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on Central Banking |
| By: | Christiano, Lawrence (Northwestern University; National Bureau of Economic Research); Ilut, Cosmin (Duke University); Motto, Roberto (European Central Bank); Rostagno, Massimo (European Central Bank) |
| Abstract: | Historical data and model simulations support the following conclusion. Inflation is low during stock market booms, so that an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare-reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices. |
| Keywords: | inflation targeting, sticky prices, sticky wages, stock price boom, DSGE model, New Keynesian model, news, interest rate rule |
| JEL: | E42 E58 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2011-005&r=cba |
| By: | Laurence M. Ball; 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. |
| JEL: | E31 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17044&r=cba |
| By: | Alberto Musso (European Central Bank); Stefano Neri (Banca d’Italia); Livio Stracca (European Central Bank) |
| Abstract: | This paper provides a systematic empirical analysis of the role of the housing market in the macroeconomy in the U.S. and the euro area. First, it establishes some stylised facts concerning key variables in the housing market on the two sides of the Atlantic, such as real house prices, residential investment and mortgage debt. It then presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the effects of monetary policy, credit supply and housing demand shocks on the housing market and the broader economy. The analysis shows that similarities outweigh differences as far as the housing market is concerned. The empirical evidence suggests a stronger role for housing in the transmission of monetary policy shocks in the U.S. The evidence is less clear-cut for housing demand shocks. Finally, credit supply shocks seem to matter more in the euro area. |
| Keywords: | residential investment, house prices, credit, monetary policy |
| JEL: | E22 E44 E52 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_807_11&r=cba |
| By: | Robert Kollmann; Stefan Zeugner |
| Abstract: | This paper explores the link between the leverage of the US financial sector, of households and non-financial businesses, and real activity. We document that leverage is negatively correlated with the future growth of real activity, and positively linked to the conditional volatility of future real activity and of equity returns. The joint information in sectoral leverage series is more relevant for predicting future real activity than the information contained in any individual leverage series. Using in-sample regressions and out-of sample forecasts, we show that the predictive power of leverage is roughly comparable to that of macro and financial variables commonly used by forecasters. Leverage information would not have allowed to predict thr "Great Recession" of 2008-2009 any better than macro/financial predictors. |
| Keywords: | Leverage; Financial crisis; Forecasts; Real activity; Volatility |
| JEL: | E32 E37 C53 G20 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/85421&r=cba |
| By: | Marcin Kolasa (National Bank of Poland and Warsaw School of Economics.); Giovanni Lombardo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement. JEL Classification: E52, E61, E44, F36, F41. |
| Keywords: | financial frictions, open economy, optimal monetary policy. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111338&r=cba |
| By: | Martin D. D. Evans (Georgetown University and NBER); Dagfinn Rime (Norges Bank (Central Bank of Norway)) |
| Abstract: | Micro-based exchange-rate research examines the determination and behavior of spot exchange rates in an environment that replicates the key features of trading in the foreign exchange (FX) market. Traditional macro exchange-rate models play little attention to how trading in the FX market actually takes place. The implicit assumption is that the details of trading are unimportant for the behavior of exchange rates over months, quarters or longer. Micro-based models, by contrast, examine how information relevant to the pricing of FX becomes reflected in the spot exchange rate via the trading process. According to this view, trading is not an ancillary market activity that can be ignored when considering exchange-rate behavior. Rather, trading is an integral part of the process through which spot rates are determined and evolve. The past decade of micro-based research has uncovered a robust and strong empirical relation between exchange rates and measures of FX trading activity. One measure in particular, order flow (i.e., the net of buyer- and seller-initiated FX trades) appears as the proximate driver of exchange-rate changes over horizons ranging from a few minutes to a few months. This finding supports the view that trading is an integral part of exchange-rate determination. It also stands in stark contrast to the well-known deficiencies of macro models in accounting for exchange-rate variations over horizons shorter than a couple of years. In this paper we provide an overview of micro-based research on exchange-rate determination. We survey both models focusing on partial equilibrium, the traditional domain of microstructure research, and recent research that focuses on the link between currency trading and macroeconomic conditions in the general equilibrium setting of modern macroeconomic models. We believe micro-based research is making some progress towards understanding the links between macroeconomic conditions and the behavior of exchange rates over macro- and policy-relevant horizons. |
