nep-cba New Economics Papers
on Central Banking
Issue of 2011‒06‒25
forty papers chosen by
Alexander Mihailov
University of Reading

  1. Government Policy, Credit Markets and Economic Activity By Lawrence Christiano; Daisuke Ikeda
  2. The possibility of ideological bias in structural macroeconomic models By Saint-Paul, Gilles
  3. From growth to cycles through beliefs By Christopher M. Gunn
  4. Risk, Monetary Policy and the Exchange Rate By Gianluca Benigno; Pierpaolo Benigno; Salvatore Nisticò
  5. Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach By Challe, E.; Giannitsarou, C.
  6. A General Equilibrium Model of Sovereign Default and Business Cycles By Enrique G. Mendoza; Vivian Z. Yue
  7. Estimating Dynamic Equilibrium Models using Macro and Financial Data By Bent Jesper Christensen; Olaf Posch; Michel van der Wel
  8. Productivity Shocks, Stabilization Policies and the Dynamics of Net Foreign Assets By Giorgio Di Giorgio; Salvatore Nistico'
  9. The loss from uncertainty on policy targets By Giorgio Di Giorgio; Guido Traficante
  10. What does Monetary Policy do to Long-Term Interest Rates at the Zero Lower Bound? By Jonathan H. Wright
  11. Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap By David Cook; Michael B. Devereux
  12. The Increased Importance of Asset Price Misalignments for Business Cycle Dynamics By Bask, Mikael; Madeira, João
  13. Getting Normalization Right: Dealing with ÔDimensional ConstantsÕ in Macroeconomics By Cristiano Cantore; Raffaele Paul Levine
  14. Monetary Policy, Liquidity Stress and Learning Dynamics By Stefano Marzioni
  15. An Open-model Forecast-error Taxonomy By David F. Hendry; Grayham E. Mizon
  16. Monetary Exit Strategy and Fiscal Spillovers By Jan Libich; Dat Thanh Nguyen; Petr Stehlík
  17. What is the Importance of Monetary and Fiscal Shocks in Explaining US Macroeconomic Fluctuations? By Barbara Rossi; Sarah Zubairy
  18. Systemic risk and financial development in a monetary model By Philippe Moutot
  19. Fiscal stimulus and distortionary taxation By Drautzburg, Thorsten; Uhlig, Harald
  20. Degree of Policy Precommitment in the UK: An Empirical Investigation of Monetary and Fiscal Policy Interactions By Tatiana Kirsanova; Stephanus le Roux
  21. Global Versus Local Shocks in Micro Price Dynamics By Philippe Andrade and Marios Zachariadis
  22. Equilibrium selection in a cashless economy with transaction frictions in the bond market By Marzo , Massimiliano; Zagaglia, Paolo
  23. An Estimated Fiscal Taylor Rule for the Postwar United States By Christopher Reicher
  24. Money and Inflation in the Euro Area during the Financial Crisis By Christian Dreger; Jürgen Wolters
  25. Money and inflation in the euro area during the financial crisis By Dreger, Christian; Wolters, Jürgen
  26. Global Imbalances and Imported Disinflation in the Euro Area By Barthélemy, J.; Cléaud, G.
  27. Structural Breaks in Inflation Dynamics within the European Monetary Union By Thomas Windberger; Achim Zeileis
  28. The history of interbank settlement arrangements: exploring central banks’ role in the payment system By Norman, Ben; Shaw, Rachel; Speight, George
  29. Exchange rate anchoring - Is there still a de facto US dollar standard? By Thierry Bracke; Irina Bunda
  30. Out-of-Sample Forecast Tests Robust to Window Size Choice By Barbara Rossi; Atsushi Inoue
  31. Global Crises and Equity Market Contagion By Geert Bekaert; Michael Ehrmann; Marcel Fratzscher; Arnaud J. Mehl
  32. The economics of TARGET2 balances By Ulrich Bindseil; Philipp Johann König
  33. Evaluating Individual and Mean Non-Replicable Forecasts By Chia-Lin Chang; Philip Hans Franses; Michael McAleer
  34. Can Oil Prices Forecast Exchange Rates? By Domenico Ferraro; Ken Rogoff; Barbara Rossi
  35. The role of oil prices in the euro area economy since the 1970s By Elke Hahn; Ricardo Mestre
  36. Price Setting in a Leading Swiss Online Supermarket By Martin Berka; Michael B. Devereux; Thomas Rudolph
  37. Belling the cat: Eli F. Heckscher on the gold standard as a discipline device By Fregert, Klas
  38. Irving Fisher and Price-Level Targeting in Austria: Was Silver the Answer? By Richard C.K. Burdekin; Kris James Mitchener; Marc D. Weidenmier
  40. Metas de Inflação, Crescimento e Estabilidade Macroeconômica Uma análise a partir de um modelo póskeynesianomacrodinâmico não-linear By Breno Santana Lobo; José Luis Oreiro

  1. By: Lawrence Christiano; Daisuke Ikeda
    Abstract: The US government has recently conducted large scale purchases of assets and implemented policies that reduced the cost of funds to financial institutions. Arguably these policies have helped to correct credit market dysfunctions, allowing interest rate spreads to shrink and output to begin a recovery. We study four models of financial frictions which explore di¤erent channels by which these e¤ects might have occured. Recent events have sparked a renewed interest in leverage restrictions and the consequences of bailouts of the creditors of banks with under-performing assets. We use two of our models to consider the welfare and other effects of these policies.
