nep-cba New Economics Papers
on Central Banking
Issue of 2015‒11‒07
twenty-two papers chosen by
Maria Semenova
Higher School of Economics

  1. Implicit Asymmetric Exchange Rate Intervention under Inflation Targeting Regimes By Ahmet Benlialper; Hasan Cömert; Nadir Öcal
  2. Monetary Regime Choice and Optimal Credit Rationing at the Official Rate: The Case of Russia By Andrey G. Shulgin
  3. Exchange Market Pressure in OECD and Emerging Economies: Domestic vs. External Factors and Capital Flows in the Old and New Normal By Joshua Aizenman; Mahir Binici
  4. Mortgages and Monetary Policy By Garriga, Carlos; Kydland, Finn E.; Sustek, Roman
  5. Unconventional Monetary Policy Tools and Bank Interest Rates By Mahir Binici; Hakan Kara; Pınar Özlü
  6. "The Malady of Low Global Interest Rates" By Tanweer Akram
  7. The Challenges of the EU Banking Union - will it succeed in dealing with the next financial crisis? By Ida-Maria Weirsøe FALLESEN
  8. Threshold-based forward guidance: hedging the zero bound By Boneva, Lena; Harrison, Richard; Waldron, Matt
  9. How Important Are Nominal Shocks For Real Exchange Rate Fluctuations? Evidence From Inflation Targeting Emerging Market Economies By M. Fatih Ekinci; Fatma Pınar Erdem; Zübeyir Kılınç
  10. On the Welfare and Cyclical Implications of Moderate Trend Inflation By Guido Ascari; Louis Phaneuf
  11. Liquidity Risk, Bank Networks, and the Value of Joining the Federal Reserve System By Charles W. Calomiris; Matthew Jaremski; Haelim Park; Gary Richardson
  12. Systemic Loops and Liquidity Regulation By Aldasoro, Iñaki; Faia, Ester
  13. Commonality in Liquidity: Effects of Monetary Policy and Macroeconomic Announcements By Ahmet Sensoy
  14. The Pitfalls of External Dependence: Greece, 1829-2015 By Carmen M. Reinhart; Christoph Trebesch
  15. The Political Economy of Pension Reform: Public Opinion in Latin America and the Caribbean By Fabiana Machado; Giselle Vesga
  16. Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis By Mariana García-Schmidt; Michael Woodford
  17. Analyzing and Comparing Basel's III Sensitivity Based Approach for the interest rate risk in the trading book By Mabelle Sayah
  18. The effects of elections on monetary policy in Turkey: An evaluation in terms of Political Business Cycle Theory By Filiz Eryılmaz
  19. Extremal dependence tests for contagion By Renée Fry-McKibbin; Cody Yu-Ling Hsiao
  20. The Impact of Monetary Policy on Credit Growth: Evidence from Firm Level Micro Data By Arif Oduncu; Fatih Altunok
  21. The Inflationary Effects of Fiscal Policy in Turkey: Evidence from a SVAR Model By Ayşe Ertuğrul
  22. Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality By Günter W. Beck; Sarah M. Lein

  1. By: Ahmet Benlialper (Ipek University, Department of Economics); Hasan Cömert (Middle East Technical University, Department of Economics); Nadir Öcal (Middle East Technical University, Department of Economics)
    Abstract: In the last decades, many developing countries abandoned their existing policy regimes and adopted inflation targeting (IT) by which they aimed to control inflation through the use of policy interest rates. During the period before the crisis, most of these countries experienced large appreciations in their currencies. Given that appreciation helps central banks to curb inflationary pressures, we ask whether central banks in developing countries have a different policy stance with respect to depreciation and appreciation. We specifically claim that during the period under investigation (2002-2008), central banks in developing countries which implement IT have tolerated appreciation but fought against depreciation in order to hit their inflation targets. In order to support our claim, we analyze two components of central bank’s response to exchange rate movements. First, we analyze central banks’ interest rate decisions by estimating a non-linear monetary policy reaction function using a panel threshold model. Evidence suggests that whereas central banks respond to depreciation pressures, they remain inactive to appreciation. Secondly, we construct a probit model in order to investigate the determinants of foreign exchange intervention of central banks. We find that depreciation has an explanatory power for sale interventions whereas appreciation does not explain purchase interventions. Hence, we conclude that central banks’ policy stance in IT developing countries with respect to exchange rate movements is asymmetric favoring appreciation. In this sense, IT seems to contribute to the ignorance of dangers regarding to financial flows leading to appreciation of currencies in developing countries.
