|
on Central Banking |
| By: | Bennett T. McCallum |
| Abstract: | Should central banks, because of the zero-lower-bound problem, raise their inflation-rate targets? Several arguments are relevant. (1) In the absence of the ZLB, the optimal steady-state inflation rate, according to standard New Keynesian reasoning, lies between the Friedman-rule value of deflation at the steady-state real interest rate and the Calvo-model value of zero, with calibration indicating a larger weight on the latter. (2) An attractive modification of the Calvo pricing equation would, however, imply that the weight on the second of these values should be zero. (3) There may be some scope for activist monetary policy to be effective even when the one-period interest rate is at the ZLB; but there is professional disagreement on this matter. (4) Present institutional arrangements are not immutable. In particular, elimination of traditional currency is feasible (even arguably attractive) and would remove the ZLB constraint on policy. (5) Increasing target inflation for the purpose of avoiding occasional ZLB difficulties would tend to undermine the rationale for central bank independence and would constitute an additional movement away from policy recognition of the economic necessity for intertemporal discipline. |
| JEL: | E31 E52 E58 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17005&r=cba |
| By: | Otmar Issing |
| Abstract: | This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset prices, as is the case in this monetary policy approach, can lead to financial instability. In contrast, giving, inter alia, monetary factors a role in central banks’ policy decisions, as is done in the ECB’s encompassing approach, helps prevent these potentially harmful side effects and thus allows for fostering financial stability. Finally, this paper makes a case against increasing the central banks’ inflation target. |
| Keywords: | Asset prices , Central banks , Credit , European Central Bank , Financial stability , Inflation targeting , Monetary aggregates , Monetary policy , Money , |
| Date: | 2011–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/97&r=cba |
| By: | Laurence Ball and Sandeep Mazumder |
| Abstract: | This paper examines inflation dynamics in the Unites States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960- 2007 are used to predict inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and variance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:580&r=cba |
| By: | Olivier Coibion |
| Abstract: | This paper studies the small estimated effects of monetary policy shocks from standard VAR’s versus the large effects from the Romer and Romer (2004) approach. The differences are driven by three factors: the different contractionary impetus, the period of reserves targeting and lag length selection. Accounting for these factors, the real effects of policy shocks are consistent across approaches and most likely medium. Alternative monetary policy shock measures from estimated Taylor rules also yield medium-sized real effects and indicate that the historical contribution of monetary policy shocks to real fluctuations has been significant, particularly during the 1970s and early 1980s. |
| JEL: | E3 E4 E5 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17034&r=cba |
| By: | Akito Matsumoto; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci |
| Abstract: | We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices. |
| Date: | 2011–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/110&r=cba |
| By: | Jean Pisani-Ferry; Adam Posen |
| Abstract: | The response in 2008-09 to the global financial crisis was in many ways a high water mark for transatlantic policy coordination. The major economies of the EU and the US rapidly agreed on a series of measures to limit the crisis. However, the common approach has since unraveled. This paper explores why the Â?London consensusÂ? has not survived for much more than a year.In response to this situation this working paper suggests a critical quantum of coordination. Key measures include a commitment to avoiding deliberate currency depreciation and unilateral intervention; agreement to give the IMF an enhanced monitoring role; the adoption by parliaments of medium-term fiscal plans ; and cooperation on the issue of Chinese undervaluation. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:498&r=cba |
| By: | Warwick J McKibbin; Andrew B Stoeckel |
| Abstract: | The build up in government debt in response to the ‘great recession’ has raised a number of policy dilemmas for individual countries as well as the world as a whole. Where the government fiscal stimulus was seen as necessary to restore confidence to markets and stimulate deteriorating economies in the aftermath of the ‘great recession’ by 2010 the massive fiscal stimulus programs and associated run-up in debt had, for many economies, become a confidence sapping exercise. This need for a change of fiscal policy stance has fuelled another debate that has two related aspects. One is the impact of fiscal consolidation on economies that are tightening and the flow-on effects to the world economy. The other debate is how much tightening there should be and how quickly. This paper explores these issues in a global framework focussing on the national and global consequences of coordinated fiscal consolidation. It explores the implications this fiscal adjustment might have on country risk premia and what happens if all countries coordinate their fiscal adjustment except the United States. A coordinated fiscal consolidation in the industrial world that is not accompanied by US actions is likely to lead to a substantial worsening of trade imbalances globally as the release of capital in fiscally contracting economies flows into the US economy, appreciates the US dollar and worsens the current position of the US. The scale of this change is likely to be sufficient to substantially increase the probability of a trade war between the United States and other economies. In order to avoid this outcome, a coordinated fiscal adjustment is clearly in the interest of the global economy. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2011-09&r=cba |
| By: | Nicoletta Batini; Giovanni Callegari; Julia Guerreiro |
| Abstract: | This paper updates existing measures of the U.S. fiscal gap to include federal laws up to and including the mid-December 2010 federal fiscal stimulus. It then applies the methodology of generational accounting to establish how the burden of adjustment required to attain fiscal sustainability is shared across generations. We find that the U.S. fiscal and generational imbalances are large under plausible parametric assumptions, and, while not much affected by the financial crisis, they have not improved much by the passing of the Final Healthcare Legislation. We find that, under our baseline scenario, a full elimination of the fiscal and generational imbalances would require all taxes to go up and all transfers to be cut immediately and permanently by 35 percent. A delay in the adjustment makes it more costly. |
| Keywords: | Accounting , Economic models , Fiscal analysis , Fiscal policy , Fiscal sustainability , Public debt , Tax burdens , Tax reductions , Taxes , United States , |
