forecaster’s Perspective By Katja Drechsel; Rolf Scheufele
  41. The response of labour taxation to changes in government debt By Fédéric Holm-Hadulla; Nadine Leiner-Killinger; Michal Slavík
  42. Subprime consumer credit demand - evidence from a lender's pricing experiment By Sule Alan; Ruxandra Dumitrescu; Gyongyi Loranth
  43. Reoccurring Financial Crises in the United States By Yochanan Shachmurove
  44. Adaptive social learning By Christoph March
  45. The threat of 'currency wars': A European perspective By Zsolt Darvas; Jean Pisani-Ferry
  46. "The Dismal State of Macroeconomics and the Opportunity for a New Beginning" By L. Randall Wray
  47. "Money in Finance" By L. Randall Wray
  48. Inflation and unemployment in Switzerland: from 1970 to 2050 By Oleg Kitov; Ivan Kitov
  49. Asian Business Cycle Synchronisation By Dong He; Wei Liao
  50. Cycles Inside Cycles. Spanish Regional Aggregation By Maria Dolores Gadea; Ana Gomez Loscos; Antonio Montañes
  51. Measuring Monetary Conditions in A Small Open Economy: The Case of Malaysia By Abdul Majid, Muhamed Zulkhibri
  52. Medium-term projection model of the National Bank of Serbia By Mirko Djukic; Jelena Momcilovic; Ljubica Trajcev

  1. By: Christoph Himmels (Department of Economics, University of Exeter); Tatiana Kirsanova (Department of Economics, University of Exeter)
    Abstract: We study the existence and uniqueness properties of monetary policy with limited commitment in LQ RE models. We use a New Keynesian model with debt accumulation in the spirit of Leeper (1991) as a `lab', because this model generates multiple equilibria under pure discretion, and under full commitment there are two distinct determinate regimes. We study how these properties change over the continuum of intermediate cases between commitment and discretion. We find that although multiple equilibria exist for high degrees of precommitment, even a small degree of precommitment selects a unique equilibrium for a wide range of parameters. We discuss the stability properties of policy equilibria which can be used to design an equilibrium selection criterion. We also demonstrate very different welfare implications for different policy equilibria.
    Keywords: Limited Commitment, Commitment, Discretion, Multiple Equilibria
    JEL: E31 E52 E58 E61 C61
    Date: 2011
  2. By: Simon Wren-Lewis
    Abstract: The apparent success of independent central banks in conducting monetary policy has led many to argue that some form of policy delegation should also be applied to the macroeconomic aspects of fiscal policy. A number of countries have recently established Fiscal Councils, although their role is typically to give advice on paths for government debt and deficits rather than decide upon and implement policy. This paper examines how useful a comparison between monetary and fiscal policy can be in motivating and guiding Fiscal Councils. Simple analogies between inflation bias and deficit bias can be misleading, and the motives for delegating aspects of fiscal policy may be rather different from those generally associated with monetary policy. In addition, lack of knowledge about the desirable goals of long run debt policy, compared to a greater understanding of the objectives of monetary policy, may help explain key differences in the nature of delegation between the two. The paper ends by making some comparisons between the delegation of monetary and fiscal policy in the United Kingdom.
    Keywords: Delegation, fiscal councils, deficit bias, government debt
    JEL: E62 E65
    Date: 2011
  3. By: Calmfors, Lars (Institute for International Economic Studies, Stockholm University)
    Abstract: The paper analyses how independent fiscal watchdogs (fiscal policy councils) can strengthen the incentives for fiscal discipline. Several countries have recently established such institutions. By increasing fiscal transparency they can raise the awareness of the long-run costs of current deficits and increase the reputational costs for governments of violating their fiscal rules. Councils that make also normative judgements, where fiscal policy is evaluated against the government's own pre-set objectives, are likely to be more influential than councils that do only positive analysis. To fulfil their role adequately, fiscal watchdogs should be granted independence in much the same way as central banks. There are arguments both in favour and against extending the remit of a fiscal policy council to include also tax, employment and structural policies. Whether or not this should be done depends on the existence of other institutions making macroeconomic forecasts and analysing fiscal policy, the existence of institutions providing independent analysis in other economic policy areas, and the severity of fiscal problems.
    Keywords: Fiscal Policy Council; Fiscal policy; Government policy;
    JEL: A00 E62
    Date: 2010–09–01
  4. By: Calmfors, Lars (Institute for International Economic Studies, Stockholm University); Wren-Lewis, Simon (Department of Economics, Merton College, Oxford University)
    Abstract: N/A
    Keywords: Fiscal policy Council; Fiscal policy; Government policy;
    JEL: A00 E62
    Date: 2010–12–01
  5. By: Lars Calmfors; Simon Wren-Lewis
    Abstract: Fiscal councils now exist in a number of countries. This paper first considers the extent of deficit bias, potential explanations for it, and how independent institutions could help reduce it. Are fiscal councils complements to or substitutes for fiscal rules, and why do none at present have any formal control over fiscal decisions? The paper then outlines the specific tasks that a fiscal council might undertake, and examines how these are combined in eleven fiscal councils. A more detailed examination is undertaken of the fiscal councils in Sweden and the UK. The paper draws some conclusions on the role of fiscal forecasting, ensuring independence, and the provision of policy advice.
    Keywords: Fiscal policy, debt, deficit bias, fiscal council
    JEL: E62 E65
    Date: 2011
  6. By: Calmfors, Lars (Institute for International Economic Studies, Stockholm University)
    Abstract: N/A
    Keywords: The Swedish Fiscal Policy Council; fiscal policy; government policy
    JEL: A00 E62
    Date: 2011–01
  7. By: Calmfors, Lars (Institute for International Economic Studies, Stockholm University)
    Abstract: The Swedish Fiscal Policy Council, established in 2007, has small resources but a broad remit. In addition to monitoring the long-run sustainability of fiscal policy, the council evaluates the short-run fiscal stance from a cyclical perspective. The council also analyses long-run employment and growth developments. Another task is to evaluate the motives, explanations and research basis for government policies. There is no unique best set-up of a fiscal policy council. Instead, it has to be adapted to the special characteristics of each country. The set-up of the Swedish council appears consistent both with the preexisting institutional framework, with also other bodies making detailed budget evaluations and macroeconomic forecasts, and with a strong tradition of academic participation in the policy debate. The broad remit could lead to less focus on the fiscal watchdog role. On the other hand, the council plays a "supervisory" role in the general economic policy debate, helping to raise the standards of the discussion, which is a fundamental democratic objective.
