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on Central Banking |
| By: | Athanasios Orphanides; John Williams |
| Abstract: | What monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s? We use counterfactual simulations of an estimated model of the U.S. economy to evaluate alternative monetary policy strategies. We show that policies constructed using modern optimal control techniques aimed at stabilizing inflation, economic activity, and interest rates would have succeeded in achieving a high degree of economic stability as well as price stability only if the Federal Reserve had possessed excellent information regarding the structure of the economy or if it had acted as if it placed relatively low weight on stabilizing the real economy. Neither condition held true. We document that policymakers at the time both had an overly optimistic view of the natural rate of unemployment and put a high priority on achieving full employment. We show that in the presence of realistic informational imperfections and with an emphasis on stabilizing economic activity, an optimal control approach would have failed to keep inflation expectations well anchored, resulting in high and highly volatile inflation during the 1970s. Finally, we show that a strategy of following a robust first-difference policy rule would have been highly effective at stabilizing inflation and unemployment in the presence of informational imperfections. This robust monetary policy rule yields simulated outcomes that are close to those seen during the period of the Great Moderation starting in the mid-1980s. |
| JEL: | E52 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17080&r=cba |
| By: | James Morley; Jeremy M. Piger; Robert H. Rasche |
| Abstract: | We investigate the importance of trend inflation and the real-activity gap for explaining observed inflation variation in G7 countries since 1960. Our results are based on a bivariate unobserved-components model of inflation and unemployment in which inflation is decomposed into a stochastic trend and transitory component. As in recent implementations of the New Keynesian Phillips Curve, it is the transitory component of inflation, or “inflation gap”, that is driven by the real-activity gap, which we measure as the deviation of unemployment from its natural rate. Even when allowing for changes in the contributions of trend inflation and the inflation gap, we find that both are important determinants of inflation variation at business cycle horizons for all G7 countries throughout much of the past 50 years. Also, the real-activity gap explains a large fraction of the variation in the inflation gap for each country, both historically and in recent years. Taken together, the results suggest the New Keynesian Phillips Curve, once augmented to include trend inflation, is an empirically relevant model for the G7 countries. We also provide new estimates of trend inflation for the G7 that incorporate information in the real-activity gap for identification and, through formal model comparisons, new statistical evidence regarding structural breaks in the variability of trend inflation and the inflation gap. |
| Keywords: | Inflation (Finance) ; Phillips curve |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-011&r=cba |
| By: | Edward Nelson |
| Abstract: | This paper views the policy response to the recent financial crisis from the perspective of Milton Friedman's monetary economics. Five major aspects of the policy response are: 1) discount window lending has been provided broadly to the financial system, at rates low relative to the market rates prevailing pre-crisis; 2) the Federal Reserve's holdings of government securities have been adjusted with the aim of putting downward pressure on the path of several important interest rates relative to the path of short-term rates; 3) deposit insurance has been extended, helping to insulate the money stock from credit market disruption; 4) the commercial banking system has received assistance via a recapitalization program, while existing equity holders have borne losses; and 5) an interest-on-reserves system has been introduced. These five elements of the policy response are in keeping with those that would arise from Friedman's framework, while a number of the five depart appreciably from other prominent benchmarks (such as the Bagehot-Thornton prescription for discount rate policy, and New Keynesian approaches to stabilization policy). One notable part of the policy response, the TALF initiative, draws largely on frameworks other than Friedman's. But, in important respects, the overall monetary and financial policy response to the crisis can be viewed as Friedman's monetary economics in practice. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-26&r=cba |
| By: | N. Gregory Mankiw; Matthew C. Weinzierl |
