nep-cba New Economics Papers
on Central Banking
Issue of 2012‒02‒01
39 papers chosen by
Alexander Mihailov
University of Reading

  1. How inflationary is an extended period of low interest rates? By Charles T. Carlstrom; Timothy S. Fuerst; Matthias Paustian
  2. Inflation dynamics when inflation is near zero By Jeffrey C. Fuhrer; Giovanni P. Olivei; Geoffrey M. B. Tootell
  3. Liquidity when it matters: QE and Tobin’s q By Driffill, John; Miller, Marcus
  4. Collateral Crises By Gary B. Gorton; Guillermo Ordonez
  5. The Safe-Asset Share By Gary B. Gorton; Stefan Lewellen; Andrew Metrick
  6. Optimal disclosure policy and undue diligence By David Andolfatto; Aleksander Berentsen; Christopher J. Waller
  7. Are banks passive liquidity backstops? deposit rates and flows during the 2007-2009 crisis By Viral V. Acharya; Nada Mora
  8. Some unpleasant general equilibrium implications of executive incentive compensation contracts By John B. Donaldson; Natalia Gershun; Marc P. Giannoni
  9. Identification and Estimation of Gaussian Affine Term Structure Models By James D. Hamilton; Jing Cynthia Wu
  10. Common and idiosyncratic disturbances in developed small open economies By Pablo A. Guerron-Quintana
  11. Financial markets forecasts revisited: are they rational, herding or bold? By Ippei Fujiwara; Hibiki Ichiue; Yoshiyuki Nakazono; Yosuke Shigemi
  12. Quantity rationing of credit By Waters , George A.
  13. Optimal monetary policy in a two country model with firm-level heterogeneity By Dudley Cooke
  14. Getting up to Speed on the Financial Crisis: A One-Weekend-Reader's Guide By Gary B. Gorton; Andrew Metrick
  15. Strategic monetary and fiscal policy interaction in a liquidity trap By Ali al-Nowaihi; Sanjit Dhami
  16. Transmission of Sovereign Risk in the Euro Crisis By Filippo Brutti; Philip Sauré
  17. Has the Euro affected the choice of invoicing currency? By Jenny E. Ligthart; Sebastian E. V. Werner
  18. Forecasting disconnected exchange rates By Travis J. Berge
  19. Capital Controls and Foreign Exchange Policy By Marcel Fratzscher
  20. Learning generates Long Memory By Guillaume Chevillon; Sophocles Mavroeidis
  21. Learning Within Rational-Expectations Equilibrium By Thomas W.L. Norman
  22. Fat-Tail Distributions and Business-Cycle Models By Guido Ascari; Giorgio Fagiolo; Andrea Roventini
  23. What can financial stability reports tell us about macroprudential supervision? By Jon Christensson; Kenneth Spong; Jim Wilkinson
  24. The Great Recession and bank lending to small businesses By Judit Montoriol-Garriga; J. Christina Wang
  25. Basel Accord and financial intermediation: the impact of policy By Martin Berka; Christian Zimmermann
  26. Bayesian estimation of NOEM models: identification and inference in small samples By Enrique Martínez-García; Diego Vilán; Mark Wynne
  27. Nonlinear expectations in speculative markets: Evidence from the ECB survey of professional forecasters By Reitz, Stefan; Rülke, Jan-Christoph; Stadtmann, Georg
  28. Aggregate hours worked in OECD countries: new measurement and implications for business cycles By Lee E. Ohanian; Andrea Raffo
  29. How Does Quality Impact on Import Prices? By Konstantins Benkovskis; Julia Wörz
  30. Account-to-account electronic money transfers: recent developments in the United States By Oz Shy
  31. International Macroeconomic Policy: When Wealth Affects People's Impatience By Wang Peng; Heng-fu Zou
  32. Foreign Output Shocks and Monetary Policy Regimes in Small Open Economies: A DSGE Evaluation of East Asia By Joseph D. ALBA; Wai-Mun CHIA; Donghyun PARK
  33. Monetary policy and unemployment in open economies By Engler, Philipp
  34. Selective Hiring and Welfare Analysis in Labor Market Models By Steffen Ahrens, Dennis Snower
  35. The evolution of Alexandre Lamfalussy's thought on the international and European monetary system (1961-1993) By Ivo Maes
  36. Should Economists Use Open Source Software for Doing Research? By A. Talha Yalta; A. Yasemin Yalta
  37. Monetary Policy Implications of Financial Frictions in the Czech Republic By Jakub Rysanek; Jaromir Tonner; Osvald Vasicek
  38. Nonlinearity and Structural Stability in the Phillips Curve: Evidence from Turkey By Mubariz Hasanov; Aysen Arac; Funda Telatar
  39. Un Gran VAR Bayesiano para la Economía Chilena By Wildo González

  1. By: Charles T. Carlstrom; Timothy S. Fuerst; Matthias Paustian
    Abstract: Recent monetary policy experience suggests a simple test of models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. But a monetary model should be rejected if a reasonably short nominal rate peg results in an unreasonably large inflation response. We pursue this simple test in three variants of the familiar dynamic new Keynesian (DNK) model. All of these models fail this test. Further some variants of the model produce inflation reversals where an interest rate peg leads to sharp deflations.
