|
on Central Banking |
| By: | Maurice Obstfeld |
| Abstract: | This paper analyzes current stresses in the two key areas that concerned the architects of the original Bretton Woods system: international liquidity and exchange rate management. Despite radical changes since World War II in the market context for liquidity and exchange rate concerns, they remain central to discussions of international macroeconomic policy coordination. To take two prominent examples of specific (and related) coordination problems, liquidity issues are paramount in strategies of national self-insurance through foreign reserve accumulation, while recent attempts by emerging market economies (EMEs) to limit real currency appreciation have relied heavily on nominal exchange rate management. A central message is that a diverse set of potential asymmetries among sovereign member states provides fertile ground for a variety of coordination failures. The paper goes on to discuss institutions and policies that might mitigate some of these inefficiencies. |
| JEL: | F32 F33 F36 F42 G15 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17641&r=cba |
| By: | Jeffrey A. Frankel; Carlos A. Végh; Guillermo Vuletin |
| Abstract: | In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical fiscal policy. In sharp contrast, emerging and developing countries have followed procyclical fiscal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. We trace this critical shift in fiscal policy to the quality of institutions. We provide a formal analysis, which controls for the endogeneity of institutions and other determinants of fiscal procyclicality, that strongly suggests that there is a causal link running from stronger institutions to less procyclical or countercyclical fiscal policy. |
| JEL: | E62 F41 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17619&r=cba |
| By: | John Geanakoplos (Cowles Foundation, Yale University); Lasse H. Pedersen (Stern School of Business, NYU) |
| Abstract: | We discuss how leverage can be monitored for institutions, individuals, and assets. While traditionally the interest rate has been regarded as the important feature of a loan, we argue that leverage is sometimes even more important. Monitoring leverage provides information about how risk builds up during booms as leverage rises and how crises start when leverage on new loans sharply declines. Leverage data is also a crucial input for crisis management and lending facilities. Leverage at the asset level can be monitored by down payments or margin requirement or and haircuts, giving a model-free measure that can be observed directly, in contrast to other measures of systemic risk that require complex estimation. Asset leverage is a fundamental measure of systemic risk and so is important in itself, but it is also the building block out of which measures of institutional leverage and household leverage can be most accurately and informatively constructed. |
| Keywords: | Leverage, Loan to value, Margins, Haircuts, Monitor, Regulate, Leverage on new loans, Asset leverage, Investor leverage |
| JEL: | D52 D53 E44 G01 G10 G12 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1838&r=cba |
| By: | Monfort, A.; Renne, J-P. |
| Abstract: | In this paper, we propose a model of the joint dynamics of euro-area sovereign yield curves. The arbitrage-free valuation framework involves five factors and two regimes, one of the latter being interpreted as a crisis regime. These common factors and regimes explain most of the fluctuations in euro-area yields and spreads. The regime-switching feature of the model turns out to be particularly relevant to capture the rise in volatility experienced by fixed-income markets over the last years. In our reduced-form set up, each country is characterized by a hazard rate, specified as some linear combinations of the factors and regimes. The hazard rates incorporate both liquidity and credit components, that we aim at disentangling. The estimation suggests that a substantial share of the changes in euro-area yield differentials is liquidity-driven. Our approach is consistent with the fact that sovereign default risk is not diversifiable, which gives rise to specific risk premia that are incorporated in spreads. Once liquidity-pricing effects and risk premia are filtered out of the spreads, we obtain estimates of the actual –or real-world– default probabilities. The latter turn out to be significantly lower than their risk-neutral counterparts. |
| Keywords: | default risk, liquidity risk, term structure of interest rates, regime-switching, euro-area spreads. |
| JEL: | E43 E44 E47 G12 G24 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:352&r=cba |
| By: | Jordà, Òscar; Schularick, Moritz; Taylor, Alan M. |
| Abstract: | This paper studies the role of leverage in the business cycle. Based on a study of nearly 200 recession episodes in 14 advanced countries between 1870 and 2008, we document a new stylized fact of the modern business cycle: more credit-intensive booms tend to be followed by deeper recessions and slower recoveries. We find a close relationship between the rate of credit growth relative to GDP in the expansion phase and the severity of the subsequent recession. We use local projection methods to study how leverage impacts the behavior of key macroeconomic variables such as investment, lending, interest rates, and inflation. The effects of leverage are particularly pronounced in recessions that coincide with financial crises, but are also distinctly present in normal cycles. The stylized facts we uncover lend support to the idea that financial factors play an important role in the modern business cycle. |
