nep-cba New Economics Papers
on Central Banking
Issue of 2011‒09‒16
sixty papers chosen by
Alexander Mihailov
University of Reading

  1. Lessons for monetary policy: what should the consensus be? By Otmar Issing
  2. International Liquidity: The Fiscal Dimension By Maurice Obstfeld
  3. A DSGE model of banks and financial intermediation with default risk By Wickens, Michael R.
  4. Bubbles, Banks, and Financial Stability By Kosuke Aoki; Kalin Nikolov
  5. Financial Markets and Unemployment By Tommaso Monacelli; Vincenzo Quadrini; Antonella Trigari
  6. The price of liquidity: the effects of market conditions and bank characteristics By Falko Fecht; Kjell G. Nyborg; Jörg Rocholl
  7. What is the Risk of European Sovereign Debt Defaults? Fiscal Space, CDS Spreads and Market Pricing of Risk By Joshua Aizenman; Michael M. Hutchison; Yothin Jinjarak
  8. Global asset pricing By Karen K. Lewis
  9. Who Should Supervise? The Structure of Bank Supervision and the Performance of the Financial System By Barry Eichengreen; Nergiz Dincer
  10. A Fiscal Union for the Euro: Some Lessons from History By Michael D. Bordo; Agnieszka Markiewicz; Lars Jonung
  11. The Federal Reserve as an informed foreign-exchange trader: 1973-1995 By Michael D Bordo; Owen F Humpage; Anna J Schwartz
  12. Can oil prices forecast exchange rates? By Domenico Ferraro; Ken Rogoff; Barbara Rossi
  13. Sharing the burden: monetary and fiscal responses to a world liquidity trap By David Cook; Michael B. Devereux
  14. Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities By Mardi Dungey; Gerald P. Dwyer; Thomas Flavin
  15. Indexed debt contracts and the financial accelerator By Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
  16. Money, Financial Stability and Efficiency By Allen, Franklin; Carletti, Elena; Gale, Douglas M
  17. Dollar Illiquidity and Central Bank Swap Arrangements During the Global Financial Crisis By Rose, Andrew K; Spiegel, Mark
  18. Sovereigns, Upstream Capital Flows and Global Imbalances By Laura Alfaro; Sebnem Kalemli-Ozcan; Vadym Volosovych
  19. Heterogeneous sunspots solutions under learning and replicator dynamics By Michele Berardi
  20. Individual rationality, model-consistent expectations and learning By Liam Graham
  21. Learning, information and heterogeneity By Liam Graham
  22. Monetary Policy and TIPS Yields before the Crisis By Gerlach, Stefan; Moretti, Laura
  23. Differences in Early GDP Component Estimates Between Recession and Expansions By Tara M. Sinclair; H.O. Stekler
  24. Foreign exchange market structure, players and evolution By Michael R. King; Carol Osler; Dagfinn Rime
  25. Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management By Antonio Scalia; Benjamin Sahel
  26. The Impact of the Basel III Liquidity Regulations on the Bank Lending Channel: A Luxembourg case study By Gaston Giordana; Ingmar Schumacher
  27. Cyclicality of Credit Supply: Firm Level Evidence By Bo Becker; Victoria Ivashina
  28. Asset Market Participation, Monetary Policy Rules and the Great Inflation By Bilbiie, Florin Ovidiu; Straub, Roland
  29. Optimal monetary policy under financial sector risk By Scott Davis; Kevin X.D. Huang
  30. The Information Improving Channel of Exchange Rate Intervention: How Do Official Announcements Work? By Kentaro Iwatsubo; Satoshi Kawanishi
  31. The coexistence of commodity money and fiat money By Olivier Ledoit; Sébastien Lotz
  32. Stylized (Arte) Facts on Sectoral Inflation By De Graeve, Ferre; Walentin, Karl
  33. Price setting in turbulent times By Thorvardur Tjörvi Ólafsson; Ásgerdur Pétursdóttir; Karen Á. Vignisdóttir
  34. Professional Forecasters: How to Understand and Exploit Them Through a DSGE Model By Luis E. Rojas
  35. Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions By Emi Nakamura; Jón Steinsson
  36. Money growth and inflation in the euro area: a time-frequency view By António Rua
  37. Do banking shocks matter for the U.S. economy? By Naohisa Hirakata; Nao Sudo; Kozo Ueda
  38. Measuring the NAIRU: a complementary approach By De la Serve, M-E.; Lemoine, M.
  39. Inflation variability and the relationship between inflation and growth By Raghbendra Jha; Tu Dang
  40. Welfare costs of inflation and the circulation of U. S. currency abroad By Alessandro Calza; Andrea Zaghini
  41. Improving GDP Measurement: A Forecast Combination Perspective By Boragan Aruoba; Francis X. Diebold; Jeremy Nalewaik; Frank Schorfheide; Dongho Song
  42. Household savings behaviour in crisis times By Carin van der Cruijsen; Jakob de Haan; David-Jan Jansen; Robert Mosch
  43. Household Sector Borrowing in the Euro Area: A Micro Data Persective By Ramon Gomez-Salvador; Adriana Lojschova; Thomas Westermann
  44. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate" By Alfonso Palacio-Vera
  45. The Global Financial Crisis and the European Integration Project By Patrick Leblond
  46. Monetary policy, capital inflows, and the housing boom By Filipa Sá; Tomasz Wieladek
  47. Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation By Filipa Sá; Pascal Towbin; Tomasz Wieladek
  48. Housing Market Dynamics: Any News? By Sandra Gomes; Caterina Mendicino
  49. Improving the reliability of real-time Hodrick-Prescott filtering using survey forecasts By Jaqueson K. Galimberti; Marcelo L. Moura
  50. Forecasting performance of three automated modelling techniques during the economic crisis 2007-2009 By Anders Bredahl Kock; Timo Teräsvirta
  51. Computing maximally smooth forward rate curves for coupon bonds: An iterative piecewise quartic polynomial interpolation method By Paul Beaumont; Yaniv Jerassy-Etzion
  52. Price setting in a leading Swiss online supermarket By Martin Berka; Michael B. Devereux; Thomas Rudolph
  53. Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata By Jósef Sigurdsson; Rannveig Sigurdardottir
  54. The Implementation of Monetary Policy in China: The Interbank Market and Bank Lending By Hongyi Chen; Qianying Chen; Stefan Gerlach
  55. The Chinese Impact on GDP Growth and Inflation in the Industrial Countries By Christian Dreger; Yanqun Zhang
  56. Sustainable Real Exchange Rates in the New EU Member States: What Did the Great Recession Change? By Jan Babecky; Ales Bulir; Katerina Smidkova
  57. Is Monetary Policy in the New EU Member States Asymmetric? By Borek Vasicek
  58. Inflation Targeting and Inflation Persistence in Asia-Pacific By Stefan Gerlach; Peter Tillmann
  59. Money dynamics with multiple banks of issue: evidence from Spain 1856-1874 By Galo Nuño; Pedro Tedde; Alessio Moro
  60. The effects of fiscal shocks on the exchange rate in Spain By Laura Fernández-Caballero

  1. By: Otmar Issing
    Abstract: This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset prices, as is the case in this monetary policy approach, can lead to financial instability. In contrast, giving, inter alia, monetary factors a role in central banks' policy decisions, as is done in the ECB's encompassing approach, helps prevent these potentially harmful side effects and thus allows for fostering financial stability. Finally, this paper makes a case against increasing the central banks' inflation target.