    JEL: E42 E58 E63
    Date: 2011–06
  2. By: Saint-Paul, Gilles (TSE)
    Date: 2011–06–08
  3. By: Christopher M. Gunn
    Abstract: I present a theoretical model where the economy endogenously adopts the technological ideas of a slowly evolving technological frontier, and show that the presence of a "technological gap" between unadopted ideas and current productivity can lead to multiple equilibria and therefore the possibility that changes in beliefs can be self-fulfilling, often referred to as sunspots. In the model these sunspots take the form of beliefs about the value of adopting the new technological ideas, and unleash both a boom in aggregate quantities as well as eventual productivity growth, increasing the value of adoption and self-confirming the beliefs. Moreover, I demonstrate that the scope for these indeterminacies is a function of the steady-state growth rate of the underlying technological frontier of ideas, and that during times of low growth in ideas, the potential for indeterminacies disappears. Under this view, technology becomes important for cycles not necessarily because of sudden shifts in the technological frontier, but rather, because it defines a technological regime for the economy such that expectations about its value can produce aggregate fluctuations where in a different regime they could not.
    Keywords: expectations-driven business cycle, sunspot, multiple equilibria, indeterminacy, technology, news shock, intangible capital, investment-specific technical change, embodied, technological transition, technological adoption.
    JEL: C62 C68 E00 E2 E3 O3 O4
    Date: 2011–06
  4. By: Gianluca Benigno; Pierpaolo Benigno; Salvatore Nisticò
    Abstract: In this research, we provide new empirical evidence on the importance of time-varying uncertainty for the exchange rate and the excess return in currency markets. Following an increase in monetary policy uncertainty, the dollar exchange rate appreciates in the medium run, while an increase in the volatility of productivity leads to a dollar depreciation. We propose a general-equilibrium theory of exchange rate determination based on the interaction between monetary policy and time-varying uncertainty aimed at understanding these regularities. In the model, the behaviour of the exchange rate following nominal and real volatility shocks is consistent with the empirical evidence. Furthermore we show that risk factors and interest-rate smoothing are important in accounting for the negative coefficient in the UIP regression.
    JEL: E0 E43 E52 F3 F31 F41
    Date: 2011–06
  5. By: Challe, E.; Giannitsarou, C.
    Abstract: Recent empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on stock prices: a 25-basis point increase in the Fed funds rate is associated with an immediate decrease in broad stock indices that may range from 0.5 to 2.3 percent, followed by a gradual decay as stock prices revert towards their long-run expected value. In this paper, we assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. The model we consider allows for staggered price and wage setting, as well as time-varying risk aversion through habit formation. We find that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our findings are robust to a range of variations and parameterizations of the model.
    Keywords: Monetary policy; Asset prices; New Keynesian general equilibrium model.
    JEL: E31 E52 G12
    Date: 2011
  6. By: Enrique G. Mendoza; Vivian Z. Yue
    Abstract: Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-hoc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around defaults, countercyclical spreads, high debt ratios, and key business cycle moments.
    JEL: E32 E44 F32 F34
    Date: 2011–06
  7. By: Bent Jesper Christensen (Aarhus University and CREATES); Olaf Posch (Aarhus University and CREATES); Michel van der Wel (Erasmus University Rotterdam and CREATES)
    Abstract: We show that including financial market data at daily frequency, along with macro series at standard lower frequency, facilitates statistical inference on structural parameters in dynamic equilibrium models. Our continuous-time formulation conveniently accounts for the difference in observation frequency. We suggest two approaches for the estimation of structural parameters. The first is a simple regression-based procedure for estimation of the reduced-form parameters of the model, combined with a minimum-distance method for identifying the structural parameters. The second approach uses martingale estimating functions to estimate the structural parameters directly through a non-linear optimization scheme. We illustrate both approaches by estimating the stochastic AK model with mean-reverting spot interest rates. We also provide Monte Carlo evidence on the small sample behavior of the estimators and estimate the model using 20 years of U.S. macro and financial data.
