nep-cba New Economics Papers
on Central Banking
Issue of 2011‒09‒22
thirty papers chosen by
Alexander Mihailov
University of Reading

  1. The Financial Crisis and the Geography of Wealth Transfers By Gourinchas, Pierre-Olivier; Rey, Hélène; Truempler, Kai Alexander
  2. Toward a Political Economy of Macroeconomic Thinking By Gilles St. Paul
  3. The Fiscal Stimulus of 2009-10: Trade Openness, Fiscal Space and Exchange Rate Adjustment By Joshua Aizenman; Yothin Jinjarak
  4. Optimal Monetary Policy with Endogenous Entry and Product Variety By Bilbiie, Florin Ovidiu; Fujiwara, Ippei; Ghironi, Fabio
  5. Aggregate Hours Worked in OECD Countries: New Measurement and Implications for Business Cycles By Lee E. Ohanian; Andrea Raffo
  6. Inflation dynamics and labor market specifications: a Bayesian DSGE approach for Japan's economy By Ichiue, Hibiki; Kurozumi, Takushi; Sunakawa, Takeki
  7. Markups and the Welfare Cost of Business Cycles: A Reappraisal By Jean-Olivier Hairault; François Langot
  8. Communication of Central Bank Thinking and Inflation Dynamics By Man-Keung Tang; Xiangrong Yu
  9. Central bank communication on financial stability By Benjamin Born; Michael Ehrmann; Marcel Fratzscher
  10. Evaluating interest rate rules in an estimated DSGE model By Vasco Cúrdia; Andrea Ferrero; Ging Cee Ng; Andrea Tambalotti
  11. External Adjustment and the Global Crisis By Gian Maria Milesi-Ferretti; Philip R. Lane
  12. The Federal Reserve as an Informed Foreign Exchange Trader: 1973 – 1995 By Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
  13. Global crisis and equity market contagion By Geert Bekaert; Michael Ehrmann; Marcel Fratzscher; Arnaud Mehl
  14. Liquidity management of U.S. global banks: internal capital markets in the Great Recession By Nicola Cetorelli; Linda Goldberg
  15. The Optimality and Controllability of Discretionary Monetary Policy By Huiping Yuan; Stephen M. Miller
  16. The unreliability of credit-to-GDP ratio gaps in real-time: Implications for countercyclical capital buffers By Rochelle M. Edge; Ralf R. Meisenzahl
  17. A theory of the non-neutrality of money with banking frictions and bank recapitalization By Zeng, Zhixiong
  18. Changing of the guard - Challenges ahead for the new ECB president By Guntram B. Wolff
  19. International Financial Integration and National Price Levels: The Role of the Exchange Rate Regime By Mathias Hoffmann; Peter Tillmann
  20. Behind closed doors: Revealing the ECB’s Decision Rule By Bernd Hayo; Pierre-Guillaume Méon
  21. Forecasting economic growth in the euro area during the great moderation and the great recession By Marco J. Lombardi; Philipp Maier
  22. Improving GDP Measurement: A Forecast Combination Perspective By S. Boragan Aruoba; Francis X. Diebold; Jeremy Nalewaik; Frank Schorfheide; Dongho Song
  23. First Impressions Matter: Signalling as a Source of Policy Dynamics By Stephen Hansen; Michael McMahon
  24. Cross-Checking Optimal Monetary Policy with Information from the Taylor Rule By Peter Tillmann
  25. Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses By D. Filiz Unsal
  26. Empirical Evidence on Inflation and Unemployment in the Long Run By Alfred A. Haug & Ian P. King
  27. Central Bank Transparency and Financial Market Expectations: The Case of Emerging Markets By Matthias Neuenkirch
  28. John Maynard Keynes: Is That you Knocking on the Door? By Tadeusz Kowalski; Yochanan Shachmurove
  29. Public Debt Targeting An Application to the Caribbean By Giovanni Melina; Alejandro D Guerson
  30. Formal Sector Price Discoveries: Results from a Developing Country By M. Ali Choudhary; Saima Naeem; Abdul Faheem; Nadim Haneef; Farooq Pasha

  1. By: Gourinchas, Pierre-Olivier; Rey, Hélène; Truempler, Kai Alexander
    Abstract: This paper studies the geography of wealth transfers during the 2008 global financial crisis. We construct valuation changes on bilateral external positions in equity, direct investment and portfolio debt at the height of the crisis to map who benefited and who lost on their external exposure. We find a very diverse set of fortunes governed by the structure of countries' external portfolios. In particular, we are able to relate the gains and losses on debt portfolios to the country's exposure to ABCP conduits and the extent of dollar shortage.
