|
on Central Banking |
| By: | Robin Pope; Reinhard Selten |
| Abstract: | The public debt may hamper US GDP say studies that estimate debt tipping effects as if there were a single world currency. This means that such studies ignore the likely biggest cause of changes in growth rates, namely damage from exchange rate liquidity shocks because we do not live in the fairyland of a single world currency. The conclusions of these studies are accordingly invalid. They deflect attention from a prime danger, namely an exchange-rate-precipitated global meltdown. These studies are misleading in other respects too. Their estimates of growth determinants implicitly or explicitly conflate the differential growth effects of government expenditures and with those of government debt. They fail to allow for the increase in wastefulness of private production. This is despite the fact that over the last 40 years, there have been private activities, including key segments of the financial and the pharmaceutical industries, whose expansion has damaged overall health and growth. The upshot is misdirected policy analysis and advice. Policy should instead be directed to adequate employment-generating fiscal stimulus in a global downturn, to averting further damage from exchange rate liquidity shock by creating a single world money and to ensuring that for profit activities in the pharmaceutical and financial industries are adequately regulated, and where this is infeasible, shut down and replaced with fiscally stimulated productive activities. |
| Keywords: | Hitler, exchange rates, employment multipliers, private sector inefficiency, central bank cooperation, central bank conflict, public debt, tipping points, uncertainty, financial sector, pharmaceutical sector, World War 2, Korean War, fiscal stimulus |
| JEL: | E6 F31 G01 H62 I18 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse15_2011&r=cba |
| By: | Elias Albagli; Christian Hellwig; Aleh Tsyvinski |
| Date: | 2012–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000347&r=cba |
| By: | Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan |
| Abstract: | The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear porblem where the unconditional expectation of the objective is maximised and the steady- state is distorted. Thus, the measure of policy performance is a linear combination of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules. |
| Keywords: | Linear-quadratic approximation., unconditional expectations, optimal monetary policy, ranking simple policy rules. |
| JEL: | E20 E32 F32 F41 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2011_15&r=cba |
| By: | G. PEERSMAN |
| 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, that is so-called quantitative easing. 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 quantitative easing policies, 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. |
| Keywords: | Unconventional monetary policy, SVARs |
| JEL: | C32 E30 E44 E51 E52 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:11/734&r=cba |
| By: | Batini, Nicoletta (IMF and University of Surrey); Levine, Paul (University of Surrey); Lotti, Emanuela (University of Surrey); Yang, Bo (University of Surrey) |
| Abstract: | How does informality in emerging economies affect the conduct of monetary and fiscal policy? To answer this question we construct a two-sector, formal-informal new Keynesian closed-economy. The informal sector is more labour intensive, is untaxed, has a classical labour market, faces high credit constraints in financing investment and is less visible in terms of observed output. We compare outcomes under welfare- optimal monetary policy, discretion and welfare-optimized interest-rate Taylor rules alongside a balanced-budget fiscal regime. We compare the model, first with no frictions in these two markets, then with frictions in only the formal labour market and finally with frictions on both credit markets and the formal labour market. Our main conclusions are first, labour and financial market frictions, the latter assumed to be stronger in the informal sector, cause the time-inconsistency problem to worsen. The importance of commitment therefore increases in economies characterized by a large informal sector with the features we have highlighted. Simple implementable optimized rules that respond only to observed aggregate inflation and formal-sector output can be significantly worse in welfare terms than their optimal counterpart, but are still far better than discretion. Simple rules that respond, if possible, to the risk premium in the formal sector result in a significant welfare improvement. |
| Keywords: | Informal economy ; Emerging economies ; Labour market ; Credit market ; Tax policy ; Interest rate rules |
| JEL: | J65 E24 E26 E32 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:11/97&r=cba |
