nep-cba New Economics Papers
on Central Banking
Issue of 2016‒05‒08
23 papers chosen by
Maria Semenova
Higher School of Economics

  1. Exchange rate pass-through in emerging countries: Do the inflation environment, monetary policy regime and institutional quality matter? By Antonia Lopez-Villavicencio; Valérie Mignon
  2. The Real Exchange Rate in Open-Economy Taylor Rules: A Re-Assessment By Richard T. Froyen; Alfred V Guender
  3. Strengthening the role of local currencies in EU candidate and potential candidate countries By Windischbauer, Ulrich
  4. A macroprudential stable funding requirement and monetary policy in a small open economy By Punnoose Jacob; Anella Munro
  5. Common faith or parting ways? A time varying parameters factor analysis of euro-area inflation By Delle Monache,; Ivan Petrella; Fabrizio Venditti
  6. Evaluating Systemic Risk using Bank Default Probabilities in Financial Networks By Sergio Rubens Stancato de Souza; Thiago Christiano Silva; Benjamin Miranda Tabak; Solange Maria Guerra
  7. Effectiveness of Monetary Policy: Evidence from Turkey By Avci, S. Burcu; Yucel, Eray
  8. What to Aim for? The Choice of an Inflation Objective When Openness Matters By Richard T. Froyen; Alfred V Guender
  9. Optimal Monetary Policy, Exchange Rate Misalignments and Incomplete Financial Markets By Senay, Ozge; Sutherland, Alan
  10. The Macroeconomic Risks of Undesirably Low Inflation By Arias, Jonas E.; Erceg, Christopher J.; Trabandt, Mathias
  11. The Economics of Bank Supervision By Thomas M. Eisenbach; David O. Lucca; Robert M. Townsend
  12. “The Distributive Effects of Conventional and Unconventional Monetary Policies” By Karen Davtyan
  13. Exchange Rate Pass-Through in the Euro Area By Rajmund Mirdala
  14. Unsurprising Shocks: Information, Premia, and the Monetary Transmission By Silvia Miranda-Agrippino
  15. Quantitative Easing: An Underappreciated Success By Joseph E. Gagnon
  16. Financial supervision to fight fiscal dominance? The gold standard in Greece and South-East Europe between economic and political objectives and fiscal reality, 1841-1939 By Matthias Morys
  17. Macroprudential Policies: General Analysis and a Look into the Chilean Experience By Claudio Raddatz; Rodrigo Vergara
  18. The limits of central bank forward guidance under learning By Cole, Stephen
  19. Turnover Liquidity and the Transmission of Monetary Policy By Lagos, Ricardo; Zhang, Shengxing
  20. Sovereign Defaults, External Debt, and Real Exchange Rate Dynamics By Tamon Asonuma
  21. Capital Requirements, Risk Shifting and the Mortgage Market By Uluc, Arzu; Wieladek, Tomasz
  22. Lost in translation? ECB's monetary impulses and financial intermediaries' responses By Beck, Günter Wilfried; Kotz, Hans-Helmut; Zabelina, Natalia
  23. Policy Regimes and the Shape of the Phillips Curve in Australia By Mallick, Debdulal

  1. By: Antonia Lopez-Villavicencio; Valérie Mignon
    Abstract: In this paper, we estimate the exchange rate pass-through (ERPT) to consumer prices and assess its dynamics for a sample of 15 emerging countries over the 1994-2015 period. To this end, we augment the traditional bivariate relationship between the nominal effective exchange rate and inflation by accounting for the inflation environment, monetary policy regime, as well as domestic institutional factors. We show that both the level and volatility of inflation matter in the sense that declining ERPT is evidenced with more stable and anti-inflationary environment. Monetary policy also plays a key role since adopting an inflation target-especially de jure-leads to a significant reduction in ERPT for most countries. Adopting exchange rate targeting regime matters as well, contributing to a diminishing ERPT. Finally, we find evidence that transparency of monetary policy decisions clearly reduces ERPT, while this is not the case for central bank independence.
    Keywords: exchange rate pass-through; inflation; emerging countries; monetary policy.
