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on Macroeconomics |
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Issue of 2005‒10‒04
205 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Günter Coenen (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates the performance of optimised interest rate rules when there is uncertainty about a key determinant of the monetary transmission mechanism, namely the degree of persistence characterising the inflation process. The paper focuses on the euro area and utilises two variants of an estimated small-scale macroeconomic model featuring distinct types of staggered contracts specifications which induce quite different degrees of inflation persistence. The paper shows that a cautious monetary policy-maker is welladvised to design and implement interest rate policies under the assumption that inflation persistence is high when uncertainty about the prevailing degree of inflation persistence is pervasive. |
| Keywords: | Macroeconomic modelling; staggered contracts; inflation persistence; monetary policy rules; robustness; euro area. |
| JEL: | E31 E52 E58 E61 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030290&r=mac |
| By: | Ignazio Angeloni (Dipartimento del Tesoro, Mnistero dell'Economia e delle Finanze.); Michael Ehrmann (Directorate General Research, European Central Bank, Kaiserstrasse, 29, 60311, Frankfurt am Main, Germany.) |
| Abstract: | We build a stylised 12-country model of the euro area and use it to analyse why differences in national inflation and growth rates arise within the European monetary union. We find that inflation persistence is a key potential explanatory factor. Other more frequently mentioned reasons, like country-specific shocks or differences in the monetary transmission mechanism across countries, count less. We also look at how a monetary policy geared to area-wide average inflation affects these differentials. Our model suggests that area-wide inflation stability and low inflation differentials are complementary. |
| Keywords: | Currency union; inflation differentials; inflation persistence; euro area. |
| JEL: | E31 E32 E52 F42 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040388&r=mac |
| By: | Florin O. Bilbiie (Nuffield College, University of Oxford, New Road, Oxford, OX1 1NF, United Kingdom.) |
| Abstract: | When enough agents do not participate in asset markets, the slope of the aggregate demand curve is reversed. Monetary policy should be passive, to ensure equilibrium determinacy and to minimize variations in output and inflation. This paper presents evidence that asset markets participation in the US was limited over the Great Inflation period and the slope of the IS curve had the ’wrong’ sign. Our results may help explain the ’Great Inflation’ and give optimism for FED policy. If the economy was characterized by a relatively higher degree of financial frictions over that period: (i) policy implied a determinate equilibrium and ruled out sunspot fluctuations; (ii) policy was closer to optimal than conventional wisdom dictates; (iii) responses and variability of macroeconomic variables conditional upon fundamental shocks are close to their estimated counterparts for a wide range of reasonable parameterizations. Notably, ’cost-push’ shocks are enough to generate a Great Inflation. |
| Keywords: | The Great Inflation; monetary policy rules; Taylor Principle; real (in)determinacy; limited asset markets participation. |
| JEL: | E31 E32 E44 E58 E65 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040408&r=mac |
| By: | Andreas Schabert (University of Amsterdam, Department of Economics, Roeterstraat 11, 1018 WB Amsterdam,The Netherlands) |
| Abstract: | In this paper, we analyze the relation between interest rate targets and money supply in a (bubble-free) rational expectations equilibrium of a standard cash-in-advance model. We examine contingent monetary injections aimed to implement interest rate sequences that satisfy interest rate target rules. An interest rate target with a positive inflation feedback in general corresponds to money growth rates rising with inflation. When prices are not completely flexible, this implies that a non-destabilizing money supply cannot implement a forward-looking and active interest rate rule. This principle also applies for an alternative model version with an interest elastic money demand. The implementation of a Taylor-rule then requires a money supply that leads to explosive or oscillatory equilibrium sequences. In contrast, an inertial interest rate target can be implemented by a non-destabilizing money supply, even if the inflation feedback exceeds one, which is often found in interest rate rule regressions. |
| Keywords: | Interest rate rules; contingent money supply; macroeconomic stability; policy equivalence; interest rate inertia. |
| JEL: | E52 E41 E32 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050483&r=mac |
| By: | Antonella Trigari (IGIER, Bocconi University, Italy) |
| Abstract: | In order to explain the joint fluctuations of output, inflation and the labor market, this paper first develops a general equilibrium model that integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. Then, it estimates a set of structural parameters characterizing the dynamics of the labor market using an application of the minimum distance estimation. The estimated model can explain the cyclical behavior of employment, hours per worker, job creation and job destruction conditional on a shock to monetary policy. Moreover, allowing for variation of the labor input at the extensive margin leads to a significantly lower elasticity of marginal costs with respect to output. This helps to explain the sluggishness of inflation and the persistence of output after a monetary policy shock. The ability of the model to account for the joint dynamics of output and inflation rely on its ability to explain the dynamics in the labor market. |
| Keywords: | Business Cycles, Search and Matching Models, Monetary Policy, Inflation. |
| JEL: | E32 J41 J64 E52 E31 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040304&r=mac |
| By: | Liam Graham (Corresponding author : Department of Economics, University of Warwick, Coventry, CV4 7AL, UK.); Dennis J. Snower (Department of Economics, Birkbeck College, University of London, 7 Gresse Street, London W1P 2LL, UK.) |
| Abstract: | We analyse the effects of money growth within a standard New Keynesian framework and show that the interaction between staggered nominal contracts and money growth leads to a long-run trade-off between output and money growth. We explore the microeconomic mechanisms that lead to this trade-off, and show that it remains even when the contract length is endogenised. |
| Keywords: | Inflation; unemployment; Phillips curve; nominal inertia; monetary policy; dynamic general equilibrium. |
| JEL: | E20 E40 E50 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040412&r=mac |
| By: | Juan de Dios Tena; Francesco Giovannoni |
| Abstract: | This paper studies the effect of market structure and macroeconomic uncertainty on the transmission of monetary policy. We motivate our analysis with a simple model which predicts that: 1) investment and production in more concentrated sectors are more affected by demand changes and 2) high uncertainty makes investment and production more sensitive to demand changes. The empirical analysis estimates the effect of monetary shocks on sectoral output for different sectors in the US using different structural vector autoregressive VAR approaches. The results are largely consistent with the proposed theory. |
| Keywords: | Market concentration, macroeconomic uncertainty, monetary policy transmission, vector autoregressive models. |
| JEL: | E22 E32 E52 D43 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:05/576&r=mac |
| By: | Annick Bruggeman (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium); Gonzalo Camba-Méndez (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany); Björn Fischer (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany); João Sousa (Bank of Portugal, Rua Francisco Ribeiro 2, P-1100-150, Lisboa, Portugal) |
| Abstract: | The quantity theory of money predicts a positive relationship between monetary growth and inflation over long-run horizons. However, in the short-run, transitory shocks to either money or inflation can obscure the inflationary signal stemming from money. The spectral analysis of time series provides filtering tools for removing fluctuations associated with certain frequency movements. However, use of these techniques in isolation is often criticised as being an oversimplistic statistical exercise potentially void of economic content. The objective of this paper is to develop ‘structural’ filtering techniques that rely on the use of spectral analysis in combination with a structural economic model with well identified shocks. A ‘money augmented’ Phillips curve that links inflation to money tightness and demand shocks of medium to long-term persistence is presented. It is shown that medium to long-term movements in inflation are mostly associated with the estimated monetary indicators. |
| Keywords: | Inflation; Money. |
| JEL: | E31 E50 C32 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050470&r=mac |
| By: | Barbara Annicchiarico (Ceis, Facoltà di Economia, Università di Roma “Tor Vergata”,Via Columbia 2, 00133 Rome, Italy.) |
| Abstract: | This paper investigates the inflationary effects of fiscal policy in an optimising general equilibrium monetary model with capital accumulation, flexible prices and wealth effects. The model is calibrated to Euro Area quarterly data. Simulation results show that government deficits, high debt level and slow fiscal adjustment adversely affect price stability in the presence of an independent monetary authority adopting a monetary targeting regime. The mechanism through which fiscal policy affects the dynamics of the price level presents monetarist properties, since the price level is determined in the monetary market. The effects produced by fiscal expansions on price dynamics are due to the behaviour of consumers, sharing the burden of fiscal adjustment with future generations. Fiscal variables are shown to influence the consumption plan of individuals and the demand for real money balances, thus affecting the equilibrium conditions in the money market where the price level is determined. |
| Keywords: | Price Stability; Fiscal Policy and Government Debt. |
| JEL: | E31 E62 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030285&r=mac |
| By: | Klaus Adam (European Central Bank, DG Research); Roberto M. Billi (Center for Financial Studies) |
| Abstract: | We determine optimal discretionary monetary policy in a New-Keynesian model when nominal interest rates are bounded below by zero. Nominal interest rates should be lowered faster in response to adverse shocks than in the case without bound. Such ‘preemptive easing’ is optimal because expectations of a possibly binding bound in the future amplify the effects of adverse shocks. Calibrating the model to the U.S. economy we find the easing effect to be quantitatively important. Moreover, the lower bound binds rather frequently and imposes significant welfare losses. Losses increase further when inflation is partly determined by lagged inflation in the Phillips curve. Targeting positive inflation rates reduces the frequency of a binding lower bound, but tends to reduce welfare compared to a target rate of zero. The welfare gains from policy commitment, however, appear significant and are much larger than in the case without lower bound. |