| Date: | 2011–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/72&r=cba |
| By: | Stephan Fahr (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roberto Motto (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oreste Tristani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We evaluate the ECB’s monetary policy strategy against the underlying economic structure of the euro area economy, in normal times and in times of severe financial dislocations. We show that in the years preceding the financial crisis that started in 2007 the strategy was successful at ensuring macroeconomic stability and steady growth despite shocks to the supply side and to the transmission mechanism which complicated the policy process. Emphasis on monetary indicators in the ECB’s monetary policy strategy – the monetary pillar – was instrumental in avoiding more volatile and less predictable patterns of inflation and growth. After the collapse of financial intermediation in late 2008, the strategy of the ECB was to preserve the integrity of the monetary policy transmission mechanism by adopting a comprehensive package of non-standard policy measures. According to our quantitative evaluation of the impact of the non-standard policy package, which notably did not include entering commitments regarding the future path of the policy rate, the liquidity interventions decided in October 2008 and in May 2009 were critical to preserving price stability and forestalling a more disruptive collapse of the macro-economy. JEL Classification: E31, E44, E51, E58. |
| Keywords: | Monetary Policy, Monetary transmission, Credit, Supply factors, Financial crisis, Non-standard policy measures. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111336&r=cba |
| By: | Guenter W. Beck (University of Siegen, Hölderlinstr. 3, 57076 Siegen, Germany and CFS.); Kirstin Hubrich (Research Department, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Massimiliano Marcellino (European University Institute, Via Roccettini, 9, I-50014 Fiesole, Florenz, Italy; Bocconi University and CEPR.) |
| Abstract: | We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors. We conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes. JEL Classification: E31, C38, D4, F4. |
| Keywords: | Disaggregated prices, euro area regional and sectoral inflation, common factor models. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111334&r=cba |
| By: | Igor Lebrun; Esther Perez Ruiz |
| Abstract: | Real unit labor costs (RULC) growth differentials between euro area members have persisted since EMU began and even widened out in the run-up to the crisis. This paper focuses on the causes underlying such dispersion. According to our empirical findings, persistent RULC growth differentials can be attributed to divergent evolutions in capital-output ratios, nominal effective exchange rates and country-specific institutional features, coupled with an increased sensitivity of RULC to fundamentals following the shift in the monetary regime. Because these RULC growth discrepancies in EMU partly result from heterogeneous structural characteristics, policy action seeking more homogenous regulation across the euro area can make a significant contribution to reduce them. |
| Date: | 2011–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/109&r=cba |
| By: | Chia-Lin Chang (Department of Applied Economics, Department of Finance, National Chung Hsing University); Philip Hans Franses (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam); Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, Complutense University of Madrid, and Institute of Economic Research, Kyoto University) |
| Abstract: | Macroeconomic forecasts are often based on the interaction between econometric models and experts. A forecast that is based only on an econometric model is replicable and may be unbiased, whereas a forecast that is not based only on an econometric model, but also incorporates expert intuition, is non-replicable and is typically biased. In this paper we propose a methodology to analyze the qualities of individual and means of non-replicable forecasts. One part of the methodology seeks to retrieve a replicable component from the non-replicable forecasts, and compares this component against the actual data. A second part modifies the estimation routine due to the assumption that the difference between a replicable and a non-replicable forecast involves measurement error. An empirical example to forecast economic fundamentals for Taiwan shows the relevance of the methodological approach using both individuals and mean forecasts. |
| Keywords: | Individual forecasts, mean forecasts, efficient estimation, generated regressors, replicable forecasts, non-replicable forecasts, expert intuition. |
| JEL: | C53 C22 E27 E37 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:773&r=cba |
| By: | Carla Soares; Paulo M.M. Rodrigues |
| Abstract: | The financial markets turmoil of 2007-09 impacted on the overnight segment, which is the first step of monetary policy implementation. We model the volatility of the EONIA spread as an EGARCH. However, the nature of the EGARCH considered will be different in the period before the fixed rate full allotment policy of the ECB (2004 - 2008) where we follow the approach of Hamilton (1996) and in the period afterwards (2008 - 2009) where a conventional EGARCH seems sufficient to capture the behaviour of volatility. The results suggest a greater difficulty during the turmoil for the ECB to steer the level of the EONIA spread relative to the main reference rate. The liquidity effect has been reduced since 2007 and in particular since the full allotment policy at the refinancing operations. On the other hand, the liquidity policy and especially the provision of long-term liquidity followed was effective in reducing market volatility. Liquidity provision conditions were also found to have influenced the EONIA spread only since the financial market turmoil. Fine-tuning operations contributed to stabilize money market conditions, especially during the turmoil. The EGARCH parameter estimates also suggest a structural change in the behaviour of the EONIA spread in reaction to shocks. |
| JEL: | E43 E52 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201112&r=cba |
| By: | Pau Rabanal; Christopher W. Crowe; Deniz Igan; Giovanni Dell'Ariccia |
| Abstract: | The financial crisis showed, once again, that neglecting real estate booms can have disastrous consequences. In this paper, we spell out the circumstances under which a more active policy agenda on this front would be justified. Then, we offer tentative insights on the pros and cons as well as implementation challenges of various policy tools that can be used to contain the damage to the financial system and the economy from real estate boom-bust episodes. |
| Keywords: | Bank credit , Business cycles , Cross country analysis , Demand , Fiscal policy , Housing , Monetary policy , Private sector , Property taxes , Real estate prices , Taxes , |
| Date: | 2011–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/91&r=cba |
