nep-cba New Economics Papers
on Central Banking
Issue of 2011‒04‒30
43 papers chosen by
Alexander Mihailov
University of Reading

  1. Discount Rates By John H. Cochrane
  2. Bank Finance Versus Bond Finance By Fiorella De Fiore; Harald Uhlig
  3. Intergenerational redistribution in the Great Recession By Andrew Glover; Jonathan Heathcote; Dirk Krueger; José-Víctor Ríos-Rull
  4. Institutions and Business Cycles By Sumru Altug; Mustafa Emin; Bilin Neyapti
  5. From the financial crisis to the economic crisis The impact of the financial trouble of 2007-2008 on the growth of seven advanced countries By J.-C. BRICONGNE; J.-M. FOURNIER; V. LAPÈGUE; O. MONSO
  6. Beyond the DSGE Straitjacket By Pesaran, Hashem; Smith, Ron P.
  7. Household Leverage and the Recession By Thomas Philippon; Virgiliu Midrigan
  8. Central bank communication on financial stability By Benjamin Born; Michael Ehrmann; Marcel Fratzscher
  9. Business cycle dynamics under rational inattention By Bartosz Maćkowiak; Mirko Wiederholt
  10. The Evolution of the Monetary Policy Regimes in the U.S. By Jinho Bae; Chang-Jin Kim; Dong Heon Kim
  11. Price uncertainty and the existence of financial equilibrium. By Lionel de Boisdeffre
  12. Price uncertainty and the existence of financial equilibrium By Lionel De Boisdeffre
  13. Expectations of inflation: the biasing effect of thoughts about specific prices By Wändi Bruine de Bruin; Wilbert van der Klaauw; Giorgio Topa
  14. A Comprehensive Approach to the Euro-Area Debt Crisis By Zsolt Darvas; Jean Pisani-Ferry; Andr‚ Sapir
  15. Distributional dynamics under smoothly state-dependent pricing By James Costain; Anton Nakov
  16. Learning from Prices, Liquidity Spillovers, and Market Segmentation By Giovanni Cespa; Thierry Focault
  17. French and American labour markets in response to cyclical shocks between 1986 and 2007: a DSGE approach By T. LE BARBANCHON; B. OURLIAC; O. SIMON
  18. Inflation variability and the relationship between inflation and growth By Raghbendra Jha; Tu Dang
  19. The Quantity Theory revisited: A new structural Approach By Makram El-Shagi; Sebastian Giesen; L. J. Kelly
  20. The effectiveness of monetary policy in steering money market rates during the recent financial crisis By Puriya Abbassi; Tobias Linzert
  21. Fiscal data revisions in Europe By Francisco de Castro; Javier J. Pérez; Marta Rodríguez Vives
  22. Agent-based macroeconomics - a baseline model By Lengnick, Matthias
  23. Volatility, money market rates, and the transmission of monetary policy By Seth B. Carpenter; Selva Demiralp
  24. "Hegemonic Currencies during the Crisis: The Dollar versus the Euro in a Cartalist Perspective" By David Fields; Matías Vernengo
  25. Does the level of capital openness explain “fear of floating” amongst the inflation targeting countries? By Mukherjee, Sanchita
  26. Cross-section Dependence and the Monetary Exchange Rate Model: A Panel Analysis By Joscha Beckmann; Ansgar Belke; Frauke Dobnik
  27. International Propagation of Financial Shocks in a Search and Matching Environment By Marlène Isoré
  28. How did the crisis in international funding markets affect bank lending? Balance sheet evidence from the United Kingdom By Aiyar, Shekhar
  29. Accounting for Japanese Business Cycles: A Quest for Labor Wedges By Keisuke Otsu
  30. U.S. intervention during the Bretton Wood Era:1962-1973 By Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
  31. A Monetary Theory with Non-Degenerate Distributions By Hongfei Sun; Shouyong Shi; Guido Menzio
  32. Global rebalancing: the macroeconomic impact on the United Kingdom By Haberis, Alex; Markovic, Bojan; Mayhew, Karen; Zabczyk, Pawel
  33. Tailwinds and headwinds: how does growth in the BRICs affect inflation in the G7? By Lipinska, Anna; Millard, Stephen
  34. Emerging Market Business Cycles Revisited: Learning about the Trend By Emine Boz; Christian Daude; C. Bora Durdu
  35. Money Market Integration and Sovereign CDS Spreads Dynamics in the New EU States By Peter Chobanov; Amine Lahiani; Nikolay Nenovsky
  36. Inflation and inflation uncertainty: Evidence from two Transition Economies By Ahmad Zubaidi Baharumshah; Akram Hasanov; Stilianos Fountas
  37. Shifts in portfolio preferences of international investors: an application to sovereign wealth funds By Sa, Filipa; Viani, Francesca
  38. Understanding the macroeconomic effects of working capital in the United Kingdom By Fernandez-Corugedo, Emilio; McMahon, Michael; Millard, Stephen; Rachel, Lukasz
  39. The Cost Channel of Monetary Policy in a Post Keynesian Macrodynamic Model of Inflation and Output Targeting By Gilberto Tadeu Lima; Mark Setterfield
  40. Is Monetary Policy in New Members States Asymmetric? By Borek Vasicek
  41. SOE PL 2009 - An Estimated Dynamic Stochastic General Equilibrium Model for Policy Analysis And Forecasting By Grzegorz Grabek; Bohdan Klos; Grzegorz Koloch
  42. Fiscal policy, structural reforms and external imbalances: a quantitative evaluation for Spain By Ángel Gavilán; Pablo Hernández de Cos; Juan F. Jimeno; Juan A. Rojas
  43. Inflation Targeting in Brazil, Chile and South Africa: An Empirical Investigation of Their Monetary Policy Framework By Mona Kamal

  1. By: John H. Cochrane
    Abstract: Discount rate variation is the central organizing question of current asset pricing research. I survey facts, theories and applications. We thought returns were uncorrelated over time, so variation in price-dividend ratios was due to variation in expected cashflows. Now it seems all price-dividend variation corresponds to discount-rate variation. We thought that the cross-section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount-rate theories based on central ingredients and data sources. Discount-rate variation continues to change finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics.