    Keywords: Inflation Targeting, Central Banking, Developing Countries, Exchange Rates
    JEL: E52 E58 E31 F31
    Date: 2015
  2. By: Andrey G. Shulgin (National Research University Higher School of Economics)
    Abstract: Stabilizing monetary policy in a small open economy is constrained by the open economy trilemma. In a crisis this constraint may not allow the Central Bank to cut interest rates because this may cause significant capital flight and the ensuing problems. In this paper we investigate whether the Central Bank’s credit rationing at the official rate (CROR) may soften the open economy trilemma constraint and improve the results of monetary policy for different monetary regimes. We construct a DSGE model appropriate for analysing the forward-looking behaviour of households facing a non-zero probability of credit rationing at the official rate. A simulation of estimated on a Russian data model and welfare optimization exercises allow us to contribute to the question of optimal monetary regime choice and to analyse the role of credit rationing for different monetary regimes. We have found significant credit rationing in the quarterly Russian data of 2001–2014. The share of liquidity constrained (non-Ricardian) households and the probability of CROR are estimated as 22% and 66% respectively. Welfare maximization exercises reveal a trade off between low-inflation and high-welfare solutions and favour of a floating exchange rate regime. Researching CROR gives mixed results. On the one hand we found the optimal value of the probability of CROR in both exchange rate-based and Taylor rule-based models. On the other hand the resulting improvement in welfare is very small.
    Keywords: DSGE; Bayesian estimation; intermediate exchange rate regime; rationing of credit; exchange rate rule; Russia
    JEL: E52 E58 F41
    Date: 2015
  3. By: Joshua Aizenman; Mahir Binici
    Abstract: We study the ways domestic and external global factors (such as risk appetite, global liquidity, U.S. monetary policy, and commodity prices) affected the exchange market pressure before and after the global financial crisis as well as the role of these factors during the Federal Reserve’s tapering episode. Utilizing a comprehensive database on capital controls, we investigate whether control measures have a significant impact on mitigating exchange market pressure associated with capital flows [net and gross]. Using quarterly data over the 2000–2014 period and a dynamic panel model estimation, we find that external factors played a significant role in driving exchange market pressure for both OECD countries and emerging market countries, with a larger impact on the latter. While the effect of net capital flows on exchange market pressure is muted, short-term gross portfolio inflows and outflows comprise important factors that account for exchange market pressure. Short-term portfolio flows and long-term foreign direct investment flows have a significant impact on exchange market pressure for emerging market economies and no significant effect for OECD countries. Capital controls seem to significantly reduce the exchange market pressure although the economic size of this impact is highly dependent on the institutional quality.
    JEL: F3 F31 F33
    Date: 2015–10
  4. By: Garriga, Carlos (Federal Reserve Bank of St. Louis); Kydland, Finn E. (University of California–Santa Barbara and NBER); Sustek, Roman (University of London and Centre for Macroeconomics)
    Abstract: Mortgages are long-term nominal loans. Under incomplete asset markets, monetary policy is shown to affect housing investment and the economy through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels, distinct from traditional transmission of monetary policy, are evaluated within a general equilibrium model. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger effects than transitory shocks, manifesting themselves as long-short spread. The transmission is stronger under adjustable- than fixed-rate mortgages. Higher, persistent, inflation benefits homeowners under FRMs, but hurts them under ARMs.
