nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒04‒03
forty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  3. Macroeconomic Performance and Inequality: Brazil 1983-94 By M.F.Meyer Bittencourt
  4. Capital Market Frictions, Business Cycle and Monetary Transmission By Olivier Pierrard
  5. The Asian Crisis Reconsidered By Takashi Shiraishi
  6. What Happens After the Central Bank of Brazil Increases the Target Interbank Rate by 1%? By Rubens Penha Cysne
  7. Aggregate Savings When Individual Income Varies By Floden, Martin
  8. US Monetary Police 1988-2004: An Empirical Analysis By Anders Møller Christensen; Heino Bohn Nielsen
  9. Business Cycle Linkages for the G7 Countries:Does the US Lead the World? By D R Osborn; P J Perez; M Sensier
  10. Belief in a Just World and Redistributive Politics By Roland Benabou; Jean Tirole
  11. Transition Variables in the Markov-switching Model: Some Small Sample Properties By Erlandsson, Ulf
  12. Fluctuating Macro Policies and the Fiscal Theory By Troy Davig; Eric M. Leeper
  13. Revisiting the one type permanent shocks hypothesis: Aggregate fluctuations in a multi-sector economy By Antonio Acconcia; Saverio Simoneli
  14. "International Consumption Patterns among High-income Countries: Evidence from the OECD Data" By Istvan Konya; Hiroshi Ohashi
  15. The Tactical and Strategic Value of Commodity Futures By Claude B. Erb; Campbell R. Harvey
  16. "Saving and Interest Rates in Japan: Why They Have Fallen and Why They Will Remain Low" By R. Anton Braun; Daisuke Ikeda; Douglas H. Joines
  17. The Economic Case for Fiscal Federalism in Scotland By Ronald MacDonald; Paul Hallwood
  18. Consumption Asymmetry and the Stock Market: Empirical Evidence By Nicholas Apergis; Stephen M. Miller
  19. Inflation Targeting and Output Growth: Evidence from Aggregate European Data By Nicholas Apergis; Stephen M. Miller; Alexandros Panethimitakis; Athanassios Vamvakidis
  20. Consumption asymmetry and the stock market: New evidence through a threshold adjustment model By Nicholas Apergis; Stephen M. Miller
  21. Buying Less, But Shopping More: Changes In Consumption Patterns During A Crisis By David McKenzie y Ernesto Schargrodsky
  22. A Note on the Bias of using Futures Rates as a Proxy for the Instantaneous Forward Rate By Thuy-Duong To
  23. An Adverse Selection Model of Optimal Unemployment Insurance By Marcus Hagedorn; Ashok Kaul; Tim Mennel
  24. Strategic Substitutabilities versus Strategic Complementarities: Towards a General Theory of Expectational Coordination? By Roger Guesnerie
  25. Dynamic analysis of bankruptcy and economic waves. By Irina Peaucelle
  26. Monetary Aggregation By William Barnett
  27. Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience By Tomáš Holub
  28. The CNB’s Policy Decisions – Are They Priced in by the Markets? By David Navrátil; Viktor Kotlán
  29. Stress Testing: A Review of key Concepts By Martin Čihák
  30. Designing Stress Tests for the Czech Banking System By Martin Čihák
  31. Predicting Bank CAMELS and S&P Ratings: The Case of the Czech Republic By Alexis Derviz; Jiří Podpiera
  32. EU Enlargement and Endogeneity of some OCA Criteria: Evidence from the CEECs By Ian Babetskii
  33. The Role of Banks in the Czech Monetary Policy Transmission Mechanism By Anca Pruteanu
  34. Consumers, Consumer Prices and the Czech Business Cycle Identification By Jiří Podpiera
  35. Anatomy of the Czech Labour Market:From Over-Employment to Under-Employment in Ten Years? By Vladislav Flek; Kamil Galuščák; Jaromír Gottvald; Jaromír Hurník; Štěpán Jurajda; David Navrátil; Petr Mareš; Daniel Münich; Tomáš Sirovátka; Jiří Večerník
  36. The value of interest rate stabilization polices when agents are learning By Duffy, John; Xiao, Wei
  37. Re-examining inflation and inflation uncertainty in developed and emerging countries By Daal, Elton; Naka, Atsuyuki; Sanchez, Benito
  38. Exploring the International Linkages of the Euro Area: A Global VAR Analysis By Stephane Dees; Filippo di Mauro; M. Hashem Pesaran; L. Vanessa Smith
  39. Monetary Policy Transparency:Too Good to be True? By Iris Biefang-Frisancho Mariscal; Peter Howells
  40. Models of Military Expenditure and Growth: A Critical Review By J Paul Dunne; Ron Smith; Dirk Willenbockel

  1. By: Miquel Faig; Belén Jerez
    Abstract: Inflation, as a tax on money, gives buyers an incentive to reduce their money balances. Sellers are aware of this incentive and try to attract buyers by announcing price offers that induce buyers to spend a larger fraction of their money. We examine the effect of inflation on equilibrium price offers and associated trades in a competitive search environment where buyers experience preference shocks after they are matched with a seller. With full information,equilibrium price offers consist of a flat fee applied equally to all buyers independently of the quantities they purchase. If buyers'preferences are private information, sellers must charge more to buyers who purchase larger quantities due to incentive compatibility restrictions. In this case, equilibrium price offers consist of a non-linear price schedule. However, as inflation rises, price schedules become relatively flat. This implies that buyers with a low desire to consume purchase higher quantities and spend their cash more rapidly. Buyers with a high desire to consume purchase lower quantities because, as their money balances fall, they become liquidity constrained. This is in contrast with the full information benchmark where inflation reduces the quantities purchased by all buyers. The equilibrium is efficient at the Friedman rule and inflation reduces welfare both with full and private information.
