|
on Central Banking |
| By: | Claudio Borio |
| Abstract: | The global financial crisis has shaken the foundations of the deceptively comfortable pre-crisis central banking world. Central banks face a threefold challenge: economic, intellectual and institutional. This essay puts forward a compass to help central banks sail in the largely uncharted waters ahead. The compass is based on tighter integration of the monetary and financial stability functions, keener awareness of the global dimensions of those tasks, and stronger safeguards for an increasingly vulnerable central bank operational independence. |
| Keywords: | central banking, monetary and financial stability, macroprudential, own-house-in-order doctrine, operational independence |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:353&r=cba |
| By: | Fernando M. Martin |
| Abstract: | I study how the general and specific details of a micro founded monetary framework affect the determination of policy when the government has limited commitment. The conduct of policy depends on the interaction between the incentive to smooth distortions intertemporally and a time-consistency problem. In equilibrium, fiscal and monetary policies are distortionary, but long-run policy is not afflicted by time-consistency problems. Policy variables in specific applications of the general framework react similarly to variations in fundamentals. Nevertheless, resolving certain environment frictions affect long-run policy significantly. The response of government policy to aggregate shocks is qualitatively similar across the studied model variants. However, there are significant quantitative differences in the response of government policy to productivity shocks, mainly due to the idiosyncratic behavior of the money demand. Environments with no trading frictions display the best fit to post-war U.S. data. |
| Keywords: | Economic policy |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-026&r=cba |
| By: | Giancarlo Corsetti; Keith Kuester; Andre Meier; Gernot J. Muller |
| Abstract: | The authors analyze the effects of government spending cuts on economic activity in an environment of severe fiscal strain, as reflected by a sizeable risk premium on government debt. Specifically, they consider a "sovereign risk channel," through which sovereign default risk spills over to the rest of the economy, raising funding costs in the private sector. The authors' analysis is based on a variant of the model suggested by Cúrdia and Woodford (2009). It allows for costly financial intermediation and inter-household borrowing and lending in equilibrium, but maintains the tractability of the baseline New Keynesian model. They show that, if monetary policy is constrained in offsetting the effect of higher sovereign risk on private-sector borrowing conditions, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy can become self-fulfilling. Under these conditions, fiscal retrenchment can limit the risk of macroeconomic instability. In addition, if fiscal strain is very severe and monetary policy is constrained for an extended period, fiscal retrenchment may actually stimulate economic activity. |
| Keywords: | Fiscal policy ; Monetary policy |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-43&r=cba |
| By: | Andrew T. Foerster |
| Abstract: | This paper considers a model with financial frictions and studies the role of expectations and unconventional monetary policy response to financial crises. During a financial crisis, the financial sector has reduced ability to provide credit to productive firms, and the central bank may help lessen the magnitude of the downturn by using unconventional monetary policy to inject liquidity into credit markets. The model allows parameters to change according to a Markov process, which gives agents in the economy expectation about the probability of the central bank intervening in response to a crises, as well as expectations about the central bank's exit strategy post-crises. Using this Markov regime switching specification, the paper addresses three issues. First, it considers the effects of different exit strategies, and shows that, after a crisis, if the central bank sells off its accumulated assets too quickly, the economy can experience a double-dip recession. Second, it analyzes the effects of expectations of intervention policy on pre-crises behavior. In particular, if the central bank increases the probability of intervening during crises, this increase leads to a loss of output in pre-crisis times. Finally, the paper considers the welfare implications of guaranteeing intervention during crises, and shows that providing a guarantee can raise or lower welfare depending upon the exit strategy used, and that committing before a crisis can be welfare decreasing but then welfare increasing once a crisis occurs. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp11-04&r=cba |
| By: | Ippei Fujiwara; Yasuo Hirose |
| Abstract: | Recent studies document the deteriorating performance of forecasting models during the Great Moderation. This conversely implies that forecastability is higher in the preceding era, when the economy was unexpectedly volatile. We offer an explanation for this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium models. First, we analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a prototypical New Keynesian model, we numerically demonstrate that indeterminacy due to passive monetary policy can yield superior forecastability as long as the degree of uncertainty about sunspot fluctuations is relatively small. |
| Keywords: | Forecasting ; Mathematical models ; Monetary policy |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:91&r=cba |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper examines how the scale and composition of public debt can affect economies that implement a combination of “passive” monetary policy and “active” fiscal policy. This policy configuration is argued to be of both historical and contemporary interest in the cases of the U.S. and Japanese economies. It is shown that higher average levels and moderate average maturities of debt can induce macroeconomic instability under a range of policies specified as simple rules. However, interest rate pegs in combination with active fiscal policies almost always ensure macroeconomic stability. This finding suggests that in periods where the zero lower bound on nominal interest rates is a relevant constraint on policy design, a switch in fiscal regime is desirable. |
| Keywords: | Monetary policy ; Debts, Public ; Fiscal policy ; Interest rates ; Price levels |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:515&r=cba |
| By: | David O. Lucca; Emanuel Moench |