| Abstract: | This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short run and flexible in the long run. Policy is evaluated by how well it raises the welfare of the representative household. While the model has Keynesian features, its policy prescriptions differ significantly from textbook Keynesian analysis. Moreover, the model suggests that the commonly used "bang for the buck" calculations are potentially misleading guides for the welfare effects of alternative fiscal policies. |
| JEL: | E52 E62 E63 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17029&r=cba |
| By: | Galí, Jordi; Smets, Frank; Wouters, Rafael |
| Abstract: | We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations. |
| Keywords: | Nominal rigidities; output gap; Phillips curve; unemployment fluctuations; wage markup shocks |
| JEL: | D58 E24 E31 E32 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8401&r=cba |
| By: | Claessens, Stijn; Kose, Ayhan; Terrones, Marco E |
| 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: | asset busts; booms; credit crunches; financial crises; recessions; recoveries |
| JEL: | E32 E44 E51 F42 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8396&r=cba |
| By: | Michael T. Kiley; Jae W. Sim |
| Abstract: | We develop a macroeconomic model in which the balance sheet/liquidity condition of financial institutions plays an important role in the determination of asset prices and economic activity. The financial intermediaries in our model are required to make investment commitments before a complete resolution of idiosyncratic funding risk that can be addressed only by costly refinancing, forcing them to behave in a risk-averse manner. The model shows that the balance sheet condition of intermediaries can drive asset values away from their fundamentals, causing aggregate investment and output to respond to shocks to intermediaries. We use this model to evaluate several public policies designed to address balance sheet problems at financial institutions. With regard to short-run policies, we find that capital injections conditioned upon voluntary recapitalization can be a more effective tool than direct lending/asset purchases. With regard to long-run policies, we demonstrate that higher capital requirements can have sizable short-run effects on economic activity if not implemented carefully, and that a long transition period helps avoid such effects. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-28&r=cba |
| By: | Harris Dellas (University of Bern and CEPR); George S. Tavlas (Bank of Greece) |
| Abstract: | Dooley, Folkerts-Landau and Garber (DFG) argue that the present constellation of global exchange-rate arrangements constitutes a revived Bretton-Woods system. DFG ALSO argue that the revived system will be sustainable, despite its large global imbalances. We argue that, to the extent that the present system constitutes a revived Bretton-Woods system, it is vulnerable to the same set of destabilizing forces - - including asset price bubbles and global financial crises - - that led to the breakdown of the earlier regime. |
| Keywords: | Bretton-Woods system;international liquidity;price bubbles;Markov switching model |
| JEL: | C22 F33 N10 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:122&r=cba |
| By: | Rose, Andrew K; Wieladek, Tomasz |
| Abstract: | We provide the first empirical tests for financial protectionism, defined as a nationalistic change in banks’ lending behaviour, as the result of public intervention, which leads domestic banks either to lend less or at higher interest rates to foreigners. We use a bank-level panel data set spanning all British and foreign banks providing loans within the United Kingdom between 1997Q3 and 2010Q1. During this time, a number of banks were nationalised, privatised, given unusual access to loan or credit guarantees, or received capital injections. We use standard empirical panel-data techniques to study the "loan mix," domestic (British) loans of a bank expressed as a fraction of its total loan activity. We also study effective short-term interest rates, though our data set here is much smaller. We examine the loan mix for both British and foreign banks, both before and after unusual public interventions such as nationalisations and public capital injections. We find strong evidence of financial protectionism. After nationalisations, foreign banks reduced the fraction of loans going to the UK by about eleven percentage points and increased their effective interest rates by about 70 basis points. By way of contrast, nationalised British banks did not significantly change either their loan mix or effective interest rates. Succinctly, foreign nationalised banks seem to have engaged in financial protectionism, while British nationalised banks have not. |
| Keywords: | bank; crisis; domestic; empirical; foreign; loan; nationalisation; panel; privatization |
| JEL: | F36 G21 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8404&r=cba |
| By: | Andrew K. Rose; Tomasz Wieladek |