    Date: 2005–03
  2. By: Rebeca Albacete; Antoni Espasa
    Abstract: Economic agents and financial authorities require frequent updates to a path of accurate inflation forecasts and need forecasts to include an explanation of the factors by which they are determined. This paper studies how to approach this need, developing a method for analysing inflation in the euro area, measured according to HICP. Time series models using the most recent information on prices and an important functional and geographically disaggregation can provide monthly forecasts which are reasonably accurate, but they do not provide an explanation of the factors by which the forecast is determined. In this respect, it is important to enlarge the data set used considering explanatory variables and build congruent econometric models including variables which, following previous works by D. Hendry, capture disequilibria on different markets, goods and services, labour, monetary and international. The final result of this work shows that combining the forecasts from a monthly time series vector model, constructed on price subindexes from a disaggregation of the HICP by countries and sectors, with the forecasts derived from a quarterly econometric vector model on aggregate inflation and other economic variables, very accurate forecasts are obtained. Both vector models are specified including empirical cointegration restrictions, which in the first case capture the constrains necessary present between the trends of the price subindexes and in the second approximate the long-run restrictions postulated by economic theory.
    Date: 2005–01
  3. By: M.F.Meyer Bittencourt
    Abstract: This paper examines how macroeconomic performance affected earnings inequality during the 1980’s and early 90’s in Brazil. The evidence shows that the chronic high inflation existent at the time had a clear and significant effect in raising inequality. The results based on panel time series data and analysis are robust for different concepts of inflation, inequality measures, estimators and specifications. The economic intuition suggests that high inflation rates combined with incomplete indexation coverage more than offset any progressive effect expectedly coming from the debtor and creditor channel. Hence, credible and stable macroeconomic policies, which keep inflation low and under control in the long run is to be a necessary first step of any public policy package implemented to tackle the high levels of inequality existent in Brazil.
    Keywords: Inequality, inflation, indexation
    JEL: C50 D30 E31 E32
    Date: 2005–01
  4. By: Olivier Pierrard
    Abstract: Empirical evidence shows that some firms may be capital constraintbecause of capital market imperfections. We therefore extend the business cycle models with frictions `a la Pissarides on the labour market by also introducing symmetric frictions on the capital market. We show that the capital market frictions (and their interactions with the labour market frictions) improve the statistical properties of the model and generate a financial accelerator.
    Keywords: capital market frictions; business cycle; monetary transmission
    JEL: E13 E24 E51
    Date: 2005–02
  5. By: Takashi Shiraishi
    Date: 2005–03
  6. By: Rubens Penha Cysne (EPGE/FGV)
    Date: 2005–03
  7. By: Floden, Martin (Dept. of Economics, Stockholm School of Economics)
    Abstract: This paper examines aggregate savings in a general equilibrium model where infinitely lived households face volatile (and possibly uncertain) income paths, hold a risk-free asset, and face a liquidity constraint. I first show that the equilibrium capital stock in an economy without uncertainty, but where individual income varies, can be larger than in an economy where each household's income is constant. When income is stochastic, the equilibrium capital stock is always larger than when income is constant. This additional capital accumulation has sometimes been interpreted as precautionary savings, but I demonstrate that it is mostly generated by permanent-income motives.
    Keywords: equilibrium interest rate; aggregate savings; precautionary saving; infinite horizon; general equilibrium
    JEL: D52 D91 E21
    Date: 2005–03–23
  8. By: Anders Møller Christensen (Danmarks Nationalbank); Heino Bohn Nielsen (Institute of Economics, University of Copenhagen)
    Abstract: Relationships between the Federal funds rate, unemployment, inflation, and the long-term government-bond rate are investigated with cointegration techniques. We find a stable long-term relationship between the Federal funds rate, unemployment, and the bond rate. This relationship is interpretable as a policy target because deviations are corrected primarily via the Federal funds rate. A traditional Taylor-type rule is clearly rejected by the data. Inflation does thus only influence the instrument indirectly via the bond rate, but we find that inflation is controllable with the Federal funds rate. The results are in accordance with recent developments in monetary theory stressing management of expectations as an important transmission channel.