    Keywords: Financial markets ; Monetary policy ; Banks and banking, Central
    Date: 2011
  2. By: Maurice Obstfeld
    Abstract: This paper argues that if policymakers seek to enhance global liquidity, then the international community must provide a higher and better coordinated level of fiscal support than it has in the past. Loans to troubled sovereigns or financial institutions imply a credit risk that ultimately must be lodged somewhere. Expanded international lending facilities, including an expanded IMF, cannot remain unconditionally solvent absent an expanded level of fiscal backup. The same point obviously applies to the European framework for managing internal sovereign debt problems, including proposals for a jointly guaranteed eurozone sovereign bond. Even attainment of a significant role for the Special Drawing Right depends upon enhanced fiscal resources and burden sharing at the international level.
    JEL: F33 F34 F36 H87
    Date: 2011–09
  3. By: Wickens, Michael R.
    Abstract: This paper takes the view that a major contributing factor to the financial crisis of 2008 was a failure to correctly assess and price the risk of default. In order to analyse default risk in the macroeconomy, a simple general equilibrium model with banks and financial intermediation is constructed in which default-risk can be priced. It is shown how the credit spread can be attributed largely to the risk of default and how excess loan creation may emerge due different attitudes to risk by borrowers and lenders. The model can also be used to analyse systemic risk due to macroeconomic shocks which may be reduced by holding collateral.
    Keywords: Default; Financial crisis; Financial intermediation; Liquidity shortages; Risk
    JEL: E44 E51 G12 G21 G33
    Date: 2011–09
  4. By: Kosuke Aoki (Faculty of Economics, University of Tokyo); Kalin Nikolov (European Central Bank)
    Abstract: This paper asks two main questions: (1) What makes some asset price bubbles more costly for the real economy than others? and (2) When do costly bubbles occur? We construct a model of rational bubbles under credit frictions and show that when bubbles held by banks burst this is followed by a costly financial crisis. In contrast, bubbles held by ordinary savers have relatively muted effects. Banks tend to invest in bubbles when financial liberalisation decreases their profitability.
    Date: 2011–08
  5. By: Tommaso Monacelli; Vincenzo Quadrini; Antonella Trigari
    Abstract: We study the importance of financial markets for (un)employment fluctuations in a model with searching and matching frictions where firms issue debt under limited enforcement. Higher debt allows employers to bargain lower wages which in turn increases the incentive to create jobs. The transmission mechanism of 'credit shocks' is fundamentally different from the typical credit channel and the model can explain why firms cut hiring after a credit contraction even if they have not shortage of funds for hiring workers. The theoretical predictions are consistent with the estimation of a structural VAR whose identifying restrictions are derived from the theoretical model.
    JEL: E24 E32 E44
    Date: 2011–09
  6. By: Falko Fecht (European Business School, Universität für Wirtschaft und Recht, Gustav-Stresemann-Ring 3, D-65189 Wiesbaden, Germany.); Kjell G. Nyborg (University of Zurich, Institut für Banking & Finance, Plattenstrasse 14, 8032 Zürich, Schweiz.); Jörg Rocholl (ESMT European School of Management and Technology, Schlossplatz 1, D- 10178 Berlin, Germany.)
    Abstract: We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual banklevel data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes. JEL Classification: G12, G21, E43, E58, D44.
    Keywords: Banks, liquidity, money markets, repos, imbalance.
    Date: 2011–09
  7. By: Joshua Aizenman; Michael M. Hutchison; Yothin Jinjarak
    Abstract: We estimate the pricing of sovereign risk for sixty countries based on fiscal space (debt/tax; deficits/tax) and other economic fundamentals over 2005-10. We measure how accurately the model predicts sovereign credit default swap (CDS) spreads, focusing in particular on the five countries in the South-West Eurozone Periphery (Greece, Ireland, Italy, Portugal, and Spain). Dynamic panel estimates of the model suggest that fiscal space and other macroeconomic factors are statistically significant and economically important determinants of market-based sovereign risk. Although the explanatory power of fiscal space measures drop during the crisis, the TED spread, trade openness, external debt and inflation play a larger role. As expectations of market volatility jumped during the crisis, the weakly concavity of creditors’ payoff probably accounts for the emergence of TED spread as a key pricing factor. However, risk-pricing of the South-West Eurozone Periphery countries is not predicted accurately by the model either in-sample or out-of-sample: unpredicted high spreads are evident during global crisis period, especially in 2010 when the sovereign debt crisis swept over the periphery area. We “match” the periphery group with five middle income countries outside Europe that were closest in terms of fiscal space during the European fiscal crisis. We find that Eurozone periphery default risk is priced much higher than the “matched” countries in 2010, even allowing for differences in fundamentals. One interpretation is that the market has mispriced risk in the Eurozone periphery. An alternative interpretation is that the market is pricing not on current fundamentals but future fundamentals, expecting the periphery fiscal space to deteriorate markedly and posing a high risk of debt restructuring. Adjustment challenges of the Eurozone periphery may be perceived as economically and politically more difficult than the matched group of middle income countries because of exchange rate and monetary constraints.
    JEL: E43 F34 F36 H63
    Date: 2011–09
  8. By: Karen K. Lewis
    Abstract: Financial markets have become increasingly global in recent decades, yet the pricing of internationally traded assets continues to depend strongly upon local risk factors, leading to several observations that are difficult to explain with standard frameworks. Equity returns depend upon both domestic and global risk factors. Further, local investors tend to overweight their asset portfolios in local equity. The stock prices of firms that begin to trade across borders increase in response to this information.> ; Foreign exchange markets also display anomalous relationships. The forward rate predicts the wrong sign of future movements in the exchange rate, implying that traders can make profits by borrowing in lower interest rate currencies and investing in higher interest rate currencies. Furthermore, the sign of the foreign exchange premium changes over time, a fact difficult to reconcile with consumption variability. In this review, I describe the implications of the current body of research for addressing these and other global asset pricing challenges.
