nep-cba New Economics Papers
on Central Banking
Issue of 2011‒10‒22
forty-four papers chosen by
Alexander Mihailov
University of Reading

  1. Sticky Prices: A New Monetarist Approach By Allen Head; Lucy Qian Liu; Guido Menzio; Randall Wright
  2. A Theory of Asset Prices Based on Heterogeneous Information By Elias Albagli; Christian Hellwig; Aleh Tsyvinski
  3. Ambiguity in Asset Pricing and Portfolio Choice: A Review of the Literature By Massimo Guidolin; Francesca Rinaldi
  4. Endogenous Credit Cycles By Chao Gu; Randall Wright
  5. A Model of Mortgage Default By John Y. Campbell; João F. Cocco
  6. Liquidity and the Threat of Fraudulent Assets By Yiting Li; Guillaume Rocheteau; Pierre-Olivier Weill
  7. Government Policy and Ownership of Financial Assets By Kristian Rydqvist; Joshua Spizman; Ilya A. Strebulaev
  8. Traded and nontraded goods prices, and international risk sharing: an empirical investigation By Corsetti, Giancarlo; Dedola, Luca; Viani, Francesca
  9. Traded and Nontraded Goods Prices, and International Risk Sharing: an Empirical Investigation. By Giancarlo Corsetti; Luca Dedola; Francesca Viani
  10. Credit Risk in General Equilibrium By Jürgen Eichberger; Klaus Rheinberger; Martin Summer
  11. When bigger isn’t better: Bail outs and bank behaviour By Li, Han Hao; Miller, Marcus; Zhang, Lei
  12. Ending “Too Big To Fail”: Government Promises vs. Investor Perceptions By Todd A. Gormley; Simon Johnson; Changyong Rhee
  13. Political Uncertainty and Risk Premia By Pástor, Luboš; Veronesi, Pietro
  14. Financial Sector Ups and Downs and the Real Sector: Big Hindrance, Little Help By Joshua Aizenman; Brian Pinto; Vladyslav Sushko
  15. Structural features of distributive trades and their impact on prices in the euro area By Robert Anderton; Aidan Meyler; Luca Gattini; Mario Izquierdo; Valerie Jarvis; Ri Kaarup; Magdalena Komzakova; Bettina Landau; Matthias Mohr; Adrian Page; David Sondermann; Philip Vermeulen; David Cornille; Tsvetan Tsalinski; Zornitsa Vladova; Christin Hartmann; Harald Stahl; Suzanne Linehan; Hiona Balfoussia; Stelios Panagiotou; María de los Llanos Matea; Luis J. Alvarez; Pierre-Michel Bardet-Fremann; Nicoletta Berardi; Patrick Sevestre; Emanuela Ciapanna; Concetta Rondinelli; Demetris Kapatais; Eric Walch; Patrick Lünnemann; Sandra Zerafa; Christopher Pace; Jasper Kieft; Friedrich Fritzer; Fatima Cardoso; Mateja Gabrijelcic; Branislav Karma; Jarkko Kivistö
  16. Employment and the business cycle By Marcelle, Chauvet; Jeremy, Piger
  17. Modeling Financial Crises Mutation By Elena-Ivona Dumitrescu; Bertrand Candelon; Christophe Hurlin; Franz C. Palm
  18. A Forensic Analysis of Global Imbalances By Menzie D. Chinn; Barry Eichengreen; Hiro Ito
  19. 130 years of fiscal vulnerabilities and currency crashes in advanced economies By Fratzscher, Marcel; Mehl, Arnaud; Vansteenkiste, Isabel
  20. Fiscal Spillovers in the Euro Area By Guglielmo Maria Caporale; Alessandro Girardi
  21. Exchange rate misalignment estimates – Sources of differences By Cheung , Yin-Wong; Fujii, Eiji
  22. Some lessons from the financial crisis for the economic analysis By Geoff Kenny; Julian Morgan
  23. Complementing Bagehot: Illiquidity and insolvency resolution By Eijffinger, Sylvester C W; Nijskens, Rob
  24. Is recent bank stress really driven by the sovereign debt crisis? By Guntram B. Wolff
  25. The size and composition of government debt in the euro area By Dagmar Hartwig Lojsch; Marta Rodríguez-Vives; Michal Slavík
  26. Fiscal Multipliers Over the Business Cycle By Michaillat, Pascal
  27. Incorporating theoretical restrictions into forecasting by projection methods By Giacomini, Raffaella; Ragusa, Giuseppe
  28. Interpreting the evidence for New Keynesian models of inflation dynamics By Nymoen, Ragnar; Rygh Swensen, Anders; Tveter, Eivind
  29. Forecasting Inflation using Commodity Price Aggregates By Yu-chin Chen; Stephen J. Turnovsky; Eric Zivot
  30. Efficiency wage setting, labor demand, and Phillips curve microfoundations By Campbell, Carl
  31. International risk sharing and commodity prices By Martin Berka; Mario J Crucini; Chih-Wei Wang
  32. Inflation and Welfare with Search and Price Dispersion By Liang Wang
  33. News and Financial Intermediation in Aggregate Fluctuations By Görtz, Christoph; Tsoukalas, John
  34. Buyers, Sellers and Middlemen: Variations on Search-Theoretic Themes By Yuet-Yee Wong; Randall Wright
  35. Optimal monetary policy with durable services: user cost versus purchase price By Ko, Jun-Hyung
  36. Exchange Rate Pass-Through and Credit Constraints: Firms Price to Market as Long as They Can By Georg H. Strasser
  37. Monetary Policy and TIPS Yields Before the Crisis By Stefan Gerlach; Laura Moretti
  38. The risk-taking channel of monetary policy in the USA: Evidence from micro-level data By Delis, Manthos D; Hasan, Iftekhar; Mylonidis, Nikolaos
  39. Markov Switching Models in Empirical Finance By Massimo Guidolin
  40. Investigating the Monetary Policy of Central Banks with Assessment Indicators By Marcel Bluhm
  41. Households’ Foreign Currency Borrowing in Central and Eastern Europe By Jarko Fidrmuc; Mariya Hake; Helmut Stix
  42. Do Monetary, Fiscal and Financial Institutions Really Matter for Inflation Targeting in Emerging Market Economies? By Dambala Gelo; Steven F. Koch