| Keywords: | Keywords: Exchange rate dynamics, Microstructure, Order flow |
| JEL: | F3 F4 G1 |
| Date: | 2011–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2011_05&r=cba |
| By: | Richard Barrett; Ioanna Kokores; Somnath Sen |
| Abstract: | Central banks, in executing monetary policy, while pursuing traditional objectives, such as the control of inflation, may try also to promote financial stability. In this paper, we explore a simple monetary policy game played between the central bank and the financial sector. The central bank can be of two types, one traditional and the other concerned with controlling the financial markets; however, the financial sector is unsure which, due to incomplete information. The conclusion of the paper is that for small shocks to inflation there is a pooling equilibrium, whereas for larger shocks there is separation. In the latter case, central bank concern for the stability of the financial sector is outed. We conclude by relating our results to the recent worldwide financial crisis. |
| Keywords: | Monetary policy, central bank, financial stability, strategic behaviour, incomplete information |
| JEL: | E44 E52 E58 E61 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:11-10&r=cba |
| By: | Rüdiger Fahlenbrach; Robert Prilmeier; René M. Stulz |
| 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:nbr:nberwo:17038&r=cba |
| By: | Zheng Liu; Pengfei Wang; Tao Zha |
| Abstract: | We argue that positive co-movements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the co-movements by incorporating two key features into a DSGE model: We introduce land as a collateral asset in firms' credit constraints and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment. |
| JEL: | E21 E27 E32 E44 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17045&r=cba |
| By: | Kajuth, Florian; Schmidt, Tobias |
| Abstract: | The contribution of this paper is to offer a rationale for the observed seasonal pattern in house prices. We first document seasonality in house prices for the US and the UK using formal statistical tests and illustrate its quantitative importance. In the second part of the paper we employ a standard model of dynamic optimisation with housing demand and seasonal shocks in non-durables in order to characterise seasonality in house prices as an equilibrium outcome. We provide empirical evidence for seasonality in house prices with our small model using US and UK data. -- |
| Keywords: | house prices,seasonality,optimal housing consumption |
| JEL: | D91 R21 R31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201108&r=cba |
| By: | Sergio Santoro (Bank of Italy) |
| Abstract: | We study an endowment economy with complete markets and heterogeneous agents who do not have rational expectations, but form their beliefs using adaptive learning algorithms that may differ from one individual to another. We show that market completeness allows agents to smooth consumption across states of nature, but not across time, and that the initial wealth distribution is not enough to pin down the long-run equilibrium. Consequently, initial differences in beliefs create persistent consumption imbalances that are not grounded in fundamentals. In some cases these imbalances are eventually unsustainable: the debt of one of the agents would grow without bounds, and binding borrowing limits are necessary to prevent Ponzi schemes. Finally, we find that our slight departure from rational expectations affects efficiency properties of the competitive equilibrium: if the social welfare function attaches fixed Pareto weights to the different individuals, there are configurations of individual expectations under which society is better off with financial autarky than with complete markets. The first best can be restored by introducing a distortionary tax on borrowing, which transfers consumption from the more optimistic agent to the other. |
| Keywords: | learning, heterogeneous agents, complete markets |
| JEL: | C62 D83 D84 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_806_11&r=cba |
| By: | Ryo Jinnai |