| Keywords: | nonlinear policy; zero lower bound; liquidity trap. |
| JEL: | C63 E31 E52 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040380&r=mac |
| By: | Klaus Adam (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | This paper presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. With rational inflation expectations, the economy does not generate persistent deviations of output and inflation in response to a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns. Such behavior emerges because subjects’ inflation expectations fail to be captured by rational expectations functions. Instead, a Restricted Perceptions Equilibrium (RPE), which assumes that agents use optimal but ’simple’ forecast functions, describes subjects’ inflation expectations surprisingly well and explains the observed behavior of output and inflation. |
| Keywords: | Experiments; Output and Inflation Dynamics; Restricted Perceptions Equilibrium; Rational Expectations. |
| JEL: | E32 E37 C91 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050492&r=mac |
| By: | Gert Peersman (Department of Financial economics, Ghent University); Roland Straub (European University Institute) |
| Abstract: | This paper provides evidence for the impact of technology, labor supply, monetary policy and aggregate spending shocks on hours worked in the Euro area. The evidence is based on a vector autoregression identified using sign restrictions that are consistent with both sticky price and real business cycle models. In contrast to most of the existing literature for the US, evidence of a positive response of hours to technology shocks is found, which is consistent with the conventional real business cycle interpretation and at odds with sticky price models. In addition, an important role for technology shocks in explaining business cycle fluctuations is found. |
| Keywords: | Technology shocks; Real business cycle models; Sticky price models; Vector autoregressions. |
| JEL: | E32 E24 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040373&r=mac |
| By: | Tomasz Lyziak (National Bank of Poland, Bureau of Macroeconomic Research, ul. ?wi?tokrzyska 11/21, 00-919 Warsaw, Poland.) |
| Abstract: | Inflation expectations constitute a subject of particular contemporary interest to central banks, especially those pursuing a monetary policy based on a strategy of direct inflation targeting. Macroeconomic theory indicates that the transmission of monetary policy impulses and their impact on the real and nominal sectors of the economy bear a close relationship to properties of inflation expectations. Qualitative data on inflation expectations, as obtained from surveys, can be quantified with the use of probability or regression methods. This paper presents the results of two versions of the probability method, implemented in order to estimate numerical measures of Polish consumer inflation expectations, based on the monthly Ipsos-Demoskop survey. In addition, the unbiasedness and macroeconomic efficiency of Polish consumer inflation expectations are tested, as are the way in which these are formed. The pattern of responses to the survey question and quantified measures of Polish consumer inflation expectations are also compared with the respective findings for the euro area. |
| Keywords: | Inflation expectations; Surveys; Rationality; Poland; Euro Area. |
| JEL: | C42 D12 D84 E58 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030287&r=mac |
| By: | Günter Coenen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany.); Volker Wieland (Professur für Geldtheorie und -politik, Johann-Wolfgang-Goethe Universität, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable. |
| Keywords: | monetary policy rules; zero-interest-rate bound; liquidity trap; nominal rigidities; exchange rates. |
| JEL: | E31 E52 E58 E61 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040350&r=mac |
| By: | Susan Athey (Stanford University and National Bureau of Economic Research,Stanford University, Stanford, CA 94305-6072, USA.); Andrew Atkeson (University of California, Los Angeles,CA, USA. Federal Reserve Bank of Minneapolis, and National Bureau of Economic Research.); Patrick J. Kehoe (Federal Reserve Bank of Minneapolis, University of Minnesota, and National Bureau of Economic Research) |
| Abstract: | How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society’s desire to give the monetary authority discretion to react to its private information against society’s need to guard against the time inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. Although this dynamic mechanism design problem seems complex, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate. The more severe the time inconsistency problem, the more tightly the cap constrains policy and the smaller is the degree of discretion. As this problem becomes sufficiently severe, the optimal degree of discretion is none. |
| Keywords: | Rules vs. discretion; time inconsistency; optimal monetary policy; inflation targets; inflation caps. |
| JEL: | E5 E6 E52 E58 E61 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040338&r=mac |
| By: | Jordi Galí (CREI and Universitat Pompeu Fabra, Spain.); J. David López-Salido (Banco de España, Alcala 50, E-28014 Madrid, Spain.); Javier Vallés (Banco de España, Alcala 50, E-28014 Madrid, Spain.) |
| Abstract: | Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending. |
| Keywords: | rule-of-thumb consumers; fiscal multiplier; government spending; Taylor rules. |
| JEL: | E32 E62 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040339&r=mac |
| By: | Giovanni Lombardo (Deutsche Bundesbank, Postfach 100602, D-60006 Frankfurt am Main, Germany.); Alan Sutherland (Department of Economics, University of St Andrews, St Andrews, Fife, KY16 9AL, UK.) |
| Abstract: | A two-country sticky-price model is used to analyse the interactions between fiscal and monetary policy. The role of an ‘activist’ fiscal policy as a stabilisation tool is considered and a measure of the welfare gains from international fiscal policy cooperation is derived. It is found that welfare gains from fiscal cooperation do exist provided monetary policy is set cooperatively. There are also welfare gains from fiscal policy cooperation in a monetary union. However, it is found that a ‘non-activist’ fiscal policy can be better than non-cooperative fiscal policy when the international correlation of shocks is strongly negative. And non-cooperative fiscal policy can be better than cooperative fiscal policy if monetary policy is not set cooperatively. |
| Keywords: | Fiscal and monetary policy; policy coordination. |
| JEL: | E52 E58 F42 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030289&r=mac |
| By: | Paolo Surico (Istituto di Economia Politica, Università Bocconi,Via Gobbi 5, 20136 Milan, Italy.) |
| Abstract: | This paper offers an alternative explanation for the behavior of postwar US inflation by measuring a novel source of monetary policy time-inconsistency due to Cukierman (2002). In the presence of asymmetric preferences, the monetary authorities end up generating a systematic inflation bias through the private sector expectations of a larger policy response in recessions than in booms. Reduced-form estimates of US monetary policy rules indicate that while the inflation target declines from the pre- to the post-Volcker regime, the average inflation bias, which is about one percent before 1979, tends to disappear over the last two decades. This result can be rationalized in terms of the preference on output stabilization, which is found to be large and asymmetric in the former but not in the latter period. |
| Keywords: | Asymmetric preferences; time-inconsistency; average inflation bias; US inflation. |
| JEL: | E52 E58 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030291&r=mac |
| By: | Rangan Gupta (University of Connecticut and University of Pretoria) |
| Abstract: | The paper develops a short-run model of a small open financially repressed economy characterized by unorganized money markets, capital good imports, capital mobility, wage indexation, and flexible exchange rates. The analysis shows that financial liberalization, in the form of an increased rate of interest on deposits and tight monetary policy, unambiguously and unconditionally causes deflation. Moreover, the results do not depend on the degree of capital mobility and structure of wage setting. The paper recommends that a small open developing economy should deregulate interest rates and tighten monetary policy if reducing inflation is a priority. The pre-requisite for such a policy, however, requires the establishment of a flexible exchange rate regime. |
| Keywords: | Financial Liberalization; Inflation; Small open economy. |
| JEL: | E31 E44 E52 F41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-39&r=mac |
| By: | Klaus Adam (European Central Bank, DG Research); Roberto M. Billi (Center for Financial Studies) |
| Abstract: | We determine optimal monetary policy under commitment in a forwardlooking New Keynesian model when nominal interest rates are bounded below by zero. The lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear. A calibration to the U.S. economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound. Rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached. While the empirical magnitude of U.S. mark-up shocks seems too small to entail zero nominal interest rates, shocks affecting the natural real interest rate plausibly lead to a binding lower bound. Under optimal policy, however, this occurs quite infrequently and does not require targeting a positive average rate of inflation. |
| Keywords: | nonlinear optimal policy, zero interest rate bound, commitment, liquidity trap, New Keynesian. |
| JEL: | C63 E31 E52 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040377&r=mac |
| By: | Günter Coenen (Corresponding author: Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Andrew T. Levin (Federal Reserve Board,Washington, DC 20551 USA) |
| Abstract: | We formulate a generalized price-setting framework that incorporates staggered contracts of multiple durations and that enables us to directly identify the influences of nominal vs. real rigidities. Using German macroeconomic data over the period 1975Q1 through 1998Q4 to estimate this framework, we find that the data is well-characterized by a truncated Calvostyle distribution with an average duration of about two quarters. We also find that new contracts exhibit very low sensitivity to marginal cost, corresponding to a relatively high degree of real rigidity. Finally, our results indicate that backward-looking behavior is not needed to explain the aggregate data, at least in an environment with a stable monetary policy regime and a transparent and credible inflation objective. |
| Keywords: | Overlapping contracts; nominal rigidity; real rigidity; inflation persistence; simulation-based indirect inference. |