| Keywords: | business cycles; financial crises; leverage; local projections |
| JEL: | C14 C52 E51 F32 F42 N10 N20 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8678&r=cba |
| By: | Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor |
| Abstract: | This paper studies the role of leverage in the business cycle. Based on a study of nearly 200 recession episodes in 14 advanced countries between 1870 and 2008, we document a new stylized fact of the modern business cycle: more credit-intensive booms tend to be followed by deeper recessions and slower recoveries. We find a close relationship between the rate of credit growth relative to GDP in the expansion phase and the severity of the subsequent recession. We use local projection methods to study how leverage impacts the behavior of key macroeconomic variables such as investment, lending, interest rates, and inflation. The effects of leverage are particularly pronounced in recessions that coincide with financial crises, but are also distinctly present in normal cycles. The stylized facts we uncover lend support to the idea that financial factors play an important role in the modern business cycle. |
| JEL: | C14 C52 E51 F32 F42 N10 N20 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17621&r=cba |
| By: | Martin S. Feldstein |
| Abstract: | The creation of the euro should now be recognized as an experiment that has led to the sovereign debt crisis in several countries, the fragile condition of major European banks, the high levels of unemployment, and the large trade deficits that now exist in most Eurozone countries. Although the European Central Bank managed the euro in a way that achieved a low rate of inflation, other countries both in Europe and elsewhere have also had a decade of low inflation without incurring the costs of a monetary union. The emergence of these problems just a dozen years after the start of the euro in 1999 was not an accident or the result of bureaucratic mismanagement but the inevitable consequence of imposing a single currency on a very heterogeneous group of countries, a heterogeneity that includes not only economic structures but also fiscal traditions and social attitudes. This paper reviews (1) the reasons for these economic problems, (2) the political origins of the European Monetary Union, (3) the current attempts to solve the sovereign debt problem, (4) the long-term problem of inter-country differences of productivity growth and competitiveness, (5) the special problems of Greece and Italy, (6) and the pros and cons of a Greek departure from the Eurozone. |
| JEL: | E0 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17617&r=cba |
| By: | Hallett, Andrew Hughes (Asian Development Bank Institute); Oliva, Juan Carlos Martinez (Asian Development Bank Institute) |
| Abstract: | This paper addresses the issue of international payments in a stock-flow framework, by capturing the interaction between the current account balance and international assets portfolios of domestic and foreign investors. It is argued that the stability of such interaction may be affected by shifts in the preferences of investors, by the relative rate of return of different assets, and—more in general—by institutional settings. The model is then used for policy analysis purposes to derive the conditions for the existence of dynamic equilibria, and if they can be attained, under the assumption of market-distorting policy choices. |
| Keywords: | global economic imbalances; international payments; exchange rates; capital controls; current account balance; international assets portfolios |
| JEL: | F13 F32 F34 |
| Date: | 2011–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0330&r=cba |
| By: | Anton Nakov (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.); Galo Nuno (Banco de España, Alcala 48, 28014 Madrid, Spain.) |
| Abstract: | We study the dynamics of a Lucas-tree model with finitely lived agents who "learn from experience." Individuals update expectations by Bayesian learning based on observations from their own lifetimes. In this model, the stock price exhibits stochastic boom-and-bust fluctuations around the rational expectations equilibrium. This heterogeneous-agents economy can be approximated by a representative-agent model with constant-gain learning, where the gain parameter is related to the survival rate. JEL Classification: G12, D83, D84. |
| Keywords: | Learning from experience, OLG, assett pricing, bubbles, heterogeneous agents. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111396&r=cba |
| By: | Anton Nakov (Banco de España and European Central Bank); Galo Nuño (Banco de España) |
| Abstract: | We study the dynamics of a Lucas-tree model with finitely lived agents who “learn from experience.” Individuals update expectations by Bayesian learning based on observations from their own lifetimes. In this model, the stock price exhibits stochastic boom-and-bust fluctuations around the rational expectations equilibrium. This heterogeneous-agents economy can be approximated by a representative-agent model with constant-gain learning, where the gain parameter is related to the survival rate. |
| Keywords: | Learning from experience, OLG, asset pricing, bubbles, heterogeneous agents |
| JEL: | G12 D83 D84 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1132&r=cba |
| By: | Fatih Guvenen |