| Abstract: | Since the Federal Open Market Committee (FOMC) began announcing its policy decisions in 1994, U.S. stock returns have on average been more than thirty times larger on announcement days than on other days. Surprisingly, these abnormal returns are accrued before the policy announcement. The excess returns earned during the twenty-four hours prior to scheduled FOMC announcements account for more than 80 percent of the equity premium over the past seventeen years. Similar results are found for major global equity indexes, but not for other asset classes or other economic news announcements. We explore a few risk-based explanations of these findings, none of which can account for the return anomaly.Since the Federal Open Market Committee (FOMC) began announcing its policy decisions in 1994, U.S. stock returns have on average been more than thirty times larger on announcement days than on other days. Surprisingly, these abnormal returns are accrued before the policy announcement. The excess returns earned during the twenty-four hours prior to scheduled FOMC announcements account for more than 80 percent of the equity premium over the past seventeen years. Similar results are found for major global equity indexes, but not for other asset classes or other economic news announcements. We explore a few risk-based explanations of these findings, none of which can account for the return anomaly. |
| Keywords: | Federal Open Market Committee ; Equity ; Stocks - Rate of return ; Bank investments ; Banks and banking, Foreign ; International finance |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:512&r=cba |
| By: | Michael D. Bauer; Glenn D. Rudebusch |
| Abstract: | Previous research has emphasized the portfolio balance effects of Federal Reserve bond purchases, in which a reduced bond supply lowers term premia. In contrast, we find that such purchases have important signaling effects that lower expected future short term interest rates. Our evidence comes from dynamic term structure models that decompose declines in yields following Fed announcements into changes in risk premia and expected short rates. To overcome problems in measuring term premia, we consider unbiased model estimation and restricted risk price estimation. We also characterize the estimation uncertainty regarding the relative importance of the signaling and portfolio balance channels. |
| Keywords: | Monetary policy ; Interest rates ; Bond market |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2011-21&r=cba |
| By: | Rojas-Breu, M. |
| Abstract: | The rate-of-return-dominance puzzle asks why low-return assets, like fiat money, are used in actual economies given that risk-free higher-return assets are available. As long as this question remains unresolved, most conclusions from monetary models which arbitrarily restrict the marketability properties of alternative assets to make money valuable are difficult to assess. In this paper, I provide a framework in which fiat money has value in equilibrium, even though a higher-return asset is available and there are neither restrictions nor transaction costs in using it. I suggest that the use of money is associated with frictions underlying debt contracts. In an environment where full enforcement is not feasible, the actual rate of return on assets is determined by incentives eliciting voluntary debt repayment. I show that the inflation rate or, more generally, the depreciation rate of an asset in which debts are denominated may function as a commitment device. As a result, money is used in equilibrium and the optimal inflation rate is positive. |
| Keywords: | Money, Inflation, Debt Enforcement, Banking. |
| JEL: | E41 E50 E51 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:345&r=cba |
| By: | Lubos Pastor; Pietro Veronesi |
| Abstract: | We study the pricing of political uncertainty in a general equilibrium model of government policy choice. We find that political uncertainty commands a risk premium whose magnitude is larger in poorer economic conditions. Political uncertainty reduces the value of the implicit put protection that the government provides to the market. It also makes stocks more volatile and more correlated when the economy is weak. In addition, we find that government policies cannot be judged by the stock market response to their announcement. Announcements of deeper reforms tend to elicit less favorable stock market reactions. |
| JEL: | G12 G18 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17464&r=cba |
| By: | Willem Van Zandweghe; Alexander Wolman |
| Abstract: | We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above 8 percent for a baseline calibration, but it varies substantially with alternative structural parameter values. If the initial condition involves inflation higher than steady state, discretionary policy generates an immediate drop in inflation followed by a gradual increase to the steady state. Unlike the two-period Taylor model, discretionary policy in the Calvo model does not accommodate predetermined prices in a way that inevitably leads to multiple private-sector equilibria. |
| Keywords: | Inflation (Finance) ; Monetary policy ; Prices |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:11-03&r=cba |
| By: | Barbara Rossi |
| Abstract: | The forecasting literature has identi fied two important, broad issues. The fi rst stylized fact is that the predictive content is unstable over time; the second is that in-sample predictive content does not necessarily translate into out-of-sample predictive ability, nor ensures the stability of the predictive relation over time. The objective of this chapter is to understand what we have learned about forecasting in the presence of instabilities, especially regarding the two questions above. The empirical evidence raises a multitude of questions. If in-sample tests provide poor guidance to out-of-sample forecasting ability, what should researchers do? If there are statistically significant instabilities in the Granger-causality relationships, how do researchers establish whether there is any Granger-causality at all? And if there is substantial instability in predictive relationships, how do researchers establish which models is the "best" forecasting model? And finally, if a model forecasts poorly, why is that, and how should researchers proceed to improve the forecasting models? In this chapter, we will answer these questions by discussing various methodologies for inference as well as estimation that have been recently proposed in the literature. We also provide an empirical analysis of the usefulness of the existing methodologies using an extensive database of macroeconomic predictors of output growth and inflation. |
