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on Central Banking |
| By: | Lane, Philip R.; Milesi-Ferretti, Gian Maria |
| Abstract: | The period preceding the global financial crisis was characterized by a substantial widening of current account imbalances across the world. Since the onset of the crisis, these imbalances have contracted to a significant extent. In this paper, we analyze the ongoing process of external adjustment in advanced economies and emerging markets. We find that countries whose pre- crisis current account balances were in excess of what could be explained by standard economic fundamentals have experienced the largest contractions in their external balance. We subsequently examine the contributions of real exchange rates, domestic demand and domestic output to the adjustment process (allowing for differences across exchange rate regimes) and find that external adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. Finally, we show that other investment flows was the main adjustment category in the financial account but that ECB liquidity and official external assistance have cushioned the exit of private capital flows for some countries. |
| Keywords: | current account adjustment; global crisis |
| JEL: | F31 F32 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8546&r=cba |
| By: | Philip R. Lane; Gian Maria Milesi Ferretti |
| Abstract: | The period preceding the global financial crisis was characterized by a substantial widening of current account imbalances across the world. Since the onset of the crisis, these imbalances have contracted to a significant extent. In this paper, we analyze the ongoing process of external adjustment in advanced economies and emerging markets. We find that countries whose pre-crisis current account balances were in excess of what could be explained by standard economic fundamentals have experienced the largest contractions in their external balance. We subsequently examine the contributions of real exchange rates, domestic demand and domestic output to the adjustment process (allowing for differences across exchange rate regimes) and find that external adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. Finally, we show that changes in other investment flows were the main channel of financial account adjustment, with official external assistance and ECB liquidity cushioning the exit of private capital flows for some countries. |
| JEL: | F32 F34 F41 F42 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17352&r=cba |
| By: | Gian Maria Milesi-Ferretti (International Monetary Fund and CEPR); Philip Lane (Trinity College Dublin, IIIS and CEPR) |
| Abstract: | The period preceding the global financial crisis was characterized by a substantial widening of current account imbalances across the world. Since the onset of the crisis, these imbalances have contracted to a significant extent. In this paper, we analyze the ongoing process of external adjustment in advanced economies and emerging markets. We find that countries whose precrisiscurrent account balances were in excess of what could be explained by standard economic fundamentals have experienced the largest contractions in their external balance. We subsequently examine the contributions of real exchange rates, domestic demand and domestic output to the adjustment process (allowing for differences across exchange rate regimes) and find that external adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. Finally, we show that other investment flows was the main adjustment category in the financial account but that ECB liquidity and official external assistance have cushioned the exit of private capital flows for some countries. |
| Keywords: | global crisis, current account adjustment. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp369&r=cba |
| By: | Andrew K. Rose; Mark M. Spiegel |
| Abstract: | While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness. |
| JEL: | E42 E58 F31 F33 F41 F42 G15 O24 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17359&r=cba |
| By: | Ana Fostel; John Geanakoplos |
| Date: | 2011–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000192&r=cba |
| By: | Sebnem Kalemli-Ozcan; Bent Sorensen; Sevcan Yesiltas |
| Abstract: | We present new stylized facts on bank and firm leverage for 2000-2009 using extensive internationally comparable micro level data from several countries. The main result is that there was very little buildup in leverage for the average non-financial firm and commercial bank before the crisis, but the picture was quite different for large commercial banks in the United States and for investment banks worldwide. We document the following patterns: a) there was an increase in leverage ratios of investment banks and financial firms during the early 2000s; b) there was no visible increase for commercial banks and non-financial firms; c) off balance-sheet items constitute a big fraction of assets, especially for large commercial banks in the United States; d) the leverage ratio is procyclical for investment banks and for large commercial banks in the United States; e) banks in emerging markets with tighter bank regulation and stronger investor protection experienced significantly less deleveraging during the crisis. These results show that excessive risk taking before the crisis was not easily detectable because the risk involved the quality rather than the amount of assets. |
| JEL: | F3 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17354&r=cba |
| By: | Kalemli-Ozcan, Sebnem; Sorensen, Bent E; Yesiltas, Sevcan |
| Abstract: | We present new stylized facts on bank and firm leverage for 2000-2009 using extensive internationally comparable micro level data from several countries. The main result is that there was very little buildup in leverage for the average non-financial firm and commercial bank before the crisis, but the picture was quite different for large commercial banks States and for investment banks worldwide. We document the following patterns: a) there was an increase in leverage ratios of investment banks and financial firms during the early 2000s; b) there was no visible increase for commercial banks and non-financial firms; c) off balance-sheet items constitute a big fraction of assets, especially for large commercial banks in the United States; d) the leverage ratio is procyclical for investment banks and for large commercial banks in the United States; e) banks in emerging markets with tighter bank regulation and stronger investor protection experienced significantly less deleveraging during the crisis. These results show that excessive risk taking before the crisis was not easily detectable because the risk involved the quality rather than the amount of assets. |
| Keywords: | banks; crisis; firms; international; leverage |
| JEL: | E32 F15 F36 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8549&r=cba |