| Abstract: | This article reviews macroeconomic models with heterogeneous households. A key question for the relevance of these models concerns the degree to which markets are complete. This is because the existence of complete markets imposes restrictions on (i) how much heterogeneity matters for aggregate phenomena and (ii) the types of cross-sectional distributions that can be obtained. The degree of market incompleteness, in turn, depends on two factors: (i) the richness of insurance opportunities provided by the economic environment and (ii) the nature and magnitude of idiosyncratic risks to be insured. First, I review a broad collection of empirical evidence---from econometric tests of “full insurance,” to quantitative and empirical analyses of the permanent income (“self insurance”) model that examine how it fits the facts about life cycle allocations, to studies that try to directly measure where economies place between these two benchmarks (“partial insurance”). The empirical evidence I survey reveals significant uncertainty in the profession regarding the magnitudes of idiosyncratic risks as well as whether or not these risks have increased since the 1970s. An important difficulty stems from the fact that inequality often arises from a mixture of idiosyncratic risk and fixed (or predictable) heterogeneity, making the two challenging to disentangle. I also discuss applications of incomplete markets models to trends in wealth, consumption, and earnings inequality both over the life cycle and over time, where this challenge is evident. Third, I discuss “approximate” aggregation---the finding that some incomplete markets models generate aggregate implications very similar to representative-agent models. What approximate aggregation does and does not imply is illustrated through several examples. Finally, I discuss some computational issues relevant for solving and calibrating such models and I provide a simple yet fully parallelizable global optimization algorithm that can be used to calibrate heterogeneous agent models. |
| JEL: | E1 E13 E21 E24 E32 E6 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17622&r=cba |
| By: | Hans-Werner Sinn; Timo Wollmershaeuser |
| Abstract: | The European Monetary Union is stuck in a severe balance-of-payments imbalance of a nature similar to the one that destroyed the Bretton Woods System. Greece, Ireland, Portugal, Spain and Italy have suffered from balance-of-payments deficits whose accumulated value, as measured by the Target balances in the national central banks’ balance sheets, was 404 billion euros in August 2011. The national central banks of these countries covered the deficits by creating and lending out additional central bank money that flowed to the euro core countries, Germany in particular, and crowded out the central bank money resulting from local refinancing operations. Thus the ECB forced a public capital export from the core countries that partly compensated for the now reluctant private capital flows to, and the capital flight from, the periphery countries. |
| JEL: | E50 E58 E63 F32 F34 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17626&r=cba |
| By: | Fratzscher, Marcel; Mehl, Arnaud |
| Abstract: | This paper assesses whether the international monetary system is already tri-polar and centred around the US dollar, the euro and the Chinese renminbi (RMB). It focuses on what we call China’s" dominance hypothesis", i.e. whether the renminbi is already the dominant currency in Asia, exerting a large influence on exchange rate and monetary policies in the region, a direct reference to the old "German dominance hypothesis" which ascribed to the German mark a dominant role in Europe in the 1980s-1990s. Using a global factor model of exchange rates and a complementary event study, we find evidence that the RMB has become a key driver of currency movements in emerging Asia since the mid-2000s, and even more so since the global financial crisis. These results are consistent with China’s dominance hypothesis and with the view that the international monetary system is already tri-polar. However, we also find that China’s currency movements are to some extent affected by those in the rest of Asia. |
| Keywords: | China; euro; exchange rates; German dominance hypothesis; International monetary system; renminbi; tri-polarity; US dollar |
| JEL: | F30 F31 F33 N20 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8671&r=cba |
| By: | Norman R. Swanson (Rutgers University); Oleg Korenok (VCU); Stanislav Radchenko (Goldman Sachs) |
| Abstract: | We take an agnostic view of the Phillips curve debate, and carry out an empirical investigation of the relative and absolute efficacy of Calvo sticky price (SP), sticky information (SI), and sticky price with indexation models (SPI), with emphasis on their ability to mimic inflationary dynamics. We look at evidence for a group of 13 OECD countries, and consider three alternative measures of inflationary pressure, including the output gap, labor share, and unemployment. We find that the SPI model is preferable to the Calvo SP and the SI models because it captures the type of strong inflationary persistence that has in the past characterized the economies in our sample. However, two caveats to this conclusion are that improvement in performance is driven mostly by lagged inflation and that the SPI model overemphasizes inflationary persistence. There appears to be room for improvement in all models in order to induce them to better “track” inflation persistence. |
| Keywords: | sticky price , sticky information, empirical distribution,, model selection |
| JEL: | E12 E3 C32 |
| Date: | 2011–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201104&r=cba |
| By: | Salih Fendoglu |