| JEL: | E31 E52 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040418&r=mac |
| By: | João Sousa (Banco de Portugal,Av. Almirante Reis 71, P-1150-012 Lisbon, Portugal.); Andrea Zaghini (European Central Bank, Directorate Monetary Policy, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyses the international transmission of monetary shocks with a special focus on the effects of foreign money ("global liquidity") on the euro area. We estimate structural VAR models for the euro area and the global economy including a global liquidity aggregate. The impulse responses obtained show that a positive shock to extra-euro area liquidity leads to permanent increases in the euro area M3 aggregate and the price level, a temporary rise in real output and a temporary appreciation of the real effective exchange rate of the euro. Moreover, we find that innovations in global liquidity play an important role in explaining price and output fluctuations in the euro area and in the global economy. |
| Keywords: | Monetary policy; Structural VAR; International spillovers. |
| JEL: | E52 F01 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040309&r=mac |
| By: | Federico Ravenna (Economics Department, 401 E2 Building, University of California, Santa Cruz, CA 95064, US) |
| Abstract: | This paper shows that the credibility gain from permanently committing to a fixed exchange rate by joining the European Monetary Union can outweigh the loss from giving up independent monetary policy. When the central bank enjoys only limited credibility a pegged exchange rate regime yields a lower loss compared to an inflation targeting policy, even if this policy ranking would be reversed in a fullcredibility environment. There exists an initial stock of credibility that must be achieved for a policy-maker to adopt inflation targeting over a strict exchange rate targeting regime. Full credibility is not a precondition, but exposure to foreign and financial shocks and high steady state inflation make joining the EMU relatively more attractive for a given level of credibility. The theoretical results are consistent with empirical evidence we provide on the relationship between credibility and monetary regimes using a Bank of England survey of 81 central banks. |
| Keywords: | Inflation targeting; Credibility; Open Economy; Exchange Rate. Regimes, Monetary Policy |
| JEL: | E52 E31 F02 F41 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050516&r=mac |
| By: | Lars E. O. Svensson (Department of Economics, Fischer Hall, Princeton University, Princeton, NJ 08544-1021, United States) |
| Abstract: | “Forecast targeting,” forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking and one backward looking. A practical finite-horizon approximation is used. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complex function of all inputs in the monetary-policy decision process, including the central bank’s judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit. |
| Keywords: | Inflation targeting; optimal monetary policy; forecasts. |
| JEL: | E42 E52 E58 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050476&r=mac |
| By: | Claudio Morana (University of Piemonte Orientale, Faculty of Economics, Via Perrone 18, I-28100, Novara, Italy) |
| Abstract: | In the paper we propose a new methodological approach to core inflation estimation,based on a frequency domain principal components estimator, suited to estimate systems of fractionally cointegrated processes. The proposed core inflation measure is the scaled common persistent factor in inflation and excess nominal money growth and bears the interpretation of monetary inflation. The proposed measure is characterised by all the properties that an “ideal” core inflation process should show, providing also a superior forecasting performance relative to other available measures. |
| Keywords: | Long memory; Common factors; Fractional cointegration; Markov switching; Core inflation; Euro area. |
| JEL: | C22 E31 E52 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040305&r=mac |
| By: | Lawrence Christiano (Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, Illinois 60208, USA); Roberto Motto (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Massimo Rostagno (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | We evaluate the Friedman-Schwartz hypothesis that a more accommodative monetary policy could have greatly reduced the severity of the Great Depression. To do this, we first estimate a dynamic, general equilibrium model using data from the 1920s and 1930s. Although the model includes eight shocks, the story it tells about the Great Depression turns out to be a simple and familiar one. The contraction phase was primarily a consequence of a shock that induced a shift away from privately intermediated liabilities, such as demand deposits and liabilities that resemble equity, and towards currency. The slowness of the recovery from the Depression was due to a shock that increased the market power of workers. We identify a monetary base rule which responds only to the money demand shocks in the model. We solve the model with this counterfactual monetary policy rule. We then simulate the dynamic response of this model to all the estimated shocks. Based on the model analysis, we conclude that if the counterfactual policy rule had been in place in the 1930s, the Great Depression would have been relatively mild. |
| Keywords: | General equilibrium; Lower bound; Deflation; Shocks |
| JEL: | E31 E40 E51 E52 E58 N12 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040326&r=mac |
| By: | Robert-Paul Berben (Monetary and Economic Policy Department, Bank of the Netherlands,Westeinde 1, P.O. Box 98, 1017 ZN Amsterdam, NL.); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Julian Morgan (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Theodoros Mitrakos (Bank of Greece, 21 E.Venizelos Avenue, 10250 Athens, Greece.); Nikolaos G. Zonzilos (Bank of Greece, 21 E.Venizelos Avenue, 10250 Athens, Greece.) |
| Abstract: | This paper analyses the response of inflation in the euro area to five macroeconomic shocks through the use of results derived from Eurosystem large-scale macroeconomic models. The main finding is that only a fiscal shock, and to a lesser extent a TFP shock, generate marked inflation persistence. In contrast, an indirect tax and an oil price shock appear much less persistent and a social security shock generates less inflation persistence in the majority of the countries (although some weak persistence was observed at the euro area level). The paper also considers evidence on the sources of persistence, which indicates that it is crucially affected by the responsiveness of wages to employment, by the sluggishness in the adjustments of the demand components, and by the speed of adjustment of employment to output and wage changes. |
| Keywords: | Inflation persistence; large-scale macroeconomic models; impulse response function. |
| JEL: | C53 E31 E52 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050521&r=mac |
| By: | Andrew T. Levin (Federal Reserve Board of Governors); Fabio M. Natalucci (Federal Reserve Board of Governors); Jeremy M. Piger (Federal Reserve Bank of St. Louis, Research Department) |
| Abstract: | We find evidence that adopting an explicit inflation objective plays a role in anchoring long-run inflation expectations and in reducing the intrinsic persistence of inflation. For the period 1994-2003, private-sector long-run inflation forecasts exhibit significant correlation with lagged inflation for a number of industrial economies, including the United States. In contrast, this correlation is largely absent for the five countries that maintained explicit inflation objectives over this period, indicating that these central banks have been reasonably successful in delinking expectations from realized inflation. We also show that the null hypothesis of a random walk in core CPI inflation can be clearly rejected for four of these five countries, but not for most of the other industrial countries. Finally, we provide some evidence concerning the initial effects of the adoption of explicit inflation objectives in a number of emerging-market economies. |
| Keywords: | Inflation expectations, Consensus Forecasts, inflation persistence. |
| JEL: | E31 E52 E58 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040383&r=mac |
| By: | Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates whether the degree of interdependence between the United States and the euro area economies has changed with the advent of EMU. It addresses this issue from the perspective of financial markets by analysing the effects of monetary policy and macroeconomic news on daily interest rates. First, the paper finds that the interdependence of money markets has increased strongly around EMU. Although spillover effects from the United States to the euro area remain stronger than in the opposite direction, US markets have started reacting to euro area developments since the onset of EMU. Second, certain US macroeconomic news affect euro area money markets, especially in recent years. Finally, we show that US macroeconomic news have become good leading indicators for economic developments in the euro area, indicating that the higher money market interdependence is at least partly explained by the increased real integration of the two economies. |
| Keywords: | interdependence; announcements; news; money markets; real-time data; United States; euro area. |
| JEL: | E43 E52 F42 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040342&r=mac |
| By: | Andreas Schabert (University of Amsterdam, Department of Economics, Roeterstraat 11, 1018 WB Amsterdam,The Netherlands.); Christian Stoltenberg (Humboldt University Berlin, Department of Economics, D-10178 Berlin, Germany) |
| Abstract: | This paper examines how money demand induced real balance effects contribute to the determination of the price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. There exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of-period money enters the utility function. Real money can then serve as a state variable, implying that interest rate setting must be passive for unique, stable, and non-oscillatory equilibrium sequences. When end-ofperiod money provides utility, an equilibrium is consistent with infinitely many price level sequences, and equilibrium uniqueness requires an active interest rate setting. The stability results are, in general, independent of the magnitude of real balance effects, and apply also when prices are sticky. In contrast, under a constant money growth policy, equilibrium sequences are (likely to be) locally stable and unique for all model variants. |
| Keywords: | Real balance effects; predetermined money; price level determination; real determinacy; monetary policy rules. |
| JEL: | E32 E41 E52 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050458&r=mac |
| By: | Pierpaolo Benigno (New York University, Department of Economics, 269 Mercer Street, New York, NY 10003, USA.); Michael Woodford (Columbia University, Department of Economics, 420 W. 118th Street, New York, NY 10027, USA.) |