| By: | Kathryn M.E. Dominguez; Yuko Hashimoto; Takatoshi Ito |
| Abstract: | This study examines whether pre-crisis international reserve accumulations, as well as exchange rate and reserve policy decisions made during the global financial crisis, can help to explain cross-country differences in post-crisis economic performance. Our approach focuses not only on the total stock of official reserves held by countries, but also on the decisions by governments to purchase or sell reserve assets during the crisis period. We introduce new data made available through the IMF Special Data Dissemination Standard (SDDS) Reserve Template, which allow us to distinguish interest income and valuation changes in the stock of official reserves from the actively managed component of reserves. We use this novel data to gauge how (and whether) reserve accumulation policies influenced the economic and financial performance of countries during and after the global crisis. Our findings support the view that higher reserve accumulations prior to the crisis are associated with higher post-crisis GDP growth. |
| JEL: | F3 F31 F32 F33 F41 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17362&r=cba |
| By: | Marcel Fratzscher |
| Abstract: | The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks – key crisis events as well as changes to global liquidity and risk – have exerted a large effect on capital flows both in the crisis and in the recovery. However, these effects have been highly heterogeneous across countries, with a large part of this heterogeneity being explained by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals. Comparing and quantifying these effects shows that common factors (“push” factors) were overall the main drivers of capital flows during the crisis, while country-specific determinants (“pull” factors) have been dominant in accounting for the dynamics of global capital flows in 2009 and 2010, in particular for emerging markets. |
| JEL: | F21 F30 G11 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17357&r=cba |
| By: | Claudio Raddatz; Sergio L. Schmukler |
| Abstract: | This paper uses micro-level data on mutual funds from different financial centers investing in equity and bonds to study how investors and managers behave and transmit shocks across countries. The paper finds that the volatility of mutual fund investments is driven quantitatively by both the underlying investors and fund managers through (i) injections/redemptions into each fund and (ii) managerial changes in country weights and cash. Both investors and managers respond to country returns and crises and adjust their investments substantially, for example, generating large reallocations during the global crisis. Their behavior tends to be pro-cyclical, reducing their exposure to countries during bad times and increasing it when conditions improve. Managers actively change country weights over time, although there is significant short-run pass-through from returns to these weights. Consequently, capital flows from mutual funds do not seem to have a stabilizing role and expose countries in their portfolios to foreign shocks. |
| JEL: | F3 F32 F36 G1 G11 G15 G2 G23 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17358&r=cba |
| By: | Nuno Cassola (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ali Hortacsu (The University of Chicago, Department of Economics, 1126 E. 59th Street, Chicago, IL 60637, USA.); Jakub Kastl (Stanford University, Department of Economics, Landau Economics Building, 579 Serra Mall, USA.) |
| Abstract: | We study European banks’ demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank’s auctions for one-week loans, their main channel of monetary policy implementation. Our analysis provides a high-frequency, disaggregated perspective on the 2007 crisis, which was previously studied through comparisons of collateralized and uncollateralized interbank money market rates which do not capture the heterogeneous impact of the crisis on individual banks. Through a model of bidding, we show that banks’ bids reflect their cost of obtaining short-term funds elsewhere (e.g., in the interbank market) as well as a strategic response to other bidders. The strategic response is empirically important: while a naïve interpretation of the raw bidding data may suggest that virtually all banks suffered an increase in the cost of short-term funding, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. We also find considerable heterogeneity in the short-term funding costs among banks: for over one third of the bidders, funding costs increased by more than 20 basis points, and funding costs vary widely with respect to the country-of-origin. Estimated funding costs of banks are also predictive of market- and accounting-based measures of bank performance, suggesting the external validity of our findings. JEL Classification: D44, E58, G01. |
| Keywords: | Multiunit auctions, primary market, structural estimation, subprime market, liquidity crisis. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111374&r=cba |
| By: | Carol Bertaut; Laurie Pounder DeMarco; Steven B. Kamin; Ralph W. Tryon |
| Abstract: | The “global saving glut” (GSG) hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. We present a more complete picture of how capital flows contributed to the crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. By adding to domestic demand for private-label ABS, substantial foreign acquisitions of these securities contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates. |
| JEL: | F3 G1 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17350&r=cba |
| By: | Galina Hale |
| Abstract: | The importance of information asymmetries in the capital markets is commonly accepted as one of the main reasons for home bias in investment. We posit that effects of such asymmetries may be reduced through relationships between banks established through bank-to-bank lending and provide evidence to support this claim. To analyze dynamics of formation of such relationships during 1980-2009 time period, we construct a global banking network of 7938 banking institutions from 141 countries. We find that recessions and banking crises tend to have negative effects on the formation of new connections and that these effects are not the same for all countries or all banks. We also find that the global financial crisis of 2008-09 had a large negative impact on the formation of new relationships in the global banking network, especially by large banks that have been previously immune to effects of banking crises and recessions. |
| JEL: | F34 F36 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17356&r=cba |
| By: | Mahvash S. Qureshi; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon |
| Abstract: | We examine whether macroprudential policies and capital controls can contribute to enhancing financial stability in the face of large capital inflows. We construct new indices of foreign currency (FX)-related prudential measures, domestic prudential measures, and financial-sector capital controls for 51 emerging market economies over the period 1995–2008. Our results indicate that both capital controls and FX-related prudential measures are associated with a lower proportion of FX lending in total domestic bank credit and a lower proportion of portfolio debt in total external liabilities. Other prudential policies appear to help restrain the intensity of aggregate credit booms. Experience from the global financial crisis suggests that prudential and capital control policies in place during the boom seem to have enhanced economic resilience during the bust. |
| JEL: | F21 F32 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17363&r=cba |
| By: | Buch, Claudia M.; Koch, Cathérine Tahmee; Koetter, Michael |
| Abstract: | The World Financial Crisis has shaken the fundamentals of international banking and triggered a downward spiral of asset prices. To prevent a further meltdown of markets, governments have intervened massively through rescues measures aimed at recapitalizing banks and through liquidity support. We use a detailed, banklevel dataset for German banks to analyze how the lending and borrowing of their foreign affiliates has responded to domestic (German) and to US crisis support schemes. We analyze how these policy interventions have spilled over into foreign markets. We identify loan supply shocks by exploiting that not all banks have received policy support and that the timing of receiving support measures has differed across banks. We find that banks covered by rescue measures of the German government have increased their foreign activities after these policy interventions, but they have not expanded relative to banks not receiving support. Banks claiming liquidity support under the Term Auction Facility (TAF) program have withdrawn from foreign markets outside the US, but they have expanded relative to affiliates of other German banks. -- |
| Keywords: | Cross-border banking,financial crisis,government support,Term Auction Facility |
| JEL: | F34 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201115&r=cba |
| By: | Christian Heebøll-Christensen (Department of Economics, University of Copenhagen) |
| Abstract: | This paper compares the financial destabilizing effects of excess liquidity versus credit growth, in relation to house price bubbles and real economic booms. The analysis uses a cointegrated VAR model based on US data from 1987 to 2010, with a particulary focus on the period preceding the global financial crisis. Consistent with monetarist theory, the results suggest a stable money supply-demand relation in the period in question. However, the implied excess liquidity only resulted in financial destabilizing effect after year 2000. Meanwhile, the results also point to persistent cycles of real house prices and leverage, which appear to have been driven by real credit shocks, in accordance with post-Keynesian theories on financial instability. Importantly, however, these mechanisms of credit growth and excess liquidity are found to be closely related. In regards to the global financial crisis, a prolonged credit cycle starting in the mid-1990s - and possibly initiated subprime mortgage innovations - appears to have created a long-run housing bubble. Further fuelled by expansionary monetary policy and excess liquidity, the bubble accelerated in period following the dot-com crash, until it finally burst in 2007. |
| Keywords: | financial instability; housing bubbles; credit view; money view; cointegrated VAR model; impulse response analysis |
| JEL: | C32 E51 E44 G21 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1121&r=cba |
| By: | Morten L. Bech; Carl T. Bergstrom; Rodney J. Garratt; Martin Rosvall |
| Abstract: | We use an information-theoretic approach to describe changes in lending relationships between federal funds market participants around the time of the Lehman Brothers failure. Unlike previous work that conducts maximum-likelihood estimation on undirected networks, our analysis distinguishes between borrowers and lenders and looks for broader lending relationships (multibank lending cycles) that extend beyond the immediate counterparties. We find that significant changes in lending patterns emerge following implementation of the Interest on Reserves policy by the Federal Reserve on October 9, 2008. |
| Keywords: | Federal funds market (United States) ; Federal Reserve System ; Bank loans ; Financial crises |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:507&r=cba |
| By: | Nicola Cetorelli; Linda S. Goldberg |
| Abstract: | The recent crisis highlighted the importance of globally active banks in linking markets. One channel for this linkage is through how these banks manage liquidity across their entire banking organization. We document that funds regularly flow between parent banks and their affiliates in diverse foreign markets. We use the Great Recession as an opportunity to identify the balance sheet shocks to parent banks in the United States, and then explore which foreign affiliate features are associated with those businesses being protected, for example their status as important locations in sourcing funding or as destinations for foreign investment activity. We show that distance from the parent organization lays a significant role in this allocation, where distance is bank-affiliate specific and depends on the ex ante relative importance of such locations as local funding pools and in their overall foreign investment strategies. These flows are a form of global interdependence previously unexplored in the literature on international shock transmission. |
| JEL: | F3 G15 G21 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17355&r=cba |
| By: | Robert Anderton (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and School of Economics, University Nottingham.) |