    Keywords: The Swedish Fiscal Policy Council; fiscal policy; government policy; labor economics; growth
    JEL: A00 E62
    Date: 2010–03–18
  8. By: Calmfors, Lars (Institute for International Economic Studies, Stockholm University)
    Abstract: A fundamental overhaul of EU economic governance is needed. The most important reform is a strengthening of national fiscal frameworks, including the establishment of independent fiscal watchdogs in Member States that do not yet have such institutions. At the European level, a permanent crisis resolution mechanism should be integrated with both broader macroeconomic surveillance and the sanction system. An independent European fiscal council could, based on macroeconomic risk considerations, decide in advance appropriate haircuts in the event of future sovereign debt restructuring.
    Keywords: EU; economic governance; fiscal policy; macroeconomics
    JEL: A00 E62
    Date: 2010–08–18
  9. By: Shigenori Shiratsuka (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper explores a policy framework for central banks from a macroprudential perspective, to pursue price and financial system stability in a consistent and sustainable manner. Triggered by the recent financial crisis, fundamental reform of the financial system is advocated to establish more stable foundations for supporting sustainable growth in the global economy. Achieving higher stability purely by more stringent microprudential regulations tends to result in lower efficiency in financial intermediation. Crises are fundamentally endogenous to the financial system and arise from exposure to common risks among financial institutions, underpinned by complicated incentives at both the micro and macro levels. In that context, macroprudential policy is often pointed out as a missing element in the current policy framework in order to strike a balance between the efficiency and stability of the financial system as a whole. Pursuing both price and financial system stability in a consistent and sustainable manner requires combination of monetary and prudential policies, especially macroprudential policy. To that end, this paper proposes to extend constrained discretion for monetary policy, proposed as the conceptual basis for flexible inflation targeting, to overall central banking, encompassing monetary and macroprudential policies.
    Keywords: Macroprudential policy, Procyclicality, Financial imbalances, Asset-price and credit bubble, Constrained discretion.
    JEL: E58 G28
    Date: 2011–02
  10. By: Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
    Abstract: This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic (financial) stability is defined in terms of the volatility of nominal income (real house prices). Numerical experiments show that even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of interest rate smoothing, and the stronger the policymaker's concern with macroeconomic stability, the larger is the sensitivity of the regulatory rule to credit growth gaps.
    Date: 2011
  11. By: Salvatore Dell’Erba, Sergio Sola (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper reconsiders the long term effect of fiscal policy on interest rates using a real-time dataset of macroeconomic and fiscal variables in a panel of 17 OECD countries over the period 1989-2009. We show that, after controlling for cross sectional dependence using a Factor Augmented Panel, interest rates are mostly related to global factors. Among domestic fiscal variables, the level of expected public debt mantains a positive correlation with interest rates, while among the global factors, the aggregate monetary and fiscal stance play a quantitatively sizeable role. We then analyze how impulses from the aggregate fiscal stance influence each country's interest rates. We find that these effects are modest in large economies and particularly strong in economies characterized by low initial financial integration, leading the way to a novel interpretation of the divergent behaviour of interest rates in the recent financial crisis.
    Keywords: Real time data; Fiscal Policy; Interest rates; Cross sectional dependence; Heterogeneous panels; Factor model.
    JEL: C10 E43 F42 H68
    Date: 2011–03–03
  12. By: Jennifer L. Castle; David F. Hendry
    Abstract: Even in scientific disciplines, forecast failures occur. Four possible states of nature (a model is good or bad, and it forecasts well or badly) are examined using a forecast-error taxonomy, which traces the many possible sources of forecast errors. This analysis shows that a valid model can forecast badly, and a poor model can forecast successfully. Delineating the main causes of forecast failure reveals transformations that can correct failure without altering the ‘quality’ of the model in use. We conclude that judging a model by the accuracy of its forecasts is more like fools’ gold than a gold standard.
    Keywords: Model evaluation, forecast failure, model selection
    JEL: C52
    Date: 2011
  13. By: Don Harding (La Trobe University); Adrian Pagan (QUT and UTS)
    Abstract: The fact that the Global Financial Crisis, and the Great Recession it ushered in, was largely unforeseen, has led to the common opinion that macroeconomic models and analysis is deficient in some way. Of course it has probably always been true that businessmen, journalists and politicians have agreed on the proposition that economists canÂ’t forecast recessions. Yet we see an enormous published literature that presents results which suggest it is possible to do so, either with some new model or some new estimation method e.g. Kaufman (2010), Galvao (2006), Dueker (2005), Wright (2006) and Moneta (2005). Moreover, there seem to be no shortage of papers still emerging that make claims along these lines. So a question that naturally arises is how one is to reconcile the existence of an expanding literature on predicting recessions with the scepticism noted above?
    Keywords: Global Financial Crisis, Great Recession,
    Date: 2010–12–09
  14. By: Markus Hoermann (TU Dortmund University); Andreas Schabert (University of Amsterdam, and TU Dortmund University)
    Abstract: We present a simple macroeconomic model with open market operations that allows examining the effects of quantitative and credit easing. The central bank controls the policy rate, i.e. the price of money in open market operations, as well as the amount and the type of assets that are accepted as collateral for money. When the policy rate is sufficiently low, this set-up gives rise to an (il-)liquidity premium on non-eligible assets. Then, a quantitative easing policy, which increases the size of the central bank's balance sheet, can increase real activity and prices, while a credit easing policy, which changes the composition of the balance sheet, can lower interest rate spreads, stimulate real activity, and reduce prices. The effectiveness of quantitative and credit easing is however limited to the extent that eligible assets are scarce. Nevertheless, they can help escaping from the zero lower bound.
    Keywords: Monetary policy; collateralized lending; quantitative easing; credit easing; liquidity premium; zero lower bound
    JEL: E4 E5 E32
    Date: 2011–01–04
  15. By: Evgeny Zhelobodko (NSU - Novosibirsk State University - Novosibirsk State University); Sergey Kokovin (NSU - Novosibirsk State University - Novosibirsk State University, Sobolev Institute of Mathematics - Russian Academy of Science); Mathieu Parenti (Université Panthéon Sorbonne - Paris 1 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jacques-François Thisse (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain, CEPR - Centre for Economic Policy Research - Centre for Economic Policy Research, 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)
    Abstract: We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium using the concept of Relative Love for Variety. When the RLV increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The CES is a borderline case. We extend our setting to heterogeneous firms and show that the cutoff cost decreases (increases) when the RLV increases (decreases). Last, we study how combining vertical, horizontal and cost heterogeneity affects our results.