    Keywords: Asset pricing ; Financial markets
    Date: 2011
  9. By: Barry Eichengreen; Nergiz Dincer
    Abstract: We assemble data on the structure of bank supervision, distinguishing supervision by the central bank from supervision by a nonbank governmental agency and independent from dependent governmental supervisors. Using observations for 140 countries from 1998 through 2010, we find that supervisory responsibility tends to be assigned to the central bank in low-income countries where that institution is one of few public-sector agencies with the requisite administrative capacity. It is more likely to be undertaken by a non-independent agency of the government in countries ranked high in terms of government efficiency and regulatory quality. We show that the choice of institutional arrangement makes a difference for outcomes. Countries with independent supervisors other than the central bank have fewer nonperforming loans as a share of GDP even after controlling for inflation, per capita income, and country and/or year fixed effects. Their banks are required to hold less capital against assets, presumably because they have less need to protect against loan losses. Savers in such countries enjoy higher deposit rates. There is some evidence, albeit more tentative, that countries with these arrangements are less prone to systemic banking crises.
    JEL: G0 H1
    Date: 2011–09
  10. By: Michael D. Bordo; Agnieszka Markiewicz; Lars Jonung
    Abstract: The recent financial crisis 2007-2009 was the longest and the deepest recession since the Great Depression of 1930. The crisis that originated in subprime mortgage markets was spread and amplified through globalised financial markets and resulted in severe debt crises in several European countries in 2010 and 2011. Events revealed that the European Union had insufficient means to halt the spiral of European debt crisis. In particular, no pan-European fiscal mechanism to face a global crisis is available at present. The aim of this study is to identify the characteristics of a robust common fiscal policy framework that could have alleviated the consequences of the recent crisis. This is done by using the political and fiscal history of five federal states; Argentina, Brazil, Canada, Germany and the United States.
    JEL: H10 H70 H73
    Date: 2011–09
  11. By: Michael D Bordo; Owen F Humpage; Anna J Schwartz
    Abstract: If official interventions convey private information useful for price discovery in foreign-exchange markets, then they should have value as a forecast of near-term exchange-rate movements. Using a set of standard criteria, we show that approximately 60 percent of all U.S. foreign-exchange interventions between 1973 and 1995 were successful in this sense. This percentage, however, is no better than random. U.S. intervention sales and purchases of foreign exchange were incapable of forecasting dollar appreciations or depreciations. U.S. interventions, however, were associated with more moderate dollar movements in a manner consistent with leaning against the wind, but only about 22 percent of all U.S. interventions conformed to this pattern. We also found that the larger the size of an intervention, the greater was its probability of success, although some interventions were inefficiently large. Other potential characteristics of intervention, notably coordination and secrecy, did not seem to influence our success rates.
    Keywords: Board of Governors of the Federal Reserve System (U.S.) ; Foreign exchange
    Date: 2011
  12. By: Domenico Ferraro; Ken Rogoff; Barbara Rossi
    Abstract: This paper investigates whether oil prices have a reliable and stable out-of-sample relationship with the Canadian/U.S. dollar nominal exchange rate. Despite state-of-the-art methodologies, the authors find little systematic relation between oil prices and the exchange rate at the monthly and quarterly frequencies. In contrast, the main contribution is to show the existence of a very short-term relationship at the daily frequency, which is rather robust and holds no matter whether the authors use contemporaneous (realized) or lagged oil prices in their regression. However, in the latter case the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account.
    Keywords: Foreign exchange rates ; Economic forecasting
    Date: 2011
  13. 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 optimal policy response to this type of 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 policymaker 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 desired mix in terms of the level and composition of world expenditure. Thus, in response to conditions generating a global liquidity trap, there is a critical mutual interaction between monetary and fiscal policy.
    Keywords: Monetary policy ; Fiscal policy ; Interest rates
    Date: 2011
  14. By: Mardi Dungey; Gerald P. Dwyer; Thomas Flavin
    Abstract: The misevaluation of risk in securitized financial products is central to understand- ing the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors affecting collateralized debt obligations (CDOs) based on subprime mortgages. A key feature of subprime-mortgage backed indices is that they are distinct in their vintage of issuance. Using a latent factor framework that incorporates this vintage effect, we show the increasing importance of a common factor on more senior tranches during the crisis. We examine this common factor and its relationship with spreads. We estimate the effects on the common factor of the financial crisis.
    JEL: G12 C32
    Date: 2011–09
  15. By: Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
    Abstract: This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation.
    Keywords: Indexation (Economics) ; Financial markets
    Date: 2011
  16. By: Allen, Franklin; Carletti, Elena; Gale, Douglas M
    Abstract: Most analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with non-contingent nominal deposit contracts, the first-best efficient allocation can be achieved in a decentralized banking system. What is required is that the central bank accommodates the demands of the private sector for fiat money. Variations in the price level allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone; real transfers are needed.
    Keywords: monetary policy; nominal contracts
    JEL: E42 E44 E52 E58
    Date: 2011–09
  17. By: Rose, Andrew K; Spiegel, Mark
    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.
    Keywords: dollar; exchange rate; Federal Reserve; financial crisis; illiquidity; swap; TAF
    JEL: E44 E58 F31 F33 F41 F42 G15 O24
    Date: 2011–09
  18. By: Laura Alfaro; Sebnem Kalemli-Ozcan; Vadym Volosovych
    Abstract: We decompose capital flows – both debt and equity – into public and private components and study their relationship with productivity growth. This exercise reveals that international capital flows are mainly shaped by government decisions and sovereign to sovereign transactions. Specifically, we show: (i) international capital flows net of government debt are positively correlated with growth and allocated according to the neoclassical predictions; (ii) international capital flows net of official aid flows, which are mostly accounted as debt, are also positively correlated with productivity growth consistent with the predictions of the neoclassical model; (iii) public debt flows are negatively correlated with growth only if government debt is financed by another sovereign and not by private lenders. Our results show that the failure to consider official flows as the main driver of uphill flows and global imbalances is an important shortcoming of the recent literature.
    JEL: F2 F41 O1
    Date: 2011–09
  19. By: Michele Berardi
    Abstract: In a linear stochastic forward-looking univariate model with predetermined variables, we consider the possibility of heterogeneous equilibria with sunspots emerging endogenously through adaptive learning and replicator dynamics. In particular, we investigate equilibria where only a fraction of agents in the economy condition their forecasts on a sunspot, and equilibria where di¤erent groups of agents use di¤erent sunspots. We comclude that, although such heterogeneous equilibria exist and can be stable under adaptive learning, they do no survive under endogenous replicator dynamics. Moreover, we show that even homogeneous sunspot equilibria require some degree of coordinations among agents for them to emerge in an economy. We conclude that heterogeneous equilibria with sunspots are fragile under endogenous selection of predictors by agents, and that even the relevance of homogeneous sunspot equilibria is questioned once agents are allowed to doubt about the importance of sunspots in their forecasts.