| By: | BAUWENS, Luc (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); KOOP, Gary (University of Strathclyde, U.K); KOROBILIS, Dimitris (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); ROMBOUTS, Jeroen V. K. (Institute of Applied Economics at HEC Montréal, CIRANO, CIRPEE, Canada; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium.) |
| Abstract: | This paper compares the forecasting performance of different models which have been proposed for forecasting in the presence of structural breaks. These models differ in their treatment of the break process, the parameters defining the model which applies in each regime and the out-of-sample probability of a break occurring. In an extensive empirical evaluation involving many important macroeconomic time series, we demonstrate the presence of structural breaks and their importance for forecasting in the vast majority of cases. However, we find no single forecasting model consistently works best in the presence of structural breaks. In many cases, the formal modeling of the break process is important in achieving good forecast performance. However, there are also many cases where simple, rolling OLS forecasts perform well. |
| Keywords: | forecasting, change-points, Markov switching, Bayesian inference |
| JEL: | C11 C22 C53 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2011003&r=cba |
| By: | Alfred Guender (University of Canterbury) |
| Abstract: | Compared to the standard Phillips curve, an open-economy version that features a real exchange rate channel leads to a markedly different target rule in a New Keynesian optimizing framework. Under optimal policy from a timeless perspective (TP) the target rule involves additional history dependence in the form of lagged inflation. The target rule also depends on more parameters, notably the discount factor as well as two IS and two Phillips curve parameters. Stabilization policy in this open economy model is no longer isomorphic to policy in a closed economy. Because of the additional history dependence in an open economy target rule price level targeting is no longer consistent with optimal policy. The gains from commitment are smaller in economies where the real exchange rate channel exerts a direct effect on inflation in the Phillips curve. |
| Keywords: | CPI Inflation Targeting; UIP Puzzle; Instrument Rule; Target Rule; Optimal Monetary Policy |
| JEL: | E52 F41 |
| Date: | 2011–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:11/19&r=cba |
| By: | Alfred Guender (University of Canterbury) |
| Abstract: | Employing an optimizing framework, this paper shows that a target rule dominates a simple instrument rule when the focus of monetary policy is on CPI inflation. The target rule approach produces a systematic relationship between the current CPI inflation rate and the lagged policy instrument that renders the former immune to the stochastic risk premium. No matter how policy parameters are set, the optimal simple instrument rule cannot replicate the superior stabilization results achieved by the target rule approach. The optimal simple instrument rule also fails to account for the UIP puzzle. In contrast, the target rule approach can motivate the widely reported phenomenon whereby high interest rate currencies tend to appreciate. In fact the degree of openness and the central bank’s relative aversion to CPI inflation variability determine the sensitivity of observed changes in the nominal exchange rate to the lagged interest rate differential. |
| Keywords: | CPI Inflation Targeting; UIP Puzzle; Instrument Rule; Target Rule; Optimal Monetary Policy |
| JEL: | E4 E5 F3 |
| Date: | 2011–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:11/18&r=cba |
| By: | Richard T. Froyen; Alfred Guender (University of Canterbury) |
| Abstract: | One issue in the literature on monetary policy in New Keynesian models has been the relative merits of instrument versus target rules. This paper focuses on optimal instrument and target rules within three workhorse models in the literature: IS-LM, AS-AD and the New Keynesian model. The focus on optimal rules enables us to exploit the equivalence among alternative expressions of optimal policies for a given information set. We find that in the AD-AS model, characterized by the presence of observable information variables and unobservable target variables, an optimal explicit instrument rule, a combination policy, and a target rule produce identical outcomes for the target variables. In the New Keynesian model, the optimal explicit instrument rule achieves the same stabilization results as the globally optimal target rule. However, the latter approach provides a more direct rationale for introducing inertia into policymaking. This seems to be the key advantage of the target rule approach. Along other dimensions such as robustness and transparency, target rules offer no clear advantages over optimal instrument rules. |
| JEL: | E3 E5 |
| Date: | 2011–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:11/20&r=cba |
| By: | Juha Tervala (Aboa Centre for Economics and University of Turku) |
| Abstract: | In this paper, I examine the international welfare effects of monetary policy. I develop a New Keynesian two-country model, where central banks in both countries follow the Taylor rule. I show that a decrease in the domestic interest rate, under producer currency pricing, is a beggar-thyself policy that reduces domestic welfare and increases foreign welfare in the short term, regardless of whether the cross-country substitutability is high or low. In the medium term, it is a beggar-thy-neighbour (beggar-thyself) policy, if the Marshall-Lerner condition is satisfied (violated). Under local currency pricing, a decrease in the domestic interest rate is a beggar-thy-neighbour policy in the short term, but a beggarthyself policy in the medium term. Both under producer and local currency pricing, a monetary expansion increases world welfare in the short term, but reduces it in the medium term. |
| Keywords: | Open economy macroeconomics, monetary policy, beggar-thyself, beggar-thy-neighbour, Taylor rule, welfare analysis |
| JEL: | E32 E52 F30 F41 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp66&r=cba |
| By: | Juha Tervala (Aboa Centre for Economics and University of Turku) |
| Abstract: | This paper examines the implications of "keeping up with the Joneses" preferences (jealousy) for the welfare effects of monetary policy. I develop a New Keynesian model, where households are jealous and the central bank follows the Taylor rule. I show that the welfare effects of monetary policy over time depend significantly on the relative strength of the consumption externality caused by jealousy and the monopolistic distortion. If jealousy (the monopolistic distortion) dominates, then a decrease in the interest rate reduces (increases) welfare in the short run, but increases (reduces) welfare in the medium run. |
| Keywords: | Monetary policy, jealousy, consumption externality |
| JEL: | E40 E50 E52 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp65&r=cba |
| By: | Ignazio Angeloni |