    Keywords: cointegration; equilibrium correction; monetary policy; Taylor rule; Bond rate
    JEL: C32 E52
    Date: 2005–02
  9. By: D R Osborn; P J Perez; M Sensier
    Abstract: This paper empirically models the relationship between quarterly business cycle movements in the US and the other G7 countries, including an analysis of the US with a European (E15) aggregate. By using a nonlinear smooth transition vector autoregressive framework, the possibility of asymmetric business cycle linkages is explored. Statistical testing almost always rejects linearity, with the nonlinearity in the VAR generally associated with lagged annual US growth. To represent different types of possible business cycle linkages, three nonlinear VAR models are estimated for each country with the US, where these represent common business cycle regimes, US-led (but not common) regimes and country-specific (or idiosyncratic) regimes. In general, high annual US growth is found to lead to a distinct business cycle regime in other G7 countries compared with average or low US growth. Tests indicate that quarterly US growth patterns are important for other countries primarily in the lower regime, with domestic autoregressive lags then sometimes insignificant.
    Date: 2005
  10. By: Roland Benabou; Jean Tirole
    Abstract: International surveys reveal wide differences between the views held in different countries concerning the causes of wealth or poverty and the extent to which people are responsible for their own fate. At the same time, social ethnographies and experiments by psychologists demonstrate individuals' recurrent struggle with cognitive dissonance as they seek to maintain, and pass on to their children, a view of the world where effort ultimately pays off and everyone gets their just deserts. This paper offers a model that helps explain: i) why most people feel such a need to believe in a "just world"; ii) why this need, and therefore the prevalence of the belief, varies considerably across countries; iii) the implications of this phenomenon for international differences in political ideology, levels of redistribution, labor supply, aggregate income, and popular perceptions of the poor. The model shows in particular how complementarities arise endogenously between individuals' desired beliefs or ideological choices, resulting in two equilibria. A first, "American" equilibrium is characterized by a high prevalence of just-world beliefs among the population and relatively laissez-faire policies. The other, "European" equilibrium is characterized by more pessimism about the role of effort in economic outcomes and a more extensive welfare state. More generally, the paper develops a theory of collective beliefs and motivated cognitions, including those concerning "money" (consumption) and happiness, as well as religion.
    JEL: D31 D72 D80 E62
    Date: 2005–03
  11. By: Erlandsson, Ulf (Department of Economics, Lund University)
    Abstract: This paper researches small-sample properties of the Markov-switching model with time-varying transition probabilities. By means of simulation, it is shown that the likelihood ratio statistic is over-sized for sample sizes relevant in many empirical applications. The number of regime switches occurring in the sample rather than the total number of observations is central to the magnitude of the distortion, with other factors such a persistence in transition equation variables and the precision at which states are inferred being influential on size. In an application to possible predictors of switches to recessions in U.S. data, it is shown that critical values for the likelihood ratio statistic need to be adjusted far upwards to reflect true confidence levels.
    Keywords: regime switching; transition probability; small-sample
    JEL: C13 C32 E32
    Date: 2005–03–21
  12. By: Troy Davig; Eric M. Leeper
    Abstract: This paper estimates regime-switching rules for monetary policy and tax policy over the post-war period in the United States and imposes the estimated policy process on a calibrated dynamic stochastic general equilibrium model with nominal rigidities. Decision rules are locally unique and produce a stationary long-run rational expectations equilibrium in which (lump-sum) tax shocks always affect output and inflation. Tax non-neutralities in the model arise solely through the mechanism articulated by the fiscal theory of the price level. The paper quantifies that mechanism and finds it to be important in U.S. data, reconciling a popular class of monetary models with the evidence that tax shocks have substantial impacts. Because long-run policy behavior determines existence and uniqueness of equilibrium, in a regime-switching environment more accurate qualitative inferences can be gleaned from full-sample information than by conditioning on policy regime.
    JEL: E1 E5 E6
    Date: 2005–03
  13. By: Antonio Acconcia (Università di Napoli Federico II and CSEF); Saverio Simoneli (Università di Napoli Federico II and ECARES)
    Abstract: We use data for the US manufacturing sectors to revisit recent explanations of aggregate fluctuations in labor productivity and employment. The two main findings are: (a) the common working hypothesis that a single source of shocks is responsible for the long-run persistence of labor productivity is difficult to reconcile with the behavior of this variable across sectors; (b) the near zero correlation between the aggregate productivity and employment growth rates can be explained as the outcome of strong positive and negative correlations within, respectively, the durable and non-durable goods sectors. Within the durable goods sector, investment specific innovations have positive effects on both labor productivity and hours worked at short- as well as long-run horizons. The effect on labor productivity, however, is not detected with aggregate data.
    Keywords: Technology shock, Dynamic Factor Model, Long-Run Restrictions, Sectors
    JEL: C10 E32 O41
    Date: 2005–04–01
  14. By: Istvan Konya (Department of Economics, Magyar Nemzeti Bank); Hiroshi Ohashi (Faculty of Economics, University of Tokyo)
    Abstract: The paper analyzes product-level consumption patterns among countries in the OECD in the period from 1985 to 1999. Estimation results find robust evidence of strong convergence in cross-country consumption patterns. The paper also finds a relationship between openness and the cross-country consumption pattern.