    Keywords: Mortgage finance; monetary policy; general equilibrium; housing investment; redistribution
    JEL: E32 E52 G21 R21
    Date: 2015–10–25
  5. By: Mahir Binici (Central Bank of Turkey); Hakan Kara (Central Bank of Turkey); Pınar Özlü (Central Bank of Turkey)
    Abstract: In the aftermath of the global crisis, to alleviate the dilemma between price stability and financial stability and to reduce macro financial risks, many central banks in emerging economies developed unconventional policies and heavily used macro-prudential tools. In this process, the Central Bank of Turkey used a policy combination of interest rate corridor, one-week repo rate, reserve requirements, foreign exchange intervention and liquidity policy. In this study, using bank level data, we investigate the impact of alternative policy tool on the credit and deposit rates. Accordingly, we document that the impact of policy instruments on deposit and loan rates differs; implying different policy instruments could have significant implications for bank behavior.
    Date: 2015
  6. By: Tanweer Akram
    Abstract: Long-term interest rates in advanced economies have been low since the global financial crisis. However, in the United States the Federal Reserve could begin to hike its policy rate, the federal funds target rate, before the end of the year. In the United Kingdom, the Bank of England could follow suit. What is the outlook for global long-term interest rates? What are the risks around interest rates? What can policymakers do to cure the malady of low interest rates? It is argued that global interest rates are likely to stay low in the remainder of this year and the first half of next year due to a combination of domestic and international factors, even if a few central banks gradually begin to tighten monetary policy. The cure for this malady lies in proactive fiscal policy and measures to support job growth. Boosting effective demand and promoting higher wages and real disposable income would help lift inflation rates close to their targets and raise long-term interest rates.
    Keywords: Government Bond Yields; Global Interest Rates; Long-Term Interest Rates
    JEL: E43 E50 E60
    Date: 2015–10
  7. By: Ida-Maria Weirsøe FALLESEN (European Commission, DG Competition, Cabinet of Commissioner Margrethe Vestager.)
    Abstract: The EU Banking Union combines micro- and macro-prudential regulation. It aims at breaking the “doom loop” between banks and sovereign debt, promoting financial stability and mitigating the next financial shock to the real EU economy, at the lowest possible cost to the financial institutions and to the taxpayers. Success, or failure, is determined by how the banking union copes with the challenges to its two main pillars, the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). Under the SSM, in its new supervisory role, the ECB may be subject to conflicts between the objectives of price and financial stability, and the single-supervisor role may be sub-optimal. Two regulators might have been preferable and more focus on ECB accountability will now be required. The shock-absorbing Single Resolution Fund (SRF), which is part of the SRM, may not have the capacity to deal with a crisis of the size of the one of 2008. Especially as the nature and severity of a future financial crisis cannot be forecasted. The design of the banking union is not the result of theoretical studies, but a political compromise to deal with an acute crisis. The theoretical studies that are included in this paper are not supportive of the banking union in its current form. Nevertheless, there is a good chance that the EU Banking Union may succeed, as ECB supervision of the 123 systemically important banks should contain potential demands on the SRM. In the event of a crisis that is too severe for the banking union to absorb with its current capability, the crucial assumption is that there is political will to rapidly provide new resources. The same applies, if a major financial crisis develops before the banking union is fully operational.