    Date: 2011
  20. By: Liam Graham
    Abstract: To isolate the impact of the assumption of model-consistent expectations, this paper proposes a baseline case in which households are individually rational, have full information and learn using forecast rules specified as in the minimum state variable representation of the economy. Applying this to the benchmark stochastic growth model shows that the economy with learning converges quickly to an equi-librium very similar to that with model-consistent expectations. In other words, if households are individually rational, the assumption that they can also form model-consistent expectations does not seem a strong one. The mechanism by which learning affects the model is considered in detail and the implications of relaxing the assumptions of the baseline case are explored.
    Keywords: adaptive learning; rational expectations; bounded rationality; expectations formation.
    JEL: D83 C62 E30
    Date: 2011–08–20
  21. By: Liam Graham
    Abstract: Most DSGE models assume full information and model-consistent expectations. This paper relaxes both these assumptions in the context of the stochastic growth model with incomplete markets and heterogeneous agents. Households do not have direct knowledge of the structure of economy or the values of aggregate quanti?ties; instead they form expectations by learning from the prices in their market-consistent information sets. The economy converges quickly to an equilibrium which is similar to the equilibrium with model-consistent expectations and market-consistent information. Learning does not introduce strong dynamics at the aggre-gate level, though more interesting things happen at the household level. At least in the context of this model, assumptions about information seem important for aggregates; assumptions about the ability to form model-consistent expectations less so.
    Keywords: imperfect information; adaptive learning; dynamic general equilibrium; heterogeneity; expectations.
    JEL: D52 D84 E32
    Date: 2011–08–20
  22. By: Gerlach, Stefan; Moretti, Laura
    Abstract: We make three points. First, the decade before the financial crisis in 2007 was characterized by a collapse in the yield on TIPS. Second, estimated VARs for the federal funds rate and the TIPS yield show that while monetary policy shocks had negligible effects on the TIPS yield, shocks to the latter had one-to-one effects on the federal funds rate. Third, these findings can be rationalized in a New Keynesian model.
    Keywords: long real interest rates; monetary policy; TIPS
    JEL: E42 E53 E58
    Date: 2011–09
  23. By: Tara M. Sinclair (George Washington University); H.O. Stekler (George Washington University)
    Abstract: In this paper we examine the quality of the initial estimates of the components of both real and nominal U.S. GDP. We introduce a number of new statistics for measuring the magnitude of changes in the components from the initial estimates available one month after the end of the quarter to the estimates available 3 months after the end of the quarter. We further specifically investigate the potential role of changes in the state of the economy for these changes. Our analysis shows that the early data generally reflected the composition of the changes in GDP that was observed in the later data. Thus, under most circumstances, an analyst could use the early data to obtain a realistic picture of what had happened in the economy in the previous quarter. However, the differences in the composition of the vectors of the two vintages were larger during recessions than in expansions. Unfortunately, it is in those periods when accurate information is most vital for forecasting.
    Keywords: Flash Estimates, Data Revisions, GDP Components, Statistical Tests, Business Cycles
    JEL: C82 E32 C53
    Date: 2011–02
  24. By: Michael R. King (Richard Ivey School of Business, University of Western Ontario); Carol Osler (Brandeis International Business School, Brandeis University); Dagfinn Rime (Norges Bank (Central Bank of Norway))
    Abstract: Electronic trading has transformed foreign exchange markets over the past decade, and the pace of innovation only accelerates. This formerly opaque market is now fairly transparent and transaction costs are only a fraction of their former level. Entirely new agents have joined the fray, including retail and high-frequency traders, while foreign exchange trading volumes have tripled. Market concentration among dealers has risen reflecting the heavy investments in technology. Undeterred, some new non-bank market participants have begun to make markets, challenging the traditional foreign exchange dealers on their own turf. This paper outlines the players in this market and the structure of their interactions. It also presents new evidence on how that structure has changed over the past two decades. Throughout, it highlights issues relevant to exchange rate modelling.
    Keywords: exchange rates, algorithmic trading, market microstructure, electronic trading, high frequency trading
    JEL: F31 G12 G15 C42 C82
    Date: 2011–08–14
  25. By: Antonio Scalia (Banca d’Italia, Via Nazionale 91, 00184 Rome, Italy.); Benjamin Sahel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The investment of the ECB reserves in US dollars and yen, delegated to a network of portfolio managers in the Eurosystem’s national central banks, involves a periodic assessment of performance against a common benchmark, controlled by the ECB and subject to revision on a monthly basis. Monetary reward for the best performers is almost entirely absent, and compensation comes mainly as reputational credit following the transmission of the annual report to the Governing Council. Employing a new data set on individual portfolio variables during 2002-2009, we study this peculiar tournament and show the existence of risk-shifting behaviour by reserve managers related to their year-to-date ranking: interim losers increase relative risk in the second half of the year, in the same way as mutual fund managers. In the dollar case, risk-shifting is asymmetric: the adjustment to ranking is generally reduced or entirely offset if reserve managers have achieved a positive interim performance against the benchmark. Yen reserve managers that rank low show a tendency to increase effort, as proxied by portfolio turnover. We also find that reserve managers who ranked low in the previous year tend to reduce risk significantly. Our evidence is consistent with a reserve managers’ anecdote, according to which they obtain a concave reputational reward within their national central banks, which induces risk aversion and explains the observed low usage of the risk budget. Since reserve managers should have a comparative advantage over the tactical benchmark within a monthly horizon, possible enhancements to the design of the tournament are discussed. These might involve an increased reward for effort and performance by means of a convex scoring system linked to monthly, rather than annual, performance. JEL Classification: G11, E58, D81.
    Keywords: Foreign reserves, tournament, incentives, effort, delegated portfolio management.
    Date: 2011–09
  26. By: Gaston Giordana; Ingmar Schumacher
    Abstract: In this paper we study the impact of the Basel III liquidity regulations, namely the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), on the bank lending channel in Luxembourg. For this aim we built, based on individual bank data, time series of the LCR and NSFR for a sample of banks covering between 82% and 100% of total assets of the banking sector. Additionally, we simulated the optimal balance sheet adjustments needed to adhere to the regulations. We extend the existing literature on the identification of the bank lending channel by adding as banks characteristics the estimated shortfalls in both the LCR and NSFR. We find a significant role for the bank lending channel in Luxembourg which mainly works through small banks with a large shortfall in the NSFR. We also show that big banks are able to increase their lending following a contractionary monetary policy shock, in line with the fact that big banks in Luxembourg are liquidity providers. Our extrapolation and simulation results suggest that the bank lending channel will no longer be effective in Luxembourg once banks adhere to the Basel III liquidity regulations. We find that adhering to the NSFR may reduce the bank lending channel more strongly than complying with the LCR.