    Keywords: Interest rates ; Interest rate risk
    Date: 2012
  2. By: Jeffrey C. Fuhrer; Giovanni P. Olivei; Geoffrey M. B. Tootell
    Abstract: This paper discusses the likely evolution of U.S. inflation in the near and medium term on the basis of (1) past U.S. experience with very low levels of inflation, (2) the most recent Japanese experience with deflation, and (3) recent U.S. micro evidence on downward nominal wage rigidity. Our findings question the view that stable long-run inflation expectations and downward nominal wage rigidity will provide sufficient support to prices such that deflation can be avoided. We show that an inflation model fitted on Japanese data over the past 20 years, which accounts for both short- and long-run inflation expectations, matches the recent U.S. inflation experience quite well. While the model indicates that U.S. inflation might be subject to a lower bound, it does not rule out a prolonged period of mild deflation going forward. In addition, our micro evidence on wages suggests no obvious downward rigidity in the firm's wage costs, downward rigidity in individual wages notwithstanding. As a consequence, downward nominal wage rigidity may provide little offset to deflationary pressures in the current U.S. situation, despite some circumstantial evidence that this channel might have been at work in the past.
    Keywords: Inflation (Finance) ; Deflation (Finance) ; Deflation (Finance) - Japan
    Date: 2011
  3. By: Driffill, John (Birkbeck, University of London); Miller, Marcus (University of Warwick)
    Abstract: When financial markets freeze in fear, borrowing costs for solvent governments may fall towards zero in a flight to quality – but credit-worthy private borrowers can be starved of external funding. In Kiyotaki and Moore (2008), where liquidity crisis is captured by the effective rationing of private credit, tightening credit constraints have direct effects on investment. If prices are sticky, the effects on aggregate demand can be pronounced – as reported by FRBNY for the US economy using a calibrated DSGE-style framework modified to include such frictions. In such an environment, two factors stand out. First the recycling of credit flows by central banks can dramatically ease credit-rationing faced by private investors: this is the rationale for Quantitative Easing. Second, revenue-neutral fiscal transfers aimed at would-be investors can have similar effects. We show these features in a stripped- down macro model of inter-temporal optimisation subject to credit constraints.
    Keywords: Credit Constraints; Temporary Equilibrium; Liquidity Shocks
    Date: 2011
  4. By: Gary B. Gorton; Guillermo Ordonez
    Abstract: Short-term collateralized debt, such as demand deposits and money market instruments - private money, is efficient if agents are willing to lend without producing costly information about the collateral backing the debt. When the economy relies on such informationally-insensitive debt, firms with low quality collateral can borrow, generating a credit boom and an increase in output and consumption. Financial fragility builds up over time as information about counterparties decays. A crisis occurs when a small shock then causes a large change in the information environment. Agents suddenly have incentives to produce information, asymmetric information becomes a threat and there is a decline in output and consumption. A social planner would produce more information than private agents, but would not always want to eliminate fragility.
    JEL: E2 E20 E32 E44 G01 G2 G20
    Date: 2012–01
  5. By: Gary B. Gorton; Stefan Lewellen; Andrew Metrick
    Abstract: We document that the percentage of all U.S. assets that are “safe” has remained stable at about 33 percent since 1952. This stable ratio is a rare example of calm in a rapidly changing financial world. Over the same time period, the ratio of U.S. assets to GDP has increased by a factor of 2.5, and the main supplier of safe financial debt has shifted from commercial banks to the “shadow banking system.” We analyze this pattern of stylized facts and offer some tentative conclusions about the composition of the safe-asset share and its role within the overall economy.