| Abstract: | We provide the first empirical tests for financial protectionism, defined as a nationalistic change in banks’ lending behaviour, as the result of public intervention, which leads domestic banks either to lend less or at higher interest rates to foreigners. We use a bank-level panel data set spanning all British and foreign banks providing loans within the United Kingdom between 1997Q3 and 2010Q1. During this time, a number of banks were nationalised, privatised, given unusual access to loan or credit guarantees, or received capital injections. We use standard empirical panel-data techniques to study the “loan mix,” domestic (British) loans of a bank expressed as a fraction of its total loan activity. We also study effective short-term interest rates, though our data set here is much smaller. We examine the loan mix for both British and foreign banks, both before and after unusual public interventions such as nationalisations and public capital injections. We find strong evidence of financial protectionism. After nationalisations, foreign banks reduced the fraction of loans going to the UK by about eleven percentage points and increased their effective interest rates by about 70 basis points. By way of contrast, nationalised British banks did not significantly change either their loan mix or effective interest rates. Succinctly, foreign nationalised banks seem to have engaged in financial protectionism, while British nationalised banks have not. |
| JEL: | F36 G21 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17073&r=cba |
| By: | Menno Middeldorp |
| Abstract: | Over the last two decades, the Federal Open Market Committee (FOMC), the rate-setting body of the United States Federal Reserve System, has become increasingly communicative and transparent. According to policymakers, one of the goals of this shift has been to improve monetary policy predictability. Previous academic research has found that the FOMC has indeed become more predictable. Here, I contribute to the literature in two ways. First, instead of simply looking at predictability before and after the Fed’s communication reforms in the 1990s, I identify three distinct periods of reform and measure their separate contributions. Second, I correct the interest rate forecasts embedded in fed funds futures contracts for risk premiums, in order to obtain a less biased measure of predictability. My results suggest that the communication reforms of the early 1990s and the “guidance” provided from 2003 significantly improved predictability, while the release of the FOMC’s policy bias in 1999 had no measurable impact. Finally, I find that FOMC speeches and testimonies significantly lower short-term forecasting errors. |
| Keywords: | Federal Open Market Committee ; Disclosure of information ; Interest rates ; Forecasting ; Monetary policy ; Federal funds |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:491&r=cba |
| By: | Sebastian Edwards |
| Abstract: | In this paper I discuss some of the most important lessons on exchange rate policies in emerging markets during the last 35 years. The analysis is undertaken from the perspective of both the Latin American and East Asian nations. Some of the topics addressed include: the relationship between exchange rate regimes and growth, the costs of currency crises, the merits of “dollarization,” the relation between exchange rates and macroeconomic stability, monetary independence under alternative exchange rate arrangements, and the effects of the recent global “currency wars” on exchange rates in commodity exporters. |
| JEL: | F0 F31 F32 F41 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17074&r=cba |
| By: | Pfajfar, D.; Zakelj, B. (Tilburg University, Center for Economic Research) |
| Abstract: | We establish several stylized facts about the behavior of individual uncertainty and disagreement between individuals when forecasting inflation in the laboratory. Subjects correctly perceive the underlying inflation uncertainty in only 60% of cases, which can be interpreted as the overconfidence bias. Determinants of individual uncertainty, dis- agreement among forecasters and properties of aggregate distribution are analyzed. We find that the interquartile range of the aggregate distribution has the highest correlation with inflation variability; however the average confidence interval performs best in a forecasting exercise. Allowing subjects to insert asymmetric confidence intervals results in wider upper intervals than lower intervals on average, thus perceiving higher uncertainty with respect to inflation increases. In different treatments we study the influence of different monetary policy designs on the formation of confidence bounds. Inflation targeting produces lower uncertainty and higher accuracy of intervals than inflation forecast targeting. |
| Keywords: | Laboratory Experiments;Confidence Bounds;New Keynesian Model;Inflation Expectations |
| JEL: | C91 C92 E37 D80 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011053&r=cba |
| By: | Hirokazu Ishise (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: hirokazu.ishise@boj.or.jp)) |