| Abstract: | This paper presents a model in which improvement in the future TFP is, on impact, associated with increases in consumption, stock prices, and real wages, and decreases in GDP, investment, hours worked, and inflation. These predictions are consistent with empirical findings of Barsky and Sims. The model features research and development, sticky nominal wages, and the monetary authority responding to inflation and consumption growth. The proposed policy rule fits the actual Federal Funds rate as closely as an alternative policy rule responding to inflation and GDP growth, and is better at reducing distortion due to the nominal wage stickiness. |
| Keywords: | news shock, R&D, inflation, sticky wages, monetary policy |
| JEL: | E00 E30 E52 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd10-173&r=cba |
| By: | Blix Grimaldi, Marianna (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | While knowing there is a financial distress 'when you see it' might be true, it is not particularly helpful. Indeed, central banks have an interest in understanding more systematically how their communication affects the markets, not least in order to avoid unnecessary volatility; the markets for their part have an interest in better deciphering the message of central banks, especially of course with regard to the conduct of future monetary policy. In this paper we use a novel approach rooted in textual analysis to begin to address these issues. Building on previous work from textual analysis, we are able to use quantitative methods to help identify and measure financial stress. We apply the techniques to the European Central Banks Monthly Bulletin and show that the results give a much more complete and nuanced picture of market distress than those based only on market data and may help improve how the Central Banks communication is designed and understood. |
| Keywords: | Financial stress; central bank communication; textual analysis; logit distribution |
| JEL: | E50 E58 G10 |
| Date: | 2011–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0252&r=cba |
| By: | Kobayashi, Keiichiro |
| Abstract: | To analyze the macroeconomic consequences of a systemic bank run, we integrate the banking model `a la Diamond and Rajan (2001a) into a simplified version of an infinite-horizon neoclassical growth model. The banking sector intermediates the collateral-secured loans from households to entrepreneurs. The entrepreneurs also deposit their working capital in the banks. The systemic bank run, which is a sunspot phenomenon in this model, results in a deep recession through causing a sudden shortage of the working capital. We show that an increase in the probability of occurrence of the systemic run can persistently lower output, consumption, labor, capital and the asset price, even if the systemic run does not actually occur. This result implies that the slowdown of economic growth after the financial crises may be caused by the increased fragility of the banking system or the raised fears of recurrence of the systemic runs. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hit:piecis:515&r=cba |
| By: | Adolfson, Malin (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Division of International Finance) |
| Abstract: | In this paper, we use Monte Carlo methods to study the small sample properties of the classical maximum likelihood (ML) estimator in artificial samples generated by the New- Keynesian open economy DSGE model estimated by Adolfson et al. (2008) with Bayesian techniques. While asymptotic identification tests show that some of the parameters are weakly identified in the model and by the set of observable variables we consider, we document that ML is unbiased and has low MSE for many key parameters if a suitable set of observable variables are included in the estimation. These findings suggest that we can learn a lot about many of the parameters by confronting the model with data, and hence stand in sharp contrast to the conclusions drawn by Canova and Sala (2009) and Iskrev (2008). Encouraged by our results, we estimate the model using classical techniques on actual data, where we use a new simulation based approach to compute the uncertainty bands for the parameters. From a classical viewpoint, ML estimation leads to a significant improvement in fit relative to the log-likelihood computed with the Bayesian posterior median parameters, but at the expense of some the ML estimates being implausible from a microeconomic viewpoint. We interpret these results to imply that the model at hand suffers from a substantial degree of model misspecification. This interpretation is supported by the DSGE-VAR() analysis in Adolfson et al. (2008). Accordingly, we conclude that problems with model misspecification, and not primarily weak identification, is the main challenge ahead in developing quantitative macromodels for policy analysis. |
| Keywords: | Identification; Bayesian estimation; Monte-Carlo methods; Maximum Likelihood estimation; New-Keynesian DSGE Model; Open economy. |
| JEL: | C13 C51 E30 |
| Date: | 2011–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0251&r=cba |
| By: | Michał Brzoza-Brzezina (National Bank of Poland, Economic Institute); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Economic Institute; Warsaw School of Economics) |