    Keywords: Banking Union, supervision, resolution, Eurozone, financial crisis
    JEL: E42 E52 F33 F36 G01 O52
    Date: 2015–10
  8. By: Boneva, Lena (Bank of England); Harrison, Richard (Bank of England); Waldron, Matt (Bank of England)
    Abstract: Motivated by policies implemented by some central banks in response to the financial crisis, we use a simple New Keynesian model to study a particular form of forward guidance. We assume that the policy maker makes a state-contingent commitment to hold the policy rate at the zero lower bound (ZLB) in a way that ensures that specific macroeconomic variables (eg inflation) do not breach particular ‘thresholds’. In common with other similar policies, threshold-based forward guidance (TBFG) can be used to stimulate the economy at the ZLB via a commitment to hold the policy rate lower-for-longer than would otherwise have been the case. But TBFG also acts as a hedge against the asymmetric effects of shocks. That is because if further adverse shocks arise, prolonging the recession, exit would be expected to occur later and the policy would provide additional stimulus. In contrast, if positive shocks arrive, so that the economy recovers more quickly than originally expected, exit would be expected to occur sooner, thereby removing some of the policy stimulus. This hedging property of TBFG also means that there is a relatively low incentive for policy makers to renege on the policy, unlike lower-for-longer policies that depend purely on calendar time.
    Keywords: New Keynesian model; monetary policy; zero lower bound; forward guidance; thresholds
    JEL: E17 E31 E52
    Date: 2015–10–23
  9. By: M. Fatih Ekinci (Central Bank of Turkey); Fatma Pınar Erdem (Central Bank of Turkey); Zübeyir Kılınç (Central Bank of Turkey)
    Abstract: This study compares the importance of the nominal shocks in explaining the real exchange rate fluctuations before and after the adoption of inflation targeting regime in emerging market economies. We follow the structural VAR methodology proposed by Clarida and Gali (1994) to identify the macroeconomic shocks that determine fluctuations in relative output growth, relative inflation and the real exchange rate. The structural decomposition shows that real shocks account for most of the variation in the real exchange rate. Furthermore, findings indicate that the explanatory power of the nominal shocks in the real exchange rate fluctuations have increased after the implementation of the inflation targeting regime.
    Keywords: Okun Kanunu, İşsizlik, Büyüme, Dinamik Panel Veri
    JEL: C32 F31 F41
    Date: 2015
  10. By: Guido Ascari; Louis Phaneuf
    Abstract: Abstract We offer a comprehensive evaluation of the welfare and cyclical implications of moderate trend inflation. In an extended version of a medium-scale New Keynesian model, recent proposals to increase trend inflation from 2 to 4 percent would generate a consumption-equivalent welfare loss of 3.7 percent based on the non-stochastic steady state and of 6.9 percent based on the stochastic mean. Welfare costs of this magnitude are driven by four main factors: i) multiperiod nominal wage contracting, ii) trend growth in investment-specific and neutral technology, iii) roundaboutness in the U.S. production structure, and iv) and the interaction between trend inflation and shocks to the marginal efficiency of investment (MEI), insofar that this type of shock is sufficiently persistent. Moreover, moderate trend inflation has important cyclical implications. It interacts much more strongly with MEI shocks than with either productivity or monetary shocks.
    Keywords: Wage and price contracting; trend inflation; trend growth in technology; roundabout production; investment shocks; inflation costs; business cycles.
    JEL: E31 E32
    Date: 2015–11–03
  11. By: Charles W. Calomiris; Matthew Jaremski; Haelim Park; Gary Richardson
    Abstract: Reducing systemic liquidity risk related to seasonal swings in loan demand was one reason for the founding of the Federal Reserve System. Existing evidence on the post-Federal Reserve increase in the seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings suggests that it succeeded in that mission. Nevertheless, less than 8 percent of state-chartered banks joined the Federal Reserve in its first decade. Some have speculated that nonmembers could avoid higher costs of the Federal Reserve’s reserve requirements while still obtaining access indirectly to the Federal Reserve discount window through contacts with Federal Reserve members. We find that individual bank attributes related to the extent of banks’ ability to mitigate seasonal loan demand variation predict banks’ decisions to join the Federal Reserve. Consistent with the notion that banks could obtain indirect access to the discount window through interbank transfers, we find that a bank’s position within the interbank network (as a user or provider of liquidity) predicts the timing of its entry into the Federal Reserve System and the effect of Federal Reserve membership on its lending behavior. We also find that indirect access to the Federal Reserve was not as good as direct access. Federal Reserve member banks saw a greater increase in lending than nonmember banks.