    Keywords: Structural estimation, AK-Vasicek model, Martingale estimating function
    JEL: C13 E32 O40
    Date: 2011–06–09
  8. By: Giorgio Di Giorgio (LUISS Guido Carli University); Salvatore Nistico' (La Sapienza University of Rome and LUISS Guido Carli University)
    Keywords: Fiscal Deficit, Net Foreign Assets, DSGE Models, Monetary and Fiscal Policy.
    JEL: E43 E44 E52 E58
    Date: 2011
  9. By: Giorgio Di Giorgio (LUISS Guido Carli University); Guido Traficante (Universita' Europea di Roma and LUISS Guido Carli University)
    Abstract: What is the welfare loss arising from uncertainty about true policy targets? We quantify these effects in a DSGE model where private agents are unable to distinguish between temporary shocks to potential output and to the inßation target. Agents use optimal Þltering techniques to construct estimates of the unknown variables. We Þnd that the welfare costs of not observing the inßation target and potential output are relevant even in the case of a small measurement error. We also show that, in our framework, uncertainty about the inßation target is more costly than uncertainty about potential output.
    Keywords: Monetary Policy, Kalman Filter, Potential Output.
    JEL: E5 E37 E52 E58
    Date: 2011
  10. By: Jonathan H. Wright
    Abstract: The federal funds rate has been stuck at the zero bound for over two years and the Fed has turned to unconventional monetary policies, such as large scale asset purchases to provide stimulus to the economy. This paper uses a structural VAR with daily data to identify the effects of monetary policy shocks on various longer-term interest rates during this period. The VAR is identified using the assumption that monetary policy shocks are heteroskedastic: monetary policy shocks have especially high variance on days of FOMC meetings and certain speeches, while there is nothing unusual about these days from the perspective of any other shocks to the economy. A complementary high-frequency event-study approach is also used. I find that stimulative monetary policy shocks lower Treasury and corporate bond yields, but the effects die off fairly fast, with an estimated half-life of about two months.
    JEL: C22 E43 E58
    Date: 2011–06
  11. By: David Cook; Michael B. Devereux
    Abstract: With integrated trade and financial markets, a collapse in aggregate demand in a large country can cause ‘natural real interest rates’ to fall below zero in all countries, giving rise to a global ‘liquidity trap’. This paper explores the policy choices that maximize the joint welfare of all countries following such a shock, when governments cooperate on both fiscal and monetary policy. Adjusting to a large negative demand shock requires raising world aggregate demand, as well as redirecting demand towards the source (home) country. The key feature of demand shocks in a liquidity trap is that relative prices respond perversely. A negative shock causes an appreciation of the home terms of trade, exacerbating the slump in the home country. At the zero bound, the home country cannot counter this shock. Because of this, it may be optimal for the foreign policy-maker to raise interest rates. Strikingly, the foreign country may choose to have a positive policy interest rate, even though its ‘natural real interest rate’ is below zero. A combination of relatively tight monetary policy in the foreign country combined with substantial fiscal expansion in the home country achieves the level and composition of world expenditure that maximizes the joint welfare of the home and foreign country. Thus, in response to conditions generating a global liquidity trap, there is a critical mutual interaction between monetary and fiscal policy.
    JEL: E5 F41 F42
    Date: 2011–06
  12. By: Bask, Mikael (Department of Economics); Madeira, João (University of Exeter Business School)
    Abstract: We outline a dynamic stochastic general equilibrium (DSGE) model with trend extrapolation in asset pricing that we fit to quarterly U.S. macroeconomic time series with Bayesian techniques. To be more precise, we modify the DSGE model in Smets and Wouters (2007) by incorporating asset traders who use a mix of fundamental analysis and trend extrapolation in asset pricing. We conclude that trend extrapolation in asset pricing is quantitatively relevant, statistically significant and results in a substantial improvement of the model’s fit to the data. We also find that the strength in trend extrapolation is much stronger during the Great Moderation than it was prior to this period. Moreover, allowing for asset mispricing leads to more pronounced hump-shaped dynamics of the asset price and investment. Thus, asset price misalignments should be an important ingredient in DSGE models that aim to understand business cycles dynamics in general and the interaction between the real and financial sectors in particular.
