|
on Central Banking |
| By: | Franklin Allen; Elena Carletti |
| Abstract: | Until Lehman Brothers' bankruptcy in September 2008, the conventional wisdom was that the crisis was the result of problems in the financial sector. However, after the dramatic falls in industrial production in countries such as Japan and Germany starting in the last quarter of 2008, it became clear that the origins of the crisis were deeper. This paper argues that there was an economic crisis that was due to the bursting of a property and stock bubble in the US and a number of other countries. Just as in Japan in the 1990's, this greatly affected the real economy. The problems in the financial system were a symptom rather than a cause, but there was a strong feedback effect into the real economy. The structure of the global financial system and the nature of banking regulation have been severely inadequate. The paper suggests reforms in the structure of the IMF, the governance of central banks and the form of banking regulation. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:575&r=cba |
| By: | Eichengreen, Barry (Asian Development Bank Institute); Rua, Gisela (Asian Development Bank Institute) |
| Abstract: | This paper considers the general equilibrium relationship between exchange rates and global imbalances. It emphasizes that the exchange rate is not a primitive but an equilibrium price determined by the policy mix. It uses extensions of the two-country Obstfeld-Rogoff model to analyze the response of imbalances and real exchange rates to shocks. Finally, it analyzes the characteristics of episodes in which chronic current account surpluses (as opposed to deficits) come to an end. |
| Keywords: | global imbalances; exchange rates; current account; economic rebalancing; global rebalancing |
| JEL: | F00 F30 F40 |
| Date: | 2011–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0278&r=cba |
| By: | Hoffmann, Mathias; Krause, Michael; Laubach, Thomas |
| Abstract: | This paper examines to what extent the build-up of 'global imbalances' since the mid-1990s can be explained in a purely real open-economy DSGE model in which agents' perceptions of long-run growth are based on filtering observed changes in productivity. We show that long-run growth estimates based on filtering U.S. productivity data comove strongly with long-horizon survey expectations. By simulating the model in which agents filter data on U.S. productivity growth, we closely match the U.S. current account evolution. Moreover, with household preferences that control the wealth effect on labor supply, we can generate output movements in line with the data. -- |
| Keywords: | open economy DSGE models,trend growth,Kalman filter,real-time data,news and business cycles,current account |
| JEL: | F32 E32 D83 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201101&r=cba |
| By: | Gianluca Benigno; Hande Küçük-Tuger |
| Abstract: | Recent contributions have shown that it is possible to account for the so-called consumption-real exchange anomaly in models with goods market frictions where international asset trade is limited to a riskless bond. In this paper, we consider a more realistic international asset market structure and show that as soon as we depart from the single bond economy, we can no longer account for the consumption-real exchange anomaly. Our central result holds for a simple asset market structure in which two nominal bonds are traded across countries. We explore the role of demand shocks such as news shocks in generating meaningful market incompleteness. We show that only under specific settings news shocks can improve the performance of the model in matching the portfolio positions and consumption-real exchange rate correlations that we observe in the data. |
| Keywords: | Portfolio choice, incomplete financial markets, international risk sharing, consumption-real exchange rate anomaly |
| JEL: | F31 F41 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1048&r=cba |
| By: | Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young |
| Abstract: | This paper analyzes quantitatively the extent to which there is overborrowing (i.e., inefficient borrowing) in a business cycle model for emerging market economies with production and an occasionally binding credit constraint. The main finding of the analysis is that overborrowing is not a robust feature of this class of model economies: it depends on the structure of the economy and its parametrization. Specifically, we find underborrowing in a production economy with our baseline calibration, but overborrowing with more impatient agents and more volatile shocks. Endowment economies display overborrowing regardless of parameter values, but they do not allow for policy intervention when the constraint binds (in crisis times). Quantitatively, the welfare gains from implementing the constrained efficient allocation are always larger near crisis times than in normal< ones. In production economies, they are one order of magnitude larger than in endowment economies both in crisis and normal times. This suggests that the scope for economy-wide macroprudential policy interventions (e.g. prudential taxation of capital flows and capital controls) is weak in this class of models. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:582&r=cba |
| By: | James D. Hamilton; Jing Cynthia Wu |
| Abstract: | This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level, slope and curvature term-structure risk. We find these Treasury factors historically were quite helpful for predicting both yields and excess returns over 1990-2007. The historical correlations are consistent with the claim that if in December of 2006, the Fed were to have sold off all its Treasury holdings of less than one-year maturity (about $400 billion) and use the proceeds to retire Treasury debt from the long end, this might have resulted in a 14-basis-point drop in the 10-year rate and an 11-basis-point increase in the 6-month rate. We also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009. Our estimates imply that at the zero lower bound, such a maturity swap would have the same effects as buying $400 billion in long-term maturities outright with newly created reserves, and could reduce the 10-year rate by 13 basis points without raising short-term yields. |
| JEL: | E43 E52 G12 H63 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16956&r=cba |
| By: | Eric M. Leeper; Todd B. Walker; Shu-Chun Susan Yang |
| Abstract: | News--or foresight--about future economic fundamentals can create rational expectations equilibria with non-fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react. Using tax policies as a leading example of foresight, simple theory makes transparent the economic behavior and information structures that generate non-fundamental equilibria. Econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes; biases are quantitatively important when two canonical theoretical models are taken as data generating processes. Both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized tax information flows. Differential U.S. federal tax treatment of municipal and treasury bonds embeds news about future taxes in bond yield spreads. Including that measure of tax news in identified VARs produces substantially different inferences about the macroeconomic impacts of anticipated taxes. |
| JEL: | C5 E62 H30 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16951&r=cba |
| By: | Eric Leeper |
| Abstract: | Slow moving demographics are aging populations around the world and pushing many countries into an extended period of heightened fiscal stress. In some countries, taxes alone cannot or likely will not fully fund projected pension and health care expenditures. If economic agents place sufficient probability on the economy hitting its ”fiscal limit” at some point in the future, after which further tax revenues are not forthcoming, it may no longer be possible for “good” monetary policy—behavior that obeys the Taylor principle—to control inflation or anchor inflation expectations. In the period leading up to the fiscal limit, the more aggressively that monetary policy leans against inflationary winds, the more expected inflation becomes unhinged from the inflation target. Problems confronting monetary policy are exacerbated when policy institutions leave fiscal objectives and targets unspecified and, therefore, fiscal expectations unanchored. In light of this theory, the paper contrasts monetary-fiscal policy frameworks in the United States and Chile. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:580&r=cba |