| Abstract: | In this paper we compare two standard extensions to the New Keynesian model featuring financial frictions. The first model, originating from Kiyotaki and Moore (1997), is based on collateral constraints. The second, developed by Carlstrom and Fuerst (1997) and Bernanke et al. (1999), accentuates the role of external finance premia. Our goal is to compare the workings of the two setups. Towards this end, we tweak the models and calibrate them in a way that allows for both qualitative and quantitative comparisons. Next, we make a thorough analysis of the two frameworks using moment matching, impulse response analysis and business cycle accounting. Overall, we find that the business cycle properties of the external finance premium framework are more in line with empirical evidence. In particular, the collateral constraint model fails to generate hump-shaped impulse responses and, for some important variables, shows moments that are inconsistent with the data by a large margin. |
| Keywords: | financial frictions, DSGE models, business cycle accounting |
| JEL: | E30 E44 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:80&r=cba |
| By: | Regassa Senbeta S. |
| Abstract: | Firms in many low income countries depend entirely on imported capital and intermediate inputs. As a result, in these countries economic activity is considerably in?uenced by the capacity of the economy to import these inputs which, in turn, depends on the availability and cost of foreign exchange. In this study we introduce foreign exchange availability as an additional constraint faced by ?rms into an otherwise standard small open economy New Keynesian DSGE model. The model is then calibrated for a typical Sub Saharan African economy and the behaviour of the model in response to both domestic and external shocks is compared with the standard model. The impulse response functions of the two models are the same qualitatively for most of the variables though the model with foreign exchange constraint generates more variability in most of the variables than the standard model. This behaviour of the model with foreign exchange constraint is consistent with the stylized facts of low income countries. Furthermore, for variables for which the two models have di¤erent impulse response functions, the model with foreing exchange constraint is both theoretically consistent and matches the stylized facts. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2011004&r=cba |
| By: | Graham, Liam (University College London); Snower, Dennis J. (Kiel Institute for the World Economy) |
| Abstract: | The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al (2003) uses a richer model but still finds deflation optimal. In an otherwise standard new Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations. |
| Keywords: | optimal monetary policy, inflation targeting, unemployment, Phillips curve, nominal inertia, monetary policy |
| JEL: | E20 E40 E50 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5694&r=cba |
| By: | Alessandro Flamini (Department of Economics, The University of Sheffield) |
| Abstract: | In a two-sector New-Keynesian model, this paper shows that the dispersion in the degree of sectoral price stickiness plays a key role in the determination of the dynamics of aggregate inflation and, consequently, of the whole economy. The dispersion in price stickiness reduces the persistence of inflation and, to a smaller extent, of the interest rate. It also reduces the volatility of inflation, the interest rate and the output-gap. Thus two economies with the same average degree of price stickiness but a different variance may behave very differently, highlighting the relevance of sectoral data for economic estimations and forecasts. |
| Keywords: | Sectoral asymmetries, price stickiness, New Keynesian model, persistence, volatility. |
| JEL: | E31 E32 E37 E52 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2011013&r=cba |
| By: | Ignacio Monzon; Michael Rapp |
| Abstract: | Observational learning is typically examined when agents have precise information about their position in the sequence of play. We present a model in which agents are uncertain about their positions. Agents are allowed to have arbitrary ex-ante beliefs about their positions: they may observe their position perfectly, imperfectly, or not at all. Agents sample the decisions of past individuals and receive a private signal about the state of the world. We show that social learning is robust to position uncertainty. Under any sampling rule satisfying a stationarity assumption, learning is complete if signal strength is unbounded. In cases with bounded signal strength, we show that agents achieve what we define as constrained efficient learning: individuals do at least as well as the most informed agent would do in isolation. |
| Keywords: | social learning; information aggregation; herds; position uncertainty; observational learning |
| JEL: | C72 D83 D85 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:206&r=cba |