| Abstract: | This paper aims to shed light on why the downturn in global trade during the intensification of the financial crisis in 2008Q4-2009Q1 was so severe and synchronized across the world, and also examines the subsequent recovery in global trade during 2009Q2-2010Q1. The paper finds that a structural imports function which captures the different and time-varying importintensities of the components of total final expenditure - consumption, investment, government expenditure, exports, etc – can explain the sharp decline in global imports of goods and services. By contrast, a specification based on aggregate total expenditure can not fully capture the global trade downturn. In particular, panel estimates for a large number of OECD countries suggest that the high import-intensity of exports at the country-level can explain a significant proportion of the decline in world imports during the crisis, while declines in the highly import-intensive expenditure category of investment also contributed to the remaining fall in global trade. At the same time, the high and rising import-intensity of exports also reflects and captures the rapid growth in “vertical specialisation”, suggesting that widespread global production chains may have amplified the downturn in world trade and partly explains its high-degree of synchronisation across the globe. In addition, the estimates find that stockbuilding, business confidence and credit conditions also played a role in the global trade downturn. Meanwhile, the global trade recovery (2009Q2-2010Q1) can only be partially explained by differential elasticities for the components of demand (although the results confirm that the upturn in OECD imports was also driven by strong export growth and the associated reactivation of global production chains, as well as the recovery in stockbuilding and the fiscal stimulus). This may be due in part to the many policy measures that were implemented to boost global trade at that time and which can not be captured by the specification. JEL Classification: E0, F01, F10, F15, F17. |
| Keywords: | Globalisation, financial crisis, global trade downturn and recovery, timevarying parameters, import-intensity of components of total final expenditure, vertical specialisation, synchronisation, forecasting. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111370&r=cba |
| By: | Björn Hilberg (Goethe-Universität Frankfurt am Main, Grüneburgplatz 1, D-60629 Frankfurt am Main, Germany.); Josef Hollmayr (Goethe-Universität Frankfurt am Main, Grüneburgplatz 1, D-60629 Frankfurt am Main, Germany.) |
| Abstract: | In this paper we set up a New-Keynesian model that features an interbank market. The introduction of an interbank market is important to analyze liquidity problems among heterogenous agents within the financial sector. First, because this allows for a situation where increased liquidity supply by the central bank is only partially passed on to the interbank market. Second, this framework allows us to analyze one additional policy measure besides the common interest rate policy undertaken by central banks to alleviate the liquidity shortage on the interbank market. Namely haircuts on eligible assets in repurchase agreements (“Repos”). By varying haircuts applied to securities that serve as collateral in repurchase agreements the stress on the interbank market can be mitigated by bringing down the interest rate charged among banks. Furthermore an exogenous bubble process is modeled which enables us to examine the effects of a deviation of the market price of capital from its fundamental price. This leads to a discussion whether central banks should ”lean against the wind”, i.e. react to deviations of asset prices in the setting of their policy instrument. Finally, this paper tries to shed some light on the “exit strategy” that a central bank should follow after the asset price bubble bursted and the interbank market begins to work properly again. JEL Classification: E4, E5, E61, G21. |
| Keywords: | DSGE, monetary policy, collateral, haircuts, exit strategy. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111373&r=cba |
| By: | Kazuo Ueda (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper summarizes non-traditional monetary policy measures adopted by the Bank of Japan (BOJ) during the last two decades and by other G7 central banks since the start of the current global financial turmoil and analyzes the effectiveness of such measures. The paper begins with a typology of policies usable near the zero lower bound on interest rates (ZLB). They are:(i) forward guidance of future policy rates;(ii) targeted asset purchases;(iii) and quantitative easing (QE). Using this typology, I review the measures adopted by the BOJ and other central banks. I then offer a news analysis of the effects of the measures adopted by the BOJ on asset prices, comparing them with those adopted by the Fed. Many of the measures, with the exception of strategy (iii), are shown to have moved asset prices in the expected directions. Another exception is that most of the monetary easing measures failed to weaken the yen. Despite some effects on asset prices, however, the measures have failed to stop the deflationary trend of the Japanese economy clearly. I discuss some possible reasons for this and more general implications for monetary policy. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf252&r=cba |
| By: | Maria Demertzis; Nicola Viegi |
| Abstract: | We use an overlapping generations model to show that a bail-out is the optimal response to a fiscal crisis when the level of integration in a Monetary Union is high and the departure from Ricardian equivalence is significant. As it may not be optimal expost, the no bail-out rule is not credible ex-ante. To make it credible, one would have to look for arrangements that make the cost of one country defaulting sufficiently small, such that it does not impose a risk to the viability of the whole Monetary Union. One way to do that that we exploit is by reducing the relative size of the individual fiscal authority (from national to regional, for example). |
| Keywords: | Debt Default; Monetary Union; Bail-Out |
| JEL: | E62 F33 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:309&r=cba |
| By: | Luque, Jaime; Morelli, Massimo; Tavares, José |
| Abstract: | Inspired by the current debate over the future of the monetary union in Europe, this paper provides a simple model for the determination of the conditions of survival of the common good, which requires the creation of an effective fiscal union. We highlight the importance of institutional design and varying decision weights for the enlargement of the space for consensus. Our model deepens the discussion of economic risk and political risk in fiscal federalism, and highlights the related roles of country heterogeneity and institutional design in enlarging the scope for cross country fiscal agreements. |
| Keywords: | autarky; consensus; fiscal union; heterogeneous countries; uncertainty; voting weights |
| JEL: | D70 D78 E62 F15 H77 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8552&r=cba |
| By: | Stähler, Nikolai |
| Abstract: | The current crisis and discussions, in the euro area in particular, show that sovereign debt crises/defaults are no longer restricted to developing economies. After crises in many Latin American countries, the literature on quantitative dynamic macro-models of sovereign default has been advancing. Current debate should take notice of the findings from this literature - an extensive overview of which has been provided in this paper. This paper also discusses the difficulties involved in, but also possibilities of, integrating this type of model in standard business cycle models (RBC and DSGE models). This is likely to be particularly helpful when using models to analyse upcoming issues in the euro area, such as a suitable (sovereign) insolvency law or the assumption of joint liability. -- |