| Abstract: | The cross-country correlations of international real business cycle models depend critically on the number of countries in the models. A positive productivity shock in one country will stimulate investment in the country that has experienced the shock, while reducing internal investment in the other countries, which will then simultaneously experience a slump. This comovement mechanism is absent in two-country models. |
| Keywords: | International Real Business Cycles, Cross-Country Correlations, Multi-Country, Country Size |
| JEL: | E32 F41 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-11&r=cba |
| By: | Jeremy J. Nalewaik |
| Abstract: | This paper presents evidence that the economic stall speed concept has some empirical content, and can be moderately useful in forecasting recessions. Specifically, output tends to transition to a slow-growth phase at the end of expansions before falling into a recession, and the paper designs Markov-switching models that behave in that way. While the switching models using output growth alone produce a considerable number of false positive recession signals, adding the slope of the yield curve, the percent change in housing starts, and the change in the unemployment rate to the model reduces false positives and improves recession forecasting. The switching model is particularly good at forecasting at long horizons, outperforming Blue Chip consensus forecasts. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-24&r=cba |
| By: | González-Aguado, Carlos; Suarez, Javier |
| Abstract: | This paper explores the effects of shifts in interest rates on corporate leverage and default. We develop a dynamic model in which the relationship between firms and their outside financiers is affected by a moral hazard problem and entrepreneurs' initial wealth is scarce. The endogenous link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee the survival of their firms. Firms start up with leverage typically higher than some state-contingent target leverage ratio, and adjust gradually to it through earnings retention. The dynamic response of leverage and default to cut and rises in interest rates is both asymmetric (since it is easier to adjust to a higher target leverage than to a lower one) and heterogeneously distributed across firms (since interest rates affect the burden of outstanding leverage, which differs across firms). We find that both interest rate rises and interest rate cuts increase the aggregate default rate in the short-run. Instead, higher rates produce lower default rates in the longer run since they induce lower target leverage across all firms. These results help rationalize some of the empirical evidence regarding the so-called risk-taking channel of monetary policy. |
| Keywords: | credit risk; firm dynamics; interest rates; search for yield; short-term debt |
| JEL: | E52 G32 G33 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8398&r=cba |
| By: | Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | Not in an estimated DSGE model of the US economy, once we account for the fact that most of the high-frequency volatility in wages appears to be due to noise, rather than to variation in workers' preferences or market power. |
| JEL: | E30 E52 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17071&r=cba |
| By: | Hansen, Stephen (Universitat Pompeu Fabra); McMahon, Michael (University of Warwick) |
| Abstract: | A large theoretical literature assumes that experts differ in terms of preferences and the distribution of their private signals, but the empirical literature to date has not separately identified them. This paper proposes a novel way of doing so by relating the probability a member chooses a particular policy decision to the prior belief that it is correct. We then apply this methodology to study differences between internal and external members on the Bank of England's Monetary Policy Committee. Using a variety of proxies for the prior, we provide evidence that they differ significantly on both dimensions. Key words: Bayesian decision making ; Committees ; Monetary policy JEL classification: D81 ; D82 ; E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:963&r=cba |
| By: | Aldo Caliari |
| Abstract: | Recent calls for more intense debate on and reforms to the international monetary system imply that the current system is unable to respond appropriately and adequately to challenges that have appeared, or become more acute, in recent years. This paper focuses on four such challenges: ensuring an orderly exit from global imbalances, facilitating more complementary adjustments between surplus and deficit countries without recessionary impacts, better supporting international trade by reducing currency volatility and better providing development and climate finance. After describing them, it proposes reforms to enable the international monetary system to better respond to these challenges. |
| Keywords: | global imbalances, current account adjustment, development finance, aggregate demand, Special Drawing Rights, international monetary system, International Monetary Fund, macroeconomic policy coordination |