    JEL: G0
    Date: 2011–04
  2. By: Fiorella De Fiore; Harald Uhlig
    Abstract: We present a dynamic general equilibrium model with agency costs where: i) firms are heterogeneous in the risk of default; ii) they can choose to raise finance through bank loans or corporate bonds; and iii) banks are more efficient than the market in resolving informational problems. The model is used to analyze some major long-run differences in corporate finance between the US and the euro area. We suggest an explanation of those differences based on information availability. Our model replicates the data when the euro area is characterized by limited availability of public information about corporate credit risk relative to the US, and when european firms value more than US firms the flexibility and information acquisition role provided by banks.
    JEL: C68 E20 E44
    Date: 2011–04
  3. By: Andrew Glover; Jonathan Heathcote; Dirk Krueger; José-Víctor Ríos-Rull
    Abstract: In this paper we construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages, as observed in the data. Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline more than twice as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is approximately welfare-neutral for households in the 20–29 age group, but translates into a large welfare loss of around 10% of lifetime consumption for households aged 70 and over.
    Date: 2011
  4. By: Sumru Altug (Koc University and CEPR); Mustafa Emin (Bocconi University); Bilin Neyapti (Bilkent University)
    Abstract: This paper investigates the relationship between the main business cycles features and the institutional and structural characteristics of countries in which they are observed. We derive the business cycle characteristics of the individual countries using the nonparametric Harding-Pagan approach. Our sample is comprised of 63 countries that includes industrial, emerging and formerly centrally planned economies from all continents. We correlate these characteristics with a wide range of macroeconomic, structural and institutional factors that have been hypothesized to affect macroeconomic outcomes. In our analysis, we also examine the determinants of business cycle synchronization for the countries in our sample. In contrast to earlier studies which seek to account for such synchronization using gravity arguments as well as trade intensity and bilateral financial linkages, we also consider the proximity of their institutional and policy environments.
    Keywords: Institutions, business cycles, synchronization, nonparametric analysis
    JEL: C32 E32 E37
    Date: 2011–04
  5. By: J.-C. BRICONGNE (Banque de France et Université Paris I); J.-M. FOURNIER (Crest-Insee); V. LAPÈGUE (Insee); O. MONSO (Insee)
    Abstract: The financial crisis started in the United States in 2007 on the subprime mortgage market and, then, gradually spread to all financial markets and strongly impacted growth in the main advanced countries through the years 2008 and 2009. Given its scope and its subsequent uncertainty, we discuss the capacity of macroeconometric models estimated on the past to quantify its various transmission channels. We try to measure the total impact of the crisis on the economy of seven advanced countries and on the euro area as a whole using the macroeconomic multinational model NiGEM. During the years 2008 and 2009, Germany suffered from a particularly strong drop in world trade, which would explain more than a half of the effect of the crisis measured in this way in 2009. The United Kingdom and the United States may especially have been affected by wealth effects and a strong drop in their inner demand. This drop may partly have been due to credit tightening. Japan seems to be the most affected country in 2009: the drop in foreign trade was exacerbated by the appreciation of the yen and investment seems to have strongly over-reacted to the fall in activity. A contrario, the fact that France suffered from a less marked drop in output in 2009 might be explained by an absence of over-reaction in economic behaviours and less sensitivity to the fall in world trade.
    Keywords: financial crisis, simulation, macroeconometric model, macro-financial linkages
    JEL: E17
    Date: 2011
  6. By: Pesaran, Hashem (University of Cambridge); Smith, Ron P. (Birkbeck College, University of London)
    Abstract: Academic macroeconomics and the research department of central banks have come to be dominated by Dynamic, Stochastic, General Equilibrium (DSGE) models based on micro-foundations of optimising representative agents with rational expectations. We argue that the dominance of this particular sort of DSGE and the resistance of some in the profession to alternatives has become a straitjacket that restricts empirical and theoretical experimentation and inhibits innovation and that the profession should embrace a more flexible approach to macroeconometric modelling. We describe one possible approach.
    Keywords: macroeconometric models, DSGE, VARs, long run theory
    JEL: C1 E1
    Date: 2011–04
  7. By: Thomas Philippon; Virgiliu Midrigan
    Abstract: A salient feature of the recent U.S. recession is that output and employment have declined more in regions (states, counties) where household leverage had increased more during the credit boom. This pattern is difficult to explain with standard models of financing frictions. We propose a theory that can account for these cross-sectional facts. We study a cash-in-advance economy in which home equity borrowing, alongside public money, is used to conduct transactions. A decline in home equity borrowing tightens the cash-in-advance constraint, thus triggering a recession. We show that the evidence on house prices, leverage and employment across US regions identifies the key parameters of the model. Models estimated with cross-sectional evidence display high sensitivity of real activity to nominal credit shocks. Since home equity borrowing and public money are, in the model, perfect substitutes, our counter-factual experiments suggest that monetary policy actions have significantly reduced the severity of the recent recession.
    JEL: E2 E4 E5 G0
    Date: 2011–04
  8. By: Benjamin Born (University of Bonn.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Central banks regularly communicate about financial stability issues, by publishing Financial Stability Reports (FSRs) and through speeches and interviews. The paper asks how such communications affect financial markets. Building a unique dataset, it provides an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs and speeches by 37 central banks over the past 14 years. The findings suggest that FSRs have a significant and potentially long-lasting effect on stock market returns, and also tend to reduce market volatility. Speeches and interviews, in contrast, have little effect on market returns and do not generate a volatility reduction during tranquil times, but have had a substantial effect during the 2007-10 financial crisis. The findings suggest that financial stability communication by central banks are perceived by markets to contain relevant information, and they underline the importance of differentiating between communication tools, their content and the environment in which they are employed. JEL Classification: E44, E58, G12.
    Keywords: central bank, financial stability, communication, event study.
    Date: 2011–04
  9. By: Bartosz Maćkowiak (CEPR and European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Mirko Wiederholt (Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, USA.)
    Abstract: We develop a dynamic stochastic general equilibrium model with rational inattention by households and firms. Consumption responds slowly to interest rate changes because households decide to pay little attention to the real interest rate. Prices respond quickly to some shocks and slowly to other shocks. The mix of fast and slow responses of prices to shocks matches the pattern found in the empirical literature. Changes in the conduct of monetary policy yield very different outcomes than in models currently used at central banks because systematic changes in policy cause reallocation of attention by decision-makers in households and firms. JEL Classification: D83, E31, E32, E52.
    Keywords: information choice, rational inattention, monetary policy, business cycles.
