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on Central Banking |
| By: | Committee, Nobel Prize (Nobel Prize Committee) |
| Abstract: | How are GDP and inflation affected by a temporary increase in the interest rate or a tax cut? What happens if a central bank makes a permanent change in its inflation target or a government modifies its objective for budgetary balance? This year’s Laureates in economic sciences, Thomas J. Sargent and Christopher A. Sims, have developed methods for answering these and many other questions regarding the causal relationship between economic policy and different macroeconomic variables such as GDP, inflation, employment and investments. |
| Keywords: | Causation; macroeconomics |
| JEL: | C32 E60 |
| Date: | 2011–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2011_001&r=cba |
| By: | Committee, Nobel Prize (Nobel Prize Committee) |
| Abstract: | One of the main tasks for macroeconomists is to explain how macroeconomic aggregates -such as GDP, investment, unemployment, and inflation- behave over time. How are these variables affected by economic policy and by changes in the economic environment? A primary aspect in this analysis is the role of the central bank and its ability to influence the economy. How effective can monetary policy be in stabilizing unwanted fluctuations in macroeconomic aggregates? How effective has it been historically? Similar questions can be raised about fiscal policy. Thomas J. Sargent and Christopher A. Sims have developed empirical methods that can answer these kinds of questions. This year's prize recognizes these methods and their successful application to the interplay between monetary and fi scal policy and economic activity. |
| Keywords: | Causation; macroeconomics |
| JEL: | C32 E60 |
| Date: | 2011–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2011_002&r=cba |
| By: | Gregory C. Chow (Princeton University) |
| Abstract: | This paper provides a statistical reason and strong econometric evidence for supporting the adaptive expectations hypothesis in economics. It points out why the rational expectations hypothesis was embraced by the economics profession without sufficient evidence. Finally it will summarize the conditions under which these two competing hypotheses can be used effectively. |
| Keywords: | macroeconomics, adaptive expectations, rational expectations |
| JEL: | E00 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:1334&r=cba |
| By: | Tobias Adrian; Markus K. Brunnermeier |
| Abstract: | We propose a measure for systemic risk: CoVaR, the value at risk (VaR) of the financial system conditional on institutions being under distress. We define an institution's contribution to systemic risk as the difference between CoVaR conditional on the institution being under distress and the CoVaR in the median state of the institution. From our estimates of CoVaR for the universe of publicly traded financial institutions, we quantify the extent to which characteristics such as leverage, size, and maturity mismatch predict systemic risk contribution. We also provide out of sample forecasts of a countercyclical, forward looking measure of systemic risk and show that the 2006Q4 value of this measure would have predicted more than half of realized covariances during the financial crisis. |
| JEL: | G21 G22 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17454&r=cba |
| By: | Charles Engel (University of Wisconsin and Hong Kong Institute for Monetary Research) |
| Abstract: | The well-known uncovered interest parity puzzle arises from the empirical regularity that, among developed country pairs, the high interest rate country tends to have high expected returns on its short term assets. At the same time, another strand of the literature has documented that high real interest rate countries tend to have currencies that are strong in real terms - indeed, stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity. These two strands - one concerning short-run expected changes and the other concerning the level of the real exchange rate - have apparently contradictory implications for the relationship of the foreign exchange risk premium and interest-rate differentials. This paper documents the puzzle, and shows that existing models appear unable to account for both empirical findings. The features of a model that might reconcile the findings are discussed. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:272011&r=cba |
| By: | Reuven Glick; Michael Hutchison |
| Abstract: | A currency crisis is a speculative attack on the foreign exchange value of a currency, resulting in a sharp depreciation or forcing the authorities to sell foreign exchange reserves and raise domestic interest rates to defend the currency. This article discusses analytical models of the causes of currency and associated crises, presents basic measures of the incidence of crises, evaluates the accuracy of empirical models in predicting crises, and reviews work measuring the consequences of crises on the real economy. Currency crises have large measurable costs on the economy, but our ability to predict the timing and magnitude of crises is limited by our theoretical understanding of the complex interactions between macroeconomic fundamentals, investor expectations and government policy. |
| Keywords: | Capital movements ; Foreign exchange |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2011-22&r=cba |
| By: | Michael D. Bordo; Harold James |
| Abstract: | We discuss three well known plans that were offered in the twentieth century to provide an artificial replacement for gold and key currencies as international reserves: Keynes’ Bancor, the SDR and the Ecu( predecessor to the euro).The latter two of these reserve substitutes were institutionalized but neither replaced the dollar as the principal medium of international reserve. |
| JEL: | F02 F33 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17492&r=cba |
| By: | Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani |
| Abstract: | Do financial market participants free-ride on liquidity? To address this question, we construct a dynamic general equilibrium model where agents face idiosyncratic preference and technology shocks. A secondary financial market allows agents to adjust their portfolio of liquid and illiquid assets in response to these shocks. The opportunity to do so reduces the demand for the liquid asset and, hence, its value. The optimal policy response is to restrict (but not eliminate) access to the secondary financial market. The reason for this result is that the portfolio choice exhibits a pecuniary externality: An agent does not take into account that by holding more of the liquid asset, he not only acquires additional insurance but also marginally increases the value of the liquid asset which improves insurance to other market participants. |
| Keywords: | Monetary policy, liquidity, financial markets |
| JEL: | E52 E58 E59 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:032&r=cba |
| By: | Martina Cecioni (Banca d'Italia); Giuseppe Ferrero (Banca d'Italia); Alessandro Secchi (Banca d'Italia) |
| Abstract: | In this paper, after discussing the theoretical underpinnings of unconventional monetary policy measures, we review the existing empirical evidence on their effectiveness, focusing on those adopted by the European Central Bank and by the Federal Reserve. These measures operate in two ways: through the signalling channel and through the portfolio-balance channel. In the former, the central bank can use communication to steer interest rates and to restore confidence in the financial markets; the latter hinges on the hypothesis of imperfect substitutability of assets and liabilities in the balance sheet of the private sector and postulates that the central bank’s asset purchases and liquidity provision lower financial yields and improve funding conditions. The review of the empirical literature suggests that the unconventional measures were effective and that their impact on the economy was sizeable. However, a very large degree of uncertainty surrounds the precise quantification of these effects. |
| Keywords: | Central bank, unconventional monetary policy, financial crisis, signalling channel, portfolio balance channel |