| By: | Luca RICCETTI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Alberto RUSSO (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Mauro GALLEGATI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali) |
| Abstract: | In this paper we build on the network-based financial accelerator model of Delli Gatti et al. (2010), modelling the firms' financial structure following the "dynamic trade-off theory", instead of the "pecking order theory". Moreover, we allow for multiperiodal debt structure and consider multiple bank-firm links based on a myopic preferred-partner choice. In case of default, we also consider the loss given default rate (LGDR). We find many results: (i) if leverage increases, the economy is riskier; (ii) a higher leverage pro-cyclicality has a destabilizing effect; (iii) a pro-cyclical leverage weakens the monetary policy effect; (iv) a Central Bank that wants to increase the interest rate, should previously check if the banking system is well capitalized; (v) policy maker has to develop the laws about bankruptcies to reduce the LGDR and improve the stability of banks. |
| Keywords: | Leverage, agent based model, bankruptcy cascades, dynamic trade-off theory, monetary policy |
| JEL: | C63 E32 E52 G01 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:371&r=cba |
| By: | Jochen Michaelis (University of Kassel) |
| Abstract: | In this paper we introduce the cost channel of monetary policy (e.g., Ravenna and Walsh, 2006) into an otherwise standard New Keynesian model of a two-country monetary union, which is being hit by aggregate, asymmetric and idiosyncratic shocks. The single central bank implements the optimal discretionary monetary policy by setting the union interest rate. The cost channel makes monetary policy less effective in combating in?action, but it is shown that the optimal response to the decline in effectiveness is a stronger use of the instrument. Moreover, we show how the sign of the spillover effects of idiosyncratic shocks depends on the strength of the cost channel. If the cost channel exceeds a well-defined threshold, then the interest rate turns into a supply-side instrument. |
| Keywords: | cost channel; optimal monetary policy; monetary union; open economy macroeconomics |
| JEL: | E E F |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201203&r=cba |
| By: | Ola Honningdal Grytten (Norwegian School of Economics and Business Administration and Norges Bank (Central Bank of Norway)) |
| Abstract: | On the basis of data from the Historical Monetary Statistics-project by Norges Bank, the present paper serves a threefold purpose. In the first place it gives an overview of financial crisis in Norway from her independence from Denmark in 1814 till present times. Secondly, historical business cycles are mapped and we conclude that the major financial crises were mirrored in significant slumps in the real economy. Thirdly, the paper investigates credit and monetary developments, and concludes that the major financial crises in Norway typically took place after substantial money and credit expansion causing overheating and bubbles to the economy. |
| Keywords: | Business cycles, supply of money and credit, Financial crises |
| JEL: | E32 E51 G01 N13 N14 |
| Date: | 2012–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2011_21&r=cba |
| By: | Birol Kanik |
| Abstract: | This paper evaluates different types of simple monetary policy rules according to the determinacy and learnability of rational expectations equilibrium criteria within a dynamic stochastic general equilibrium framework. Incorporating housing prices and collateralized borrowing into the standard model allow us to answer important policy questions. One objective is to investigate whether responding to housing prices affects determinacy and learnability of rational expectations equilibrium. For this purpose, we work with a New Keynesian model in which housing plays an accelerator role in business cycles as a collateralized asset. The results show that for current data rule, responding to asset prices does not improve learnable outcomes but for a monetary policy with lagged data and forward-looking rules we see improved learnable outcome if current housing prices are available to monetary authority. Moreover, we examine the effects of interest rate inertia and price stickiness on E-stability of REE. |
| Keywords: | monetary policy rules, determinacy, learning, housing prices |
| JEL: | E3 E4 E5 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1203&r=cba |
| By: | KANIK, Birol |