| Abstract: | This paper studies whether financial variables per se should matter for monetary policy. Earlier consensus view - using financial amplification models with disturbances that have no direct effect on credit market conditions- suggests that financial variables should not be assigned an independent role in policy making. Introducing uncertainty, time- variation in cross-sectional dispersion of firms’ productive performance, alters this policy prescription. The results show that (i) optimal policy is to dampen the strength of financial amplification by responding to uncertainty (at the expense of creating a mild degree of fluctuations in inflation). Moreover, a higher uncertainty makes the planner more willing to relax the financial constraints. (ii) Credit spreads are a good proxy for uncertainty, and hence, within the class of simple monetary policy rules I consider, a non-negligible response to credit spreads -together with a strong anti-inflationary stance- achieves the highest aggregate welfare possible. |
| Keywords: | Optimal Monetary Policy, Financial Amplification, Uncertainty Shocks |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1126&r=cba |
| By: | Ingo Fender (Bank for International Settlements); Bernd Hayo (Philipps-University Marburg); Matthias Neuenkirch (Philipps-University Marburg) |
| Abstract: | In this paper, we study the effects of US target rate changes and related communications by members of the Federal Reserve Board of Governors on spreads for emerging market sovereign credit default swaps (CDS). Using GARCH models, we find that during the pre-financial crisis sub-sample (April 2002–July 2007) CDS spreads react more to country-specific factors than to US monetary policy news. This finding is reversed during the financial crisis sub-sample (August 2007–December 2009), when US monetary policy actions and communications affect CDS spreads in a notable way. Finally, our analysis suggests that CDS spreads became more prone to spillover effects during the financial crisis. |
| Keywords: | Credit default swaps, emerging markets, Federal Reserve communication, financial crisis, policy spillovers |
| JEL: | E52 G14 G15 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201139&r=cba |
| By: | Femke van Esch; Eelke de Jong |
| Abstract: | With the Maastricht treaty, the members of the Eurozone agreed on the establishment of a very independent European Central Bank, as well as making their National Central Banks far more independent. However, over the years French political leaders systematically brought forward proposals undermining the ECB's independence, to the dismay of Germany. A pattern that surfaced again during the current sovereign debt crisis and has complicated finding a timely and unified answer to the problems. The article conducts tests of various factors expected to influence the preference for central bank independence. It shows that economic explanations are unable to account for the persistent differences amongst European member-states on this issue. Instead, cultural differences in attitudes, especially a nation's score on the dimension of Power Distance - its acceptance of centralisation of power in a small set of political leaders or institutions - does show a correlation with the different levels of internalisation of the Central Bank independence norm. |
| Keywords: | Central Bank Independence; Culture; European Central Bank; Franco- German relations |
| JEL: | E58 E52 F36 B52 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1123&r=cba |
| By: | Norman R. Swanson (Rutgers University); Nii Ayi Armah (Bank of Canada) |
| Abstract: | Central banks regularly monitor select financial and macroeconomic variables in order to obtain early indication of the impact of monetary policies. This practice is discussed on the Federal Reserve Bank of New York website, for example, where one particular set of macroeconomic “indicators” is given. In this paper, we define a particular set of “indicators” that is chosen to be representative of the typical sort of variable used in practice by both policy-setters and economic forecasters. As a measure of the “adequacy” of the “indicators”, we compare their predictive content with that of a group of observable factor proxies selected from amongst 132 macroeconomic and financial time series, using the diffusion index methodology of Stock and Watson (2002a,b) and the factor proxy methodology of Bai and Ng (2006a,b) and Armah and Swanson (2010). The variables that we predict are output growth and inflation, two representative variables from our set of indicators that are often discussed when assessing the impact of monetary policy. Interestingly, we find that that indicators are all contained within the set the observable variables that proxy our factors. Our findings, thus, support the notion that a judiciously chosen set of macroeconomic indicators can effectively provide the same macroeconomic policy-relevant information as that contained in a largescale time series dataset. Of course, the large-scale datasets are still required in order to select the key indicator variables or confirm one’s prior choice of key variables. Our findings also suggest that certain yield “spreads” are also useful indicators. The particular spreads that we find to be useful are the difference between Treasury or corporate yields and the federal funds rate. After conditioning on these variables, traditional spreads, such as the yield curve slope and the reverse yield gap are found to contain no additional marginal predictive content. We also find that the macroeconomic indicators (not including spreads) perform best when forecasting inflation in non-volatile time periods, while inclusion of our spread variables improves predictive accuracy in times of high volatility. |
| Keywords: | diffusion index, factor, forecast, macroeconometrics;, monetary policy, parameter estimation error, proxy; federal reserve bank |
| JEL: | C22 C33 C51 |