| JEL: | C53 C22 C01 E2 E27 E37 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:11-20&r=cba |
| By: | Michael Dotsey; Shigeru Fujita; Tom Stark |
| Abstract: | The Phillips curve has long been used as a foundation for forecasting inflation. Yet numerous studies indicate that over the past 20 years or so, inflation forecasts based on the Phillips curve generally do not predict inflation any better than a univariate forecasting model. In this paper, the authors take a deeper look at the forecasting ability of Phillips curves from both an unconditional and a conditional view. Namely, they use the test results developed by Giacomini and White (2006) to examine the forecasting ability of Phillips curve models. The authors' main results indicate that forecasts from their Phillips curve models are unconditionally inferior to those of their univariate forecasting models and sometimes the difference is statistically significant. However, the authors do find that conditioning on various measures of the state of the economy does at times improve the performance of the Phillips curve model in a statistically significant way. Of interest is that improvement is more likely to occur at longer forecasting horizons and over the sample period 1984Q1—2010Q3. Strikingly, the improvement is asymmetric — Phillips curve forecasts tend to be more accurate when the economy is weak and less accurate when the economy is strong. It, therefore, appears that forecasters should not fully discount the inflation forecasts of Phillips curve-based models when the economy is weak. |
| Keywords: | Phillips curve ; Unemployment |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-40&r=cba |
| By: | Philip Arestis; Michail Karouglou; Kostas Mouratidis (Department of Economics, The University of Sheffield) |
| Abstract: | This paper estimates central bank policy preferences in the case of the European Monetary Union and of the UK. We do so, by adopting the framework suggested by Cecchetti and Ehrmann (1999), which, however, we extent in two respects. First, we allow policy preferences to be asymmetric by assuming that inflation and output follow a Markov process. Second, following Bean (1998) we introduce dynamics in the supply and demand relationships. In doing so we estimate state-dependent policy frontiers. Empirical results from the static model show that monetary policy in the European Monetary Union and in the UK put a lot of weight on price stability. However, there is evidence of 'price puzzle' especially in the high volatility regime. The price puzzle might be the by-product of frequent realignments in the European Monetary System currency crises in 1992, 1993 and 1995 and of the more recent 2008 financial crisis. Estimates of the optimal policy frontier suggest that although the UK enjoys higher anti-inflatonary credibility, it also faces a higher trade-off between inflation and output variability than the European Monetary Union. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2011019&r=cba |
| By: | Roman Horvath; Jakub Mateju |
| Abstract: | This paper contributes to a better understanding of how inflation targets are set. First, we gather evidence on how inflation targets are set from official central bank and government publications and from a questionnaire of our own design. Second, we estimate the determinants of the level of the inflation target in 19 inflation-targeting countries using unbalanced panel interval regressions to deal with the issue that targets are typically set as a range rather than as a point. We find that both a higher level and higher variability of inflation are associated with a higher target. The setting of the inflation target is also found to have an important international dimension, because higher world inflation is positively correlated with inflation targets. Rapidly growing countries exhibit higher inflation targets. Our results also show that authorities establish a wider target range for the inflation rate when the macroeconomic environment is less stable. We find that central bank credibility is negatively associated with the level of the inflation target, suggesting that less credible central banks are likely to recognize the risks related to anchoring inflation expectations at low levels. On the other hand, government party orientation does not matter, even in less independent central banks. |
| Keywords: | Central bank, credibility, independence, inflation, inflation targeting. |
| JEL: | E31 E42 E52 E58 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2011/06&r=cba |
| By: | Bernd Hayo (University of Marburg); Ummad Mazhar (Université Libre de Bruxelles and Université de Strasbourg) |
| Abstract: | This paper studies monetary policy committee transparency (MPCT) based on a new index that measures central bankers’ educational and professional backgrounds as disclosed through central bank websites. Based on a novel cross-sectional data set covering 75 central banks, we investigate the determinants of MPCT as well as its economic consequences. We find that past inflation, quality of institutional setup, and extent of Internet use in a country are important determinants of MPCT. MPCT has a robust and significantly negative impact on inflation variability, even after controlling for important macroeconomic variables and institutional transparency, as well as instrumenting MPCT in various ways. |
| Keywords: | Monetary Policy Committee, Transparency, Monetary Policy Transparency, Monetary Policy, Central Banks |
| JEL: | E52 E58 D12 D83 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201140&r=cba |
| By: | Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University); Kenya Takaku (Graduate School of Economics, Nagoya University) |
| Abstract: | This paper reexamines optimal debt stabilization policy in a small open economy borrowing from abroad. We incorporate spending reversals as a policy option available to policy-makers for stabilizing public debt. Results show that spending reversals can be welfare-improving and that there exists an optimal degree of spending reversal if the debt elasticity of the country-specific risk premium is high. The tradeoff between smoothing the tax rate and stabilizing the sovereign interest rate in the discussion of optimal tax rate policy (Bi, 2010) does not arise. Spending reversals can lower both the tax rate volatility and that of the interest rate. |
| Keywords: | sovereign debt, debt stabilization, welfare, spending reversals, small open economy |
| JEL: | F41 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2011-26&r=cba |
| By: | NEMOTO Tadanobu; OGURA Yoshiaki; WATANABE Wako |
