nep-cba New Economics Papers
on Central Banking
Issue of 2012‒02‒08
ten papers chosen by
Alexander Mihailov
University of Reading

  1. The ECB and the Interbank Market By Domenico Giannone; Michèle Lenza; Huw Pill; Lucrezia Reichlin
  2. The financial accelerator and monetary policy rules By Christoph Thoenissen; Gunes Kamber
  3. Financial Globalization and Animal Spirits By Kunieda, Takuma; Shibata, Akihisa
  4. Limited Participation in International Business Cycle Models: A Formal Evaluation By Gao, Xiaodan; Hnarkovska, Viktoria; Marmer, Vadim
  5. Evaluating point and density forecasts of DSGE models By Wolters, Maik Hendrik
  6. Forecasting Data Vintages By Tara M. Sinclair
  7. Nonlinear expectations in speculative markets - Evidence from the ECB survey of professional forecasters By Reitz, Stefan; Rülke, Jan-Christoph; Stadtmann, Georg
  8. Fiscal Multipliers over the Business Cycle By Pascal Michaillat
  9. Continuous time regime switching model applied to foreign exchange rate. By Stéphane Goutte; Benteng Zou
  10. The Impact of Seasonal and Price Adjustments on the Predictability of German GDP Revisions By Jens Boysen-Hogrefe, Stefan Neuwirth