| JEL: | E52 E58 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_102_11&r=cba |
| By: | Fabio C. Bagliano (Department of Economics and Public Finance "G. Prato", University of Torino); Claudio Morana (Department of Economics, University of Milan-Bicocca) |
| Abstract: | The paper aims at understanding the main channels of macro-finance interaction that have featured in the US recent “Great Recession” episode. Domestic interactions of macro and financial shocks are investigated within a global framework, allowing for spillover effects of the US crisis to other OECD countries, as well as to major emerging economies, and controlling for further feedback effects on the US economy. A total of 50 countries is investigated by means of a large-scale open economy macroeconometric model, set in the factor vector autoregressive (F-VAR) framework, over the period 1980:1-2009:1. The overall picture appears to be consistent with a boom-bust credit cycle mechanism, whereby financial factors are the triggering force of the downturn in real activity and worsened economic conditions feed back to asset prices, starting a cumulative process. |
| Keywords: | Macro-finance interactions, financial crisis, economic crisis, international business cycles, factor vector autoregressive models |
| JEL: | C22 E32 F36 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:tur:wpaper:23&r=cba |
| By: | Mahir Binici; Yin-Wong Cheung |
| Abstract: | We explore the role of interest rate policy in the exchange rate determination process. Specifically, we derive exchange rate equations from interest rate rules that are theoretically optimal under a few alternative settings. The exchange rate equation depends on its underlying interest rate rule and its performance could vary across evaluation criteria and sample periods. The exchange rate equation implied by the interest rate rule that allows for interest rate and inflation inertia under commitment offers some encouraging results – exchange rate changes “calibrated” from the equation have a positive and significant correlation with actual data, and offer good direction of change prediction. Our exercise also demonstrates the role of the foreign exchange risk premium in determining exchange rates and the difficulty of explaining exchange rate variability using only policy based fundamentals. |
| Keywords: | Taylor Rule, Exchange Rate Determination, Mean Squared Prediction Error, Direction of Change, Foreign Exchange Risk Premium |
| JEL: | F31 E52 C52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1116&r=cba |
| By: | Paulo Júlio (Gabinete de Estratégia e Estudos, Portuguese Ministry of Economy and Employment, and NOVA School of Business and Economics); Pedro M. Esperança (Currently M.Sc. student at the University of Oxford. This article was written while the author was visiting at the Gabinete de Estratégia e Estudos, Portuguese Ministry of Economy and Employment); João C. Fonseca (Gabinete de Estratégia e Estudos, Portuguese Ministry of Economy and Employment) |
| Abstract: | We assess and compare the quality of forecasts issued for Portugal, at several time spans. Our analysis, covering the 2002-2010 period, focuses on real GDP growth and the corresponding expenditure components. We use a scaled statistic to compare the forecast accuracy of GDP components with different volatility levels, and explore the contributions of expenditure components to the GDP forecast error. Moreover, we propose two new statistics – termed Mean of Total Weighted Absolute Error and Mean of Total Weighted Squared Error – to evaluate the overall accuracy of components' predictions. The results suggest that GDP forecasts are generally optimistic at longer horizons (1-year ahead predictions), mainly due to overly optimistic forecasts in investment and exports. At shorter horizons (same-year predictions), GDP forecasts are more accurate, but this is achieved with relatively large errors in components' predictions, whose effects tend to cancel out. |
| Keywords: | Forecast evaluation, GDP expenditure components, Contributions to GDP growth, Mean of total weighted absolute error, Mean of total weighted squared error, Portugal |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0041&r=cba |
| By: | Pesaran, M. H.; Xu, T. |
| Abstract: | This paper proposes a theoretical framework to analyze the impacts of credit and technology shocks on business cycle dynamics, where firms rely on banks and households for capital financing. Firms are identical ex ante but differ ex post due to different realizations of firm specific technology shocks, possibly leading to default by some firms. The paper advances a new modelling approach for the analysis of financial intermediation and firm defaults that takes account of the financial implications of such defaults for both households and banks. Results from a calibrated version of the model highlights the role of financial institutions in the transmission of credit and technology shocks to the real economy. A positive credit shock, defined as a rise in the loan to deposit ratio, increases output, consumption, hours and productivity, and reduces the spread between loan and deposit rates. The effects of the credit shock tend to be highly persistent even without price rigidities and habit persistence in consumption behaviour. |
| JEL: | E32 E44 G21 |
| Date: | 2011–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1159&r=cba |
| By: | Stijn Claessens; Eugenio Cerutti; Patrick McGuire |
| Abstract: | The recent financial crisis has shown how interconnected the financial world has become. Shocks in one location or asset class can have a sizable impact on the stability of institutions and markets around the world. But systemic risk analysis is severely hampered by the lack of consistent data that capture the international dimensions of finance. While currently available data can be used more effectively, supervisors and other agencies need more and better data to construct even rudimentary measures of risks in the international financial system. Similarly, market participants need better information on aggregate positions and linkages to appropriately monitor and price risks. Ongoing initiatives that will help in closing data gaps include the G20 Data Gaps Initiative, which recommends the collection of consistent bank-level data for joint analyses and enhancements to existing sets of aggregate statistics, and the enhancement to the BIS international banking statistics. |
| Keywords: | Bank credit , Banking systems , Credit risk , Data collection , Financial risk , International banking , International financial system , |
| Date: | 2011–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/222&r=cba |
| By: | Alexander Jung (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.) |
| Abstract: | This paper provides new empirical evidence on policy-makers’ voting patterns on interest rates. Applying (pooled) Taylor-type rules and using real-time information available from published inflation reports and voting records, the paper tests for heterogeneity among committee members in three monetary policy committees: the FOMC, the Bank of England’s MPC and the Riksbank’s Executive Board. It separately estimates the empirical reaction functions with and without imposing the long-run restriction from the inertia, thereby distinguishing between the short-run and long-run responses of members to incoming information. Unconstrained reaction functions that measure the short-term response show that preference heterogeneity and some diversity of views on the inflation and economic outlook was present in all three committees. By contrast, constrained reaction functions that measure the long-term response find that evidence in favour of preference heterogeneity in all three committees is at best weak. Preference distributions in all three committees were fairly symmetric around the respective mean and diversity of views was only observed in the case of Sweden when including the financial crisis episode. A cluster analysis of the Riksbank’s Executive Board, which only comprises internal members, confirms that its members have disperse preferences and views on the transmission mechanism. For the FOMC and for the MPC this analysis suggests that among several background characteristics (membership, background, tenure), membership is a potentially relevant factor that may explain some of the differences in preferences. JEL Classification: C23, D72, D83, E58. |