    Keywords: bank, bank lending channel, monetary policy, Basel III, LCR, NSFR
    JEL: E51 E52 E58 G21 G28
    Date: 2011–06
  27. By: Bo Becker; Victoria Ivashina
    Abstract: Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time-series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms’ substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm’s switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings.
    JEL: E32 E44 G21
    Date: 2011–09
  28. By: Bilbiie, Florin Ovidiu; Straub, Roland
    Abstract: This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price DSGE model, whereby at low enough asset market participation, standard aggregate demand logic is inverted: interest rate increases become expansionary. Thereby, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare, suggesting that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom suggests. We provide empirical evidence consistent with this hypothesis, and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Inflation and the Great Moderation.
    Keywords: aggregate demand; Bayesian estimation; Great Inflation; Great Moderation; limited asset markets participation; passive monetary policy rules; real (in)determinacy
    JEL: E31 E32 E44 E52 E58 E65 N12 N22
    Date: 2011–09
  29. By: Scott Davis; Kevin X.D. Huang
    Abstract: We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in both the real and financial sectors (Davis, "The Adverse Feedback Loop and the Effects of Risk in the both the Real and Financial Sectors" Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No. 66, November 2010) we find that when the conventional parameters in the Taylor rule (the coefficients on the lagged interest rate, inflation, and the output gap) are optimally chosen, the central bank should not put any weight on endogenous fluctuations in the interbank lending spread. ; However, the central bank should adjust the risk free rate in response to fluctuations in the spread that occur because of exogenous financial shocks, but we find that the central bank should not be too aggressive in its easing policy. Optimal policy calls for a two-thirds of a percentage point cut in the risk free rate in response to a financial shock that causes a one percentage point increase in interbank lending spreads.
    Keywords: Business cycles ; Financial markets ; Monetary policy
    Date: 2011
  30. By: Kentaro Iwatsubo (Graduate School of Economics, Kobe University); Satoshi Kawanishi (Sophia University)
    Abstract: This paper studies the relationship between official announcements and the effectiveness of foreign exchange interventions in a noisy rational expectations equilibrium model. We show that when heterogeneously informed traders have inaccurate information, an exchange rate is likely to be misaligned from its fundamental value in the presence of noise trades. Then the central bank uses the disclosure of public information to improve the accuracy of private agentsf information and encourage risk-arbitrage thereby enhancing the informativeness of the exchange rate. This effect holds, even when the central bank does not possess superior information to traders, as long as public information is not perfectly correlated with the information of traders. We provide evidence that announced interventions are more effective in periods of high implied volatility, consistent with the theoretical prediction that the implied volatility of the exchange rate is positively correlated with the information inaccuracy of traders and the degree of an exchange rate misalignment.
    Keywords: Foreign exchange intervention, Announcements, Implied volatility
    JEL: F31
    Date: 2011–08
  31. By: Olivier Ledoit; Sébastien Lotz
    Abstract: In reaction to the monetary turmoil created by the financial crisis of September 2008, both legislative and constitutional reforms have been proposed in different Countries to introduce Commodity Money longside existing National Fiat Currency. A thorough evaluation of the Economic consequences of these new proposals is warranted. This paper surveys some of the existing knowledge in Monetary and Financial Economics for the purpose of answering the significant Economic questions raised by these new political initiatives.
    Keywords: Currency competition, commodity money, fiat money, gold, safe haven, search models
    JEL: E42 E52
    Date: 2011–08
  32. By: De Graeve, Ferre (Monetary Policy Department, Central Bank of Sweden); Walentin, Karl (Monetary Policy Department, Central Bank of Sweden)
    Abstract: Research on disaggregate price indices has found that sectoral shocks generate the bulk of sectoral inflation variance, but no persistence. Aggregate shocks, by contrast, are the root of sectoral inflation persistence, but have negligible relative variance. We argue that these findings are largely an artefact of using overly simple factor models to characterize inflation. Sectoral inflation series are subject to particular features such as sales and item substitutions. In factor models, these blow up the variance of sectoral shocks, while reducing their persistence. Controlling for such effects, we find that inflation variance is driven by both aggregate and sectoral shocks. Sectoral shocks, too, generate substantial inflation persistence. Both findings contrast sharply with earlier evidence from factor models. However, these results align well with recent micro evidence. This has implications for the foundations of price stickiness, and provide quantitative inputs for calibrating models with sectoral heterogeneity.
    Keywords: Inflation persistence; sticky prices; factor model; sectoral inflation
    JEL: E50 G21
    Date: 2011–08–01
  33. By: Thorvardur Tjörvi Ólafsson; Ásgerdur Pétursdóttir; Karen Á. Vignisdóttir
    Abstract: This price setting survey among Icelandic firms aims to make two contributions to the literature. First, it studies price setting in an advanced economy within a more turbulent macroeconomic environment than has previously been done. The results indicate that price adjustments are to a larger extent driven by exchange rate fluctuations than in most other advanced countries. The median Icelandic firm reviews its prices every four months and changes them every six months. The main sources of price rigidity and the most commonly used price setting methods are the same as in most other countries. A second contribution to the literature is our analysis of the nexus between price setting and exchange rate movements, a topic that has attracted surprisingly limited attention in this survey-based literature. A novel aspect of our approach is to base our analysis on a categorisation of firms in the domestic market by their direct exposure to exchange rate movements captured by imported input costs as a share of total production costs. More exposed firms are found to be more likely to use state-dependent pricing, to adjust their prices in response to exchange rate changes, and to rely on increasing prices rather than decreasing costs to restore profit margins after an exchange rate depreciation. They also review their prices more often but nevertheless, surprisingly, have the same price change frequency as the median firm. On the other hand, price review frequency declines and time-dependent pricing increases as domestic labour costs rise relative to total production costs. The results provide important insight into inflation dynamics due to an interaction between high and asymmetric exchange rate pass-through and price indexation. This interaction causes an exchange rate depreciation to spread to sectors less exposed to such changes through the use of price indexation. Exchange rate pass-through, price indexation and backward-looking behaviour in price setting therefore pose challenges for monetary policy in Iceland.
    Date: 2011–07
  34. By: Luis E. Rojas
    Abstract: This paper derives a link between the forecasts of professional forecasters and a DSGE model. I show that the forecasts of a professional forecaster can be incorporated to the state space representation of the model by allowing the measurement error of the forecast and the structural shocks to be correlated. The parameters capturing this correlation are reduced form parameters that allow to address two issues i) How the forecasts of the professional forecaster can be exploited as a source of information for the estimation of the model and ii) How to characterize the deviations of the professional forecaster from an ideal complete information forecaster in terms of the shocks and the structure of the economy.