  43. Non-linear convergence in Asian interest rates and inflation rates By Kisswani, Khalid/ M.; Nusair, Salah/ A.
  44. The Effects of Monetary Policy On Real Farm Prices in South Africa By Goodness C. Aye; Rangan Gupta

  1. By: Allen Head; Lucy Qian Liu; Guido Menzio; Randall Wright
    Abstract: Why do some sellers set nominal prices that apparently do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption; here it is a result. We use search theory, with two consequences: prices are set in dollars, since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When the money supply increases, some sellers may keep prices constant, earning less per unit but making it up on volume, so profit stays constant. The calibrated model matches price-change data well. But, in contrast with other sticky-price models, money is neutral.
    JEL: E0
    Date: 2011–10
  2. By: Elias Albagli (USC Marshall); Christian Hellwig (Toulouse School of Economics); Aleh Tsyvinski (Dept. of Economics, Yale University)
    Abstract: We propose a theory of asset prices that emphasizes heterogeneous information as the main element determining prices of different securities. Our main analytical innovation is in formulating a model of noisy information aggregation through asset prices, which is parsimonious and tractable, yet flexible in the specification of cash flow risks. We show that the noisy aggregation of heterogeneous investor beliefs drives a systematic wedge between the impact of fundamentals on an asset price, and the corresponding impact on cash flow expectations. The key intuition behind the wedge is that the identity of the marginal trader has to shift for different realization of the underlying shocks to satisfy the market-clearing condition. This identity shift amplifies the impact of price on the marginal trader's expectations. We derive tight characterization for both the conditional and the unconditional expected wedges. Our first main theorem shows how the sign of the expected wedge (that is, the difference between the expected price and the dividends) depends on the shape of the dividend payoff function and on the degree of informational frictions. Our second main theorem provides conditions under which the variability of prices exceeds the variability for realized dividends. We conclude with two applications of our theory. First, we highlight how heterogeneous information can lead to systematic departures from the Modigliani-Miller theorem. Second, in a dynamic extension of our model we provide conditions under which bubbles arise.
    Keywords: Information aggregation, Information wedge, Heterogeneous beliefs, Modigliani-Miller theorem, Bubbles
    JEL: G12 G14 G30 E44
    Date: 2011–10
  3. By: Massimo Guidolin; Francesca Rinaldi
    Abstract: Empirical research suggests that investors’ behavior is not well described by the traditional paradigm of (subjective) expected utility maximization under rational expectations. A literature has arisen that models agents whose choices are consistent with models that are less restrictive than the standard subjective expected utility framework. In this paper we survey the literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices. We conclude that the ambiguity literature has led to a number of significant advances in our ability to rationalize empirical features of asset returns and portfolio decisions, such as the failure of the two-fund separation theorem in portfolio decisions, the modest exposure to risky securities observed for a majority of investors, the home equity preference in international portfolio diversification, the excess volatility of asset returns, the equity premium and the risk-free r ate puzzles, and the occurrence of trading break-downs. JEL codes: G10, G18, D81. Keywords: ambiguity, ambiguity-aversion, participation, liquidity, asset pricing.By Massimo Guidolin, Francesca Rinaldi
    Date: 2011
  4. By: Chao Gu; Randall Wright
    Abstract: We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.
    JEL: E32 E44
    Date: 2011–10
  5. By: John Y. Campbell; João F. Cocco
    Abstract: This paper solves a dynamic model of a household's decision to default on its mortgage, taking into account labor income, house price, inflation, and interest rate risk. Mortgage default is triggered by negative home equity, which results from declining house prices in a low inflation environment with large mortgage balances outstanding. Not all households with negative home equity default, however. The level of negative home equity that triggers default depends on the extent to which households are borrowing constrained. High loan-to-value ratios at mortgage origination increase the probability of negative home equity. High loan-to-income ratios also increase the probability of default by tightening borrowing constraints. Comparing mortgage types, adjustable-rate mortgage defaults occur when nominal interest rates increase and are substantially affected by idiosyncratic shocks to labor income. Fixed-rate mortgages default when interest rates and inflation are low, and create a higher probability of a default wave with a large number of defaults. Interest-only mortgages trade off an increased probability of negative home equity against a relaxation of borrowing constraints, but overall have the highest probability of a default wave.
    JEL: E21 G21 G33
    Date: 2011–10
  6. By: Yiting Li; Guillaume Rocheteau; Pierre-Olivier Weill
    Abstract: We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset's resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.
    JEL: E41 E44 E5 E58 G1 G12
    Date: 2011–10
  7. By: Kristian Rydqvist; Joshua Spizman; Ilya A. Strebulaev
    Abstract: Since World War II, direct stock ownership by households across the globe has largely been replaced by indirect stock ownership by financial institutions. We argue that tax policy is the driving force. Using long time-series from eight countries, we show that the fraction of household ownership decreases with measures of the tax benefits of holding stocks inside tax-deferred plans. This finding is important for policy considerations on effective taxation and for financial economics research on the long-term effects of taxation on corporate finance and asset prices.