| Date: | 2011–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201115&r=cba |
| By: | Georg, Co-Pierre |
| Abstract: | This paper proposes a dynamic multi-agent model of a banking system with central bank. Banks optimize a portfolio of risky investments and riskless excess reserves according to their risk, return, and liquidity preferences. They are linked via interbank loans and face stochastic deposit supply. Evidence is provided that the central bank stabilizes interbank markets in the short-run only. Comparing different interbank network structures, it is shown that money-center networks are more stable than random networks. Systemic risk via contagion is compared to common shocks and it is shown that both forms of systemic risk require different optimal policy responses. -- |
| Keywords: | systemic risk,contagion,common shocks,multi-agent simulations |
| JEL: | C63 E52 G01 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:201112&r=cba |
| By: | Hori, Masahiro; Kawagoe, Masaaki |
| Abstract: | Economists unanimously agree that economic agents’ expectations are crucially important in determining macroeconomic outcomes. However, mainstream macroeconomists usually simply assume that expectations are rational, leaving unexamined the fundamental question whether individual agents’ actual expectations are rational or not. Against this background, this study examines the properties of Japanese households’ inflation expectations using micro-based inflation expectations data from the Monthly Consumer Confidence Survey Covering All of Japan. Our analyses show that actual inflation expectations by Japanese households are not rational in the sense that they are upward biased, at least ex post, and individual households appear not to instantaneously incorporate into their expectations information that is freely available from news reports on the views of professional forecasters. Our findings, moreover, suggest that while the sticky information model appears to better explain inflation expectations dynamics (than rational expectations models), we encounter a handful of facts that look inconsistent with the simple model. |
| Keywords: | inflation expectations, consumer survey |
| JEL: | D84 E31 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:hit:cisdps:530&r=cba |
| By: | Mark J. Holmes (Department of Economics,Waikato University, New Zealand); Jesús Otero (Facultad de Economía, Universidad del Rosario, Colombia); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece) |
| Abstract: | The stationarity of OECD real exchange rates over the period 1972-2008 is tested using a panel of twenty six member countries. The methodology followed stems from the need to meet several key concerns: (i) the identification of which panel members are stationary; (ii) the presence of cross-sectional dependence among the countries in the panel; and (iii) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ a recent test that examines the time series properties of the data within a panel framework, namely the Hadri and Rao (2008) panel stationarity test. The real exchange rates of the twenty six OECD countries are found to be stationary when considered as a panel, but only after allowing for endogenously-determined structural breaks and cross section dependence. We also find that once these structural breaks are removed from the underlying series, the half-life of shocks to the real exchange rate is much shorter than has been calculated in earlier studies. |
| Keywords: | Heterogeneous dynamic panels, purchasing power parity, mean reversion, panel stationarity test. |
| JEL: | F31 F33 G15 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1135&r=cba |
| By: | Gert Peersman (Ghent University, Sint-Pietersnieuwstraat 25, B-9000 Ghent, Belgium.) |
| Abstract: | I find that the Eurosystem can stimulate the economy beyond the policy rate by increasing the size of its balance sheet or the monetary base. The transmission mechanism turns out to be different compared to traditional interest rate innovations: (i) whilst the effects on economic activity and consumer prices reach a peak after about one year for an interest rate innovation, this is more than six months later for a shift in the monetary base that is orthogonal to the policy rate (ii) interest rate spreads charged by banks decline persistently after a rise in the monetary base, whereas the spreads increase significantly after a fall in the policy rate (iii) there is no significant short-run liquidity effect after an interest rate innovation, that is additional bank loans are generated by a greater credit multiplier. In contrast, the multiplier declines considerably after an expansion of the Eurosystem’s balance sheet. JEL Classification: C32, E30, E44, E51, E52. |
| Keywords: | Unconventional monetary policy, SVARs. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111397&r=cba |
| By: | Abbassi, Puriya; Nautz, Dieter |
| Abstract: | The Eurosystem's main refinancing operations (MRO) are key for the interbank money market and the monetary transmission process in the euro area. This paper investigates how money market rates respond to the information revealed by various aspects of an MRO auction outcome. Our results confirm that the level of MRO rates governed short-term money market rates before the financial crisis. Since the start of the financial crisis, however, the information content of MRO rates has changed. While the levels of MRO rates have lost much of their pre-crisis significance, the spread between the weighted average and the marginal MRO rate has become an important barometer for the actual situation in the money market during the crisis. -- |