    JEL: E02 E41 E44 E52 G2 G21
    Date: 2012–01
  6. By: David Andolfatto; Aleksander Berentsen; Christopher J. Waller
    Abstract: While both public and private financial agencies supply asset markets with large amounts of information, they do not generally disclose all asset-related information to the general public. This observation leads us to ask what principles might govern the optimal disclosure policy for an asset manager or financial regulator. To investigate this question, we study the properties of a dynamic economy endowed with a risky asset, and with individuals that lack commitment. Information relating to future asset returns is available to society at zero cost. Legislation dictates whether this information is to be made public or not. Given the properties of our environment, nondisclosure is generally desirable. This result is overturned, however, when individuals are able to access hidden information—what we call undue diligence—at sufficiently low cost. Information disclosure is desirable, in other words, only to the extent that individuals can easily discover it for themselves.
    Date: 2012
  7. By: Viral V. Acharya; Nada Mora
    Abstract: Can banks maintain their advantage as liquidity providers when they are heavily exposed to a financial crisis? The standard argument - that banks can - hinges on deposit inflows that are seeking a safe haven and provide banks with a natural hedge to fund drawn credit lines and other commitments. We shed new light on this issue by studying the behavior of bank deposit rates and inflows during the 2007-09 crisis. Our results indicate that the role of the banking system as a stabilizing liquidity insurer is not one of the passive recipient, but of an active seeker, of deposits. We find that banks facing a funding squeeze sought to attract deposits by offering higher rates. Banks offering higher rates were also those most exposed to liquidity demand shocks (as measured by their unused commitments, wholesale funding dependence, and limited liquid assets), as well as with fundamentally weak balance-sheets (as measured by their non-performing loans or by subsequent failure). Such rate increases have a competitive effect in that they lead other banks to offer higher rates as well. Overall, the results present a nuanced view of deposit rates and flows to banks in a crisis, one that reflects banks not just as safety havens but also as stressed entities scrambling for deposits.
    Date: 2011
  8. By: John B. Donaldson; Natalia Gershun; Marc P. Giannoni
    Abstract: We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. A generic family of compensation contracts similar to those employed in practice is studied. When compensation is convex in the firm’s own dividend (or share price), a given increase in the firm’s output generated by an additional unit of physical investment results in a more than proportional increase in the manager’s income. Incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general equilibrium, one in which business cycles are driven by self-fulfilling fluctuations in the manager’s expectations that are unrelated to the economy’s fundamentals. Arbitrarily large fluctuations in macroeconomic variables may result. We also provide a theoretical justification for the proposed family of contracts by demonstrating that they yield first-best outcomes for specific parameter choices.
    Date: 2011
  9. By: James D. Hamilton; Jing Cynthia Wu
    Abstract: This paper develops new results for identification and estimation of Gaussian affine term structure models. We establish that three popular canonical representations are unidentified, and demonstrate how unidentified regions can complicate numerical optimization. A separate contribution of the paper is the proposal of minimum-chi-square estimation as an alternative to MLE. We show that, although it is asymptotically equivalent to MLE, it can be much easier to compute. In some cases, MCSE allows researchers to recognize with certainty whether a given estimate represents a global maximum of the likelihood function and makes feasible the computation of small-sample standard errors.
    JEL: C13 E43 G12
    Date: 2012–01
  10. By: Pablo A. Guerron-Quintana
    Abstract: Using an estimated dynamic stochastic general equilibrium model, I show that shocks to a common international stochastic trend explain on average about 10% of the variability of output in several small developed economies. These shocks explain roughly twice as much of the volatility of consumption growth as the volatility of output growth. Country-speci c disturbances account for the bulk of the volatility in the data. Substantial heterogeneity in the estimated parameters and stochastic processes translates into a rich array of impulse responses across countries.
    Date: 2012
  11. By: Ippei Fujiwara; Hibiki Ichiue; Yoshiyuki Nakazono; Yosuke Shigemi
    Abstract: We test whether professional forecasters forecast rationally or behaviorally using a unique database, QSS Database, which is the monthly panel of forecasts on Japanese stock prices and bond yields. The estimation results show that (i) professional forecasts are behavioral, namely, significantly influenced by past forecasts, (ii) there exists a stock-bond dissonance: while forecasting behavior in the stock market seems to be herding, that in the bond market seems to be bold in the sense that their current forecasts tend to be negatively related to past forecasts, and (iii) the dissonance is due, at least partially, to the individual forecasters' behavior that is influenced by their own past forecasts rather than others. Even in the same country, forecasting behavior is quite different by market.