| JEL: | F31 F32 F33 F42 F59 K33 O19 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:une:wpaper:104&r=cba |
| By: | R. Anton Braun; Lena Mareen Körber |
| Abstract: | Recent research has found that the dynamic properties of the New Keynesian model can be very different when the nominal interest rate is zero. Improvements in technology and reductions in the labor tax rate lower economic activity, and the size of the government purchase output multiplier can be well above one. This paper provides evidence that the focus on specifications of the New Keynesian model that produce unorthodox results in a liquidity trap may be misplaced. We show that a prototypical New Keynesian model fit to Japanese data exhibits orthodox dynamics during Japan's episode with zero interest rates. We then demonstrate that this specification is more consistent with outcomes in Japan than alternative specifications that have unorthodox properties. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2011-10&r=cba |
| By: | Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234) |
| Abstract: | The paper investigates if the most popular alternative to the purchasing parity power approach (PPP) to estimate equilibrium exchange rates, the fundamental equilibrium exchange rate (FEER) influences exchange rate dynamics in the long run. For a large panel of industrialized and emerging countries and on the period 1982-2007, we detect the presence of unit roots in the series of real effective exchange rates and in the series of FEERs. We find and estimate a cointegration relationship between real effective exchange rates and FEERs. The results show that the FEER has a positive and significant influence on exchange rate dynamics in the long run. |
| Keywords: | Fundamental equilibrium exchange rates; Panel unit root tests; Global imbalances; Fully modified ordinary least square; Dynamic ordinary least square; Pooled Mean Group |
| Date: | 2011–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cepnwp:halshs-00593674&r=cba |
| By: | Berganza, Juan Carlos (BOFIT); Broto, Carmen (BOFIT) |
| Abstract: | Emerging economies with inflation targets (IT) face a dilemma between fulflling the theoretical conditions of "strict IT", which implies a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with forex interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, forex interventions in some IT countries have been more effective in reducing volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers. |
| Keywords: | inflation targeting; exchange rate volatility; foreign exchange interventions; emerging economies |
| JEL: | E31 E42 E52 E58 F31 |
| Date: | 2011–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2011_009&r=cba |
| By: | Buch, Claudia M.; Eickmeier, Sandra; Prieto, Esteban |
| Abstract: | There is growing consensus that the conduct of monetary policy can have an impact on stability through the risk-taking incentives of banks. Falling interest rates might induce a 'search for yield' and generate incentives to invest into risky activities. This paper provides evidence on the link between monetary policy, commercial property prices, and bank risk taking. We use a factor-augmented vector autoregressive model (FAVAR) for the U.S. for the period 1997-2008. We include standard macroeconomic indicators and factors summarizing information provided in the Federal Reserve's Survey of Terms of Business Lending. These data allow modeling the reactions of banks' new lending volumes and prices as well as the riskiness of new loans. We do not find evidence for increased risk taking for the entire banking system after a monetary policy loosening or an unexpected increase in property prices. This masks, however, important differences across banking groups. Small domestic banks increase their exposure to risk, foreign banks lower risk, and large domestic banks do not change their risk exposure. -- |
| Keywords: | FAVAR,bank risk taking,macro-finance linkages,monetary policy,commercial property prices |
| JEL: | E44 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201110&r=cba |
| By: | George-Marios Angeletos; Jennifer La'O |
| Abstract: | We consider a class of convex, competitive, neoclassical economies in which agents are rational; the equilibrium is unique; there is no room for randomization devices; and there are no shocks to preferences, technologies, endowments, or other fundamentals. In short, we rule out every known source of macroeconomic volatility. And yet, we show that these economies can be ridden with large and persistent fluctuations in equilibrium allocations and prices. These fluctuations emerge because decentralized trading impedes communication and, in so doing, opens the door to self-fulfilling beliefs despite the uniqueness of the equilibrium. In line with Keynesian thinking, these fluctuations may be attributed to “coordination failures” and “animal spirits”. They may also take the form of “fads”, or waves of optimism and pessimism that spread in the population like contagious diseases. Yet, these ostensibly pathological phenomena emerge at the heart of the neoclassical paradigm and require neither a deviation from rationality, nor multiple equilibria, nor even a divergence between private and social motives. |