    JEL: E31 E52 F31
    Date: 2016
  2. By: Richard T. Froyen; Alfred V Guender (University of Canterbury)
    Abstract: This paper re-examines the merits of including an exchange rate response in Taylor-type interest rate rules for small open economies. Taylor (2001) and Taylor and Williams (2011) express what has been the conventional view: inclusion of the real exchange rate will either add little or might negatively affect the rule’s performance. We argue that developments in the theory of optimal monetary policy for open economies taken together with increased instability in world financial markets warrant a re-examination of the issue. Examining three flexible inflation targeting strategies, we find that a small weight on real exchange rate stability in the loss function is sufficient to improve the performance of Taylor-type rules relative to optimal policy. Gains are substantial for domestic and REX inflation targets because a small weight on real exchange rate fluctuations inhibits the aggressive use of the policy instrument under optimal policy. As real exchange rate stability is a built-in feature of a CPI inflation objective, the gains under a CPI inflation target are considerably lower. A central bank that values real exchange rate stability and follows a Taylor-type rule should respond to the real exchange rate. Doing so reduces relative losses irrespective of the specification of the inflation objective. Only a complete disregard for exchange rate stability bears out the view that there is no substantive role for the real exchange rate in Taylor-type rules.
    Keywords: CPI, Domestic, REX Inflation Targeting, Taylor-Type Rules, Timeless Perspective, Real Exchange Rate
    JEL: E3 E5 F3
    Date: 2016–02–20
  3. By: Windischbauer, Ulrich
    Abstract: This paper deals with the phenomenon of high levels of unofficial euroisation in countries preparing for EU membership (Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Serbia and Turkey). The challenges stemming from unofficial euroisation are particularly relevant for central banks as high degrees of euroisation reduce the effectiveness of monetary policy and create risks to financial stability. Unofficial euroisation in these countries is fuelled by legacies of inflation and macroeconomic imbalances, close economic and financial linkages with the euro area, as well as the perspective of EU membership. While euroisation (or, more generally, dollarisation) is typically a sticky phenomenon that is difficult to reverse, entrenched as it is in the behaviour and mind-set of economic agents, the paper finds - based also on the experience of countries outside the region - that there is a set of policies under the competence of domestic authorities which are conducive to strengthening the use of domestic currencies, even though efforts to bring down dollarisation or euroisation rates typically take a long time to show results. In this context, macroeconomic stabilisation is a necessary but not sufficient condition. It needs to be flanked by targeted prudential and regulatory measures, as well as efforts to develop local currency capital markets. Authorities in EU candidate and potential candidate countries have already engaged in such endeavours and euroisation rates have gone down to some extent in recent years, though at different levels and at an uneven pace. Nevertheless, further efforts are needed, while acknowledging that some specific factors like the strong presence of euro area headquartered banks in these countries as well as their EU accession perspective are conducive to euroisation. JEL Classification: E42, E52, E58, F31, F41, G28
    Keywords: bank regulation, capital markets, currency, dollarisation, euroisation, financial stability, monetary policy, prudential policy, South-East Europe
    Date: 2016–04
  4. By: Punnoose Jacob; Anella Munro
    Abstract: The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. A similar regulation has been in place in New Zealand since 2010. This paper introduces the stable funding requirement (SFR) into a DSGE model featuring a banking sector with richly-specified liabilities, and estimates the model for New Zealand. We then evaluate the implications of an SFR for monetary policy trade-offs. Altering the steadystate SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifies the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth.
    Keywords: DSGE models, prudential policy, monetary policy, small open economy, sticky interest rates, banks, wholesale funding
    JEL: E31 E32 E44 F41
    Date: 2016–05
  5. By: Delle Monache, (Bank of Italy); Ivan Petrella (Department of Economics, Mathematics & Statistics, Birkbeck; Bank of England); Fabrizio Venditti (Bank of Italy)
    Abstract: We analyze the interaction among the common and country specific components for the inflation rates in twelve euro area countries through a factor model with time varying parameters. The variation of the model parameters is driven by the score of the predictive likelihood, so that, conditionally on past data, the model is Gaussian and the likelihood function can be evaluated using the Kalman filter. The empirical analysis uncovers significant variation over time in the model parameters. We find that, over an extended time period, inflation persistence has fallen over time and the importance of common shocks has increased relatively to the idiosyncratic disturbances. According to the model, the fall in inflation observed since the sovereign debt crisis, is broadly a common phenomenon, since no significant cross country inflation differentials have emerged. Stressed countries, however, have been hit by unusually large shocks.