    Date: 2011–08–15
  35. By: Emi Nakamura; Jón Steinsson
    Abstract: We use rich historical data on military procurement spending across U.S. regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and draw-downs have differential effects across regions. We use this variation to estimate an "open economy relative multiplier'' of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The closed economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind.'' In contrast, our estimate "differences out'' these effects because different regions in the union share a common monetary and tax policy. Our estimate provides evidence in favor of models in which demand shocks can have large effects on output.
    JEL: E32 E62
    Date: 2011–09
  36. By: António Rua
    Abstract: This paper provides new insights on the relationship between money growth and inflation in the euro area over the last forty years. This highly relevant link for the European Central Bank monetary policy strategy is assessed using wavelet analysis. In particular, wavelet analysis allows to study simultaneously the relationship between money growth and inflation in the euro area at the frequency level and assess how it has changed over time. The findings indicate a stronger link between inflation and money growth at low frequencies over the whole sample period. At the typical business cycle frequency range the link is only present until the beginning of the 1980’s. Moreover, there seems to be a recent deterioration of the leading properties of money growth with respect to inflation in the euro area. These results highlight the importance of a regular assessment of the role of money growth in tracking inflation developments in the euro area since such relationship varies across frequencies and over time.
    JEL: C40 E30 E40 E50
    Date: 2011
  37. By: Naohisa Hirakata; Nao Sudo; Kozo Ueda
    Abstract: The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17 percent of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36 percent of the variations.
    Keywords: Price levels ; Financial markets ; Monetary policy
    Date: 2011
  38. By: De la Serve, M-E.; Lemoine, M.
    Abstract: Estimates of the Nairu generally suffer from a large uncertainty, which can be reduced by adopting a bivariate framework and assuming that shifts of the Phillips curve share a common trend with the unemployment rate. We consider in this paper if this common trend assumption is empirically relevant or not for seven economies over the sample 1973-2010. First, it appears that the Nairu can substantially differ from the unemployment trend. Second, relaxing the common trend assumption improves the fit of the inflation equation. Third, this assumption is necessary for getting an important reduction of uncertainty in a bivariate framework.
    Keywords: Nairu, inflation, uncertainty.
    JEL: C32 E31 E24
    Date: 2011
  39. By: Raghbendra Jha; Tu Dang
    Abstract: We examine the effect of inflation variability and economic growth using annual historical data on both developing and developed countries. The data cover 182 developing countries and 31 developed countries for the period 1961-2009. Proxying inflation variability by the five-year coefficient of variation of inflation, we obtain the following results: (1) For developing countries, there is significant evidence to suggest that when the rate of inflation exceeds 10 percent inflation variability has a negative effect on economic growth. (2) For developed countries, there is no significant evidence that inflation variability is detrimental to growth.
    Keywords: Inflation, Growth, Threshold, Variablity
    JEL: C51 E31 E58
    Date: 2011
  40. By: Alessandro Calza; Andrea Zaghini
    Abstract: Empirical studies of the "shoe-leather" costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using monetary data adjusted for U.S. dollars abroad, we show that the failure to control for currency held by nonresidents may lead to significantly overestimating the shoe-leather costs for the domestic economy. In particular, our estimates of shoe-leather costs are minimized for a positive but moderate value of the inflation rate, thereby justifying a deviation from the Friedman rule in favor of the Fed's current policy.
    Keywords: Price levels ; Demand for money ; Monetary policy
    Date: 2011
  41. By: Boragan Aruoba (Department of Economics, University of Maryland); Francis X. Diebold (Department of Economics, University of Maryland); Jeremy Nalewaik (Federal Reserve Board, Washington D.C.); Frank Schorfheide (Department of Economics, University of Pennsylvania); Dongho Song (Department of Economics, University of Pennsylvania)
    Abstract: Two often-divergent U.S. GDP estimates are available, a widely-used expenditure side version, GDPE, and a much less widely-used income-side version, GDPI . We propose and explore a "forecast combination" approach to combining them. We then put the theory to work, producing a superior combined estimate of GDP growth for the U.S., GDPC. We compare GDPC to GDPE and GDPI, with particular attention to behavior over the business cycle. We discuss several variations and extensions.
    Keywords: National Income and Product Accounts, Output, Expenditure, Economic Activity, Business Cycle, Recession
    JEL: E01 E32
    Date: 2011–09–06
  42. By: Carin van der Cruijsen; Jakob de Haan; David-Jan Jansen; Robert Mosch
    Abstract: We analyze whether households’ savings behaviour was affected by adverse experiences during the crisis and knowledge about banking supervision. Using a survey among Dutch households, we find that both factors have affected the allocation of savings. Individuals whose bank went bankrupt or received government support during the crisis gather more information about banks and saving instruments and are more likely to have savings at several banks. Respondents with better knowledge about banking supervision are more likely to gather information about banks and saving instruments, to spread their savings across banks, and to shift savings to other banks.
    Keywords: savings; financial literacy; financial crisis; household decision-making
    JEL: D14 D84 E58
    Date: 2011–08
  43. By: Ramon Gomez-Salvador; Adriana Lojschova; Thomas Westermann
    Abstract: This paper uses microdata from the EU-SILC (Statistics on Income and Living Conditions) to generate structural information for the euro area on the incidence of household indebtedness and of the burden to service debt. It distinguishes this incidence according to relevant characteristics such as income, age and employment status, all elements that can be cross-examined in the light of theories such as the life-cycle hypothesis. Overall, income appears as the dominant feature determining the debt status of a household. The paper also examines the evolution of indebtedness and debt service burdens over time and compares it with the US. In general, the results suggest that the macroeconomic implications of indebtedness for monetary transmission and financial stability are not associated with the mean but with the tails of the distribution.
    Keywords: household indebtedness, financial vulnerability, micro survey data, monetary transmission.
    JEL: C42 D12 D14 G21
    Date: 2011–02
  44. By: Alfonso Palacio-Vera
    Abstract: The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expansionary effect stems mainly from a reduction in the financial cost of servicing the public debt. The efficacy of the channel that allegedly operates through the compression of the risk/term premium on securities is found to be ambiguous. Finally, we show that a country that issues its own currency can avoid becoming stuck in a structural "liquidity trap," provided its central bank is willing to monetize the debt created by a strong enough fiscal expansion.