    JEL: G10 G20 H22 H30
    Date: 2011–10
  8. By: Corsetti, Giancarlo; Dedola, Luca; Viani, Francesca
    Abstract: Accounting for the pervasive evidence of limited international risk sharing is an important hurdle for open-economy models, especially when these are adopted in the analysis of policy trade-offs likely to be affected by imperfections in financial markets. Key to the literature is the evidence, at odds with efficiency, that consumption is relatively high in countries where its international relative price (the real exchange rate) is also high. We reconsider the relation between cross-country consumption differentials and real exchange rates, by decomposing it into two components, reflecting the prices of tradable and nontradable goods, respectively. We document that, as a common pattern among OECD countries, both components tend to contribute to the overall lack of risk sharing, with the tradable price component playing the dominant role in accounting for efficiency deviations. We relate these findings to two mechanisms proposed by the literature to reconcile open economy models with the data. One features strong Balassa-Samuelson effects on nontradable prices due to productivity gains in the tradable sector, with a muted offsetting response of tradable prices. The other, endogenous income effects causing nontradable but especially tradable prices to appreciate with a rise in domestic consumption demand.
    Keywords: consumption-real exchange rate anomaly; Harrod-Balassa-Samuelson effect; incomplete markets; international transmission mechanism; terms of trade
    JEL: F41 F42
    Date: 2011–10
  9. By: Giancarlo Corsetti; Luca Dedola; Francesca Viani
    Abstract: Accounting for the pervasive evidence of limited international risk sharing is an important hurdle for open-economy models, especially when these are adopted in the analysis of policy trade-offs likely to be affected by imperfections in financial markets. Key to the literature is the evidence, at odds with efficiency, that consumption is relatively high in countries where its international relative price (the real exchange rate) is also high. We reconsider the relation between cross-country consumption differentials and real exchange rates, by decomposing it into two components, reflecting the prices of tradable and nontradable goods, respectively. We document that, as a common pattern among OECD countries, both components tend to contribute to the overall lack of risk sharing, with the tradable price component playing the dominant role in accounting for efficiency deviations. We relate these findings to two mechanisms proposed by the literature to reconcile open economy models with the data. One features strong Balassa-Samuelson effects on nontradable prices due to productivity gains in the tradable sector, with a muted offsetting response of tradable prices. The other, endogenous income effects causing nontradable but especially tradable prices to appreciate with a rise in domestic consumption demand.
    JEL: F41 F42
    Date: 2011–10
  10. By: Jürgen Eichberger (University of Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften); Klaus Rheinberger; Martin Summer
    Abstract: Credit risk models used in quantitative risk management treat credit risk analysis conceptually like a single person decision problem. From this perspective an exogenous source of risk drives the fundamental parameters of credit risk: probability of default, exposure at default and the recovery rate. In reality these parameters are the result of the interaction of many market participants: They are endogenous. The authors develop a general equilibrium model with endogenous credit risk that can be viewed as an extension of the capital asset pricing model. They analyze equilibrium prices of securities as well as equilibrium allocations in the presence of credit risk. The authors use the model to discuss the conceptual underpinnings of the approach to risk weight calibration for credit risk taken by the Basel Committee. JEL classification: G32, G33, G01, D52
    Keywords: Credit Risk, Endogenous Risk, Systemic Risk, Banking Regulation
    Date: 2011–09–09
  11. By: Li, Han Hao; Miller, Marcus; Zhang, Lei
    Abstract: The traditional theory of commercial banking explains maturity transformation and liquidity provision assuming no asymmetric information and no excess profits. It captures the possibility of bank runs and business cycle risk; but it ignores the moral hazard problems connected with risk-taking by large banks counting on state bail outs. In this paper market concentration and risk-shifting is incorporated in an analytically tractable fashion; and the modified framework is used to consider measures to restore competition and stability--including, in particular, those recommended for the UK by the Independent Commission on Banking (2011), chaired by Sir John Vickers.
    Keywords: bailouts; money and banking; regulation; risk-taking; seigniorage
    JEL: E41 E58 G21 G28
    Date: 2011–10
  12. By: Todd A. Gormley; Simon Johnson; Changyong Rhee
    Abstract: Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea’s 1997-99 crisis, suggests an answer: No. Despite a general “no bailout” policy during the crisis, the largest Korean corporate groups (chaebol) – facing severe financial and governance problems – could still borrow heavily from households through issuing bonds at prices implying very low expected default risk. The evidence suggests “too big to fail” beliefs were not eliminated by government promises, presumably because investors believed that this policy was not time consistent. Subsequent government handling of potential and actual defaults by Daewoo and Hyundai confirmed the market view that creditors would be protected.
    JEL: E44 G18 G21 G3
    Date: 2011–10
  13. By: Pástor, Luboš; Veronesi, Pietro
    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.
    Keywords: Bayesian; government; learning; political; put; risk premium; uncertainty
    JEL: G12 G18
    Date: 2011–10
  14. By: Joshua Aizenman; Brian Pinto; Vladyslav Sushko
    Abstract: We examine how financial expansion and contraction cycles affect the broader economy through their impact on 8 real economic sectors in a panel of 28 countries over 1960-2005, paying particular attention to large, or sharp, contractions and magnifying and mitigating factors. Overall, the construction sector is the most responsive to financial sector growth, with a number of others such as government, public utilities, and transportation also exhibiting significant sensitivity to lagged financial sector growth. Sharp fluctuations in the financial sector have asymmetric effects, with the majority of real sectors adversely affected by contractions but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively by the financial openness channel with foreign reserves mitigating these effects with a sizeable (10 to 15 times greater) impact during sharp financial contractions. Both effects are magnified during particularly large financial contractions (with coefficients on interaction terms 2 to 3 times greater than when all contractions are considered). Consequent upon a financial contraction, the most severe real sector contractions occur in countries with high financial openness, relative predominance of construction, manufacturing, and wholesale and retail sectors, and low international reserves. Finally, we find that abrupt financial contractions are more likely to follow periods of accelerated growth, indicative of “up by the stairs, down by the elevator dynamics.”