    Keywords: monopolistic competition ; additive preferences ; love for variety ; heterogeneous firms
    Date: 2011–02
  16. By: Zsolt Darvas; Jean Pisani-Ferry; André Sapir
    Abstract: The euro area’s sovereign debt crisis continues though significant steps have been taken to resolve it. This paper proposes a comprehensive solution to the crisis based on three pillars: a plan to restore banking sector soundness in the whole euro area, a resolution of sovereign debt crisis - including a revision of EU assistance facilities and a reduction of the Greek public debt - and a strategy to foster growth and competitiveness. The paper provides novel estimates and analysis focusing on the current situation of Greece, Ireland, Portugal and Spain.
    Keywords: fiscal sustainability, euro-area crisis, financial interdependence
    JEL: F34 E60 H63
    Date: 2011–02
  17. By: Jan Babecky; Philip Du Caju; Theodora Kosma; Martina Lawless; Julian Messina; Tairi Room
    Abstract: Firms have multiple options at the time of adjusting their wage bills. However, previous literature has mainly focused on base wages. We broaden the analysis beyond downward rigidity in base wages by investigating the use of other margins of labour cost adjustment at the firm level. Using data from a unique survey, we find that European firms make frequent use of other, more flexible, components of compensation to adjust the cost of labour. Changes in bonuses and non-pay benefits are some of the potential margins firms use to reduce costs. We also show how the margins of adjustment chosen are affected by firm and worker characteristics.
    Keywords: European Union, firm survey, labour costs, wage rigidity.
    JEL: J30 C81 P5
    Date: 2010–12
  18. By: Junko Koeda (Assistant Professor, Department of Economics, University of Tokyo, 7-3-1, Hongo, Bunkyo-ku, Tokyo, Japan. Tel: +81-3- 5841-5649, (E-mail:; Ryo Kato (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. In contrast to the assumption of many macro-finance models, policy-shock processes appear to be time varying and persistent. We allow for this heteroskedasticity by constructing a no-arbitrage GARCH affine term structure model, in which policy-shock volatility is defined as the conditional volatility of the error term in a Taylor rule. We find that an increase in monetary policy uncertainty raises the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics.
    Keywords: GARCH, Estimation, Term Structure of Interest Rates, Financial Markets and the Macro-economy, Monetary Policy
    JEL: C13 C32 E43 E44 E52
    Date: 2010–10
  19. By: Aleš Maršál (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: I lay out small open economy model with nominal rigidities to study the implication of model dynamics on the term structure of interest rates. It has been shown that in order to obtain at least moderate match simultaneously of the macro and finance data, one has to introduce long-memory habits in consumption together with a large number of highly persistent exogenous shocks. These elements of the model however worsen the fit of macro data. I find that in the open economy framework the foreign demand channel allows us to match some of the data features even without including habits and a large number of exogenous shocks.
    Keywords: DSGE small open economy model, term structure of interest rates, perturbation method, second order approximation
    JEL: G12 E17
    Date: 2011–02
  20. By: Richhild Moessner; Feng Zhu; Colin Ellis
    Abstract: We provide a new perspective on disagreement in inflation expectations by examining the full probability distributions of UK consumer inflation forecasts based on an adaptive bootstrap multimodality test. Furthermore, we compare the inflation forecasts of the Bank of England's Monetary Policy Committee (MPC) with those of UK consumers, for which we use data from the 2001-2007 February GfK NOP consumer surveys. Our analysis indicates substantial disagreement among UK consumers, and between the MPC and consumers, concerning one-year- ahead inflation forecasts. Such disagreement persisted throughout the sample, with no signs of convergence, consistent with consumers' inflation expectations not being "well-anchored" in the sense of matching the central bank's expectations. UK consumers had far more diverse views about future inflation than the MPC. It is possible that the MPC enjoyed certain information advantages which allowed it to have a narrower range of inflation forecasts.
    Keywords: Adaptive kernel method, adaptive multimodality test, consumer survey, inflation forecasts, nonparametric density estimation
    Date: 2011–02
  21. By: Steffen Ahrens; Stephen Sacht
    Abstract: This paper estimates a high-frequency New Keynesian Phillips curve via the Generalized Method of Moments. Allowing for higher-thanusual frequencies strongly mitigates the well-known problems of smallsample biases and structural breaks. Applying a daily frequency allows us to obtain eventspecific estimates for the Calvo parameter of nominal rigidity - for instance for the recent financial and economic crisis -, which can be easily transformed into their weekly, monthly and quarterly equivalences to be employed for the analysis of eventspecific monetary and fiscal policy. With Argentine data from the end of 2007 to the beginning of 2011, we find the daily Calvo parameter to vary in a very close range around 0.97, which implies averagely fixed prices of approximately 40 days or equivalently one and a half month or a little less than half a quarter. This has strong implication for the modeling of monetary policy analysis since it implies that at a quarterly frequency a flexible price model has to be employed. In the same vein, to analyze monetary policy in a sticky price framework, a monthly model seems more appropriate
    Keywords: Calvo Staggering, High-Frequency NKM, GMM
    JEL: C63 E31
    Date: 2011–03
  22. By: Cristina Conflitti
    Abstract: Survey data on expectations and economic forecasts play an important role in providing better insights into how economic agents make their own forecasts, what factors do affect the accuracy of these forecasts and why agents disagree in making them. Uncertainty is also important for better understanding many areas of economic behavior. Several approaches to measure uncertainty and disagreement have been proposed but a lack of direct observations and information on uncertainty and disagreement lead to ambiguous definitions of these two concepts. Using data from the European Survey of Professional Forecasters (SPF), which provide forecast point estimates and probability density forecasts, we consider several measures of uncertainty and disagreement at both aggregate and individual level. We overcome the problem associated with distributional assumptions of probability density forecasts by using an approach that does not assume any functional form for the individual probability densities but just approximating the histogram by a piecewise linear function. We extend earlier works to the European context for the three macroeconomic variables: GDP, inflation and unemployment. Moreover, we analyze how these measures perform with respect to different forecasting horizons. Looking at point estimates and disregarding the individual probability information provides misestimates of disagreement and uncertainty. Comparing the three macroeconomic variables of interest, uncertainty and disagreement are higher for GDP and inflation than unemployment, at short and long horizons. Besides this, it is difficult to find a common behavior between uncertainty and disagreement among the variables: results do not support evidence that, if uncertainty or disagreement are relatively high for one of the variable than it is the same for the others
    Date: 2010–11
  23. By: Jonathan Benchimol (Economics Department - ESSEC Business School); André Fourçans (Economics Department - ESSEC Business School)
    Abstract: Cet article présente un modèle théorique et empirique de la zone euro, en mettant en perspective le rôle de la monnaie. Le modèle s'inscrit dans le cadre « Nouveaux Keynésiens-DSGE », la monnaie étant introduite dans la fonction d'utilité des ménages sous une forme non-séparable. En testant le modèle selon la méthode bayésienne nous expliquons la variance de la production et de l'inflation, mais aussi du taux d'intérêt, des balances réelles, de la production et des balances réelles en prix flexibles. Le rôle de la monnaie est analysé plus particulièrement. Nous montrons que son impact sur la production dépend du degré d'aversion au risque des agents, qu'il augmente avec ce degré, et qu'il devient significatif quand l'aversion au risque inter-temporel est suffisamment élevée. L'impact direct de la monnaie est en revanche très limité pour expliquer la variance de l'inflation, la politique monétaire, via le taux d'intérêt, constituant le facteur dominant.