| Abstract: | We propose an integrated treatment of the problems of optimal monetary and fiscal policy, for an economy in which prices are sticky and the only available sources of government revenue are distorting taxes. Our linear-quadratic approach allows us to nest both conventional analyses of optimal monetary stabilization policy and analyses of optimal tax-smoothing as special cases of our more general framework. We show how a linear-quadratic policy problem can be derived which yields a correct linear approximation to the optimal policy rules from the point of view of the maximization of expected discounted utility in a dynamic stochastic general-equilibrium model. Finally, we derive targeting rules through which the monetary and fiscal authorities may implement the optimal equilibrium. |
| Keywords: | Loss function, output gap, tax smoothing, targeting rules. |
| JEL: | E52 E61 E63 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040345&r=mac |
| By: | Carl E.Walsh (Professor, University of California, Santa Cruz and Visiting Scholar, Federal Reserve Bank of San Francisco. Corresponding address: Department of Economics, University of California, Santa Cruz, CA 95064, USA) |
| Abstract: | In this paper, I evaluate the performance deterioration that occurs when the central bank employs an optimal targeting rule that is based on incorrect parameter values. I focus on two parameters — the degree of inflation inertia and the degree of price stickiness. I explicitly account for the effects of the structural parameters on the objective function used to evaluate outcomes, as well as on the model’s behavioral equations. The costs of using simple rules relative to the costs of parameter misspecification are also assessed. |
| Keywords: | Monetary Policy, Robustness, Misspecification. |
| JEL: | E52 E58 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050477&r=mac |
| By: | Athanasios Orphanides (Board of Governors of the Federal Reserve System, Federal Reserve Board,Washington, D.C. 20551,USA.); John C. Williams (Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA 94105,USA.) |
| Abstract: | We develop an estimated model of the U.S. economy in which agents form expectations by continually updating their beliefs regarding the behavior of the economy and monetary policy. We explore the effects of policymakers' misperceptions of the natural rate of unemployment during the late 1960s and 1970s on the formation of expectations and macroeconomic outcomes. We find that the combination of monetary policy directed at tight stabilization of unemployment near its perceived natural rate and large real-time errors in estimates of the natural rate uprooted heretofore quiescent inflation expectations and destabilized the economy. Had policy reacted less aggressively to perceived unemployment gaps, inflation expectations would have remained anchored and the stagflation of the 1970s would have been avoided. Learning from the experience of the 1970s, policymakers eschewed activist policies in favor of policies that concentrated on the achievement of price stability, contributing to the subsequent improvements in macroeconomic performance. |
| Keywords: | Monetary policy; stagflation; rational expectations; learning. |
| JEL: | E52 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040337&r=mac |
| By: | Huw Dixon (Corresponding author: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom); Engin Kara (Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom) |
| Abstract: | In this paper we develop the Generalized Taylor Economy (GTE) in which there are many sectors with overlapping contracts of different lengths. In economies with the same average contract length, monetary shocks will be more persistent when longer contracts are present. We are able to solve the puzzle of why Calvo contracts appear to be more persistent than simple Taylor contracts: it arises because of the distribution of contract lengths. When we choose a GTE with the same distribution of completed contract lengths as the Calvo, the economies behave in a similar manner. |
| Keywords: | Persistence; Taylor contract; Calvo. |
| JEL: | E50 E24 E32 E52 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050489&r=mac |
| By: | Philipp C. Rother (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | Among the harmful effects of inflation, the negative consequences of inflation volatility are of particular concern. These include higher risk premia, hedging costs and unforeseen redistribution of wealth. This paper presents panel estimations for a sample of OECD countries which suggest that activist fiscal policies may have an important impact on CPI inflation volatility. Major results are robust for unconditional and conditional inflation volatility, the latter derived from country-specific GARCH models, and across different data frequencies, time periods and econometric methodologies. From a policy perspective, these results point to the possibility of further destabilising effects of discretionary fiscal policies, in addition to their potential to destabilise output. |
| Keywords: | Inflation volatility; Fiscal policy |
| JEL: | E31 E62 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040317&r=mac |
| By: | Alfred A. Haug (Department of Economics, York University); William G. Dewald (Ohio State University, Department of Economics.) |
| Abstract: | We study how fluctuations in money growth correlate with fluctuations in real and nominal output growth and inflation. We pick cycles from each time series that last 2 to 8 (business cycles) and 8 to 40 (longer-term cycles) years, using band-pass filters. We employ a data set from 1880 to 2001 for eleven countries, without gaps. Fluctuations in money growth do not play a systematic and important role at the business cycle frequency. However, money growth leads or contemporaneously affects nominal output growth and inflation in the longer run. This result holds despite differences in policies and institutions across countries. |
| Keywords: | Band-pass filters; 2 to 8 year cycles; 8 to 40 year cycles. |
| JEL: | E3 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040382&r=mac |
| By: | Massimo Giuliodori (Department of Economics, University of Amsterdam, Roeterstraat 11, 1018 WB Amsterdam, The Netherlands); Roel Beetsma (Department of Economics, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands) |
| Abstract: | We use a Vector Auto Regression (VAR) analysis to explore the (spill-over) effects of fiscal policy shocks in Europe. To enhance comparability with the existing literature, we first analyse the effects of these shocks at the national level. Here, we employ identification based on Choleski decomposition and a structural VAR, both of which lead to the same results. Then, we turn to study the cross-border spill-overs of fiscal shocks via the trade channel. Fiscal expansions in Germany, France and Italy lead to significant increases in imports from a number of European countries. In order to mimic the case of monetary union, we also shut off the effects via the short-term interest rate and the nominal exchange rate and find a slight strengthening on average of the cross-country spill-overs from a fiscal expansion. These results suggest that it may be worthwhile to further investigate the possibility of enhanced fiscal coordination. |
| Keywords: | Fiscal shocks; Fiscal policy; Monetary policy; Spill-overs; impulse responses. |
| JEL: | E62 E63 F42 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040325&r=mac |
| By: | André Meier (European University Institute,Via della Piazzuola 43, 50133 Firenze, Italy); Gernot J. Müller (Goethe University Frankfurt, Mertonstr. 17, 60054 Frankfurt am Main, Germany) |
| Abstract: | Financial frictions affect the way in which different components of GDP respond to a monetary policy shock. We embed the financial accelerator of Bernanke, Gertler and Gilchrist (1999) into a medium-scale Dynamic General Equilibrium model and evaluate the relative importance of financial frictions in explaining monetary transmission. Specifically, we match the impulse responses generated by the model with empirical impulse response functions obtained from a vector autoregression on US time series data. This allows us to provide estimates for the structural parameters of our model and judge the relevance of different model features. In addition, we propose a set of simple and instructive specification tests that can be used to assess the relative fit of various restricted models. Although our point estimates suggest some role for financial accelerator effects, they are actually of minor importance for the descriptive success of the model. |
| Keywords: | Monetary Policy; Output Composition; Financial Frictions; Minimum Distance Estimation. |
| JEL: | E32 E44 E51 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050500&r=mac |
| By: | Laurent Bilke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper uses disaggregated CPI time series to show that a break in the mean of French inflation occurred in the mid-eighties and that the 1983 monetary policy shift mostly accounted for it. CPI average yearly growth declined from nearly 11% before the break date (May 1985) to 2.1% after. No other break in the 1973-2004 sample period can be found. Controlling for this mean break, both aggregate and sectoral inflation persistence are stable and low, with the unit root lying far in the tail of the persistence estimates. However, persistence differs dramatically across sectors. Finally, the duration between two price changes (at the firm level) appears positively related with inflation persistence (at the aggregate level). |
| Keywords: | Multiple breaks test; inflation persistence; monetary policy; sectoral prices. |
| JEL: | E31 C12 C22 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050463&r=mac |
| By: | Alistair Dieppe (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Keith Küster (Chair for Monetary Theory and Policy, Johann Wolfgang Goethe-University Postbox 94, D-60054 Frankfurt/Main.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we analyze optimal monetary policy rules in a model of the euro area, namely the ECB’s Area Wide Model, which embodies a high degree of intrinsic persistence and a limited role for forward-looking expectations. These features allow us, in large measure, to differentiate our results from many of those prevailing in New Keynesian paradigm models. Specifi- cally, our exercises involve analyzing the performance of various generalized Taylor rules both from the literature and optimized to the reference model. Given the features of our modelling framework, we find that optimal policy smoothing need only be relatively mild. Furthermore, there is substantial gain from implementing forecast-based as opposed to outcome-based policies with the optimal forecast horizon for inflation ranging between two and three years. Benchmarking against fully optimal policies, we further highlight that the gain of additional states in the rule may compensate for a reduction of communicability. Thus, the paper contributes to the debate on optimal monetary policy in the euro area, as well as to the conduct of monetary policy in face of substantial persistence in the transmission mechanism. |
| Keywords: | euro area; monetary policy rule; optimization. |
| JEL: | E4 E5 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040360&r=mac |