    Date: 2011–04
  10. By: Jinho Bae (Department of Economics, Konkuk University, Seoul, South Korea); Chang-Jin Kim (Department of Economics, Korea University, Seoul, South Korea); Dong Heon Kim (Department of Economics, Korea University, Seoul, South Korea)
    Abstract: The existing literature on U.S. monetary policy provides no sense of a cnsensus regarding the existence of a monetary policy regime. This paper explores the evolution of U.S. monetary policy regimes via the development of a Markov-switching model predicated on narrative and statistical evidence of a monetary policy regime. We identified five regimes for the period spanning 1956:I - 2005:IV and they roughly corresponded to the Chairman term of the Federal Reserve, except for the Greenspan era. More importantly, we demonstrate that the conflicting results regarding the response to inflation for the pre-Volcker period in the existing literature is not attributable to the different data but due to different samples, and also provided an insight regarding the Great Inflation?namely, that the near non-response to inflation in the early 1960s appears to have constituted the initial seed of the Great Inflation. We also find via analysis of the Markov-switching model for the U.S. real interest rate, that the regime changes in the real interest rate follow the regime changes in monetary policy within two years and that the evolution of real interest rate regimes provides a good explanation for the conflicting results regarding the dynamics of real interest rate.
    Keywords: Monetary policy rule; Markov switching; Great Inflation; Real interest rate; Evolution
    JEL: E5 C32
    Date: 2011
  11. By: Lionel de Boisdeffre (Centre d'Economie de la Sorbonne)
    Abstract: We consider a pure exchange economy, with incomplete financial markets, where agents face an "exogenous uncertainty", on the future state of nature and an "endogenous uncertainty", on the future price in each random state. Namely, every agents forms price anticipations on each spot market, distributed along an idiosyncratic probability law. At a sequential equilibrium, all agents expect the "true" price as a possible outcome and elect optimal strategies at the first period, which clear on all markets at every time period. We show that, provided the endogenous uncertainty is large enough, a sequential equilibrium exists under standard conditions, for all types of financial structures (i.e., with real, nominal and mixed assets). This result suggests that standard existence problems of sequential equilibrium models, following Hart (1975), stem form the single price expectation assumption.
    Keywords: Sequential equilibrium, temporary equilibrium, perfect foresight, expectations, incomplete markets, asymmetric information, arbitrage, existence proof.
    JEL: D52
    Date: 2011–03
  12. By: Lionel De Boisdeffre (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: We consider a pure exchange economy, with incomplete financial markets, where agents face an "exogenous uncertainty", on the future state of nature and an "endogenous uncertainty", on the future price in each random state. Namely, every agents forms price anticipations on each spot market, distributed along an idiosyncratic probability law. At a sequential equilibrium, all agents expect the "true" price as a possible outcome and elect optimal strategies at the first period, which clear on all markets at every time period. We show that, provided the endogenous uncertainty is large enough, a sequential equilibrium exists under standard conditions, for all types of financial structures (i.e., with real, nominal and mixed assets). This result suggests that standard existence problems of sequential equilibrium models, following Hart (1975), stem form the single price expectation assumption.
    Keywords: General equilibrium, incomplete markets, existence of equilibrium, anticipations.
    Date: 2011–03
  13. By: Wändi Bruine de Bruin; Wilbert van der Klaauw; Giorgio Topa
    Abstract: National surveys follow consumers’ expectations of future inflation, because they may directly affect the economic choices they make, indirectly affect macroeconomic outcomes, and be considered in monetary policy. Yet relatively little is known about how individuals form the inflation expectations they report on consumer surveys. Medians of reported inflation expectations tend to track official estimates of realized inflation, but show large disagreement between respondents, due to some expecting seemingly extreme inflation. We present two studies to examine whether individuals who consider specific price changes when forming their inflation expectations report more extreme and disagreeing inflation expectations due to focusing on specific extreme price changes. In Study 1, participants who were instructed to recall any price changes or to recall the largest price changes both thought of various items for which price changes were perceived to have been extreme. Moreover, they reported more extreme year-ahead inflation expectations and showed more disagreement than did a third group that had been asked to recall the average change in price changes. Study 2 asked participants to report their year-ahead inflation expectations, without first prompting them to recall specific price changes. Half of participants nevertheless thought of specific prices when generating their inflation expectations. Those who thought of specific prices reported more extreme and more disagreeing inflation expectations, because they were biased toward various items associated with more extreme perceived price changes. Our findings provide new insights into expectation formation processes and have implications for the design of survey-based measures of inflation.
    Keywords: Consumer surveys ; Inflation (Finance) ; Prices
    Date: 2011
  14. By: Zsolt Darvas (Institute of Economics - Hungarian Academy of Sciences, Bruegel); Jean Pisani-Ferry (Bruegel); Andr‚ Sapir (Bruegel)
    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
  15. By: James Costain (Banco de España, Calle Alcalá 48, 28014 Madrid, Spain.); Anton Nakov (Banco de España and European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into “intensive”, “extensive”, and “selection” margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to firm-specific shocks is gradual, though inappropriate econometrics might make it appear immediate. JEL Classification: E31, E52, D81.
    Keywords: Nominal rigidity, state-dependent pricing, menu costs, heterogeneity, Taylor rule.
    Date: 2011–04
  16. By: Giovanni Cespa (Cass Business School, CSEF, and CEPR); Thierry Focault (HEC, School of Management, Paris, GREGHEC, and CEPR)
    Abstract: We describe a new mechanism that explains the transmission of liquidity shocks from one security to another (“liquidity spillovers”). Dealers use prices of other securities as a source of information. As prices of less liquid securities convey less precise information, a drop in liquidity for one security raises the uncertainty for dealers in other securities, thereby affecting their liquidity. The direction of liquidity spillovers is positive if the fraction of dealers with price information on other securities is high enough. Otherwise liquidity spillovers can be negative. For some parameters, the value of price information increases with the number of dealers obtaining this information. In this case, related securities can appear segmented, even if the cost of price information is small.