    Keywords: Estimation bayésienne ; Modèle DSGE ; Monnaie ; Zone euro
    Date: 2010–04
  24. By: Marcus Kappler; Helmut Reisen; Moritz Schularick; Edouard Turkisch
    Abstract: In this paper we study the macroeconomic effects of large exchange rate appreciations. In a sample of 128 countries since 1960, we identify 25 episodes of large nominal and real appreciations shocks and study their macroeconomic effects in a dummy-augmented panel autoregressive model. Our results show that an exchange rate appreciation can have strong effects on current account balances. Within three years after the appreciation event, the current account balance on average deteriorates by three percentage points of GDP. This effect occurs through a reduction of savings without a meaningful reduction in investment. Real export growth slows down substantially, while imports remain by and large unaffected. However, the output costs of appreciation are small and not statistically significant, indicating a shift towards domestic sources of growth. All these effects appear somewhat more pronounced in developing countries.<BR>Dans ce document de travail, nous étudions les effets macroéconomiques de larges appréciations du taux de change. Dans un échantillon de 128 pays depuis 1960, nous identifions 25 épisodes de larges appréciations nominales et réelles, et nous étudions leurs effets macroéconomiques dans un modèle autorégressif en données de panel augmenté d’une variable indicatrice. Nos résultats montrent qu’une appréciation du taux de change peut avoir des effets importants sur la balance courante. En moyenne, dans les trois ans suivant l’épisode d’appréciation, la balance courante se détériore en moyenne de trois points de PIB. Cet effet se produit via par une réduction de l’épargne, sans une réduction significative de l’investissement. La croissance réelle des exportations se ralentit sensiblement, alors que les importations restent dans l’ensemble inchangées. Toutefois, les pertes en termes de production résultant des appréciations sont faibles et non statistiquement significatifs, ce qui indique un déplacement vers des sources internes de croissance. Tous ces effets apparaissent quelque peu plus prononcés dans les pays en développement.
    Keywords: current account adjustment, global imbalances, exchange rate changes, ajustement du compte courant, déséquilibres mondiaux, variations de taux de change
    JEL: F31 F32 F4 N10 O16
    Date: 2011–02
  25. By: Daniel A. Dias (Department of Economics, University of Illinois.); Carlos Robalo Marques (Banco de Portugal, Research Department.); Fernando Martins (Banco de Portugal, Research Department, ISEG (Technical University of Lisbon) and Universidade Lusíada de Lisboa.)
    Abstract: Thanks to recent findings based on survey data, it is now well known that firms differ from each other with respect to their price-reviewing strategies. While some firms review their prices at fixed intervals of time, others prefer to perform price revisions in response to changes in economic conditions. In order to explain this fact, some theories have been suggested in the literature. However, empirical evidence on the relative importance of the factors determining firms’ different strategies is virtually nonexistent. This paper contributes to filling this gap by investigating the factors that explain why firms follow time-, state- or time- and state-dependent price-reviewing rules. We find that firms’ strategies vary with firm characteristics that have a bearing on the importance of information costs, the variability of the optimal price and the sensitivity of profits to non-optimal prices. Menu costs, however, do not seem to play a significant role. JEL Classification: C41, D40, E31.
    Keywords: Survey data, price stickiness, menu costs, information costs, multinomial probit.
    Date: 2011–03
  26. By: Ingrid Lo; Stephen Sapp
    Abstract: This paper empirically examines how dispersions across investors beliefs influence traders order submission decisions in the foreign exchange market. Previous research has found that dispersion in traders beliefs regarding future macroeconomic announcements has a significant impact on both price dynamics and trading volume before the announcements in the foreign exchange and other financial markets. However, little is known about how this dispersion impacts traders choice in submitting different types of orders and thus to supply and demand liquidity either before or after such announcements. Since the types of orders submitted by traders at these times are the building blocks of the observed price and trading dynamics, it is important to understand how differences in investors' information sets before and after important macroeconomic announcements affect their order submission decisions. We find that (i) belief dispersion affects the size and aggressiveness of orders both before and after macroeconomic announcements, (ii) the magnitude of the impact of factors known to affect order choice depends on the level of belief dispersion, and (iii) the influence of information shocks (the revelation of unexpected information) on order choices depends on the level of belief dispersion.
    Keywords: Exchange rates; Market structure and pricing
    JEL: D4 G1
    Date: 2011
  27. By: Bernd Hayo (Philipps-University Marburg); Ali M. Kutan (Southern Illinois University Edwardsville; The Emerging Markets Group, London; William Davidson Institute, Michigan); Matthias Neuenkirch (Philipps-University Marburg)
    Abstract: Using a GARCH model, we analyze the influence of U.S. monetary policy action and communication on the price volatility of commodities for the period 1998–2009. We find, first, that U.S. monetary policy events have an economically significant impact on price volatility. Second, expected target rate changes and communications decrease volatility, whereas target rate surprises and unorthodox monetary policy measures increase it. Third, we find a change in reaction to central bank communication during the recent financial crisis: the “calming” effect of communication found for the whole sample is partly offset during that period.