    Keywords: global financial crisis; international monetary system; reserve currency; valuation effects
    JEL: F32 F33
    Date: 2011–09
  2. By: Gilles St. Paul
    Abstract: This paper investigates, in a simplified macro context, the joint determination of the (incorrect) perceived model and the equilibrium. I assume that the model is designed by a self-interested economist who knows the true structural model, but reports a distorted one so as to influence outcomes. This model influences both the people and the government; the latter tries to stabilize an unobserved demand shock and will make different inferences about that shock depending on the model it uses. The model's choice is constrained by a set of autocoherence conditions that state that, in equilibrium, if everybody uses the model then it must correctly predict the moments of the observables. I then study, in particular, how the models devised by the economists vary depending on whether they are "progressive" vs. "conservative". The predictions depend greatly on the specifics of the economy being considered. But in many cases, they are plausible. For example, conservative economists will tend to report a lower keynesian multiplier, and a greater long-term inflationary impact of output expansions. On the other hand, the economists' margin of manoeuver is constrained by the autocoherence conditions. Here, a "progressive" economist who promotes a Keynesian multiplier larger than it really is, must, to remain consistent, also claim that demand shocks are more volatile than they really are. Otherwise, people will be disappointed by the stabilization performance of fiscal policy and reject the hypothesized value of the multiplier. In some cases, autocoherence induces the experts to make, loosely speaking, ideological concessions on some parameter values. The analysis is illustrated by empirical evidence from the Survey of Professional Forecasters.
    JEL: A11 E6
    Date: 2011–09
  3. By: Joshua Aizenman; Yothin Jinjarak
    Abstract: This paper studies the cross-country variation of the fiscal stimulus and the exchange rate adjustment propagated by the global crisis of 2008-9, identifying the role of economic structure in accounting for the heterogeneity of response. We find that greater de facto fiscal space prior to the global crisis and lower trade openness were associated with a higher fiscal stimulus/GDP during 2009-2010 (where the de facto fiscal space is the inverse of the average tax-years it would take to repay the public debt). Lowering the 2006 public debt/average tax base from the level of low-income countries (5.94) down to the average level of the Euro minus the Euro-area peripheral countries (1.97), was associated with a larger crisis stimulus in 2009-11 of 2.78 GDP percentage points. Joint estimation of fiscal stimuli and exchange rate depreciations indicates that higher trade openness was associated with a smaller fiscal stimulus and a higher depreciation rate during the crisis. Overall, the results are in line with the predictions of the neo-Keynesian open-economy model.
    JEL: E62 F42 O23
    Date: 2011–09
  4. By: Bilbiie, Florin Ovidiu; Fujiwara, Ippei; Ghironi, Fabio
    Abstract: We show that deviations from long-run stability of product prices are optimal in the presence of endogenous producer entry and product variety in a sticky-price model with monopolistic competition in which price stability would be optimal in the absence of entry. Specifically, a long-run positive (negative) rate of inflation is optimal when the benefit of variety to consumers falls short of (exceeds) the market incentives for creating that variety under flexible prices, governed by the desired markup. Plausible preference specifications and parameter values justify a long-run inflation rate of two percent or higher. Price indexation implies even larger deviations from long-run price stability. However, price stability (around this non-zero trend) is close to optimal in the short run, even in the presence of time-varying flexible-price markups that distort the allocation of resources across time and states. The central bank uses its leverage over real activity in the long run, but not in the short run. Our results point to the need for continued empirical research on the determinants of markups and investigation of the benefit of product variety to consumers.
    Keywords: Entry; Optimal inflation rate; Price stability; Product variety; Ramsey-optimal monetary policy.