    Keywords: Liquidity spillovers, Liquidity Risk, Contagion, Value of price information, Transparency, Colocation
    JEL: G10 G12 G14
    Date: 2011–04–18
  17. By: T. LE BARBANCHON (Insee); B. OURLIAC (Insee); O. SIMON (Insee)
    Abstract: Until the current economic crisis, the recovery capacity of the American and French labour markets had often been compared. The United States had been considered more "resilient", namely more affected by cyclical shocks in the short term but more quickly coming back to their initial path in the medium term. As this conclusion may be modified in the context of the current crisis, it is also relevant to study if it is actually valid on the previous period. Between 1986 and 2007, the output gap of the United States presented more pronounced fluctuations and came back to the equilibrium more rapidly. However, it does not mean that the United States were more resilient since it can also result from the fact that the American economy was affected by other kinds of shocks than the French economy. To distinguish which explanation is the most relevant, it is difficult to use an astructural approach. This study is therefore based on a structural approach directly inspired from Christoffel and Linzert (2005). We use two calibrated DSGE models, one for the French economy, the other for the United States, which include a labour market matching model à la Diamond, Mortensen and Pissarides. The comparison of the impulse response functions between the two models show that differences in resilience cannot be assessed globally: they depend on the shock which affects the economy. The differences are the most significant for shocks related to the labour market but they are less sensible for standard shocks like productivity shocks or monetary shocks. We use the same DSGE models to determine the nature of historical shocks between 1986 and 2007 and to assess the contributions of these shocks to output fluctuations. According to the models, the dynamics of the two economies on the period is thus characterized by different combinations of shocks, rather than different absorption capacity of these shocks.
    Keywords: Labour market, matching model, business fluctuations, DSGE model, resilience
    JEL: E24 E32 J64
    Date: 2011
  18. By: Raghbendra Jha; Tu Dang
    Abstract: We examine the effect of inflation variability and economic growth using annual historical data on both developing and developed countries. The data cover 182 developing countries and 31 developed countries for the period 1961-2009. Proxying inflation variability by the five-year coefficient of variation of inflation, we obtain the following results: (1) For developing countries, there is significant evidence to suggest that when the rate of inflation exceeds 10 % inflation variability has a negative effect on economic growth. (2) For developed countries, there is no significant evidence that inflation variability is detrimental to growth.
    JEL: C51 E31 E58 O40
    Date: 2011–04
  19. By: Makram El-Shagi; Sebastian Giesen; L. J. Kelly
    Abstract: While the long run relation between money and inflation is well established, empirical evidence on the adjustment to the long run equilibrium is very heterogeneous. In this paper we show, that the development of US consumer price inflation between 1960Q1 and 2005Q4 is strongly driven by money overhang. To this end, we use a multivariate state space framework that substantially expands the traditional vector error correction approach. This approach allows us to estimate the persistent components of velocity and GDP. A sign restriction approach is subsequently used to identify the structural shocks to the signal equations of the state space model, that explain money growth, inflation and GDP growth. We also account for the possibility that measurement error exhibited by simple-sum monetary aggregates causes the consequences of monetary shocks to be improperly identified by using a Divisia monetary aggregate. Our findings suggest that when the money is measured using a reputable index number, the quantity theory holds for the United States.
    Keywords: Divisia money, state space decomposition, sign restrictions
    JEL: E31 E52 C32
    Date: 2011–04
  20. By: Puriya Abbassi (Gutenberg-Universität Mainz, Saarstrasse 21, D-55128 Mainz, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The recent financial crisis deeply affected the money market yield curve and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates using two measures: first, the predictability of money market rates on the basis of monetary policy expectations, and second the impact of extraordinary central bank measures on money market rates. We find that market expectations about monetary policy are less relevant for money market rates up to 12 months after August 2007 compared to the pre-crisis period. At the same time, our results indicate that the ECB’s net increase in outstanding open market operations as of October 2008 accounts for at least a 100 basis point decline in Euribor rates. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises. JEL Classification: E43, E52, E58.
    Keywords: Monetary transmission mechanism, Financial Crisis, Monetary policy implementation, European Central Bank, Money market.
    Date: 2011–04
  21. By: Francisco de Castro (Banco de España); Javier J. Pérez (Banco de España); Marta Rodríguez Vives (European Central Bank)
    Abstract: Public deficit figures are subject to revisions, as most macroeconomic aggregates are. Nevertheless, in the case of Europe, the latter could be particularly worrisome given the role of fiscal data in the functioning of EU’s multilateral surveillance rules. Adherence to such rules is judged upon initial releases of data, in the framework of the so-called Excessive Deficit Procedure (EDP) Notifications. In addition, the lack of reliability of fiscal data may hinder the credibility of fiscal consolidation plans. In this paper we document the empirical properties of revisions to annual government deficit figures in Europe by exploiting the information contained in a pool of real-time vintages of data pertaining to fifteen EU countries over the period 1995-2008. We build up such real-time dataset from official publications. Our main findings are as follows: (i) preliminary deficit data releases are biased and non-efficient predictors of subsequent releases, with later vintages of data tending to show larger deficits on average; (ii) such systematic bias in deficit revisions is a general feature of the sample, and cannot solely be attributed to the behaviour of a small number of countries, even though the Greek case is clearly an outlier; (iii) Methodological improvements and clarifications stemming from Eurostat’s decisions that may lead to data revisions explain a significant share of the bias, providing some evidence of window dressing on the side of individual countries; (iv) expected real GDP growth, political cycles and the strength of fiscal rules also contribute to explain revision patterns; (v) nevertheless, if the systematic bias is excluded, revisions can be considered rational after two years.
    Keywords: data revisions, real-time data, news and noise, fiscal statistics, rationality
    JEL: E01 E21 E24 E31 E5 H60
    Date: 2011–04
  22. By: Lengnick, Matthias
    Abstract: This paper develops a baseline agent-based macroeconomic model and contrasts it with the common dynamic stochastic general equilibrium approach. Although simple, the model can reproduce a lot of the stylized facts of business cycles. The author argues that agent-based modeling is an adequate response to the recently expressed criticism of macroeconomic methodology. It does not depend on the strict assumption of rationality and allows for aggregate behavior that is more than simply a replication of microeconomic optimization decisions. At the same time it allows for absolutely consistent micro foundations. Most importantly, it does not depend on equilibrium assumptions or fictitious auctioneers and does therefore not rule out coordination failures, instability and crisis by definition. --
    Keywords: agent-based modeling,complex adaptive systems,microfoundations of macroeconomics
    JEL: B4 E1 E50
    Date: 2011
  23. By: Seth B. Carpenter; Selva Demiralp
    Abstract: Central banks typically control an overnight interest rate as their policy tool, and the transmission of monetary policy happens through the relationship of this overnight rate to the rest of the yield curve. The expectations hypothesis, that longer-term rates should equal expected future short-term rates plus a term premium, provides the typical framework for understanding this relationship. We explore the effect of volatility in the federal funds market on the expectations hypothesis in money markets. We present two major results. First, the expectations hypothesis is likely to be rejected in money markets if the realized federal funds rate is studied instead of an appropriate measure of the expected federal funds rate. Second, we find that lower volatility in the bank funding markets market, all else equal, leads to a lower term premium and thus longer-term rates for a given setting of the overnight rate. The results appear to hold for the US as well as the Euro Area and the UK. The results have implications for the design of operational frameworks for the implementation of monetary policy and for the interpretation of the changes in the Libor-OIS spread during the financial crisis. We also demonstrate that the expectations hypothesis is more likely to hold the more closely linked the short- and long-term interest rates are.