| Abstract: | There is an unequivocal sign that a cooperation mechanism, a policymaking forum, a â??Gâ?? in short, is losing effectiveness; that its agenda is becoming an end in itself rather than a premise for purposeful action. It is when its press communiquées lose focus and turn into long lists of unrelated wishes, none of which entailing a serious commitment by any of the participants. We have seen this in the past, for example in certain phases of the G7/G8 history, and malicious voices suggest this is already happening to the G20, the young and most ambitious global economic cooperation forum ever conceived. Are the critics right? Should we lose hope and start thinking about something else? The ongoing French presidency, that will convene the next summit in Cannes in November, is a tests. Meanwhile, based on our criterion, the ministerial meeting just concluded in Paris gives little ground to contradict the critics. As already noted in this Monitor, the first steps of the G20, after the launch of the new formation at the level of heads of state and government (Washington, 2008), had been promising. Pressed by events, in the Fall of 2008 the leaders swiftly put together a sensible list of priorities and an innovative delegation structure, composed of the G20 summit at the top, supported by ministers and governors, and by the Financial Stability Board and the International Monetary Fund conducting technical work in their areas of expertise. More importanly, concrete actions followed, especially in the area of financial regulation. Then two things happened. To begin with, the crisis ended; or, should we say, its most acute manifestations in the financial markets subsided. As we had expected, the ensuing sense of relaxation weakened the will of policymakers to minimize divergences and agree on concrete actions. Second, the priorities evolved. Faced by the difficulty of agreing on a set of macro-policies to reduce global imbalances, participants turned attention elsewhere: to the reform of the international monetary system (an even more contentious subject, if possible), to the wish of some governments to combat â??speculationâ??, notably in commodity markets, to the implications of rising inflation and the exit strategies, and so on. A good starting point is to recognise that all these issues are linked. All G20 members (even the US now) agree that global imbalances contributed to the crisis, and that something should be done about them now, before new and bigger gaps arise. The state of the international monetary system (IMS) is an angle of the same problem. For surplus and deficit countries alike, global imbalances are a symptom of the inability of the current non-system to define, and enforce, any meaningful notion of â??rules of the gameâ??. The US were allowed, even encouraged, to neglect their rising external deficit by their ability to issue ever increasing volumes of the only universally accepted reserve asset, the US dollar. On the surplus side, China and others were moved by similar (dis)incentives, with reverse sign; they were even forced, by lack of alternatives, to accumulate surpluses in order to secure precautionary buffers against future adverse shocks. The present system lacks self-regulation, not only with regard to bilateral payment positions but, more importantly, with regard to global liquidity creation. Here is where commodity price booms link up. In early 2008, when the financial crisis could still be mistaken as mild and the recession had not yet started, commodity prices reached a historical peak, fuelled by five or more consecutive years of global liquidity expansion. After a short halt we are now seeing something similar happening again. Commodity markets are discounting the fact that the international community has found no better way, to exit the recession an prevent double dips, than to reactivate the same mechanisms of the past, made of new and bigger imbalances and an excessive expansion of global liquidity. â??Speculationâ?? (whatever it means) may add fuel in certain situations, but the new commodity bubble we are now observing (accompanied, not by chance, by stock market indices again well above historical trends) logically follows from the current global policy setting. The French authorities were right to include the reform of the IMS among the key priorities of the presidency. The problem is that none of the realistic alternatives can by itself guarantee greater discipline, in a reasonably near future. A multipolar system, with a somewhat more prominent role for the renbinbi and perhaps the euro, would help balance the composition of international reserves but not necessarily ensure a firmer control over their total creation. The same applies to other proposals under discussion that feature an enhanced role for the SDR, either via regular allocations or some form of â??substitution accountâ??. It is unlikely that a better control of global imbalances can result soon from changes in the IMS. Besides, if effective cooperation is hard to achieve consensually, as we see, it is equally hard to seek it through systemic rules that themselves need consensus to be decided and enforced. A peer review process, based on a shared methodology and indicators to detect which country is out of balance and should adjust, supported by an adequately empowered IMF, still seems the inescapable starting point. The Paris meeting just concluded opened up with a simple suggestion on the table: using 5 indicators (current accounts, international reserves, exchange rates, public deficits and private savings) to preliminarily identify external imbalances, triggering a more detailed review. After 2 days of discussion it agreed on the following formula to define the relevant indicators: â??(i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies.â?? One may object to this use of ministerial time, or to the convoluted wording, but this matters little. What is important is to move ahead: complete the agreement with operational guidelines and put the review process to work. This is what the leaders promised in Pittsburgh. Perhaps the parties will end up agreeing on what to do, even if they disagreed on why to do it. Post scriptum. Two final remarks on other subjects: 1. Financial reform. This is another key topic of the G20 agenda, but was not a majoe focus of the discussion in Paris. Ministers and governors reiterated their mandate to the Financial Stability Board to bring forward its agenda, notably on all aspects of the Basel III framework and on shadow banking systems. All in all, the FSB agenda appears to be on track, though effective implementation in all jurisdictions will be a different matter. 2. Speculation in commodity markets. After the comments heard on the eve of the meeting, it is surprising to see that the word â??speculationâ?? was not even mentioned the ministersâ?? final statement. This is unfortunate, not because the subject necessarily justifies policy intervention, but because it would be useful to give more substance to the notion of â??potential excessive commodity price volatilityâ??, mentioned in the statement. The IMF has already conducted analyses that could be revisited and updated in light of the recent experience, as a basis for a G20 position on this issue. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polbrf:524&r=cba |