    JEL: E31 E32 E52
    Date: 2011–09
  5. By: Lee E. Ohanian; Andrea Raffo
    Abstract: We build a new quarterly dataset of aggregate hours worked consistent with standard NIPA constructs for 14 OECD countries over the last fifty years. We find that cyclical features of labor markets across countries differ markedly from the accepted empirical facts reported in the literature based on either just U.S. hours data, or based on cross-country employment data. We document that total hours worked in many OECD countries are about as volatile as output, that a relatively large fraction of labor market adjustment takes place along the intensive margin outside the United States, and that the volatility of total hours relative to output volatility has increased over time in almost all countries. We use these data to re-assess productivity and labor wedges during the Great Recession and during prior recessions. We find that the Great Recession in many OECD countries is a significant puzzle in that labor wedges are quite small, while those in the U.S. Great Recession - and those in previous European recessions - are much larger. These new data indicate that understanding cyclical labor fluctuations in OECD countries requires understanding why hours fluctuate so much more than previously considered, how and why labor markets changed so much in the last few years, why cyclical adjustment of hours per worker in countries with large firing costs is not even larger than observed, and why the Great Recession differs so much across countries.
    JEL: E0 F41 J22
    Date: 2011–09
  6. By: Ichiue, Hibiki; Kurozumi, Takushi; Sunakawa, Takeki
    Abstract: Which labor market specification is better able to describe inflation dynamics, a widely-used sticky wage model or a recently-investigated labor market search model? Using a Bayesian likelihood approach, we estimate these two models with Japan’s data. This paper shows that the labor market search model is superior to the sticky wage model in terms of both marginal likelihood and out-of-sample forecast performance, particularly regarding inflation. The labor market search model is better able to replicate the cross-correlation among inflation, real wages, and output in the data. Moreover, in this model, real marginal cost is determined by both hiring cost and unit labor cost that varies with employment fluctuations, which gives rise to a high contemporaneous correlation between inflation and real marginal cost as represented in the New Keynesian Phillips curve.
    Keywords: Inflation dynamics; Marginal cost; Labor market search; Extensive margin; Bayesian estimation
    JEL: E32 E24 E37
    Date: 2011–09
  7. By: Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications)
    Abstract: Gali et al. (2007) have recently shown quantitatively that fluctuations in the efficiency of resource allocation do not generate sizable welfare costs. In their economy, which is distorted by monopolistic competition in the steady state, we show that they underestimate the welfare cost of these fluctuations by ignoring the negative effect of aggregate volatility on average consumption and leisure. As monopolistic suppliers, both firms and workers aim to preserve their expected markups; the interaction between aggregate fluctuations and price-setting behavior results in average consumption and employment levels that are lower than their counterparts in the flexible-price economy. This level effect increases the efficiency cost of business cycles. It is all the more sizable with the degree of inefficiency in the steady state, lower labor-supply elasticities, and when prices instead of wages are rigid.
    Keywords: Business cycle costs; inefficiency gap; New-Keynesian Macroeconomics
    Date: 2011–09–14
  8. By: Man-Keung Tang; Xiangrong Yu
    Abstract: This paper studies the role of central bank communication of its economic assessment in shaping inflation dynamics. Imperfect information about the central bank’s assessment - or the basis for monetary policy decisions - could complicate the private sector’s learning about its policy response function. We show how clear central bank communication, which facilitates agents’ understanding of policy reasoning, could bring about less volatile inflation and interest rate dynamics, and afford the authorities with greater policy flexibility. We then estimate a simple monetary model to fit the Mexican economy, and use the suggested paramters to illustrate the model’s quantitative implications in scenarios where the timing, nature and persistence of shocks are uncertain.
    Keywords: Central bank role , Central banks , Economic models , Inflation targeting , Mexico , Monetary policy , Transparency ,
    Date: 2011–08–03
  9. By: Benjamin Born (University of Bonn); Michael Ehrmann (European Central Bank); Marcel Fratzscher (European Central Bank)
    Abstract: Central banks regularly communicate about financial stability issues, by publishing Financial Stability Reports (FSRs) and through speeches and interviews. The paper asks how such communications affect financial markets. Building a unique dataset, it provides an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs and speeches by 37 central banks over the past 14 years. The findings suggest that FSRs have a significant and potentially long-lasting effect on stock market returns, and also tend to reduce market volatility. Speeches and interviews, in contrast, have little effect on market returns and do not generate a volatility reduction during tranquil times, but have had a substantial effect during the 2007-10 financial crisis. The findings suggest that financial stability communication by central banks are perceived by markets to contain relevant information, and they underline the importance of differentiating between communication tools, their content and the environment in which they are employed.