  1. By: Domenico Giannone; Michèle Lenza; Huw Pill; Lucrezia Reichlin
    Abstract: This paper analyses the impact on the macroeconomy of the ECB’s non-standard monetary policy implemented in the aftermath of the collapse of Lehman Brothers in the Fall of 2008. We study in particular the effect of the expansion of the intermediation of transactions across central bank balance sheets as dysfunctional financial markets seize up, which we regard as a key channel of transmission for non-standard monetary policy measures. Our approach is similar to Lenza et al. 2009 but we introduce the important innovation of distinguishing between private intermediation of interbank transactions in the money market and central bank intermediation of bank-to-bank transactions across the Eurosystem balance sheet. We do this by exploiting data drawn from the aggregate Monetary and Financial Institutions (MFI) balance sheet which allows us to construct a new measure of the ‘policy shock’ represented by the ECB’s increasing role as a financial intermediary. We find that bank loans to households and, in particular, to non-financial corporations are higher than would have been the case without the ECB’s intervention. In turn, the ECB’s support has a significant impact on economic activity: two and a half years after the failure of Lehman Brothers, the level of industrial production is estimated to be 2% higher, and the unemployment rate 0.6 percentage points lower, than would have been the case in the absence of the ECB’s non-standard monetary policy measures.
    Keywords: non-standard monetary policy measures; interbank market
    JEL: E50 E58
    Date: 2012–01
  2. By: Christoph Thoenissen; Gunes Kamber
    Abstract: The ability of financial frictions to amplify the output response of monetary policy, as in the financial accelerator model of Bernanke et al. (1999), is analyzed for a wider class of policy rules where the policy interest rate responds to both in inflation and the output gap. When policy makers respond to the output gap as well as in inflation, the standard financial accelerator model reacts less to an interest rate shock than does a comparable model without an operational financial accelerator mechanism. In recessions, when firm-specific volatility rises, financial acceleration due to financial frictions is further reduced, even under pure inflation targeting.
    Keywords: Financial acceleration; financial frictions; monetary policy.
    JEL: E32 E52
    Date: 2011–12
  3. By: Kunieda, Takuma; Shibata, Akihisa
    Abstract: Using a multi-country general equilibrium model, we demonstrate that when agents face credit constraints in an international financial market, rational expectations, which are ex-post heterogeneous between countries, cause business fluctuations. If the international financial market becomes perfect, only a unique perfect foresight equilibrium is obtained, implying that no business fluctuations appear.
    Keywords: Business fluctuations; Financial globalization; Sunspots; Heterogeneous agents; Rational expectations
    JEL: F49 E44 F36
    Date: 2012–01–22
  4. By: Gao, Xiaodan; Hnarkovska, Viktoria; Marmer, Vadim
    Abstract: In this paper we study the role of limited asset market participation (LAMP) for international business cycles. We show that when limited participation is introduced into an otherwise standard model of international business cycles, the performance of the model improves significantly, especially in matching cross-country correlations. To perform formal evaluation of the models we develop a novel statistical procedure that adapts the test of Vuong (1989) to DSGE models and accounts for the possibility that models are misspecified. Based on this test we show that the improvements brought out by LAMP are statistically significant, leading a model with LAMP to outperform a representative agent model. Furthermore, when LAMP is introduced, a model with complete markets is found to do better than a model with no trade in financial assets - a well-known favorite in the literature. Our results remain robust to the inclusion of investment specific technical change.
    Keywords: international business cycles, incomplete markets, limited asset market participation
    JEL: F3 F4
    Date: 2012–01–22
  5. By: Wolters, Maik Hendrik
    Abstract: This paper investigates the accuracy of point and density forecasts of four DSGE models for inflation, output growth and the federal funds rate. Model parameters are estimated and forecasts are derived successively from historical U.S. data vintages synchronized with the Fed’s Greenbook projections. Point forecasts of some models are of similar accuracy as the forecasts of nonstructural large dataset methods. Despite their common underlying New Keynesian modeling philosophy, forecasts of different DSGE models turn out to be quite distinct. Weighted forecasts are more precise than forecasts from individual models. The accuracy of a simple average of DSGE model forecasts is comparable to Greenbook projections for medium term horizons. Comparing density forecasts of DSGE models with the actual distribution of observations shows that the models overestimate uncertainty around point forecasts.
    Keywords: DSGE models; forecasting; model uncertainty; forecast combination; density forecasts; real-time data; Greenbook
    JEL: E0 E32 C53 E31 E37
    Date: 2012–01–23
  6. By: Tara M. Sinclair (George Washington University)
    Abstract: This article provides a discussion of Clements and Galvão’s “Forecasting with Vector Autoregressive Models of Data Vintages: US output growth and inflation.” Clements and Galvão argue that a multiple-vintage VAR model can be useful for forecasting data that are subject to revisions. Clements and Galvão draw a “distinction between forecasting future observations and revisions to past data,” which brings yet another real time data issue to the attention of forecasters. This comment discusses the importance of taking data revisions into consideration and compares the multiple-vintage VAR approach of Clements and Galvão to a state-space approach.
    Keywords: Real time data, Evaluating forecasts, Forecasting practice, Time series, Econometric models
    JEL: C53
    Date: 2012–01
  7. By: Reitz, Stefan (Institute for Quantitative Business and Economics Research); Rülke, Jan-Christoph (Department of Economics); Stadtmann, Georg (Department of Business and Economics)
    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: C33 D84 F31
    Date: 2012–01–03
  8. By: Pascal Michaillat
    Abstract: This paper illustrates why fiscal policy becomes more effective as unemployment rises in recessions. The theory is based on the equilibrium unemployment model of Michaillat (forthcoming), in which jobs are rationed in recessions. Fiscal policy takes the form of government spending on public-sector jobs. Recessions are periods of acute job shortage without much competition for workers among recruiting firms; hiring in the public sector does not crowd out hiring in the private sector much; therefore fiscal policy reduces unemployment effectively. Formally the fiscal multiplier—the reduction in unemployment rate achieved by spending one dollar on public-sector jobs—is countercyclical. An implication is that available estimates of the fiscal multiplier, which measure the average effect of fiscal policy over the business cycle, do not apply in recessions because the multiplier is much higher in recessions than on average.
    Keywords: Fiscal multiplier, unemployment, business cycle, job rationing, matching frictions
    JEL: E24 E32 E62 J64
    Date: 2012–01
  9. By: Stéphane Goutte (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Paris VI - Pierre et Marie Curie - Université Paris VII - Paris Diderot); Benteng Zou (CREA - Center for Research in Economic Analysis - Université du Luxembourg)
    Abstract: Modified Cox-Ingersoll-Ross model is employed, combining with Hamilton (1989) type Markov regime switching framework, to study foreign exchange rates, where all parameter values depend on the value of a continuous time Markov chain. Basing on real data of some foreign exchange rates, the Expectation-Maximization algorithm is extended to this more general model and it is applied to calibrate all parameters. We compare the obtained results regarding to results obtained with non regime switching models and notice that our results match much better the reality than the others without Markov switching. Furthermore, we illustrate our model on various foreign exchange rate data and clarify some significant eco- nomic time periods in which financial or economic crisis appeared, thus, regime switching obtained.
    Keywords: Foreign exchange rate; Regime switching model; calibration; financial crisis
    Date: 2012–01–21
  10. By: Jens Boysen-Hogrefe, Stefan Neuwirth
    Abstract: Releases of the GDP are subject to revisions over time. This paper examines the predictability of German GDP revisions using forecast rationality tests. Previous studies of German GDP covering data until 1997 finds that revisions of real seasonally adjusted GDP are predictable. This paper uses a newly available real-time data to analyze the revisions of real seasonal adjusted GDP, of nominal unadjusted GDP, of the seasonal pattern, and of the GDP deflator for the period between 1992 and 2006. We find that the revisions of the nominal unadjusted GDP are unpredictable, but that the revisions of the price adjustments are predictable. Nevertheless, revisions of real seasonally adjusted GDP are hardly predictable and less well predictable compared to earlier studies. This lower predictability seems to be linked to the finding that revisions of seasonal adjustments are hardly predictable, too, and that their predictability decreased over time
    Keywords: Real-time data, GDP revisions, noise, news, forecasting, seasonal adjustment, price adjustment
    JEL: C82
    Date: 2012–01

This nep-cba issue is ©2012 by Alexander Mihailov. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.