    Date: 2012
  12. By: Waters , George A. (Bank of Finland Research and Illinois State University)
    Abstract: Quantity rationing of credit, when firms are denied loans, has greater potential to explain macroeconomic fluctuations than borrowing costs. This paper develops a DSGE model with both types of financial frictions. A deterioration in credit market confidence leads to a temporary change in the interest rate, but a persistent change in the fraction of firms receiving financing, which leads to a persistent fall in real activity. Empirical evidence confirms that credit market confidence, measured by the survey of loan officers, is a significant leading indicator for capacity utilization and output, while borrowing costs, measured by interest rate spreads, is not.
    Keywords: quantity rationing; credit; VAR
    JEL: E10 E24 E44 E50
    Date: 2012–01–17
  13. By: Dudley Cooke
    Abstract: This paper studies non-cooperative monetary policy in a two country general equilibrium model where international economic integration is endogenised through firm-level heterogeneity and monopolistic competition. Economic integration between countries is a source of policy competition, generating higher long-run inflation, and increased gains from monetary cooperation.
    Keywords: Price levels ; Macroeconomics - Econometric models
    Date: 2012
  14. By: Gary B. Gorton; Andrew Metrick
    Abstract: All economists should be conversant with “what happened?” during the financial crisis of 2007-2009. We select and summarize 16 documents, including academic papers and reports from regulatory and international agencies. This reading list covers the key facts and mechanisms in the build-up of risk, the panics in short-term-debt markets, the policy reactions, and the real effects of the financial crisis.
    JEL: A0 D0 E0 G0
    Date: 2012–01
  15. By: Ali al-Nowaihi; Sanjit Dhami
    Abstract: Given the recent experience, there is growing interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. Using the Dixit-Lambertini (2003) framework of strategic policy interaction between the Treasury and the Central Bank, we find that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal inflation target is given to the Central Bank. Second, the Treasury, who retains control over fiscal policy and acts as a Stackelberg leader, is given optimal output and inflation targets. This solution achieves the optimal rational expectations pre-commitment solution. This result holds true for a range of specifications about the Treasury's behavior. However, when there is the possibility of a liquidity trap, if monetary policy is delegated to an independent central bank with an optimal inflation target, but the Treasury retains discretion over fiscal policy, then the outcome can be a very poor one. 
    Keywords: liquidity trap; strategic monetary-fiscal interaction; optimal Taylor rules.
    JEL: E63 E52 E58 E61
    Date: 2011–06
  16. By: Filippo Brutti (University of Zurich); Philip Sauré (Swiss National Bank)
    Abstract: We assess the role of financial linkages for the transmission of sovereign risk in the Euro Crisis. Building on the narrative approach by Romer and Romer (1989), we use financial news to identify structural shocks in a VAR model of daily sovereign CDS for eleven European countries. To estimate how these shocks transmit across borders, we use data on cross-country bank exposures to sovereign debt. Our results indicate that exposure to Greek sovereign debt and debt of Greek banks constitute important transmission channels. Overall, financial linkages explain up to two thirds of transmission of sovereign debt in the Euro Crisis.
    Date: 2012–01
  17. By: Jenny E. Ligthart (CentER and Department of Economics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands.); Sebastian E. V. Werner (Tilburg University, Warandelaan 2, 5037 AB Tilburg, The Netherlands.)
    Abstract: We present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice is explained by both currency-specific and country-specific determinants. We use unique quarterly panel data on the invoicing of Norwegian imports from OECD countries for the 1996-2006 period. We find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro, whereas the home currency share of non-eurozone countries fell slightly. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect. JEL Classification: F33, F41, F42, E31, C25.
    Keywords: Euro, invoicing currency, exchange rate risk, inflation volatility, vehicle currencies, compositional multinomial logit.