| By: | Carsten Detken (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper aims at deriving some stylised facts for financial, real, and monetary policy developments during asset price booms. We observe various macroeconomic variables in a pre-boom, boom and post-boom phase. Not all booms lead to large output losses. We analyse the differences between highcost and low-cost booms. High-cost booms are clearly those in which real estate prices and investment crash in the post-boom periods. In general it is difficult to distinguish a high-cost from a low-cost boom at an early stage. However, high-cost booms seem to follow very rapid growth in the real money and real credit stocks just before the boom and at the early stages of a boom. There is also evidence that high-cost booms are associated with significantly looser monetary policy conditions over the boom period, especially towards the late stage of a boom. We finally discuss the results with regard to the theoretical literature. |
| Keywords: | asset price booms; asset price bubbles; optimal monetary policy; over-investment; real estate prices. |
| JEL: | E44 E52 E58 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040364&r=mac |
| By: | James Yetman (School of Economics and Finance, University of Hong Kong, Pokfulam Road, Hong Kong.) |
| Abstract: | Price level targeting has been proposed as an alternative to inflation targeting that may confer benefits if a central bank sets policy under discretion, even if society’s loss function is specified in terms of inflation (instead of price level) volatility. This paper demonstrates the sensitivity of this argument. If even a small portion of agents use a rule-of-thumb to form inflation expectations, or does not fully understand the nature of the target, price level targeting may in fact impose costs on society rather than benefits. While rational expectations and perfect credibility are generally beneficial with either a price level or an inflation target, an inflation target is more robust to alternative assumptions. These results suggest that caution should be exercised in considering a price level target as the basis for monetary policy, unless society has preferences specified in terms of price level, rather than inflation, volatility. |
| Keywords: | Price Level Targeting; Inflation Targeting; Credibility; Free Lunch; Discretion. |
| JEL: | E52 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030284&r=mac |
| By: | Günter Coenen (Directorate General Research, European Central Bank); Roland Straub (Monetary and Financial Systems Department, International Monetary Fund) |
| Abstract: | In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non-Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also due to the large negative wealth effect induced by the highly persistent nature of government spending shocks. |
| Keywords: | non-Ricardian households; fiscal policy; DSGE modelling; euro area. |
| JEL: | E32 E62 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050513&r=mac |
| By: | Ramón Adalid (Directorate General Statistics, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Günter Coenen (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Peter McAdam (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Stefano Siviero (Economic Research Department, Banca d’Italia, Rome, Italy) |
| Abstract: | In this paper, we examine the performance and robustness of optimised interest-rate rules in four models of the euro area which differ considerably in terms of size, degree of aggregation, relevance of forward-looking behavioural elements and adherence to micro-foundations. Our findings are broadly consistent with results documented for models of the U.S. economy: backward-looking models require relatively more aggressive policies with at most moderate inertia; rules that are optimised for such models tend to perform reasonably well in forward-looking models, while the reverse is not necessarily true; and, hence, the operating characteristics of robust rules (i.e., rules that perform satisfactorily in all models) are heavily weighted towards those required by backward-looking models. |
| Keywords: | Macroeconomic modelling; model uncertainty; monetary policy rules; robustness; euro area. |
| JEL: | E31 E52 E58 E61 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050479&r=mac |
| By: | George Hondroyiannis (Economic Research Department, Bank of Greece); Sophia Lazaretou (Economic Research Department, Bank of Greece) |
| Abstract: | The paper estimates inflation persistence in Greece from 1975 to 2003, a period of high variation in inflation and changes in policy regimes. Two empirical methodologies, univariate autoregressive (AR) modelling and second-generation random coefficient (RC) modelling, are employed to estimate inflation persistence. The empirical results from all the procedures suggest that inflation persistence was high during the inflationary period and the first six years of the disinflationary period, while it started to decline after 1997, when inflationary expectations seem to have been stabilised, and thus, monetary policy was effective at reducing inflation. Empirical findings also detect a sluggish response of inflation to changes in monetary policy. This observed delay seems to have changed little over time. |
| Keywords: | CPI inflation, persistence, structural change. |
| JEL: | E31 E37 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040370&r=mac |
| By: | Maarten Dossche (National Bank of Belgium, Boulevard de Berlaimont 14, 1000 Brussels, Belgium); Gerdie Everaert (SHERPPA, Ghent University, Hoveniersberg 24, 9000 Ghent, Belgium) |
| Abstract: | Time series estimates of inflation persistence incur an upward bias if shifts in the inflation target of the central bank remain unaccounted for. Using a structural time series approach we measure different sorts of inflation persistence allowing for an unobserved time-varying inflation target. Unobserved components are identified using Kalman filtering and smoothing techniques. Posterior densities of the model parameters and the unobserved components are obtained in a Bayesian framework based on importance sampling. We find that inflation persistence, expressed by the half-life of a shock, can range from 1 quarter in case of a cost-push shock to several years for a shock to long-run inflation expectations or the output gap. |
| Keywords: | Inflation persistence; inflation target; Kalman filter; Bayesian analysis. |
| JEL: | C11 C13 C22 C32 E31 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050495&r=mac |
| By: | Julius Moschitz (Universitat Autònoma de Barcelona, Dept. d’Economia i d’Història Econòmica, 08193 Bellaterra, Barcelona, Spain.) |
| Abstract: | The overnight interest rate is the price paid for one day loans and defines the short end of the yield curve. It is the equilibrium outcome of supply and demand for bank reserves. This paper models the intertemporal decision problems in the reserve market for both central and commercial banks. All important institutional features of the euro area reserve market are included. The model is then estimated with euro area data. A permanent change in reserve supply of one billion euro moves the overnight rate by eight basis points into the opposite direction, hence, there is a substantial liquidity effect. Most of the predictable patterns for the mean and the volatility of the overnight rate are related to monetary policy implementation, but also some calendar day effects are present. Banks react sluggishly to new information. Implications for market efficiency, endogeneity of reserve supply and underbidding are studied. |
| Keywords: | Money markets; EONIA rate; Liquidity effect; Central bank operating procedures. |
| JEL: | E52 E58 E43 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040393&r=mac |
| By: | Sandrine Corvoisier (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany); Benoît Mojon (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | In most OECD countries, we cannot reject up to three breaks in the mean of inflation: one break in the late 1960’s-early 1970’s, one in the early-mid 1980’s and another break in the early 1990’s. These breaks tend to be associated more often to breaks in the mean of nominal variables than to the one of real variables, which reinforces the view that they are monetary phenomena. We also show that ignoring breaks in the mean of inflation clearly lead to overrate inflation persistence in standard bi-variate models of inflation. The response of inflation to shocks in these models is markedly faster with breaks than without breaks. Finally, controlling for breaks in the mean of inflation weakens the effects on inflation of M3 growth and of the real unit labour cost towards insignificance while the effects of the output gaps on inflation are more robust. |
| Keywords: | Structural breaks; inflation persistence. |
| JEL: | E31 E52 C32 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050451&r=mac |
| By: | Frank Smets (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Raf Wouters (National Bank of Belgium.) |
| Abstract: | This paper estimates a DSGE model with many types of shocks and frictions for both the US and the euro area economy over a common sample period (1974-2002). The structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies, differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments. Our main conclusion is that each of those characteristics is remarkably similar across both currency areas. |
| Keywords: | DSGE models; business cycle fluctuations. |
| JEL: | E1 E2 E3 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040391&r=mac |
| By: | Bjørn-Roger Wilhelmsen (Norges Bank, Bankplassen 2, 0107 Oslo, Norway); Andrea Zaghini (Banca d’Italia, Servizio Studi, Via Nazionale 91, 00184 Roma, Italy) |
| Abstract: | The paper evaluates the ability of market participants to anticipate monetary policy decisions in the euro area and in 13 other countries. First, by looking at the magnitude and the volatility of the changes in the money market rates we show that the days of policy meetings are special days for financial markets. Second, we find that the predictability of the ECB’s monetary policy is fully comparable (and sometimes slightly better) to that of the FED and the Bank of England. Finally, an econometric analysis of the ability of market participants to incorporate in the current money rates the expected changes in the key policy rate shows that in the euro area policy decisions are anticipated well in advance. |
| Keywords: | Monetary policy; Predictability; Money market rates. |
| JEL: | E4 E5 G1 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050504&r=mac |
| By: | Sami Vähämaa (University of Vaasa, Department of Accounting and Finance, P.O. Box 700, FIN-65101 Vaasa, Finland;) |