| Keywords: | Monetary policy committee, Taylor rule, collective decision-making, voting behavior, pooled regressions, heterogeneous preferences. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111383&r=cba |
| By: | Kentaro Iwatsubo (Graduate School of Economics, Kobe University); Ian W. Marsh (Cass Business School) |
| Abstract: | We examine the links between end-user order flows as seen by a major European commercial bank and macroeconomic fundamentals. We show that both exchange rate changes and flows are only weakly related to macroeconomic news announcements and hypothesise that gthe cat is already out of the bagh by the time the news is announced. Instead, order flows of financial and corporate customers reflect in real time the evolution of macroeconomies. The actions of the banks receiving the order flows in turn reveal the information to the market as a whole which prices the exchange rate accordingly. By the time the news is announced, the exchange rate already contains the majority of the information. |
| Keywords: | Order flows, Fundamentals, Exchange rates, News, Microstructure |
| JEL: | F31 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1120&r=cba |
| By: | Broner, Fernando A; Didier, Tatiana; Erce, Aitor; Schmukler, Sergio |
| Abstract: | This paper analyzes the joint behavior of international capital flows by foreign and domestic agents--gross capital flows--over the business cycle and during financial crises. We show that gross capital flows are very large and volatile, especially relative to net capital flows. When foreigners invest in a country, domestic agents tend to invest abroad, and vice versa. Gross capital flows are also pro-cyclical, with foreigners investing more in the country and domestic agents investing more abroad during expansions. During crises, especially during severe ones, there is retrenchment, that is, a reduction in both capital inflows by foreigners and capital outflows by domestic agents. This evidence sheds light on the nature of shocks driving capital flows and helps discriminate among existing theories. Our findings seem consistent with shocks that affect foreign and domestic agents asymmetrically, such as sovereign risk and asymmetric information. |
| Keywords: | crises; domestic investors; foreign investors; gross capital flows; net capital flows |
| JEL: | F21 F30 F32 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8591&r=cba |
| By: | Anna Iara; Guntram B. Wolff |
| Abstract: | In this working paper, with a unique data set summarising the quality of rules-based fiscal governance in European Union member states, the authors show that stronger fiscal rules in euro-area members reduce sovereign risk premia, in particular in times of market stress. Anna Iara and Guntram Wolff develop a model of sovereign spreads that are determined by the probability of default in interaction with the level of risk aversion. Estimation of the model confirms the central predictions. The legal basis for the rules, and mechanisms for enforcing them, are the most important dimensions of rulesbased fiscal governance. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:615&r=cba |
| By: | Maxym Kryshko |
| Abstract: | When estimating DSGE models, the number of observable economic variables is usually kept small, and it is conveniently assumed that DSGE model variables are perfectly measured by a single data series. Building upon Boivin and Giannoni (2006), we relax these two assumptions and estimate a fairly simple monetary DSGE model on a richer data set. Using post-1983 U.S.data on real output, inflation, nominal interest rates, measures of inverse money velocity, and a large panel of informational series, we compare the data-rich DSGE model with the regular - few observables, perfect measurement - DSGE model in terms of deep parameter estimates, propagation of monetary policy and technology shocks and sources of business cycle fluctuations. We document that the data-rich DSGE model generates a higher implied duration of Calvo price contracts and a lower slope of the New Keynesian Phillips curve. To reduce the computational costs of the likelihood-based estimation, we employed a novel speedup as in Jungbacker and Koopman (2008) and achieved the time savings of 60 percent. |
| Keywords: | Business cycles , Economic models , Monetary policy , |
| Date: | 2011–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/219&r=cba |
| By: | Maxym Kryshko |
| Abstract: | Dynamic factor models and dynamic stochastic general equilibrium (DSGE) models are widely used for empirical research in macroeconomics. The empirical factor literature argues that the co-movement of large panels of macroeconomic and financial data can be captured by relatively few common unobserved factors. Similarly, the dynamics in DSGE models are often governed by a handful of state variables and exogenous processes such as preference and/or technology shocks. Boivin and Giannoni(2006) combine a DSGE and a factor model into a data-rich DSGE model, in which DSGE states are factors and factor dynamics are subject to DSGE model implied restrictions. We compare a data-richDSGE model with a standard New Keynesian core to an empirical dynamic factor model by estimating both on a rich panel of U.S. macroeconomic and financial data compiled by Stock and Watson (2008).We find that the spaces spanned by the empirical factors and by the data-rich DSGE model states are very close. This proximity allows us to propagate monetary policy and technology innovations in an otherwise non-structural dynamic factor model to obtain predictions for many more series than just a handful of traditional macro variables, including measures of real activity, price indices, labor market indicators, interest rate spreads, money and credit stocks, and exchange rates. |
| Keywords: | Economic models , Monetary policy , |
| Date: | 2011–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/216&r=cba |
| By: | Florin O. Bilbiie; Ippei Fujiwara; Fabio Ghironi |
| 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. |
| JEL: | E31 E32 E52 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17489&r=cba |
| By: | Francis X. Diebold; Kamil Yilmaz |
| Abstract: | We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. We also show that variance decompositions define weighted, directed networks, so that our connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, we track both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities in recent years, including during the financial crisis of 2007-2008. |
| JEL: | C3 G2 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17490&r=cba |
| By: | Luís Aguiar-Conraria (Universidade do Minho, NIPE, and Escola de Economia e Gestão); Manuel M. F. Martins (Cef.up, Faculdade de Economia, Universidade do Porto); Maria Joana Soares (Universidade do Minho, NIPE, and Departmento de Matemática) |
| Abstract: | We use wavelet tools and Economic Sentiment Indicators to study the synchronization of economic cycles in the Euro Area. We assess the time-varying and frequency-varying pattern of business cycles synchronization in the Area and test the impact of the creation of the European Monetary Union in 1999. Among several results, we find that (a) the EMU is associated with a significant increase in synchronization of economic sentiment in the Euro Area; (b) the hard-peg of its currency to the Euro led to a comparable synchronization of Denmark's economic sentiment after 1999, differently from what happened in the case of the UK. |
| Keywords: | Business cycle synchronization; Economic sentiment; Euro Area; Continuous wavelet transform; Wavelet coherency; Wavelet distance; Phase-difference. |
| JEL: | C32 C49 E32 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:por:cetedp:1005&r=cba |
| By: | Stijn Claessens; Hui Tong; Igor Zuccardi |