| Abstract: | This paper evaluates different types of simple monetary policy rules according to the determinacy and learnability of rational expectations equilibrium criteria within a dynamic stochastic general equilibrium framework. Incorporating housing prices and collateralized borrowing into the standard model allow us to answer important policy questions. One objective is to investigate whether responding to housing prices affects determinacy and learnability of rational expectations equilibrium. For this purpose, we work with a New Keynesian model in which housing plays an accelerator role in business cycles as a collateralized asset. The results show that for current data rule, responding to asset prices does not improve learnable outcomes but for a monetary policy with lagged data and forward-looking rules we see improved learnable outcome if current housing prices are available to monetary authority. Moreover, we examine the effects of interest rate inertia and price stickiness on E-stability of REE. |
| Keywords: | monetary policy rules; determinacy; learning; housing prices |
| JEL: | E5 E4 E3 |
| Date: | 2011–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35782&r=cba |
| By: | Robert C. Feenstra; Hong Ma; J. Peter Neary; D.S. Prasada Rao |
| Abstract: | The latest World Bank estimates of real GDP per capita for China are significantly lower than previous ones. We review possible sources of this puzzle and conclude that it reflects a combination of factors, including substitution bias in consumption, reliance on urban prices which we estimate are higher than rural ones, and the use of an expenditure-weighted rather than an output-weighted measure of GDP. Taking all these together, we estimate that real per-capita GDP in China was 50% higher relative to the U.S. in 2005 than the World Bank estimates. |
| JEL: | E01 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17729&r=cba |
| By: | Mario Cerrato; John Crosby; Muhammad Kaleem |
| Abstract: | This paper examines both the in-sample and out-of-sample performance of three monetary fundamental models of exchange rates and compares their out-of-sample performance to that of a simple Random Walk model. Using a data-set consisting of five currencies at monthly frequency over the period January 1980 to December 2009 and a battery of newly developed performance measures, the paper shows that monetary models do better (in-sample and out-of- sample forecasting) than a simple Random Walk model. |
| Keywords: | monetary models, forecasting |
| JEL: | F31 G10 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2011_17&r=cba |
| By: | Dag Kolsrud and Ragnar Nymoen (Statistics Norway) |
| Abstract: | A standard model of equilibrium unemployment consists of static equations for real wage ambitions (wage curve) and real wage scope (price curve), which jointly determine the NAIRU. The heuristics of the model states that unless the rate of unemployment approaches the NAIRU from any given initial value, inflation will be increasing or decreasing over time. We formalize this influential heuristic argument with the aid of a dynamic model of the wage-price spiral where the static theory's equations are re-interpretated as attractor relationships. We show that NAIRU unemployment dynamics are sufficient but not necessary for inflation stabilization, and that the dynamic wage-price spiral model generally has a dynamically stable solution for any pre-determined rate of unemployment. We also discuss a restricted version of the model that conforms to the accelerationist view that inflation increases/falls if unemployment is not at its ‘natural rate’. |
| Keywords: | AS-AD; equilibrium-correction; imperfect competition; macroeconomics; NAIRU; Phillips curve; unemployment; wage-price spiral. |
| JEL: | E24 E30 J50 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:671&r=cba |
| By: | C. Randall Henning; Martin Kessler |
| Abstract: | Ever since first the blueprints for monetary union in Europe were drawn up, the United States, considered as a collection of individual states or regions, has served as a benchmark for assessing its feasibility and evaluating alternative policy options. Starting with Robert Mundellâ??s seminal 1961 article on optimal currency areas, countless papers have explored the inner workings of US labour, product and capital markets, and of its public finances, in the hope of learning lessons for Europe. It could be argued that this US inspiration is mistaken. After all, it is not the only economic and monetary federation in the world. Other federations work on different principles â?? especially when it comes to public finances â?? and there is no guarantee that US arrangements are optimal â?? especially, again, regarding public finances. But we know the US better and we think we understand it better, so success or failure relative to the US test carries much more weight than with the Australian, Canadian, Indian or Swiss tests. For better or worse, the US remains our ultimate policy laboratory. This essay on US fiscal federalism by Randall Henning and Martin Kessler builds on the established tradition. But unlike many papers that take current US features as a given, they tell us what present arrangements governing responsibility over public debt gradually emerged from, and why. By