| Abstract: | This paper uses data on German government bond futures options to examine the behaviour of market expectations around monetary policy actions of the European Central Bank (ECB). In particular, this paper focuses on the asymmetries in bond market expectations, as measured by the skewness of option-implied probability distributions of future bond yields. The results show that market expectations are systematically asymmetric around monetary policy actions of the ECB. Around monetary policy tightening, option-implied yield distributions are positively skewed, indicating that market participants attach higher probabilities for sharp yield increases than for sharp decreases. Correspondingly, around loosening of the policy, implied yield distributions are negatively skewed, suggesting that markets assign higher probabilities for sharp yield decreases than for increases. Furthermore, the results indicate that market expectations are significantly altered around monetary policy actions, as asymmetries in market expectations tend to increase before changes in the monetary policy stance, and to decrease afterwards. |
| Keywords: | Market expectations; Asymmetries; Implied skewness; Monetary policy. |
| JEL: | E44 E52 G10 G13 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040315&r=mac |
| By: | Gerard O'Reilly (Central Bank and Financial Services Authority of Ireland); Karl Whelan (Central Bank and Financial Services Authority of Ireland) |
| Abstract: | This paper analyzes the stability over time of the econometric process for Euro-area inflation since 1970, focusing in particular on the behaviour of the so-called persistence parameter (the sum of the coefficients on the lagged dependent variables). Perhaps surprisingly, in light of the Lucas critique, our principal finding is that there appears to be relatively little instability in the parameters of the Euro-area inflation process. Full-sample estimates of the persistence parameter are generally close to one, and we fail to reject the hypothesis that this parameter has been stable over time. We discuss how these results provide some indirect evidence against rational expectations models with strong forward-looking elements, such as the New-Keynesian Phillips curve. |
| Keywords: | Inflation Persistence; Euro Area; Lucas Critique. |
| JEL: | E31 E52 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040335&r=mac |
| By: | Peter McAdam (European Central Bank, Kaiserstraße 29, Frankfurt D60311, Germany.) |
| Abstract: | There has been much discussion of the differences in macroeconomic performance and prospects between the US, Japan and the euro area. Using Markov-switching techniques, in this paper we identify and compare specifically their major business-cycle features and examine the case for a common business cycle, asymmetries in the national cycles and, using a number of algorithms, date business-cycle turning points. Despite a high degree of trade and financial linkages, the cyclical features of US, Japan and the euro area appear quite distinct. Documenting and comparing such international business-cycle features can aid forecasting, model selection and policy analysis etc. |
| Keywords: | Business cycle; Markov switching; Synchronization; Turning Points. |
| JEL: | C32 F20 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030283&r=mac |
| By: | Gonzalo Camba-Méndez (Corresponding author. European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); George Kapetanios (Department of Economics, Queen Mary, University of London, Mile End Road, London E1 4N, United Kingdom.) |
| Abstract: | Standard measures of prices are often contaminated by transitory shocks. This has prompted economists to suggest the use of measures of underlying inflation to formulate monetary policy and assist in forecasting observed inflation. Recent work has concentrated on modelling large datasets using factor models. In this paper we estimate factors from datasets of disaggregated price indices for European countries. We then assess the forecasting ability of these factor estimates against other measures of underlying inflation built from more traditional methods. The power to forecast headline inflation over horizons of 12 to 18 months is adopted as a valid criterion to assess forecasting. Empirical results for the five largest euro area countries as well as for the euro area are presented. |
| Keywords: | Core Inflation; Dynamic Factor Models; Forecasting. |
| JEL: | E31 C13 C32 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040402&r=mac |
| By: | Joseph G. Pearlman (London Metropolitan University – Department of Economics, Finance and International Business (EFIB), 84 Morgate, London EC2M 6SQ, United Kingdom.) |
| Abstract: | We investigate the role of economic transparency within the framework of one of Townsend’s models of ‘forecasting the forecasts of others’. The equilibrium has the property that ‘higher order beliefs’ are coordinated into a finite-dimensional setup that is amenable to address monetary policy issues. We focus here on the role of public information about the money supply, and find that it should be fully revealing. |
| Keywords: | Transparency; central banks; asymmetric information; public information. |
| JEL: | D82 E58 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050455&r=mac |
| By: | Olli Castrén (DG Economics, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tuomas Takalo (Research Department, Bank of Finland, P.O. Box 160, Fin-00101 Helsinki, Finland.); Geoffrey Wood (Cass Business School, City University, 106 Bunhill Row, London EC7 8TZ, United Kingdom.) |
| Abstract: | It is commonly thought that an open economy can accommodate output shocks through either exchange rate or real sector adjustments. We formalise this notion by incorporating labour market rigidities into an “escape clause” model of currency crises. We show that the absence of structural reform makes a currency peg more fragile and undermines the credibility of the monetary authority in a dynamic setting. The fragility is captured by a devaluation premium in expectations that increases the average inflation rate when the currency peg is more vulnerable to “busts” than “booms”. This interaction between macroeconomic and microeconomic rigidities suggests that a policy reform can only be consistent if it renders either exchange rates or labour markets flexible. |
| Keywords: | Exchange rate policy; labour market flexibility; structural reform. |
| JEL: | E42 F33 D84 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040406&r=mac |
| By: | Gregory Gadzinski (GREQAM, Université de la Mediterraneé.); Fabrice Orlandi (Corresponding author: DG Economics, EU Countries Division, Forecasting and Monitoring Unit; European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.) |
| Abstract: | In this paper we report results on inflation persistence using 79 inflation series covering the EU countries, the euro area and the US for five different inflation variables. The picture that emerges is one of moderate inflation persistence across the board. In particular we find euro area inflation persistence to be broadly in line with US inflation persistence. The issue of allowing for intercept dummies in the underlying inflation models is found to be of paramount importance to avoid overestimation of the level of persistence. The use of alternative measures of persistence is found to be commendable on the grounds that they complement each other in practice. |
| Keywords: | Inflation dynamics; structural change; median unbiased estimates. |
| JEL: | E31 E52 C22 C12 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040414&r=mac |
| By: | Robert G. King (Boston University,Postal: 270 Bay State Road, Boston, MA 02215, USA.); Alexander L.Wolman (Federal Reserve Bank of Richmond P.O. Box 27622 Richmond VA 23261, USA.) |
| Abstract: | In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. Multiple equilibria also arise in other similar contexts where (i) a policymaker cannot commit, and (ii) forward-looking agents determine a state variable to which future policy responds. |
| Keywords: | monetary policy; discretion; time-consistency; multiple equilibria; complementarity. |
| JEL: | E5 E61 D78 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040343&r=mac |
| By: | Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Andres Manzanares (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Benedict Weller (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.) |
| Abstract: | This paper explores the role of central bank capital in ensuring that central banks focus on price stability in monetary policy decisions. The paper goes beyond the existing literature on this topic by developing a simple, but comprehensive, model of the relationship between a central bank's balance sheet structure and its inflation performance. The first part of the paper looks at solvency, i.e. under which conditions the "economic" capital (i.e. the discounted long term P&L) of a central bank always remains positive, despite adverse shocks, assuming a stability oriented monetary policy. The second part shows that in practice, capital is important for central banks beyond the issue of positive economic capital, when taking realistic assumptions regarding central bank independence. Capital thus remains a key tool to ensure that central banks are unconstrained in their focus on price stability in monetary policy decisions. |
| Keywords: | Central Bank Capital; Central Bank Independence. |
| JEL: | E42 E58 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040392&r=mac |
| By: | Kristoffer P. Nimark (European University Institute, Department of Economics,Villa San Paolo,Via della Piazzuola 43, I-50133 Florence, Italy) |
| Abstract: | In this paper we derive a Phillips curve with a role for higher order expectations of marginal cost and future inflation. We introduce a small idiosyncratic component in firms’ marginal costs and let the economywide average marginal cost be unobservable to the individual firm. The model can then replicate the backward looking component found in estimates of the ’Hybrid’ New Keynesian Phillips Curve, even though the pricing decision of the firm is entirely forward looking. The Phillips curve derived here nests the standard New-Keynesian Phillips Curve as a special case. We take a structural approach to imperfect common knowledge that allow us to infer whether the assumed information imperfections necessary to replicate the data are quantitatively realistic or not. We also provide an algorithm for solving a class of models involving dynamic higher order expectations of endogenous variables. |
| Keywords: | Calvo pricing; Higher order expectations; Imperfect Common Knowledge; New-Keynesian Phillips Curve. |
| JEL: | E00 E31 E32 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050474&r=mac |
| By: | Nicoletta Batini (Research Adviser, MPC Unit, Bank of England,Threadneedle Street, London EC2R 8AH, United Kingdom.); Paul Levine (Professor of Economics, University of Surrey, Guildford, Surrey GU2 7XH, United Kingdom.); Joseph Pearlman (Professor of Economics, London Metropolitan University, 31 Jewry St, London EC3N 2EY, United Kingdom.) |
| Abstract: | We examine the performance of forward-looking inflation-forecast-based rules in open economies. In a New Keynesian two-bloc model, a methodology first employed by Batini and Pearlman (2002) is used to obtain analytically the feedback parameters/horizon pairs associated with unique and stable equilibria. Three key findings emerge: first, indeterminacy occurs for any value of the feedback parameter on inflation if the forecast horizon lies too far into the future. Second, the problem of indeterminacy is intrinsically more serious in the open economy. Third, the problem is compounded further in the open economy when central banks respond to expected consumer, rather than producer price inflation. |
