nep-cba New Economics Papers
on Central Banking
Issue of 2011‒12‒05
twelve papers chosen by
Alexander Mihailov
University of Reading

  1. Business Cycle, Currency and Trade, Revisited By Michael J. Artis; Toshihiro Okubo
  2. Trend Growth and Learning About Monetary Policy Rules By Mewael Tesfaselassie
  3. Monetary policy, financial stability, and the distribution of risk By Evan F. Koenig
  4. The improbable renaissance of the Phillips curve: The crisis and euro area inflation dynamics By Lourdes Acedo Montoya; Björn Döhring
  5. Survival and long-run dynamics with heterogeneous beliefs under recursive preferences By Jaroslav Borovicka
  6. Borders and Big Macs By Anthony Landry
  7. Household Consumption Through Recent Recessions By Thomas F. Crossley; Hamish Low; Cormac O’Dea
  8. Oil efficiency, demand, and prices: a tale of ups and downs By Martin Bodenstein; Luca Guerrieri
  9. Making the case for a low intertemporal elasticity of substitution By R. Anton Braun; Tomoyuki Nakajima
  10. The wage dynamics in Spain: evidence from individual data By Victor Montuenga; Inmaculada Garcia
  11. Leading Indicators of Real Activity and Inflation for Turkey, 2001-2010 By Sumru Altug; Erhan Uluceviz
  12. La Suisse et la zone euro : votre monnaie, notre problème ? La possibilité d'un ancrage de jure By Cyriac Guillaumin; Guillaume Vallet