| Keywords: | Sovereign Debt,Default Risk,Endogenous Borrowing Constraints,Small Open Economy |
| JEL: | F34 F41 E21 E32 G10 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201117&r=cba |
| By: | Irina Stanga |
| Abstract: | This paper investigates the interaction of market views on the sustainability of sovereign debt and the perceived credit risk of banks. This interaction came into spotlight during the recent financial crisis, as government interventions in support of the financial sector were associated with increases in fiscal burden. I analyze and quantify the effect of government interventions in the domestic financial system on the default risks of the banking sector and sovereign borrowers. The paper focuses on the cases of Ireland and Spain, which experienced large public interventions in the domestic banking system and at a later stage highly volatile bond markets. For each country, I estimate a Vector Autoregression model to trace the interaction among sovereign CDS spreads, bank CDS spreads, and a measure of the business cycle over the sample period 2007-2011. I identify shocks by imposing sign restrictions on the impulse response functions. The results point towards a risk transfer from the financial to the sovereign sector, which generates an increase in the credit risk of the latter but only a temporary drop in that of banks. |
| Keywords: | Financial Crises; Sovereign Debt; VAR; Sign Restrictions |
| JEL: | C32 E44 H63 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:314&r=cba |
| By: | Peter McAdam (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Alpo Willman (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We argue that the New-Keynesian Phillips Curve literature has failed to deliver a convincing measure of “fundamental inflation”. We start from a careful modeling of optimal price setting allowing for non-unitary factor substitution, non-neutral technical change and timevarying factor utilization rates. This ensures the resulting real marginal cost measures match volatility reductions and level changes witnessed in many US time series. The cost measure comprises conventional counter-cyclical cost elements plus pro-cyclical (and co-varying) utilization rates. Although pro-cyclical elements dominate, real marginal costs are becoming less cyclical over time. Incorporating this richer driving variable produces more plausible price-stickiness estimates than otherwise and suggests a more balanced weight of backward and forward-looking inflation expectations than commonly found. Our results challenge existing views of inflation determinants and have important implications for modeling inflation in New-Keynesian models. JEL Classification: E20, E30. |
| Keywords: | Inflation, real marginal costs, production function, labor share, cyclicality, utilization, intensive labor, overtime premia. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111369&r=cba |
| By: | Olivier Armantier; Wändi Bruine de Bruin; Giorgio Topa; Wilbert van der Klaauw; Basit Zafar |
| Abstract: | We compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment designed such that future inflation affects payoffs. The inflation expectations survey is found to be informative in the sense that the beliefs reported by the respondents are correlated with their choices in the experiment. Furthermore, most respondents appear to act on their inflation expectations showing patterns consistent (both in direction and magnitude) with expected utility theory. Respondents whose behavior cannot be rationalized tend to be less educated and to score lower on a numeracy and financial literacy scale. These findings are therefore the first to provide support to the microfoundations of modern macroeconomic models. |
| Keywords: | Consumer surveys ; Inflation (Finance) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:509&r=cba |
| By: | Pfajfar, D.; Zakelj, B. (Tilburg University, Center for Economic Research) |
| Abstract: | Using laboratory experiments within a New Keynesian macro framework, we explore the formation of inflation expectations and its interaction with monetary policy design. The central question in this paper is how to design monetary policy in the environment characterized by heterogeneous expectations. Rules that use actual rather than forecasted inflation produce lower inflation variability and alleviate expectational cycles. Degree of responsiveness to deviations of inflation from its target in the Taylor rule produces nonlinear effects on inflation variability. We also provide considerable support for the existence of heterogeneity of inflation expectations and show that a significant proportion of subjects are rational in our experiment. However, most subjects rather than using a single model they tend to switch between alternative models. |
| Keywords: | Laboratory Experiments;Inflation Expectations;New Keynesian Model;Monetary Policy Design. |
| JEL: | C91 C92 E37 E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011091&r=cba |
| By: | Chen, Qianying |
| Abstract: | This paper re-investigates the implications of monetary policy rules on changes in exchange rate, in a risk-adjusted, uncovered interest parity model with unrestricted parameters, emphasizing the importance of modeling market expectations of monetary policy. I use consensus forecasts as a proxy for market expectations. The analysis on the Deutsche mark, Canadian dollar, Japanese yen, and the British pound relative to the U.S. dollar from 1979 to 2008 shows that, through the expectations of future monetary policy, Taylor rule fundamentals are able to forecast changes in the exchange rate, even over short-term horizons of less than two years. Furthermore, the market expectation formation processes of short-term interest rates change over time and differ across countries, which contributes to the time varying relationship between exchange rates and macroeconomic fundamentals, together with the time varying currency risk premia and exchange rate forecast errors. -- |
| Keywords: | Exchange Rate,Monetary Policy,Expectation,Learning,VAR,Consensus Forecast |
| JEL: | F31 E52 D83 C32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201118&r=cba |
| By: | James Costain (Banco de España, C/Alcalá 48, 28014 Madrid, Spain.); Anton Nakov (Banco de España, C/Alcalá 48, 28014 Madrid, Spain and European Central Bank.) |
| Abstract: | This paper proposes two models in which price stickiness arises endogenously even though firms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our first specification, firms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specification derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since firms making sufficiently large errors choose to adjust, both versions generate a strong "selection effect" in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), but fits microdata better than their specification. JEL Classification: E31, D81, C72. |