    Date: 2005–03
  15. By: Claude B. Erb; Campbell R. Harvey
    Abstract: Historically, commodity futures have had excess returns similar to those of equities. But what should we expect in the future? The usual risk factors are unable to explain the time-series variation in excess returns. In addition, our evidence suggests that commodity futures are an inconsistent, if not tenuous, hedge against unexpected inflation. Further, the historically high average returns to a commodity futures portfolio are largely driven by the choice of weighting schemes. Indeed, an equally weighted long-only portfolio of commodity futures returns has approximately a zero excess return over the past 25 years. Our portfolio analysis suggests that the a long-only strategic allocation to commodities as a general asset class is a bet on the future term structure of commodity prices, in general, and on specific portfolio weighting schemes, in particular. In contrast, we provide evidence that there are distinct benefits to an asset allocation overlay that tactically allocates using commodity futures exposures. We examine three trading strategies that use both momentum and the term structure of futures prices. We find that the tactical strategies provide higher average returns and lower risk than a long-only commodity futures exposure.
    JEL: G11 G12 G13 E44
    Date: 2005–03
  16. By: R. Anton Braun (Faculty of Economics, University of Tokyo); Daisuke Ikeda (Bank of Japan); Douglas H. Joines (Marshall School of Business, University of Southern California)
    Abstract: This paper quantifies the role of alternative shocks in accounting for the recent declines in Japanese saving rates and interest rates and provides some projections about their future course. We consider four distinct sources of variation in saving rates and real interest rates: changes in fertility rates, changes in survival rates, changes in technology and changes in uninsurable labor income risk. The emprical relevance of these factors is explored using a computable dynamic OLG model. We find that the combined effects of demographics and slower total factor productivity growth successfully explain both the levels and the magnitudes of the declines in the saving rate and the after-tax real interest rate during the 1990s. Model simulations indicate that the Japanese savings puzzle is over.
    Date: 2005–03
  17. By: Ronald MacDonald (University of Glasgow); Paul Hallwood (University of Connecticut)
    Abstract: In this paper we consider the case for assigning tax revenues to Scotland, by which we mean that taxes levied on Scottish tax bases should be returned to the Scottish budget. The budget, however, would continue to be supplemented by transfers from the Westminster budget. This arrangement differs from the current situation whereby public spending is largely financed by a bloc grant from Westminster. Our suggestion falls short of full fiscal federalism for Scotland . meaning that Scotland had control over choice of tax base and of tax rates, and fiscal transfers from Westminster would be minimal. We use propositions drawn from the theory of fiscal federalism to argue for a smaller vertical imbalance between taxes retained in Scotland and public spending in Scotland. A closer matching of spending with taxes would better signal to beneficiaries the true costs of public spending in terms of taxes raised. It would also create more complete incentives for politicians to provide public goods and services in quantities and at qualities that voters are actually willing to pay for. Under the current bloc grant system, the marginal tax cost of spending does not enter into political agents. calculations as spending is out of a fixed total budget. Moreover, the Scottish electorate is hindered in signaling its desire for local public goods and services since the size of the total budget is determined by a rigid formula set by Westminster. At the present time we reject proposals for full fiscal federalism because in sharply reducing vertical imbalance in the Scottish budget, it is likely to worsen horizontal balance between Scotland and the other UK regions. Horizontal balance occurs where similarly situated regions enjoy the same per capita level of public goods and services at the same per capita tax cost. The complete removal of the bloc grant under full fiscal federalism would remove the mechanism that currently promotes horizontal equity in the UK. Variability in own-source tax revenues creates other problems with full fiscal federalism. Taxes derived from North Sea oil would constitute a large proportion of Scottish taxes, but these are known to be volatile in the face of variable oil prices and the pound-dollar exchange rate. At the present time variability in oil tax revenue is absorbed by Westminster. Scotland is insulated through the bloc grant. This risk sharing mechanism would be lost with full fiscal federalism. It is true that Scotland could turn to financial markets to tide itself over oil tax revenue downturns, but as a much smaller and less diversified financial entity than the UK as a whole it would probably have to borrow on less favorable terms than can Westminster. Scotland would have to bear this extra cost itself. Also, with full fiscal federalism it is difficult to see how the Scottish budget could be used as a macroeconomic stabilizer. At present, tax revenue downturns in Scotland - together with the steady bloc grant - are absorbed through an increase in vertical imbalance. This acts as an automatic stabilizer for the Scottish economy. No such mechanism would exist under full fiscal federalism. The borrowing alternative would still exist but on the less favorable terms - as with borrowing to finance oil tax shortfalls
    Keywords: Barnett formula, bloc grants, devolution, fiscal federalism, local public goods, oil taxes, regional economics, Scottish economy, soft budget constraint, tax assignment, UK economy, UK fiscal system.