    Keywords: central bank, financial stability, communication, event study
    JEL: E44 E58 G12
    Date: 2011
  10. By: Vasco Cúrdia; Andrea Ferrero; Ging Cee Ng; Andrea Tambalotti
    Abstract: The empirical DSGE (dynamic stochastic general equilibrium) literature pays surprisingly little attention to the behavior of the monetary authority. Alternative policy rule specifications abound, but their relative merit is rarely discussed. We contribute to filling this gap by comparing the fit of a large set of interest rate rules (fifty-five in total), which we estimate within a simple New Keynesian model. We find that specifications in which monetary policy responds to inflation and to deviations of output from its efficient level—the one that would prevail in the absence of distortions—have the worst fit within the set we consider. Policies that respond to measures of the output gap based on statistical filters perform better, but the best-fitting rules are those that also track the evolution of the model-consistent efficient real interest rate.
    Date: 2011
  11. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: After widening substantially in the period preceding the global financial crisis, current account imbalances across the world have contracted to a significant extent. This paper analyzes the factors underlying this process of external adjustment. It finds that countries whose pre-crisis current account balances were in excess of what could be explained by economic fundamentals have experienced the largest contractions in their external balance. External adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. 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.
    Keywords: Cross country analysis , Currency pegs , Current account balances , Current account deficits , Demand , Exchange rate regimes , Financial crisis , Global Financial Crisis 2008-2009 , Production , Real effective exchange rates ,
    Date: 2011–08–15
  12. 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.
    JEL: E52 E58 F31 N22
    Date: 2011–09
  13. By: Geert Bekaert (Columbia University, 3022 Broadway, New York, NY 10027, USA.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.)
    Abstract: Using the 2007-2009 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use an asset pricing framework with global and local factors to predict crisis returns, defining unexplained increases in factor loadings as indicative of contagion. We find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small. By contrast, there has been systematic and substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. Consequently, we reject the globalization hypothesis that links the transmission of the crisis to the extent of global exposure. Instead, we confirm the old “wake-up call” hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis. JEL Classification: F3, G14, G15.
    Keywords: Contagion, financial crisis, equity markets, global transmission, market integration, country risk, factor model, financial policies, FX reserves, current account.
    Date: 2011–09
  14. By: Nicola Cetorelli; Linda Goldberg
    Abstract: The recent crisis highlighted the importance of globally active banks in linking markets. One channel for this linkage is the liquidity management of these banks, specifically the regular flow of funds 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 features of foreign affiliates are associated with protecting, 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 plays a significant role in this allocation, where distance is bank-affiliate specific and depends on the location’s ex ante relative importance in local funding pools and overall foreign investment strategies. These flows are a form of global interdependence previously unexplored in the literature on international shock transmission.
    Date: 2011
  15. By: Huiping Yuan (Xiamen University); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: This paper addresses two issues -- the time-inconsistency of optimal policy and the controllability of target variables within new-classical and new-Keynesian model structures. We can resolve both issues by delegation. That is, we design central bank loss functions by determining the two target values and the weight between the two targets. With a single decision maker, the time-inconsistency issue does not exist; the target controllability issue does. Delegating the long-run target values (target variables’ equilibriums under the Ramsey optimal policy) and the same weight as society to the central bank can achieve Ramsey optimality and path controllability. With multiple decision makers (game), both issues of time-inconsistency and target controllability exist and the delegation becomes more complicated. The long-run target values can only achieve asymptotic, not path, controllability. Path controllability requires the delegation of short-run target values, which commits or binds the central bank to follow exactly the Ramsey optimal paths. The short-run inflation target value conforms to the macroeconomic structure (i.e., Phillips curve). With path controllability, the constant average and state-contingent inflation biases are removed. To eliminate the stabilization bias, the delegated weight must differ from society in a dynamic game. When the Phillips curve exhibits output (inflation) persistence, the central bank must place more weight on output (inflation) stabilization. When the Phillips curve exhibits principally forward-looking behavior, the delegated weight can require a conservative or liberal central bank. In sum, delegating certain short-run target values and a different weight can cause discretionary monetary policy to prove Ramsey optimal and path controllable in a dynamic game.