| By: | Rodrigo Vergara |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchep:38&r=cba |
| By: | José De Gregorio |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchep:36&r=cba |
| By: | Sofía Bauducco; Rodrigo Caputo |
| Abstract: | In this paper we discuss the arguments for and against the adoption of price-level targeting. We review recent theoretical contributions, and illustrate the main differences between price-level targeting and inflation targeting in a simple New Keynesian model. We conclude that, contrary to conventional wisdom, price-level targeting can, in some circumstances, deliver better outcomes than inflation targeting. Its main advantage lies on the fact that it acts as a commitment device when the Central Bank is unable to commit to its future actions. However, even in the circumstances under which price-level targeting performs better, there are three caveats to be considered. First, a higher proportion of backward-looking price setters reduces the effectiveness of price-level targeting, because it weakens the expectational channel through which price-level targeting operates. Second, communicating a price-level target may be a difficult task for the Central Bank. Finally, price-level targeting itself is not immune to considerations of time-inconsistency. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:601&r=cba |
| By: | Luis Felipe Céspedes; Roberto Chang; Diego Saravia |
| Abstract: | The last financial crisis revealed that financial imperfections and institutions play a more important role than the literature has assigned them for a long time, and it is possible to ascertain strongly that in the coming years macroeconomic research will be dominated by the study of the relationships between financial frictions, financial systems and aggregate fluctuations. This paper conducts a selective review of existing literature on monetary policy and its interaction with financial variables. It then examines frontier research presented at the XIII Annual Conference of the Central Bank of Chile, which gathers new theoretical results and empirical evidence applicable both in developed countries and in the Chilean economy |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:594&r=cba |
| By: | Luis Felipe Céspedes; Roberto Chang; Javier García-Cicco |
| Abstract: | This paper discusses theoretical and practical aspects of the various unconventional central bank policies during the 2008-2009 crisis. In terms of theory, we first discuss the role of credibility in the attainment of inflationary goals once the nominal interest rate is at a lower bound, paying particular attention to the role of the central bank’s balance sheet. Additionally, we present a model which has at its core a financial imperfection that highlights the role of bank’s capital as well as the relevance of alternative credit policies that can be used to deal with financial distress. On the other hand, we review evidence regarding the recent experience. We discuss the timing and type of observed unconventional policies. We then explore alternative measures to assess the stance of monetary policy in a situation when the policy rate has reached its lower bound. Finally, we present some descriptive evidence on the effect of the applied policies on the shape of the yield curve and the lending-deposit spread. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:586&r=cba |
| By: | Rodrigo Alfaro; Andrés Sagner |
| Abstract: | Credit and market risks are crucial for financial institutions. In this paper we present the model used by the Central Bank of Chile to conduct the stress tests for commercial banks in Chile. Market risk uses a balance-sheet approach that is consistent with the credit risk. For exchange rate risk we consider a change in the value of the portfolio under an unexpected change in the exchange rate by X%, meanwhile the interest rate risk is computed using a model for the whole yield curve. In particular, the modeling of this risk follows Nelson and Siegel (1987). Credit risk is computed using a non-linear VAR that relates banking system aggregates (loan loss provisions, credit growth, and write-offs) with macroeconomics variables (output growth, short and long term interest rates, terms of trade, and unemployment). For each Financial Stability Report (FSR) the model is calibrated using data from 1997 to the most recent date at monthly frequency. The effect on individual banks is computed adjusting the loan loss provision and total loans of each bank with the forecast value for the system. Given that forecasts are separated by type of loans (commercial, mortgage, and consumer) then the final effect on a particular bank depend on its initial composition. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:610&r=cba |
| By: | Javier García-Cicco |
| Abstract: | I use a unique micro price data to estimate the pass-through from commodity prices to retail prices in several countries. The paper presents and develops a simple methodology to estimate the pass-through from the prices of different commodities into various sectors across several countries. This is the first exercise of this type. As expected, countries respond differently to the different shocks; and sectors respond differently across countries and commodities. A third of all the explained variation is driven by sectoral characteristics, which is a dimension mostly disregarded by the literature. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:573&r=cba |
| By: | Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Michael McAleer; Teodosio Pérez-Amaral |
| 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: | 2011–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:11/12&r=cba |
| By: | Bernd Schwaab (European Central Bank, Financial Markets Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Siem Jan Koopman (Department of Econometrics, VU University Amsterdam and Tinbergen Institute.); André Lucas (Department of Finance, VU University Amsterdam, and Duisenberg school of finance.) |
| Abstract: | We propose a novel framework to assess financial system risk. Using a dynamic factor framework based on state-space methods, we construct coincident measures (‘thermometers’) and a forward looking indicator for the likelihood of simultaneous failure of a large number of financial intermediaries. The indicators are based on latent macro-financial and credit risk components for a large data set comprising the U.S., the EU-27 area, and the respective rest of the world. Credit risk conditions can significantly and persistently de-couple from macro-financial fundamentals. Such decoupling can serve as an early warning signal for macro-prudential policy. JEL Classification: G21, C33. |
| Keywords: | financial crisis, systemic risk, credit portfolio models, frailty-correlated defaults, state space methods. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111327&r=cba |
| By: | De Paoli, Bianca (Bank of England); Zabczyk, Pawel (Bank of England) |
| Abstract: | This paper analyses the conduct of monetary policy in an environment in which cyclical swings in risk appetite affect households’ propensity to save. It uses a New Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive following positive shocks. |
| Keywords: | Precautionary saving; monetary policy; cyclical risk aversion; macro-finance; DSGE models. |
| JEL: | E32 G12 |
| Date: | 2011–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0418&r=cba |
| By: | Michael Coopersmith |
| Abstract: | A relation between interest rates and inflation is presented using a two component economic model and a simple general principle. Preliminary results indicate a remarkable similarity to classical economic theories, in particular that of Wicksell. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1104.2344&r=cba |
| By: | Gerke, Rafael; Hammermann, Felix |
| Abstract: | We use robust control to study how a central bank in an economy with imperfect interest rate pass-through conducts monetary policy if it fears that its model could be misspecified. The effects of the central bank's concern for robustness can be summarised as follows. First, depending on the shock, robust optimal monetary policy under commitment responds either more cautiously or more aggressively. Second, such robustness comes at a cost: the central bank dampens volatility in the inflation rate preemptively, but accepts higher volatility in the output gap and the loan rate. Third, if the central bank faces uncertainty only in the IS equation or the loan rate equation, the robust policy shifts its concern for stabilisation away from inflation. -- |