| Abstract: | This paper is an empirical examination of the existence of the inside bank premium arising from relationship banking, which is predicted in the extant theoretical models. These models predict that the contracted interest rate of a loan extended by an inside bank when there exist asymmetries between the inside bank and outside banks, such as the information advantage of the inside bank or the implicit insurance and other borrower-specific services exclusively provided by the inside bank, is higher than that without such asymmetries. Our statistical estimations are based on the dataset collected through the survey for small and medium-sized firms in Japan, which were designed to contain the questions about a firm's loan application process, and the agreed-upon loan terms that are crucial to our tests. Our estimations show that such an inside bank premium is 30-50 basis points on average for short-term loans. This is economically significant for the median short-term interest rate of 1.9 %. The subsample regressions show that this premium is more likely to come from the implicit insurance and that this premium is more significant for smaller inside banks in more competitive loan markets. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:11067&r=cba |
| By: | Michael D. Bauer |
| Abstract: | How do interest rates react to news? This paper presents a new methodology, based on a simple dynamic term structure model, which provides for an integrated analysis of the effects of monetary policy actions and macroeconomic news on the term structure of interest rates. I find several new empirical results: First, monetary policy directly affects distant forward rates. Second, policy news is more complex than macro news. Third, while payroll news causes the most action in interest rates, it does not affect distant forward rates. Fourth, the term structure response to macro news is consistent with considerable interest rate smoothing. |
| Keywords: | Interest rates ; Monetary policy |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2011-20&r=cba |
| By: | Bartzsch, Nikolaus; Rösl, Gerhard; Seitz, Franz |
| Abstract: | In dem vorliegenden Papier versuchen wir den Bestand der Euro-Banknoten zu ermitteln, der sich von der deutschen Banknotenemission im Ausland befindet. Dabei unterscheiden wir nach Beständen, die außerhalb des Euro-Währungsraumes gehalten werden, und solchen, die in anderen Ländern der EWU zirkulieren. Die Analyse basiert auf Ansätzen, die den Auslandsumlauf auf indirektem Wege abschätzen. Der Untersuchungszeitraum reicht von 2002 bis 2009. Wir finden heraus, dass Ende 2009 insgesamt rund zwei Drittel der deutschen kumulierten Nettoemissionen im Ausland umliefen. Der größte Teil, etwa 160 Mrd. €, befand sich außerhalb des Euro-Raums, der Rest - 80 Mrd. € - lief in anderen EWU-Ländern um. Somit entsprach der Inlandsumlauf deutscher Euro-Banknoten nur rund einem Drittel aller von der Bundesbank in Höhe von 350 Mrd. € in Umlauf gegebenen Banknoten. Damit werden die Ergebnisse direkter Ansätze bestätigt. -- In this paper, we endeavour to determine the volume of euro banknotes issued by Germany that is in circulation outside Germany. In so doing, we draw a distinction between banknotes outstanding in non-euro-area countries and those that are in circulation in other euro-area countries. The analysis is based on approaches that estimate the volume of banknotes in circulation outside Germany indirectly. The observation period runs from 2002 to 2009. We discover that, at the end of 2009, a total of roughly two-thirds of Germany's cumulated net issuance of euro banknotes was in circulation outside Germany. The lion's share of roughly €160 billion was in non-euro-area countries, with the remaining €80 billion in other euro-area countries. Thus, the volume of German euro banknotes in circulation in Germany accounted for only roughly one-third of all banknotes issued by the Deutsche Bundesbank (€350 billion). This confirms the results of direct approaches. |
| Keywords: | Banknoten,Euro,Auslandsumlauf,Hortung,Transaktionskasse,Binnenmigration,Banknotes,euro,foreign demand,hoarding,transaction balances,domestic migration |
| JEL: | E41 E42 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201121&r=cba |
| By: | Bartzsch, Nikolaus; Rösl, Gerhard; Seitz, Franz |
| Abstract: | In this paper, we endeavour to determine the volume of euro banknotes issued by Germany that is in circulation outside Germany. In so doing, we draw a distinction between banknotes outstanding in non-euro-area countries and those that are in circulation in other euro-area countries. The analysis is based on approaches that estimate the volume of banknotes in circulation outside Germany indirectly. The observation period runs from 2002 to 2009. We discover that, at the end of 2009, a total of roughly two-thirds of Germany's cumulated net issuance of euro banknotes was in circulation outside Germany. The lion's share of roughly €160 billion was in non-euro-area countries, with the remaining €80 billion in other euro-area countries. Thus, the volume of German euro banknotes in circulation in Germany accounted for only roughly one-third of all banknotes issued by the Deutsche Bundesbank (€350 billion). This confirms the results of direct approaches. -- In dem vorliegenden Papier versuchen wir den Bestand der Euro-Banknoten zu ermitteln, der sich von der deutschen Banknotenemission im Ausland befindet. Dabei unterscheiden wir nach Beständen, die außerhalb des Euro-Währungsraumes gehalten werden, und solchen, die in anderen Ländern der EWU zirkulieren. Die Analyse basiert auf Ansätzen, die den Auslandsumlauf auf indirektem Wege abschätzen. Der Untersuchungszeitraum reicht von 2002 bis 2009. Wir finden heraus, dass Ende 2009 insgesamt rund zwei Drittel der deutschen kumulierten Nettoemissionen im Ausland umliefen. Der größte Teil, etwa 160 Mrd. €, befand sich außerhalb des Euro-Raums, der Rest - 80 Mrd. € - lief in anderen EWU-Ländern um. Somit entsprach der Inlandsumlauf deutscher Euro-Banknoten nur rund einem Drittel aller von der Bundesbank in Höhe von 350 Mrd. € in Umlauf gegebenen Banknoten. Damit werden die Ergebnisse direkter Ansätze bestätigt. |
| Keywords: | Banknotes,euro,foreign demand,hoarding,transaction balances,domestic migration,Banknoten,Euro,Auslandsumlauf,Hortung,Transaktionskasse,Binnenmigration |
| JEL: | E41 E42 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201121e&r=cba |
| By: | Rianne Legerstee (Erasmus University Rotterdam); Philip Hans Franses (Erasmus University Rotterdam) |