| Keywords: | Taylor rules; inflation-forecast-based rules; indeterminacy; open economy. |
| JEL: | E52 E37 E58 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040340&r=mac |
| By: | Carlos Andrés Amaya |
| Abstract: | This paper is concerned with interest rate setting by commercial banks and how the transmission of monetary policy is re°ected in these rates. For this purpose we study the case of the Colombian banking industry for the period 1996-2004. Using microdata, the Certi¯cate of Deposit(CD) market and the credit market are studied for a balanced panel of 21 and 16 banks, respectively. The paper motivates the discussion with a theoretical model that explains how banks set their interest rates and how these are a®ected by the policy rate. Overcoming some of the empirical di±culties presented in other studies, this paper deals with them by performing panel unit root tests and panel cointegration tests. The results suggest that the transmission of the policy rate to the CD rate and the credit rate is on average high and quick. Additionally, rates react strongly to in°ation shocks, specially credit rates. Finally, the evidence presented shows the importance of banks' characteristics and in°ation as long-run drivers of interest rates. |
| Keywords: | Banks, Monetary Policy, Interest Rates, Panel Data |
| JEL: | C33 E43 E52 E58 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:352&r=mac |
| By: | Albert Marcet (Institut d’Anàlisi Econòmica (CSIC), and Departament d’Economia i Empresa,Universitat Pompeu Fabra, C/ Ramon Trias Fargas, 23-25, 08005, Barcelona, Spain;); Juan Pablo Nicolini (Universidad Torcuato Di Tella, C/Miñones 2177, C1428ATG Buenos Aires, Argentina) |
| Abstract: | This paper studies the short run correlation of inflation and money growth. We study whether a model of learning does better or worse than a model of rational expectations, and we focus our study on countries of high inflation. We take the money process as an exogenous variable, estimated from the data through a switching regime process. We find that the rational expectations model and the model of learning both offer very good explanations for the joint behavior of money and prices. |
| Keywords: | Inflation and money growth; switching regimes; quasi-rationality. |
| JEL: | D83 E17 E31 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050469&r=mac |
| By: | Patrick Lünnemann (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983 Luxembourg, Luxembourg.); Thomas Y. Mathä (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983 Luxembourg, Luxembourg.) |
| Abstract: | This paper analyses the degree of inflation persistence in the EU15, the euro area and each of its member states using disaggregate price indices from the Harmonised Index of Consumer Prices. Our results reveal substantial heterogeneity across countries and indices. The overall results, based on both parametric and non-parametric persistence measures, suggest a very moderate degree of median and mean inflation persistence. For most price indices we are able to reject the unit root hypothesis, as well as the notion of disaggregate inflation exhibiting a high degree of persistence. Durable goods and services tend to be relatively less persistent than other indices. Aggregation effects, both across indices and countries, tend to be present. We find structural breaks both owing to the change in the monetary regime and to the modified treatment of sales in the official HICP series. The latter tends to reduce the measured degree of inflation persistence. |
| Keywords: | Inflation persistence; Mean reversion; Aggregation effect; Structural breaks. |
| JEL: | E31 C21 C22 C14 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040415&r=mac |
| By: | Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper assesses the change in Federal Reserve policy introduced in 1999, with the publication of statements about the outlook for monetary policy (and later about the balance of risks) immediately after each FOMC meeting. We find that markets anticipated monetary policy decisions equally well under this new disclosure regime than before, but arrived at their expectations in different ways. Under the new regime, markets extract information from the statements, whereas before, they needed to revert to other types of Fed communication in the inter-meeting periods, and come to their own assessment of the implications of macroeconomic data releases. Taken together, these findings suggest that the Fed's new disclosure practice may indeed have improved transparency in the sense that information is now released to the markets at an earlier time and with clearer signals, but that the Fed can extract less information from observing market reactions to macroeconomic data releases. |
| Keywords: | Transparency; monetary policy; announcements; communication; disclosure. |
| JEL: | E43 E52 E58 G12 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050457&r=mac |
| By: | Ulrich Bindseil (DG Human Resources, Budget and Organisation, European Central Bank) |
| Abstract: | Before 1914, there was little doubt that central bank policy meant first of all control of short term interest rates. This changed dramatically in the early 1920s with the birth of “reserve position doctrine” (RPD) in the US, according to which a central bank should, via open market operation, steer some reserve concept, which would impact via the money multiplier on monetary aggregates and ultimate goals. While the Fed returned to an unambiguous steering of short term interest rates only in the 1990s, for example the Bank of England never adopted RPD. This paper explains the astonishing rise and fall of RPD. The endurance of RPD is explained by a symbiosis of central bankers who may have partially sympathised with RPD since it masked their responsibility for short term interest rates, and academics who were too eager to simplify away some key features of money markets and central bank operations. |
| Keywords: | operational target of monetary policy, monetary policy instruments, monetary policy implementation, instruments’ choice problem |
| JEL: | E43 E52 B22 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040372&r=mac |
| By: | Jesús Fernández-Huertas Moraga (Columbia University, Department of Economics, 420 West 118th Street, New York, NY 10027, USA.); Jean-Pierre Vidal (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates fiscal sustainability in an overlapping generations economy with endogenous growth coming from human capital formation through educational spending. We assess how budgetary imbalances affect economic dynamics and the outlook for economic growth, thereby providing a rationale for fiscal rules ensuring sustainability. Our results show that the appropriate response of fiscal policy to temporary shocks is not trivial in the absence of fiscal rules. Fiscal rules allow for a timely reaction, thereby avoiding possibly disruptive fiscal adjustment in the future: the more adjustment is delayed, the larger is its necessary scale. We perform a rough calibration of the model to simulate the effects of a demographic shock (change in the population growth rate) under different fiscal policy scenarios. |
| Keywords: | Fiscal sustainability; public debt; overlapping generations. |
| JEL: | E62 H63 H55 O41 E17 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040395&r=mac |
| By: | Valeria De Bonis (Dipartimento di Scienze Economiche, University of Pisa); Pompeo Della Posta (Dipartimento di Scienze economiche, University of Pisa) |
| Abstract: | In this paper we extend Nordhaus’ (1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that: a) co-operation among national fiscal authorities is welfare improving only if they also co-operate with the central bank; b) when this condition is not satisfied, fiscal rules, as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact, may work as co-ordination devices that improve welfare; c) the relationship between several treasuries and a single central bank makes the fiscal leadership solution collapse to the Nash one, so that, contrary to Nordhaus (1994) and Dixit and Luisa Lambertini (2001), when moving from the Nash to the Stackelberg solution, fiscal discipline no longer obtains. Also in this case we thus argue in favour of fiscal rules in a monetary union. |
| Keywords: | Fiscal and monetary policy co-ordination; monetary union;international fiscal issues |
| JEL: | E61 F42 H87 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ave:wpaper:262005&r=mac |
| By: | Mika Tujula (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Guido Wolswijk (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | Fiscal balances have deteriorated quickly in recent years, bringing back to the foreground the question what factors help explain such sharp changes. This paper takes a broad perspective at the issue regarding countries included, the range of explanatory variables tried, and the time-span. The empirical analysis shows that changes in budget balances are affected by debt growth, macroeconomic developments and political factors. In particular, we find that the run-up to EMU induced additional consolidation in Europe and that budget balances deteriorate markedly in election years. Asset prices also may affect budgets, but the impact remains limited in normal times. |
| Keywords: | Fiscal policy; asset prices; economic growth; budget balance; Stability and Growth Pact. |
| JEL: | E61 E62 H61 H62 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040422&r=mac |
| By: | Shigeru Fujita (Federal Reserve Bank of Philadelphia); Garey Ramey (University of California, San Diego) |
| Abstract: | In aggregate U.S. data, exogenous shocks to labor productivity induce highly persistent and hump-shaped responses to both the vacancy- unemployment ratio and employment. We show that the standard version of the Mortensen-Pissarides matching model fails to replicate this dynamic pattern due to the rapid responses of vacancies. We extend the model by introducing a sunk cost for creating new job positions, motivated by the well-known fact that worker turnover exceeds job turnover. In the matching model with sunk costs, vacancies react sluggishly to shocks, leading to highly realistic dynamics. |
| Keywords: | Unemployment, Vacancies, Labor Adjustment, Matching |
| JEL: | E32 J63 J64 |
| Date: | 2005–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509026&r=mac |
| By: | Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gonzalo Camba-Mendez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Astrid Hirsch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Benedict Weller (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper explains to what extent excess reserves are and should be relevant today in the implementation of monetary policy, focusing on the specific case of the operational framework of the Eurosystem. In particular, this paper studies the impact that changes to the operational framework for monetary policy implementation have on the level and volatility of excess reserves. A ‘transaction costs’ model that replicates the rather specific intra-reserve maintenance period pattern of excess reserves in the euro area is developed. Simulation results presented not only show that excess reserves may increase considerably under some changes to the operational framework, but also that their volatility and hence unpredictability could. |