| Keywords: | Logit equilibrium, state-dependent pricing, (S,s) adjustment, near rationality, information-constrained pricing. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111375&r=cba |
| By: | Craig, Ben; Fecht, Falko |
| Abstract: | While net settlement systems make more efficient use of liquidity than gross settlement systems, they are known to generate systemic risk. What does that tendency imply for the stability of the payments [or financial] system when the two settlement systems coexist? Do liquidity shortages induce banks to settle more transactions in net settlement system, thereby increasing systemic risk? Or do banks require their counterparties to send payments through gross settlement system when default risks are high, increasing the need for liquidity and the money market rate but reducing overall systemic risk? This paper studies the factors that drive the relative importance of net and gross settlement systems over the short run, using daily data on transaction volumes from the large-volume payment systems of all euro area countries that have had both a net and a gross settlement system at the same time. Applying a large portfolio of different econometric techniques, we find that it is actually the transactions volumes in gross settlement systems that affect the daily price of liquidity and the credit risk spread in money markets. -- |
| Keywords: | Payment System,financial stability,interbank market,financial contagion |
| JEL: | E44 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201116&r=cba |
| By: | Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper we analyse the relative importance of fundamental and speculative demand on oil futures price levels and volatility. In a first step, we present a theoretical heterogeneous agent model of the oil futures market based on noise trading. We use the model to study the interaction between the oil futures price, volatility, developments in underlying fundamentals and the presence of different types of agents. We distinguish between commercial traders (who are physically involved in oil) and non-commercial traders (who are not involved physically with oil). Based on the theoretical model we find that a multiplicity of equilibria can exist. More specifically, on the one hand, if we have high fundamental volatility, high uncertainty about future oil demand, and the oil price deviation from fundamentals or the price trend is small, we will only have commercial traders entering the market. On the other hand, if a large unexpected shock to the oil spot price occurs then all traders will enter the market. In a next step, we empirically test the model by estimating a markov-switching model with time-varying transition probabilities. We estimate the model over the period January 1992 - April 2011. We find that up to 2004, movements in oil futures prices are best explained by underlying fundamentals. However, since 2004 regime switching has become more frequent and the chartist regime has been the most prominent. JEL Classification: D84, Q33, Q41, G15. |
| Keywords: | Markov switching models, oil prices, speculation. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111371&r=cba |
| By: | Barbara Rossi; Tatevik Sekhposyan |
| Abstract: | This paper proposes forecast optimality tests that can be used in unstable environments. They include tests for forecast unbiasedness, efficiency, encompassing, serial uncorrelation, and, in general, regression-based tests of forecasting ability. The proposed tests are applied to evaluate the rationality of the Federal Reserve Greenbook forecasts as well as a variety of survey-based private forecasts. In addition, we consider whether Money Market Services forecasts are rational. Our robust tests suggest more empirical evidence against forecast rationality than previously found but con firm that the Federal Reserve has additional information about current and future states of the economy relative to market participants. |
| Keywords: | Forecasting, forecast optimality, regression-based tests of forecasting ability, Greenbook forecasts, survey forecasts, real-time data |
| JEL: | C22 C52 C53 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:11-18&r=cba |
| By: | David Mortimer Krainz |
| Abstract: | This paper compares the forecasting performance of three different econometric models for the Eurozone and the USA: A vector auto regression (VAR), a Bayesian vector auto regression (BVAR), and a structural vector error correction model (SVEC). The forecast evaluation is based on 19 vintages of real time data for output, inflation rates, interest rates, the exchange rate and the money stock from the fourth quarter of 2004 until the first quarter of 2010. The oil price is used as the only exogenous variable in the model. Imposing a stringent set of long-run assumptions on the econometric model results in less accurate forecasts. The difference is significant for several variables and forecast horizons. Reducing the comparison to data from the pre-financial crisis period reduces the size of forecast errors but does not change the overall picture. |
| Keywords: | Eurozone, USA, econometric models, forecasting performance |
| Date: | 2011–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2011:i:399&r=cba |
| By: | Gastón Chaumont; Miguel Fuentes; Felipe Labbé; Alberto Naudon |
| Abstract: | In this paper we use a new database of scanner-level prices for the Chilean economy to characterize the microeconomic behavior of prices during a period of high inflation. We are able to characterize the price-setting behavior by supermarket chain. The evidence indicates that there is significant heterogeneity in the pricing behavior of individual retailers. Analyzing the source of shocks, results show that even though chain-specific shocks account for a sizable fraction of the observed variation, common (i.e. countrywide) shocks to individual goods and product categories are the most important factors to explain the behavior of prices. In other words, the pricing strategy of retailers seems less important in developing countries to explain microeconomic price dynamics. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:641&r=cba |
| By: | Monica Billio (University of Venice, Gretta Assoc. and School for Advanced Studies In Venice); Roberto Casarin (University of Venice, Gretta Assoc. and School for Advanced Studies In Venice); Francesco Ravazzolo (Norges Bank); Herman K. van Dijk (Erasmus University Rotterdam, VU University Amsterdam) |