| Abstract: | This paper analyzes through what channels the euro crisis has affected firm valuations globally. It examines stock price responses over the past year for 3045 non-financial firms in 16 countries to three key crisis events. Using pre-crisis benchmarks, it separates effects arising from changes in external financing and trade conditions and examines how bank and trade linkages propagated effects across borders. It finds that policy measures announced impacted financially-constrained firms more, particularly in creditor countries with greater bank exposure to peripheral euro countries. Trade linkages with peripheral countries also played a role, with euro exchange rate movements causing differential effects. |
| Keywords: | Capital markets , Corporate sector , Euro Area , Europe , Financial crisis , Sovereign debt , Spillovers , Stock prices , Trade , |
| Date: | 2011–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/227&r=cba |
| By: | Christian Kascha; Carsten Trenkler |
| Abstract: | We bring together some recent advances in the literature on vector autoregressive moving-average models creating a relatively simple specification and estimation strategy for the cointegrated case. We show that in the cointegrated case with fixed initial values there exists a so-called final moving representation which is usually simpler but not as parsimonious than the usual Echelon form. Furthermore, we proof that our specification strategy is consistent also in the case of cointegrated series. In order to show the potential usefulness of the method, we apply it to US interest rates and find that it generates forecasts superior to methods which do not allow for moving-average terms. |
| Keywords: | Cointegration, VARMA models, forecasting |
| JEL: | C32 C53 E43 E47 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:033&r=cba |
| By: | Jason Allen; Teodora Paligorova |
| Abstract: | Banks reliance on short-term funding has increased over time. While an effective source of financing in good times, the 2007 financial crisis has exposed the vulnerability of banks and ultimately firms to such a liability structure. The authors show that banks that relied most on wholesale funding were the ones to contract its lending the most during the crisis. Their results suggest that banks propagate liquidity shocks by reducing credit only to a certain type of borrower. Importantly, in the financial crisis banks passed the liquidity shock only to public firms. Furthermore, long-term relationships between firms and banks played an important role during the crisis. Public firms with weak banking relationships pre-crisis experienced a greater credit crunch than other public borrowers. |
| Keywords: | Financial institutions |
| JEL: | G20 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-13&r=cba |
| By: | Huw Dixon (Cardiff Business School); Engin Kara (University of Bristol, Economics Department) |
| Abstract: | We estimate and compare two models, the Generalized Taylor Economy (GTE) and the Multiple Calvo model (MC); that have been built to model the distributions of contract lengths observed in the data. We compare the performances of these models to those of the standard models such as the Calvo and its popular variant, using the ad hoc device of indexation. The estimations are made with Bayesian techniques for the US data. The results indicate that the data strongly favour the GTE. |
| Keywords: | DSGE models, Calvo, Taylor, price-setting. |
| JEL: | E32 E52 E58 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1125&r=cba |
| By: | Kenneth L. Judd; Lilia Maliar; Serguei Maliar |
| Abstract: | We introduce a technique called "precomputation of integrals" that makes it possible to compute conditional expectations in dynamic stochastic models in the initial stage of the solution procedure. This technique can be applied to any set of equations that contains conditional expectations, in particular, to the Bellman and Euler equations. After the integrals are precomputed, we can solve stochastic models as if they were deterministic. We illustrate the benefits of precomputation of integrals using one- and multi-agent numerical examples. |
| JEL: | C63 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17418&r=cba |
| By: | Pierre Guérin (International Economic Analysis Department, Bank of Canada, 234 Wellington Street, Ottawa, Canada, K1A 0G9 and European University Institute); Laurent Maurin (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.); Matthias Mohr (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.) |
| Abstract: | The paper focuses on the estimation of the euro area output gap. We construct model-averaged measures of the output gap in order to cope with both model uncertainty and parameter instability that are inherent to trend-cycle decomposition models of GDP. We first estimate nine models of trend-cycle decomposition of euro area GDP, both univariate and multivariate, some of them allowing for changes in the slope of trend GDP and/or its error variance using Markov-switching specifications, or including a Phillips curve. We then pool the estimates using three weighting schemes. We compute both ex-post and real-time estimates to check the stability of the estimates to GDP revisions. We finally run a forecasting experiment to evaluate the predictive power of the output gap for inflation in the euro area. We find evidence of changes in trend growth around the recessions. We also find support for model averaging techniques in order to improve the reliability of the potential output estimates in real time. Our measures help forecasting inflation over most of our evaluation sample (2001-2010) but fail dramatically over the last recession. JEL Classification: C53, E32, E37. |
| Keywords: | Trend-cycle decomposition, Phillips curve, unobserved components model, Kalman Filter, Markov-switching, auxiliary information, model averaging, inflation forecast, real-time analysis. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111384&r=cba |
| By: | Feenstra, Robert; Ma, Hong; Neary, J Peter; Rao, DS Prasada |
| 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; Gerschenkron Effect; International comparisons of real income and GDP; Measurement economics; substitution bias |
| JEL: | C43 F10 O53 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8592&r=cba |
| By: | Lars Lefgren; Brennan Platt; Joseph Price |
| Abstract: | Outcome bias occurs when an evaluator considers ex-post outcomes when judging whether a choice was correct, ex-ante. We formalize this cognitive bias in a simple model of distorted Bayesian updating. We then examine strategy changes made by professional football coaches. We find they are more likely to revise their strategy after a loss than a win — even for narrow losses, which are uninformative about future success. This increased revision following a loss occurs even when a loss was expected, and the offensive strategy is revised even when failure is attributable to the defense. These results are consistent with our model’s predictions. |
| JEL: | C11 D81 L83 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17477&r=cba |
| By: | Efrem Castelnuovo (Università di Padova); Luca Fanelli (Università di Bologna) |
| Abstract: | We work with a newly developed method to empirically assess whether a specified new-Keynesian business cycle monetary model estimated with U.S. quarterly data is consistent with a unique equilibrium or multiple equilibria under rational expectations. We conduct classical tests to verify if the structural model is correctly specified. Conditional on a positive answer, we formally assess if such model is either consistent with a unique equilibrium or with indeterminacy. Importantly, our full-system approach requires neither the use of prior distributions nor that of nonstandard inference. The case of an indeterminate equilibrium in the pre-1984 sample and of a determinate equilibrium in the post-1984 sample is favored by the data. The long-run coefficients on inflation and the output gap in the monetary policy rule are found to be weakly identified. However, our results are further supported by a proposed identification-robust indicator of indeterminacy |