    JEL: E62 H1 H61 H7 H87
    Date: 2004–07
  18. By: Nicholas Apergis (University of Macedonia, Greece); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: This paper examines whether U.S. stock-market wealth asymmetrically affects consumption. After identifying asymmetric behavior for consumption and stock market wealth, the results confirm that stock-market wealth asymmetrically affects real per capita consumption. Negative 'news' affects consumption more than positive 'news'.
    Keywords: Consumption; Stock market; Wealth effect; Asymmetry
    JEL: E21 E44
    Date: 2004–10
  19. By: Nicholas Apergis (University of Macedonia, Greece); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); Alexandros Panethimitakis (University of Athens); Athanassios Vamvakidis (International Monetary Fund)
    Abstract: This paper evaluates inflation targeting and assesses its merits by comparing alternative targets in a macroeconomic model. We use European aggregate data to evaluate the performance of alternative policy rules under alternative inflation targets in terms of output losses. We employ two major alternative policy rules, forward-looking and spontaneous adjustment, and three alternative inflation targets, zero percent, two percent, and four percent inflation rates. The simulation findings suggest that forward-looking rules contributed to macroeconomic stability and increase monetary policy credibility. The superiority of a positive inflation target, in terms of output losses, emerges for the aggregate data. The same methodology, when applied to individual countries, however, suggests that country-specific flexible inflation targeting can improve employment prospects in Europe.
    JEL: E31 E32 E37 E52
    Date: 2005–03
  20. By: Nicholas Apergis (University of Macedonia, Greece); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: This paper investigates whether stock market wealth affects real consumption asymmetrically through a threshold adjustment model. The empirical findings for the US show that wealth produces an asymmetric effect on real consumption, with negative 'news' affecting consumption less than positive 'news.' Thus, policy makers may want to focus more attention on preventing asset 'bubbles' than on responding to negative asset shocks.
    Keywords: Consumption; Stock market; Wealth effect; Asymmetry
    JEL: E21 E44
    Date: 2005–03
  21. By: David McKenzie y Ernesto Schargrodsky
    Abstract: Market research data are utilized to examine the use of changes in shopping behavior as a method of mitigating the effects of the 2002 Argentine economic crisis. Although the total quantity and real value of goods purchased fell during the crisis, consumers are found to be spending more days shopping. This increase in shopping frequency occurs through consumers purchasing lower-quality goods from a wider variety of shopping channels. This paper provides the first estimates of the magnitude of such effects during a recession, and suggests that this increase in shopping frequency can be an important coping mechanism for households. Shopping more often is shown to enable households to seek out lower prices and locate substitutes, allowing a given level of expenditure to buy more goods.
    Date: 2005
  22. By: Thuy-Duong To (School of Finance and Economics, University of Technology, Sydney)
    Abstract: The note shows that there is a non-negligible bias in using the futures rates as a proxy for the instantaneous forward rates in the estimation of forward rate models. It is therefore desirable to derive the evolution of observable rates, then use the distributional properties of this evolution to do the estimation. In a general case where these properties are hard to obtained, a filtering technique is required.
    Keywords: Heath-Jarrow-Morton; forward rate; futures; estimation bias
    JEL: C51 E43 G12 G13
    Date: 2004–12–01
  23. By: Marcus Hagedorn; Ashok Kaul; Tim Mennel
    Abstract: We ask whether offering a menu of unemployment insurance contracts is welfare improving in a heterogeneous population. We adopt a repeated moral-hazard framework as in Shavell/Weiss (1979) supplemented by unobserved heterogeneity about agents’ job opportunities. Our main theoretical contribution is an analytical characterization of the sets of jointly feasible entitlements that renders an efficient computation of these sets feasible. Our main economic result is that optimal contracts for ”bad” searchers tend to be upward-sloping due to an adverse-selection effect. This is in contrast to the well-known optimal decreasing time-profile of benefits in pure moral hazard environments that continue to be optimal for ”good” searchers in our model.
    Keywords: Unemployment Insurance, Recursive Contracts, Adverse Selection, Repeated Moral Hazard
    JEL: J65 J64 D82 C61 E61
  24. By: Roger Guesnerie
    Abstract: This paper contrasts the views of expectational coordination in a stylised economic model under two polar assumptions: Strategic Complementarities (StCo) dominate or on the contrary are dominated by Strategic Substitutabilities (StSu). Although in the StCo case, "uniqueness" often "buys" "eductive stability", the two issues are strikingly different in the second case. Furthermore if, in the first case, incomplete information often improves "expectational coordination", it may have the converse effect in the StSu case. It is finally argued that, in macroeconomic contexts, StSu often unambiguously dominate StCo, even in a large class of models with Keynesian features, and even in an aggregate framework that magnifies the StCo effects. The "remains" of StCo in general cases are discussed.
    Date: 2005
  25. By: Irina Peaucelle
    Date: 2005
  26. By: William Barnett (Department of Economics, The University of Kansas)
    Abstract: This entry on monetary aggregation will appear under that title in The New Palgrave Dictionary of Economics, 2nd edition, edited by Steven Durlauf and Lawrence Blume. The entry provides an up-to-date overview of state-of-the-art research on monetary aggregation and index number theory, from its origins in 1980 to the current time. At the end of this dictionary entry, emphasis is placed on ongoing research on extensions to risk and to multilateral aggregation within multicountry areas, such as the euro area. Research on monetary aggregation theory has been especially successful in solving the 'puzzles' that have appeared in the monetary economics literature over the past 35 years.