| Keywords: | optimal monetary policy,commitment,model uncertainty |
| JEL: | E44 E58 E32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201102&r=cba |
| By: | Guido Menzio (Department of Economics, University of Pennsylvania); Shouyong Shi (Department of Economics, University of Toronto); Hongfei Sun (Department of Economics, Queens University) |
| Abstract: | Dispersion of money balances among individuals is the basis for a range of policies but it has been abstracted from in monetary theory for tractability reasons. In this paper, we fill in this gap by constructing a tractable search model of money with a non-degenerate distribution of money holdings. We assume search to be directed in the sense that buyers know the terms of trade before visiting particular sellers. Directed search makes the monetary steady state block recursive in the sense that individuals’ policy functions, value functions and the market tightness function are all independent of the distribution of individuals over money balances, although the distribution affects the aggregate activity by itself. Block recursivity enables us to characterize the equilibrium analytically. By adapting lattice-theoretic techniques, we characterize individuals’ policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists. Moreover, we provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate and analyze the properties of this distribution. |
| Keywords: | Money; Distribution; Search; Lattice-Theoretic |
| JEL: | E00 E4 C6 |
| Date: | 2011–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-009&r=cba |
| By: | Giancarlo Corsetti; Keith Kuester; Gernot J. Müller |
| Abstract: | According to conventional wisdom, fiscal policy is more effective under a fixed exchange rate regime than under a flexible one. In this paper we reconsider the transmission of shocks to government spending across these regimes within a standard new-Keynesian model of a small open economy. Because of the stronger emphasis on intertemporal optimization, the new-Keynesian framework requires a precise specification of fiscal and monetary policies, and their interaction, at both short and long horizons. We derive an analytical characterization of the transmission mechanism of expansionary spending policies under a peg, showing that the long-term real interest rate necessarily rises if inflation rises on impact, in response to an increase in government spending. This drives down private demand even though short-term real rates fall. As this need not be the case under floating exchange rates, the conventional wisdom needs to be qualified. Under plausible medium-term fiscal policies, government spending is not necessarily less expansionary in a floating regime. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:608&r=cba |
| By: | Michele Modugno (European Central Bank, DG-R/EMO, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.) |
| Abstract: | This paper proposes a methodology to nowcast and forecast inflation using data with sampling frequency higher than monthly. The nowcasting literature has been focused on GDP, typically using monthly indicators in order to produce an accurate estimate for the current and next quarter. This paper exploits data with weekly and daily frequency in order to produce more accurate estimates of inflation for the current and followings months. In particular, this paper uses the Weekly Oil Bulletin Price Statistics for the euro area, the Weekly Retail Gasoline and Diesel Prices for the US and daily World Market Prices of Raw Materials. The data are modeled as a trading day frequency factor model with missing observations in a state space representation. For the estimation we adopt the methodology exposed in Banbura and Modugno (2010). In contrast to other existing approaches, the methodology used in this paper has the advantage of modeling all data within a unified single framework that, nevertheless, allows one to produce forecasts of all variables involved. This offers the advantage of disentangling a model-based measure of ”news” from each data release and subsequently to assess its impact on the forecast revision. The paper provides an illustrative example of this procedure. Overall, the results show that these data improve forecast accuracy over models that exploit data available only at monthly frequency for both countries. JEL Classification: C53, E31, E37. |
| Keywords: | Factor Models, Forecasting, Inflation, Mixed Frequencies. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111324&r=cba |
| By: | Eickmeier, Sandra; Lemke, Wolfgang; Marcellino, Massimiliano |
| Abstract: | 1971-2009. Financial shocks are defined as unexpected changes of a financial conditions index (FCI), recently developed by Hatzius et al. (2010), for the US. We use a time-varying factor-augmented VAR to model the FCI jointly with a large set of macroeconomic, financial and trade variables for nine major advanced countries. The main findings are as follows. First, positive US financial shocks have a considerable positive impact on growth in the nine countries, and vice versa for negative shocks. Second, the transmission to GDP growth in European countries has increased gradually since the 1980s, consistent with financial globalization. A more marked increase is detected in the early 1980s in the US itself, consistent with changes in the conduct of monetary policy. Third, the size of US financial shocks varies strongly over time, with the `global financial crisis shock' being very large by historical standards and explaining 30 percent of the variation in GDP growth on average over all countries in 2008-2009, compared to a little less than 10 percent over the 1971-2007 period. Finally, large collapses in house prices, exports and TFP are the main drivers of the strong worldwide propagation of US financial shocks during the crisis. -- |
| Keywords: | international business cycles,international transmission channels,financial markets,globalization,financial conditions index,global financial crisis,timevarying FAVAR |
| JEL: | F1 F4 F15 C3 C5 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201105&r=cba |
| By: | Kaminska, Iryna (Bank of England); Meldrum, Andrew (University of Cambridge); Smith, James (Bank of England) |
| Abstract: | This paper extends a popular no-arbitrage affine term structure model to model jointly bond markets and exchange rates across the United Kingdom, United States and euro area. Using a monthly data set of forward rates from 1992, we first demonstrate that two global factors account for a significant proportion in the variation of bond yields across countries. We also show that, in order to explain country-specific movements in yield curves, local factors are required. Although we implement a very general factor structure, we find that our global factors are related to global inflation and global economic activity, while local factors are closely linked to monetary policy rates. In this respect our results are similar to previous work. But an important advantage of our joint international model is that we are able to decompose interest rates into risk-free rates and risk premia. Additionally, we are able to study the implications for exchange rates. We show that while differences in risk-free rates matter, to a large extent changes in the exchange rate are determined by time-varying exchange rate risk premia. |
| Keywords: | Term structure models; exchange rates. |
| JEL: | C33 E43 F31 |
| Date: | 2011–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0419&r=cba |
| By: | Sofía Bauducco |