| By: | Gümbel, Alexander (Toulouse School of Economics); Sussman, Oren (University of Oxford) |
| Abstract: | We develop a theoretical model where a redistribution of bank capital (e.g., due to reckless trading and/or faulty risk management) leads to a “freeze” of the interbank market. The fire-sale market plays a central role in spreading the crisis to the real economy. In crisis, credit rationing and liquidity hoarding appear simultaneously; endogenous levels of collateral (or margin requirements) are affected by both low fire-sale prices and high lending rates. Relative to previous analysis, this dual channel generates a stronger price and output effect. The main focus is on the policy analysis. We show that i) non-discriminating equity injections are more effective than liquidity injections, but in both the welfare effect is an order-of-magnitude lower than the price effect; ii) a discriminating policy that bails out only distressed banks is feasible but will be limited by incentive-compatibility constraints; iii) a restriction on international capital flows has an ambiguous effect on welfare. |
| Keywords: | Debt deflation, Bailout, Liquidity Injection |
| JEL: | G21 G28 G33 |
| Date: | 2010–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:24167&r=cba |
| By: | Jagjit S. Chadha (Keynes College, University of Kent); Luisa Corrado (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | The financial crisis has led to the development of an active debate on the use of macro-prudential instruments for regulating the banking system, in particular for liquidity and capital holdings. Within the context of a micro-founded macroeconomic model, we allow commercial banks to choose their optimal mix of asset creation, apportioning this to either reserves or private sector loans. We examine the implications for quantities, relative non-financial and financial prices from standard macroeconomic shocks alongside shocks to the expected liquidity of banks and to the efficiency of the banking sector. We focus on the response by the monetary sector, in particular the optimal reserve-deposit ratio adopted by commercial banks. Overall we find some rationale for Basel III in providing commercial banks with an incentive to hold liquid assets, such as reserves, as this acts to limit the procyclicality of lending to the private sector. |
| Keywords: | Liquidity, interest on reserves, policy instruments, Basel. |
| JEL: | E31 E40 E51 |
| Date: | 2011–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:193&r=cba |
| By: | Pablo Pincheira; Mauricio Calani |
| Abstract: | Communication with the public is an ever-growing practice among central banks and complements their decisions of interest rate setting. In this paper we examine one feature of the communicational practice of the Central Bank of Chile which summarizes the assessment of the Board about the most likely future of monetary policy. We show that this assessment, which is called communicational bias or simply c-bias, contains valuable information regarding the future stance of monetary policy. We do this by comparing, against several benchmarks, the c-bias ability to correctly forecast the direction of monetary policy rates. Our results are consistent with the hypothesis that the Central Bank of Chile has (in our sample period) matched words and deeds. In fact, the c-bias is a more accurate predictor than two versions of random walks and than a uniformly-distributed random variable. It also outperforms, at some horizons, the predictive ability of a discrete Taylor-rule-type model that uses persistence, output gap and inflation-deviation-from-target as arguments. Furthermore, the c-bias is more accurate than survey-based forecasts at several forecasting horizons. We also show that the c-bias can provide information to improve monetary policy rate forecasts based on the forward rate curve. |
| Date: | 2011–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:col:000425:008451&r=cba |
| By: | Fahlenbrach, Rudiger (Ecole Polytechnique Federale de Lausanne); Prilmeier, Robert (OH State University); Stulz, Rene M. (OH State University) |
| Abstract: | We investigate whether a bank's performance during the 1998 crisis, which was viewed at the time as the most dramatic crisis since the Great Depression, predicts its performance during the recent financial crisis. One hypothesis is that a bank that has an especially poor experience in a crisis learns and adapts, so that it performs better in the next crisis. Another hypothesis is that a bank's poor experience in a crisis is tied to aspects of its business model that are persistent, so that its past performance during one crisis forecasts poor performance during another crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis. This effect is economically important. In particular, it is economically as important as the leverage of banks before the start of the crisis. The result cannot be attributed to banks having the same chief executive in both crises. Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises. |
| JEL: | G21 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2011-10&r=cba |
| By: | Leonardo Gambacorta (Bank for International Settlements (BIS).); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | The 2007-2010 financial crisis highlighted the central role of financial intermediaries’ stability in buttressing a smooth transmission of credit to borrowers. While results from the years prior to the crisis often cast doubts on the strength of the bank lending channel, recent evidence shows that bank-specific characteristics can have a large impact on the provision of credit. We show that new factors, such as changes in banks’ business models and market funding patterns, had modified the monetary transmission mechanism in Europe and in the US prior to the crisis, and demonstrate the existence of structural changes during the period of financial crisis. Banks with weaker core capital positions, greater dependence on market funding and on non-interest sources of income restricted the loan supply more strongly during the crisis period. These findings support the Basel III focus on banks’ core capital and on funding liquidity risks. They also call for a more forwardlooking approach to the statistical data coverage of the banking sector by central banks. In particular, there should be a stronger focus on monitoring those financial factors that are likely to influence the functioning of the monetary transmission mechanism particularly in a period of crisis. JEL Classification: E51, E52, E44. |
| Keywords: | bank lending channel, monetary policy, financial innovation. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111335&r=cba |
| By: | James P Walsh |
| Abstract: | Food prices are generally excluded from measures of inflation most closely watched by policymakers due either to their transitory nature or their higher volatility. However, in lower income countries, food price inflation is not only more volatile but also on average higher than nonfood inflation. Food inflation is also in many cases more persistent than nonfood inflation, and shocks in many countries are propagated strongly into nonfood inflation. Under these conditions, and particularly given high global commodity price inflation in recent years, a policy focus on measures of core inflation that exclude food prices can misspecify inflation, leading to higher inflationary expectations, a downward bias to forecasts of future inflation and lags in policy responses. In constructing measures of core inflation, policymakers should therefore not assume that excluding food price inflation will provide a clearer picture of underlying inflation trends than headline inflation. |