    Date: 2012–01
  18. By: Travis J. Berge
    Abstract: Catalyzed by the work of Meese and Rogoff (1983), a large literature has documented the inability of empirical models to accurately forecast exchange rates out-of-sample. This paper extends the literature by introducing an empirical strategy that endogenously builds forecast models from a broad set of conventional exchange rate signals. The method is extremely flexible, allowing for potentially nonlinear models for each currency and forecast horizon that evolve over time. Analysis of the models selected by the procedure sheds light on the erratic behavior of exchange rates and their apparent disconnect from macroeconomic fundamentals. In terms of forecast ability, the Meese-Rogoff result remains intact. At short horizons, the method cannot outperform a random walk, although at longer horizons the method does outperform the random walk null. These findings are found consistently across currencies and forecast evaluation methods.
    Date: 2011
  19. By: Marcel Fratzscher
    Abstract: The empirical analysis in the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued currencies. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and increased output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy framework and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows.
    Date: 2011–12
  20. By: Guillaume Chevillon (ESSEC Business School - ESSEC Business School); Sophocles Mavroeidis (Chercheur Indépendant - Aucune)
    Abstract: We consider a prototypical representative-agent forward-looking model, and study the low frequency variability of the data when the agent's beliefs about the model are updated through linear learning algorithms. We nd that learning in this context can generate strong persistence. The degree of persistence depends on the weights agents place on past observations when they update their beliefs, and on the magnitude of the feedback from expectations to the endogenous variable. When the learning algorithm is recursive least squares, long memory arises when the coe cient on expectations is su ciently large. In algorithms with discounting, long memory provides a very good approximation to the low-frequency variability of the data. Hence long memory arises endogenously, due to the self-referential nature of the model, without any persistence in the exogenous shocks. This is distinctly di erent from the case of rational expectations, where the memory of the endogenous variable is determined exogenously. Finally, this property of learning is used to shed light on some well-known empirical puzzles.
    Keywords: Learning ; Long Memory ; Persistence ; Present-Value Models
    Date: 2011–11–24
  21. By: Thomas W.L. Norman
    Abstract: Models of macroeconomic learning are populated by agents who possess a great deal of knowledge of the “true” structure of the economy, and yet ignore the impact of their own learning on that structure; they may learn about an equilibrium, but they do not learn within it. An alternative learning model is presented where agents’ decisions are informed by hypotheses they hold regarding the economy. They periodically test these hypotheses against observed data, and replace them if they fail. It is shown that agents who learn in this way spend almost all of the time approximating rational-expectations equilibria.
    Keywords: Rational-expectations equilibrium, Learning, Hypothesis testing
    JEL: E00 D83 D84
    Date: 2012
  22. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Giorgio Fagiolo (Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa); Andrea Roventini (University Paris Ouest Nanterre La Defense, Department of Economic Sciences (University of Verona) and Laboratory of Economics and Management (LEM) (Sant'Anna School of Advanced Studies, Pisa))
    Abstract: Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this sta- tistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.
    Keywords: Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential- Power Distributions, Laplace Distributions, DSGE Models, RBC Models.
    JEL: C1 E3
    Date: 2012–01
  23. By: Jon Christensson; Kenneth Spong; Jim Wilkinson
    Abstract: Many countries have suggested macroprudential supervision as a means for earlier identification and better control of the risks that might lead to a financial crisis. Since macroprudential supervision would focus on the financial system in its entirety and on major risks that could threaten financial stability, it shares many of the same goals as the financial stability reports written by most central banks. This article examines the financial stability reports of five central banks to assess how effective they were in identifying the problems that led to the recent financial crisis and what implications they might have for macroprudential supervision. ; The financial stability reports in these five countries were generally successful in foreseeing the risks that contributed to the crisis, but the reports underestimated the severity of the crisis and did not fully anticipate the timing and pattern of important events. While the stress tests in these reports provided insights into the resiliency and capital needs of the banks in these countries, the stresses and scenarios tested often differed from what actually occurred and some of the reports did not consider them to be likely events. One other major challenge for the central banks was in taking the concerns expressed in financial stability reports and linking them to effective and timely supervisory policy. Overall, the reports were a worthwhile exercise in identifying and monitoring key financial trends and emerging risks, but they also indicate the significant challenges macroprudential supervision will have in anticipating and addressing financial market disruptions
    Date: 2011
  24. By: Judit Montoriol-Garriga; J. Christina Wang
    Abstract: This paper investigates whether small firms have experienced worse tightening of credit conditions during the Great Recession than large firms. To structure the empirical analysis, the paper first develops a simple model of bank loan pricing that derives both the interest rates on loans actually made and the marginal condition for loans that would be rationed in the event of an economic downturn. Empirical estimations using loan-level data find evidence that, once we account for the contractual features of business loans made under formal commitments to lend, interest rate spreads on small loans have declined on average relative to spreads on large loans during the Great Recession. Quantile regressions further reveal that the relative decline in average spread is entirely accounted for by loans to the riskier borrowers. These findings are consistent with the pattern of differentially more rationing of credit to small borrowers in recessions as predicted by the model. This suggests that policy measures that counter this effect by encouraging lending to small businesses may be effective in stimulating their recovery and, in turn, job growth.