    Keywords: Central Bank Communication, Commodities, Federal Reserve Bank, Monetary Policy, Price Volatility
    JEL: E52 E58 G14 Q10 Q40
    Date: 2011
  28. By: Zied Ftiti (Université de Lyon, Lyon, F-69003, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Jean-François Goux (Université de Lyon, Lyon, F-69003, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: La politique de ciblage d'inflation est un régime monétaire qui vise l'inflation. Sa pratique a été marquée par une grande stabilité observée aux débuts des années 90 et 2000. Un débat émerge sur l'efficacité et la performance économique de ce régime. De nombreuses recherches se sont intéressées à cette question sans pouvoir pour autant parvenir à un consensus ultime. L'objectif de ce papier est de contribuer à ce débat en clarifiant l'origine de ce régime monétaire et en proposant, par la suite, notre propre grille d'analyse quantitative. Nous avons recours à l'analyse de deux agrégats macroéconomique : l'inflation et la croissance économique selon différents échantillons. Dans un premier temps, nous évaluons l'évolution de ces deux grandeurs, dans tous les pays à ciblage d'inflation, entre la période précédant son adoption et la période post-adoption. Les résultats de cette première comparaison montrent sans exception que tous les pays à ciblage d'inflation ont eu un taux d'inflation plus faible et moins volatile. De même, nous prouvons que le ciblage d'inflation ne sacrifie pas la croissance économique en contre partie d'une faible volatilité d'inflation. Dans un second temps et pour des raisons de robustesse nous procédons à une comparaison des pays voisins deux à deux, dont l'un adoptant le régime de ciblage d'inflation et l'autre pratiquant une politique monétaire différente. Cette seconde comparaison montre que tous les pays à ciblage d'inflation sans exception ont connu de meilleures performances macroéconomiques que leurs voisins de non ciblage. A partir de ces résultats nous concluons à l'efficacité et la performance économique de cette politique monétaire à la fois pour les pays industrialisés et les pays émergents.
    Keywords: ciblage d'inflation, performance, efficacité, stabilité
    JEL: C40 E52 E63
    Date: 2011
  29. By: Zied Ftiti (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon); Jean-François Goux (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)
    Abstract: La politique de ciblage d'inflation est un régime monétaire qui vise l'inflation. Sa pratique a été marquée par une grande stabilité observée aux débuts des années 90 et 2000. Un débat émerge sur l'efficacité et la performance économique de ce régime. De nombreuses recherches se sont intéressées à cette question sans pouvoir pour autant parvenir à un consensus ultime. L'objectif de ce papier est de contribuer à ce débat en clarifiant l'origine de ce régime monétaire et en proposant, par la suite, notre propre grille d'analyse quantitative. Nous avons recours à l'analyse de deux agrégats macroéconomique : l'inflation et la croissance économique selon différents échantillons. Dans un premier temps, nous évaluons l'évolution de ces deux grandeurs, dans tous les pays à ciblage d'inflation, entre la période précédant son adoption et la période post-adoption. Les résultats de cette première comparaison montrent sans exception que tous les pays à ciblage d'inflation ont eu un taux d'inflation plus faible et moins volatile. De même, nous prouvons que le ciblage d'inflation ne sacrifie pas la croissance économique en contre partie d'une faible volatilité d'inflation. Dans un second temps et pour des raisons de robustesse nous procédons à une comparaison des pays voisins deux à deux, dont l'un adoptant le régime de ciblage d'inflation et l'autre pratiquant une politique monétaire différente. Cette seconde comparaison montre que tous les pays à ciblage d'inflation sans exception ont connu de meilleures performances macroéconomiques que leurs voisins de non ciblage. A partir de ces résultats nous concluons à l'efficacité et la performance économique de cette politique monétaire à la fois pour les pays industrialisés et les pays émergents.
    Keywords: ciblage d'inflation, performance, efficacité, stabilité
    Date: 2011
  30. By: Henning Weber
    Abstract: Empirical data indicate that firms tend to have below-average productivity upon entry and that they tend to experience post-entry productivity growth. I present a New Keynesian model with growth in firm-specific productivity and firm turnover that captures these two phenomena. The model predicts that the optimal rate of long-run inflation is positive and equal to growth in firm-specific productivity. When linearized at positive optimal inflation, the model is observationally equivalent to the basic New Keynesian model with homogenous productivity linearized at zero inflation. Optimal stabilization policies are the same in both models, and the Taylor principle ensures determinacy in either model
    Keywords: Optimal long-run inflation, trend inflation, heterogenous firms
    JEL: E01 E31 E32
    Date: 2011–02
  31. By: Daniel A. Dias (Department of Economics, University of Illinois.); Carlos Robalo Marques (Banco de Portugal, Research Department.); Fernando Martins (Banco de Portugal, Research Department, ISEG (Technical University of Lisbon) and Universidade Lusíada de Lisboa.); Joao M.C. Santos Silva (Department of Economics, University of Essex and CEMAPRE.)
    Abstract: Infrequent price changes at the firm level are now well documented in the literature. However, a number of issues remain partly unaddressed. This paper contributes to the literature on price stickiness by investigating the lags of price adjustments to different types of shocks. We find that adjustment lags to cost and demand shocks vary with firm characteristics, namely the firm’s cost structure, the type of pricing policy, and the type of good. We also document that firms react asymmetrically to demand and cost shocks, as well as to positive and negative shocks, and that the degree and direction of the asymmetry varies across firms. JEL Classification: C41, D40, E31.
    Keywords: Firm heterogeneity, Panel-ordered probit, Real rigidities, Survey data.