| Abstract: | We analyze the behavior of experts who quote forecasts for monthly SKU-level sales data where we compare data before and after the moment that experts received different kinds of feedback on their behavior. We have data for 21 experts located in as many countries who make SKU-level forecasts for a variety of pharmaceutical products for October 2006 to September 2007. We study the behavior of the experts by comparing their forecasts with those from an automated statistical program, and we report the forecast accuracy over these 12 months. In September 2007 these experts were given feedback on their behavior and they received a training at the headquarters' office, where specific attention was given to the ins and outs of the statistical program. Next, we study the behavior of the experts for the 3 months after the training session, that is, October 2007 to December 2007. Our main conclusion is that in the second period the experts' forecasts deviated lesser from the statistical forecasts and that their accuracy improved substantially. |
| Keywords: | model forecasts; expert forecasts; judgmental adjustment; feedback; outcome feedback; performance feedback; cognitive process feedback; task properties feedback |
| JEL: | C53 C93 |
| Date: | 2011–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110135&r=cba |
| By: | Hess, Dieter; Orbe, Sebastian |
| Abstract: | We analyze the quality of macroeconomic survey forecasts. Recent findings indicate that they are anchoring biased. This irrationality would challenge the results of a wide range of empirical studies, e.g., in asset pricing, volatility clustering or market liquidity, which rely on survey data to capture market participants' expectations. We contribute to the existing literature in two ways. First, we show that the cognitive bias is a statistical artifact. Despite highly significant anchoring coefficients a bias adjustment does not improve forecasts' quality. To explain this counterintuitive result we take a closer look at macroeconomic analysts' information processing abilities. We find that analysts benefit from the use of an extensive information set, neglected in the anchoring bias test. Exactly this information advantage drives the misleading anchoring bias test results. Second, we find that the superior information aggregation capabilities enable analysts to easily outperform sophisticated timeseries forecasts and therefore survey forecasts should clearly be favored. -- |
| Keywords: | macroeconomic announcements,efficiency of forecasts,anchoring bias,rationality of analysts |
| JEL: | G12 G14 E17 E37 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1113&r=cba |
| By: | Todd Clark; Michael W. McCracken |
| Abstract: | This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy when the models being compared are overlapping in the sense of Vuong (1989). Two models are overlapping when the true model contains just a subset of variables common to the larger sets of variables included in the competing forecasting models. We consider an out-of-sample version of the two-step testing procedure recommended by Vuong but also show that an exact one-step procedure is sometimes applicable. When the models are overlapping, we provide a simple-to-use fixed regressor wild bootstrap that can be used to conduct valid inference. Monte Carlo simulations generally support the theoretical results: the two-step procedure is conservative while the one-step procedure can be accurately sized when appropriate. We conclude with an empirical application comparing the predictive content of credit spreads to growth in real stock prices for forecasting U.S. real GDP growth. |
| Keywords: | Forecasting |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1121&r=cba |
| By: | Todd E. Clark; Michael W. McCracken |
| Abstract: | This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy when the models being compared are overlapping in the sense of Vuong (1989). Two models are overlapping when the true model contains just a subset of variables common to the larger sets of variables included in the competing forecasting models. We consider an out-of-sample version of the two-step testing procedure recommended by Vuong but also show that an exact one-step procedure is sometimes applicable. When the models are overlapping, we provide a simple-to-use fixed regressor wild bootstrap that can be used to conduct valid inference. Monte Carlo simulations generally support the theoretical results: the two-step procedure is conservative while the one-step procedure can be accurately sized when appropriate. We conclude with an empirical application comparing the predictive content of credit spreads to growth in real stock prices for forecasting U.S. real GDP growth. |
| Keywords: | Forecasting |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-024&r=cba |
| By: | António Afonso; João Tovar Jalles |
| Abstract: | This paper investigates the sustainability of fiscal policy in a set of 19 countries by taking a longer-run secular perspective over the period 1880-2009. Via a systematic analysis of the stationarity properties of the first-differenced level of government debt, and disentangling the components of the debt series using Structural Time Series Models, we are able to conclude that the solvency condition would be satisfied in mostly all cases since non-stationarity can be rejected, and, therefore, longer-run fiscal sustainability cannot be rejected (Japan and Spain can be exceptions). The same would be true for the panel sample analysis. |
| Keywords: | fiscal sustainability, government debt, unit roots, breaks, structural time series models Classification-C23, E62, H62 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp172011&r=cba |
| By: | Piotr Keblowski (University of Lodz, Poland); Aleksander Welfe (University of Lodz, Poland) |
| Abstract: | The paper presents a new approach to exchange rate modelling that augments the CHEER model with a sovereign credit default risk as perceived by financial investors making their decisions. In the cointegrated VAR system with nine variables comprised of the short- and long-term interest rates in Poland and the euro area, inflation rates, CDS indices and the zloty/euro exchange rate, four long-run relationships were found. Two of them link term spreads with inflation rates, the third one describes the exchange rate and the fourth one explains the inflation rate in Poland. Transmission of shocks was analysed by common stochastic trends. The estimation results were used to calculate the zloty/euro equilibrium exchange rate.Length: 25 pages |
| Keywords: | exchange rate modelling, sovereign credit default risk, CDS spread, international parities, equilibrium exchange rate |
| JEL: | C32 E31 E43 |
| Date: | 2011–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:wse:wpaper:57&r=cba |