| Abstract: | In this paper we study the optimal monetary and fiscal policy mix in a model in which agents are subject to idiosyncratic uninsurable shocks to their labor productivity. We identify two main effects of anticipated inflation absent in representative agent frameworks. First, inflation stimulates saving for precautionary reasons. Hence, a higher level of anticipated inflation implies a higher capital stock in steady state, which translates into higher wages and lower taxes on labor income. This benefits poor, less productive agents. Second, inflation acts as a regressive consumption tax, which favors rich and productive agents. We calibrate our model economy to the U.S. economy and compute the optimal policy mix. We find that, for a utilitarian government, the Friedman rule is optimal even when we allow for the presence of heterogeneity and uninsurable idiosyncratic risk. Although the aggregate welfare costs of inflation are small, individual costs and benefits are large. Net winners from inflation are poor, less productive agents, while middle-class and rich households are always net losers. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:611&r=cba |
| By: | Koop, Gary (University of Strathclyde); Pesaran, Hashem (University of Cambridge); Smith, Ron P. (Birkbeck College, University of London) |
| Abstract: | In recent years there has been increasing concern about the identification of parameters in dynamic stochastic general equilibrium (DSGE) models. Given the structure of DSGE models it may be difficult to determine whether a parameter is identified. For the researcher using Bayesian methods, a lack of identification may not be evident since the posterior of a parameter of interest may differ from its prior even if the parameter is unidentified. We show that this can be the case even if the priors assumed on the structural parameters are independent. We suggest two Bayesian identification indicators that do not suffer from this difficulty and are relatively easy to compute. The first applies to DSGE models where the parameters can be partitioned into those that are known to be identified and the rest where it is not known whether they are identified. In such cases the marginal posterior of an unidentified parameter will equal the posterior expectation of the prior for that parameter conditional on the identified parameters. The second indicator is more generally applicable and considers the rate at which the posterior precision gets updated as the sample size (T) is increased. For identified parameters the posterior precision rises with T, whilst for an unidentified parameter its posterior precision may be updated but its rate of update will be slower than T. This result assumes that the identified parameters are -consistent, but similar differential rates of updates for identified and unidentified parameters can be established in the case of super consistent estimators. These results are illustrated by means of simple DSGE models. |
| Keywords: | Bayesian identification, DSGE models, posterior updating, New Keynesian Phillips Curve |
| JEL: | C11 C15 E17 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5638&r=cba |
| By: | Stephen Hall; George S. Tavlas |
| Abstract: | This paper surveys the literature dealing with the thesis put forward by Dooley, Folkerts-Landau and Garber (DFG) that the present constellation of global exchange-rate arrangements constitutes a revived Bretton-Woods regime. DFG also argue that the revived regime will be sustainable, despite its large global imbalances. While much of the literature generated by DFG’s thesis points to specific differences between the earlier regime and revived regime that render the latter unstable, we argue that an underlying similarity between the two regimes renders the revived regime unstable. Specifically, to the extent that the present system constitutes a revived Bretton-Woods system, it is vulnerable to the same set of destabilizing forces -- including asset price bubbles and global financial crises -- that marked the latter years of the earlier regime, leading to its breakdown. We extend the Markov switching model to examine the relation between global liquidity and commodity prices. We find evidence of commodity-price bubbles in both the latter stages of the earlier Bretton-Woods regime and the revived regime. |
| Keywords: | Bretton-Woods regime, international liquidity, price bubbles, Markov switching model |
| JEL: | C22 F33 N10 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:11/21&r=cba |
| By: | Alessandro Calza (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Andrea Zaghini (Banca d’Italia, Research Department, Via Nazionale 91, I-00184 Rome, Italy.) |
| Abstract: | Empirical studies of the "shoe-leather" costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using monetary data adjusted for US dollars abroad, we show that the failure to control for currency held by non residents may lead to significantly overestimating the shoe-leather costs for the domestic economy. In particular, our estimates of shoe-leather costs are minimized for a positive but moderate value of the inflation rate, thereby justifying a deviation from the Friedman rule in favour of the Fed's current policy. JEL Classification: F16, J31. |
| Keywords: | Wage Structure, Inter-industry Wage Differentials, International Trade, Matched Employer-employee Data. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111326&r=cba |
| By: | Monica Correa Lopez; Agustin Garcia Serrador; Ana Cristina Mingorance |
| Abstract: | We analyse the impact of product market competition on the responsiveness of inflation to macroeconomic imbalances. Results based on a 20-country OECD panel estimated for the period 1961-2006 show that if product market competition is high the response of inflation to lagged inflation and unemployment is reduced, while inflation is more responsive to changes in productivity growth in countries in which competition is above the OECD average. When product market competition is measured by barriers to firms’ entry, we also find that low entry barriers dampen the effect on inflation of movements in import prices. These results are attributed to temporary mark-up changes after demand- and supplyside shocks. |
| Keywords: | Inflation dynamics; Product market competition; Labour market coordination; Trade union density. |
| JEL: | E31 J51 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1025&r=cba |
| By: | Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz |
| Abstract: | By the early 1960s, outstanding U.S. dollar liabilities began to exceed the U.S. gold stock, suggesting that the United States could not completely maintain its pledge to convert dollars into gold at the official price. This raised uncertainty about the Bretton Woods parity grid, and speculation seemed to grow. In response, the Federal Reserve instituted a series of swap lines to provide central banks with cover for unwanted, but temporary accumulations of dollars and to provide foreign central banks with dollar funds to finance their own interventions. The Treasury also began intervening in the market. The operations often forestalled gold losses, but in so doing, delayed the need to solve Bretton Woods’ fundamental underlying problems. In addition, the institutional arrangements forged between the Federal Reserve and the U.S. Treasury raised important questions bearing on Federal Reserve independence. |
| JEL: | E0 N1 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16946&r=cba |
| By: | Stéphane Auray (CNRS, THEMA, EQUIPPE, Universités Lille Nord de France (ULCO),Université de Sherbrooke (GREDI) and CIRPEE, Canada.); Beatriz de Blas (Universidad Autonoma de Madrid, Departamento de Analisis Economico, T. et H. Economico, Campus de Cantoblanco, 28049 Madrid, Spain.); Aurélien Eyquem (Université de Lyon, Lyon, F-69003, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | This paper analyzes jointly optimal fiscal and monetary policies in a small open economy with capital and sticky prices. We allow for trade in consumption goods under perfect international risk sharing. We consider balanced-budget fiscal policies where authorities use distortionary taxes on labor and capital together with monetary policy using the nominal interest rate. First, as long as a symmetric equilibrium is considered, the steady state in an open economy is isomorphic to that of a closed economy. Second, whereas sticky prices allocations are almost indistinguishable from flexible prices allocations, the open economydimension delivers results that are qualitatively similar to those of a closed economy but with significant quantitative changes. Fluctuations in terms of trade implied by complete international financial markets affect (i) consumption through changes in the consumption price index (CPI), (ii) hours through changes in the CPI-based real wage and (iii) capital accumulation through the relative price of capital goods. These wedges affect the volatility and persistence of optimal tax rates, and resulting allocations are quite different, as compared to a closed economy. |