| By: | Kulish, Mariano; Jones, Callum |
| Abstract: | We write a New Keynesian model as an aggregate demand curve and an aggregate supply curve, relating inflation to output growth. The graphical representation shows how structural shocks move aggregate demand and supply simultaneously. We estimate the curves on US data from 1948 to 2010. The Great Recession in 2008-09 is explained by a collapse of aggregate demand driven by adverse preference and permanent technology shocks, and expectations of low inflation. |
| JEL: | E27 E37 E58 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:003&r=cba |
| By: | Marcos R. de Castro; Solange N. Gouvea; André Minella; Rafael C. dos Santos; Nelson F. Souza-Sobrinho |
| Abstract: | We develop and estimate a DSGE model for the Brazilian economy, to be used as part of the macroeconomic modeling framework at the Central Bank of Brazil. The model combines the building blocks of standard DSGE models (e.g., price and wage rigidities and adjustment costs) with the following features that better describe the Brazilian economy: (i) a fiscal authority pursuing an explicit target for the primary surplus; (ii) administered or regulated prices as part of consumer prices; (iii) external finance for imports, amplifying the effects of changes in external financial conditions on the economy; and (iv) imported goods used in the production function of differentiated goods. It also includes the presence of financially constrained households. We estimate the model with Bayesian techniques, using data starting in 1999, when inflation targeting was implemented. Model evaluation, based on impulse response functions, moment conditions, variance error decomposition and initial forecasting exercises, suggests that the model can be a useful tool for policy analysis and forecasting. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:239&r=cba |
| By: | Christopher Reicher |
| Abstract: | Several authors have proposed staggered wage bargaining as a way to introduce sticky wages into search and matching models while preserving individual rationality. I evaluate the quantitative implications of such an approach. I feed through a series of estimated shocks from US data into a search and matching model with sticky prices and wages. I compare the implications of how the sticky wages enter into the hiring decision, and there seems to be a tradeoff between generating business cycle volatility and matching the lack of a long-run relationship between vacancy creation and inflation. With regard to wages, the sticky wage model unconditionally does a better job at matching wages than the flexible wage model |
| Keywords: | wages, sticky prices, staggered Nash bargaining, inflation, new hires, search and matching, business cycles |
| JEL: | E24 E25 E32 J23 J31 J63 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1674&r=cba |
| By: | Ferman, Marcelo |
| Abstract: | This paper builds a dynamic stochastic general equilibrium (DSGE) model of endogenous growth that is capable of generating substantial degrees of endogenous persistence in productivity. When products go out of patent protection, the rush of entry into their production destroys incentives for process improvements. Consequently, old production processes are enshrined in industries producing non-protected products, resulting in aggregate productivity persistence. Our model also generates sizeable delayed movements in productivity in response to preference shocks, providing a form of endogenous news shock. Finally, if we calibrate our model to match a high aggregate mark-up then we can replicate the negative response of hours to a positive technology shock, even without the inclusion of any frictions. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:005&r=cba |
| By: | Shigeru Iwata; Han Li |
| Abstract: | When a certain procedure is applied to extract two component processes from a single observed process, it is necessary to impose a set of restrictions that defines two components. One popular restriction is the assumption that the shocks to the trend and cycle are orthogonal. Another is the assumption that the trend is a pure random walk process. The unobserved components (UC) model (Harvey, 1985) assumes both of the above, whereas the BN decomposition (Beveridge and Nelson, 1981) assumes only the latter. Quah (1992) investigates a broad class of decompositions by making the former assumption only. This paper provides a general framework in which alternative trend-cycle decompositions are regarded as special cases, and examines alternative decomposition schemes from the perspective of the frequency domain. We find that as long as the US GDP is concerned, the conventional UC model is inappropriate for the trend-cycle decomposition. We agree with Morley et al (2003) that the UC model is simply misspecified. However, this does not imply that the UC model that allows for the correlated shocks is a better model specification. The correlated UC model would lose many attractive features of the conventional UC model. |