    Keywords: Recessions ; Small business - Finance ; Bank loans
    Date: 2011
  25. By: Martin Berka; Christian Zimmermann
    Abstract: This paper studies loan activity in a context where banks must follow Basel Accord-type rules and acquire financing from households. Loan activity typically decreases when entrepreneurs’ investment returns decline, and we study which type of policy could revigorate an economy in a trough. We find that active monetary policy increases loan volume even when the economy is in good shape; introducing active capital requirement policy can be effective as well if it implies tightening of regulation in bad times. This is performed with an heterogeneous agent economy with occupational choice, financial intermediation and aggregate shocks to the distribution of entrepreneurial returns.
    Date: 2011
  26. By: Enrique Martínez-García; Diego Vilán; Mark Wynne
    Abstract: The global slack hypothesis (e.g., Martínez-García and Wynne [2010]) is central to the discussion of the trade-offs monetary policy faces in an increasingly more open world economy. Open-Economy (forward-looking) New Keynesian Phillips curves describe how expected future inflation and a measure of global output gap (global slack) affect the current inflation rate.> ; This paper studies the (potential) weak identification of these relationships in the context of a fully specified structural model using Bayesian estimation techniques. We trace the problems to sample size, rather than misspecification bias. We conclude that standard macroeconomic time series with a coverage of less than forty years are subject to potentially serious identification issues, and also to model selection errors. We recommend estimation with simulated data prior to bringing the model to the actual data as a way of detecting parameters that are susceptible to weak identification in short samples.
    Keywords: Macroeconomics - Econometric models
    Date: 2012
  27. By: Reitz, Stefan; Rülke, Jan-Christoph; Stadtmann, Georg
    Abstract: Chartist and fundamentalist models have proven to be capable of replicating stylized facts on speculative markets. In general, this is achieved by specifying nonlinear interactions of otherwise linear asset price expectations of the respective trader groups. This paper investigates whether or not regressive and extrapolative expectations themselves exhibit significant nonlinear dynamics. The empirical results are based on a new data set from the European Central Bank Survey of Professional Forecasters on oil price expectations. In particular, we find that forecasters form destabilizing expectations in the neighborhood of the fundamental value, whereas expectations tend to be stabilizing in the presence of substantial oil price misalignment. --
    Keywords: agent based models,nonlinear expectations,survey data
    JEL: F31 D84 C33
    Date: 2012
  28. By: Lee E. Ohanian; Andrea Raffo
    Abstract: We build a dataset of quarterly hours worked for 14 OECD countries. We document that hours are as volatile as output, that a large fraction of labor adjustment takes place along the intensive margin, and that the volatility of hours relative to output has increased over time. We use these data to reassess the Great Recession and prior recessions. The Great Recession in many countries is a puzzle in that labor wedges are small, while those in the U.S. Great Recession - and those in previous European recessions - are much larger.
    Date: 2011
  29. By: Konstantins Benkovskis (Monetary Policy Department, Latvijas Banka); Julia Wörz (Foreign Research Division, Oesterreichische Nationalbank)
    Abstract: Understanding the dynamics of import price developments is an important but challenging issue which affects the way we look on consumers' welfare, real exchange rates and exchange rate pass-through. In this paper we propose an exact import price index which extends the approach by Broda and Weinstein (2006) who adjust price developments for changes in varieties of imported products. We relax two assumptions still underlying the Broda and Weinstein (2006) approach, thus allowing the set of imported goods and the quality to vary. This variety-, set-of-products-, and quality-adjusted import price index shows that gains from variety in European G7 countries, although positive, are rather small compared to calculated gains from quality. Using HS 07 (vegetables) as our benchmark group of products with unchanged quality, we find significant gains from quality for Germany, France, Italy and the UK between 1995 and 2010. Although these results are not invariant to the choice of the benchmark category, they clearly stress the importance of incorporating the quality issues in empirical literature. Ignoring changes in import quality can give misleading estimates of import prices and consumers' welfare. JEL classification: C43, D60, F12, F14, L15
    Keywords: import variety, price index, quality, welfare gains from trade
    Date: 2011–12–31
  30. By: Oz Shy
    Abstract: This paper reviews recent developments in online and mobile banking in the United States that provide bank account holders with low-cost interfaces to manage account-to-account electronic money transfers. The paper analyzes the emerging decentralized market in which A2A money transfers are becoming available in the United States and compares it with the A2A market in other countries. The paper constructs analytical examples to explain and evaluate the structure of the emerging U.S. market and discusses possible policy actions that may enhance the use of A2A money transfers in the United States.