bringing in the historical dimension and the trial-and-error process that took place over more than two centuries, they help us understand the logic behind alternative arrangements and why the current one has in the end prevailed. Their careful historical account yields several important lessons. It first recalls that the US system as we know it, with its combination of a large federal budget responsible for the bulk of public debt and limited thrifty state budgets subject to balanced budget rules, emerged gradually from a sequence of events; in fact the initial set-up, as designed and enforced by Alexander Hamilton, was almost exactly the opposite. Second, it makes clear that beyond economic principles, attitudes towards what was in the aftermath of independence called the â??assumptionâ?? of state debt were shaped by broader political considerations â?? not least the aim of building a genuine federal government. Third, it explains how after the US was firmly established as a federation, changing political conditions led to a reversal of the federal governmentâ??s stance and to the enforcement of a â??no bail-outâ?? principle. An intriguing feature of US history is therefore that the competences and features of federal government grew out of its assumption of state debt, and that the centre imposed a de-facto no bail-out regime only after having assumed essential powers. Another interesting observation by Henning and Kessler is that balanced budget rules were adopted spontaneously by states in response to financial stress and defaults, rather than as a disciplinary device mandated by the centre. Thus, there is still significant variability between states regarding the modus operandi and strictness of budget rules. The question remains if what matters is the strictness of the rule, or deeper political preferences at state level, of which the rule is only an expression. Finally, Henning and Kessler emphasise, a no less important lesson for Europe is that policy principles and institutions should be looked at as a system rather than in isolation. As the authors point out, it may seem obvious to recall that states in the US can abide by strict budget balance rules to the extent the federal government is responsible for stabilisation and the bail-out of insolvent banks, but this simple lesson is sometimes overlooked in European discussion. Jean Pisani-Ferry Director of Bruegel |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bre:esslec:669&r=cba |
| By: | Xu, T.T. |
| Abstract: | The recent financial crisis raises important issues about the role of credit in international business cycles and the transmission of financial shocks across country borders. This paper investigates the international spillover of US credit shocks and the importance of credit in explaining business cycle fluctuations using a global vector autoregressive (GVAR) model with credit, estimated over the period 1979Q2 to 2006Q4 for 26 major advanced and emerging economies. Results from the country-specific models reveal the importance of bank credit in explaining output growth, changes in inflation and long term interest rates in countries with developed banking sector. The generalized impulse response function (GIRF) for a one standard error negative shock to US real credit provides strong evidence of the spillover of US credit shock to the UK, the Euro area, Japan and other industrialized economies. |
| JEL: | C32 G21 E44 E32 |
| Date: | 2012–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1202&r=cba |
| By: | Gianni De Nicoló; Marcella Lucchetta |
| Abstract: | We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy. |
| Keywords: | Banks , Competition , Economic models , Financial stability , |
| Date: | 2011–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/295&r=cba |
| By: | Melanie-Kristin Beck; Bernd Hayo (University of Marburg); Matthias Neuenkirch (University of Marburg) |
| Abstract: | We study the correlation between pairs of bond and stock markets in Canada and the United States between January 1998 and December 2006 in the framework of Diagonal-BEKK models. Our research question is whether monetary policy action and communication by the Bank of Canada and the Federal Reserve significantly affect the co-movement of financial markets. We find that target rate changes and various forms of communication by both central banks increase correlations within Canadian bond and stock markets as well as between Canadian and US financial markets. |
| Keywords: | Bank of Canada, Central Bank Communication, Diagonal-BEKK Models, Dynamic Correlations, Federal Reserve, Financial Markets |
| JEL: | E52 F30 G12 G15 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201201&r=cba |
| By: | Christian Venneslan; Ragnar Trøite; Christoffer Kleivset; Bastian Klunde |