    Keywords: Asset Price Bubble; Bayesian Technique; Business Cycle; DSGE Model; Fundamental Analysis; Trend Extrapolation
    JEL: E32 E44
    Date: 2011–06–08
  13. By: Cristiano Cantore (University of Surrey); Raffaele Paul Levine (University of Surrey)
    Abstract: We contribute to a recent literature on the normalization, calibration and estimation of CES production functions. The problem arises because CES ÔshareÕ parameters are not in fact shares, but depend on underlying dimensions - they are Ôdimensional constantsÕ in other words. It follows that such parameters cannot be calibrated, nor estimated unless the choice of units is made explicit. We use an RBC model to demonstrate two equivalent solutions. The standard one expresses the production function in deviation form about some reference point, usually the steady state of the model. Our alternative, Ôre-parametrizationÕ, expresses dimensional constants in terms of a new dimensionless (share) parameter and all remaining dimensionless ones. We show that our Ôre-parametrizationÕ method is equivalent and arguably more straightforward than the standard normalization in deviation form. We then examine a similar problem of dimensional constants for CES utility functions in a two-sector model and in a small open economy model; then re-parametrization is the only solution to the problem, showing that our approach is in fact more general.
    JEL: E23 E32 E37
    Date: 2011–06
  14. By: Stefano Marzioni (LUISS Guido Carli University)
    Abstract: This paper examines the interactions between monetary policy and stability of interbank money markets. After showing some empirical evidence of a central bank's concern for money market stability I derive a forward smoothing interest rate rule moving from an explicit target in terms of a liquidity stress indicator. The implications of this approach on equilibrium determinacy and learnability are analyzed. I show that equilibrium uniqueness is not necessarily compatible with equilibrium learnability, and learnability, in general, has tighter requirements than determinacy.
    Keywords: LIBOR-OIS spread, Taylor Rule, Adaptive Learning, DSGE models, Monetary Policy.
    JEL: E43 E44 E52 E58
    Date: 2011
  15. By: David F. Hendry; Grayham E. Mizon
    Abstract: We develop forecast-error taxonomies when there are unmodeled variables, forecast ‘off-line’. We establish three surprising results. Even when an open system is correctly specified in-sample with zero intercepts, despite known future values of strongly exogenous variables, changes in dynamics can induce forecast failure when they have non-zero means. The additional impact on forecast failure of incorrectly omitting such variables depends only on shifts in their means. With no such shifts, there is no reduction in forecast failure from forecasting unmodeled variables relative to omitting them in 1-step or multi-step forecasts. Simulation illustrations confirm these results.
    Keywords: Forecasting, Forecast-error taxonomies, Location shifts, Open models
    JEL: C51 C22
    Date: 2011
  16. By: Jan Libich; Dat Thanh Nguyen; Petr Stehlík
    Abstract: The paper models strategic monetary-fiscal interactions in the aftermath of the global financial crisis - in a single country as well as a monetary union. It depicts both the short- term (stabilization) perspective and the long-term (sustainability) perspective, and the link between them. This is done in a game theoretic framework that allows for revisions of actions, deterministic or stochastic. In addition, we consider incomplete information about economic conditions, and different types of government. We find that, under ambitious fiscal policies, a legislated long-term monetary commitment may: (i) reduce the risk of a double-dip recession and deflation in the short-term, and at the same time (ii) facilitate the 'exit strategy' of monetary policy, ie prevent sub-optimally high future inflation caused by fiscal spillovers. Our analysis thus implies that an explicit numerical target for average inflation may play the role of a monetary 'credibility insurance' over all phases of the business cycle, and is beneficial especially in countries facing fiscal stress.
    JEL: E52 C70
    Date: 2011–02
  17. By: Barbara Rossi; Sarah Zubairy
    Abstract: This paper analyzes the importance of monetary and fiscal policy shocks in explaining US macroeconomic fluctuations, and establishes new stylized facts. The novelty of our empirical analysis is that we jointly consider both monetary and fiscal policy, whereas the existing literature only focuses on either one or the other. Our main findings are twofold: fiscal shocks are relatively more important in explaining medium cycle fluctuations whereas monetary policy shocks are relatively more important in explaining business cycle fluctuations; and failing to recognize that both monetary and fiscal policy simultaneously affect macroeconomic variables might incorrectly attribute the fluctuations to the wrong source.