| Keywords: | GMM, Indeterminatezza, Massima Verosimiglianza, Errata specificazione, modello neo-Keynesiano per il ciclo economico, VAR, Identificazione debole GMM, Indeterminacy, Maximum Likelihood, Misspecification, new-Keynesian business cycle model, VAR, Weak identification. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bot:quadip:112&r=cba |
| By: | Rianne Legerstee (Erasmus University Rotterdam); Philip Hans Franses (Erasmus University Rotterdam); Richard Paap (Erasmus University Rotterdam) |
| Abstract: | Experts can rely on statistical model forecasts when creating their own forecasts. Usually it is not known what experts actually do. In this paper we focus on three questions, which we try to answer given the availability of expert forecasts and model forecasts. First, is the expert forecast related to the model forecast and how? Second, how is this potential relation influenced by other factors? Third, how does this relation influence forecast accuracy? We propose a new and innovative two-level Hierarchical Bayes model to answer these questions. We apply our proposed methodology to a large data set of forecasts and realizations of SKU-level sales data from a pharmaceutical company. We find that expert forecasts can depend on model forecasts in a variety of ways. Average sales levels, sales volatility, and the forecast horizon influence this dependence. We also demonstrate that theoretical implications of expert behavior on forecast accuracy are reflected in the empirical data. |
| Keywords: | model forecasts; expert forecasts; forecast adjustment; Bayesian analysis; endogeneity |
| JEL: | C11 C53 |
| Date: | 2011–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110141&r=cba |
| By: | Toni Gravelle; Fuchun Li |
| Abstract: | In this paper, we define a financial institution’s contribution to financial systemic risk as the increase in financial systemic risk conditional on the crash of the financial institution. The higher the contribution is, the more systemically important is the institution for the system. Based on relevant but different measurements of systemic risk, we propose a set of market-based measures on the systemic importance of financial institutions, each designed to capture certain aspects of systemic risk. Multivariate extreme value theory approach is used to estimate these measures. Using six big Canadian banks as the proxy for Canadian banking sector, we apply these measures to identify systemically important banks in Canadian banking sector and major risk contributors from international financial institutions to Canadian banking sector. The empirical evidence reveals that (i) the top three banks, RBC Financial Group, TD Bank Financial Group, and Scotiabank are more systemically important than other banks, although with different order from different measures, while we also find that the size of a financial institution should not be considered as a proxy of systemic importance; (ii) compared to the European and Asian banks, the crashes of U.S. banks, on average, are the most damaging to the Canadian banking sector, while the risk contribution to the Canadian banking sector from Asian banks is quite lower than that from banks in U.S. and euro area; (iii) the risk contribution to the Canadian banking sector exhibits “ home bias ”, that is, cross-country risk contribution tends to be smaller than domestic risk contribution. |
| Keywords: | Financial stability; Financial system regulation and policies; Financial institutions; Econometric and statistical methods |
| JEL: | C14 G21 G32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-19&r=cba |
| By: | Nathan Porter; Nuno Cassola |
| Abstract: | China’s financial prices are informative enough for the PBC to introduce a monetary policy framework centered around interest rates. While bond yields are not fully efficient—reflecting regulation, liquidity, and segmentation—we find they contain considerable information about the state of the economy as well as evidence of an emerging transmission channel: changes in PBC rates influence the structure of Treasury, financial, and corporate bond yield curves, which are then associated with changes in growth and inflation. Coporate spreads are also a leading indicator of growth and inflation. While further liberalization will strengthen both efficiency and transmission, several necessary elements to move towards indirect monetary policy are already in place. |
| Keywords: | Bond markets , Bonds , China , Interest rate structures , Monetary policy , |
| Date: | 2011–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/225&r=cba |
| By: | Francis X. Diebold (University of Pennsylvania and NBER); Kamil Yýlmaz (Koc University) |
| Abstract: | We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. We also show that variance decompositions define weighted, directed networks, so that our connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, we track both average and daily time-varying connectedness of major U.S. financial institutions’ stock return volatilities in recent years, including during the financial crisis of 2007-2008. |
| Keywords: | Risk measurement, risk management, portfolio allocation, market risk, credit risk, systemic risk, asset markets, degree distribution |
| JEL: | C3 G2 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1124&r=cba |
| By: | Robert Amano; Jim Engle-Warnick; Malik Shukayev |
| Abstract: | In this paper, we use an economics decision-making experiment to test a key assumption underpinning the efficacy of price-level targeting relative to inflation targeting for business cycle stabilization and mitigating the effects of the zero lower bound on nominal interest rates. In particular, we attempt to infer whether experimental participants understand the stationary nature of the price level under price-level targeting by observing their inflation forecasting behaviour in a laboratory setting. This is an important assumption since, without it, price-level targeting can lead to worse outcomes than inflation targeting. Our main result suggests that participants formulate inflation expectations consistent with the target-reverting nature of the price level but that they do not fully utilize it in their forecasts of future inflation. |
| Keywords: | Monetary policy framework |
| JEL: | E32 E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-18&r=cba |
| By: | Luca Agnello (Banque de France and University of Palermo); Vitor Castro (University of Coimbra and NIPE); Ricardo M. Sousa (University of Minho, NIPE, London School of Economics and FMG) |
| Abstract: | We assess the response of fiscal policy to developments in asset markets in the US and the UK. We estimate fiscal policy rules augmented with aggregate wealth, wealth composition (i.e. financial and housing wealth) and asset prices (i.e. stock and housing prices) using: (i) a linear framework based on a fully simultaneous system approach; and (ii) two nonlinear specifications that rely on a smooth transition regression (STR) and a Markov-switching (MS) model. The linear framework suggests that, while primary spending does not seem to react to wealth composition or asset prices, taxes and primary surplus are significantly: (i) cut when financial wealth or stock prices rise; and (ii) raised when housing wealth or housing prices increase. The smooth transition regression model shows that primary spending and fiscal balance are adjusted in a nonlinear fashion to both wealth and price effects, while the Markov-switching framework highlights the importance of tax cuts (in the US) and spending hikes (in the UK) to offset the decline in wealth during major recessions and financial crises. Overall, our results provide evidence of a non-stabilizing effect of government debt, a countercyclical policy and a vigilant track of wealth developments by fiscal authorities. |
| Keywords: | fiscal policy, wealth composition, asset prices. |
| JEL: | E37 E52 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2011-18&r=cba |
| By: | Coles, Melvyn G; Kelishomi, Ali Moghaddasi |