| Keywords: | monetary policy implementation,central bank auctions,European Central Bank,money markets and financial crisis |
| JEL: | E43 E52 E58 D44 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201124&r=cba |
| By: | Cristiano Cantore (University of Surrey); Paul Levine (University of Surrey); Giovanni Melina (University of Surrey) |
| Abstract: | We analyse the effects of a government spending expansion in a dynamic stochastic general equilibrium (DSGE) model with Mortensen-Pissarides labour market frictions, deep habits and a constant-elasticity-of-substitution (CES) production function. The combination of deep habits and CES technology is crucial. The presence of deep habits enables the model to deliver output and unemployment multipliers in the high range of recent empirical estimates, while an elasticity of substitution between capital and labour in the range of available estimates allows it to produce a scenario compatible with the observed jobless recovery. An accommodative monetary policy with respect to the output gap alongside sticky prices plays an important role for the stabilisation properties of the fiscal stimulus. |
| Keywords: | Fiscal policy; deep habits; labour market search-match frictions; unemployment; CES production function |
| JEL: | E24 E62 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1111&r=cba |
| By: | Francis Breedon (Queen Mary, University of London); Thórarinn G. Pétursson (Central Bank of Iceland); Andrew K. Rose (Haas School of Business) |
| Abstract: | We look at the exchange rate policy choices and outcomes for small rich economies. Small rich economies face significant policy challenges due to proportionately greater economic volatility than larger economies. These economies usually choose some form of fixed exchange rate regime, particularly in the very small economies where the per capita cost of independent monetary policy is relatively high. When such countries do choose a free or managed floating regime, they appear to derive no benefit from those regimes; their exchange rate volatility seems to rise without any significant change in fundamental economic volatility. Thus, for these countries, floating exchange rates seem to create problems for policy makers without solving any. |
| Keywords: | Small economies, Exchange rate regimes |
| JEL: | F33 E52 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp684&r=cba |
| By: | Auray, Stephane (Crest-Ensai, Universites Lille Nord de France (ULCO), France); de Blas, Beatriz (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.) |
| Abstract: | We simulate and estimate a new Keynesian search and matching model with sticky wages in which capital has to be financed with cash, at least partially. Our objective is to assess the ability of this framework to account for the persistence of output and inflation observed in the data. We find that our setup generates enough output and inflation persistence with standard stickiness parameters. The key factor driving these results is the inclusion of investment in the CIA constraint, rather than any other nominal or real rigidity. The model reproduces labor market dynamics after a positive increase in productivity: hours fall, nominal wages hardly react, and real wages go up. Regarding money supply shocks, we investigate the conditions under which our model specification generates the liquidity effect, a fact which is absent in most sticky price models. |
| Keywords: | persistence; sticky prices; staggered bargaining wages; monetary facts; labor market facts; cash-in-advance. |
| JEL: | E32 E41 E52 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:uam:wpaper:201110&r=cba |
| By: | Le Bihan, H.; Matheron, J. |
| Abstract: | In this paper, using US as well as French sectoral data and indicators of price rigidity, we re-examine the (lack of) relation between price stickiness and inflation persistence. This has recently been put forward by Bils and Klenow (2004) as evidence against time-dependent price setting models. We obtain that, when filtering out sector-specific shocks along the lines of Boivin et al. (2009), and allowing for an alternative assumption on the marginal cost process, the case against the time-dependent Calvo model is substantially weakened. |
| Keywords: | Sticky prices, Heterogeneity, Inflation persistence. |
| JEL: | E31 E32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:353&r=cba |
| By: | Muhammad Naveed Tahir (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon) |
| Abstract: | In this paper we investigate the impact of financial globalization on the behaviour of inflation targeting emerging market economies with respect to exchange rate - do central banks respond to exchange rate movements or not. We use quarterly data for six emerging market inflation targeting economies from the date of their inflation targeting adoption to 2009 Q4. The study uses small open economy new Keynesian model à la Gali and Monacelli (2005), and employs multi-equation GMM technique to investigate the relationship. We find that the response of central bank to the exchange rate in case of Brazil, Chile, Mexico and Thailand is statistically significant while insignificant for Korea and Czech Republic. Theoretically, it should not be so as even under flexible inflation targeting central bank responds to inflation deviation and output gap; we think that the peculiar characteristics of emerging markets, like fear of floating, weak financial system and low level of central bank credibility make exchange rate important for these economies. |
| Keywords: | Inflation Targeting; Exchange Rate; Emerging Markets |
| Date: | 2011–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00646601&r=cba |