| By: | Yunus Aksoy (Department of Economics, Mathematics & Statistics, Birkbeck); Giovanni Melina (Department of Economics, Mathematics & Statistics, Birkbeck; University of Surrey) |
| Abstract: | In addition to containing stable information to explain inflation, state-local expenditures have also a larger share of the forecast error variance of US inflation than the Federal funds rate. Non-defense federal expenditures are useful in predicting real output variations and, starting from the early 1980s, present also a larger share of the forecast error variance of US real output than the Federal funds rate. |
| Keywords: | Information value, state-local expenditures, forecast error variance decomposition |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1105&r=cba |
| By: | Andreas Orland; Michael W.M. Roos |
| Abstract: | Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged infl ation and a weight less than one on expected infl ation. We argue that myopic price setting of some agents explains the low weight on expected infl ation. The lagged term can be explained by trend extrapolation if information about the future is costly. In a laboratory experiment we implement the Calvo (1983) microfoundations of the Phillips curve. Both of our hypotheses are supported by the experimental data. About half of the subjects set optimal Calvo prices while about a third is myopic. |
| Keywords: | Hybrid Phillips curve; experimental economics; myopia; behavioral macroeconomics |
| JEL: | C91 D92 E52 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0281&r=cba |
| By: | Don Bredin (School of Business, University College Dublin); Stilianos Fountas (Department of Economics, University of Macedonia) |
| Abstract: | We use over two hundred years of US inflation data to examine the impact of inflation uncertainty on inflation. An analysis of the full period without allowing for various regimes shows no impact of uncertainty on inflation. However, once we distinguish between recessions and non recessions, we find that inflation uncertainty has a negative effect on inflation only in recession times, thus providing support to the Holland hypothesis. |
| Keywords: | asymmetric GARCH, recession, inflation uncertainty. |
| JEL: | C22 E31 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2011_13&r=cba |
| By: | Ahrens, Steffen; Sacht, Stephen |
| Abstract: | This paper estimates a high-frequency New Keynesian Phillips curve via the Generalized Method of Moments. Allowing for higher-than-usual frequencies strongly mitigates the well-known problems of small-sample bias and structural breaks. Applying a daily frequency allows us to obtain estimates for the Calvo parameter of nominal rigidity over a very short period - for instance for the recent financial and economic crisis - which can then be easily transformed into their monthly and quarterly equivalences and be employed for the analysis of monetary and fiscal policy. With Argentine data from the end of 2007 to the beginning of 2011, we estimate the daily Calvo parameter and find that on average, prices remain fixed for approximately two to three months which is in line with recent microeconomic evidence. -- |
| Keywords: | Calvo Staggering,High-Frequency NKM,GMM |
| JEL: | E31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201108&r=cba |
| By: | António Afonso; João Tovar Jalles |
| Abstract: | In an OCDE panel, for the period 1970-2010, we assess the effects of fiscal consolidation episodes, with four different definitions. Our results reveal that lower final government consumption would increase private consumption in three out of the four approaches, when there is a fiscal consolidation, and the debt ratio is above the cross-country average. The change in the cyclically adjusted primary balance and the duration of the consolidation episode contribute for the success of the consolidation, and the opposite applies if the latter is more based on the revenue side. Finally, the effects of social transfers on private investment tend to be negative. |
| Keywords: | fiscal consolidation, non-Keynesian effects, panel data, logit Classification-C23, E21, E62, H5, H62 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp152011&r=cba |
| By: | Iacopo Mastromatteo; Elia Zarinelli; Matteo Marsili |
| Abstract: | In this paper we estimate the propagation of liquidity shocks through interbank markets when the information about the underlying credit network is incomplete. We show that techniques such as Maximum Entropy currently used to reconstruct credit networks severely underestimate the risk of contagion by assuming a trivial (fully connected) topology, a type of network structure which can be very different from the one empirically observed. We propose an efficient message-passing algorithm to explore the space of possible network structures, and show that a correct estimation of the network degree of connectedness leads to more reliable estimations for systemic risk. Such algorithm is also able to produce maximally fragile structures, providing a practical upper bound for the risk of contagion when the actual network structure is unknown. We test our algorithm on ensembles of synthetic data encoding some features of real financial networks (sparsity and heterogeneity), finding that more accurate estimations of risk can be achieved. Finally we find that this algorithm can be used to control the amount of information regulators need to require from banks in order to sufficiently constrain the reconstruction of financial networks. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1109.6210&r=cba |
| By: | Robert C. Feenstra; Hong Ma; J. Peter Neary; D.S. Prasada Rao |
| Abstract: | The latest World Bank estimates of real GDP per capita for China are significantly lower than previous ones. We review possible sources of this puzzle and conclude that it reflects a combination of factors, including substitution bias in consumption, reliance on urban prices which we estimate are higher than rural ones, and the use of an expenditure-weighted rather than an output-weighted measure of GDP. Taking all these together, we estimate that real per-capita GDP in China was 50% higher relative to the U.S. in 2005 than the World Bank estimates. |
| Keywords: | EKS, Geary-Khamis and GAIA indexes, Gerschrnekron effect, International comparisons of real income and GDP, Measurement economics, Substitution bias |
| JEL: | F10 C43 O53 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:566&r=cba |
| By: | Susanto Basu (Boston College; NBER); Brent Bundick (Boston College) |