    Keywords: Monetary policy, government spending, fiscal policy, business cycle fluctuations, medium cycle
    JEL: E1 E5 E6 C5
    Date: 2011
  18. By: Philippe Moutot (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: In a stochastic pure endowment economy with money but no financial markets, two types of agents trade one non-durable good using two alternative types of cash constraints. Simulations of the corresponding variants are compared to Arrow-Debreu and Autarky equilibriums. First, this illustrates how financial innovation or financial regression, including systemic risk, may arise in a neo-classical model with rational expectations and may or may not be countered. Second, the price and money partition dynamics that the two variants generate absent any macroeconomic shock, exhibit jumps as well as fat-tails and vary depending on the discount rate. JEL Classification: E44.
    Keywords: Financial development, Systemic Risk, Heterogeneity, Rational expectations, Monetary model, Cash constraints.
    Date: 2011–06
  19. By: Drautzburg, Thorsten; Uhlig, Harald
    Abstract: We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (Smets and Wouters, 2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially. --
    Keywords: Fiscal Stimulus,New Keynesian model,liquidity trap,zero lower bound,fiscal multiplier
    JEL: E62 E63 E65 H20 H62
    Date: 2011
  20. By: Tatiana Kirsanova (Department of Economics, University of Exeter); Stephanus le Roux (Department for Work and Pensions)
    Abstract: This paper investigates the conduct of monetary and fiscal policy in the UK in the period of the Bank of England independence and before the start of the quantitative easing. Using a simple DSGE New Keynesian model of non-cooperative monetary and fiscal policy interactions under the fiscal intra-period leadership we demonstrate that the past policy in the UK is better explained as following optimal policy under discretion than under commitment. We estimate policy objectives of both policy makers, and derive implied policy rules.
    Keywords: Monetary and Fiscal Policy, Commitment, Discretion, Macroeconomic Stabilisation, Bayesian Estimation
    JEL: E52 E61 E63
    Date: 2011
  21. By: Philippe Andrade and Marios Zachariadis
    Abstract: A number of recent papers point to the importance of distinguishing between the price reaction to micro and macro shocks in order to reconcile the volatility of individual prices with the observed persistence of aggregate inflation. We emphasize instead the importance of distinguishing between global and local shocks. We exploit a panel of 276 micro price levels collected on a semi-annual frequency from 1990 to 2010 across 88 cities in 59 countries around the world, that enables us to distinguish between different types (local and global) of micro and macro shocks. The persistence associated with each of these components and its relation with volatility of the different components, provides a number of new facts. Prices respond more slowly to global shocks as compared to local ones .in particular, prices respond faster to local macro shocks than to global micro ones .implying that the relatively slow response of prices to macro shocks documented in recent studies comes from global rather than local sources. In addition, more volatility in local conditions leads to more persistent relative price distortions due to slower response of prices to global shocks, with this local -global link more than twice as large as the corresponding micro-macro link. Finally, global shocks account for half of the volatility in prices. Overall, our results imply that global shocks are important when analyzing price dynamics or assessing price-setting models.
    Keywords: global shocks, local shocks, micro shocks, macro shocks, price adjustment, micro-macro gap, price-setting models, micro prices
    Date: 2011–06
  22. By: Marzo , Massimiliano; Zagaglia, Paolo
    Abstract: The present paper introduces two bonds in a standard New-Keynesian model to study the role of segmentation in bond markets for the determinacy of rational expectations equilibria. We use a strongly-separable utility function to model 'liquid' bonds that provide transaction services for the purchase of consumption goods. 'Illiquid' bonds, instead, provide the standard services of store of value. We interpret liquid bonds as mimicking short-term instruments, and illiquid bonds to represent long-dated instruments. In this simple setting, the expectation hypothesis holds after log-linearizing the model and after pricing the bonds according to an affine scheme. We assume that monetary policy follows a standard Taylor rule. In this context, the inflation targeting parameter should be higher than one for determinacy of rational expectations equilibria to be achieved. We compute an analytical solution for the bond pricing kernel. We also show that the possibility of obtaining this analytical solution depends on the type of utility function. When utility is weakly separable between consumption and liquid bonds, the Taylor principle holds conditional to the output and inflation coefficients in the Taylor rule. Achieving solution determinacy requires constraining these coefficients within bounds that depend on the structural parameters of the model, like the intertemporal elasticity of consumption substitution.