    JEL: G21 G28 N22
    Date: 2015–10
  12. By: Aldasoro, Iñaki; Faia, Ester
    Abstract: Risk contagion in the banking sector occurs through interconnections on the asset side or through liquidity spirals affecting the liability side. We build a network model of optimizing banks featuring contagion on both sides of banks’ balance sheets. To already existing asset side channels (liquidity hoarding, interbank exposures and fire sales of common assets) we add a critical liability side channel of contagion, namely bank runs triggered by information coordination akin to global games. The model is calibrated to the network of large European banks by a simulated method of moments approach and by using the real-world interbank matrix as a prior for the maximum entropy estimation of the model-based interbank matrix. We use the model to study the effects of phase-in increases of liquidity coverage ratios. Interestingly we find that the systemic risk profile of the system is not improved and might even deteriorate. Based on those insights we propose an alternative approach: differential (across banks) increases in coverage ratios based on systemic importance rankings help to mitigate the externalities and deliver a much more stable system.
    Keywords: bank runs; contagion; interconnections; liquidity scarcity; phase-ins
    JEL: C63 D85 G21 G28 L14
    Date: 2015–11
  13. By: Ahmet Sensoy
    Abstract: After the recent nancial crisis, few issues receive more attention than central banks' actions or major macroeconomic announcements in markets. Motivated by this fact, we investigate the impact of specic macro-announcements on liquidity commonal-ity in Turkey. Using a weighted spread constructed by a proprietary database of order ows, we reveal that among several developed countries, only U.S. monetarypolicy and macroeconomic announcements raise commonality in liquidity. More-over, commonality is signicantly aected (increased) only beyond the best price quotes, showing that researchers may obtain misleading results on commonality if they consider spread at the best price levels as a liquidity proxy.
    Keywords: Commonality in liquidity, order book, monetary policy, macroeconomic announcements, market microstructure
    JEL: D23 D82 G11 G12
    Date: 2015–10
  14. By: Carmen M. Reinhart; Christoph Trebesch
    Abstract: Two centuries of Greek debt crises highlight the pitfalls of relying on external financing. Since its independence in 1829, the Greek government has defaulted four times on its external creditors – with striking historical parallels. Each crisis is preceded by a period of heavy borrowing from foreign private creditors. As repayment difficulties arise, foreign governments step in, help to repay the private creditors, and demand budget cuts and adjustment programs as a condition for the official bailout loans. Political interference from abroad mounts and a prolonged episode of debt overhang and financial autarky follows. We conclude that these cycles of external debt and dependence are a perennial theme of Greek history, as well as in other countries that have been “addicted” to foreign savings.
    JEL: F3 G01 H6 N10 N13 N14
    Date: 2015–10
  15. By: Fabiana Machado; Giselle Vesga
    Abstract: Countries around the world are facing important challenges to the sustainability of their pension systems. Changing policies, especially those of large scope and financial magnitude, is a political challenge. It takes a combination of willingness, capacity and enough political support to change the status quo and avoid costly subsequent reversals. Taking advantage of several waves of public opinion data in Latin America and the Caribbean, this paper aims to identify and analyze individual-level factors that are relevant to gauging political support for pension reform.
    Keywords: Social Policy & Protection, Social Security, Pension funds, Political economy of reform, Pension reform, Public opinion
    Date: 2015–09
  16. By: Mariana García-Schmidt; Michael Woodford
    Abstract: We illustrate a pitfall that can result from the common practice of assessing alternative monetary policies purely by considering the perfect foresight equilibria (PFE) consistent with the proposed rule. In a standard New Keynesian model, such analysis may seem to support the “Neo-Fisherian” proposition according to which low nominal interest rates can cause inflation to be lower. We propose instead an explicit cognitive process by which agents may form their expectations of future endogenous variables. Under some circumstances, a PFE can arise as a limiting case of our more general concept of reflective equilibrium, when the process of reflection is pursued sufficiently far. But we show that an announced intention to fix the nominal interest rate for a long enough period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of such policies. Our alternative approach implies that a commitment to keep interest rates low should raise inflation and output, though by less than some PFE analyses apply.