| Abstract: | This article surveys the degree of central bank independence in Norway between 1945 and 1970. By comparing the developments in Norway with those of Sweden and the United Kingdom, it is shown that the Norwegian central bank had less room for maneuver than in the other countries. In spite of a high legal independence, the actual performance of central bank operations was almost completely subordinated the instructions given by the Ministry of Finance. A particular vivid, dirigiste environment followed the experiences of the 1930s and the war in Norway, curtailing any effort to make the central bank an independent institution in the machinery of state economic management that followed the return to peace. |
| Keywords: | Central bank independence, monetary policy, institutional design |
| JEL: | F33 N44 |
| Date: | 2012–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2011_20&r=cba |
| By: | Nicolás De Roux |
| Abstract: | I use the measures of frequency of price adjustment in Nakamura and Steinsson (2008) to show that stickier price industries have higher levels of output response to monetary policy shocks. Using a Vector Auto-regression model, I build different measures of response to a monetary policy shock of 14 US industries. These measures are shown to be related to the level of price rigidity. More precisely, I find that if firms within an industry change prices twice as often as firms in another industry, output deviation from trend in response to a negative shock of 25 basis points will be 69 percentage points smaller in the less sticky industry. This result is stronger when I account for measurement error in the level of response. |
| Date: | 2011–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:009244&r=cba |
| By: | Ivan Petrella (Department of Economics, Mathematics & Statistics, Birkbeck); Emiliano Santoro (Catholic University of Milan; University of Copenhagen) |
| Abstract: | This paper deals with the analysis of price-setting in U.S. manufacturing industries. Recent studies have heavily criticized the ability of the New Keynesian Phillips curve (NKPC) to fit aggregate inflation [see, e.g., Rudd and Whelan, 2006, Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?, American Economic Review, vol. 96(1), pp. 303-320]. We challenge this evidence, showing that forward-looking behaviour as implied by the New Keynesian model of price-setting is widely supported at the sectoral level. In fact, current and expected future values of the income share of intermediate goods emerge as an effective driver of inflation dynamics. Unlike alternative proxies for the forcing variable, the cost of intermediate goods presents dynamic properties in line with the predictions of the New Keynesian theory. |
| Keywords: | New Keynesian Phillips Curve; Aggregation; Sectoral Data; Intermediate Goods |
| JEL: | E31 L60 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1202&r=cba |
| By: | Hafedh Bouakez (HEC Montréal and CIRPÉE, 3000 chemin de la Côte-Sainte-Catherine, Montréal, Québec, Canada H3T 2A7.); Aurélien Eyquem (Université de Lyon, Lyon, F-69007, France ; Ecole Normale Supérieure de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne, Ecully, F-69130, France ; and GREDI, Canada) |
| Abstract: | A robust prediction across a wide range of open-economy macroeconomic models is that an unanticipated increase in public spending in a given country appreciates it currency in real terms. This result, however, contradicts the findings of a number of recent empirical studies, which instead document a significant and persistent depreciation of the real exchange rate following an expansionary government spending shock. In this paper, we rationalize the findings of the empirical literature by proposing a small-open-economy model that features three key ingredients : incomplete and imperfect international financial markets, sticky prices, and a not-too-aggressive monetary policy. The model predicts that in response to an unexpected increase in public expenditures, the risk-adjusted long-term real interest rate falls, causing the real exchange rate to depreciate. We establish this result both analytically, within a special version of the model, and numerically for the more general case. |
| Keywords: | Real exchange rate, public spending shocks, small open economy, sticky prices, monetary policy. |
| JEL: | F31 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1139&r=cba |
| By: | Aurélien Eyquem (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon); Hafedh Bouakez (CIRPEE - Centre interuniversitaire sur le risque, les politiques économiques et l'emploi - Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi, HEC Montréal - HEC MONTRÉAL) |