| Keywords: | small open economy, Sticky prices, optimal monetary and fiscal policies |
| JEL: | E52 E62 E63 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1115&r=cba |
| By: | Pablo Pincheira |
| Abstract: | Inference about predictive ability is usually carried out in the form of pairwise comparisons between two competing forecasting methods. Nevertheless, some interesting questions are concerned with families of models and not just with a couple of forecasting strategies. An example of this would be the question about the predictive accuracy of pure time-series models versus models based on economic fundamentals. It is clear that an appropriate answer to this question requires comparing families of models, which may include a number of different forecasting strategies. Another usual approach in the literature consists of comparing the accuracy of a new forecasting method with a natural benchmark. Nevertheless, unless the econometrician is completely sure about the superiority of the benchmark over the rest of the methods available in the literature, he/she may want to compare the accuracy of his/her new forecasting model, and its extensions, against a broader set of methods. In this article we present a simple methodology to test the null hypothesis of equal predictive ability between two families of forecasting methods. Our approach corresponds to a natural extension of the White (2000) reality check in which we allow for the families being compared to be populated by a large number of forecasting methods. We illustrate our testing approach with an empirical application comparing the ability of two families of models to predict headline inflation in Chile, the US, Sweden and Mexico. With this illustration we show that comparing families of models using the usual approach based on pairwise comparisons of the best ex-post performing models in each family, may lead to conclusions that are at odds with those suggested by our approach. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:607&r=cba |
| By: | Michael Devereux |
| Abstract: | The macroeconomic response to the economic crisis has revived old debates about the usefulness of monetary and fiscal policy in fighting recessions. Without the ability to further lower interest rates, policy authorities in many countries have turned to expansionary fiscal policies. Recent literature argues that government spending may be very effective in such environments. But a critical element of the stimulus packages in all countries was the use of deficit financing and tax reductions. This paper explores the role of government debt and deficits in an economy constrained by the zero bound on nominal interest rates. Given that the liquidity trap is generated by a large increase in the desire to save on the part of the private sector, the wealth effects of government deficits can provide a critical macroeconomic response to this. Government spending financed by deficits may be far more expansionary than that financed by tax increases in such an environment. In a liquidity trap, tax cuts may be much more effective than during normal times. Finally, monetary policies aimed at directly increasing monetary aggregates may be effective, even if interest rates are unchanged. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:581&r=cba |
| By: | Stähler, Nikolai; Thomas, Carlos |
| Abstract: | This paper develops a medium-scale dynamic, stochastic, general equilibrium (DSGE) model for fiscal policy simulations. Relative to existingmodels of this type, our model incorporates a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. We also provide a notable degree of disaggregation on the government expenditures side, by explicitly distinguishing between (productivity-enhancing) public investment, public purchases and the public sector wage bill. Finally, we consider a labor market characterized by search and matching frictions, which allows to analyze the response of equilibrium unemployment to fiscal measures. In order to illustrate some of its applications, and motivated by recent policy debate in the Euro Area, we calibrate the model to Spain and the rest of the area and simulate a number of fiscal consolidation scenarios. We find that, in terms of output and employment losses, fiscal consolidation is the least damaging when achieved by reducing the public sector wage bill, whereas it is most damaging when carried out by cutting public investment. -- |
| Keywords: | General Equilibrium,Fiscal Policy Simulations,Labor Market Search |
| JEL: | E24 E32 E62 H20 H50 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201106&r=cba |
| By: | Sandra Gomes (Bank of Portugal, Economic Research Department, Av. Almirante Reis 71, 1150-012 Lisbon, Portugal.); Pascal Jacquinot (European Central Bank, Directorate General of Research, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Matthias Mohr (European Central Bank, Directorate General of Economics, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Massimiliano Pisani (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy.) |
| Abstract: | We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, there are benefits from implementing unilateral structural reforms. A reduction of markup by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. As reforms are implemented gradually over a period of five years, output would smoothly reach its new long-run level in seven years. Second, cross-country coordination of reforms would add extra benefits to each region in the euro area, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. This is true in particular for a small and open economy such as Portugal. Specifically, in the long run German output would increase by 9.2 percent, Portuguese output by 8.6 percent. Third, cross-country coordination would make the macroeconomic performance of the different regions belonging to the euro area more homogeneous, both in terms of price competitiveness and real activity. Overall, our results suggest that reforms implemented apart by each country in the euro area produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects. JEL Classification: C53, E52, F47. |
| Keywords: | Economic policy, structural reforms, dynamic general equilibrium modeling, competition, markups, monetary policy. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111323&r=cba |
| By: | Baum, Anja; Koester, Gerrit B. |
| Abstract: | Does the state of the business cycle matter for the effects of fiscal policy shocks on GDP? This study analyses quarterly German data from 1976 to 2009 in a threshold SVAR, expanding the SVAR approach by Blanchard and Perotti (2002). In a linear benchmark SVAR, the analysis finds that hiking spending yields a short-term fiscal multiplier of around 0.70, while the fiscal multiplier resulting from an increase in taxes and social security contributions is -0.66. In addition, the threshold model derives fundamentally new insights on the effects of shocks, depending on when in the business cycle they occur, their size and their direction. Most importantly, fiscal spending multipliers are much larger in times of a negative output gap but have only a very limited effect in times of a positive output gap. Discretionary revenue policies, on the other hand, have a generally more limited impact. Our findings have important implications for the optimal fiscal policy mix over different stages of the business cycle. Various robustness checks, including a different threshold specification, do not influence these implications substantially. -- |
| Keywords: | fiscal policy,business cycle,nonlinear analysis,fiscal multipliers |
| JEL: | E62 E32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201103&r=cba |
| By: | Falch, Nina Skrove; Nymoen, Ragnar |