| JEL: | D52 D83 E32 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17060&r=cba |
| By: | Jens Ludwig; Jeffrey R. Kling; Sendhil Mullainathan |
| Abstract: | Randomized controlled trials are increasingly used to evaluate policies. How can we make these experiments as useful as possible for policy purposes? We argue greater use should be made of experiments that identify behavioral mechanisms that are central to clearly specified policy questions, what we call “mechanism experiments.” These types of experiments can be of great policy value even if the intervention that is tested (or its setting) does not correspond exactly to any realistic policy option. |
| JEL: | C93 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17062&r=cba |
| By: | Bernd Hayo (University of Marburg); Britta Niehof (University of Marburg) |
| Abstract: | This paper formally proves that Rigobon and Sack (2004)'s approach of identifying monetary policy shocks through heteroscedasticity can be extended to a multimarket and multicountry framework. Applying our multivariate framework allows deriving consistent estimators of monetary policy effects. The advantage of our extended approach is illustrated by applying it to European nancial markets. We analyse monetary policy actions of the European Central Bank (ECB), the Bank of England, the Swiss National Bank, and the Swedish Riksbank on major stock indices. First, in line with the Rigobon and Sack (2004) approach, we nd an increase in the variance of European stock and money market returns on days when monetary policy committee meetings are held. Second, monetary policy actions have a significant impact on nancial markets. Third, we discover that ECB monetary policy moves have spillover eects on the British and Swiss financial markets, but find no evidence of reverse causality. |
| Keywords: | Financial markets, instrumental variable estimation, identification through heteroscedasticity, spillover effects |
| JEL: | E44 E52 G15 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201124&r=cba |
| By: | Gasteiger, Emanuel |
| Abstract: | We present new results for the performance of Taylor rules in a New Keynesian model with heterogeneous expectations. Agents have either rational or adaptive expectations. We find that depending on the particular rule, expectational heterogeneity can create or increase the set of policies that leads to local explosiveness. This is a new level of destabilization compared to what is known. In addition, we demonstrate that policy inertia is an effective tool to safeguard the economy against local explosiveness. Thus, we provide a rationalization for central banks to adjust interest rates with notable inertia in response to shocks. |
| Keywords: | Monetary Policy; Taylor Rules; Heterogeneous Expectations; |
| JEL: | D84 E52 |
| Date: | 2011–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:31004&r=cba |
| By: | Galina Hale |
| Abstract: | Recent literature argues that the structure of a banking network is important for its stability. We use network analysis to formally describe bank relationships in the global banking network between 1980 and 2009 and analyze the effects of recessions and banking crises on these relationships. We construct a novel data set that builds a bank-level global network from loan-level data on syndicated loans to financial institutions. Our network consists of 7938 banking institutions from 141 countries. We find that the network became more interconnected and more asymmetric, and therefore potentially more fragile, prior to 2008, and that its expansion slowed in recent years, dramatically so during the 2008-09 crisis. We use a stylized model to describe potential effects of banking crises and recessions on bank relationships. Empirically, we find that the structure of a global banking network is not invariant to banking crises nor to recessions, especially those in the United States. While recessions appear to encourage banks to make new connections, especially on the periphery of the network, the global financial crisis of 2008-09 made banks very cautious in their lending, meaning that almost no new connections were made during the crisis, particularly in 2009. We also find that during country-specific recessions or banking crises past relationships become more important as few new relationships are formed. |
| Keywords: | Banks and banking ; Financial crises |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2011-13:x:1&r=cba |
| By: | Theoharry Grammatikos (Luxembourg School of Finance, University of Luxembourg); Robert Vermeulen (De Nederlandsche Bank, The Netherlands) |