| By: | Muhammad Naveed Tahir (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | In this paper we investigate the impact of financial globalization on the behaviour of inflation targeting emerging market economies with respect to exchange rate – do central banks respond to exchange rate movements or not. We use quarterly data for six emerging market inflation targeting economies from the date of their inflation targeting adoption to 2009 Q4. The study uses small open economy new Keynesian model à la Gali and Monacelli (2005), and employs multi-equation GMM technique to investigate the relationship. We find that the response of central bank to the exchange rate in case of Brazil, Chile, Mexico and Thailand is statistically significant while insignificant for Korea and Czech Republic. Theoretically, it should not be so as even under flexible inflation targeting central bank responds to inflation deviation and output gap ; we think that the peculiar characteristics of emerging markets, like fear of floating, weak financial system and low level of central bank credibility make exchange rate important for these economies. |
| Keywords: | Inflation Targeting; Exchange Rate; Emerging Markets |
| JEL: | E52 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1130&r=cba |
| By: | Seth B. Carpenter (Division of Monetary Affairs Board of Governors of the Federal Reserve System); Selva Demiralp (Koc University) |
| Abstract: | We explore the effect of volatility in the federal funds market on the expectations hypothesis in money markets. We find that lower volatility in the bank funding markets market, all else equal, leads to a lower term premium and thus longer-term rates for a given setting of the overnight rate. The results appear to hold for the US as well as the Euro Area and the UK. The results have implications for the design of operational frameworks for the implementation of monetary policy and for the interpretation of the changes in the Libor-OIS spread during the financial crisis |
| Keywords: | Monetary transmission mechanism, expectations hypothesis, term premium |
| JEL: | E43 E52 E58 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1129&r=cba |
| By: | Selva Demiralp (Koc University); Hakan Kara (Central Bank of Turkey Research and Monetary Policy Department); Pýnar Özlü (Central Bank of Turkey Research and Monetary Policy Department) |
| 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 CBT’s words match its deeds, i.e., whether communication improves predictability using the Autoregressive Conditional Hazard model. 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 and the relative importance of communication in driving market yields has increased through time. |
| Keywords: | Central Bank Communication, Predictability, Transparency |
| JEL: | E52 E58 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1128&r=cba |
| By: | Cloyne, J.S. |
| Abstract: | This thesis analyses the macroeconomic effects of changes in fiscal policy. Chapter 1 provides an overview. Chapter 2 estimates the macroeconomic effects of tax changes in the United Kingdom. Identification is achieved by constructing an extensive new 'narrative' dataset of 'exogenous' tax changes in the post-war U.K. economy. Using this dataset I find that a 1 per cent cut in taxes increases GDP by 0.6 per cent on impact and by 2.5 per cent over three years. These findings are remarkably similar to narrative-based estimates for the United States. Furthermore, 'exogenous' tax changes are shown to have contributed to major episodes in the U.K. post-war business cycle. The long appendix contains the detailed historical narrative and dataset. Chapter 3 estimates the endogenous feedback from output, debt and government spending to fiscal instruments in the United States. The central innovation is to make direct use of narrative-measured tax shocks in a DSGE model estimated using Bayesian methods. I therefore assume the tax shocks are observable, rather than latent variables. I show that the feedback from debt to the fiscal instruments is weaker than previously estimated and that the capital tax multiplier is higher. Moreover, the data are more consistent with a model with endogenous feedback than one with an exogenous fiscal policy specification. Chapter 4 examines the transmission mechanism of government spending shocks by constructing and estimating a DSGE model for the United States. I show that the endogenous response of different taxes and the strength of wealth effect on labour supply play a powerful role. Given that there is little prior information on the strength of these mechanisms, I estimate the key parameters in the model. I show that this estimated model can match the empirical responses of key variables that are a challenge for many models of this type. |
| Date: | 2011–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:ner:ucllon:http://discovery.ucl.ac.uk/1331876/&r=cba |
| By: | J. James Reade; Ulrich Volz |
| Abstract: | This article uses automatic model selection procedures, based on the gernal-to-specific approach, to investigate inflation in China. A novelty of this article is the use of a technique called impulse indicator saturation which allows us to uncover instabilities and to specify a general model and select down to a more specific model that best explains inflation in China. By and large, our findings suggest that China has been able to insulate itself against shocks from the US, although (maybe surprisingly) monetary growth in Europe seems to have an effect. Nonetheless, the main factors impacting Chinese inflation appear to be domestic, names GDP growth and money growth. |