    Keywords: Optimal Policy, Controllability, Policy Rules
    JEL: E42 E52 E58
    Date: 2011–08
  16. By: Rochelle M. Edge; Ralf R. Meisenzahl
    Abstract: Macroeconomists have long recognized that activity-gap measures are unreliable in real time and that this can present serious difficulties for stabilization policy. This paper investigates whether the credit-to-GDP ratio gap, which has been proposed as a reference point for accumulating countercyclical capital buffers, is subject to similar problems. We find that ex-post revisions to the U.S. credit-to-GDP ratio gap are sizable and as large as the gap itself, and that the main source of these revisions stems from the unreliability of end-of-sample estimates of the series' trend rather than from revised estimates of the underlying data. The paper considers the potential costs of gap mismeasurement. We find that the volume of lending that may incorrectly be curtailed is potentially large, although loan interest-rates appear to increase only modestly.
    Date: 2011
  17. By: Zeng, Zhixiong
    Abstract: The unconventional monetary policy actions of the Federal Reserve during the recent Global Financial Crisis often involve implicit subsidies to banks. This paper offers a theory of the non-neutrality of money associated with capital injection into banks via nominal transfers, in an environment where banking frictions are present in the sense that there exists an agency problem between banks and their private-sector creditors. The analysis is conducted within a general equilibrium setting with two-sided financial contracting. We first show that even with perfect nominal flexibility, the recapitalization policy has real effects on the economy. We then introduce banking riskiness shocks and study optimal policy responses to such shocks.
    Keywords: Bankruptcy of banks; banking riskiness shocks; two-sided debt contract; unconventional monetary policy; financial crisis
    JEL: D86 E52 E44 D82
    Date: 2011–08–15
  18. By: Guntram B. Wolff
    Abstract: Jean-Claude Trichet deserves praise for fighting inflation and his handling of the financial crisis of 2007-2009. But his legacy is unfinished and we still have to see whether he will be the one who saved the euro. Important challenges remain for the incoming president.First, trust of citizens in the ECB has fallenmassively according to the Eurobarometer survey inmany euro area countries, including Germany and Greece. Trust needs to be regained. Second, the ECBâ??s stance on Greece needs to be reversed both as regards financial sector participation and SMP. The SMP for Italy can be justified but can only be a temporary solution. The ECB will therefore have to further push for a fiscal lender-of-last-resort back-stop that can also exercise conditionality.Third, a rate cut should be considered at this point in time but upcoming political pressure to increase inflation needs to be resisted.
    Date: 2011–09
  19. By: Mathias Hoffmann (Deutsche Bundesbank); Peter Tillmann (University of Giessen)
    Abstract: How does international .financial integration affect national price levels? Panel evidence for 54 industrialized and emerging countries shows that a larger ratio of foreign assets and liabilities to GDP, our measure of international .financial integration, increases the national price level under .fixed and intermediate exchange rate regimes and lowers the price level under .floating exchange rates. This paper formulates a two-country open economy sticky-price model under either segmented or complete asset markets that is able to replicate these stylized facts. It is shown that the effect of financial integration, i.e. moving from segmented to complete asset markets, is regime-dependent. Under managed exchange rates financial integration raises the national price level. Under .floating exchange rates, however financial integration lowers national price levels. Thus, the paper proposes a novel argument to rationalize systematic deviations from PPP.
    Keywords: international financial integration, exchange rate regime, national price level, PPP, foreign asset position
    JEL: F21 F36 F41
    Date: 2011
  20. By: Bernd Hayo (University of Marburg); Pierre-Guillaume Méon (University of Brussels)
    Abstract: This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area’s interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country’s share of the zone’s GDP.
    Keywords: European Central Bank, Monetary Policy Committee, Decision rules
    JEL: D70 E43 E58 F33
    Date: 2011
  21. By: Marco J. Lombardi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.); Philipp Maier (Bank of Canada, International Department, 234 Wellington, Ottawa, ON, K1A 0G9, Canada.)