    JEL: E31 E43 E52
    Date: 2015–10
  17. By: Mabelle Sayah (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1, ISFA - Institut des Science Financière et d'Assurances - PRES Université de Lyon, Faculte des Sciences - Universite Saint Joseph - USJ - Université Saint-Joseph de Beyrouth)
    Abstract: A bank's capital charge computation is a widely discussed topic with new approaches emerging continuously. Each bank is computing this figure using internal methodologies in order to reflect its capital adequacy; however, a more homogeneous model is recommended by the Basel committee to enable judging the situation of these financial institutions and comparing different banks among each other. In this paper, we compare different numerical and econometric models to the sensitivity based approach (SBA) implemented by BCBS under Basel III in its February 2015 publication in order to compute the capital charge, we study the influence of having several currencies and maturities within the portfolio and try to define the time horizon and confidence level implied by Basel s III approach through an application on bonds portfolios. By implementing several approaches, we are able to find equivalent VaRs to the one computed by the SBA on a pre-defined confidence level (97.5 %). However, the time horizon differs according to the chosen methodology and ranges from 1 month up to 1 year.
    Keywords: Sensitivity Based approach,Capital charge,GARCH,Basel III,PCA,bonds portfolio,Dynamic Nelson Siegel,ICA,interest rate risk,trading book
    Date: 2015–10–23
  18. By: Filiz Eryılmaz (Uludag University)
    Abstract: The Political Business Cycle Theory which emerged as one of the basic areas of discussion of Positive Public Choice Theory, were based on the studies of Kalecki (1943) and Akerman (1947) in the 1940s. Political Business Cycle Theory are examined under two main branches of Traditional Political Business Cycle Theory and Rational Political Business Cycle Theory. While Traditional Political Business Cycle Theory are classified in two groups as Traditional Opportunistic Political Business Cycle Theory and Traditional Partisan Political Business Cycle Theory, the Rational Political Business Cycle Theory are separated as Rational Opportunistic Political Business Cycle Theory and Rational Partisan Political Business Cycle Theory. While voters are assumed to have adaptive expectations in Traditional Political Business Cycle Theory, they are accepted as being rational in Rational Political Business Cycle Theory. Another model of differentiation of the relationship of Political Business Cycle Theory is the Opportunistic or Partisan relationship. In the Opportunistic model, it is assumed that the single aim of the governing parties, which are accepted as equally formed, is to apply policies which will maximise their chances of winning elections. In partisan models, the governing parties are not similar, and are in fact at different ends of the ideological spectrum as right and left-wing (Alesina and Roubini, 1990; Alesina, Roubini and Cohen, 1991). In this study, the Traditional Opportunistic Business Cycle Theory of Nordhaus (1975) was tested for the series of M0, M1, M2, M2Y, the interbank rate, the three-month Turkish lira (TL) time deposit rate, the three-month United States (US) dollar time deposit rate, nominal and real treasury auction rates for the Turkish economy. In the determination of whether or not political opportunistic policies were observed in general elections held in the period 1985M12- 2012M4, the autoregressive model used in studies by Alesina, Cohen ve Roubini (1991, 1992, 1997) of OECD countries and industrial countries, was used in this study.
    Keywords: Political Business Cycle Theory, Traditional Opportunistic Political Business Cycle Theory, Monetary Policy, Box-Jenkins Models, Turkey
    JEL: D72 E62 H62
    Date: 2015
  19. By: Renée Fry-McKibbin; Cody Yu-Ling Hsiao
    Abstract: A new test for financial market contagion based on changes in extremal dependence defined as co-kurtosis and co-volatility is developed to identify the propagation mechanism of shocks across international financial markets. The proposed approach captures changes in various aspects of the asset return relationships such as cross-market mean and skewness (co-kurtosis) as well as cross-market volatilities (co-volatility). Monte Carlo experiments show that the tests perform well except for when crisis periods are short in duration. Small crisis sample critical values are calculated for use in this case. In an empirical application involving the global financial crisis of 2008-09, the results show that significant contagion effects are widespread from the US banking sector to global equity markets and banking sectors through either the co-kurtosis or the co-volatility channels, reinforcing that higher order moments matter during crises.