| Abstract: | This paper examines the role of uncertainty shocks in a one-sector, representative-agent dy- namic stochastic general-equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business-cycle comovements among key macro variables. With countercycli- cal markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in offsetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then mon- etary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative effects on the economy. Calibrating the size of uncertainty shocks using fluctuations in the VIX, we find that increased uncertainty about the future may indeed have played a signifi- cant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the financial press. |
| Keywords: | Uncertainty Shocks, Monetary Policy, Sticky-Price Models |
| JEL: | E32 E52 |
| Date: | 2011–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:774&r=cba |
| By: | Tara M. Sinclair (Department of Economics/Institute for International Economic Policy, George Washington University); H.O. Stekler (Department of Economics, 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 |
| URL: | http://d.repec.org/n?u=RePEc:gwi:wpaper:2011-05&r=cba |
| By: | Ronny Nilsson; Gyorgy Gyomai |
| Abstract: | This paper reports on revision properties of different de-trending and smoothing methods (cycle estimation methods), including PAT with MCD smoothing, a double Hodrick-Prescott (HP) filter and the Christiano-Fitzgerald (CF) filter. The different cycle estimation methods are rated on their revision performance in a simulated real time experiment. Our goal is to find a robust method that gives early turning point signals and steady turning point signals. The revision performance of the methods has been evaluated according to bias, overall revision size and signal stability measures. In a second phase, we investigate if revision performance is improved using stabilizing forecasts or by changing the cycle estimation window from the baseline 6 and 96 months (i.e. filtering out high frequency noise with a cycle length shorter than 6 months and removing trend components with cycle length longer than 96 months) to 12 and 120 months. The results show that, for all tested time series, the PAT de-trending method is outperformed by both the HP or CF filter. In addition, the results indicate that the HP filter outperforms the CF filter in turning point signal stability but has a weaker performance in absolute numerical precision. Short horizon stabilizing forecasts tend to improve revision characteristics of both methods and the changed filter window also delivers more robust turning point estimates.<BR>Ce document présente l’impact des révisions dû à différentes méthodes de lissage et de correction de la tendance (méthodes d'estimation du cycle), comme la méthode PAT avec lissage en utilisant le mois de dominance cyclique (MCD), le double filtre de Hodrick-Prescott (HP) et le filtre Christiano-Fitzgerald (CF). Les différentes méthodes d'estimation du cycle sont évaluées sur leur performance de révision faite à partir d’une simulation en temps réel. Notre objectif est de trouver une méthode robuste qui donne des signaux de point de retournement tôt et stable á la fois. La performance de révisions de ces méthodes a été évaluée en fonction du biais, de la grandeur de la révision et de la stabilité du signal. Nous examinerons ensuite si la performance de la révision peut être améliorée en utilisant des prévisions de stabilisation ou en changeant la fenêtre d'estimation du cycle de base de 6 et 96 mois à une fenêtre de 12 et 120 mois. La fenêtre d’estimation de base correspond à un filtre pour éliminer le bruit (hautes fréquences) avec une longueur de cycle de moins de 6 mois et supprimer la tendance avec une longueur de cycle supérieure à 96 mois. Les résultats montrent que, pour toutes les séries testées, la méthode PAT est moins performante que les deux filtres HP ou CF. En outre, les résultats indiquent que le filtre HP surpasse le filtre CF du point de vue de la stabilité du signal du point de retournement mais sa performance est plus faible quant à la précision numérique absolue. Des prévisions à court terme ont la tendance à améliorer les caractéristiques des révisions des deux méthodes et la modification de la fenêtre de base offre aussi des estimations plus robustes des points de retournement. |
| Date: | 2011–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:oec:stdaaa:2011/4-en&r=cba |
| By: | S. Boragan Aruoba; Francis X. Diebold; Jeremy Nalewaik; Frank Schorfheide; Dongo 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 GDI . The authors propose and explore a "forecast combination" approach to combining them. They then put the theory to work, producing a superior combined estimate of GDP growth for the U.S., GDPC. The authors compare GDPC to GDPE and GDPI , with particular attention to behavior over the business cycle. They discuss several variations and extensions. |
| Keywords: | Business cycles ; Recessions ; Expenditures, Public |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-41&r=cba |
| By: | Zhi Da; Qianqiu Liu; Ernst Schaumburg |
| Abstract: | The profit to a standard short-term return reversal strategy can be decomposed analytically into four components: 1) across-industry return momentum, 2) within-industry variation in expected returns, 3) under-reaction to within-industry cash flow news, and 4) a residual. Only the residual component, which isolates reaction to recent “nonfundamental” price changes, is significant and positive in the data. A simple short-term return reversal trading strategy designed to capture the residual component generates a highly significant risk-adjusted return three times the size of the standard reversal strategy during our 1982-2009 sampling period. Our decomposition suggests that short-term return reversal is pervasive, much greater than previously documented, and driven by investor sentiment on the short side and liquidity shocks on the long side. |
| Keywords: | Rate of return ; Liquidity (Economics) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:513&r=cba |
| By: | Christophe Andre (Economics Department, Organisation for Economic Co-operation and Development (OECD)); Rangan Gupta (Department of Economics, University of Pretoria); Patrick T. Kanda (Department of Economics, University of Pretoria) |