| Abstract: | This paper tests for the transmission of the 2007-2010 financial and sovereign debt crises to fifteen EMU countries. We use daily data from 2003 to 2010 on country financial and non-financial stock market indexes. First, we find strong evidence of crisis transmission to European non-financials from US non-financials, whereas the increase in dependence of European financials on US financials is rather limited. Second, in order to test how the sovereign debt crisis affected stock market developments we split the crisis in pre- and post-Lehman sub periods. Results show that financials become significantly more dependent on changes in Greek CDS spreads after Lehman’s collapse, compared to the pre-Lehman sub period. However, this increase is not present for non-financials. Third, before the crisis euro appreciations are associated with European stock market decreases, whereas during the crisis this is reversed. Finally, the reversal in the relationship between the euro-dollar exchange rate and stock prices seems to have been triggered by Lehman’s collapse. |
| Keywords: | financial crisis, euro exchange rate, EMU, equity markets, sovereign debt |
| JEL: | F31 G15 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:10-13&r=cba |
| By: | Yuzo Honda (Kansai University); Minoru Tachibana (Osaka Prefecture University) |
| Abstract: | The Bank of Japan adopted the Quantitative Easing (QE) Policy from March 2001 to March 2006. This paper investigates whether or not this QE had an effect in stimulating real economy in Japan. The identification of policy effect in the above Japanese case enables us to evaluate indirectly the effectiveness of the non-traditional monetary policy employed by US Federal Reserve Board (FRB) or the Bank of England (BOE) just after the collapse of Lehman Brothers. We extend vector autoregression analysis by Honda, Kuroki, and Tachibana (2007, 2010; HKT), including monthly samples before and after the period of QE, but at the same time fully exploiting prior information on the structural change of operating targets of monetary policy from call rate to bank reserve during the period of QE. There are two main results. First, this paper reconfirms our qualitative findings in HKT. That is, increases in bank reserve balances boost stock prices first, and then industrial production. Secondly, an increase in bank reserve balances by 1 trillion yen led to the rise of stock prices by the range of 0.2% to 0.9%, and to the increase of industrial production by the range of 0.03% to 0.18%. Finally, FRB called their policy after the Lehman shock gcredit easingh policy, but their policy includes both aspects of credit easing and QE. The results of the present paper suggest that even the QE aspect alone of the non-traditional monetary policy by FRB or BOE should have significant stimulating policy effects. |
| Keywords: | Quantitative easing; Money injection; Portfolio rebalancing; Stock price channel; Vector autoregression |
| JEL: | E44 E52 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1118&r=cba |
| By: | Elizabeth Klee |
| Abstract: | This paper develops a theoretical model of trading in the federal funds market that captures characteristics of discount window borrowing and the federal funds market during the first year of the financial crisis, including the narrowing of the spread between the discount rate and the target rate; the increased incidence of high-rate trading; and the decline in participation in the federal funds market. The model shows that differences in stigma of borrowing from the discount window across banks can cause the federal funds rate to rise, even when the spread between the discount rate and the target rate narrows. The model is then evaluated using both aggregate and institution-level data. The data suggest that in aggregate, federal funds volume brokered at rates above the primary credit rate and discount window borrowing both increased during the first stages of the crisis. Bank-level data suggest that institutions that went to the discount window paid lower rates in the federal funds market than banks that did not. This effect became stronger as the spread between the primary credit rate and the target rate narrowed, coincident with the intensification of the financial crisis. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-23&r=cba |
| By: | Evgeny Zhelobodko (Novosibirsk State University (Russia)); Sergey Kokovin (Novosibirsk State University and Sobolev Institute of Mathematics (Russia)); Mathieu Parenti (Université de Paris 1 and PSE (France)); Jacques-François Thisse (CORE-UCLouvain (Belgium), CREA, Université du Luxembourg, 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 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:11-03&r=cba |
| By: | Emanuel Kohlscheen (Central Bank of Brazil) |
| Abstract: | This paper analyzes the citation patterns of the central banks of the 15 largest monetary areas of the world that had an active working paper series in 2010. It proceeds to construct a novel journal ranking that is more suited for monetary authorities than the academic journal rankings currently in vogue. We report individual country rankings as well as the global rankings. While important regional differences emerge, the Journal of Monetary Economics, the American Economic Review, the Journal of Money, Credit and Banking and the Journal of Finance stand out as the top outlets in the global ranking. Sweden’s Riksbanken appears to be the monetary authority that is most finely tuned with academia, followed by the European Central Bank. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:1105&r=cba |