  1. By: Michael J. Artis (University of Manchester and CEPR); Toshihiro Okubo (Keio University)
    Abstract: This paper reports estimates based on long-run data sets for GDP and trade, with three subsamples chosen to reflect the first globalization period, the "bloc economy" period and the second globalization period. The business cycle is identified as the series of deviates from a Hodrick-Prescott filtered trend, and turning points are identified. Cross-correlations of the cyclical deviates are calculated for all the pairs of the 21 countries examined. It is apparent from casual inspection that the business cycle characteristics and the pattern of crosscorrelations in the bloc economy period are different from those found for the two globalization periods whilst there is less difference between the two globalization periods. Estimation is undertaken of equations to explain the pattern of cross correlations in terms of trade and currency union membership. A dummy for the countries that belong to the Eurozone is found to be significant for the period of the first globalization, that is, well before any manifestation of a common Euro-currency is available. By contrast, Asian business cycle co-movement cannot be found.
    Date: 2011–10
  2. By: Mewael Tesfaselassie
    Abstract: The paper examines the effect of trend productivity growth on the determinacy and learnability of equilibria under alternative monetary policy rules. It shows that under a policy rule that responds to current period inflation and the output gap a higher trend growth rate relaxes the conditions for determinacy and learnability. Results are mixed for other policy rules. Under the expectations-based rule, trend growth reduces the scope for determinacy but it relaxes the conditions for learnability. Under the lagged-data-based rule rule trend growth reduces the scope for determinacy and learnability
    Keywords: trend growth, learning, monetary policy, determinacy, expectational stability
    JEL: E4 E5
    Date: 2011–11
  3. By: Evan F. Koenig
    Abstract: In an economy in which debt obligations are fixed in nominal terms, but there are otherwise no nominal rigidities, a monetary policy that targets inflation inefficiently concentrates risk, tending to increase the financial distress that accompanies adverse real shocks. Nominal-income targeting spreads risk more evenly across borrowers and lenders, reproducing the equilibrium that one would observe if there were perfect capital markets. Empirically, inflation surprises have no independent influence on measures of financial strain once one controls for shocks to nominal GDP.
    Keywords: Debt ; Inflation risk
    Date: 2011
  4. By: Lourdes Acedo Montoya; Björn Döhring
    Abstract: Why has euro area (core) inflation not fallen further during and after the "great recession"? How different are inflation dynamics across Member States? This paper analyses core inflation dynamics in the euro area and its Member States using a hybrid specification of the Phillips curve. Inflation expectations are directly observed from an expert survey, so no assumptions need to be imposed about expectations formation. The choice of the hybrid Phillips curve framework is vindicated, as the data clearly indicate the relevance of both backward-looking inflation and inflation expectations. The impact of the output gap on core inflation is significant but not large. The combination of stable inflation expectations, sluggish price adjustment and an only moderate impact of the output gap on inflation helps understanding the stability of core inflation despite large and persistent output gaps in the aftermath of the crisis. Although the heterogeneity of Phillips curve relationships across Member States is not large, the exceptionally large output gap caused by the crisis is one driver (among others) of the recently observed inflation differentials in the euro area.
    JEL: E31 E32
    Date: 2011–10
  5. By: Jaroslav Borovicka
    Abstract: I study the long-run behavior of a two-agent economy where agents differ in their beliefs and are endowed with homothetic recursive preferences of the Duffie-Epstein-Zin type. When preferences are separable, the economy is dominated in the long run by the agent whose beliefs are relatively more precise, a result consistent with the market selection hypothesis. However, recursive preference specifications lead to equilibria in which both agents survive, or to ones where either agent can dominate the economy with a strictly positive probability. In this respect, the market selection hypothesis is not robust to deviations from separability. I derive analytical conditions for the existence of nondegenerate long-run equilibria, and show that these equilibria exist for plausible parameterizations when risk aversion is larger than the inverse of the intertemporal elasticity of substitution, providing a justification for models that combine belief heterogeneity and recursive preferences.
    Keywords: Consumption (Economics)
    Date: 2011
  6. By: Anthony Landry
    Abstract: I measure the extent of international market segmentation using local, national, and international Big Mac prices. I show that the bulk of time-series price volatility observed across the United States arises between neighboring locations. Using these data, I provide new estimates of border frictions for 14 countries. I find that borders generally introduce only small price wedges, far smaller than those observed across neighboring locations. When expressing these wedges in terms of distance equivalents, I find that border widths are small in relation to price variations observed across the United States. This suggests that international markets are well integrated.
    Keywords: International trade
    Date: 2011
  7. By: Thomas F. Crossley (Koç University , University of Cambridge and Institute for Fiscal Studies); Hamish Low (University of Cambridge and Institute for Fiscal Studies); Cormac O’Dea (Institute for Fiscal Studies and University College London)
    Abstract: This paper examines trends in household consumption and saving behaviour in each of the last three recessions in the UK. The ‘Great Recession’ has been different from those that occurred in the 1980s and 1990s. It has been both deeper and longer, but also the composition of the cutbacks in expenditure differs, with a greater reliance on cuts to nondurable expenditure than was seen in previous recessions, and the distributional pattern across individuals differs. The young have cut back expenditure more than the old, as have mortage holders compared to renters. By contrast, the impact of the recession has been similar across education groups. We present evidence that suggests that two aspects of fiscal policy in the UK in 2008 and 2009 - the temporary reduction in the rate of VAT and a car scrappage scheme – had some success in encouraging households to increase durable purchases.
    Keywords: Consumption, Spending, Recessions
    JEL: E21 D12
    Date: 2011–11
  8. By: Martin Bodenstein; Luca Guerrieri
    Abstract: The macroeconomic implications of oil price fluctuations vary according to their sources. Our estimated two-country DSGE model distinguishes between country-specific oil supply shocks, various domestic and foreign activity shocks, and oil efficiency shocks. Changes in foreign oil efficiency, modeled as factor-augmenting technology, were the key driver of fluctuations in oil prices between 1984 and 2008, but have modest effects on U.S. activity. A pickup in foreign activity played an important role in the 2003-2008 oil price runup. Beyond quantifying the responses of oil prices and economic activity, our model informs about the propagation mechanisms. We find evidence that nonoil trade linkages are an important transmission channel for shocks that affect oil prices. Conversely, nominal rigidities and monetary policy are not.
    Date: 2011
  9. By: R. Anton Braun; Tomoyuki Nakajima
    Abstract: We provide two ways to reconcile small values of the intertemporal elasticity of substitution (IES) that range between 0.35 and 0.5 with empirical evidence that the IES is large. We do this reconciliation using a model in which all agents have identical preferences and the same access to asset markets. We also conduct an encompassing test, which indicates that specifications of the model with small values of the IES are more plausible than specifications with a large IES.
    Date: 2011
  10. By: Victor Montuenga; Inmaculada Garcia
    Abstract: In this paper we test the hypothesis of a wage curve against a Phillips curve for Spain within a framework which allos for these both and more general alternatives. To this end, we use data from the European Community Household Panel, which provides micro-information for the period 1994-2001. The results indicate that a partial wage adjustment is at work, as in other European countries, and that the long-run elasticiy of wages to unemploument is close to the 'empirical law of economics' of -0.1
    Date: 2011–09
  11. By: Sumru Altug (Koç University and CEPR); Erhan Uluceviz (Istanbul Bilgi University)
    Abstract: This paper develops a set of leading indicators of industrial production growth and consumer price inflation for the period 2001-2010. The choice of indicators is based on pseudo out-of-sample forecasting exercise implemented by Stock and Watson (2003), amongst others. We find that asset prices that reflect expectational factors or interest rates that capture the costs of borrowing for the Turkish economy tend to have the greatest predictive power for future real activity and inflation. Our findings provide evidence on the factors determining real activity and inflation in a period of disinflation and normalization for the Turkish economy.
    Keywords: Real activity, inflation, leading indicators, out-of-sample forecasting, combination forecasts, inflation targeting, Turkey
    JEL: E1 E32 E37 E58 F43 O52
    Date: 2011–11
  12. By: Cyriac Guillaumin (CREG - Centre de recherche en économie de Grenoble - Université Pierre Mendès-France - Grenoble II : EA4625); Guillaume Vallet (UFR ESE - UPMF - Faculté d'Économie - Grenoble 2 - Université Pierre Mendès-France - Grenoble II)
    Abstract: Avec les récentes tensions au sein de la zone euro, le franc suisse s'est fortement apprécié face à l'euro, jouant un rôle de monnaie refuge internationale. Même si la Suisse n'est pas membre de l'Union européenne (UE), son degré élevé d'intégration de facto à celle-ci fait qu'une telle appréciation se transmet à l'économie réelle. Ainsi, si l'indépendance et l'autonomie monétaires officielles de la Suisse en Europe ont des avantages, elles induisent aussi des coûts non négligeables, notamment liés au statut particulier du franc suisse. Nous étudions dans cet article l'opportunité et la viabilité pour la Suisse d'une intégration monétaire "médiane" à l'UE qui permettrait de desserrer cette contrainte extérieure du taux de change, à savoir un ancrage de jure du franc suisse à l'euro. En nous intéressant plus précisément aux origines des fluctuations du taux de change du franc suisse à l'aide d'un modèle VAR structurel, nous mettons en évidence que l'ancrage serait viable pour la Suisse mais au prix d'une perte d'autonomie monétaire significative.
    Keywords: zone euro ; modèle ; monnaie ; taux de change ; politique monétaire ; modèle VAR ; Suisse
    Date: 2011

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