    Date: 2011
  24. By: David Fields; Matías Vernengo
    Abstract: This paper suggests that the dollar is not threatened as the hegemonic international currency, and that most analysts are incapable of understanding the resilience of the dollar, not only because they ignore the theories of monetary hegemonic stability or what, more recently, has been termed the geography of money; but also as a result of an incomplete understanding of what a monetary hegemon does. The hegemon is not required to maintain credible macroeconomic policies (i.e., fiscally contractionary policies to maintain the value of the currency), but rather to provide an asset free of the risk of default. It is argued that the current crisis in Europe illustrates why the euro is not a real contender for hegemony in the near future.
    Keywords: Dollar; Euro; International Currency
    JEL: F31 F33
    Date: 2011–04
  25. By: Mukherjee, Sanchita
    Abstract: Abstract Under the assumption of perfect capital mobility, inflation targeting (IT) requires central banks to primarily focus on domestic inflation and to let their exchange rate float freely. This is consistent with the macroeconomic trilemma suggesting monetary independence, perfect capital mobility and a fixed exchange rate regime are mutually incompatible. However, some recent empirical evidence suggests that many developed and developing countries following an IT regime are reacting systematically both to deviations of inflation from its target and to exchange rates. I empirically examine whether the responsiveness of the interest rate to exchange rate fluctuations can be explained in terms of limited capital openness. Applying Arellano-Bond dynamic panel estimation method for 22 IT countries, I find that short-term interest rates do respond to real exchange rate fluctuations. However, the responsiveness of the interest rate to the exchange rate declines significantly as capital market openness increases. The results indicate that capital controls have a significant impact on the exchange rate policy of the IT central banks, as the central banks have relatively less control over the exchange rate movements with greater openness of the capital market.
    Keywords: Macroeconomic Trilemma; Inflation Targeting; Interest Rates; Exchange Rate Policy; Capital Market Openness
    JEL: E58 E52 E44 F41
    Date: 2011–04–12
  26. By: Joscha Beckmann; Ansgar Belke; Frauke Dobnik
    Abstract: This paper tackles the issue of cross-section dependence for the monetary exchange rate model in the presence of unobserved common factors using panel data from 1973 until 2007 for 19 OECD countries. Applying a principal component analysis we distinguish between common factors and idiosyncratic components and determine whether non-stationarity stems from international or national stochastic trends. We find evidence for a cross-section cointegration relationship between the exchange rates and fundamentals which is driven by those common international trends. In addition, the estimated coefficients of income and money are in line with the suggestions of the monetary model.
    Keywords: Monetary exchange rate model, common factors, panel data, cointegration, vector error-correction models
    JEL: C32 C23 F31 F41
    Date: 2011
  27. By: Marlène Isoré
    Abstract: This paper develops a two-country multi-frictional model where the freeze on liquidity access to commercial banks in one country raises unemployment rates via credit rationing in both countries. The expenditure-switching channel, whereby asymmetric monetary shocks traditionally lead to negative comovements of home and foreign outputs, is considerably weakened via opposite forces driving the exchange rate. Meanwhile, it is proved that financial market integration forms a transmission channel per se, without resorting to international cross-holdings of risky assets. The search and matching modeling serves two purposes. First, it accounts for the time needed to restore a normal level of confidence following financial market disruptions. Second, it allows dissociating pure liquidity contractions from non-walrasian financial shocks, arriving despite global excess savings and due to heterogeneity in the quality of the banking system. The former induce negative comovements of home and foreign outputs, in accordance with the literature, whereas the new type of financial shocks does generate financial contagion.
    Keywords: matching theory, financial markets, credit rationing, financial multiplier, international transmission, financial crises, open economy macroeconomics
    JEL: C78 E44 E51 F41 F42 G15
    Date: 2011–04
  28. By: Aiyar, Shekhar (Bank of England)
    Abstract: Evidence abounds on the propagation of financial stresses originating in the US mortgage market to banking systems worldwide through international funding markets. But the transmission of this external funding shock to the real economy via bank lending is surprisingly underexamined, given the central importance ascribed to this channel of contagion by policymakers. This paper provides evidence of this transmission for the UK-resident banking system, the largest in the world by asset size. It uses a novel data set, created from detailed and confidential balance sheet data reported by individual banks quarterly to the Bank of England. I find that the shock to foreign funding caused a substantial pullback in domestic lending. The results are derived using a range of instruments to correct for endogeneity and omitted variable bias. Foreign subsidiaries and branches reduced lending by a larger amount than domestically owned banks, while the latter calibrated the reduction in domestic lending more closely to the size of the funding shock.
    Keywords: Liquidity shock; transmission mechanism; bank lending; instrumental variables.
    JEL: E30 E50 G20
    Date: 2011–04–18
  29. By: Keisuke Otsu
    Abstract: The Japanese business cycle from 1980-2007 portrays less contemporaneous correlation of labor with output than in the U.S. and also tends to lead output by one quarter. A canonical real business cycle model cannot account for these facts. This paper uses the business cycle accounting method a la Chari, Kehoe and McGrattan (2007) and shows that efficiency and labor market distortions are important in accounting for the quarterly business cycle fluctuation patterns in Japan. Fiscal and monetary variables such as labor income tax, money growth and interest rates cannot fully account for the distortions in the Japanese labor market.
    Keywords: business cycle accounting; japanese labor market
    JEL: E13 E32
    Date: 2011–04
  30. 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.