    Keywords: inflation, time-varying parameters, score driven models, state space models, dynamics factor models.
    JEL: E31 C22 C51 C53
    Date: 2015–07
  6. By: Sergio Rubens Stancato de Souza; Thiago Christiano Silva; Benjamin Miranda Tabak; Solange Maria Guerra
    Abstract: In this paper, we propose a novel methodology to measure systemic risk in networks composed of financial institutions. Our procedure combines the impact effects obtained from stress measures that rely on feedback centrality properties with default probabilities of institutions. We also present new heuristics for designing feasible and relevant stress-testing scenarios that can subside regulators in financial system surveillance tasks. We develop a methodology to extract banking communities and show that these communities are mostly composed of non-large banks and have a relevant effect on systemic risk. This finding renders these communities objects of interest for supervisory activities besides SIFIs and large banks. Finally, our results provide insights and guidelines that can be useful for policymaking
    Date: 2016–04
  7. By: Avci, S. Burcu; Yucel, Eray
    Abstract: Effectiveness of monetary policy depends on the degree to which policy interest rate affects all other financial prices, including the entire term structure of interest rates, credit rates, exchange rates and asset prices. An effective monetary policy framework can be seen as a pre-condition for well-functioning financial markets. However, effectiveness of the monetary policy is not straightforward to measure and requires empirical work to understand the effects of financial infrastructure, competitiveness of financial markets as well as current economic conditions. This paper examines the effectiveness of the monetary policy in Turkey by focusing on the interest rate pass-through behavior by means of an Interacted Panel Vector Autoregressive (IPVAR) approach. The results suggest that policy rate innovations transmit fully in less than eight months. Regulatory quality of the country, competition, liquidity, and profitability of banking sector, dollarization and exchange rate flexibility, inflation, and term structure have a positive effect on interest rate pass-through. Short-term credit ratio, GDP growth, monetary growth, and capital inflows have a negative effect.
    Keywords: Interest Rate Pass-through; Deposit and Credit Channels; Policy and Market Rates; Banking Sector; Interacted Panel Vector Autoregressive Methodology
    JEL: E43 E44 E58 F41
    Date: 2016–04–20
  8. By: Richard T. Froyen; Alfred V Guender (University of Canterbury)
    Abstract: Inflation targeting countries generally define the inflation objective in terms of the consumer price index. Studies in the academic literature, however, reach conflicting conclusions concerning which measure of inflation a central bank should target in a small open economy. This paper examines the properties of domestic, CPI, and real-exchange- rate-adjusted (REX) inflation targeting. In one class of open economy New Keynesian models there is an isomorphism between optimal policy in an open versus closed economy. In the type of model we consider, where the real exchange rate appears in the Phillips curve, this isomorphism breaks down; openness matters. REX inflation targeting restores the isomorphism but this may not be desirable. Instead, under domestic and CPI inflation targeting the exchange rate channel can be exploited to enhance the effects of monetary policy. Our results indicate that CPI inflation targeting delivers price stability across the three inflation objectives and will be desirable to a central bank with a high aversion to inflation instability. CPI inflation targeting also does a better job of stabilizing the real exchange rate and interest rate which is an advantage from the standpoint of financial stability. REX inflation targeting does well in achieving output stability and has an advantage if demand shocks are predominant. In general, the choice of the inflation objective affects the trade-offs between policy goals and thus policy choices and outcomes.