    Date: 2011–03
  32. By: Oleksiy Kryvtsov; Virgiliu Midrigan
    Abstract: Recent New Keynesian models of macroeconomy view nominal cost rigidities, rather than nominal price rigidities, as the key feature that accounts for the observed persistence in output and inflation. Kryvtsov and Midrigan (2010a,b) reassess these conclusions by combining a theory based on nominal rigidities and storable goods with direct evidence on inventories for the U.S. This paper applies Kryvtsov and Midrigan’s model to the case of Canada. The model predicts that if costs of production are sticky and markups do not vary much in response to, say, expansionary monetary policy, firms react by excessively accumulating inventories in anticipation of future cost increases. In contrast, in the Canadian data inventories are fairly constant over the cycle and in response to changes in monetary policy. Similarly to Kryvtsov and Midrigan, we show that markups must decline sufficiently in times of a monetary expansion in order to reduce firms’ incentive to hold inventories and thus bring the model’s inventory predictions in line with the data. The model consistent with salient features of the dynamics of inventories in the Canadian data implies that countercyclical markups account for a sizable (50-80%) fraction of the response of real variables to monetary shocks.
    Keywords: Business fluctuations and cycles; Transmission of monetary policy
    JEL: E31 F12
    Date: 2011
  33. By: KOBAYASHI Keiichiro
    Abstract: We construct a monetary model of financial crises that can explain two characteristic features of the global financial crisis in 2008/2009, namely, the widespread freeze of asset transactions and a sharp contraction in aggregate output. We assume that the assets, such as real estate, work as media of exchange on a de facto basis in the goods market. In the financial crisis, excessively indebted investors hoard the assets hoping for a miraculous rise in their value (risk-shifting behavior), although the asset hoarding hinders the assets from working as media of exchange in the goods trading. Accordingly, the asset hoarding causes the disappearance of a significant portion of broad "money," which directly results in a contraction in aggregate production. Since the root of the problem is an external diseconomy caused by excessive indebtedness of investors, fiscal and monetary policies and debt reduction for investors have almost equivalent effects in terms of recovery efforts in a financial crisis.
    Date: 2011–02
  34. By: KOBAYASHI Keiichiro
    Abstract: We propose a simple model of financial crises, which may be useful for the unified analysis of macro and financial policies implemented during the 2008-2009 financial crisis. A financial crisis is modeled as the disappearance of inside money due to the lemon problem à la Akerlof (1970), in a simplistic variant of Lucas and Stokey's (1987) Cash-in-Advance economy, where both cash and capital stocks work as media of exchange. The exogenous emergence of a huge amount of bad assets represents the occurrence of a financial crisis. Information asymmetry regarding the good assets(capital stocks) and the bad assets causes the good assets to cease functioning as inside money. The private agents have no proper incentive to dispose of the bad assets, and the crisis could be persistent, because the lemon problem is an external diseconomy. Macroeconomic policy (e.g., fiscal stimulus) provides outside money for substitution, and financial stabilization (e.g., bad-asset purchases) restores the inside money by resolving information asymmetry. The welfare-improving effect of the macro policy may be nonexistent or temporary, while the bad-asset purchases may have a permanent effect to shift the economy out of the crisis equilibrium.
    Date: 2011–02
  35. By: KOBAYASHI Keiichiro
    Abstract: We generalize Lagos and Wright's (2005) framework for a monetary economy in a way that there exist two technologies, "high" and "low," for producing the goods in a decentralized matching market. The high technology is more productive than the low technology, while the agents who use the high technology cannot commit in advance to deliver the goods. The lack of commitment makes it infeasible to produce the goods with the high technology if trade is conducted via a simple cash payment. To use the high technology, private valuable assets, e.g., residential property, should be put up as a "hostage" à la Williamson (1983) in the transaction. In this setting, a deterioration in the balance sheet due to a financial crisis leads to the disappearance of residential assets which are not yet put up as collateral, and hinder the usage of the high technology, leading to a decline in aggregate productivity. In this case, monetary injections cannot restore productivity after a financial crisis.
    Date: 2011–02
  36. By: Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Both the equilibrium interest rate and the equity premium, as well as risk premiums of risky investments are all important quantities in cost-benefit analyses. In the light of the current (2008 -) financial crisis, it is of interest to study models that connect the the financial sector with the real economy. The effects of climate change has, on the other hand, been the subject of extensive discussions, for example in connection with the Stern report. The paper addresses both these issues, first based on standard assumptions. In particular we investigate what is needed to have long-term interests lower than short term rates. Our model allows us to tell what happens to risk premiums in turbulent times, consistent with observations. Next we extend the pure exchange model to a production economy. As a result we obtain an equilibrium term structure of interest rates, as well as a model for the equity premium. We end by a discussion of risk adjustments of the discount factor. For projects aimed at insuring future consumption, the interest rate is smaller than the risk free rate. Mitigation can have the characteristics of such a project.
    Keywords: Dynamic equilibrium; the Lucas model; term structure; CIR; pure exchange; production economy; equity premium puzzle; risk free rate puzzle; climate models; Stern Review
    JEL: D00 G00
    Date: 2011–02–28
  37. By: Mundaca, B. Gabriela
    Abstract: Intervention operations in the foreign exchange market are used by the Banco Central de Reserva del Peru to manage both the level and volatility of their exchange rates. The Banco Central de Reserva del Peru provides information to the market about the specific hours of the day interventions would take place and the total amount of intervention. It consistently buys and sells on the foreign exchange market to avoid large appreciations and depreciations of the Peruvian nuevo sol against the U.S. dollar (Sol/USD), respectively. The estimates in this paper indicate that past information on interventions has moved the sol in the intended direction but only during the time the Banco Central de Reserva del Peru has announced it would be active in the foreign exchange market. The authors also find that the expectation of future interventions by the Banco Central de Reserva del Peru decreases the volatility of the sol when it intervenes to avoid an appreciation of the sol; however, the opposite occurs when the intervention takes place to defend the sol from depreciation. Indeed, the sol has been less volatile during periods when the Banco Central de Reserva del Peru has intervened than otherwise.
    Keywords: Debt Markets,Emerging Markets,Economic Stabilization,Currencies and Exchange Rates,Macroeconomic Management
    Date: 2011–02–01
  38. By: Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics) Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).); Juan-Ángel Jiménez-Martín (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid); Chia-Lin Chang (NCHU Department of Applied Economics (Taiwan)); Teodosio Pérez-Amaral (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid)
    Abstract: The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. McAleer, Jimenez-Martin and Perez- Amaral (2009) proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper addresses the question of risk management of risk, namely VaR of VIX futures prices. We examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). We find that an aggressive strategy of choosing the Supremum of the single model forecasts is preferred to the other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, though these are admissible under the Basel II Accord.