    Keywords: Internet banking ; Electronic funds transfers
    Date: 2011
  31. By: Wang Peng (Institute for Advanced Studies, Wuhan University); Heng-fu Zou (Institute for Advanced Studies, Wuhan University; CEMA in Central University of Finance and Economics)
    Abstract: Under a modified neo-classical framework, this paper reexamined the effect of international macroeconomic policies by rejecting the routine assumption of a constant rate of time preference. In the model presented here, we suppose the holdings of real financial wealth will affect people's impatience which has far-reaching implications towards various core issues in international macroeconomics. The introducing of wealth into instantaneous discounting function yields intriguing dynamics of consumption, real balances, and foreign bond holdings. One interesting feature of our model is that stationary rate of time preference no longer necessarily equals real interest rate. We also find that central bank's foreign exchange intervention is not super-neutral even if households capitalize all transfers from the government, which contradicts Obstfeld(1981) in that the distribution of the economy¡¯s claims on the rest of the world between the public and the central bank is relevant to the economic performance. The monetary policy affects the real factors, but how the economy behaves in the long run and in the short run differs a lot from Uzawa(1968) and Obstfeld(1981).
    Keywords: international macroeconomic policy, impatience, foreign exchange, monetary policy
    JEL: D90 F3 F4
    Date: 2012
  32. By: Joseph D. ALBA (Joseph D. ALBA Nanyang Technological University, Singapore); Wai-Mun CHIA (Wai-Mun CHIA Nanyang Technological University, Singapore); Donghyun PARK (Donghyun PARK Asian Development Bank (ADB), The Philippines)
    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.
    Date: 2011–12–01
  33. By: Engler, Philipp
    Abstract: After an expansionary monetary policy shock employment increases and unemployment falls. In standard New Keynesian models the fall in aggregate unemployment does not affect employed workers at all. However, Lüchinger, Meier and Stutzer (2010) found that the risk of unemployment negatively affects utility of employed workers: An increases in aggregate unemployment decreases workers' subjective well-being, which can be explained by an increased risk of becoming unemployed. I take account of this effect in an otherwise standard New Keynesian open economy model with unemployment as in Galí (2010) and find two important results with respect to expansionary monetary policy shocks: First, the usual wealth effect in New Keynesian models of a declining labor force, which is at odds with the data as highlighted by Christiano, Trabandt and Walentin (2010), is shut down. Second, the welfare effects of such shocks improve considerably, modifying the standard results of the open economy literature that set off with Obstfeld and Rogoff's (1995) redux model. --
    Keywords: open economy macroeconomics,monetary policy,unemployment
    JEL: E24 E52 F32 F41
    Date: 2011
  34. By: Steffen Ahrens, Dennis Snower
    Abstract: We incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive inflation. Workers with relatively low incomes experience envy, whereas those with relatively high incomes experience guilt. The former seek to raise their income, and the latter seek to reduce it. The greater the inflation rate, the greater the degree of wage dispersion under Calvo wage contracts, and thus the greater the degree of envy and guilt experienced by the workers. Since the envy effect is stronger than the guilt effect, according to the available empirical evidence, a rise in the inflation rate leads workers to supply more labor over the contract period, generating a significant positive long-run relation between inflation and output (and employment), for low inflation rates. This Phillips curve relation, together with an inefficient zero-inflation steady state, provides a rationale for a positive long-run inflation rate. Given standard calibrations, optimal monetary policy is associated with a long-run inflation rate around 2 percent
    Keywords: inflation, long-run Phillips curve, fairness, inequity aversion
    JEL: D03 E20 E31 E50
    Date: 2012–01
  35. By: Ivo Maes (National Bank of Belgium, Research Department; Université catholique de Louvain, Robert Triffin Chair; HUBrussel; ICHEC Brussels Management School)
    Abstract: The establishment of the European Monetary Institute (EMI), the predecessor of the European Central Bank, on 1 January 1994, was a milestone in the process of European monetary integration. In this paper, we look at the work on the international and European monetary system of Alexandre Lamfalussy, its first president. Lamfalussy pursued a threefold career: as a private banker, a central banker and an academic. Partly under the influence of Robert Triffin, Lamfalussy soon became interested in international monetary issues. This paper analyses his views on the international monetary system and on European monetary integration, including his contributions to the Delors Report, which provided the framework for European monetary union. The paper draws extensively on archival research in the Lamfalussy papers at the Bank for International Settlements and the minutes of the EEC Committee of Governors' meetings. The paper provides not only an analysis of Lamfalussy's thought on European monetary integration, but also offers crucial insight into the Weltanschauung and way of thinking of European central bankers in this period.