| Abstract: | This paper evaluates inflation forecasts made by Norges Bank which is recognized as a successful forecast targeting central bank. It is reasonable to expect that Norges Bank produces inflation forecasts that are on average better than other forecasts, both 'naïve' forecasts, and forecasts from econometric models outside the central bank. The authors find that the superiority of the Bank's forecast cannot be asserted, when compared with genuine ex-ante real time forecasts from an independent econometric model. The 1-step Monetary Policy Report forecasts are preferable to the 1-step forecasts from the outside model, but for the policy relevant horizons (4 to 9 quarters ahead), the forecasts from the outsider model are preferred with a wider margin. An explanation in terms of too high speed of adjustment to the inflation target is supported by the evidence. Norges Bank's forecasts are convincingly better than 'naïve' forecasts over the second half of our sample, but not over the whole sample, which includes a change in the mean of inflation. -- |
| Keywords: | inflation forecasts,monetary policy,forecast comparison,forecast targeting central bank,econometric models |
| JEL: | C32 C53 E37 E44 E47 E52 E58 E65 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20116&r=cba |
| By: | Uluc Aysun (University of Connecticut) |
| Abstract: | This paper shows that when financial frictions are dynamically modeled, broader inferences can be drawn from DSGE models with asymmetric information costs. By embedding a partial equilibrium framework of bankruptcy proceedings in a dynamic New Keynesian model I find, for example, that financial liberalization episodes are only effective in countries with an efficient judicial system. More generally, I find that the response of output to various shocks depends on the duration of bankruptcy proceedings. These relationships, however, are not strictly unidirectional. The responses to adverse shocks are amplified (mitigated) when the shocks also generate an increase (a decrease) in real interest rates and an increase (decrease) in the stock of bankruptcy cases. I find empirical support for one prediction of the model by investigating macroeconomic and foreclosure data from U.S. states; monetary policy is more effective in states that have longer foreclosure proceedings. |
| Keywords: | Foreclosure, DSGE, financial frictions, court efficiency. |
| JEL: | C63 E44 E52 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2011-07&r=cba |
| By: | Alistair Dieppe; Alberto González Pandiella; Stephen Hall; Alpo Willman |
| Abstract: | Rational expectations has been the dominant way to model expectations, but the literature has quickly moved to a more realistic assumption of boundedly rational learning where agents are assumed to use only a limited set of information to form their expectations. A standard assumption is that agents form expectations by using the correctly specified reduced form model of the economy, the minimal state variable solution (MSV), but they do not know the parameters. However, with medium-sized and large models the closed-form MSV solutions are difficult to attain given the large number of variables that could be included. Therefore, agents base expectations on a misspecified MSV solution. In contrast, we assume agents know the deep parameters of their own optimizing frameworks. However, they are not assumed to know the structure nor the parameterization of the rest of the economy, nor do they know the stochastic processes generating shocks hitting the economy. In addition, agents are assumed to know that the changes (or the growth rates) of fundament variables can be modeled as stationary ARMA(p,q) processes, the exact form of which is not, however, known by agents. This approach avoids the complexities of dealing with a potential vast multitude of alternative mis-specified MSVs. Using a new Multi-country Euro area Model with Boundedly Estimated Rationality we show this approach is compatible with the same limited information assumption that was used in deriving and estimating the behavioral equations of different optimizing agents. We find that there are strong differences in the adjustment path to the shocks to the economy when agent form expectations using our learning approach compared to expectations formed under the assumption of strong rationality. Furthermore, we find that some variation in expansionary fiscal policy in periods of downturns compared to boom periods. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:11/27&r=cba |
| By: | Mauricio Calani; Kevin Cowan; Pablo García S. |
| Abstract: | The events surrounding the financial crisis and recession of 2008-2009 required significant policy responses by central banks. For formal inflation targeters (IT) a natural question arises about whether IT frameworks were flexible enough to address this unprecedented policy environment. In this paper we tackle this question by assessing the policy responses to the crisis of nine IT central banks that did not face systemic problems in their banking or financial systems. We first document substantial deviations of actual policy responses from prescriptions of conventional monetary policy reaction functions, beginning in the second half of 2008. Although several explanations for the deviations are offered, highlighting the extreme challenges at the time, we can more easily reconcile the findings with a decline in the persistence of monetary policy, again, in all cases. Second, we document the banks’ non-monetary-policy measures adopted at the time, and estimate their impact on local money markets (both in local currency and US dollars) and on exchange rates. While these measures helped broadly to normalize markets, firm conclusions on the effectiveness of specific measures are elusive, owing to the difficulty in comparing the different mix of measures adopted across countries and the significant heterogeneity in specific economies’ responses to these non-monetary policy measures. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:587&r=cba |
| By: | Benjamín García |
| Abstract: | In this paper we develop an alternative Taylor rule where the level of inertia depends on the gap between the actual and desired interest rates. This rule is estimated for six inflation-targeting countries, namely Chile, Colombia, Mexico, New Zealand, Peru, and South Korea. Evidence of a varying inertia is found for all the tested countries. While for the sample with stable interest rate movements this rule exhibits a fit similar to a classic Taylor rule, it provides a better fit for the post financial crisis sub-sample. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:592&r=cba |
| By: | Andreas Schabert (TU Dortmund University , University of Amsterdam); Sweder J.G. van Wijnbergen (University of Amsterdam) |
| Abstract: | We analyse the impact of interactions between monetary and fiscal policy on macroeconomic stability. We find that in the presence of sovereign default beliefs a monetary policy, which aims to stabilize inflation through an active interest rate policy, will destabilize the economy if the feedback from debt surprises back to the primary surplus is too weak. This result, which relies on endogenous changes in the default premium, is at odds with the results in an environment without default risk, where an active monetary policy guarantees macroeconomic stability. The results are highly relevant for the design of fiscal and monetary policy in emerging markets where sovereign credibility is not well established. Recent debt developments in Western Europe and in the US suggest these results might become relevant for more mature financial markets too. |
| Keywords: | Inflation targeting; fiscal-monetary policy interactions; sovereign default risk; foreign debt |
| JEL: | E52 E63 F41 |
| Date: | 2011–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110064&r=cba |
| By: | Mirko Abbritti (Universidad de Navarra.); Stephan Fahr (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Growth of wages, unemployment, employment and vacancies exhibit strong asymmetries between expansionary and contractionary phases. In this paper we analyze to what degree downward wage rigidities in the bargaining process affect other variables of the economy. We introduce asymmetric wage adjustment costs in a New-Keynesian DSGE model with search and matching frictions in the labor market. We find that the presence of downward wage rigidities strongly improves the fit of the model to the skewness of variables and the relative length of expansionary and contractionary phases even when detrending the data. Due to the asymmetry, wages increase more easily in expansions, which limits vacancy posting and employment creation, similar to the flexible wage case. During contractions nominal wages decrease slowly, shifting the main burden of adjustment to employment and hours worked. The asymmetry also explains the differing transmission of positive and negative demand shocks from wages to inflation. Downward wage rigidities help explaining the asymmetric business cycle of many OECD countries where long and smooth expansions with low growth rates are followed by sharp but short recessions with large negative growth rates. JEL Classification: E31, E52, C61. |