| By: | James Laurenceson (School of Economics, The University of Queensland); Ceara Hui |
| Abstract: | The Global Financial Crisis served to refocus attention on the potential for monetary policy to exert an impact on asset prices. In turn, asset price fluctuations were shown to exert a powerful impact on the real economy. In this paper we consider these linkages in the case of China. Using SVAR modelling techniques, our results indicate that a monetary policy shock has a significant impact on asset prices, particularly share prices, and notably more so than on general goods and services prices. However, a shock to asset prices has little impact on the real economy. Policy implications are discussed. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:427&r=cba |
| By: | Fabia A. de Carvalho; Marcos Valli |
| Abstract: | This paper takes Brazilian data to an open economy DSGE model that features realistic aspects of fiscal policy in Brazil. The model incorporates primary surplus targets, cyclical expenditures and social programs in the form of public transfers, public investment and distortive taxation. We test for two competing specifications of the role of public capital in the real economy. Bayesian model comparison favors the infrastructure approach to public capital. The presence of non-Ricardian households allows fiscal policy shocks to affect real economy aggregates and distribution. The model is used to address questions regarding the effect of shocks to different fiscal policy instruments upon the business cycle. We also investigate whether recent fiscal policy in Brazil has exerted significant inflationary pressures. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:240&r=cba |
| By: | Andrés González; Lavan Mahadeva; Juan D. Prada; Diego Rodríguez |
| Abstract: | In this document we lay out the microeconomic foundations of a dynamic stochastic general equilibrium model designed to forecast and to advice monetary policy authorities in Colombia. The model is called Policy Analysis Tool Applied to Colombian Needs (PATACON). In companion documents we present other aspects of the model and its platform, including the estimation of the parameters that affect the dynamics and the impulse responses functions. |
| Date: | 2011–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:008698&r=cba |
| By: | Hernando Vargas Herrera |
| Abstract: | The role of the exchange rate and the exchange rate regime in the monetary policy decision-making process in Colombia is described. The rationale for the intervention of the Central Bank in the FX market is explained and the experience in this regard is reviewed. Special attention is given to the seemingly varying effectiveness of different types of intervention and to the challenges posed by the sterilization of purchases of foreign currency. The exchange rate regime, FX regulation and FX policy determine the resilience of the economy in the face of external shocks and allow for the possibility of countercyclical monetary policy responses. A virtuous circle is created in which the volatility present in a flexible exchange rate regime improves the conditions for the functioning of a flexible exchange rate regime. |
| Date: | 2011–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:008699&r=cba |
| By: | Harold Ngalawa; Nicola Viegi |
| Abstract: | This paper sets out to investigate the process through which monetary policy affects economic activity in Malawi. Using innovation accounting in a structural vector autoregressive model, it is established that monetary authorities in Malawi employ hybrid operating procedures and pursue both price stability and high growth and employment objectives. Two operating targets of monetary policy are identified, viz., bank rate and reserve money, and it is demonstrated that the former is a more effective measure of monetary policy than the latter. The study also illustrates that bank lending, exchange rates and aggregate money supply contain important additional information in the transmission process of monetary policy shocks in Malawi. Furthermore, it is shown that the floatation of the Malawi Kwacha in February 1994 had considerable effects on the country’s monetary transmission process. In the post-1994 period, the role of exchange rates became more conspicuous than before although its impact was weakened; and the importance of aggregate money supply and bank lending in transmitting monetary policy impulses was enhanced. Overall, the monetary transmission process evolved from a weak, blurred process to a somewhat strong, less ambiguous mechanism. |
| JEL: | E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:217&r=cba |