| Keywords: | Beveridge-Nelson decomposition, Unobserved Component Models |
| JEL: | E44 F36 G15 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd10-171&r=cba |
| By: | MArcio Gomes Pinto Garcia (Department of Economics PUC-Rio) |
| Abstract: | Unlike common wisdom, sterilized FX purchases under inflation targeting, i.e., those that keep the interest rate at the level targeted by the central bank, generally increase aggregate demand. We resort to a simple model with a credit channel to argue that FX purchases, by funding bank credit, end up increasing aggregate and money demand, while expanding loans and reducing the loan interest rate. Therefore, restoring the interest rate to the level previous to the FX purchase may not be sufficient to avoid the expansionary effect; the new money market equilibrium, at the same interest rate, will entail a larger money supply, higher output and larger money demand. Recent Brazilian evidence is reviewed, showing that this effect may be empirically relevant. If this is the case, inflation targeters may have another reason to be concerned when conducting FX sterilized interventions, besides their high cost and controversial effectiveness in preventing nominal appreciation. FX sterilized purchases may not only fail to prevent nominal appreciation, but also boost activity and inflation, thereby appreciating the real exchange rate. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:589&r=cba |
| By: | Antoni, Espasa; Iván, Mayo |
| Abstract: | The paper is focused on providing joint consistent forecasts for an aggregate and all its components and in showing that this indirect forecast of the aggregate is at least as accurate as the direct one. The procedure developed in the paper is a disaggregated approach based on single-equation models for the components, which take into account common stable features which some components share between them. The procedure is applied to forecasting euro area, UK and US inflation and it is shown that its forecasts are significantly more accurate than the ones obtained by the direct forecast of the aggregate or by dynamic factor models. A by-product of the procedure is the classification of a large number of components by restrictions shared between them, which could be also useful in other respects, as the application of dynamic factors, the definition of intermediate aggregates or the formulation of models with unobserved components |
| Keywords: | Common trends, Common serial correlation, Inflation, Euro Area, UK, US, Cointegration, Single-equation econometric models |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws110805&r=cba |
| By: | Daisuke Nagakura |
| Abstract: | In this paper, we propose a simple methodology for investigating how shocks to trend and cycle are correlated in unidentified unobserved components models, in which the correlation is not identified. The proposed methodology is applied to U.S. and U.K. real GDP data. We find that the correlation parameters are negative for both countries. We also investigate how changing the identification restriction results in different trend and cycle estimates. |
| Keywords: | Unobserved components model, Trend, Cycle, Business Cycle Analysis |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd10-172&r=cba |
| By: | Karin Kondor; Karsten Staehr |
| Abstract: | This paper uses regression analyses to explain the different output performance in the 27 countries in the EU based on measures of their pre-existing vulnerability and resilience. Rapid financial deepening and high financial leverage, both domestically and externally, were followed by larger output losses during the crisis. The level of financial depth, on the other hand, did not affect output negatively. A large degree of trade openness was associated with weaker output performance, possibly because of falling export demand during the crisis. Finally, government deficits and debt stocks do not seem have impacted negatively on output. The Baltic States stand out as having much explanatory power in the sample due to their large output losses during the crisis. |
| Keywords: | global financial crisis, contagion, business cycles, GDP |
| JEL: | E32 F4 |
| Date: | 2011–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2011-03&r=cba |
| By: | Konstantin A. Kholodilin; Ulrich Thießen |
| Abstract: | In this paper, the extent of the shadow economy in OECD countries is investigated. The estimates of the size of the shadow economy are obtained using the panel-data techniques applied to the data on 38 OECD member states over the period 1991-2007. Our estimates tend to be somewhat lower than the alternative estimates. However, our and alternative estimates of shadow economy are quite well correlated - the corresponding correlation coefficients lie between 0.63 and 0.65. The only exception is our estimates for 2002 and those of Schneider et al. (2010) for 2002, for which a low correlation is observed. We find that the estimates of the size of the shadow economy are very sensitive to the assumption on the velocity of money circulation. It is shown that the micro- and macro-evidence are consistent at a relatively low velocity of money circulation. |