    Keywords: Banks and banking, Central ; Foreign exchange administration ; Federal Open Market Committee ; Gold ; Bretton Woods Agreements Act
    Date: 2011
  31. By: Hongfei Sun (Queen's University); Shouyong Shi (University of Toronto); Guido Menzio (University of Pennsylvania)
    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
  32. By: Haberis, Alex (Bank of England); Markovic, Bojan (National Bank of Serbia); Mayhew, Karen (Bank of England); Zabczyk, Pawel (Bank of England)
    Abstract: This paper considers the implications for the United States, the United Kingdom and the rest of the world (ROW) of shocks that may contribute to a further reduction in global current account imbalances using a dynamic stochastic general equilibrium (DSGE) model. We consider a shock that increases domestic demand in the ROW; a shock that reduces domestic demand in the United States; and a supply shock that raises US productivity relative to other countries. The impact on UK output and inflation depends on the nature of the shock that drives global rebalancing. An increase in domestic demand in the ROW would raise UK exports and output, but would also contribute to increased inflationary pressure in the United Kingdom. Further weakness in US domestic demand is likely to weigh on UK output and inflation. Productivity gains in the United States relative to other countries would worsen the United Kingdom’s current account position, pushing down on output, but would lead to reduced inflationary pressure in the United Kingdom.
    Keywords: Global imbalances; Current account; DSGE models.
    JEL: D58 F41 F47
    Date: 2011–04–15
  33. By: Lipinska, Anna (Bank of England); Millard, Stephen (Bank of England)
    Abstract: In this paper, we analyse the impact of a persistent productivity increase in a set of countries – which we think of as the BRIC economies – on inflation in their trading partners, the G7. In particular we want to understand conditions under which this shock can lead to tailwinds or headwinds in the economies of trading partners. We build a three-country DSGE model in which there are two oil-importing countries (home and foreign) and one oil-exporting country. We perform several experiments where we try to disentangle the importance of different factors that can shape inflation dynamics in the home country when the foreign country is hit by a persistent productivity shock. These factors are wage stickiness, the role of the oil sector and its share in both consumption and production, foreign monetary policy and the degree of completeness of financial markets. We find that the tailwinds effect, lowering inflation in the home economy, dominates the headwinds effect as long as there is scope for borrowing and lending across countries and the foreign country’s production is not too oil intensive.
    Date: 2011–04–15
  34. By: Emine Boz (IMF); Christian Daude (OECD); C. Bora Durdu (FRB)
    Abstract: We build an equilibrium business cycle model in which agents cannot perfectly distinguish between the permanent and transitory components of TFP shocks and learn about those components using the Kalman filter. Calibrated to Mexico, the model predicts a higher variability of consumption relative to output and a strongly negative correlation between the trade balance and output for a wide range of variability and persistence of permanent shocks vis-a-vis the transitory shocks. Moreover, our estimation for Mexico and Canada suggests more severe informational frictions in emerging markets than in developed economies.
    Keywords: emerging markets, business cycles, learning, Kalman filter
    JEL: F41 E44 D82
    Date: 2011–04
  35. By: Peter Chobanov; Amine Lahiani; Nikolay Nenovsky
    Abstract: When the first phase of the crisis focused primarily on the interbank market volatility, the second phase spread on the instability of public finance. Although the overall stance of public finances of the new members is better than the old member countries, the differences within the new group are significant (from the performer Estonia to the laggard Hungary). Sovereign CDS spreads have become major variables focused on risks and expectations about the fiscal situation of different countries. In the paper we investigate, first, whether there is a link in the new member states (NMS) between the expectations about the condition of their public finances and the dynamics of money markets,including integration of national money markets with the euro area.....Our study confirm that the strong link between monetary and public finance risk as apart of total systemic risk increase during the crisis especially for currency boards regimes, when the link becomes stronger and pronounced. For the inflation targeting countries the link became weaker and less pronounced.
    Keywords: money markets, sovereign CDS spreads, EU enlargement, monetary regimes, financial crisis
    JEL: E43 G10 P20 F31 F34
    Date: 2010–10–01
  36. By: Ahmad Zubaidi Baharumshah (Department of Economics, Universiti Putra Malaysia); Akram Hasanov (Department of Economics, Universiti Putra Malaysia); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper examines the causal link between inflation and inflation uncertainty for the transition economies of Russia and Ukraine. The Iterated Cumulative Sums of Squares Exponential Generalized Autoregressive Conditional Heteroskedasticity (ICSS-EGARCH-M-t) models that allow for asymmetry and regime shifts in the variance of inflation are employed to establish the inflation-inflation uncertainty causal relationship. We find three breaks in the inflation volatility series that coincide with the major historical events in these two countries. The empirical results reveal strong support of the Friedman-Ball hypothesis in both countries. Additionally, we discover that the reverse causal relation between inflation and inflation uncertainty as predicted by the Holland hypothesis holds in Ukraine, but this stabilization policy behavior does not seem to prevail in Russia.
    Keywords: transition economies, inflation, inflation uncertainty, ICSS-EGARCH-t.
    JEL: I20 I23
    Date: 2011–04
  37. By: Sa, Filipa (Trinity College, University of Cambridge); Viani, Francesca (Banco de España)
    Abstract: Reversals in capital inflows can have severe economic consequences. This paper develops a dynamic general equilibrium model to analyse the effect on interest rates, asset prices, investment, consumption, output, the exchange rate and the current account of a shift in portfolio preferences of foreign investors. The model has two countries and two asset classes (equities and bonds). It is characterised by imperfect substitutability between assets and allows for endogenous adjustment in interest rates and asset prices. Therefore, it accounts for capital gains arising from equity price movements, in addition to valuation effects caused by changes in the exchange rate. To illustrate the mechanics of the model, we calibrate it to analyse the consequences of an increase in the importance of sovereign wealth funds (SWFs). Specifically, we ask what would happen if ‘excess’ reserves held by emerging markets were transferred from central banks to SWFs. We look separately at two diversification paths: one in which SWFs keep the same allocation across bonds and equities as central banks, but move away from dollar assets (path 1); and another in which they choose the same currency composition as central banks, but shift from US bonds to US equities (path 2). In path 1, the dollar depreciates and US net debt falls on impact and increases in the long run. In path 2, the dollar depreciates and US net debt increases in the long run. In both cases, there is a reduction in the ‘exorbitant privilege’, ie, the excess return the United States receives on its assets over what it pays on its liabilities. The model is applicable to other episodes in which foreign investors change the composition of their portfolios.
    Keywords: Portfolio preferences; sudden stops; imperfect substitutability; global imbalances; sovereign wealth funds.