    Keywords: Lamfalussy, exchange rates, European monetary integration, Delors Report
    JEL: B31 E42 F36
    Date: 2011–11
  36. By: A. Talha Yalta (TOBB University of Economics and Technology, Department of Economics); A. Yasemin Yalta (Hacettepe University, Department of Economics)
    Abstract: We survey the literature on the accuracy of econometric software. We also assess the advantages of open source software from the point of view of reliability and discuss its potential in applied economics, which has now become fully dependent on computers. As a case study, we apply various accuracy tests on gretl (GNU Regression, Econometrics and Time-series Library) and demonstrate that the open source nature of the program made it possible to see the cause, facilitated a rapid fix, and enabled verifying the correction of a number of flaws that we uncovered. We also run the same tests on four widely-used proprietary econometric packages and observe the known accuracy errors that remained uncorrected for more than five years.
    Keywords: Open source; Econometric software; gretl; Accuracy; Software reliability
    Date: 2012
  37. By: Jakub Rysanek; Jaromir Tonner; Osvald Vasicek
    Abstract: As the global economy seems to be recovering from the 2009 financial crisis, we find it desirable to look back and analyze the Czech economy ex post. We work with a Swedish New Keynesian model of a small open economy which embeds financial frictions in light of the financial accelerator literature. Without explicitly modeling the banking sector, this model serves as a tool for understanding how a negative financial shock may spread to the real economy and how monetary policy may react. We use Bayesian techniques to estimate the model parameters to adjust the model structure closer to the evidence stemming from Czech data. Our attention focuses on a set of experiments in which we generate ex post forecasts of the economy prior to the 2009 crisis and illustrate that the monetary policy response to an upcoming crisis implied by the model with financial frictions is stronger on account of an increasing interest rate spread.
    Keywords: Bayesian methods, financial frictions.
    JEL: C53 E32 E37
    Date: 2011–12
  38. By: Mubariz Hasanov (Hacettepe University, Department of Economics); Aysen Arac (Hacettepe University, Department of Economics); Funda Telatar (Hacettepe University, Department of Economics)
    Abstract: In this paper, we investigate possible nonlinearities in the inflation–output relationship in Turkey for the 1980–2008 period. We first estimate a linear bivariate model for the inflation rate and output gap, and test for linearity of the estimated model against nonlinear alternatives. Linearity test results suggest that the relationship between the inflation rate and output gap is highly nonlinear. We estimate a bivariate timevarying smooth transition regression model, and compute dynamic effects of one variable on the other by generalized impulse response functions. Computed impulse response functions indicate that inflation–output relationship in Turkey during the analyzed period was regime dependent and varied considerably across time.
    Keywords: Phillips Curve; Nonlinearity; Structural Stability
    JEL: C32 C51 E31
    Date: 2012
  39. By: Wildo González
    Abstract: This article develops a large Bayesian VAR with more than 100 variables for the Chilean economy, as Banbura, Giannone and Reichlin (2010). We show that, when the degree of shrinkage is set in relation to the cross-sectional dimension of the sample (bayesian shrinkage), the forecasting performance of a VAR can be improved by adding macroeconomic variables and sectoral information. The results show that the large bayesian VAR compares favorably with some univariate models. It further examines the impulse responses to a monetary shock, as well as to some sectoral shocks.
    Date: 2012–01

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