    Keywords: term structure; determinacy; pricing kernel; fiscal and monetary policy
    JEL: E43 E63
    Date: 2011–06–05
  23. By: Christopher Reicher
    Abstract: This paper documents the systematic response of postwar U.S. fiscal policy to fiscal imbalances and the business cycle using a multivariate Fiscal Taylor Rule. Adjustments to taxes and purchases both account for a large portion of the fiscal response to debt, while authorities seem reluctant to adjust transfers. As expected, taxes are highly procyclical; purchases are acyclical; and transfers are countercyclical. Neither pattern has changed much over time, except that adjustment happens more slowly after 1981 than before 1980. The role of adjustments to purchases in stabilizing the debt indicates that the recent discussion about spending reversals is highly relevant
    Keywords: Spending reversals, Fiscal Taylor Rule, deficits, fiscal policy, taxes, spending, transfer payments
    JEL: E62 E63 H20 H62
    Date: 2011–05
  24. By: Christian Dreger; Jürgen Wolters
    Abstract: This paper explores the stability of the relation between money demand for M3 and inflation in the euro area by including the recent period of the financial crisis. Evidence is based on a cointegration analysis, where inflation and asset prices are allowed to enter the long run relationship. By restricting the cointegrating space, equations for money and inflation are identified. The results indicate that the equilibrium evolution of M3 is still in line with money demand. In the long run, inflation is affected by asset prices and detrended output. Excess liquidity plays an important role for inflation dynamics. While the hypothesis of weak exogeneity is rejected for real money balances and inflation, real income, real asset prices and the term structure do not respond to deviations from the long run equilibria. A single equation analysis derived from this system still provides reliable information for the conduct of monetary policy in real time, since the error correction terms are very similar to those obtained by the system approach. To monitor the monetary development, a single money demand equation is sufficient, at least as a rough indication.
    Keywords: Money demand, inflation, excess liquidity, cointegration analysis
    JEL: C22 C52 E41
    Date: 2011
  25. By: Dreger, Christian; Wolters, Jürgen
    Abstract: This paper explores the stability of the relation between money demand for M3 and inflation in the euro area by including the recent period of the financial crisis. Evidence is based on a cointegration analysis, where inflation and asset prices are allowed to enter the long run relationship. By restricting the cointegrating space, equations for money and inflation are identified. The results indicate that the equilibrium evolution of M3 is still in line with money demand. In the long run, inflation is affected by asset prices and detrended output. Excess liquidity plays an important role for inflation dynamics. While the hypothesis of weak exogeneity is rejected for real money balances and inflation, real income, real asset prices and the term structure do not respond to deviations from the long run equilibria. A single equation analysis derived from this system still provides reliable information for the conduct of monetary policy in real time, since the error correction terms are very similar to those obtained by the system approach. To monitor the monetary development, a single money demand equation is sufficient, at least as a rough indication. --
    Keywords: Money demand,inflation,excess liquidity,cointegration analysis
    JEL: C22 C52 E41
    Date: 2011
  26. By: Barthélemy, J.; Cléaud, G.
    Abstract: We estimate a medium-scale DSGE model for the euro area in an open economy framework. The model includes structural trends on all variables, which allow us to estimate on gross data. We first provide a theoretical balanced growth path consistent with permanent productivity shocks, inflation target changes, and permanent shocks to the openness of the economies. We then define the cycle as the gap between this sustainable trajectory and the gross data, thus our model properly deals with deviations of the trade balance. Finally, we find persistent and strong effects from the asymmetric increase of euro area imports during the last ten years on domestic inflation. From the first quarter of 2000 to the last quarter of 2008, we estimate the contribution of the imbalanced development of international trade on euro area inflation to an average of -0.7%, and on the 3-Month interest rate to an average of -1.4%.
    Keywords: Global Imbalances, Disinflation, Business Fluctuations, Open Economy Macroeconomics.
    JEL: E32 F41
    Date: 2011
  27. By: Thomas Windberger; Achim Zeileis
    Abstract: To assess the effects of the EMU on inflation rate dynamics of its member states, the inflation rate series for 21 European countries are investigated for structural changes. To capture changes in mean, variance, and skewness of inflation rates, a generalized logistic model is adopted and complemented with structural break tests and breakpoint estimation techniques. These reveal considerable differences in the patterns of inflation dynamics and the structural changes therein. Overall, there is a convergence towards a lower mean inflation rate with reduced skewness, but it is accompanied by an increase in variance.
    Keywords: inflation rate, structural break, EMU, generalized logistic distribution
    JEL: E31 C22 C52
    Date: 2011–06
  28. By: Norman, Ben (Bank of England); Shaw, Rachel (Bank of England); Speight, George (Bank of England)
    Abstract: Modern central banks have come to view payment systems as a key area of strategic interest, both as part of their responsibilities for financial stability and for the implementation of monetary policy. By considering the evolution of interbank settlement arrangements and central banking functions in the context of a number of diverse historical country case studies, this paper seeks to improve understanding of the development of, and reasons for, central banks’ current roles. Starting from a situation where the earliest banks gradually began to accept claims on each other, banks introduced a variety of innovations to clear and settle between themselves more efficiently. Focusing particularly on the lender of last resort function – a key characteristic of a central bank – this paper explores whether institutions at the centre of clearing and settlement arrangements developed central bank-like characteristics.