| Keywords: | shadow economy, OECD countries, panel-data estimation |
| JEL: | C51 E26 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1122&r=cba |
| By: | Martina Cecioni (Bank of Italy); Stefano Neri (Bank of Italy) |
| Abstract: | Based on a structural VAR and a dynamic general equilibrium model, we provide evidence of the changes in the monetary transmission mechanism (MTM) in the European Monetary Union after the adoption of the common currency in 1999. The estimation of a Bayesian VAR over the periods before and after 1999 suggests that the effects of a monetary policy shock on output and prices have not significantly changed over time. We claim that this cannot be the final word on the evolution of the MTM as changes in the conduct of monetary policy and the structure of the economy may have offset each other giving rise to similar responses of output and inflation to monetary policy shocks between the two periods. The estimation of a DSGE model with several real and nominal frictions over the two sub-samples shows that monetary policy has become more effective in stabilizing the economy as the result of a decrease in the degree of nominal rigidities and a shift in monetary policy towards inflation stabilization. |
| Keywords: | monetary policy, transmission mechanism, Bayesian methods |
| JEL: | E32 E37 E52 E58 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_808_11&r=cba |
| By: | Guerrazzi, Marco |
| Abstract: | This paper aims at providing a critical assessment of the new ‘Farmerian’ economics, i.e. the recent Farmer’s attempt to provide a new micro-foundation of the General Theory grounded on modern search and business cycle theories. Specifically, I develop a theoretical model that summarizes the main arguments of the suggested approach by showing that a special importance has to be attached to the search mechanism, the choice of units and ‘animal spirits’ modelling. Thereafter, referring to self-made real-business-cycle experiments, I discuss the main empirical implications of the resulting framework. Finally, I consider its policy implications by stressing the problematic nature of demand management interventions and the advisability of extending the role of the central bank in preventing financial bubbles and crashes. |
| Keywords: | Old Keynesian Economics; search; demand constrained equilibrium; Shimer puzzle; economic policy. |
| JEL: | E12 E24 |
| Date: | 2010–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30832&r=cba |
| By: | Jan Kregel |
| Abstract: | At the end of 1930, as the 1929 US stock market crash was starting to have an impact on the real economy in the form of falling commodity prices, falling output, and rising unemployment, John Maynard Keynes, in the concluding chapters of his Treatise on Money, launched a challenge to monetary authorities to take "deliberate and vigorous action" to reduce interest rates and reverse the crisis. He argues that until "extraordinary," "unorthodox" monetary policy action "has been taken along such lines as these and has failed, need we, in the light of the argument of this treatise, admit that the banking system can not, on this occasion, control the rate of investment, and, therefore, the level of prices." The "unorthodox" policies that Keynes recommends are a near-perfect description of the Japanese central bank's experiment with a zero interest rate policy (ZIRP) in the 1990s and the Federal Reserve's experiment with ZIRP, accompanied by quantitative easing (QE1 and QE2), during the recent crisis. These experiments may be considered a response to Keynes's challenge, and to provide a clear test of his belief in the power of monetary policy to counter financial crisis. That response would appear to be an unequivocal No. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:11-04&r=cba |
| By: | Klaus Schmidt-Hebbel (Catholic Universty of Chile) |
| Abstract: | Latin America's central banks were strengthened in the 1990s by independence laws, adoption of new policy regimes (foremost inflation targeting), and more transparent policy decisions bound by ex-ante rules and ex-post accountability. Central bank modernization - supported by significant fiscal adjustment and financial-sector strengthening - led most Latin American countries to converge to one-digit inflation rates and contributed to higher and more stable growth than in the past. Yet the region's new policy framework was put to severe testing by the global financial crisis and recession. Quick and innovative policy responses by the region's central banks helped domestic financial systems and the real economy to resist well the massive financial and real consequences of the banking crisis and recession in industrial countries. Empirical evidence reported here shows that the central banks' new policy framework and policy response during the crisis dampened significantly the amplitude of the recession. Having weathered well the global financial crisis and recession, now Latin America's central banks face a large array of policy challenges, which are reviewed in this lecture. Some are common to central banks in industrial and emerging economies, derived from the crisis itself and the issues it poses for improving the role of central banks in attaining more effectively both monetary and financial stability. Other challenges are idiosyncratic to emerging economies in the region (and elsewhere) that are facing renewed growth, high commodity prices, large capital inflows, and real exchange-rate appreciation. |