| Keywords: | labor market, unemployment, downward wage rigidity, asymmetric adjustment costs, non—linear dynamics. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111321&r=cba |
| By: | Rodrigo Caputo; Juan Pablo Medina; Claudio Soto. |
| Abstract: | Financial frictions have been shown to play an important role amplifying business cycles fluctuations. In this paper we show that the financial accelerator mechanism, analyzed by Bernanke, Gertler and Gilrchrist (1999), combined with adaptive learning can amplify business cycle fluctuations significantly as the balance sheet channel interacts with the presence of endogenous asset price “bubbles”. These large business cycle fluctuations are amplified in a non-linear way by the size of the shocks and by the degree of financial fragility in the economy determined by its leverage. Our preliminary results indicate that even in the presence of endogenous bubbles, responding aggressively to inflation reduces output and inflation volatility. If the central bank adjusts its policy instrument in response to asset price fluctuations, it may reduce output volatility and even inflation volatility in the short run. However, that monetary policy conduct leads to a surge in inflation several periods after the shocks. A policy that aggressively responds to changes in asset prices may marginally reduce output volatility with respect to a policy that reacts aggressively to inflation, but also at the cost of generating inflationary pressures. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:590&r=cba |
| By: | Shin-ichi Fukuda |
| Abstract: | This paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets. |
| JEL: | E44 F32 F36 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16962&r=cba |
| By: | Charles Amélie (Audencia Nantes, School of Management, 8 route de la Jonelière, 44312 Nantes Cedex 3, France.); Darné Olivier (EMNA, University of Nantes, IEMN–IAE, Chemin de la Censive du Tertre, BP 52231, 44322 Nantes, France.); Claude Diebolt (BETA/CNRS, Université de Strasbourg, France.) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:afc:wpaper:11-01&r=cba |
| By: | Alfredo Pistelli; Víctor Riquelme |
| Abstract: | This paper compares domestic food, energy and core inflation in a sample of 44 countries during the recent commodities price boom-and-bust cycle, and explains differences across countries. In particular, it explores the role of structural and cyclical factors in explaining cross-country differences. Structural factors are essential in explaining cross-country differences in food and energy inflation. Differences in both price levels and domestic price regulations are key and significant. About half of the difference between the increase in domestic food prices in Chile from 2007 to 2008, and the average food inflation for the whole sample of countries, was explained by these factors. Even though the unexplained component of food and energy inflation in Chile is positive and greater than that of other countries during the boom, actual core inflation was less than expected inflation using the model. This is evidence contrary to the de-anchoring of inflation expectations hypothesis. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:567&r=cba |
| By: | Juan Carlos Berganza (Banco de España); Carmen Broto (Banco de España) |
| Abstract: | Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of "strict IT", which imply a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with FX interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, FX interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers. |
| Keywords: | inflation targeting, exchange rate volatility, foreign exchange interventions, emerging economies |
| JEL: | E31 E42 E52 E58 F31 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1105&r=cba |
| By: | Eickmeier, Sandra; Lemke, Wolfgang; Marcellino, Massimiliano |
| Abstract: | We propose a classical approach to estimate factor-augmented vector autoregressive (FAVAR) models with time variation in the factor loadings, in the factor dynamics, and in the variance-covariance matrix of innovations. When the time-varying FAVAR is estimated using a large quarterly dataset of US variables from 1972 to 2007, the results indicate some changes in the factor dynamics, and more marked variation in the factors' shock volatility and their loading parameters. Forecasts from the time-varying FAVAR are more accurate than those from a constant parameter FAVAR for most variables and horizons when computed insample, for some variables in pseudo real time, mostly financial indicators. Finally, we use the time-varying FAVAR to assess how monetary transmission to the economy has changed. We find substantial time variation in the volatility of monetary policy shocks, and we observe that the reaction of GDP, the GDP deflator, inflation expectations and long-term interest rates to an equally-sized monetary policy shock has decreased since the early-1980s. -- |
| Keywords: | FAVAR,time-varying parameters,monetary transmission,forecasting |
| JEL: | C3 C53 E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201104&r=cba |
| By: | Jeffrey Frankel |
| Abstract: | Historically, many countries have suffered a pattern of procyclical fiscal policy: spending too much in booms and then forced to cut back in recessions, thereby exacerbating the business cycle. This problem has especially plagued Latin American commodity-producers. Since 2000, fiscal policy in Chile has been governed by a structural budget rule that has succeeded in implementing countercyclical fiscal policy. The key innovation is that the two most important estimates of the structural versus cyclical components of the budget – trend output and the 10-year price of copper – are made by expert panels and thus insulated from the political process. Chile’s fiscal institutions could usefully be emulated everywhere, but especially in other commodityexporting countries. This paper finds statistical support for a series of hypotheses regarding forecasts by official agencies that have responsibility for formulating the budget. 1) Official forecasts of budgets and GDP in a sample of 33 countries are overly optimistic on average. 2) The bias toward over-optimism is stronger the longer the horizon 3) The bias is greater among European governments that are politically subject to the budget rules in the Stability and Growth Pact. 4) The bias is greater at the extremes of the business cycle, particularly in booms. 5) In most countries, the real growth rate is the key macroeconomic input for budget forecasting. In Chile it is the price of copper. 6) Real copper prices mean-revert in the long run, but this is not always readily perceived. 7) Chile’s official forecasts are not overly optimistic on average. 8) Chile has apparently avoided the problem of official forecasts that unrealistically extrapolate in boom times. The conclusion is that official forecasts, if not insulated from politics, tend to be overly optimistic and that the problem can be worse when the government is formally subject to a budget rule. The key innovation that has allowed Chile in general to achieve countercyclical fiscal policy, and in particular to run surpluses in booms, is not just a structural budget rule in itself, but rather the regime that entrusts to panels of independent experts the responsibility for estimating the extent to which contemporaneous copper prices and GDP have departed from their long-run averages. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:604&r=cba |
| By: | Jeffrey A. Frankel |