    Abstract: We evaluate forecasts for the euro area in data-rich and ‘data-lean’ environments by comparing three different approaches: a simple PMI model based on Purchasing Managers’ Indices (PMIs), a dynamic factor model with euro area data, and a dynamic factor model with data from the euro plus data from national economies (pseudo-real time data). We estimate backcasts, nowcasts and forecasts for GDP, components of GDP, and GDP of all individual euro area members, and examine forecasts for periods of low and high economic volatility (more specifically, we consider 2002-2007, which falls into the ‘Great Moderation’, and the ‘Great Recession’ 2008-2009). We find that all models consistently beat naive AR benchmarks, and overall, the dynamic factor model tends to outperform the PMI model (at times by a wide margin). However, accuracy of the dynamic factor model can be uneven (forecasts for some countries have large errors), with the PMI model dominating clearly for some countries or over some horizons. This is particularly pronounced over the Great Recession, where the dynamic factor model dominates the PMI model for backcasts, but has considerable difficulties beating the PMI model for nowcasts. This suggests that survey-based measures can have considerable advantages in responding to changes during very volatile periods, whereas factor models tend to be more sluggish to adjust. JEL Classification: C50, C53, E37, E47.
    Keywords: Forecasting, dynamic factor model, PMI model.
    Date: 2011–09
  22. By: S. Boragan Aruoba; Francis X. Diebold; Jeremy Nalewaik; Frank Schorfheide; Dongho Song
    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.
    JEL: E01 E32
    Date: 2011–09
  23. By: Stephen Hansen; Michael McMahon
    Abstract: We first establish that policymakers on the Bank of England's Monetary Policy Committee choose lower interest rates with experience. We then reject increasing confidence in private information or learning about the structure of the macroeconomy as explanations for this shift. Instead, a model in which voters signal their hawkishness to observers better fits the data. The motivation for signalling is consistent with wanting to control inflation expectations, but not career concerns or pleasing colleagues. There is also no evidence of capture by industry. The paper suggests that policy-motivated reputation building may be important for explaining dynamics in experts' policy choices.
    Keywords: Signalling, learning, monetary policy
    JEL: D78 E52
    Date: 2011–09
  24. By: Peter Tillmann (University of Giessen)
    Abstract: This paper shows that monetary policy should be delegated to a central bank that cross-checks optimal policy with information from the Taylor rule. Attaching some weight to deviations of the interest rate from the interest rate prescribed by the Taylor rule is beneficial if the central bank aims at optimally stabilizing inflation and output gap variability under discretion. Placing a weight on deviations from a simple Taylor rule increases the overall relative weight of inflation volatility in the effective loss function, which reduces the stabilization bias of discretionary monetary policy. The welfare-enhancing role of this modified loss function depends on the size of the stabilization bias, i.e. on the degree of persistence in the cost-push shock process, and the relevance of demand shocks. These results can be interpreted in terms of the optimal composition of monetary policy committees.
    Keywords: optimal monetary policy, stabilization bias, monetary policy delegation, robustness, Taylor rule, monetary policy committee
    JEL: E43 E52
    Date: 2011
  25. By: D. Filiz Unsal
    Abstract: The resumption of capital flows to emerging market economies since mid 2009 has posed two sets of interrelated challenges for policymakers: (i) to prevent capital flows from exacerbating overheating pressures and consequent inflation, and (ii) to minimize the risk that prolonged periods of easy financing conditions will undermine financial stability. While conventional monetary policy maintains its role in counteracting the former, there are doubts that it is sufficient to guard against the risks of financial instability. In this context, there have been increased calls for the development of macroprudential measures, with an explicit focus on systemwide financial risks. Against this background, this paper analyses the interplay between monetary policy and macroprudential regulations in an open economy DSGE model with nominal and real frictions. The key result is that macroprudential measures can usefully complement monetary policy. Even under the "optimal policy," which calls for a rather aggressive monetary policy reaction to inflation, introducing macroprudential measures is found to be welfare improving. Broad macroprudential measures are shown to be more effective than those that discriminate against foreign liabilities (prudential capital controls). However, these measures are not a substitute for an appropriate moneraty policy reaction. Moreover, macroprudential measures are less useful in helping economic stability under a technology shock.
    Keywords: Capital controls , Capital flows , Capital goods , Capital inflows , Corporate sector , Economic models , Emerging markets , Financial stability , Monetary policy ,
    Date: 2011–08–08
  26. By: Alfred A. Haug & Ian P. King
    Abstract: We examine the relationship between inflation and unemployment in the long run,using quarterly US data from 1952 to 2010. Using a band-pass filter approach, we find strong evidence that a positive relationship exists, where inflation leads unemployment by some 3 to 3.5 years, in cycles that last from 8 to 25 or 50 years. Our statistical approach is atheoretical in nature, but provides evidence in accordance with the predictions of Friedman (1977) and the recent New Monetarist model of Berentsen, Menzio, and Wright (2011): the relationship between inflation and unemployment is positive in the long run.