    JEL: F32
    Date: 2011–04–18
  38. By: Fernandez-Corugedo, Emilio (Bank of England); McMahon, Michael (University of Warwick, and Centre for Economic Performance, LSE); Millard, Stephen (Bank of England); Rachel, Lukasz (Bank of England)
    Abstract: The most recent recession has been associated with a financial crisis that led to a large widening of spreads and quantitative restrictions on lending. As well as affecting investment, such a credit contraction is likely to have had a large effect on the working capital positions of UK firms and this, in turn, is likely to have affected the United Kingdom’s supply potential, at least temporarily. However, the role of such disruptions in the business cycle is not well understood. In this paper we first document the behaviour of working capital in the United Kingdom. In order to understand the effects of working capital on macroeconomic variables, we then solve and calibrate a DSGE model that introduces an explicit role for the components of working capital (net cash, inventories, and trade credit). We find that this model produces the standard responses of macroeconomic variables to productivity shocks, but we also find that financial intermediation shocks, similar to those experienced in the United Kingdom post-2007, have persistent negative effects on economic activity; these effects are reinforced by reductions in trade credit. Our model also documents a crucial role for monetary policy to offset such shocks.
    Keywords: Working capital; business cycle model; spreads; financial crisis.
    JEL: E20 E51 E52
    Date: 2011–04–18
  39. By: Gilberto Tadeu Lima (Department of Economics, University of Sao Paulo); Mark Setterfield (Department of Economics, Trinity College)
    Abstract: This paper contributes to the debate about whether or not inflation targeting is compatible with Post Keynesian economics. It does so by developing a model that takes into account the potentially inflationary consequences of interest rate manipulations. Evaluations of the macroeconomic implications of this so-called cost channel of monetary policy are common in the mainstream literature. But this literature uses supply-determined macro models and provides standard optimizing microfoundations for the various ways in which the interest rate can affect mark-ups, prices and ultimately the form of the Phillips curve. Our purpose is to study the implications of different Phillips curves, each embodying the cost channel and derived from Post Keynesian, cost-based-pricing microfoundations, in a monetary-production economy. We focus on the impact of these Phillips curves on macroeconomic stability and the consequent efficacy of inflation and output targeting. Ultimately, our results suggest that the presence of the cost channel is of less significance than the general orientation of the policy regime, and corroborate earlier finding that, in a monetary-production economy, more orthodox policy regimes are inimical to macro stabilization.
    Keywords: Cost channel of monetary policy, incomes policy, inflation targeting, macroeconomic stability
    JEL: E12 E52 E60
    Date: 2011–04
  40. By: Borek Vasicek
    Abstract: Estimated Taylor rules became popular as a description of monetary policy conduct. There are numerous reasons why real monetary policy can be asymmetric and estimated Taylor rule nonlinear. This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary and Poland), which apply an inflation targeting regime. Two different empirical frameworks are used: (i) a Generalized Method of Moments (GMM) estimation of models that allow discrimination between the sources of potential policy asymmetry but are conditioned by specific underlying relations (Dolado et al., 2004, 2005; Surico, 2007a,b); and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes (Hansen, 2000; Caner and Hansen, 2004). We find generally little evidence for asymmetric policy driven by nonlinearities in economic systems, some evidence for asymmetric preferences and some interesting evidence on policy switches driven by the intensity of financial distress in the economy.
    Keywords: monetary policy, inflation targeting, nonlinear Taylor rules, threshold estimation
    JEL: C32 E52 E58
    Date: 2010–12–01
  41. By: Grzegorz Grabek (National Bank of Poland, Economic Institute); Bohdan Klos (National Bank of Poland, Economic Institute); Grzegorz Koloch (National Bank of Poland, Economic Institute)
    Abstract: The paper documents the effects of work on the dynamic stochastic general equilibrium (DSGE) SOEPL model that has been carried out in the recent years at the National Bank of Poland, initially at the Bureau of Macroeconomic Research and lately at the Bureau of Applied Research of the Economic Institute. In 2009, a team consisting of the authors of this paper developed a new version of the model, called SOEPL−2009 which in 2010 is to be used to obtain routine mid-term forecasts of the inflation processes and the economic trends, supporting and supplementing the traditional structural macroeconometric model and experts’ forecasts applied so far. In the recent years many researchers have engaged in the work over a class of estimated macroeconomic models (of the business cycle) integrating the effects of at least three important lines of economic and econometric research: • methods of macroeconomic modelling (gradual departure from the traditional structural models towards models resistant to Lucas’ and Sims’ critique, strongly motivated with microeconomics); • micro- and macroeconomic theories (monetary policy issues, with emphasis on the consequence of imperfect competition, the role of nominal and real rigidities, as well as anticipating and optimising behaviours of agents in an uncertain environment, with a strong shift of point of view towards general equilibrium); • estimation techniques (reduction in parameters calibration, shift from classical techniques to Bayesian techniques with Bayesian-specific risk quantification as well as systematic and controlled introduction of experts’ knowledge, improvement of projections accuracy). Merger of the three trends has brought about a class of models — DSGE models — with high analytical and developmental potential. The very potential of the models of this class seems to be the most important reason for the interest of central banks in that area, research that may be directly translated into the practice of monetary policy. Along with the development of numerical, econometric methods and the theory of economics, a number of central banks supplement or even replace the traditional structural macroeconometric models, whose forecasting applications are enhanced with experts’ knowledge, with estimated DSGE models, namely models which attempt to translate the economic processes in a more explicit and systematic manner, whereby experts’ knowledge is introduced through Bayesian methods. It happens although no formal reasons exist for which the ex post verified accuracy of forecasts within the DSGE models should be higher than that of classical models. DSGE models give, however, a chance of structural (internally consistent and microfounded) explanations of the reasons for the recently observed phenomena and their consequences for the future. DSGE models present a different image of economic processes than classical macroeconometric models — they capture the world from the perspective of structural disturbances. These disturbances set the economy in motion and economic agents respond to them in an optimal way, which eliminates the consequences of the disturbances, i.e. restores the economy to equilibrium. The analytical knowledge and experience gathered in contact with the traditional structural models rather interferes with than helps interpret the results of DSGE models. In econometric categories, the results of DSGE models are, nevertheless, at least partially compliant with that which may be achieved with VAR and SVAR models, thus, it is hard to speak about revolution here. Following the events of 2008–2009 (global financial crisis), while searching for the reasons for the problems’ occurrence, the usefulness of formalised tools constructed on a uniform, internally coherent (but also restrictive) paradigm for macroeconomic policy tends to be questioned. The reasons for the global