    Keywords: monetary aggregation, Divisia index, money demand, monetary policy, dictionary, Divisia monetary aggregates
    JEL: E41 G12 C43 C22
    Date: 2005–03
  27. By: Tomáš Holub
    Abstract: This paper discusses the role of foreign exchange interventions in the inflation-targeting regime, focusing on the Czech experience since 1998. It proposes criteria for assessing whether the interventions are consistent with the inflation targeting. While the CNB’s interventions in mid- 1998 and in 2002 pass these criteria easily, the judgement might be more uncertain concerning the interventions in early-1998 and in 1999/2000. It is also stressed that the literature on managed floating usually ignores the difficulty in defining clear procedural rules for the interventions. This contrasts with the procedures guiding the interest rate decisions under the inflation targeting regime, which may occasionally create tensions in the policy regime, as demonstrated by the Czech experience, too. The interventions’ effectiveness in the Czech Republic is also discussed. It seems that sometimes they might have had an immediate impact lasting up to 2 or 3 months, but no strategy can be identified that would work in all episodes. Moreover, even many of the “successful” interventions were not able to prevent quite prolonged periods of exchange rate overvaluation in 1998 and in 2002. It is concluded that the signalling role of foreign exchange interventions is more important than their “market-equilibrating effect”, implying a rather unstable transmission between the central bank actions and the market reactions. Finally, the paper analyses the sterilisation costs, which are shown to have been quite substantial in the Czech Republic. It is argued that the financial sustainability of the interventions is quite important for their credibility and effectiveness.
    Keywords: Exchange rate, foreign exchange interventions, inflation targeting, sterilisation.
    JEL: E42 E44 E52 E58 E65 F31
  28. By: David Navrátil; Viktor Kotlán
    Abstract: This paper asks to what extent the market prices in the future monetary policy decisions of the Czech National Bank (CNB), how this policy predictability has evolved over time, and whether the change in the central bank’s forecasting methodology in mid-2002 had any impact. Using a sample up to mid-2004, the results are threefold. First, three-quarters of the CNB’s decisions were in line with medium-term money market expectations. Notwithstanding this relatively high predictability of CNB policy, the average mistake in the expectations was biased upwards: over the entire IT period the market has priced in a higher repo rate than has actually turned out to be the case. Second, our analysis shows that the period in which forecasts with an active monetary policy (unconditional forecasts) have been used is characterized by smaller “surprises” of the money market. On the one hand, this may be connected with a change in the CNB’s communication of the forecast, including releases of verbal comments on the interest rate trajectory that is consistent with the outlook. On the other hand, it may reflect a different economic environment in the second stage of IT in the Czech Republic. Third, we analyze whether there is convergence or divergence between the central bank’s forecast-consistent interest rate trajectory and market forward rates. We show that in most cases market rates converged toward the CNB’s interest rate trajectory after the publication of the forecast.
    Keywords: Financial market reaction, inflation targeting, monetary policy predictability, term structure of interest rates.
    JEL: E43 E44 E52
  29. By: Martin Čihák
    Abstract: The note is a review of the literature on the quantitative methods used to assess the vulnerabilities of financial systems to risks. In particular, the author focuses on the role of system-wide stress testing. He summarizes the recent developments in the literature, highlighting topics relevant for the Czech case. He presents the key concepts relating to systemwide stress tests, overviews the stress tests performed by central banks and international financial institutions, and discusses conceptual issues relating to modeling of individual risk factors.
    Keywords: Financial soundness, macroprudential analysis, stress tests.
    JEL: G21 G28 E44
  30. By: Martin Čihák
    Abstract: The note discusses key issues involved in designing a suitable set of stress tests for the Czech banking system. The aim of the note is to propose stress tests that could be used by the Czech National Bank on a regular basis to assess the soundness of domestic banks, both for purposes of macroprudential surveillance and for banking supervision. The author suggests that the exercise be broadly based on the stress tests conducted during the 2001 IMF-World Bank Financial Sector Assessment Program (FSAP) mission to the Czech Republic. He summarizes the FSAP stress tests, and proposes a number of extensions and modifications. The key recommendations are presented in a table that covers also data requirements and a suggested timeframe for implementation. The note includes results of a replication of the Czech FSAP stress tests for mid-2003 data.
    Keywords: Banking system, stress tests.