    Keywords: Co-skewness, Co-kurtosis, Co-volatility, Contagion testing, Extremal dependence, Financial crisis, Lagrange multiplier tests.
    JEL: C12 F30 G11 G21
    Date: 2015–11
  20. By: Arif Oduncu (Central Bank of the Republic of Turkey); Fatih Altunok (Central Bank of the Republic of Turkey)
    Abstract: We make use of a unique data set that includes loan and bank relationship information at the firm level to investigate the role of monetary policy on the loan growth of firms. We analyze how Turkish firms adjust their credit growth in response to unexpected monetary policy shocks. We use unexpected shocks instead of interest-rate changes in order to solve the possible endogeneity problem between monetary policy and credit growth. We show that unexpected monetary tightening has a significant effect on the decline of firm credit growth. This effect is larger for credit-constrained firms. We find that unexpected shocks are effective only for short term loans but are not effective for medium and longterm loans. We also show the asymmetric impact of monetary policy on loan growth. Our results are robust to firm characteristics, credit demand and firm financial performance factors as well as the firm-bank relationship.
    Keywords: NA
    JEL: G30 G32 E52
    Date: 2015
  21. By: Ayşe Ertuğrul (Bahcesehir University)
    Abstract: The high single-digit inflation in Turkey, as well as in other developing countries is the subject of studies focusing on the role of monetary policy. While low budget deficits and sustainable debt dynamics in post 2001 crisis period in Turkey, whether the fiscal aggregates are expansionary and they play any role in inflation rigidity remain as unanswered and important questions. This study aims to provide evidence on these questions. After analyzing the nature of fiscal policy in Turkey between 2002:Q1-2014:Q4 period, I try to evaluate the impact of fiscal policy shock on macroeconomic variables, with a special focus on inflation. The methodological framework is structural vector autoregressive. Whereas the preliminary results regarding the effect on output are in line with the previous literature for fiscal policy in Turkey, the findings for the effects on inflation differ in respect to fiscal aggregates.
    Keywords: Fiscal Policy, Inflation, Nonlinearity, Structural VAR
    JEL: E31
    Date: 2015
  22. By: Günter W. Beck; Sarah M. Lein (University of Basel)
    Abstract: To model the observed slow response of aggregate real variables to nominal shocks, most macroeconomic models incorporate real rigidities in addition to nominal rigidities. One popular way of modelling such a real rigidity is to assume a non-constant demand elasticity. By using a homescan data set for three European countries, including prices and quantities bought for a large number of goods, in addition to consumer characteristics, we provide estimates of price elasticities of demand and on the degree of demand-side real rigidities. We find that price elasticities of demand are about 4 in the median. Furthermore, we find evidence for demand-side real rigidities. These are, however, much smaller than what is often assumed in macroeconomic models. The median estimate for demand-side real rigidity, the super-elasticity, is in a range between 1 and 2. To quantitatively assess the implications of our empirical estimates, we calibrate a menu-cost model with the estimated super-elasticity. We find that the degree of monetary non-neutrality doubles in the model including demand-side real rigidity, compared to the model with only nominal rigidity, suggesting a multiplier effect of around two. However, the model can explain only up to 6% of the monetary non-neutrality observed in the data, implying that additional multipliers are necessary to match the behavior of aggregate variables.
    Keywords: Demand curve, price elasticity, super-elasticity, price-setting, monetary non-neutrality
    JEL: E30 E31 E50 D12 C3
    Date: 2015

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