economy problems are searched for in models oversimplifying perception of the world and burdening the decisions regarding economic policy. We have noticed that the critique refers to a larger extent to the models as such (i.e. tools) and less to the practice of applying them (i.e. the user). Therefore, we consider that conclusions from a deeper analysis of the sources of 2008–2009 crisis, verification of the directions of economic research and methods of the research, which is likely to be held, as well as the analysis of the current policy less influenced by its rationalisation shall confirm the legitimacy of building and applying models, particularly DSGE class models. The issue of applications using the strong sides of the models remains, however, open. In our opinion, the best we can do is to try to use our model, gather and exchange experience, develop new procedures and thoroughly verify the results. The model whose details we shall present further herein derives from the structure developed at Riksbank — DSGE model for the euro area see Adolfson et al. (2005b). The euro area DSGE model, know-how, methods of estimation and applications received within the technical support of Riksbank enabled us to start several experiments, build different versions of DSGE model (a family of SOEPL models) and develop our own procedures of the model application. Some of the experiments have been described in separate papers, e.g. Grabek et al. (2007), Grabek and Kłos (2009), Grabek and Utzig-Lenarczyk (2009). The alternative we present in this paper summarizes some of the gathered experience. We pass the DSGE SOEPL−2009 model for use, with a view to considering and analysing other interpretation and understanding of economic processes than that proposed by the traditional models. Additionally, systematic work with the model (preparing forecasts and analyses of their accuracy, simulation experiments and analytical works) may reveal issues and problems that will have to be solved. Resulting knowledge shall enable the preparation of a more thorough future modification of the model, taking into account the effects of the parallel research and the conclusions arrived at during use. This paper consists of three basic parts. In the first part — relatively independent of the other parts — we have made an attempt to outline the development of the methods of macroeconomic (macroeconometric) modelling and the economic thought related to monetary policy, which brought about the creation of dynamic stochastic general equilibrium models, pushing aside other classes of models — at least in the academic world. The considerations are illustrated with simple models of real business cycles (RBC) and DSGE model based on new Keynesian paradigm. The second chapter of the first part focuses on the technical aspects of construction, estimation and application of DSGE models, drawing attention to mathematical, statistical and numerical instruments. Although it presents only the keynotes, outlines and ideas, the formalisation and precision of presentation required in that case makes the fragment of the paper slightly hermetic — a reader less interested in the techniques may omit that chapter. The further parts of the paper refer to specification, results of estimations and properties of the DSGE SOEPL−2009 model. We present, therefore, a general non-technical outline of the basic features of the model, illustrating at the same time the correlations with other DSGE models (Chapter 3). The next chapter defines decision-making problems of the optimising agents, their equilibrium conditions as well as characteristics of behaviours of the non- optimising agents. The description of the model specification is completed with balance conditions on a macro scale. The SOEPL−2009 model has been estimated with the use of Bayesian techniques. Identically as in all estimated DSGE models we are aware of, the Bayesian estimation refers solely to some of the parameters (the rest of the parameters have been calibrated). Although due to the application of the Bayesian techniques, the number of calibrated parameters has been clearly reduced, being aware of the consequences of faulty calibration we conducted a sort of sensitivity analysis (examination of the influence of changes in the calibration of parameters on the characteristics of the model). The presented SOEPL−2009 version takes into account the conclusions we arrived at based on the analysis. For the purposes of this paper and the first forecast experiments we use only point estimates of the parameters reflecting the modal value of posterior distribution, in other words our reasoning omits — hopefully temporarily — the issue of uncertainty of the parameters. The results of the estimation of parameters and assumptions made at the subsequent stages of the work (calibrated values, characteristics of prior distributions) have been presented in Chapter 6. A synthetic image of the model characteristics has been presented in Chapters 7–8, which describes the responses of observable variables to structural disturbances taken into account in the model (i.e. impulse response functions), variances decompositions (formally — forecast error decomposition), thanks to which the structure (relative role) of the impact of shocks on the observable variables may be assessed, estimation (identification) of structural disturbances in the sample, examples of historical decompositions (counterfactual experiments) and information about the ex post accuracy of forecasts — this is, thus, a typical set of information allowing understanding the consequences of the assumptions made at the stage of constructing decisionmaking problems (model specification) and choice of parameters. The Appendix presents structural form equations, equations used to determine value at a steady state and a list of variables of the SOEPL−2009 model.
    Date: 2011
  42. By: Ángel Gavilán (Banco de España); Pablo Hernández de Cos (Banco de España); Juan F. Jimeno (Banco de España); Juan A. Rojas (Banco de España)
    Abstract: This paper builds a large overlapping generations model of a small open economy featuring imperfect competition in the labor and product markets to understand i) which were the main determinants of the large expansionary phase experienced in Spain from the mid-1990s until the arrival of the global financial crisis in 2007-2008, ii) what role fiscal policy and structural reforms could have played to avoid the build-up of large external imbalance over this period, and iii) how these policies could affect the recovery of economic activity in Spain after the crisis. Our results indicate that falling interest rates and demographic changes were the main drivers of the Spanish expansionary phase. As for the macroeconomic behavior of the Spanish economy after the crisis, our results suggest that a front-loading in fiscal consolidation together with structural reforms that eliminate distortions in the goods and labor markets could make the recovery of economic activity in Spain more successful.
    Keywords: overlapping generations, imperfect competition, fiscal consolidation, demographic change, structural reforms
    JEL: E62 H30 J11
    Date: 2011–04
  43. By: Mona Kamal
    Abstract: This paper tackles the monetary policy performance in Brazil, Chile and South Africa under inflation targeting framework. Furthermore, it provides an empirical assessment through using the unrestricted Vector Auto-regression (VAR) and Structural Vector Auto-regression (SVAR) approaches depending on data spans the period from the first quarter of 1970 to the fourth quarter of 2007. On the other hand, it utilizes the Likelihood Ratio (LR) Statistic to test for possible structural changes due to the adoption of inflation targeting regime in those countries. The main findings are as follows: inflation targeting does make a difference in the performance of monetary policy in those countries. Furthermore, the experience of Brazil, Chile and South Africa provides important lessons for other emerging market economies to adopt such a framework.
    Keywords: Monetary policy, Vector Auto-regression (VAR), Structural Vector Auto-regression (SVAR) approach, Inflation Targeting Framework.
    JEL: E52 E58
    Date: 2010–11–01

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