| Abstract: | We propose new forecast combination schemes for predicting turning points of business cycles. The combination schemes deal with the forecasting performance of a given set of models and possibly providing better turning point predictions. We consider turning point predictions generated by autoregressive (AR) and Markov-Switching AR models, which are commonly used for business cycle analysis. In order to account for parameter uncertainty we consider a Bayesian approach to both estimation and prediction and compare, in terms of statistical accuracy, the individual models and the combined turning point predictions for the United States and Euro area business cycles. |
| Keywords: | Turning Points; Markov-switching; Forecast Combination; Bayesian Model Averaging |
| JEL: | C11 C15 C53 E37 |
| Date: | 2011–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110123&r=cba |
| By: | Eduardo López E.; Víctor Riquelme P.; Ercio Muñoz S. |
| Abstract: | The financial crisis of 2008, the subsequent fiscal stimulus, and damage to the fiscal< position –especially in the developed countries—, raised the concerns about their impact on long-term interest rates. Using a stylized model, we establish the link between long-term interest rates and the main fiscal policy variables, such as fiscal deficit and public debt. We estimate a panel data model of the long-term interest rate for the period 1990-2009, considering a sample of 54 emerging and developed economies. We find that, when the fiscal deficit expands by 1%, the long-term interest rate rises between 10 and 12 basis points. When we consider the role of monetary policy and its credibility and fiscal rules as stabilizers of the business cycle, we find that: (i) credibility helps maintain lower interest rate than otherwise, and ii) fiscal rules help attenuate the impact of fiscal deficit on longterm interest rates. Finally, it is found that fiscal policy explained nearly 40% of the long term interest rate for G7 countries during 2007-2010. |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:633&r=cba |
| By: | Gerlach, Stefan; Jordan, Thomas J. |
| Abstract: | This paper reviews the tactics and strategy of monetary policy in Switzerland, using a selection of Benjamin Friedman’s papers to organize the discussion, and starting in the early 1970s, when his academic papers started to appear in scholarly journals. The review focuses on the SNB’s experience with monetary targets in 1975-1999, the policy strategy adopted by the SNB in 2000, and the SNB’s experiences during the financial crisis that started in August 2007. On many occasions, Benjamin Friedman’s and the SNB’s thinking converge, while on others, they diverge. |
| Keywords: | financial crisis; inflation targeting; monetary policy; monetary targeting; Swiss National Bank |
| JEL: | E43 E53 E58 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8547&r=cba |
| By: | Kevin D. Hoover; Warren Young |
| Date: | 2011–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000227&r=cba |
| By: | Erixon, Lennart Erixon (Dept. of Economics, Stockholm University) |
| Abstract: | The new economic-policy regime in Sweden in the 1990s included deregulation, central-bank independence, inflation targets and fiscal rules but also active labour market policy and voluntary incomes policy. This article describes the content, determinants and performance of the new economic policy in Sweden in a comparative, mainly Nordic, perspective. The new economicpolicy regime is explained by the deep recession and budget crisis in the early 1990s, new economic ideas, EU integration and the power of economic experts. In the 1998-2007 period, Sweden displayed relatively low inflation and high productivity growth, but unemployment was high, especially by national standards. The restrictive monetary policy was responsible for the low inflation and the dynamic ICT sector was decisive for the productivity miracle. Furthermore, productivity increases in the ICT sector largely explains why the Central Bank undershot its inflation target in the late 1990s and early 2000s. The new economic-policy regime in Sweden performed well during the global financial crisis. However, as in other OECD countries the moderate increase in unemployment was largely attributed to labour hoarding. And the rapid recovery of the Baltic countries made it possible for Sweden to avoid a bank crisis. |
| Keywords: | Swedish model; Swedish economic policy; Swedish Central Bank; economic experts; Sweden’s macroeconomic performance; financial crisis; new economic-policy regime |
| JEL: | D78 E24 E31 E58 E62 E63 E64 J51 N14 O47 O50 |
| Date: | 2011–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2011_0025&r=cba |
| By: | Gábor Kátay (Magyar Nemzeti Bank, Department of Economics, 1850 Budapest, Szabadság tér 8-9, Hungary.) |
| Abstract: | Following the approach recently developed for the International Wage Flexibility Project (IWFP), the paper presents new estimates of downward real and nominal wage rigidity for Hungary. Results suggest that nominal rigidity is more prominent in Hungary than real rigidity. When compared to other countries participating in the IWFP, Hungary ranks among the countries with the lowest degree of downward real rigidity. The estimated downward nominal rigidity for Hungary is higher, the measure is close to but still below the overall cross-country average. Using the same methodology, the paper also con firms the widespread view that the wage growth bargained at the national level has little compulsory power in Hungary. On the other hand, the minimum wage remains an important source of potential downward wage rigidity in Hungary. JEL Classification: C23, E24, J3, J5. |
| Keywords: | Downward nominal and real wage rigidity, wage change distributions, wage flexibility. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111372&r=cba |
| By: | Romuald Morhs |
| Abstract: | The aim of this work is to study the interactions between monetary policy, credit, house prices and the macroeconomy in Luxembourg using a VAR model with quarterly data in levels from 1986 to 2009. The results of the structural analysis provide valuable information concerning the monetary policy transmission mechanism, the interactions between credit and house prices, and the importance of foreign shocks for the behaviour of domestic variables. Some tentative explanations related to the particular economic and financial structures of the Luxembourg economy are moreover suggested to interprete this empirical evidence. More specifically, the structural analysis leads to the following conclusions: (1) In accordance with the existing VAR literature, a contractionary monetary policy shock leads to a temporary decrease in output and to a gradual decline in prices. (2) Monetary policy transmission to the real economy is relatively strong in Luxembourg, a result that could be associated with the variable interest rate structure of loans to the private sector, the high degree of openness and the preponderance of the financial services industry. (3) The response of credit and GDP following a residential property price shock provides some scope for the existence of a house price channel of monetary policy transmission in Luxembourg. (4) Finally, domestic variables respond strongly to foreign shocks, as evidenced by both the impulse response functions and the forecast error variance decomposition. |