    Keywords: Floor System; Debt Monetization; Functional Finance; Policy Coordination; Neutral Interest Rate
    JEL: E10 E12 E44 E52 E58
    Date: 2011–09
  45. By: Patrick Leblond
    Abstract: When the global financial crisis hit the shores of Europe, after crossing the Atlantic, the Eurozone was considered a safe haven. After the first Greek bailout in May 2010, the discourse had now changed completely; the debt crisis was the euro’s fault. As a result, some argued that Greece and eventually other bailed-out member states should abandon the euro and reintroduce their national currencies. If they did not, then countries such as Germany and the Netherlands would give up on supporting them financially, forcing them to abandon the euro anyway. Yet, no such thing has happened. The euro and the European Union are still with us. In fact, European integration has been deepened as a result of the debt crisis. This paper explains why the doomsayers have been wrong on durability of the Eurozone. <P>
    Keywords: Debt crisis, Euro, European integration, European Monetary Union, European Union, Financial crisis.,
    Date: 2011–08–01
  46. By: Filipa Sá; Tomasz Wieladek
    Abstract: We estimate an open economy VAR model to quantify the effect of monetary policy and capital inflows shocks on the US housing market. The shocks are identified with sign restrictions derived from a standard DSGE model. We find that monetary policy shocks have a limited effect on house prices and residential investment. In contrast, capital inflows shocks driven by an increase in foreign savings have a positive and persistent effect on both housing variables. Other sources of capital inflows shocks, such as foreign monetary expansion or an increase in aggregate demand in the US, have a more limited role.
    Keywords: Monetary policy ; Money supply ; International finance
    Date: 2011
  47. By: Filipa Sá; Pascal Towbin; Tomasz Wieladek
    Abstract: A number of OECD countries experienced an environment of low interest rates and a rapid Increase in real house prices and residential investment during the past decade. Different explanations have been suggested for the housing boom: expansionary monetary policy, capital inflows due to a global savings glut and excessive financial innovation combined with inappropriately lax financial regulation. In this study we examine the effects of these three factors on the housing market. We estimate a panel VAR for a sample of OECD countries and identify monetary policy and capital inflows shocks using sign restrictions. To explore how the effects of these shocks change with the structure of the mortgage market and the degree of securitization, we allow the VAR coefficients to vary with mortgage market characteristics. Our results suggest that both types of shocks have a significant and positive effect on real house prices, real credit to the private sector and residential investment. The response of housing variables to both types of shocks is stronger in countries with more developed mortgage markets. The amplification effect of mortgage-backed securitization is particularly strong for capital inflows shocks.
    Keywords: Money supply ; Capital movements
    Date: 2011
  48. By: Sandra Gomes; Caterina Mendicino
    Abstract: This paper quantifies the role of expectation-driven cycles for housing market fluctuations in the United States. We find that news shocks: (1) account for a sizable fraction of the variability in house prices and other macroeconomic variables over the business cycle and (2) significantly contributed to booms and busts episodes in house prices over the last three decades. By linking news shocks to agents’ expectations, we find that house prices were positively related to inflation expectations during the boom of the late 1970’s while they were negatively related to interest rate expectations during the housing boom that peaked in the mid-2000’s.
    JEL: C50 E32 E44
    Date: 2011
  49. By: Jaqueson K. Galimberti; Marcelo L. Moura
    Abstract: Incorporating survey forecasts to a forecast-augmented Hodrick-Prescott filter, we evidence a considerable improvement to the reliability of US output-gap estimation in realtime. Odds of extracting wrong signals of output-gap estimates are found to reduce by almost a half, and the magnitude of revisions to these estimates accounts to only three fifths of the output-gap average size, usually an one-by-one ratio. We further analyze how this end-of-sample uncertainty evolves as time goes on and observations accumulate, showing that a 90% rate of correct assessments of the output-gap sign can be attained with five quarters of delay using survey forecasts.
    Date: 2011
  50. By: Anders Bredahl Kock (Aarhus University and CREATES); Timo Teräsvirta (Aarhus University and CREATES)
    Abstract: In this work we consider forecasting macroeconomic variables dur- ing an economic crisis. The focus is on a specific class of models, the so-called single hidden-layer feedforward autoregressive neural net- work models. What makes these models interesting in the present context is that they form a class of universal approximators and may be expected to work well during exceptional periods such as major economic crises. These models are often difficult to estimate, and we follow the idea of White (2006) to transform the speci?fication and non- linear estimation problem into a linear model selection and estimation problem. To this end we employ three automatic modelling devices. One of them is White's QuickNet, but we also consider Autometrics, well known to time series econometricians, and the Marginal Bridge Estimator, better known to statisticians and microeconometricians. The performance of these three model selectors is compared by look- ing at the accuracy of the forecasts of the estimated neural network models. We apply the neural network model and the three modelling techniques to monthly industrial production and unemployment se- ries of the G7 countries and the four Scandinavian ones, and focus on forecasting during the economic crisis 2007-2009. Forecast accuracy is measured by the root mean square forecast error. Hypothesis testing is also used to compare the performance of the different techniques with each other.
    Keywords: Autometrics, economic forecasting, Marginal Bridge estimator, neural network, nonlinear time series model, Wilcoxon's signed-rank test
    JEL: C22 C45 C52 C53
    Date: 2011–08–26
  51. By: Paul Beaumont (Department of Economics, Florida State University Author-X-Name-First: Yaniv); Yaniv Jerassy-Etzion (Department of Economics and Management; Ruppin Academic Center)
    Abstract: We present a simple and fast iterative, linear algorithm for simultaneously stripping the coupon payments from and smoothing the yield curve of the term structure of interest rates. The method minimizes pricing errors, constrains initial and terminal conditions of the curves and produces maximally smooth forward rate curves.
    Keywords: Term structure of interest rates, yield curve, coupon stripping, curve interpolation
    JEL: G12 C63
    Date: 2011–08
  52. 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.
    Keywords: Pricing ; Profit
    Date: 2011
  53. By: Jósef Sigurdsson; Rannveig Sigurdardottir
    Abstract: This paper presents new evidence about wage stickiness and the nature of wage setting. We use a unique micro dataset on monthly frequency, covering wages in the Icelandic private sector for the period from 1998-2010, and draw the following conclusions. First, the mean frequency of wage change is 10.8% per month. When weighted for heterogeneity across industries and occupations the result is almost identical; the frequency of change is 10.5% per month. Second, only 0.5% of monthly wage changes are decreases. Third, the mean duration of wage spells is 8.9 months. Onefifth of wage spells last longer than a year while other spells last for one year or shorter. Fourth, wage setting displays strong features of time-dependence: half of all wage changes are synchronised in January, but other adjustments are staggered through the year. Fifth, there is limited evidence of state-dependence: frequency of wage increases, size of increases, frequency of wage decreases and size of decreases do not correlate with inflation. However, both frequency and size of wage decreases have significant correlation with unemployment. Sixth, the hazard function for wages is mostly flat during the first months but has a large twelve-month spike. These facts align with a model of time-dependent wage contracts of fixed duration.