| Keywords: | Agricultural commodities , Commodity price fluctuations , Consumer price indexes , External shocks , Inflation , Low-income developing countries , Prices , |
| Date: | 2011–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/71&r=cba |
| By: | Troy Matheson |
| Abstract: | Financial conditions indexes are developed for the United States and euro area using a wide range of financial indicators and a dynamic factor model. The financial conditions indexes are shown to be useful for forecasting economic activity and have good revision properties. |
| Keywords: | Economic conditions , Economic forecasting , Euro Area , Forecasting models , United States , |
| Date: | 2011–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/93&r=cba |
| By: | M. Ayhan Kose; Stijn Claessens; Marco Terrones |
| Abstract: | This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy. |
| Keywords: | Business cycles , Economic models , Economic recession , Economic recovery , Financial sector , Fiscal policy , Monetary policy , |
| Date: | 2011–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/88&r=cba |
| By: | Sandra Gomes; P. Jacquinot; M. Mohr; M. Pisani |
| Abstract: | We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating a large scale 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: | C53 E52 F47 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201113&r=cba |
| By: | Kurt Mitman (Department of Economics, University of Pennsylvania); Stanislav Rabinovich (Department of Economics, University of Pennsylvania) |
| Abstract: | We study the optimal provision of unemployment insurance (UI) over the business cycle. We consider an equilibrium Mortensen-Pissarides search and matching model with risk-averse workers and aggregate shocks to labor productivity. Both the vacancy creation decisions of firms and the search effort decisions of workers respond endogenously to aggregate shocks as well as to changes in UI policy. We characterize the optimal history-dependent UI policy. We find that, all else equal, the optimal benefit is decreasing in current productivity and decreasing in current unemployment. Optimal benefits are therefore lowest when current productivity is high and current unemployment is high. The optimal path of benefits reacts non-monotonically to a productivity shock. Following a drop in productivity, benefits initially rise in order to provide short-run relief to the unemployed and stabilize wages, but then fall significantly below their pre-recession level, in order to speed up the subsequent recovery. Under the optimal policy, the path of benefits is pro-cyclical overall. As compared to the existing US UI system, the optimal history-dependent benefits smooth cyclical fluctuations in unemployment and deliver non-negligible welfare gains. |
| Keywords: | Unemployment Insurance, Business Cycles, Optimal Policy, Search and Matching |
| JEL: | E24 E32 H21 J65 |
| Date: | 2011–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-010&r=cba |
| By: | Elena, Gerko; Kirill, Sossounov |
| Abstract: | The eects of positive trend inflation is analyzed in the framework of the standard New-Keynesian model with Calvo price setting and capital accumulation. It is build on the work of Duport (2001) and Ascari and Ropele (2007) who separately considered eects of capital accumulation and trend inflation in the similar context. It is shown that the simultaneous presence of positive inflation and capital accumulation greatly aects determinacy property of equilibrium in this setup. Namely, in order to maintain stability in addition to actively react to inflation monetary authorities should react to output uctuations but not to a great extend. Overreaction to output may lead to indeterminacy. We also show that for a large set of plausible parameters standard Taylor rule leads to indeterminacy. Alternative monetary policy rules are also analyzed. |
| Keywords: | Indeterminacy Interest rate policy rule |
| JEL: | E32 E58 E52 |
| Date: | 2011–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30551&r=cba |
| By: | Dan Luo (University of Nottingham); Iris Biefang-Frisancho Mariscal (University of the West of England); Peter Howells (University of the West of England) |
| Abstract: | We use vector autoregressive models to estimate the effect of monetary policy on investors’ risk aversion. The latter is proxied by a variety of option based implied volatility indices for Germany and the UK. There is clear evidence of a procyclical response between monetary policy and risk aversion. Monetary policy shocks affect UK investors risk attitude for longer periods, while they have a stronger impact on German investors for a shorter period of time. There is also evidence that the Bank of England reacts to increases in risk aversion with expansionary monetary policy. In contrast, the ECB appears to tighten monetary policy, although this result may be explained by the ECB making policy decisions for a group of countries. These results are robust w.r.t. to the various risk aversion and monetary policy stance proxies. |
| Keywords: | Monetary policy, Risk aversion, impulse responses |
| JEL: | G12 E43 E44 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:1107&r=cba |
| By: | Iva Petrova; Emanuele Baldacci; James McHugh |
| Abstract: | This paper proposes a set of fiscal indicators to assess rollover risks using the conceptual framework developed by Cottarelli (2011). These indicators provide early warning signals about the manifestation of these risks, giving policymakers the opportunity to adjust policies before extreme fiscal stress events. Two aggregate indices are calculated: an index of fiscal vulnerability and an index of fiscal stress. Results show that both indices are elevated for advanced economies, reflecting unfavorable medium-term debt dynamics and aging-related spending pressures. In emerging economies, solvency risks are lower, but the composition of public debt remains a source of risk and the fiscal position is weaker than before the crisis. |
| Keywords: | Developed countries , Fiscal policy , Fiscal risk , Fiscal sustainability , Public debt , |
| Date: | 2011–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/94&r=cba |
| By: | Lopez, C.; Papell, David H. |
| Abstract: | We study the behavior of inflation rates among the 12 initial Euro countries in order to test whether and when the group convergence initially dictated by the Maastricht treaty and now by the ECB, occurs. We also assess the impact of events such as the advent of the Euro and the 2008 financial crisis. Due to the small size of the estimation sample, we propose a new procedure that increases the power of panel unit root tests when used to study group-wise convergence. Applying this new procedure to Euro area inflation, we find strong and lasting evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency. After the 2008 crisis, Euro area inflation rates follow the ECB’s price stability benchmark, although Greece reports relatively higher inflation. |