    Keywords: CPI, Domestic, REX Inflation Targeting, Openness, Inflation-Output Trade-off
    JEL: E3 E5 F3
    Date: 2016–03–08
  9. By: Senay, Ozge; Sutherland, Alan
    Abstract: Recent literature on monetary policy shows that, when international financial trade is restricted to a single non-contingent bond, there are significant trade-offs that prevent optimal policy from simultaneously closing all internal and external welfare gaps. Optimal policy therefore deviates from inflation targeting in order to offset real exchange rate misalignments. These simple models are, however, not good representations of modern financial markets. This paper develops a more realistic two-country model of incomplete markets, where there is international trade in nominal bonds denominated in the currencies of the two countries and equity claims on profit streams in the two countries. The analysis shows that the welfare benefits of optimal policy relative to inflation targeting are quantitatively smaller than found in simpler models of financial incompleteness. It is nevertheless found that optimal policy implies quantitatively significant stabilisation of the real exchange rate gap and trade balance gap compared to inflation targeting.
    Keywords: Country portfolios; Financial market structure; Optimal monetary policy
    JEL: E52 E58 F41
    Date: 2016–03
  10. By: Arias, Jonas E.; Erceg, Christopher J.; Trabandt, Mathias
    Abstract: This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects.
    Keywords: Inflation Expectations ; Wages ; Productivity ; Disin ation ; Monetary Policy ; Liquidity Trap ; DSGE Model
    JEL: E52 E58
    Date: 2016–04–12
  11. By: Thomas M. Eisenbach; David O. Lucca; Robert M. Townsend
    Abstract: We study bank supervision by combining a theoretical model distinguishing supervision from regulation and a novel dataset on work hours of Federal Reserve supervisors. We highlight the trade-offs between the benefits and costs of supervision and use the model to interpret the relation between supervisory efforts and bank characteristics observed in the data. More supervisory resources are spent on larger, more complex, and riskier banks. However, hours increase less than proportionally with bank size, suggesting the presence of technological scale economies in supervision. The data also show reallocation of supervisory hours at times of stress and in the post-2008 enhanced supervisory framework for large banks, providing evidence of constraints on supervisory resources. Finally, we show theoretically limits to assessing supervisory success based on ex-post outcomes, as well as benefits of ex-ante commitment policies.
    JEL: D82 G21 G28
    Date: 2016–04
  12. By: Karen Davtyan (AQR Research Group-IREA. University of Barcelona)
    Abstract: The distributional effect of monetary policy is estimated in the case of the USA. In order to identify a monetary policy shock, the paper employs contemporaneous restrictions with ex-ante identified monetary policy shocks as well as log run identification. In particular, a cointegration relation has been determined among the considered variables and the vector error correction methodology has been applied for the identification of the monetary policy shock. The obtained results indicate that contractionary monetary policy decreases income inequality in the country. These results could have important implications for the design of policies to reduce income inequality by giving more weight to monetary policy.
    Keywords: Income inequality; monetary policy; cointegration; identification. JEL classification: C32; D31; E52
    Date: 2016–04
  13. By: Rajmund Mirdala
    Abstract: Time-varying exchange rate pass-through effects to domestic prices under fixed euro exchange rate perspective represent one of the most challenging implications of the common currency. The problem is even more crucial when examining crisis related redistributive effects associated with relative price changes. The degree of the exchange rate pass-through to domestic prices reveals its role as the external price shocks absorber especially in the situation when the leading path of exchange rates is less vulnerable to the changes in the foreign prices. Adjustments in domestic prices followed by exchange rate shifts induced by sudden external price shocks are associated with changes in the relative competitiveness among member countries of the currency area. In the paper we examine exchange rate pass-through to domestic prices in the Euro Area member countries to examine crucial implications of the nominal exchange rate rigidity. Our results indicate that absorption capabilities of nominal effective exchange rates clearly differ in individual countries. As a result, an increased exposure of domestic prices to the external price shocks in some countries represents a substantial trade-off of the nominal exchange rate stability.