    JEL: F15 F31 F36 F4
    Date: 2011–10
  15. By: Robert Anderton (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Aidan Meyler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Luca Gattini (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Mario Izquierdo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Valerie Jarvis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Ri Kaarup (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Magdalena Komzakova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Bettina Landau (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Matthias Mohr (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Adrian Page (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); David Sondermann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Philip Vermeulen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); David Cornille (National Bank of Belgium, boulevard de Berlaimont 14, 1000 Brussels, Belgium.); Tsvetan Tsalinski (Bulgarian National Bank, 1, Knyaz Alexander ? Sq., 1000 Sofia, Bulgaria.); Zornitsa Vladova (Bulgarian National Bank, 1, Knyaz Alexander ? Sq., 1000 Sofia, Bulgaria.); Christin Hartmann (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.); Harald Stahl (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.); Suzanne Linehan (Central Bank and Financial Services Authority of Ireland,Dame Street, Dublin 2, Ireland.); Hiona Balfoussia (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Stelios Panagiotou (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); María de los Llanos Matea (Banco de España, Alcalá 50, E-28014 Madrid, España.); Luis J. Alvarez (Banco de España, Alcalá 50, E-28014 Madrid, España.); Pierre-Michel Bardet-Fremann (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Nicoletta Berardi (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Patrick Sevestre (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Emanuela Ciapanna (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Concetta Rondinelli (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Demetris Kapatais (Central Bank of Cyprus, 80, KENNEDY AVENUE, CY-1076 NICOSIA, Cyrpus); Eric Walch (Banque centrale du Luxembourg; 2, boulevard Royal; L-2983 Luxembourg, Luxembourg.); Patrick Lünnemann (Banque centrale du Luxembourg; 2, boulevard Royal; L-2983 Luxembourg, Luxembourg.); Sandra Zerafa (Central Bank of Malta, Pjazza Kastilja, Valletta, VLT 1060, MALTA.); Christopher Pace (Central Bank of Malta, Pjazza Kastilja, Valletta, VLT 1060, MALTA.); Jasper Kieft (De Nederlandsche Bank, Westeinde 1, 1017 ZN Amsterdam, the Netherlands.); Friedrich Fritzer (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria.); Fatima Cardoso (Banco de Portugal, Av. Almirante Reis, 71 – 8°, 1150-012 Lisboa, Portugal.); Mateja Gabrijelcic (BANK OF SLOVENIA, Slovenska 35, 1505 Ljubljana, Slovenija); Branislav Karma (Narodna banka Slovenska, Imricha Karvasa 1, 813 25 Bratislava); Jarkko Kivistö (Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland.)
    Abstract: The distributive trades, consisting of wholesaling and retailing, are a key sector of the economy. As the main interface between producers and consumers, the sector is particularly important from a monetary policy point of view: this is where most consumer goods prices are ultimately set. Despite almost 20 years of the Single Market, mark-ups in the distributive trades sector can still be substantial and differ considerably across countries, while cross-border trade remains limited. This report examines the structural features of the distributive trades sector which are likely to play an important role in determining price level and infl ation differences across countries. JEL Classification:
    Keywords: Prices, trades, euro area
    Date: 2011–09
  16. By: Marcelle, Chauvet; Jeremy, Piger
    Abstract: The Great Recession of 2007-2009 has not only caused a large wealth loss, it was also followed by a sluggish subsequent recovery. Two years after officially emerging from the recession, the economy was still growing at a low pace and payroll employment was far from reaching its previous peak. However, assessment of the employment situation was markedly different across different series. The two most important employment series, payroll employment (ENAP) and civilian employment (TCE), have recently been displaying divergent patterns. This has been a source of great uncertainty regarding labor market conditions. This paper investigates the differences in the cyclical dynamics of these series and the implications for monitoring business cycle on a current basis. Univariate and multivariate Markov switching models are applied to revised and real time unrevised data. We find that the main differences across these series occur around recessions. The employment measures have diverged considerably around the last three recessions in 1990-1991, in 2001, and in 2007-2009, but especially during their subsequent recoveries. In particular, while the probabilities of recession for models that include ENAP depict jobless recoveries, the probabilities of recessions from models with TCE fall right around the trough of the last three recessions, as determined by the NBER. This significantly impacts the identification of turning points in multivariate models in sample and in recursive real time analysis, with models that use TCE being more accurate compared to the NBER dating, and delivering faster call of troughs in real time. Models that include ENAP series, on the other hand, yield delays in signaling business cycle troughs, especially the most recent ones.
    Keywords: Employment; Business Cycle; Turning Point; Real Time; Markov-Switching; Dynamic Factor Model; Jobless Recovery
    JEL: E32 C22
    Date: 2010–06–30
  17. By: Elena-Ivona Dumitrescu (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Bertrand Candelon (Economics - Maastricht University); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Franz C. Palm (Maastricht University - univ. Maastricht)
    Abstract: The recent financial turmoils in Latin America and Europe have led to a concatenation of several events from currency, banking and sovereign debt crises. This paper proposes a multivariate dynamic probit model that encompasses the three types of crises 'currency, banking and sovereign debt' and allows us to investigate the potential causality between all three crises. To achieve this objective, we propose a methodological novelty consisting of an exact maximum likelihood method to estimate this multivariate dynamic probit model, extending thus Huguenin, Pelgrin and Holly (2009). Using a large sample of data for emerging countries, which experienced financial crises, we find that mutations from banking to currency (and vice-versa) are quite common. More importantly, the trivariate model turns out to be more parsimonious in the case of the two countries which suff ered from the 3 types of crises. These findings are strongly confi rmed by a conditional probability and an impulse-response function analysis, highlighting the interaction between the di fferent types of crises and advocating hence the implementation of trivariate models whenever it is feasible.
    Keywords: Financial crisis, Multivariate dynamic probit models, Emerging countries
    Date: 2011–08
  18. By: Menzie D. Chinn; Barry Eichengreen; Hiro Ito
    Abstract: We examine whether the behavior of current account balances changed in the years preceding the global crisis of 2008-09, and assess the prospects for global imbalances in the post-crisis period. Changes in the budget balance are an important factor affecting current account balances for deficit countries such as the U.S. and the U.K. The effect of the “saving glut variables” on current account balances has been relatively stable for emerging market countries, suggesting that those factors cannot explain the bulk of their recent current account movements. We also find the 2006-08 period to constitute a structural break for emerging market countries, and to a lesser extent, for industrialized countries. We attribute the anomalous behavior of pre-crisis current account balances to stock market performance and real housing appreciation; fiscal procyclicality and the stance of monetary policy do not matter as much. Household leverage also appears to explain some of the standard model’s prediction errors. Looking forward, U.S., fiscal consolidation alone cannot induce significant deficit reduction. For China, financial development might help shrink its current account surplus, but only when it is coupled with financial liberalization. These findings suggest that unless countries implement substantially more policy change, global imbalances are unlikely to disappear.