| Keywords: | groupwise convergence, inflation, Euro area, 2008 crisis. |
| JEL: | C32 E31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:326&r=cba |
| By: | ZHELOBODKO, Evgeny (Novosibirsk State University, Russia); KOKOVIN, Sergey (Novosibirsk State University and Sobolev Institute of Mathematics, Russia); PARENTI, Mathieu (Université Paris 1 and PSE, France); THISSE, Jean - François (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; Paris School of Economics and CEPR) |
| Abstract: | We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium using the concept of Relative Love for Variety. When the RLV increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The CES is a borderline case. We extend our setting to heterogeneous firms and show that the cutoff cost decreases (increases) when the RLV increases (decreases). Last, we study how combining vertical, horizontal and cost heterogeneity affects our results. |
| Keywords: | monopolistic competition, additive preferences, love for variety, heterogeneous firms |
| JEL: | D43 F12 L13 |
| Date: | 2011–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2011010&r=cba |
| By: | Oscar Pavlov; Mark Weder |
| Abstract: | Countercyclical markups are a key transmission mechanism in many endogenous business cycle models. Yet, recent findings suggest that aggregate markups in the US are procyclical. The current model addresses this issue. It extends Gall's (1994) composition of aggregate demand model by endogenous entry and exit of firms and by product variety effects. Endogenous business cycles emerge with procyclical markups that are within empirically plausible ranges. |
| Keywords: | Sunspot equilibria, Indeterminacy, Markups, Variety effects, Business cycles. |
| JEL: | E32 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1106&r=cba |
| By: | Oscar Pavlov (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide) |
| Abstract: | Countercyclical markups are a key transmission mechanism in many endogenous business cycle models. Yet, recent findings suggest that aggregate markups in the US are procyclical. The current model adresses this issue. It extends Gali's (1994) composition of aggregate demand model by endogenous entry and exit of firms and by product variety effects. Endogenous business cycles emerge with procyclical markups that are within empirically plausible ranges. |
| Keywords: | sunspot equilibria, indeterminacy, markups, variety effects, business cycles |
| JEL: | E32 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2011-23&r=cba |
| By: | Rita Soares |
| Abstract: | In order to overcome the omitted information problem of small-scale vector autoregression (VAR) models, this study combines the VAR methodology with dynamic factor analysis and assesses the effects of monetary policy shocks in the euro area in the period during which there is a single monetary policy. Using the factor-augmented vector auto-regressive (FAVAR) approach of Bernanke et al. (2005), we summarise the information contained in a large set of macroeconomic time series with a small number of estimated factors and use them as regressors in recursive VARs to evaluate the impact of the non-systematic component of the ECB’s actions. Overall, our results suggest that the inclusion of factors in the VAR allows us to obtain a more coherent picture of the effects of monetary policy innovations, both by achieving responses easier to understand from the theoretical point of view and by increasing the precision of such responses. Moreover, this framework allows us to compute impulse-response functions for all the variables included in the panel, thereby providing a more complete and accurate depiction of the effects of policy disturbances. However, the extra information generated by the FAVAR also delivers some puzzling responses, in particular those relating to exchange rates. |
| JEL: | C32 E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201111&r=cba |
| By: | James K. Galbraith |
| Abstract: | By general agreement, the federal budget is on an "unsustainable path." Try typing the phrase into Google News: 19 of the first 20 hits refer to the federal debt. But what does this actually mean? One suspects that some who use the phrase are guided by vague fears, or even that they don't quite know what to be afraid of. Some people fear that there may come a moment when the government's bond markets would close, forcing a default or "bankruptcy." But the government controls the legal-tender currency in which its bonds are issued and can always pay its bills with cash. A more plausible worry is inflation-notably, the threat of rising energy prices in an oil-short world-alongside depreciation of the dollar, either of which would reduce the real return on government bonds. But neither oil-price inflation nor dollar devaluation constitutes default, and neither would be intrinsically "unsustainable." After a brief discussion of the major worries, Senior Scholar James Galbraith focuses on one, and only one, critical issue: the actual behavior of the public-debt-to-GDP ratio under differing economic assumptions through time. His conclusion? The CBO's assumption that the United States must offer a real interest rate on the public debt higher than the real growth rate by itself creates an unsustainability that is not otherwise there. Changing that one assumption completely alters the long-term dynamic of the public debt. By the terms of the CBO's own model, a low interest rate erases the notion that the US debt-to-GDP ratio is on an "unsustainable path." The prudent policy conclusion? Keep the projected interest rate down. Otherwise, stay cool: don't change the expected primary deficit abruptly, and allow the economy to recover through time. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:11-02&r=cba |
| By: | Kappler, Marcus; Reisen, Helmut; Schularick, Moritz; Turkisch, Edouard |
| Abstract: | In this paper we study the macroeconomic effects of large exchange rate appreciations. Using a sample of 128 countries from 1960-2008, we identify large nominal and real appreciations shocks and study their macroeconomic effects in a dummy-augmented panel autoregressive model. Our results show that an exchange rate appreciation can have strong effects on current account balances. Within three years after the appreciation event, the current account balance on average deteriorates by three percentage points of GDP. This effect occurs through a reduction of savings without a meaningful reduction in investment. Real export growth slows down substantially, while imports remain by and large unaffected. The output costs of appreciation are small and not statistically significant, indicating a shift towards domestic sources of growth. All these effects appear somewhat more pronounced in developing countries. -- |
| Keywords: | current account adjustment,global imbalances,exchange rate changes |
| JEL: | F4 F31 F32 N10 O16 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:20113&r=cba |