    Keywords: exchange rate pass-through, inflation, Euro Area, VAR, impulse-response function
    JEL: C32 E31 F41
    Date: 2016–04
  14. By: Silvia Miranda-Agrippino (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: The use of narrow time frames to measure monetary policy surprises using interest rate futures is potentially not sufficient to guarantee their exogeneity as proxies for monetary policy shocks. Raw monetary “surprises" are, in fact, predictable. These findings are interpreted as suggesting that time-varying risk premia and news shocks are likely to be captured in the measurement. The resulting violation of the identifying assumptions in Proxy SVARs induces non-trivial distortions in the estimation of the contemporaneous transmission coefficients: consequences for the estimation of structural IRFs can be dramatic, both qualitatively and quantitatively. This paper analyses the informational content of monetary surprises and proposes a new method to construct futures-based external instruments that conditions on both central banks' and market participants' information sets. Identification of monetary policy shocks via the orthogonal proxies is shown to retrieve contemporaneous transmission coefficients that are in line with macroeconomic theory even in small, potentially informationally insufficient VARs.
    Keywords: Monetary Surprises, Identification with External Instruments, Monetary Policy, Expectations, Information Asymmetries, Event Study, Proxy SVAR
    JEL: C36 E44 E52 G14
    Date: 2016–04
  15. By: Joseph E. Gagnon (Peterson Institute for International Economics)
    Abstract: After short-term interest rates in many advanced economies fell below 1 percent, central banks turned to quantitative easing (QE) to support economic growth. They purchased massive and unprecedented amounts of long-term bonds in an effort to reduce long-term borrowing costs. Nevertheless, recovery from the Great Recession proved disappointingly slow. Recently, some central banks have pushed short-term interest rates slightly below zero to provide an additional boost to growth. The slow recovery and the turn to negative rates have raised questions about the benefits of QE bond purchases and whether their effectiveness has reached a limit. Gagnon reviews the outpouring of research on QE and its effects and finds overwhelming evidence that QE does ease financial conditions and supports economic growth. The channels are similar to those of conventional monetary policy. QE can be especially powerful during times of financial stress, but it has a significant effect in normal times with no observed diminishing returns. Rarely, if ever, have economists studying a specific question reached such a widely held consensus so quickly. But this consensus has yet to spread more broadly within the economics profession or the wider world.
    Date: 2016–04
  16. By: Matthias Morys
    Abstract: We add a historical and regional dimension to the debate on the Greek debt crisis. Analysing Greece, Romania, Serbia/Yugoslavia and Bulgaria from political independence to WW II, we find surprising parallels to the present: repeated cycles of entry to and exit from monetary unions, government debt build-up and default, and financial supervision by West European countries. Gold standard membership was more short-lived than in any other part of Europe due to fiscal dominance. Granger causality tests and money growth accounting show that the prevailing pattern of fiscal dominance was only broken under international financial control, when strict conditionality scaled back the treasury’s influence; only then were central banks able to conduct a rule-bound monetary policy and stabilize their exchange-rates. The long-run record of Greece suggests that the perennial economic and political objective of monetary union membership can only be achieved if both monetary and fiscal policy is effectively delegated abroad.
    Keywords: fiscal dominance, gold standard, financial supervision, South-East Europe
    JEL: N13 N14 N23 N24 E63 F34
    Date: 2016–04
  17. By: Claudio Raddatz; Rodrigo Vergara
    Date: 2016–03
  18. By: Cole, Stephen
    Abstract: Central bank forward guidance emerged as a pertinent tool for monetary policymakers since the Great Recession. Nevertheless, the effects of forward guidance remain unclear. This paper investigates the effectiveness of forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. Agents forecast future macroeconomic variables via either the rational expectations hypothesis or a more plausible theory of expectations formation called adaptive learning. A standard Dynamic Stochastic General Equilibrium (DSGE) model is extended to include the financial accelerator mechanism. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning to forward guidance. The macroeconomic variables are overall more responsive to forward guidance under rational expectations than under adaptive learning. During a period of economic crisis (e.g. a recession), output under rational expectations displays more favorable responses to forward guidance than under adaptive learning. These differences are exacerbated when compared to a similar analysis without financial frictions. Thus, monetary policymakers should consider the way in which expectations and credit frictions are modeled when examining the effects of forward guidance.
    Keywords: Forward Guidance, Monetary Policy, Adaptive Learning, Expectations, Financial Frictions
    JEL: D84 E30 E44 E50 E52 E58 E60
    Date: 2016–03–22
  19. By: Lagos, Ricardo (Federal Reserve Bank of Minneapolis); Zhang, Shengxing (London School of Economics)
    Abstract: We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.