    JEL: G21 G28 E44
  31. By: Alexis Derviz; Jiří Podpiera
    Abstract: In this paper we investigate the determinants of the movements in the long-term Standard & Poors and CAMELS bank ratings in the Czech Republic during the period when the three biggest banks, representing approximately 60% of the Czech banking sector’s total assets, were privatized (i.e., the time span 1998–2001). The same list of explanatory variables corresponding to the CAMELS rating inputs employed by the Czech National Bank’s banking sector regulators was examined for both ratings in order to select significant predictors among them. We employed an ordered response logit model to analyze the monthly long-run S&P rating and a panel data framework for the analysis of the quarterly CAMELS rating. The predictors for which we found significant explanatory power are: Capital Adequacy, Credit Spread, the ratio of Total Loans to Total Assets, and the Total Asset Value at Risk. Models based on these predictors exhibited a predictive accuracy of 70%. Additionally, we found that the verified variables satisfactorily predict the S&P rating one month ahead.
    Keywords: Bank rating, CAMELS, ordered logit model, panel data analysis.
    JEL: C53 E58 G21 G33
  32. By: Ian Babetskii
    Abstract: There are two opposite points of view on the link between economic integration and business cycle synchronization. De Grauwe (1997) classifies these competing views as “The European Commission View” and “The Krugman View”. According to the European Commission (1990), closer integration leads to less frequent asymmetric shocks and to more synchronized business cycles between countries. On the other hand, for Krugman (1993) closer integration implies higher specialization and, thus, higher risks of idiosyncratic shocks. Drawing on the evidence from a group of transition countries which have experienced a notable increase in trade openness and economic integration with the European Union during the past decade, this paper tries to determine whose argument is supported by the data. This is done by confronting estimated time-varying coefficients of supply and demand shock asymmetry with indicators of trade intensity and exchange rates. We find that (i) an increase in trade intensity leads to higher symmetry of demand shocks; the effect of integration on supply shock asymmetry varies from country to country; (ii) a decrease in exchange rate volatility has a positive effect on demand shock convergence. The results for demand shocks can be interpreted in favor of “The European Commission View”, also known as the endogeneity argument by Frankel and Rose (1998) in the OCA criteria discussion, according to which trade links reduce asymmetries between countries. Overall, our results support Kenen’s (2001) argument that the impact of trade integration on shock asymmetry depends on the type of shock.
    Keywords: EU enlargement, business cycle, trade, OCA (optimal currency area)
    JEL: E32 F30 F42
  33. By: Anca Pruteanu
    Abstract: With this work, we aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996–2001, we study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market’s supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. We find that changes in monetary policy alter the growth rate of loans with considerably stronger magnitude in the period 1999–2001 than in the period 1996–1998. From the analysis intended to capture the characteristics of the supply of loans, we conclude that the lending channel was operative in the period 1996–1998: we find cross-sectional differences in the lending reactions to monetary policy shocks due to degree of capitalization and liquidity. For the subsequent period 1999– 2001, the results also show distributive effects of monetary policy due to bank size and a bank’s proportion of classified loans. In the context of steadily decreasing interest rates, this bolsters the supposition of credit rationing and hence that of an operative broad credit channel. At the same time, we find evidence of linear relationships between bank characteristics and the growth rate of loans, and again these relationships change between the two time periods. This bodes well with the changes in the structure and attitude towards lending of the Czech commercial banks.
    Keywords: Bank lending channel, broad credit channel, credit rationing, monetary transmission mechanism.
    JEL: E52 E51 E58 G21
  34. By: Jiří Podpiera
    Abstract: In this paper we propose an alternative method for deriving the business cycle. We interpret the varying inflationary responses to a constant demand shock in a partial equilibrium model. An above-average inflationary response indicates a boom phase and a below-average response shows an economic slowdown. Our model uses data for prices and household budget shares which are not subject to revisions and are consistent with the inflation measure. Hence, it mitigates the common drawbacks of usually applied techniques, such as real-time data mismeasurement or end-point bias of univariate filters. It follows that the results are altered neither by GDP data revisions, labor share determination and NAIRU estimation and total productivity smoothing, nor by the end-point bias of data filtering. The proposed method is thus preferred to other complementary methods such as GDP series filtering or the production function approach in showing truly the inflation environment. It is applied to the Czech quarterly data during 1994- 2003 and compared to other available business cycle estimates for the Czech economy. Comparing our business cycle estimation method with the production function method, used by the Economic Intelligence Unit and the Czech Ministry of Finance, and the Kalman filter, used by the Czech National Bank, we found the highest correlation between our measure and the Economic Intelligence Unit’s indicator.
    Keywords: Business cycle, inflation environment, simultaneous model.
    JEL: E31 E32 E37 C30
  35. By: Vladislav Flek; Kamil Galuščák; Jaromír Gottvald; Jaromír Hurník; Štěpán Jurajda; David Navrátil; Petr Mareš; Daniel Münich; Tomáš Sirovátka; Jiří Večerník
    Abstract: In this volume we investigate the macroeconomic aspects of labour market behaviour and its microfoundations. In the first part we deal with aggregate labour market trends and issues relevant to macroeconomic policy. The second part analyses in more detail labour flexibility, namely labour market flows, long-term unemployment and labour force deprivation. The third part addresses wage flexibility and relative wages, with special attention paid to regional unemployment elasticity of wages and returns to education. Worsening labour market performance can be seen especially in a rising NAIRU, declining labour mobility, labour deprivation due to long-term unemployment, skill mismatch and emerging signs of inflexibility in wage structures. Our conclusions are of use for both macroeconomic and labour market policies, signalling, among other messages, limitations on potential output growth stemming from deteriorated labour market performance and a need for institutional and structural changes rather than counter-cyclical policies to solve the unemployment problem in the Czech Republic.