    Keywords: Median strategy, Value-at-Risk (VaR), daily capital charges, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel II Accord, VIX futures, global financial crisis (GFC).
    JEL: G32 G11 C53 C22
    Date: 2011
  39. By: Paolo Angelini; Laurent Clerc; Vasco Cúrdia; Leonardo Gambacorta; Andrea Gerali; Alberto Locarno; Roberto Motto; Werner Roeger; Skander Van den Heuvel; Jan Vlcek
    Abstract: We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in Basel Committee on Banking Supervision (BCBS, 2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility. These conclusions are fully consistent with those of reports by the Long-term Economic Impact group (BCBS, 2010b) and Macro Assessment Group (MAG, 2010b).
    Keywords: Basel III, countercyclical capital buffers, financial (in)stability, procyclicality, macroprudential
    Date: 2011–02
  40. By: Katja Drechsel; Rolf Scheufele
    Abstract: This paper analyses the recession in 2008/2009 in Germany, which is very different from previous recessions, in particular regarding its cause and magnitude. We show to what extent forecasters and forecasts based on leading indicators fail to detect the timing and the magnitude of the recession. This study shows that large forecast errors for both expert forecasts and forecasts based on leading indicators resulted during this recession which implies that the recession was very difficult to forecast. However, some leading indicators (survey data, risk spreads, stock prices) have indicated an economic downturn and hence, beat univariate time series models. Although the combination of individual forecasts provides an improvement compared to the benchmark model, the combined forecasts are worse than several individual models. A comparison of expert forecasts with the best forecasts based on leading indicators shows only minor deviations. Overall, the range for an improvement of expert forecasts during the crisis compared to indicator forecasts is relatively small.
    Keywords: leading indicators, recession, consensus forecast, non-linearities
    JEL: E37 C53
    Date: 2011–03
  41. By: Fédéric Holm-Hadulla (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Nadine Leiner-Killinger (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Michal Slavík (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the relationship between government debt and labour taxation for a panel of 18 EU countries over the period 1979-2008. The econometric estimates point to a statistically significant and economically relevant positive response of labour taxation to changes in the general government debt and interest expenditure-to-GDP ratios. The results are robust across a range of econometric specifications and labour tax indicators. JEL Classification: H2, H24, H63, J22.
    Keywords: Debt, labour taxes, fiscal adjustment.
    Date: 2011–03
  42. By: Sule Alan (Faculty of Economics and CFAP, University of Cambridge, United Kingdom.); Ruxandra Dumitrescu (Faculty of Economics and CFAP, University of Cambridge, United Kingdom.); Gyongyi Loranth (Faculty of Business, Economics and Statistics and University of Vienna and CEPR.)
    Abstract: We test the interest rate sensitivity of subprime credit card borrowers using a unique panel data set from a UK credit card company. What is novel about our contribution is that we were given details of a randomized interest rate experiment conducted by the lender between October 2006 and January 2007. We find that individuals who tend to utilize their credit limits fully do not reduce their demand for credit when subject to increases in interest rates as high as 3 percentage points. This finding is naturally interpreted as evidence of binding liquidity constraints. We also demonstrate the importance of truly exogenous variation in interest rates when estimating credit demand elasticities. We show that estimating a standard credit demand equation with nonexperimental variation leads to seriously biased estimates even when conditioning on a rich set of controls and individual fixed effects. In particular, this procedure results in a large and statistically significant 3-month elasticity of credit card debt with respect to interest rates even though the experimental estimate of the same elasticity is neither economically nor statistically different from zero. JEL Classification: D11, D12, D14.
    Keywords: subprime credit, randomized trials, liquidity constraints.
    Date: 2011–02
  43. By: Yochanan Shachmurove (Department of Economics, University of Pennsylvania and The City College of The City University of New York)
    Abstract: The economic history of the United States is riddled with financial crises and banking panics. During the nineteenth-century, eight major such episodes occurred. In the period following World War II, some believed that these crises would no longer happen, and that the U.S. had reached a time of everlasting financial stability and sustainable growth. The Savings and Loans Crisis of the 1980s, the 2001 dot-com bust and the 2007 housing bubble that led to the current global financial crises demonstrate that these phenomena are still reoccurring. Regulators and policy makers should keep aware of the recurrence of such crises.
    Keywords: Financial Crises; Financial Regulations and Reforms; Banking Panics; Banking Runs; Nineteenth and Twentieth Century Crises; Bankruptcies; Federal Reserve Bank; Subprime Mortgage; Troubled Asset Relief Program (TARP); Collateralized Debt Obligations (CDO); Mortgage Backed Securities (MBO); Glass-Steagall Act; J.P. Morgan Chase; Bear Stearns; Augustus Heinze; Timothy Geithner; Paul Volcker.
    JEL: E0 E3 E44 E5 E6 N0 N1 N2 G0 G18 G38
    Date: 2011–07–01
  44. By: Christoph March (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 investigates the learning foundations of economic models of social learning. We pursue the prevalent idea in economics that rational play is the outcome of a dynamic process of adaptation. Our learning approach offers us the possibility to clarify when and why the prevalent rational (equilibrium) view of social learning is likely to capture observed regularities in the field. In particular it enables us to address the issue of individual and interactive knowledge. We argue that knowledge about the private belief distribution is unlikely to be shared in most social learning contexts. Absent this mutual knowledge, we show that the long-run outcome of the adaptive process favors non-Bayesian rational play.
    Keywords: social Learning ; informational herding ; adaptation ; analogies ; non-Bayesian updating
    Date: 2011–02
  45. By: Zsolt Darvas (Institute of Economics Hungarian Academy of Sciences); Jean Pisani-Ferry (Bruegel, Brussels)
    Abstract: The 'currency war', as it has become known, has three aspects: 1) the inflexible pegs of undervalued currencies; 2) recent attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a 'beggar-thy-neighbour' policy as long as the Fed's policy is geared towards price stability. Current US inflationary expectations are at historically low levels. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures. The euro's exchange rate has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.