    Keywords: Asset prices; Liquidity; Monetary policy; Monetary transmission
    JEL: D83 E52 G12
    Date: 2016–05–03
  20. By: Tamon Asonuma
    Abstract: Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign’s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation.
    Keywords: Sovereign debt defaults;Real exchange rates;Exchange rate depreciation;Argentina;Debt burden;Debt service payments;External debt;Econometric models;Sovereign Defaults, External Debt, Real Exchange Rate, Currency Composition of Debt, Bond Spreads, exchange, default, exchange rate, defaults, International Lending and Debt Problems, Asset Pricing, All Countries,
    Date: 2016–02–25
  21. By: Uluc, Arzu; Wieladek, Tomasz
    Abstract: We study the effect of changes to bank-specific capital requirements on mortgage loan supply with a new loan-level dataset containing all mortgages issued in the UK between 2005Q2 and 2007Q2. We find that a rise of a 100 basis points in capital requirements leads to a 5.4% decline in individual loan size by bank. Loans issued by competing banks rise by roughly the same amount, which is indicative of credit substitution. Borrowers with an impaired credit history (verified income) are not (most) affected. This is consistent with origination of riskier loans to grow capital by raising retained earnings. No evidence for credit substitution of non-bank finance companies is found.
    Keywords: Capital requirements; credit substitution.; loan-level data; mortgage market
    JEL: G21 G28
    Date: 2016–04
  22. By: Beck, Günter Wilfried; Kotz, Hans-Helmut; Zabelina, Natalia
    Abstract: Non-bank (-balance sheet) based financial intermediation has become considerably more important over the last couple of decades. For the U.S., this trend has been discussed ever since the mid-1990s. As a consequence, traditional monetary transmission mechanisms, mainly operating through bank balance sheets, have apparently become less relevant. This in particular applies to the bank lending channel. Concurrently, recent theoretical and empirical work uncovered a "risk-taking channel" of monetary policy. This mechanism is not confined to traditional banks but has been found to operate also across the spectrum of financial intermediaries and intermediation devices, including securitization and collateralized lending/borrowing. In addition, recent empirical evidence suggests that the increasing importance of shadow-banking activities might have given rise to a so-called "waterbed effect". This is a mediating mechanisms, dampening or counteracting typically to be expected reactions to monetary policy impulses. Employing flow-of-funds data, we can document also for the Euro Area that a trend towards non-bank (not necessarily more 'market'-based) intermediation has occurred. This is, however, a fairly recent development, substantially weaker than in the U.S. Nonetheless, analyzing the response of Euro Area bank and nonbank financial intermediaries to monetary policy impulses, we find some notable behavioral differences between mainly deposit-funded and more 'market'-based financial intermediaries. We also detect, inter alia, the existence of a (still) fairly weak, but potentially policyrelevant, "waterbed" effect.
    Keywords: non-bank financial intermediation,interest-rate channel,credit channel,risk-taking channel of monetary policy,market-based financial intermediation,monetary transmission mechanism,waterbed effect
    Date: 2016
  23. By: Mallick, Debdulal
    Abstract: We document an evolving pattern in the slope of the Phillips curve in Australia at different frequencies under different monetary policy regimes and labor market regulations. Our estimation strategy relies on the frequency domain estimation but is also complemented by the time domain estimation. We document an upward sloping medium-run Phillips curve in the pre-1977 period, a downward sloping long-run Phillips curve from 1977 to 1993, and a flattened Phillips curve from 1993 onwards. Inflation lagged unemployment during the first period but led during the second period. The Phillips curve at business-cycle frequencies is downward sloping in all periods. We explain our results in terms of the monetary targeting in 1976 and the inflation targeting in 1993 by the RBA, respectively, and important changes in labor relations from the mid-1980s to the mid-1990s. The flattened Phillips curve is also observed in several industrialized countries since their adoption of inflation targeting.
    Keywords: Phillips curve, Long-run, Business-cycle, Frequency, Spectral method
    JEL: C49 E24 E31 E32
    Date: 2016

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