| Keywords: | Monetary policy, small open economy, VAR, macroeconomic shocks |
| JEL: | C32 E52 F41 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp049&r=cba |
| By: | Hwee Kwan Chow (School of Economics, Singapore Management University); Paul D. McNelis (SDepartment of Finance, Graduate School of Business Administration, Fordham University) |
| Abstract: | This paper uses a DSGE-VAR model to examine the managed exchange-rate system at work in Singapore and asks if the country has any reason to fear floating the exchange rate with a Taylor rule inflation-targeting mechanism that uses the short term interest rate instead of the exchange rate as the benchmark monetary policy instrument. Our simulation results show that the use of a more flexible exchange rate system will reduce volatility in inflation and investment but consumption volatility will increase. Overall, there are neither signi ficant welfare gains or losses in the regime shift. Given the highly open and trade dependent nature of the Singapore economy where the policy preference is for exchange rate stability, there is no impetus to abandon the present monetary regime. |
| JEL: | E52 E62 F41 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:29-2010&r=cba |
| By: | Paresh Kumar Narayan; Seema Narayan |
| Abstract: | In this paper we study the relationship between output and inflation for India, Brazil, and South Africa using the EGARCH model. For India and South Africa, we find evidence for: (1) the Cukierman and Meltzer hypothesis that inflation volatility raises inflation; (2) the Friedman hypothesis that inflation raises inflation volatility; and (3) the Black hypothesis that output volatility raises output growth, and that output volatility reduces inflation. For Brazil, we do not find any evidence of a systematic relationship between inflation and output growth. |
| Keywords: | Output, inflation, EGARCH model, volatility |
| JEL: | C22 E31 E32 |
| Date: | 2011–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:dkn:ecomet:fe_2011_06&r=cba |
| By: | José De Gregorio; Felipe Labbé |
| Abstract: | This paper examines the impact of the copper price on macroeconomic performance in Chile. We explore particular features of the Chilean business cycle focusing on economic activity and the real exchange rate. We find that the Chilean economy has become increasingly resilient to copper price shocks in the last twenty-five years, and especially during this last decade. The evidence shows that output volatility has dramatically decreased over the last twenty years, and the contribution of copper price fluctuations to output volatility has also declined. Moreover, the real exchange rate has acted as a shock absorber, and although during the last decade its short-run volatility has increased, its longrun volatility has remained stable and more recently has slightly declined. The decliningimpact of copper prices on the business cycle is due to macroeconomic policies. The evidence shows that a flexible exchange rate, a rule-based fiscal policy, and a flexible inflation targeting regime play a central role in these results. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:640&r=cba |
| By: | Hafedh Bouakez; Foued Chihi; Michel Normandin |
| Abstract: | Relatively little empirical evidence exists about countries’ external adjustment to changes in fiscal policy and, in particular, to changes in taxes. This paper addresses this question by measuring the effects of tax and government spending shocks on the current account and the real exchange rate in a sample of four industrialized countries. Our analysis is based on a structural vector autoregression in which the interaction of fiscal variables and macroeconomic aggregates is left unrestricted. Identification is instead achieved by exploiting the heteroscedasticity of the structural disturbances. Three main findings emerge: (i) the data provide little support for the twin-deficit hypothesis, (ii) the estimated effects of unexpected tax cuts are generally inconsistent with the predictions of standard economic models, except for the US, and (iii) the puzzling real depreciation triggered by an expansionary public spending shock is substantially larger in magnitude than predicted by traditional identification approaches. |
| Keywords: | Government spending, current account, exchange rate, taxes, structural vector auto-regression, twin deficits |
| JEL: | C32 E62 F41 H20 H50 H60 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1123&r=cba |
| By: | Juan Sebastian Becerra; Carlos Saavedra |
| Abstract: | This paper develops time series models that incorporate mixed-frequency data of prices in< order to yield a real-time forecast of the inflation of some CPI components in Chile. Specifically, the models use weekly prices obtained from the two main Chilean supermarket chains, in addition to autoregressive variables and monthly moving averages. The selection of the best forecasting model is made according to the lowest out-of-sample root mean squared error criterion. The predictive ability of these models in real-time is then compared with simple benchmark models. The results show that significant gains in predictability can be made by using the weekly data, despite the small number of observations available. This difference is significant according to several standard tests used in the related literature. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:634&r=cba |
| By: | Gastón Chaumont; Miguel Fuentes; Felipe Labbé; Alberto Naudon |
| Abstract: | In this paper we use a new weekly database of scanner-level prices for the Chilean economy to characterize the price-setting behavior in the supermarket industry. This period corresponds to an episode of relatively high inflation marked by a boom and a subsequent bust (from July 2007 to July 2009). Results show that prices have an average duration slightly greater than two weeks and that price changes are more frequent in Chilean supermarket than in those of other countries. Besides, changes are smaller in absolute value and price change distributions are roughly symmetric. We also find a positive and robust correlation between the absolute size of price changes and price duration. In addition, an inflation variance decomposition exercise shows that price variability is mainly explained by price change variability. Altogether, this evidence points toward a time-dependent pricing behavior in Chilean supermarkets. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:642&r=cba |