| Abstract: | This paper investigates the existence of significant spillovers from the housing sector onto the wider economy for the seven major OECD countries using Uhlig's (2005) agnostic identification procedure. This method allows identifying a housing demand shock in a six-variable VAR model by imposing sign restrictions on the impulse responses of consumer prices, residential investment, real house prices and mortgage loans, while private consumption and nominal interest rate responses are left unrestricted. The results suggest that consumption responds positively and significantly to a house price shock in Canada, France, Japan and the UK. On the other hand, a significant positive delayed response of nominal interest rates follows a house price shock in Germany, Japan, the UK and the US, suggesting that while central banks do not seem to respond instantly and systematically to a housing demand shock, the real repercussions of the latter on the economy tend to translate into higher policy rates after a few quarters. |
| Keywords: | House Price, Monetary Policy, Consumption, Agnostic Identification |
| JEL: | C32 E31 E32 E44 E52 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201118&r=cba |
| By: | Sumila Tharanga Wanaguru |
| Abstract: | This paper develops an analytical framework to explain how a liquidity shock or a shock to the aggregate haircut on collateralized assets amplifies financial crisis in a carry trade recipient country. The model allows roles for shocks to the size of a haircut, strategic behaviour across currency carry traders and the feed-back effect between asset prices and exchange rates. The paper finds that there is a threshold level of the aggregate haircut at the equilibrium. After introducing small exogenous noise, the model shows that a liquidity shock leads asset prices and the exchange rate to depart from the steady state level, triggering a financial crisis. Further, a negative shock to the interest rate differential also has the potential to trigger a liquidity crisis in the domestic market and amplify a financial crisis in the carry trade recipient country. A possible policy implication suggests that keeping policy rates low entails risks for financial systems. Therefore, instead of low inter- est rates and foreign exchange intervention policies, monetary authorities should focus on introducing macro-prudential regulations and establishing a sustainable and effective financial architecture to prevent future financial crisis. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2011-33&r=cba |
| By: | Seedwell Hove; Albert Touna Mama; Fulbert Tchana Tchana |
| Abstract: | Most emerging market economies (EMEs) which have implemented inflation targeting (IT) have continued to experience large, frequent and sometimes persistent inflation target misses. At the same time these countries had reformed their institutional structures when implementing IT. In this paper we empirically study the importance of central bank independence, fiscal discipline and financial sector development for the achievement of inflation targets in EMEs using the panel ordered logit model. We find that when we control for variables such as output gap, exchange rate gap and openness, the improvement in central bank independence, fiscal discipline and financial systems reduces the probability of inflation target misses. Importantly, some control variables lead to the missing of inflation target bands. These are, in order of importance; exchange rate gap, output gap, inflation target horizon and level of openness. The combined impact of institutional structures is quite large, indicating their signifi…cant contribution to the infl‡ation performance and credibility of IT. |
| Keywords: | In‡ation targeting, Institutions, Credibility |
| JEL: | E52 G28 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:247&r=cba |
| By: | Mishra, Prachi; Montiel, Peter J; Spilimbergo, Antonio |
| Abstract: | This paper surveys the evidence on the effectiveness of monetary transmission in developing countries. We summarize the arguments for expecting the bank lending channel to be the dominant means of monetary transmission in such countries, and present a simple model that suggests why this channel may be both weak and unreliable under the conditions that usually characterize those economies. Next, we review the empirical methodologies that have been employed in the recent literature to assess monetary policy effectiveness, both in developing countries as well as in industrial and emerging economies, essentially based on vector autoregressions (VARs). It is very hard to come away from this review of the evidence with much confidence in the strength of monetary transmission in developing countries. We distinguish between the 'facts on the ground' and 'methodological deficiencies' interpretations of the absence of evidence for strong monetary transmission. We suspect, however, that 'facts on the ground' are indeed an important part of the story. The fact that a wide range of empirical approaches have failed to yield evidence of effective monetary transmission in developing countries, and that the strongest evidence for effective monetary transmission has arisen for relatively prosperous and more institutionally-developed countries such as some central and Eastern European transition economies (at least in the later stages of their transition) and Tunisia, makes us doubt whether methodological shortcomings are the whole story. If this conjecture is correct, the stabilization challenge in developing countries is acute indeed, and identifying the means of enhancing the effectiveness of monetary policy in such countries is an important challenge |
| Keywords: | developing countries; exchange rate; institutions; monetary policy |
| JEL: | E5 O11 O16 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8577&r=cba |
| By: | Zoltán Szalai (Magyar Nemzeti Bank (central bank of Hungary)) |
| Abstract: | Modern central banks have adopted a ‘risk management’ approach in assessing and presenting risks to macroeconomic stability. This paper seeks to contribute to the improvement of central banks’ current strategies for Central and Eastern European countries, first by assessing the potential size of macroeconomic risks, and secondly by empirically relating these risks to certain selected financial variables. Our results suggest that risks to GDP and the Price Level are significantly higher than commonly supposed based on a normal distribution of their cyclical components. However, relating these risks to the selected financial variables generated mixed results and is rarely significant in economic terms. We conclude that central banks currently risk underestimating the probability of large deviations in GDP and Price Level from their trends. A combination of financial variables and the inclusion of international financial variables could result in more significant results than the ones used separately in this study, when looking for useful indicators of such events. |
| Keywords: | central bank policy, financial imbalances, GDP-at-risk, CPI-at-risk |
| JEL: | E44 E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2011/8&r=cba |