    JEL: F32 F41
    Date: 2011–10
  19. By: Fratzscher, Marcel; Mehl, Arnaud; Vansteenkiste, Isabel
    Abstract: This paper investigates the empirical link between fiscal vulnerabilities and currency crashes in advanced economies over the last 130 years, building on a new dataset of real effective exchange rates and fiscal balances for 21 countries since 1880. We find evidence that crashes depend more on prospective fiscal deficits than on actual ones, and more on the composition of public debt (i.e. rollover/sudden stop risk) than on its level per se. We also uncover significant nonlinear effects at high levels of public debt as well as significantly negative risk premia for major reserve currencies, which enjoy a lower probability of currency crash than other currencies ceteris paribus. Yet, our estimates indicate that such premia remain small in size relative to the conditional probability of a currency crash if prospective fiscal deficits or rollover/sudden stop risk are high. This suggests that a currency’s international status is not necessarily sufficient to shelter it from collapse.
    Keywords: advanced economies; banking crises; currency crashes; exchange rates; fiscal vulnerability; foreign debt; reserve currencies; total debt level
    JEL: F30 F31 N20
    Date: 2011–10
  20. By: Guglielmo Maria Caporale; Alessandro Girardi
    Abstract: This paper analyses the dynamic effects of fiscal imbalances in a given EMU member state on the borrowing costs of other countries in the euro area. The estimation of a multivariate, multi-country time series model (specifically a Global VAR, or GVAR) using quarterly data for the EMU period suggests that euro-denominated government yields are strongly linked with each other. However, financial markets seem to be able to discriminate among different issuers. Consequently, fiscal imbalances in Italy and in other peripheral countries should be closely monitored by their EMU partners and the European institutions.
    Keywords: Global VAR methodology, fiscal spillovers, euro area, public debt
    JEL: C32 E62 F42 H63
    Date: 2011
  21. By: Cheung , Yin-Wong (BOFIT); Fujii, Eiji (BOFIT)
    Abstract: We study the differences in currency misalignment estimates obtained from alternative datasets derived from two International Comparison Program (ICP) surveys. A decomposition exercise reveals that the year 2005 misalignment estimates are substantially affected by the ICP price revision. Further, we find that differences in misalignment estimates are systematically affected by a country’s participation status in the ICP survey and its data quality – a finding that casts doubt on the economic and policy relevance of these misalignment estimates. The patterns of changes in estimated degrees of misalignment across individual countries, as exemplified by the BRIC economies, are highly variable.
    Keywords: Penn effect regression; data revision; PPP-based data; measurement factors; economic factors
    JEL: C31 E01 F31 F40
    Date: 2011–11–11
  22. By: Geoff Kenny (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Julian Morgan (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: The economics profession in general, and economic forecasters in particular, have faced some understandable criticism for their failure to predict the timing and severity of the recent economic crisis. In this paper, we offer some assessment of the performance of the Economic Analysis conducted at the ECB both in the run up to and since the onset of the crisis. Drawing on this assessment, we then offer some indications of how the analysis of economic developments could be improved looking forward. The key priorities identifi ed include the need to: i) extend existing tools and/or develop new tools to account for important feedback mechanisms, for instance, improved real-fi nancial linkages and non-linear dynamics; ii) develop ways to handle the complexity arising from the presence of multiple models and alternative economic paradigms; and iii) given the limitations of point forecasts, to further develop risk and scenario analysis around baseline projections. JEL Classification: E02, E30, E2, C53
    Date: 2011–10
  23. By: Eijffinger, Sylvester C W; Nijskens, Rob
    Abstract: During the recent financial crisis, central banks have provided liquidity and governments have set up rescue programmes to restore confidence and stability, often against the LLR principle advocated by Bagehot. Using a model of a systemic bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity and monitors too little. A central bank can alleviate the liquidity problem, but induces moral hazard. Therefore, we introduce an additional authority that is able to bail out the bank either by injecting capital at a fixed return or by receiving an equity claim. This authority faces a trade-off: demanding a fixed premium increases investment but worsens moral hazard. Request for an equity claim by the fiscal authority reduces excessive risk taking at the expense of investment. This resembles the current situation on financial markets, in which banks take less risk but also provide less credit to the economy
    Keywords: Bailout; Bank Regulation; Capital; Lender of Last Resort; Liquidity
    JEL: E58 G21 G28
    Date: 2011–10
  24. By: Guntram B. Wolff
    Abstract: Ahead of the European Council meeting on 23 October, the author outlines how EU Heads of States should focus on restoring confidence in euro-area policymakersâ?? ability and determination to put the euro area on a sound footing and restore market credibility. Stress in the interbank market has increased dramatically since July and bank stock market valuation has fallen by 22 percent on average for 60 of the most important banks tested in the EBA stress tests. I find evidence that bank stock valuation is significantly and economically meaningfully affected by the bankâ??s exposure to Greek debt. Greek banks are particularly affected. Holdings of debt of the other four periphery countries does not however appear to be a strong determinant of stock price movements. Policy announcements of 21 July of no haircut on any sovereign but Greece appear to be perceived as credible. The exposure to Greece cannot explain the general and large decline in euro area banksâ?? market cap. Instead, a general confidence crisis of the euro area banking system, or more deeply the euro area construction, might be driving the fall in stock prices. The summit of 23 October should focus on restoring confidence in euro-area policymakersâ?? ability and determination to put the euro area on a sound footing. Recapitalisation of banks can only be only one aspect. A credible solution to Greece and a way forward for the larger institutional set-up, including a federal fiscal back-stop of the banking system, are of at least equal importance.