| Abstract: | This paper considers new business start-up activity within a stochastic equilibrium model of unemployment. The resulting job creation process is both natural and tractable, and generates equilibrium unemployment and vacancy dynamics which match the volatility and persistence observed in the data. The insight is that the standard Diamond/Mortensen/Pissarides matching framework works beautifully once the free entry of vacancies assumption is replaced by a model of business start-up activity. The approach is particularly important as it is demonstrated that a large part of net job creation in the U.S. economy can be attributed to new business start-ups. |
| Keywords: | aggregate dynamics; equilibrium unemployment; startups |
| JEL: | E24 E32 J63 J64 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8588&r=cba |
| By: | Antonio Minniti (Facoltà di Economia); Francesco Turino (Universidad de Alicante) |
| Abstract: | Recent empirical evidence provided by Bernard et al. (2010) and Broda and Weinstein (2010) shows that a significant share of product creation and destruction in U.S. industries occurs within existing firms and accounts for a relevant share of aggregate output. In the present paper, and consistently with this evidence, we relax the standard assumption of mono-product firms that is typically made in dynamic general equilibrium models. Building on the work of Jaimovich and Floetotto (2008), we develop an RBC model with multi-product firms and endogenous markups to assess the implications of the intra-firm extensive margin on business cycle fluctuations. In this environment, the procyclicality of product creation emerges as a consequence of strategic interactions among firms. Because of the proliferation effect induced by changes in product scope, our model embodies a quantitatively important magnification mechanism of technology shocks. |
| Keywords: | Multi-product Firms, Business Cycles, Firm Dynamics. |
| JEL: | E32 L11 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2011-20&r=cba |
| By: | Andrew Atkeson; Ariel T. Burstein |
| Abstract: | We present a tractable model of innovating firms and the aggregate economy that we use to assess the link between the responses of firms to changes in innovation policy and the impact of those policy changes on aggregate output and welfare. We argue that the key theoretical determinant of the relative long-run aggregate impact of alternative policies is their impact on the expected profitability of entering firms. We show that, to a first-order approximation, a wide range of policy changes have a long-run aggregate impact in direct proportion to the fiscal expenditures on those policies, and that to evaluate the aggregate impact of such policy changes, there is no need to calculate changes in firms' decisions in response to these policy changes. We use these results to compare the relative magnitudes of the impact on aggregates in the long run of three innovation policies in the United States: the Research and Experimentation Tax Credit, federal expenditure on R&D, and the corporate profits tax. We argue that the corporate profits tax is a relatively important policy through its negative effects on innovation and physical capital accumulation that may well undo the benefits of federal support for R&D. We also use a calibrated version of our model to examine the absolute magnitude of the impact of these policies on aggregates. We show that, depending on the magnitude of spillovers, it is possible for changes in innovation policies to have a very large impact on aggregates in the long run. However, over a 15-year horizon, the impact of changes in innovation policies on aggregate output is not very sensitive to the magnitude of spillovers. On the basis of these results we conclude that, while it is possible to make comparisons about the relative importance of different policies and sharp predictions about their aggregate impact in the medium term, it is very difficult to shed much light on the implications of innovation policies for long-run aggregate outcomes and welfare without accurate estimates as to the magnitude of innovation spillovers. |
| JEL: | E6 O11 O3 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17493&r=cba |
| By: | Jihad Dagher; Ning Fu |
| Abstract: | We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle. Using comprehensive data on mortgage originations, which we aggregate at the county level, we first establish that the market share of these independent non-bank lenders increased in virtually all US counties during the boom. We then exploit the heterogeneity in the market share of independent lenders across counties as of 2005 and show that higher market participation by these lenders is associated with increased foreclosure filing rates at the onset of the housing downturn. We carefully control for counties’ economic, demographic, and housing market characteristics using both parametric and semi-nonparametric methods. We show that this relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states. The macroeconomic consequences of our findings are significant: we show that the market share of these lenders as of 2005 is also a strong predictor of the severity of the housing downturn and subsequent rise in unemployment. Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode. |
| Keywords: | Bank regulations , Banks , Business cycles , Credit demand , Housing prices , Nonbank financial sector , United States , |
| Date: | 2011–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/215&r=cba |
| By: | Dong Jin Lee (University of Connecticut); Jong Chil Son (The Bank of Korea) |
| Abstract: | This paper empirically examines how the Fed responds to stock prices and inflation movements, using the forward-looking Taylor rule augmented with the stock price gap. The typical linear policy reaction function has a substantial change after 1991, but lacks the robustness in that the estimation result is sensitive to a minor change of the sample period. To alleviate the problem, we allow for temporary and permanent variations of the reaction coefficients by introducing nonlinearity and a structural break. The time variation of the inflation coefficient shows that the Fed is more aggressive in periods of inflationary pressure. However, unlike the linear model case, we find little evidence of a significant change in the Fed's active response to inflationary pressure after the structural break at 1991:I. We also find a positive response to the stock price change after 1991:I. But the time varying pattern of the response is counter-cyclical to stock price change, which does not support the view that the Fed actively reacts to a stock price bubble. |
| Keywords: | Monetary policy rule, nonlinear model, stock market, structural break, and time varying coefficient |
| JEL: | E31 E44 E52 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2011-19&r=cba |
| By: | Kang Shi (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research) |
| Abstract: | This paper studies the welfare implications of sectoral labor adjustment cost in a two-sector small open economy model with sticky prices. We find that, when the economy faces external shocks, if monetary policy can stabilize the real economy, then sectoral labor market adjustment cost will lead to welfare loss. However, if monetary policy such as fixed exchange rates cannot stabilize real variables, then some degree of labor market friction will improve welfare instead and the gain will be significant. As a result, the welfare gap between flexible exchange rates and fixed exchange rates decreases with sectoral labor market friction. This is because the friction can offset some of the nominal rigidity and become a substitute for monetary policy to stabilize the real economy. |
| Keywords: | Labor Adjustment Cost, Exchange Rate Policy, Two-Sector Model, Welfare |
| JEL: | F3 F4 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:302011&r=cba |
| By: | Maria Christidou (Department of Economics, University of Macedonia); Panagiotis Konstantinou (Department of Economics, University of Macedonia) |