    Keywords: Employment, labour flows, labour force marginalisation, NAIRU, returns to education, unemployment, wage curve, wage differentials, wage inflation.
    JEL: E24 J21 J30 J31 J44 J61 J62 J63 J64 J65
    Date: 2004–12
  36. By: Duffy, John; Xiao, Wei
    Abstract: We examine the expectational stability (E—stability) of rational expectations equilibrium under optimal interest rate rules in the context of the standard, “New Keynesian” model of the monetary transmission mechanism. We focus on the case where the monetary authority adds interest rate stabilization to its other objectives of inflation and output stabilization. We consider both the case where the monetary authority lacks a commitment technology and as well as the case of full commitment. We show that for both cases, optimal interest rate rules yield rational expectations equilibria that are E-stable for a wide range of empirically plausible parameter values. This finding stands in contrast to the findings of Evans and Honkapohja (2002, 2003ab) for optimal monetary policy rules in environments where interest rate stabilization is not part of the central bank’s objective function.
    Keywords: Expectational stability (E-stability), Rational expectations equilibrium, Monetary transmission mechanism
    Date: 2004–06
  37. By: Daal, Elton; Naka, Atsuyuki; Sanchez, Benito
    Abstract: This study examines the relationship between inflation and inflation uncertainty for both developed and emerging countries using the asymmetric power GARCH model. We find new evidence that suggests that positive inflationary shocks have stronger impacts on inflation uncertainty for mainly Latin American countries. We also find that inflation causes inflation uncertainty for most countries but the evidence for causality of the opposite direction is mixed.
    Keywords: Inflation, Emerging nations, Latin America
    JEL: C22 E31
    Date: 2004
  38. By: Stephane Dees; Filippo di Mauro; M. Hashem Pesaran; L. Vanessa Smith
    Abstract: This paper presents a global model linking individual country vector error-correcting models in which the domestic variables are related to the country-specific variables as an approximate solution to a global common factor model. This global VAR is estimated for 26 countries, the euro area being treated as a single economy. This paper proposes two important extensions of previous research (see Pesaran, Schuermann and Weiner, 2004). First, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. Also using average pair-wise cross-section error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international comovements of business cycles. Second, in addition to generalised impulse response functions, we propose an identification scheme to derive structural impulse responses. We focus on identification of shocks to the US economy, particularly the monetary policy shocks, and consider the time profiles of their effects on the euro area. To this end we include the US model as the first country model and consider alternative orderings of the US variables. Further to the US monetary policy shock, we also consider oil price, US equity and US real output shocks.
    Keywords: Global VAR (GVAR), Global interdependencies, global macroeconomic modeling, impulse responses
    JEL: C32 E17 F47
    Date: 2004–12
  39. By: Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England); Peter Howells (School of Economics, University of the West of England)
    Abstract: In the last fifteen years or so the conduct of monetary policy in developed economies has converged in a number of ways which include an increasing emphasis on ‘openness’ and ‘transparency’ in policy-making. There is a widespread belief that transparency in the conduct of UK monetary policy has increased substantially since, and because of, the introduction of inflation targeting and associated institutional reforms in 1992. A large measure of this belief is based upon studies which reveal the increased ability of money market agents to anticipate accurately the change in official rates. In this paper, we have updated one of those studies and show that the findings are largely unaffected by events of the last five years. More interestingly, perhaps, we have floated the possibility that this improved anticipation may be the result of developments other than institutional reforms. For example, it is notable that the Bank of England has made fewer and smaller interest changes since 1992. It is also widely believed (and the behaviour of many macro variables suggests this) that economies have generally become more stable since 1992. If this is true, then macroeconomic forecasts in general should have improved and the increased anticipation would be, partly at least, due to this rather than institutional changes. We test both theses hypotheses with negative results.
    JEL: E58
    Date: 2004–05
  40. By: J Paul Dunne (School of Economics, University of the West of England); Ron Smith (Birkbeck College); Dirk Willenbockel (Middlesex University Business School)
    Abstract: This paper reviews some of the theoretical and econometric issues involved in estimating growth models that include military spending. While the mainstream growth literature has not found military expenditure to be a significant determinant of growth, much of the defence economics literature has found significant effects. The paper argues that this is largely the product of the particular specification, the Feder- Ram model, that has been used in the defence economics literature but not in the mainstream literature. The paper critically evaluates this model, detailing its problems and limitations and suggests that it should be avoided. It also critically evaluates two alternative theoretical approaches, the Augmented Solow and the Barro models, suggesting that they provide a more promising avenue for future research. It concludes with some general comments about modelling the links between military expenditure and growth.
    Keywords: Military expenditure; models; growth
    Date: 2004–12

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