    Date: 2011–10
  25. By: Dagmar Hartwig Lojsch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marta Rodríguez-Vives (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michal Slavík (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper explains the various concepts of government debt in the euro area with particular emphasis on its size and composition. In terms of size, the paper focuses on different definitions that are in use, in particular the concept of gross general government debt used in the surveillance of the euro area countries, the total liabilities from the government balance sheet approach, and the net debt concept which subtracts government financial assets from the liability side. In addition, it discusses “hidden debt” in the form of implicit and contingent liabilities. In terms of composition, the paper provides information about euro area government debt broken down by maturity, holder or the currency of issue. All these indicators illustrate a sharp increase in government debt in most euro area countries as a result of the crisis. This in turn has several policy implications: (i) the growing government debt ratios need to be stabilised and put on a downward path which improves market confidence; (ii) fiscal surveillance needs to put more emphasis on government debt indicators than in the past; (iii) government financial assets could play a role when analysing solvency issues; (iv) implicit and other off-balance-sheet government liabilities need to be carefully monitored and reported; (v) the gross debt concept should remain the key basis for fiscal surveillance in the EU and for the Excessive Deficit Procedure in particular; (vi) beyond the size of government debt its composition is also a key factor behind public finance vulnerabilities. JEL Classification: E10, E62, G15, H30, H6.
    Keywords: Fiscal policies, government debt, sustainability, stability and growth pact.
    Date: 2011–10
  26. By: Michaillat, Pascal
    Abstract: This paper develops a theory characterizing the effects of fiscal policy on unemployment over the business cycle. The theory is based on a model of equilibrium unemployment in which jobs are rationed in recessions. Fiscal policy in the form of government spending on public-sector jobs reduces unemployment, especially during recessions: the fiscal multiplier---the reduction in unemployment rate achieved by spending one dollar on public-sector jobs---is positive and countercyclical. Although the labor market always sees vast flows of workers and a great deal of matching, recessions are periods of acute job shortage without much competition for workers among recruiting firms. Hence hiring in the public sector reduces unemployment effectively because it does not crowd out hiring in the private sector much. An implication is that empirical studies should control for the state of the economy when fiscal policies are implemented to estimate accurately the amplitude of fiscal multipliers in recessions.
    Keywords: business cycle; fiscal multiplier; job rationing; matching frictions; unemployment
    JEL: E24 E32 E62 J64
    Date: 2011–10
  27. By: Giacomini, Raffaella; Ragusa, Giuseppe
    Abstract: We propose a method for modifying a given density forecast in a way that incorporates the information contained in theory-based moment conditions. An example is "improving" the forecasts from atheoretical econometric models, such as factor models or Bayesian VARs, by ensuring that they satisfy theoretical restrictions given for example by Euler equations or Taylor rules. The method yields a new density (and thus point-) forecast which has a simple and convenient analytical expression and which by construction satisfies the theoretical restrictions. The method is flexible and can be used in the realistic situation in which economic theory does not specify a likelihood for the variables of interest, and thus cannot be readily used for forecasting.
    Keywords: Bayesian VAR; Euler conditions; Exponential tilting; Forecast comparisons
    JEL: C53
    Date: 2011–10
  28. By: Nymoen, Ragnar (Dept. of Economics, University of Oslo); Rygh Swensen, Anders (Dept. og Mathematics, University of Oslo); Tveter, Eivind (Statistics Norway)
    Abstract: We present a framework for interpretation of the empirical results of New Keynesian models of inflation dynamics. Both the rational expectations solution of the structural New Keynesian Phillips curve, NKPC, and the reduced form VAR analysis of the multivariate time series properties give insight about the joint implications of the evidence in the NKPC literature. For example, we show that the unit-root form of non-stationary may be implied for inflation even though the econometric model initally assumed stationarity. We point out and suggest a correction to an error in the literature regarding the existence or not of a rational expectations solution in the case of homogeneity and forward-dominance.
    Keywords: New Keynesian Phillips Curve; forward-looking price setting; rational expectations; VAR model
    JEL: B41 C22 E31 E52
    Date: 2011–07–19
  29. By: Yu-chin Chen; Stephen J. Turnovsky; Eric Zivot
    Abstract: This paper shows that for five small commodity-exporting countries that have adopted inflation targeting monetary policies, world commodity price aggregates have predictive power for their CPI and PPI inflation, particularly once possible structural breaks are taken into account. This conclusion is robust to using either disaggregated or aggregated commodity price indexes (although the former perform better), the currency denomination of the commodity prices, and to using mixed-frequency data. In pseudo out-of-sample forecasting, commodity indexes outperform the random walk and AR(1) processes, although the improvements over the latter are sometimes modest.
    Date: 2011–09
  30. By: Campbell, Carl
    Abstract: This study demonstrates that a model with efficiency wages and imperfect information produces a Phillips curve relationship. Equations are derived for labor demand and the efficiency wage-setting condition, and shifts in these curves in response to aggregate demand shocks result in a relationship with the characteristics of a Phillips curve. The Phillips curve differs from the efficiency wage-setting condition in that the Phillips curve is a more parsimonious expression and has a coefficient on expected inflation equal to 1. Also derived from this model is the counterpart curve to the Phillips curve in unemployment – inflation space.