    Keywords: Monetary history; central banking; payments clearing and settlement
    JEL: N21 N23
    Date: 2011–06–13
  29. By: Thierry Bracke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Irina Bunda (IMF-Singapore Regional Training Institute, 10 Shenton Way, MAS Building, Singapore 079117.)
    Abstract: The paper provides a measure of exchange rate anchoring behaviour across 149 emerging market and developing economies for the 1980-2010 period. An extension of the Frankel and Wei (2008) methodology is used to determine whether exchange rates are pegged or floating, and in the case of pegs, to which anchor currencies they are pegged. To capture the role of major currencies over time, an aggregate trade-weighted indicator is constructed based on exchange rate regimes of individual countries. The evolution of this aggregate indicator suggests that the US dollar has continuously dominated exchange rate regimes, despite some temporary decoupling during major financial crises. JEL Classification: F30, F31, F33.
    Keywords: de facto exchange rate regimes, international monetary system, emerging and developing economies, global currencies.
    Date: 2011–06
  30. By: Barbara Rossi; Atsushi Inoue
    Abstract: This paper proposes new methodologies for evaluating out-of-sample forecasting performance that are robust to the choice of the estimation window size. The methodologies involve evaluating the predictive ability of forecasting models over a wide range of window sizes. We show that the tests proposed in the literature may lack power to detect predictive ability, and might be subject to data snooping across different window sizes if used repeatedly. An empirical application shows the usefulness of the methodologies for evaluating exchange rate models' forecasting ability.
    Keywords: Predictive Ability Testing, Forecast Evaluation, Estimation Window
    JEL: C22 C52 C53
    Date: 2011
  31. By: Geert Bekaert; Michael Ehrmann; Marcel Fratzscher; Arnaud J. Mehl
    Abstract: Using the 2007-2009 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use an asset pricing framework with global and local factors to predict crisis returns, defining unexplained increases in factor loadings as indicative of contagion. We find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small. By contrast, there has been systematic and substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. Consequently, we reject the globalization hypothesis that links the transmission of the crisis to the extent of global exposure. Instead, we confirm the old “wake-up call” hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis.
    JEL: G15
    Date: 2011–06
  32. By: Ulrich Bindseil; Philipp Johann König
    Abstract: It has recently been argued that intra-eurosystem claims and liabilities in the form of TARGET2 balances would raise fundamental issues within the European monetary union. This article provides a framework for the economic analysis of TARGET2 balances and discusses the key arguments behind this recent debate. The analysis is conducted within a system of financial accounts in which TARGET2 balances can arise either due to current account transactions or cross-border capital flows. It is argued that the recent volatility of TARGET2 balances reflects capital flow movements, while the previously prevailing current account positions did not find a strong reflection in TARGET2 balances. Some recent statements regarding TARGET2 appear to be due to a failure to distinguish between the monetary base (a central bank liability concept) and the liquidity deficit of the banking system vis-à-vis the central bank (a central bank asset concept). Furthermore, the article highlights the importance of TARGET2 for the stability of the euro area and points out that the proposal to limit the size of TARGET2 liabilities essentially contradicts the idea of a monetary union.
    Keywords: TARGET2, central bank balance sheet, liquidity deficit, financial crisis
    JEL: E58 F33
    Date: 2011–06
  33. By: Chia-Lin Chang (Department of Applied Economics, Department of Finance, National Chung Hsing University, Taichung, Taiwan); Philip Hans Franses (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics), Erasmus Universiteit); Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics) Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).)
    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
  34. By: Domenico Ferraro; Ken Rogoff; Barbara Rossi
    Abstract: This paper investigates whether oil price shocks have a reliable and stable out-of-sample relationship with the Canadian/U.S Dollar nominal exchange rate. Despite state-of-the-art methodologies and clean data, we …find paradoxically little systematic relation between oil prices and the exchange rate, especially if one takes the monthly and quarterly frequencies into account. In contrast, the very short term relationship between oil prices and exchange rates at the daily frequency is rather robust, and holds no matter whether we use contemporaneous (realized) or lagged oil price shocks in our regression. However, the short-term out-of-sample predictive ability is ephemeral, and it mostly appears after time variation in the forecasting ability of the models has been appropriately taken into account. We show that a similar results hold for other currencies and commodity price shocks.