| Abstract: | A robust prediction across a wide range of open-economy macroeconomic models is that an unanticipated increase in public spending in a given country appreciates it currency in real terms. This result, however, contradicts the findings of a number of recent empirical studies, which instead document a signifi...cant and persistent depreciation of the real exchange rate following an expansionary government spending shock. In this paper, we rationalize the findings of the empirical literature by proposing a small-open-economy model that features three key ingredients : incomplete and imperfect international financial markets, sticky prices, and a not-too-aggressive monetary policy. The model predicts that in response to an unexpected increase in public expenditures, the risk-adjusted long-term real interest rate falls, causing the real exchange rate to depreciate. We establish this result both analytically, within a special version of the model, and numerically for the more general case. |
| Keywords: | Real exchange rate; public spending shocks; small open economy; sticky prices; monetary policy |
| Date: | 2012–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00655972&r=cba |
| By: | Koray Alper; Timur Hulagu; Gursu Keles |
| Abstract: | In this study, by using a panel data of Turkish banks, we empirically analyze whether monetary policies that are able to manipulate liquidity positions of banks can affect bank lending. Our results suggest that bank specific liquidity is important in credit supply. Moreover, in determining their lending, banks consider not only their individual liquidity position but also the systemic liquidity. Hence, any monetary policy which can alter liquidity is potentially effective on credit supply. |
| Keywords: | Bank lending channel, Systemic liquidity, Panel data |
| JEL: | C23 E44 E58 G21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1204&r=cba |
| By: | Mohamed Tahar Benkhodja (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 compare, first, the impact of a windfall and a boom sectors on the economy of an oil exporting country and their welfare implications ; in a second step, we analyze how monetary policy should be conducted to insulate the economy from the main impact of these shocks, namely the Dutch Disease. To do so, we built a Multisector DSGE model with nominal and real rigidities. The main finding is that Dutch disease effect arise after spending and resource movement effects in the following cases : i) flexible prices and wages both in the case of a windfall and in the case of a boom ; ii) flexible wage and sticky price only in the case of a fixed exchange rate. In other cases, Dutch disease effect can be avoided if : prices are sticky and wages are flexible when the exchange rate is flexible ; iii) prices and wages are sticky whatever the objective of the central bank is in both cases : windfall and boom. We also compare the source of fluctuation that leads to Dutch disease effect and we conclude that the windfall leads to a strong e¤ect in terms of de-industrialization compared to a boom. The choice of flexible exchange rate regime also helps to improve welfare. |
| Keywords: | Monetary Policy; Dutch Disease; Oil Prices; Small Open Economy |
| Date: | 2011–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00654511&r=cba |
| By: | Benjamin Carton |
| Keywords: | Impossible Trinity, Monetary Policy, CHINA |
| JEL: | F32 F33 A I E A |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2011-27&r=cba |
| By: | Alexander Rathke; Tobias Straumann; Ulrich Woitek |
| Abstract: | This paper reconsiders the role of monetary policy in Sweden’s strong recovery from the Great Depression. The Riksbank in the 1930s is sometimes seen as an example of a central bank that was relatively innovative in terms of the conduct of monetary policy. To consider this analytically, we estimate a small-scale, structural general equilibrium model of a small open economy using Bayesian methods. We find that the model captures the key dynamics of the period surprisingly well. Importantly, our findings suggest that Sweden avoided the worst excesses of the depression by conducting conservative rather than innovative monetary policy. We find that, by keeping the Swedish krona undervalued to replenish foreign reserves, Sweden’s exchange rate policy unintentionally contributed to the Swedish growth miracle of the 1930s, avoiding a major slump in 1932 and enabling the country to benefit quickly from the eventual recovery of world demand. |
| Keywords: | Small open economy models, exchange rate policy, structural estimation, Bayesian analysis, Great Depression |
| JEL: | C11 E58 F41 N14 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:058&r=cba |
| By: | Levine, Paul (University of Surrey); Pearlman, Joseph (London Metropolitan University) |