    Keywords: Phillips curve; Efficiency wages; Imperfect information
    JEL: E24 E31
    Date: 2011–10–14
  31. By: Martin Berka; Mario J Crucini; Chih-Wei Wang
    Date: 2011–10
  32. By: Liang Wang (Department of Economics, University of Hawaii)
    Abstract: This paper studies the effect of inflation on welfare in a monetary economy with price dispersion and consumer search. When facing greater price dispersion with higher inflation, consumers search harder for lower prices, and increased search raises welfare by intensifying market competition. Producers post inefficiently high prices, and this creates a welfare loss. Both mechanisms are affected by the consumer's monetary balance. I develop a general equilibrium model with search frictions to incorporate the interrelationship of money, search, and endogenous price dispersion. Inflation aspects welfare through three channels: the real balance channel, the search channel, and the price posting channel. I calibrate the model to U.S. data and find that the welfare cost of 10% annual inflation is worth 3.23% of consumption; however, if either the real balance or the price posting channel is closed, the welfare cost significantly decreases to less than 0.15% of consumption. The price posting channel amplifies the welfare-diminishing effect of the real balance channel, and the aggregated negative effect exceeds the positive effect due to the search channel. The search cost only generates a negligible welfare loss.
    Keywords: Inflation, Interest Rates, Money, Price Dispersion, Search, Welfare
    JEL: E31 E40 E50 D83
    Date: 2011–07–18
  33. By: Görtz, Christoph; Tsoukalas, John
    Abstract: We develop a two-sector DSGE model with financial intermediation to investigate the role of news as a driving force of the business cycle. We find that news about future capital quality is a significant source of aggregate fluctuations, accounting for around 37% in output variation in cyclical frequencies. Financial intermediation is essential for the importance and propagation of capital quality shocks. In addition, news shocks in capital quality generate aggregate and sectoral comovement as in the data and is consistent with procyclical movements in the value of capital. From a historical perspective, news shocks to capital quality are to a large extent responsible for the recession following the 1990s investment boom and the latest recession following the financial crisis, but played a much smaller role during the recession at the beginning of the 1990s. This is in line with the belief that revisions of overoptimistic expectations contributed to the last two recessions while movements in fundamentals played a much bigger role for the recession at the beginning of the 1990s.
    Keywords: News; Anticipation effects; Business cycles; DSGE; Bayesian estimation
    JEL: E2 E3
    Date: 2011–03
  34. By: Yuet-Yee Wong; Randall Wright
    Abstract: We study bilateral exchange, both direct trade and indirect trade that happens through chains of intermediaries or middlemen. We develop a model of this activity and present applications. This illustrates how, and how many, intermediaries get involved, and how the terms of trade are determined. We show how bargaining with one intermediary depends on upcoming negotiations with downstream intermediaries, leading to holdup problems. We discuss the roles of buyers and sellers in bilateral exchanges, and how to interpret prices. We develop a particular bargaining solution and relate it to other solutions. In addition to contrasting our framework with other models of middlemen, we discuss the connection to different branches of search theory. We also illustrate how bubbles can emerge in intermediation.
    JEL: D2 D4 D83
    Date: 2011–10
  35. By: Ko, Jun-Hyung
    Abstract: This paper investigates the inflation rate that should be set as the target for the central bank. To this end, we develop a two-sector economy model in the existence of long-lived durables. In contrast to recent studies that have been conducted on how monetary policy can affect the role of durable goods, which examine only the production sector, we introduce a service market. Accordingly, we can endogenously derive the traditional user cost equation and the price-rent ratio. Our main findings are as follows: First, even in cases where both service and production sectors are equally sticky, the user cost is more important than the purchase price, from the perspective of welfare loss. Second, in contrast to the situation in the economy that includes only nondurables, a temporary shock persistently influences output fluctuations. However, this does not mean that welfare loss increases as the degree of durability increases. Third, welfare is found to be a strictly increasing function of durability.
    Keywords: Durables; User cost; Price-rent ratio; Optimal monetary policy
    JEL: E31 E52
    Date: 2011–09
  36. By: Georg H. Strasser (Department of Economics, Boston College)
    Abstract: The macroeconomic evidence on the short-term impact of exchange rates on exports and prices is notoriously weak. In this paper I examine the micro-foundations of this disconnect by looking at firm export and price setting decisions in response to exchange rate fluctuations and changing credit conditions. A unique German firm survey dataset allows me to study the impact of the EUR/USD exchange rate during the years 2003-2010. Its information on pricing and export expectations at the firm-level enables me to measure the instantaneous response of a firm to changing financial constraints and exchange rates, which avoids endogeneity issues. I find that primarily large firms cause the exchange rate "puzzles" in aggregate data. The exchange rate disconnect disappears for financially constrained firms. For these firms, the pass-through rate of exchange rate changes to the prices is more than twice the rate of unconstrained firms. Similarly, their exports are about twice as sensitive to exchange rate fluctuations. Credit therefore affects not only exports via trade finance, but also international relative prices by constraining the scope of feasible pricing policies. The effect of borrowing constraints is particularly strong during the recent financial crisis.
    Keywords: exchange rate pass-through, exchange rate disconnect, financing constraints, pricing to market, exports, credit crunch, trade collapse, law of one price, trade finance
    JEL: F31 E44 F40 E32 G21
    Date: 2010–10–21
  37. By: Stefan Gerlach (Institute for Monetary and Financial Stability, Goethe University Frankfurt); Laura Moretti (Center for Financial Studies)
    Abstract: We make three points. First, the decade before the financial crisis in 2007 was characterized by a collapse in the yield on TIPS. Second, estimated VARs for the federal funds rate and the TIPS yield show that while monetary policy shocks had negligible effects on the TIPS yield, shocks to the latter had one-to-one effects on the federal funds rate. Third, these findings can be rationalized in a New Keynesian model.
    Keywords: Monetary Policy, Long Real Interest Rates, TIPS
    JEL: E43 E52 E58
    Date: 2011–09–13
  38. By: Delis, Manthos D; Hasan, Iftekhar; Mylonidis, Nikolaos
    Abstract: There is a growing consensus that a prolonged period of low interest rates can exert a negative impact on financial stability through the risk-taking incentives of banks. Using micro-level datasets from the US banking sector, this paper finds evidence of a highly significant negative relationship between monetary policy rates and bank-risk taking. This finding remains robust across various specifications, sub-periods and subsamples, thereby confirming the presence of an active risk-taking channel of monetary policy since the 1990s. The results, therefore, support the new responsibilities of the Fed on macro-prudential supervision to monitor systemic risks.