    JEL: F31 F37 C22 C53
    Date: 2011
  35. By: Elke Hahn (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper explores the role of oil prices in the euro area economy since the 1970s by applying a VAR framework with time varying parameters and stochastic volatility in which oil supply and global demand shocks are identified. Our results show that both types of shock contributed substantially to the oil price surges during historical oil crises and likewise to those over the past decade. Counterfactual histories of the price and activity variables, moreover, reveal much larger adverse contributions of both shocks to HICP inflation and GDP in the first half of the sample than in the second, which suggests that changes related to these shocks have contributed to the Great Moderation. Impulse responses, moreover, show that a decline in the pass through of the two shocks has added to the moderating contribution over time, while variance decompositions indicate no change in the relative importance of the two shocks over time. JEL Classification: E3.
    Keywords: Oil prices, Great Moderation, time varying parameter VAR model, stochastic volatility, euro area.
    Date: 2011–06
  36. By: Martin Berka; Michael B. Devereux; Thomas Rudolph
    Abstract: We study a newly released data set of scanner prices for food products in a large Swiss online supermarket. We find that average prices change about every two months, but when we exclude temporary sales, prices are extremely sticky, changing on average once every three years. Non-sale price behavior is broadly consistent with menu cost models of sticky prices. When we focus specifically on the behavior of sale prices, however, we find that the characteristics of price adjustment seems to be substantially at odds with standard theory.
    JEL: E3
    Date: 2011–06
  37. By: Fregert, Klas (Department of Economics, Lund University)
    Abstract: Unlike Knut Wicksell, Eli Heckscher did not believe the time had arrived for “managed money” to replace the gold standard after World War I. The war had shown that only a gold standard could bind the central bank to a time-consistent policy with reasonable price stability. Heckscher likened the problem of reinstating the gold standard to “Belling the cat” in Aesop’s fable. When the international gold standard crumbled in the Great Depression, he supported the Swedish price stabilization regime as a temporary system. Heckscher was an early discoverer of the time-consistency problem in monetary policy and hence stressed the importance of the institutional framework of monetary policy.
    Keywords: Heckscher; time-consistent policy; devaluation; deflation; gold standard
    JEL: B22 E31 E42
    Date: 2011–06–14
  38. By: Richard C.K. Burdekin; Kris James Mitchener; Marc D. Weidenmier
    Abstract: The question of price level versus inflation targeting remains controversial. Disagreement concerns, not so much the desirability of price stability, but rather the means of achieving it. Irving Fisher argued for a commodity dollar standard where the purchasing power of money was fixed by indexing it to a basket of commodities. We show that movements in the price of silver closely track the movements in overall prices during the classical gold standard era. The one-to-one relationship between paper and silver bonds suggests that a simple “silver rule" could have sufficed to fix the purchasing power of money.
    JEL: E31 E4 E58 N1 N33
    Date: 2011–06
  39. By: Nicolaas Groenewold (UWA Business School, The University of Western Australia); James E H Paterson (UWA Business School, The University of Western Australia)
    Abstract: The relationship between stock prices and exchange rates is an important topic of long standing. But there are still significant gaps in our knowledge of this area, not least, the ambiguity about the sign of the effect of a change in one of these variables on the other. While there are many possible reasons for this ambiguity, one which we explore in the Australian context in this paper is the omission of commodity prices. We show that a bivariate relationship which omits commodity prices performs badly but that once commodity prices are added to the relationship, our results are plausible and robust. We also throw light on the commodity-currency issue and show that the link from the exchange rate to commodity prices is stronger and more consistent than that in the opposite direction.
    Date: 2011
  40. By: Breno Santana Lobo (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília); José Luis Oreiro (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília)
    Abstract: The aim of this paper is to analyze the effects of adopting an inflation targeting regime, in which central banks set the short-term interest rate as a response to deviations of inflation from its target and of output from its potential, over economic growth. To this end, we build a non-linear post-keynesian growth model which allows the existence of more than one short-term equilibrium point. We conclude that maintaining a balanced short-term growth path after exogenous shocks depends largely on fiscal policy. Besides that, there are three possible long-term equilibrium configurations, two of which are inherently unstable. Long-term equilibrium stability of the third configuration depends on how central banks respond to deviations on inflation and output. More precisely, we show that a more cautious behavior from the Central Bank in a manner that it only increases short term interest rates when it is really required to do so could help the economy to have a balanced growth-path in the longrun.
    Keywords: inflation targeting, economic growth, dynamics, post-keynesian economics
    JEL: E12 E42 E43 E52 O41
    Date: 2011–04

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