| Abstract: | What are the effects of monetary policy on the housing market? Is the response of the housing market similar across different states? We explore the impact of monetary policy shocks on real house prices and housing investment, using US state-level data. To this end we estimate VAR models for the period 1988-2009, to assess the differential effect - if any - of a common monetary policy shock on house prices and investment. Our VAR models also allow us to explore the macroeconomic effect of wealth shocks that originate in the housing market (housing prices). Our empirical models include key macroeconomic variables, namely personal income, prices and the federal funds rate, as well as housing market variables, e.g. real house prices, given by the FHFA house price index, and housing investment, proxied by the number of housing starts. Our baseline estimates suggest that transmission of monetary policy is heterogeneous across US states. Moreover, our VAR models indicate the presence of a wealth effect across most US states, as a positive housing price innovation leads to a strong, negative response of personal income. |
| Keywords: | House prices, Monetary policy transmission, VAR, Wealth effect. |
| JEL: | C32 E21 E52 R31 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2011_14&r=cba |
| By: | Lukasz Hardt (University of Warsaw, Faculty of Economics) |
| Abstract: | In this paper we investigate the interplay between regulatory and monetary policies. We analyze how changes in institutional settings modify the functioning of various channels of monetary transmission. The paper begins with a brief presentation of the main channels of monetary transmission, including credit channel, exchange rate channel, Tobin q theory, and the credit channel. After that we define a positive institutional change and we check how such adjustments can be put into the logic of monetary transmission. We show that the most profound way institutions impact the monetary transmission is via its effect on the elasticity of investments to changes in interest rates. |
| Keywords: | monetary transmission channels, monetary policy, regulatory policy, institutional change, financial globalization |
| JEL: | E44 E52 F41 O43 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:96&r=cba |
| By: | Ron Alquist; Lutz Kilian; Robert J. Vigfusson |
| Abstract: | We address some of the key questions that arise in forecasting the price of crude oil. What do applied forecasters need to know about the choice of sample period and about the tradeoffs between alternative oil price series and model specifications? Are real or nominal oil prices predictable based on macroeconomic aggregates? Does this predictability translate into gains in out-of-sample forecast accuracy compared with conventional no-change forecasts? How useful are oil futures markets in forecasting the price of oil? How useful are survey forecasts? How does one evaluate the sensitivity of a baseline oil price forecast to alternative assumptions about future demand and supply conditions? How does one quantify risks associated with oil price forecasts? Can joint forecasts of the price of oil and of U.S. real GDP growth be improved upon by allowing for asymmetries? |
| Keywords: | Econometric and statistical methods; International topics |
| JEL: | C53 Q43 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-15&r=cba |
| By: | Christiane Baumeister; Lutz Kilian |
| Abstract: | We construct a monthly real-time data set consisting of vintages for 1991.1-2010.12 that is suitable for generating forecasts of the real price of oil from a variety of models. We document that revisions of the data typically represent news, and we introduce backcasting and nowcasting techniques to fill gaps in the real-time data. We show that real-time forecasts of the real price of oil can be more accurate than the no-change forecast at horizons up to one year. In some cases real-time MSPE reductions may be as high as 25 percent one month ahead and 24 percent three months ahead. This result is in striking contrast to related results in the literature for asset prices. In particular, recursive vector autoregressive (VAR) forecasts based on global oil market variables tend to have lower MSPE at short horizons than forecasts based on oil futures prices, forecasts based on AR and ARMA models, and the no-change forecast. In addition, these VAR models have consistently higher directional accuracy. We demonstrate how with additional identifying assumptions such VAR models may be used not only to understand historical fluctuations in the real price of oil, but to construct conditional forecasts that reflect hypothetical scenarios about future demand and supply conditions in the market for crude oil. These tools are designed to allow forecasters to interpret their oil price forecast in light of economic models and to evaluate its sensitivity to alternative assumptions. |
| Keywords: | Econometric and statistical methods; International topics |
| JEL: | Q43 C53 E32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-16&r=cba |
| By: | Sanchita Mukherjee; Rina Bhattacharya |
| Abstract: | In this paper we empirically examine the operation of the traditional Keynesian interest rate channel of the monetary policy transmission mechanism in five potential inflation targeting economies in the MENA region and compare it with fourteen inflation targeting (IT) emerging market economies (EMEs) using panel data analysis. Contrary to some existing studies, our empirical results suggest that private consumption and investment in both groups of countries are sensitive to movements in real interest rates. Moreover, we find that the adoption of IT did not significantly alter the operation of the interest rate channel in IT EMEs. Also, the interest rate elasticities of private consumption and private investment vary with the level of development of the domestic financial market. Finally, capital account liberalization have opposite effects on private consumption and private investment in the two groups of countries. |
| Keywords: | Banks , Cross country analysis , Demand , Emerging markets , Inflation targeting , Interest rates , Middle East , Monetary policy , North Africa , Private consumption , Private investment , Private sector , |
| Date: | 2011–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/229&r=cba |
| By: | William R. Cline (Peterson Institute for International Economics) |
| Abstract: | On July 21, 2011, the heads of government of the euro area announced a new plan to address the Greek debt crisis. This policy brief presents a simulation exercise that examines whether the new arrangements are likely to provide a sustainable solution. The analysis focuses on four key measures: gross debt relative to GDP; net debt relative to GDP; net interest payments relative to GDP; and amortization of medium- and long-term debt coming due during the year in question, relative to GDP. The new Greek package shows prospective future progress on all four measures, and Greek debt looks much more sustainable after the package than before. In the central baseline through 2020 after the July 2011 package, gross debt peaks at 175 percent of GDP in 2012, then falls to 113 percent by 2020; net debt falls from 121 percent of GDP in 2011 to 69 percent by 2020; purchase of private-sector involvement (PSI) collateral boosts assets from €76 billion in 2010 to about €150 billion by 2015; the interest burden falls from 7.2 percent of GDP in 2011 to 5.2 percent by 2020; amortization falls from 12 percent of GDP in 2011 to 6.5 percent by 2015, 0.5 percent in 2020; the primary surplus rises from –0.8 percent of GDP in 2011 to +6.4 percent by 2014 and after; and the average interest rate on public debt plateaus in a manageable range of about 4.5 percent. These results suggest that Greece can manage its sovereign debt under the new package so long as it meets the fiscal adjustment targets. So far the evidence is that Greek political leaders are willing to take the extensive and unpopular measures necessary to do so. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb11-15&r=cba |
| By: | Jason Allen; Ali Hortaçsu; Jakub Kastl |