    Keywords: Bank risk; monetary policy; US commercial banks; Total loans; New loans
    JEL: E43 E52 G21
    Date: 2011–10–01
  39. By: Massimo Guidolin
    Abstract: I review the burgeoning literature on applications of Markov regime switching models in empirical finance. In particular, distinct attention is devoted to the ability of Markov Switching models to fit the data, filter unknown regimes and states on the basis of the data, to allow a powerful tool to test hypotheses formulated in the light of financial theories, and to their forecasting performance with reference to both point and density predictions. The review covers papers concerning a multiplicity of sub-fields in financial economics, ranging from empirical analyses of stock returns, the term structure of default-free interest rates, the dynamics of exchange rates, as well as the joint process of stock and bond returns. JEL Classification Codes: G00, C00. Keywords: Markov switching, Regimes, Regime shifts, Nonlinearities, Predictability, Autoregressive Conditional Heteroskedasticity.
    Date: 2011
  40. By: Marcel Bluhm (Xiamen University and Center for Financial Studies)
    Abstract: This paper outlines a new method for using qualitative information to analyze the monetary policy strategy of central banks. Quantitative assessment indicators that are extracted from a central bank's public statements via the balance statistic approach are employed to estimate a Taylor-type rule. This procedure allows to directly capture a policymaker's assessments of macroeconomic variables that are relevant for its decision making process. As an application of the proposed method the monetary policy of the Bundesbank is re-investigated with a new dataset. One distinctive feature of the Bundesbank's strategy consisted of targeting growth in monetary aggregates. The analysis using the proposed method provides evidence that the Bundesbank indeed took into consideration monetary aggregates but also real economic activity and inflation developments in its monetary policy strategy since 1975.
    Keywords: Monetary Policy Rule, Statement Indicators, Bundesbank, Monetary Targeting
    JEL: E52 E58 N14
    Date: 2011–09–07
  41. By: Jarko Fidrmuc (Zeppelin University Friedrichshafen, CESifo Munich, Institute for Eastern European Studies,); Mariya Hake (Oesterreichische Nationalbank); Helmut Stix (Oesterreichische Nationalbank, Economic Studies Division Central and Eastern Europe)
    Abstract: Foreign currency loans represent an important feature of recent financial developments in CEECs. This might pose a serious challenge for macroeconomic stability. Against this background, the authors study the determinants of foreign currency loans of households, using data on the behavior of households in nine CEECs. Their results reveal that foreign currency loans are driven by households’ lack of trust in the stability of the local currency and in domestic financial institutions. Moreover, special factors including remittances and expectations of euro adoption play an important role in selected regions. The financial crisis reduced foreign currency borrowing, but there is some indication this effect might be only temporary. JEL classification: G18, G21, C25
    Keywords: Foreign currency loans, dollarization, euroization, monetary credibility, trust, CEEC
    Date: 2011–09–01
  42. By: Dambala Gelo; Steven F. Koch
    Abstract: Through the implementation of a choice experiment valuation exercise, this study set out to identify the set of community plantation attributes that impact the welfare of potential community forestry program participants. We employed a combination of choice models to evaluate the preferences, welfare impacts and choice elasticities associated with alternative community forestry programs, allowing for different assumptions regarding heterogeneity. In line with economic theory, increased participation costs reduced the demand for community forestry, while increases in expected productivity raised the demand. With respect to preferences for the other alternatives considered — type of forest, area enclosure and type of land upon which the forest was to be situated — the results point to significant differences in preferences across the study population, suggesting that programs should be tailored to the communities in which the program is to be implemented.
    Keywords: community forestry, choice experiment, conditional logit, random parameters logit and latent class model
    JEL: Q23 Q28 Q51
    Date: 2011
  43. By: Kisswani, Khalid/ M.; Nusair, Salah/ A.
    Abstract: We examine the dynamics of convergence of the ASEAN5 plus the big three for nominal interest rates, inflation rates, and real interest rates. We test for convergence relative to the U.S and Japan, using monthly data over the period January 1990 - December 2010, using non-linear unit root tests. The results show strong evidence of stationary inflation and real interest rate differentials in all but China’s inflation differential relative to the U.S., and stationary nominal interest differentials in most of the cases. We interpret these results as convergence in inflation rates and real interest rates in all cases, and as nominal interest convergence in most of the cases. Moreover, examining the impact of the Asian crisis shows less number of convergences before the crisis and more convergences after the crisis. This suggests that convergence has increased after the 1997/98 Asian crisis, and that the crisis has pulled the economies together.
    Keywords: interest rates convergence; inflation convergence; nonlinear unit root tests
    JEL: E43 E31
    Date: 2011–07–12
  44. By: Goodness C. Aye (Department of Agricultural Economics, University of Agriculture, Makurdi, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This study provides empirical evidence of aggregate, anticipated and unanticipated and asymmetric (positive and negative) effects of monetary policy on real agricultural prices in South Africa over the monthly period of 1970:01-2010:12. For this purpose, we use the Vector Autoregressive (VAR) model coupled with the monetary misperception model to distinguish between anticipated and unanticipated monetary policy shocks. Results show that the actual, anticipated and unanticipated monetary policy had significant effect on real farm prices. These findings are robust when the shocks are modelled as recursive residuals. Moreover, the positive monetary policy was consistently significant either at specific lags or jointly. With exception of the recursive anticipated monetary policy, the negative components were consistently insignificant. Further, the hypothesis of asymmetric effect was supported for the recursive anticipated monetary policy only. The effects observed in this study are quantitatively small and accounts for only a very small percentage (1.5 percent - 6.5 percent) of the variation in real farm prices.
    Keywords: Monetary policy, real farm price, asymmetric effects, recursive residuals
    JEL: C12 E52 Q11
    Date: 2011–10

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