| Keywords: | Monetary Policy, Central Banks, Latin America |
| JEL: | E52 E58 O54 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1102&r=cba |
| By: | Fernando N. de Oliveira; Leonardo Ramos |
| Abstract: | This paper has two objectives. One is to identify non anticipated monetary shocks using future contracts of DI. The second objective is to study the relation between these shocks and the term structure of interest rate. Our empirical evidence suggests that, albeit in a partial manner, the market anticipates most interest rate decisions of the Central Bank. We also show that, in general, non anticipated monetary shocks are capable of affecting the term structure of interest rates. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:238&r=cba |
| By: | Lim, Ewe Ghee; Goh, SooKhoon |
| Abstract: | This paper examines Bank Negara Malaysia’s (BNM) monetary policy autonomy in 1991-2009, a period of volatile capital flows, during which BNM operated under several exchange regimes: managed floating; fixed exchange rates; and fixed exchange rates with selective capital controls. Using a modified version of the Brissimis, Gibson and Tsakalotos (2002) model, the paper’s empirical estimates show that the same-period offset coefficients are significantly less than unity under all regimes, indicating that the Malaysian central bank possesses some short-run control over monetary policy (even under fixed exchange rates). Although the long-run offset coefficient continues to be less than unity under managed floating, it is not significantly less than unity under fixed exchange rates. These results show that Malaysia is not exempted from the impossible trinity except in the very short-run. Perhaps one of the reasons Malaysia abandoned its US dollar exchange rate peg on 20 July 2005 to move back to managed floating is to increase its monetary policy independence. One implication of the Malaysian monetary policy experience is that managed floating with active sterilization may be a viable strategy for emerging market economies to deal with volatile capital flows. |
| Keywords: | Offset Coefficient; Sterilization Coefficient; Monetary Autonomy; Impossible Trinity |
| JEL: | F41 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30804&r=cba |
| By: | Peter Tillmann (University of Giessen) |
| Abstract: | The adoption of a credible monetary policy regime such as inflation targeting is known to reduce the persistence of inflation fluctuations. This conclusion, however, is derived from aggregate inflation or sectoral inflation rates, not from regional inflation data. This paper studies the regional dimension of inflation targeting, i.e. the consequences of inflation targeting for regional inflation persistence. Based on data for Korean cities and provinces it is shown that the adoption of inflation targeting leads (i) to a fall in inflation persistence at the regional level and (ii) to a reduction in the cross-regional heterogeneity in inflation persistence. A common factor model lends further support to the role of the common component, and hence monetary policy, for regional inflation persistence. |
| Keywords: | inflation targeting, inflation persistence, monetary policy regime, regional inflation, factor model |
| JEL: | E31 E52 R11 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201122&r=cba |
| By: | Rossini, Renzo (Central Reserve Bank of Peru); Quispe, Zenon (Central Reserve Bank of Peru); Rodriguez, Donita (Central Reserve Bank of Peru) |
| Abstract: | This article explains the main features of the sterilized intervention in the foreign exchange market and the use of non-conventional policy instruments as applied by the Central Reserve Bank of Peru in order to avoid credit booms or busts in a context of a partially dollarized financial system. This monetary policy framework is based on a risk management approach that includes as the main policy tool the short-term interest rate within an inflation targeting regime. This framework helped to reduce the impact of the recent global financial crisis on the Peruvian economy and allowed to rejoin the path of growth with low inflation, avoiding major disruptions from the surge of capital inflows. |
| Keywords: | Central banks, policy framework |
| JEL: | E52 E58 F31 F32 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2011-008&r=cba |