| Abstract: | Historically, many countries have suffered a pattern of procyclical fiscal policy: spending too much in booms and then forced to cut back in recessions. This problem has especially plagued Latin American commodity exporters. Since 2000, fiscal policy in Chile has been governed by a structural budget rule that has succeeded in implementing countercyclical fiscal policy. Official estimates of trend output and the 10-year price of copper – which are key to the decomposition of the budget into structural versus cyclical components – are made by expert panels and thus insulated from the political process. Chile’s fiscal institutions hold useful lessons everywhere, but especially in other commodity exporting countries. This paper finds statistical support for a series of hypotheses regarding forecasts by official agencies that have responsibility for formulating the budget. 1) Official forecasts of budgets and GDP in a 33-country sample are overly optimistic on average. 2) The bias is stronger at longer horizons 3) The bias is greater among European governments that are politically subject to the budget rules in the Stability and Growth Pact (SGP). 4) The bias is greater in booms. 5) In most countries, the real growth rate is the key macroeconomic input for budget forecasting. In Chile it is the price of copper. 6) Real copper prices mean-revert in the long run, but this is not readily perceived. 7) Chile has avoided the problem of overly optimistic official forecasts. The conclusion: official forecasts tend to be overly optimistic, if not insulated from politics, and the problem can be worse when the government is formally subject to budget rules. The key innovation that has allowed Chile to achieve countercyclical fiscal policy in general, and to run surpluses in booms in particular, is not just a structural budget rule in itself, but a regime that entrusts to independent expert panels responsibility for estimating long-run trends in copper prices and GDP. |
| JEL: | E62 F41 H50 O54 Q33 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16945&r=cba |
| By: | Michael Pedersen |
| Abstract: | When a specific price is affected by a shock, this may spread to other prices and thus affect the overall inflation rate by more than the initial effect. This phenomenon is known as propagation of inflationary shocks and is the subject investigated in the present paper. It is argued that structural VAR models, with an imposed Cholesky decomposition, are suitable for the propagation analysis when the data vector includes the component affected by the initial shock and the rest of the CPI basket. The empirical analysis with annual Chilean inflation rates suggests that the propagation effects have generally diminished after the implementation of the inflation-targeting regime in September 1999. Propagation of shocks to the division including food prices, however, has increased, albeit with a delay of four months. An analysis of propagation of energy and food price shocks in seven industrialized and four Latin-American countries suggests that the effects in Chile are amongst the largest and, in the case of energy price shocks, with the longest duration. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:566&r=cba |
| By: | Luis Catão;; Adrian Pagan |
| Abstract: | We use an expectation-augmented SVAR representation of an open economy New Keynesian model to study monetary transmission in Brazil and Chile. The underlying structural model incorporates key structural features of Emerging Market economies, notably the role of a bank-credit channel. We find that interest rate changes have swifter effects on output and inflation in both countries compared to advanced economies and that exchange rate dynamics plays an important role in monetary transmission, as currency movements are highly responsive to changes in policy-controlled interest rates. We also find the typical size of credit shocks to have large effects on output and inflation in the two economies, being stronger in Chile where bank penetration is higher. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:579&r=cba |
| By: | Majuca, Ruperto P. |
| Abstract: | <p>We use Bayesian methods to estimate a medium-scale closed economy dynamic stochastic general equilibrium (DSGE) model for the Philippine economy. Bayesian model selection techniques indicate that among the frictions introduced in the model, the investment adjustment costs, habit formation, and the price and wage rigidity features are important in capturing the dynamics of the data, while the variable capital utilization, fixed costs, and the price and wage indexation features are not important.</p> <p>We find that the Philippine macroeconomy is characterized by more instability than the U.S. economy. An analysis of the several subperiods in Philippine economic history also reveals some quantitative evidence that risk aversion increases during crisis periods. Also, we find that the inflation targeting (IT) era is associated with a more stable economy: the standard deviations of the technology shock, the risk-premium shock, and the investment-specific technology shock have significantly lower variability than the pre-IT era, with the last two shocks being reduced by a factor of 5.6 and 2.3, respectively. The IT era is also associated with lower risk aversion. We also find that the adoption of inflation targeting is associated with interest rate smoothing in the monetary reaction function. With a more inertial reaction function, the Bangko Sentral ng Pilipinas (BSP) had achieved greater credibility and consequently, it was able to manage the expectations of forward-looking economic actors, and thereby achieved greater responses of the goal variables to the policy rates, even if the size of interest rates changes are smaller.</p> <p>However, we also find that BSP`s conduct of monetary policy appears to be more procyclical than countercyclical, particularly during the Asian financial crisis, and the recent global financial and economic crisis.</p> |
| Keywords: | new Keynesian model, Bayesian estimation |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2011-04&r=cba |
| By: | Hisali, Eria |
| Abstract: | The relationship between growth in monetary aggregates and price changes continues to be a subject of considerable debate both in the academic and policy circles. Whereas the more âconservativeâ policy makers hold that growth in monetary aggregates bear proportionately on prices, âliberalsâ on the other hand suggest a fairly weak relationship and instead mainly attribute sustained price changes to other innovations (including structural weaknesses and poor productive capacity). This study employed vector autoregression techniques (and its variants) to examine both short term as well as long term interactions between selected macroeconomic aggregates with particular focus on the relationship between money growth and price changes. Results from both the reduced form vector autoregression specification and the contemporaneous structural vector autoregression show a weak causation from growth in monetary aggregates to price changes, but the link between changes in monetary aggregates and prices becomes stronger in the long run. The results also point to a strong relationship between price changes on the one hand and exchange rate depreciation, and past inflation outcomes on the other. The results imply a potential for increased revenue from monetisation, at least up to some feasible as well as the need to focus on other possible sources of price variations. In general, whereas it is possible for the relationship between prices and money to weaken, budget deficits beyond âcertain financeable limitsâ will clearly negate the possibility of attaining other objectives of macroeconomic policy. A natural concern that arises in such a context is one of sustainability and compatibility of the budget deficit with other macroeconomic targets. We also employed the government budget accounting framework to analyse sustainability of Ugandaâs current fiscal stance. The results show that the consolidated deficit is consistent with attainment of target outcomes for other macroeconomic variables, most notably the rates of inflation and GDP growth rates. The inflation target has however, been achieved at the cost of an unsustainable domestic debt. From a policy perspective, issuing domestic debt at such a high real interest rates will allow lower money growth but at the cost of future increases in debt service obligations and thus future budget deterioration. |
| Keywords: | fiscal stance, macroeconomic aggregates, structural vector autogression, budget accounting approach, EPRC, Agricultural Finance, Financial Economics, Labor and Human Capital, Production Economics, Productivity Analysis, H62, H63, H69, |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eprcrr:102489&r=cba |