| Abstract: | We develop a optimal rules-based interpretation of the 'three pillars macroeconomic policy framework': a combination of a freely floating exchange rate, an explict target for inflation, and a mechanism than ensures a stable government debt-GDP ratio around a specified long run. We show how such monetary-fiscal rules need to be adjusted to accommodate specific features of emerging market economies.The model takes the form of two-blocs, a DSGE emerging small open economy interacting with the rest of the world and features, in particular, financial frictions. It is calibrated using India and US data. Alongside the optimal Ramsey policy benchmark, we model the three pillars as simple monetary and fiscal rules including and both domestic and CPI inflation targeting interest rate rules. A comparison with a fixed exchange rate regime is ade. We find that domestic inflation targeting is superior to partially or implicitly (through a CPI inflation target) or fully attempting to stabilizing the exchange rate. Financial frictions require fiscal policy to play a bigger role and lead to an increase in the costs associated with simple rules as opposed to the fully optimal policy. These policy prescriptions contrast with the monetary-fiscal policy stance of the Indian authorities. |
| Keywords: | Monetary policy ; Emerging economies ; Fiscal and monetary rules ; Financial accelerator ; Liability dollarization |
| JEL: | E52 E37 E58 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:11/96&r=cba |
| By: | Gabriel, Vasco (University of Surrey); Levine, Paul (University of Surrey); Pearlman, Joseph (London Metropolitan University); Yang, Bo (University of Surrey and London Metropolitan University) |
| Abstract: | We develop a closed-economy DSGE model of the Indian economy and estimate it by Bayesian Maximum Likelihood methods using Dynare. We build up in stages to a model with a number of features important for emerging economies in general and the Indian economy in particular: a large proportion of credit-constrained consumers, a financial accelerator facing domestic firms seeking to finance their investment, and an informal sector. The simulation properties of the estimated model are examined under a generalized inflation targeting Taylor-type interest rate rule with forward and backward-looking components. We find that, in terms of model posterior probabilities and standard moments criteria, inclusion of the above financial frictions and an infor- mal sector significantly improves the model fit. |
| Keywords: | Indian economy ; DSGE model ; Bayesian estimation ; Monetary interest rate rules ; Financial frictions |
| JEL: | E52 E37 E58 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:11/95&r=cba |
| By: | Michal Franta; Roman Horvath; Marek Rusnak |
| Abstract: | We investigate the evolution of the monetary policy transmission mechanism in the Czech Republic over the 1996–2010 period by employing a time-varying parameters Bayesian vector autoregression model with stochastic volatility. We evaluate whether the response of GDP and the price level to exchange rate or interest rate shocks changes over time, with a focus on the period of the recent financial crisis. Furthermore, we augment the estimated system with a lending rate and credit growth to shed light on the relative importance of financial shocks for the macroeconomic environment. Our results suggest that output and prices have become increasingly responsive to monetary policy shocks, probably reflecting financial sector deepening, more persistent monetary policy shocks, and overall economic development associated with disinflation. On the other hand, exchange rate pass-through has weakened somewhat over time, suggesting improved credibility of inflation targeting in the Czech Republic with anchored inflation expectations. We find that credit shocks had a more sizeable impact on output and prices during the period of bank restructuring with difficult access to credit. In general, our results show that financial shocks are less important for the aggregate economy in an environment of a stable financial system. |
| Keywords: | Monetary policy transmission, sign restrictions, time-varying parameters. |
| JEL: | E44 E52 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2011/13&r=cba |
| By: | Maral Shamloo |
| Abstract: | In this paper we study the dynamics of inflation in Macedonia, provide three forecasting tools and draw some policy conclusions from the quantitative results. We explore three forecasting methods for inflation. We use a Dynamic Factor Model (DFM) for short-term, monthly forecasting. We also develop two quarterly models: A Vector Error Correction Model (VECM), and a New Keynesian Phillips Curve (NKPC) for a more structural model of inflation. The NKPC shows a significant effect of output gap and inflation expectations on current inflation, confirming that the expectations channel of monetary transmission mechanism is strong. In terms of forecast-error variance, we show that all three models do very well in one-period ahead forecasting. |
| Keywords: | Forecasting models , Inflation , Interest rates , Macedonia, former Yugoslav Republic of , Monetary policy , |
| Date: | 2011–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/287&r=cba |