| By: | Rafael Romeu; Kei Kawakami |
| Abstract: | A stochastic debt forecasting framework is presented where projected debt distributions reflect both the joint realization of the fiscal policy reaction to contemporaneous stochastic macroeconomic projections, and also the second-round effects of fiscal policy on macroeconomic projections. The forecasting framework thus reflects the impact of the primary balance on the forecast of macro aggregates. Previously-developed forecasting algorithms that do not incorporate these second-round effects are shown to have systematic forecast errors. Evidence suggests that the second-round effects have statistically and economically significant impacts on the direction and dispersion of the debt-to-GDP forecasts. For example, a positive structural primary balance shock lowers the domestic real interest rate, in turn raising GDP and lowering the median debt-to-GDP projection by an additional 10 percent of GDP in the medium term relative to prior forecasting algorithms. In addition, the framework employs a new long-term (five decade) data base and accounts for parameter uncertainty, and for potentially non-normally distributed shocks. |
| Date: | 2011–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/107&r=cba |
| By: | Pål Boug, Ådne Cappelen and Anders R. Swensen (Statistics Norway) |
| Abstract: | We evaluate the empirical performance of the new Keynesian Phillips curve (NKPC) for a small open economy using cointegrated vector autoregressive models, likelihood based methods and general method of moments. Our results indicate that both baseline and hybrid versions of the NKPC as well as exact and inexact formulations of the rational expectation hypothesis are most likely at odds with Norwegian data. By way of contrast, we establish a well-specified dynamic backward-looking imperfect competition model (ICM), a model which encompasses the NKPC in-sample with a major monetary policy regime shift from exchange rate targeting to inflation targeting. We also demonstrate that the ICM model forecasts well both post-sample and during the recent financial crisis. Our findings suggest that taking account of forward-looking behaviour when modelling consumer price inflation is unnecessary to arrive at a well-specified model by econometric criteria. |
| Keywords: | The new Keynesian Phillips curve; imperfect competition model; cointegrated vector autoregressive models (CVAR); equilibrium correction models; likelihood based methods and general method of moments (GMM). |
| JEL: | C51 C52 E31 F31 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:652&r=cba |
| By: | David O Coble Fernandez; Santiago Acosta Ormaechea |
| Abstract: | The paper conducts a comparative study of the monetary policy transmission in two economies that run a well-established IT regime, Chile and New Zealand, vis-Ã -vis two economies operating under relatively newer IT regimes, and which are exposed to a significant degree of dollarization, Peru and Uruguay. It is shown that the traditional interest rate channel is effective in Chile and New Zealand. For Peru and Uruguay, the exchange rate channel is instead more relevant in the transmission of monetary policy. This latter result follows from the limited impact of the policy rate in curbing inflationary pressures in these two countries, in combination with the fact that they have a relatively large and persistent exchange rate pass through. Finally, it is shown that the on-going de-dollarization process of Peru and Uruguay has somewhat strengthened their monetary transmission through the interest rate channel. |
| Keywords: | Chile , Cross country analysis , Dollarization , Economic models , Exchange rates , Inflation targeting , Interest rates , Monetary policy , Monetary transmission mechanism , New Zealand , Peru , Uruguay , |
| Date: | 2011–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/87&r=cba |
| By: | Yulia Vymyatnina; Anna Ignatenko (St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences (RAS)) |
| Abstract: | One of the most important aims of monetary policy of the Bank of Russia is to reduce CPI inflation under simultaneous stabilization of ruble exchange rate to the major world currencies. While such task setting is obviously contradictory and requires usage of additional instrument, it is unclear whether Central bank can influence inflation processes at all. The work inquires into how inflation is influenced by credit aggregates, oil prices and exchange rate as the major factors limiting possibilities of Bank of Russia's influence on the price level. Conclusions include recommendations on monetary policy of the Bank of Russia. (in Russian) |
| Keywords: | monetary policy, inflation, Bank of Russia, oil prices, exchange rate pass through |
| JEL: | E41 |
| Date: | 2011–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:eus:wpaper:ec0311&r=cba |
| By: | Yongzheng Yang; Matt Davies; Shengzu Wang; Yiqun Wu; Jonathan C. Dunn |
| Abstract: | During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass-through and credit growth. Weak credit demand and underdeveloped financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks’ efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility. |
| Keywords: | Central banks , Cross country analysis , Demand , Exchange rate regimes , Exchange rates , Fiscal policy , Interest rates , Monetary policy , Pacific Island Countries , |
| Date: | 2011–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/96&r=cba |
| By: | Kenji Moriyama; Elif C Arbatli |
| Abstract: | This paper estimates a small open economy model for Egypt to analyze inflation, output dynamics and monetary policy during 2005-2010. The interest rate channel is found to be relatively weak in Egypt, complicating the use of interest rates as the immediate target of monetary policy. However, the paper also finds a significant level of persistence in the policy rate, making monetary policy pro-cyclical. More active use of interest rate policy, measures to improve domestic debt markets and a gradual move towards inflation targeting can help support a successful disinflation strategy for Egypt. |
| Date: | 2011–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/108&r=cba |
| By: | Shanaka J. Peiris; Rahul Anand; Ding Ding |
| Abstract: | This paper develops a practical model-based forecasting and policy analysis system (FPAS) to support a transition to an inflation forecast targeting regime in Sri Lanka. The FPAS model provides a relatively good forecast for inflation and a framework to evaluate policy trade-offs. The model simulations suggest that an open-economy inflation targeting rule can reduce macroeconomic volatility and anchor inflationary expectations given the size and type of shocks faced by the economy. Sri Lanka could aim to target a broad inflation range initially due to its susceptibility supply-side shocks while enhancing exchange rate flexibility and strengthening the effectiveness of monetary policy in the transition to an inflation forecast targeting regime. |
| Keywords: | Central banks , Forecasting models , Inflation targeting , Monetary policy , Sri Lanka , |
| Date: | 2011–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/81&r=cba |