| Abstract: | This paper explores the reliability of using prices of credit default swap contracts (CDS) as indicators of default probabilities during the 2007/2008 financial crisis. We use data from the Canadian financial system to show that these publicly available risk measures, while indicative of initial problems of the financial system as a whole, do not seem to correspond to risks implied by the cross-sectional heterogeneity in bank behavior in short-term lending markets. Strategies in, and reliance on the payments system as well as special liquidity-supplying tools provided by the central bank seem to be more important additional indicators of distress of individual banks, or lack thereof than the CDSs. It therefore seems that central banks should utilize high-frequency data on liquidity demand to obtain a better picture of financial health of individual participants of the financial system. |
| Keywords: | Financial Institutions; Financial markets; Payment, clearing, and settlement systems |
| JEL: | G28 E42 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-17&r=cba |
| By: | Selva Demiralp; Hakan Kara; Pinar Ozlu |
| Abstract: | This paper assesses the effectiveness of monetary policy communication of the Central Bank of Turkey (CBT) by quantifying the information content of the policy statements released right after the monthly Monetary Policy Committee meetings. First, we quantify the signal regarding the next interest rate decision and ask whether communication improves predictability. Our findings suggest that the role of statements in predicting the next policy move have strengthened following the adoption of full-fledged inflation targeting (IT) regime. Second, we identify the surprise component of policy communication directly from market commentaries and assess its impact on the term structure of interest rates. We find that the response of the yield curve to policy statements have become highly significant for the unanticipated changes in the monetary policy communication, especially after the implementation of the IT. We also compare the yield curve impact of the surprise component of policy decisions (actions) with the surprises in policy communication (words). Our results suggest that the relative importance of communication in driving market yields have increased through time. |
| Keywords: | Central Bank Communication, Predictability, Transparency |
| JEL: | E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1118&r=cba |
| By: | Burcu Aydin; Engin Volkan |
| Abstract: | The global financial crisis has exposed the limitations of a conventional inflation targeting (IT) framework in insulating an economy from shocks, and demonstrated that its rigid application may aggravate the effect of shocks on output and inflation. Accordingly, we investigate possible refinements to the IT framework by incorporating financial stability considerations. We propose a small open economy DSGE model, calibrated for Korea during the period of 2003 - 07, with real and financial frictions. The findings indicate that incorporating financial stability considerations can help smooth business cycle fluctuations more effectively than a conventional IT framework. |
| Keywords: | Economic models , Financial crisis , Financial stability , Global Financial Crisis 2008-2009 , Inflation targeting , Korea, Republic of , Monetary policy , |
| Date: | 2011–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/224&r=cba |
| By: | Catik, A. Nazif; Karaçuka, Mehmet |
| Abstract: | In this paper we aim to analyze the role of credit channel in the monetary transmission mechanism under different inflationary environments in Turkey covering the period 1986:1 - 2009:10. Our results suggest that traditional interest rate channel is only valid for the postinflation targeting period. This variable is also more effective monetary policy tool in terms of its impacts on economic activity in the both regimes. Credit shocks itself have significant power on economic activity and prices. However, the effect of monetary shocks on credit volume is very limited especially in the low inflation regime. -- |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:32&r=cba |
| By: | H. Cagri Akkoyun; Oguz Atuk; N. Alpay Kocak; M. Utku Ozmen |
| Abstract: | Many economic time series, specifically inflation, are inherently subject to seasonal fluctuations which obscure the real changes of the series. In this respect, seasonal adjustment is a powerful tool when removing such fluctuations. On the other hand, seasonal adjustment may provide highly volatile series, making it still difficult to interpret the movements of the series. The reason is that seasonal adjustment deals with certain type of movements that are completed on specific seasonal frequencies. However, it is possible that there may be other short term fluctuations occurring at non seasonal frequencies. From this observation and in the context of inflation, an improved methodology aiming to deal with all short term fluctuations that are completed within a year is proposed in this study. The two-step approach combines wavelet filters and band pass filters. This method yields much smoother time series than seasonal adjustment does. Moreover, the filtered series capture the dynamics of the inflation in sub groups well. Hence, this two-step procedure provides a useful tool for improved short term inflation analysis. |
| Keywords: | Consumer prices, inflation, seasonal adjustment, wavelet filter, band pass filter |
| JEL: | E31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1120&r=cba |
| By: | Jorge Restrepo; Carlos Garcia; Leonardo Luna; Dale F. Gray |
| Abstract: | This paper builds a model of financial sector vulnerability and integrates it into a macroeconomic framework, typically used for monetary policy analysis. The main question to be answered with the integrated model is whether or not the central bank should include explicitly the financial stability indicator in its monetary policy (interest rate) reaction function. It is found in general, that including distance-to-default (dtd) of the banking system in the central bank reaction function reduces both inflation and output volatility. Moreover, the results are robust to different model calibrations: whenever exchange-rate pass-through is higher; financial vulnerability has a larger impact on the exchange rate, as well as on GDP (or the reverse, there is more effect of GDP on bank’s equity - i.e., what we call endogeneity), it is more efficient to include dtd in the reaction function. |
| Keywords: | Banking systems , Central banks , Chile , Economic models , Financial risk , Financial sector , Monetary policy , |
| Date: | 2011–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/228&r=cba |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research) |
| Abstract: | An SIIO paradigm, based on structure and ideas that become engraved in institutions and affect outcomes, is developed to examine and assesses monetary policy in India after independence. Narrative history, data analysis, and reporting of research demonstrate the dialectic between ideas and structure. Exogenous supply shocks are used to identify policy shocks and isolate their effects. It turns out policy was sometimes exceedingly tight when the common understanding was of a large monetary overhang. Fiscal dominance made policy procyclical. But the three factors that cause a loss of monetary autonomy-governments, markets and openness-are moderating each other. Markets moderate fiscal profligacy and global crises moderate markets and openness. Greater current congruence between ideas and structure is improving institutions and contributing to India's better performance. |
| Keywords: | Monetary policy history, Structure, Ideas, Institutions, Outcomes, India |
| JEL: | E42 E5 E58 E63 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2011-018&r=cba |
| By: | Gregory C. Chow (Princeton University & Academia Sinica, Taiwan) |
| Abstract: | The model of Chow (1987) for inflation in China is applied to explain inflation in Taiwan. A cointegration relation linear in the log of a price index and the log of the ratio of money supply to output is estimated. Inflation is explained by the change in this log ratio, lagged inflation and the lagged residual of the cointegration relation as an error correction. The model explains Taiwan’s inflation well except during the oil crises of 1973 and 1979-80. |
| Keywords: | inflation, Taiwan, error correction |
| JEL: | E31 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:1333&r=cba |