| Keywords: | Chinese inflation, dollar peg, automatic model selection procedure |
| JEL: | C32 E52 F33 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:11-18&r=cba |
| By: | Joseph D. ALBA (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore); Wai–Mun CHIA (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore); Donghyun PARK (Asian Development Bank6 ADB Avenue, Mandaluyong City,Metro Manila, Philippines 1550) |
| Abstract: | East Asia’s small open economies were hit in varying degrees by the sharp drop in the output of major industrial countries during the global financial and economic crisis of 2008-2009. This highlights the role of monetary policy regimes in cushioning small open economies from adverse external output shocks. To assess the welfare impact of external shocks on key macroeconomic variables under different monetary policy regimes, we numerically solve and calculate the welfare loss function of a dynamic stochastic general equilibrium (DSGE) model. We find that CPI inflation targeting minimizes welfare losses for import-to-GDP ratios from 0.3 to 0.9. However, welfare under the pegged exchange rate regime is almost equivalent to CPI inflation targeting when the import-to-GDP ratio is one while the Taylor-type rule minimizes welfare when the import-to-GDP ratio is 0.1. We calibrate the model and derive welfare implications for eight East Asian small open economies. |
| Keywords: | Trade channel, Import-to-GDP ratio, small open economies, welfare, exchange rate regimes, inflation targeting, Taylor rule, foreign output shock |
| JEL: | F40 F41 E52 F31 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nan:wpaper:1105&r=cba |
| By: | Emanuel Kohlscheen |
| Abstract: | This study investigates the impact effect of monetary policy shocks on the exchange rates of Brazil, Mexico and Chile. We find that even a focus on 1 day exchange rate changes following policy events – which reduces the potential for reverse causality considerably – fails to lend support for the conventional view that associates interest rate hikes with appreciations. This lack of empirical backing for the predictions of standard open economy models that, for instance, combine the UIP condition with rational expectations (as in Dornbusch (1976)) persists irrespective of whether we use the US Dollar or effective exchange rates, whether interest rate changes are anticipated or not, whether changes in the policy rate that were followed by exchange rate intervention are excluded or whether "contaminated" events are dropped from the analysis. We argue that it is difficult to attribute this stronger version of the exchange rate puzzle to fiscal dominance, as similar results are obtained in the case of Chile - a country that has had the highest possible short-term credit rating since 1997 and a debt/GDP ratio below 10%. Indeed, in Chile a 100 b.p. hike leads to a 2.2 to 2.6% devaluation of the Peso on impact. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:259&r=cba |
| By: | Monique Reid (Department of Economics, University of Stellenbosch); Stan du Plessis (Department of Economics, University of Stellenbosch) |
| Abstract: | Central bank communication is widely recognised as crucial to the implementation of monetary policy. This communication should enhance a central bank’s management of the inflation expectations of the financial markets as well as the general public – the latter being a part of the central bank’s audience that has received relatively little research attention. In this paper, the role of the media in transmitting the SARB’s communication to the general public is explored, with the aim of improving our understanding of its impact on the expectations channel of the monetary policy transmission mechanism. A deliberate evaluation of this channel could aid the design of future strategies to communicate with the general public. |
| Keywords: | South Africa, central bank communication, consistency, monetary policy transmission mechanism, transparent monetary policy |
| JEL: | E42 E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers147&r=cba |
| By: | Huyn Hak Kim (Rutgers University); Norman R. Swanson (Rutgers University) |
| Abstract: | In this paper, we empirically assess the predictive accuracy of a large group of models based on the use of principle components and other shrinkage methods, including Bayesian model averaging and various bagging, boosting, LASSO and related methods Our results suggest that model averaging does not dominate other well designed prediction model specification methods, and that using a combination of factor and other shrinkage methods often yields superior predictions. For example, when using recursive estimation windows, which dominate other windowing" approaches in our experiments, prediction models constructed using pure principal component type models combined with shrinkage methods yield mean square forecast error best models around 70% of the time, when used to predict 11 key macroeconomic indicators at various forecast horizons. Baseline linear models (which winaround 5% of the time) and model averaging methods (which win around 25% of the time) fare substantially worse than our sophisticated nonlinear models. Ancillary findings based on our forecasting experiments underscore the advantages of using recursive estimation strategies, and provide new evidence of the usefulness of yield and yield-spread variables in nonlinear prediction specification. |
| Keywords: | prediction, bagging; boosting, Bayesian model averaging,, ridge regression; least angle regression, elastic net and non-negative garotte |
| JEL: | G1 |
| Date: | 2011–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201119&r=cba |