    Keywords: Inflation; Unemployment; Long-Run Phillips Curve
    JEL: E24 E31
    Date: 2011
  27. By: Matthias Neuenkirch (University of Marburg)
    Abstract: In this paper, we study the influence of central bank transparency on the formation of money market expectations in emerging markets. The sample covers 25 countries for the period from January 1998 to December 2009. We find, first, that transparency reduces the bias (the difference between the money market rate and the weighted expected target rate over the contract period) in money market expectations. The effect is larger for non-inflation targeters, countries with low income, and countries with low financial depth. However, the biasreducing effect of transparency prevails only if inflation is relatively low. Second, three subcategories of the Eijffinger and Geraats (2006) lead to a smaller bias in expectations: operational, political, and economic transparency, with the effect being the largest for operational transparency. Finally, an intermediate level of transparency is found to have the most favourable influence on money market expectations. Neither complete secrecy nor complete transparency is optimal.
    Keywords: Central Bank Transparency, Emerging Markets, Financial Market Expectations, Interest Rates, Monetary Policy, Money Market
    JEL: E52 E58
    Date: 2011
  28. By: Tadeusz Kowalski (Poznan University of Economics, Poznan, Poland); Yochanan Shachmurove (The City College of New York, New York, U.S.A.)
    Abstract: This paper provides an overview of the evolution of macroeconomic thought from 1936, the year John Maynard Keynes published his general theory of employment, interest and money to the year 2010. It explores the reasons for the extension of the business cycle during the postwar period. The paper details the decline in the popularity of the Keynesian theory and the return to classical economic principles. The recent crisis necessitates a shift in the way economists understand, theorize, teach and implement macroeconomic policies. The paper suggests some new elements needed in order to mitigate the next inevitable economic and financial crisis.
    Keywords: Financial crises; The United States Financial Crisis Inquiry Commission; The 2010 Economic Report of the United States President; Keynesian Theory; Adaptive Expectations; Rational Expectations; Monetary and Fiscal Policies; Business Cycles; Regulations; General Agreement on Tariffs and Trade (GATT); World Trade Organization (WTO); Trade Liberalization; United States; China; Euro; Econometric Policy Evaluation.
    JEL: B0 E0 E3 E4 E5 E6 F0 F3 F4 G0 H3 H6 K2 O51 P1 R3
    Date: 2011–09–10
  29. By: Giovanni Melina; Alejandro D Guerson
    Abstract: This paper proposes a fiscal policy framework we call Public Debt Targeting. The framework seeks to smooth primary spending over the business cycle while remaining consistent with public debt sustainability. Under the proposed framework, a government announces a commitment to a public debt band trajectory over the medium term, while sequentially announcing primary expenditures for the next budget cycle, which are determined recursively based on the history of shocks. Public debt targeting differs from a structural balance rule in that it internalizes the effect of the deterioration in creditworthiness from fiscal deficits and public debt accumulation, which tend to affect sovereign spreads, interest rates, exchange rates, and economic activity. The proposed framework is applied to Caribbean economies, which in general show high levels of public debt and procyclical primary expenditure.
    Keywords: Business cycles , Caribbean , Debt sustainability , Economic models , Fiscal policy , Government expenditures , Public debt ,
    Date: 2011–08–22
  30. By: M. Ali Choudhary (University of Surrey and State Bank of Pakistan); Saima Naeem (State Bank of Pakistan); Abdul Faheem (State Bank of Pakistan); Nadim Haneef (State Bank of Pakistan); Farooq Pasha (State Bank of Pakistan)
    Abstract: We present results of 1189 structured interviews about price-setting behavior of firms in the manufacturing and services sector in Pakistan. Our discoveries are that frequency of price change is considerably high, lowering the real impact of monetary policy. The remaining price stickiness is explained by firms caring about relative prices and the persistence of shocks. The exchange-rate and cost shocks are more important than financial and demand shocks for both setting prices and also the readiness with which these pass-through to the economy. Firms with connections with the informal sector, especially through demand, have a lower probability of price adjustment.
    JEL: E32 E52 O11
    Date: 2011–09

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