    Keywords: currency war; quantitative easing; currency intervention; international monetary system
    JEL: E52 E58 F31 F33
    Date: 2011–01
  46. By: L. Randall Wray
    Abstract: The Queen of England famously asked her economic advisers why none of them had seen "it" (the global financial crisis) coming. Obviously, the answer is complex, but it must include reference to the evolution of macroeconomic theory over the postwar period—from the "Age of Keynes," through the Friedmanian era and the return of Neoclassical economics in a particularly extreme form, and, finally, on to the New Monetary Consensus, with a new version of fine-tuning. The story cannot leave out the parallel developments in finance theory-with its efficient markets hypothesis-and in approaches to regulation and supervision of financial institutions. This paper critically examines these developments and returns to the earlier Keynesian tradition to see what was left out of postwar macro. For example, the synthesis version of Keynes never incorporated true uncertainty or "unknowledge," and thus deviated substantially from Keynes's treatment of expectations in chapters 12 and 17 of the General Theory. It essentially reduced Keynes to sticky wages and prices, with nonneutral money only in the case of fooling. The stagflation of the 1970s ended the great debate between "Keynesians" and "Monetarists" in favor of Milton Friedman's rules, and set the stage for the rise of a succession of increasingly silly theories rooted in pre-Keynesian thought. As Lord Robert Skidelsky (Keynes's biographer) argues, "Rarely in history can such powerful minds have devoted themselves to such strange ideas." By returning to Keynes, this paper attempts to provide a new direction forward.
    Keywords: Efficient Markets Hypothesis, Keynesian Economics, Orthodoxy, Heterodox Economics, Minsky, Uncertainty, Rational Expectations, New Classical, New Monetary Consensus, Monetary Theory of Production, Effective Demand, Special Properties of Money, the End of Laissez-Faire, Financial Instability Hypothesis
    JEL: A2 B15 B22 B50 E11 E12
    Date: 2011–03
  47. By: L. Randall Wray
    Abstract: This paper begins by defining, and distinguishing between, money and finance, and addresses alternative ways of financing spending. We next examine the role played by financial institutions (e.g., banks) in the provision of finance. The role of government as both regulator of private institutions and provider of finance is also discussed, and related topics such as liquidity and saving are explored. We conclude with a look at some of the new innovations in finance, and at the global financial crisis, which could be blamed on excessive financialization of the economy.
    Keywords: Money; Money of Account; Finance; Financial Instruments; Financial Institutions; Financial Innovation; Financialization; Liquidity; Saving; State Money; Chartalism; Shadow Bank; Hyman Minsky; Securitization; Robert Clower
    JEL: B14 B15 B22 B52 E12 E40 E42 E50 E51 E52 G14 G21
    Date: 2011–03
  48. By: Oleg Kitov; Ivan Kitov
    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.
    Date: 2011–02
  49. By: Dong He (Hong Kong Institute for Monetary Research); Wei Liao (Hong Kong Institute for Monetary Research)
    Abstract: This paper develops a multi-level structural factor model to study international output comovement and its underlying driving forces. Our method combines a structural VAR with a multi-level factor model, which helps us understand the economic meaning of the estimated factors. Using quarterly data of real GDP growth covering nine emerging Asian economies and G-7 countries, we estimate a global supply factor, a global demand factor, and group supply and demand factors for each group of the economies. We find that, while the role of the global factors has intensified over the past fifteen years for most of the economies, output fluctuations in Asia have remained less synchronised with the global factor than those in the industrial countries. The Asian regional factors have become increasingly important in tightening the interdependence within the region over time. Thus while emerging Asian economies cannot "decouple" completely from the advanced economies, they have nonetheless sustained a strong independent cycle among themselves. We also find that synchronised supply shocks contributed more to the observed synchronisation in output fluctuations among the Asian economies than demand shocks. This points to the role of productivity enhancement through vertical trade integration, rather than dependence on external demand, as the primary source of business cycle synchronisation in emerging Asia.
    Keywords: Business Cycle Synchronization, Asia's External Dependency, Decoupling, Multi-Level Factor Model, Structural VAR
    Date: 2011–02
  50. By: Maria Dolores Gadea; Ana Gomez Loscos; Antonio Montañes (University of Zaragoza)
    Abstract: This paper sets out a comprehensive framework to identify regional business cycles within Spain and analyses their stylised features and the degree of synchronisation among them and the Spanish economy. We show that the regional cycles are quite heterogeneous although they display some degree of synchronisation that can be partially explained using macroeconomic variables. We also propose a dynamic factor model to cluster the regional co-movements and test if the country cycle is simply the aggregation of the regional ones. We find that the Spanish business cycle is not shared by the 17 regions, but is the sum of the different regional behaviours. The implications derived from our results are useful both for policy makers and analysts.
    Keywords: Business Cycle. Synchronisation measures. Dynamic factor models
    Date: 2011–03–01
  51. By: Abdul Majid, Muhamed Zulkhibri
    Abstract: The paper explores the measurement of monetary condition in Malaysia to augment the existing monetary policy framework. As an open economy, Monetary Condition Index (MCI) and Financial Condition Index (FCI) are applicable to understand the monetary condition especially in the era of financial deregulation and liberalisation. The results obtained suggest that the index is most useful when the exchange market exhibits stable conditions, and would be a constructive tool in the simultaneous management of the foreign currency and domestic money markets. However, the frequent experience of instability caused by supply and demand shocks with persistent and large inertia in the economy complicates the practical use of MCI and FCI in Malaysia. While this approach obviously does not provide answers to every question and as a leading indicator for inflation, it nonetheless makes it possible to measure the monetary condition in the Malaysian economy.
    Keywords: Monetary condition index; Monetary Policy; Malaysia
    JEL: E58 E44
    Date: 2010–09–01
  52. By: Mirko Djukic (National Bank of Serbia); Jelena Momcilovic (National Bank of Serbia); Ljubica Trajcev (National Bank of Serbia)
    Abstract: Medium-term projections are an important element of the decision-making process in an inflation targeting regime, that the National Bank of Serbia has been implementing for the past several years. The main goal of medium-term projections is to give an answer to what should be the policy rate path that would ensure that inflation in the coming period moves close to the targeted inflation rate. The most important tool for medium-term projections is a macroeconomic model, which is a set of equations aiming to describe the price-formation mechanism in Serbia and the transmission channel of monetary policy to prices. The model is comprised of four main behavioral equations for inflation, exchange rate, output gap and policy rate, and of a number of side behavioral equations and identities. For estimating trends and gaps on history, we use multivariate Kalman filter. The model in the current form has been used since end-2008 and is subject to regular adjustments and improvements.
    Keywords: medium-term projection model, inflation targeting, Kalman filter
    JEL: C53 E17 E58
    Date: 2010–12

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