    Date: 2011–08
  54. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Qianying Chen (Hong Kong Institute for Monetary Research); Stefan Gerlach (Institute for Monetary and Financial Stability and University of Frankfurt and Hong Kong Institute for Monetary Research)
    Abstract: We analyze the impact of monetary policy instruments on interbank lending rates and retail bank lending in China using an extended version of the model of Porter and Xu (2009). Unlike the central banks of advanced economies, the People's Bank of China uses changes in the required reserve ratios and open market operations to influence liquidity in money markets and adjusts the regulated deposit and lending rates and loan targets to intervene in the retail deposit and lending market. These interventions prevent the interbank lending rate from signalling monetary policy stance and transmitting the effect of policy to the growth of bank loans.
    Keywords: Monetary Policy Implementation, Regulated Retail Interest Rates, Transmission Mechanism, Window Guidance, Bank Loans, China
    JEL: E42 E52 E58
    Date: 2011–08
  55. By: Christian Dreger; Yanqun Zhang
    Abstract: The integration of China into the global economy is one of the most spectacular events in economic history. This paper investigates to what extent this process affects output growth and inflation in the advanced countries. A GVAR model is specified to explore interdependencies between business cycles in China and industrial countries, including the US, the euro area and Japan. For robustness, the results are compared to those obtained from leading structural models, such as NiGEM and OEF. Evidence is based on the responses to a Chinese demand shock arising from the recent fiscal stimulus program. The results show that the impact on output growth in the advanced economies can be quite substantial, especially for the Asian region. The expansionary effects in the US and the euro area responses are lower, as trade linkages are less intensive. The multipliers are also reduced by a sizeable effect on inflation, as Chinese firms participate in international production chains.
    Keywords: GVAR, Chinese economy, shock transmission
    JEL: E32 F15 C51
    Date: 2011
  56. By: Jan Babecky; Ales Bulir; Katerina Smidkova
    Abstract: The Great Recession affected export and import patterns in our sample of new EU member countries, and these changes, coupled with a more volatile external environment, have a profound impact on our estimates of real exchange rate misalignments and projections of sustainable real exchange rates. We find that real misalignments in several countries with pegged exchange rates and excessive external liabilities widened relative to earlier estimates. While countries with balanced net trade positions may experience sustainable appreciation during 2010–2014, several currencies are likely to require real depreciation to maintain sustainable net external debt.
    Keywords: Foreign direct investment, Great Recession, new EU member states, sustainable exchange rates.
    JEL: F31 F33 F36 F47
    Date: 2011–08
  57. By: Borek Vasicek
    Abstract: Estimated Taylor rules have become popular as a description of monetary policy conduct. There are numerous reasons why real monetary policy can be asymmetric and estimated Taylor rules nonlinear. This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary, and Poland), which apply an inflation targeting regime. Two different empirical frameworks are used: (i) Generalized Method of Moments (GMM) estimation of models that allow discrimination between sources of potential policy asymmetry but are conditioned by specific underlying relations, and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes. We find generally little evidence for asymmetric policy driven by nonlinearities in economic systems, some evidence for asymmetric preferences, and some interesting evidence on policy switches driven by the intensity of financial distress in the economy.
    Keywords: Inflation targeting, monetary policy, nonlinear Taylor rules, threshold estimation.
    JEL: C32 E52 E58
    Date: 2011–07
  58. By: Stefan Gerlach (Institute for Monetary and Financial Stability and Goethe-University Frankfurt and Hong Kong Institute for Monetary Research); Peter Tillmann (Justus-Liebig-University Giessen and Institute for Monetary and Financial Stability and Hong Kong Institute for Monetary Research)
    Abstract: Following the Asian financial crisis in 1997-98, a number of Asian central banks adopted inflation targeting. While it is possible for the average inflation rate to be close to target, deviations of inflation could nevertheless be large and protracted. We therefore explore how successful this framework has been by looking at the persistence of inflation, as measured by the sum of the coefficients in an autoregressive model for inflation, using a median unbiased estimator and bootstrapped confidence bands. We find a significant reduction in inflation persistence following the adoption of inflation targeting. The speed by which persistence falls varies across countries. Interestingly, the economies not adopting inflation targeting do not show a decline in persistence. Measuring the performance of monetary policy strategies in terms of inflation persistence rather than the level of inflation shows that inflation targeting performs better than alternative strategies.
    Keywords: Inflation Targeting, Asia, Inflation Persistence, Monetary Policy Strategy
    JEL: C22 E31 E5
    Date: 2011–08
  59. By: Galo Nuño (Banco de España); Pedro Tedde (Banco de España); Alessio Moro (Università di Cagliari)
    Abstract: This paper analyzes the Spanish monetary system from 1856, when the Bank of Spain was created, to 1874, when it was awarded the monopoly of emission. This period was characterized by the emergence of an unregulated banking system, with multiple banks of issue entitled to emit bank notes. We focus on two main issues: i) the large fluctuations in the money supply during this period; and ii) the lack of a lender of last resort in the banking panic of 1866. To analyze this, we construct a new dataset on money supply aggregates. The paper also estimates the economic impact of monetary fluctuations with the help of a calibrated new Keynesian model. Our results suggest that money supply shocks had a milder effect on inflation and output than the one predicted by the theory.
    Keywords: unregulated banking, Gresham’s`law, lender of last resort, Overend and Gurney crisis
    JEL: N13 N23 E31 E5
    Date: 2011–09
  60. By: Laura Fernández-Caballero (Banco de España)
    Abstract: We analyse the impact of fiscal shocks on the Spanish effective exchange rate over the period 1981-2008 using a standard structural VAR framework. We show that government spending brings about positive output responses, jointly with real appreciation. Such real appreciation is explained by persistent nominal appreciation and higher relative prices. Our results indicate that the adoption of the common currency has not implied any significant change in the way fiscal shocks affect external competitiveness through their effect on relative prices. In turn, the current account deteriorates when government spending rises mainly due to the fall of exports caused by the real appreciation. Accordingly, our results in this regard are largely consistent not only with the conventional Mundell Fleming model and, in general a traditional Keynesian view, but also with a wide set of RBC or New Keynesian models under standard calibrations. Moreover, our estimations are fully in line with the “twin deficits” hypothesis. Furthermore, we show that shocks to purchases of goods and services and public investment lead to real appreciation, whereas the opposite happens with higher personnel expenditure. We obtain output multipliers around 0.5 on impact and slightly above unity one year after the shock, which are in line with previous empirical evidence regarding some individual European countries.
    Keywords: SVAR, Fiscal shocks, Effective exchange rates, Twin deficits, Fiscal multipliers
    JEL: E62 H30
    Date: 2011–09

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