| Keywords: | excess reserves; monetary policy implementation; liquidity management. |
| JEL: | E52 E58 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040361&r=mac |
| By: | Leif Danziger |
| Abstract: | With fixed costs of price and quantity adjustment, output effects of inflation depend on the elasticity of the firm’s marginal real revenue. If the elasticity always exceeds minus unity, then output decreases with inflation, while if the elasticity is always less than minus unity, then output increases with inflation. In the special case that the elasticity always equals minus unity, then output is independent of inflation. This is the case if demand is derived from a log-quadratic utility function. |
| JEL: | E31 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1538&r=mac |
| By: | Hans Peter Grüner (University of Mannheim, IZA, Bonn, and CEPR, London. Postal Address: University of Mannheim, Department of Economics, L7, 3-5, D-68131 Mannheim, Germany); Bernd Hayo (Philipps-University Marburg and ZEI, University of Bonn; Postal Address: Philipps-University Marburg, Department of Economics, (FB02), Universitaetsstr. 24, D-35032 Marburg, Germany); Carsten Hefeker (University of Siegen,HWWA, Hamburg, and CESifo, Munich; Postal Address:HWWA Institute of International Economics, Neuer Jungfernstieg 21, 20347 Hamburg, Germany) |
| Abstract: | Recent theoretical research has studied extensively the link between wage setting and monetary policymaking in unionized economies. This paper addresses the question of the role of monetary uncertainty from both an empirical and theoretical point of view. Our analysis is based on a simple model that derives the influence of monetary uncertainty on unionized wage setting. We construct an indicator of monetary policy uncertainty and test our model with data for the G5 countries. The central finding is that monetary policy uncertainty has a negative impact on nominal wage growth in countries where wage setting is relatively centralized. This result is consistent with recent theoretical approaches to central bank transparency and wage setting. |
| Keywords: | Monetary policy uncertainty; centralized wage setting; union behavior. |
| JEL: | E58 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050490&r=mac |
| By: | Björn Fischer (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Petra Köhler (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Franz Seitz (Fachhochscule Amberg-Weiden) |
| Abstract: | The present paper analyses currency in circulation in the euro area since the beginning of the 1980s. After a comprehensive literature review on this topic we present some stylised facts on currency holdings in the euro area countries as well as at an aggregate euro area level. The next chapter develops a theoretical model, which extends traditional money demand models to also incorporate arguments for the informal economy and foreign demand for specific currencies. In the empirical sections we first estimate the demand for euro legacy currencies in total and for small and large denominations within a cointegration framework. We find significant differences between the determinants of holdings of small and large denominations as well as overall currency demand. While small-value banknotes are mainly driven by domestic transactions, the demand for large-value banknotes depends on a short-term interest rate, the exchange rate of the euro as a proxy for foreign demand and inflation variability. Large-value banknotes seem to be therefore used to an important extent as a store of value domestically and abroad. As monetary policy is mainly interested in getting information on the demand for currency used for domestic transactions we also try several approaches in this direction. All the methods applied result in rather low levels of transaction balances used within the euro area of around 25% to 35% of total currency. After this we deal with possibly changing cost-benefit-considerations of the use of cash due to the introduction of euro notes and coins. Overall, there seems no evidence so far of a substantial decline of the demand for currency in the euro area. The analysis of currency in circulation and in particular estimates on the share of currency which is likely to be used for domestic transactions therefore help to explain monetary developments and are informative for monetary policy. |
| Keywords: | currency in circulation; Cointegration; Purposes of holding currency |
| JEL: | E41 E52 E58 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040330&r=mac |
| By: | Lorenzo Cappiello (European Central Bank); Stéphane Guéné (European Central Bank) |
| Abstract: | This paper studies the role of inflation in the determination of financial asset prices. We estimate an Intertemporal Capital Asset Pricing Model à la Merton (1973), with inflation as an independent source of risk, for France and Germany. Our study also allows us to evaluate how the different nature of the French and German monetary policies before 1999 as well as the convergence process towards the single currency might have affected the role of inflation in the pricing of financial assets. We find that inflation is a significant explanatory factor for the pricing of stocks and government bonds in the two countries. Moreover, while there seems to be no clear structural break in the impact of inflation on asset prices after Stage Three of Economic and Monetary Union, such an impact has been increasingly similar in the two countries after 1999. |
| Keywords: | Intertemporal CAPM, business cycles, GARCH-in-Mean |
| JEL: | C32 C61 E44 G12 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050436&r=mac |
| By: | Frank Smets (European Central Bank, CEPR and University of Ghent.); Raf Wouters (National Bank of Belgium.) |
| Abstract: | In monetary policy strategies geared towards maintaining price stability conditional and unconditional forecasts of inflation and output play an important role. This paper illustrates how modern sticky-price dynamic stochastic general equilibrium models, estimated using Bayesian techniques, can become an additional useful tool in the forecasting kit of central banks. First, we show that the forecasting performance of such models compares well with a-theoretical vector autoregressions. Moreover, we illustrate how the posterior distribution of the model can be used to calculate the complete distribution of the forecast, as well as various inflation risk measures that have been proposed in the literature. Finally, the structural nature of the model allows computing forecasts conditional on a policy path. It also allows examining the structural sources of the forecast errors and their implications for monetary policy. Using those tools, we analyse macroeconomic developments in the euro area since the start of EMU. |
| Keywords: | Forecasting; DSGE models; monetary policy; euro area. |
| JEL: | E4 E5 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040389&r=mac |
| By: | Marco Del Negro (Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree St NE, Atlanta GA 30309-4470, USA); Frank Schorfheide (Department of Economics, 3718 Locust Walk, University of Pennsylvania, Philadelphia, PA 19104-6297, USA) |
| Abstract: | This paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models and applies it to a New Keynesian DSGE model along the lines of Christiano, Eichenbaum, and Evans (JPE 2005) and Smets and Wouters (JEEA 2003). Specifically, we are studying the effects of coefficient changes in interest-rate feedback rules on the volatility of output growth, inflation, and nominal rates. The paper illustrates the sensitivity of the results to assumptions on the policy invariance of model misspecifications. |
| Keywords: | Bayesian Analysis; DSGE Models; Model Misspecification. |
| JEL: | C32 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050475&r=mac |
| By: | Matthias Mohr (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | This paper proposes a new univariate method to decompose a time series into a trend, a cyclical and a seasonal component: the Trend-Cycle filter (TC filter) and its extension, the Trend-Cycle-Season filter (TCS filter). They can be regarded as extensions of the Hodrick-Prescott filter (HP filter). In particular, the stochastic model of the HP filter is extended by explicit models for the cyclical and the seasonal component. The introduction of a stochastic cycle improves the filter in three respects - first, trend and cyclical components are more consistent with the underlying theoretical model of the filter. Second, the end-of-sample reliability of the trend estimates and the cyclical component is improved compared to the HP filter since the pro-cyclical bias in end-of-sample trend estimates is virtually removed. Finally, structural breaks in the original time series can be easily accounted for. |
| Keywords: | Economic cycles; time series; filtering; trend-cycle decomposition; seasonality. |
| JEL: | C13 C22 E32 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050499&r=mac |
| By: | Tamim Bayoumi (International Monetary Fund, NY, USA.); Douglas Laxton (International Monetary Fund, NY, USA.); Paolo Pesenti (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Using a general-equilibrium simulation model featuring nominal rigidities and monopolistic competition in product and labor markets, this paper estimates the macroeconomic benefits and international spillovers of an increase in competition. After calibrating the model to the euro area vs. the rest of the industrial world, the paper draws three conclusions. First, greater competition produces large effects on macroeconomic performance, as measured by standard indicators. In particular, we show that differences in competition can account for over half of the current gap in GDP per capita between the euro area and the US. Second, it may improve macroeconomic management by increasing the responsiveness of wages and prices to market conditions. Third, greater competition can generate positive spillovers to the rest of the world through its impact on the terms of trade. |
| Keywords: | Competition; Markups; Monetary Policy; Taylor Rule. |
| JEL: | C51 E31 E52 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040341&r=mac |
| By: | Attila Rátfai (Central European University, Department of Economics) |
| Abstract: | By placing store-level price data into bivariate Structural VAR models of inflation and relative price asymmetry, this study evaluates the quantitative importance of idiosyncratic pricing shocks in short-run aggregate price change dynamics. Robustly to alternative definitions of the relative price, identification schemes dictated by two-sided (S,s) pricing theory and measures of asymmetry in the relative price distribution, idiosyncratic shocks explain about 25 to 30 percent of the forecast error variance in inflation at the 12-month horizon. While the contemporaneous correlation between inflation and relative price asymmetry is positive, idiosyncratic shocks lead to a substantial build-up in inflation only after two to five months following the initial disturbance. |
| Keywords: | (S,s) Pricing, Relative Price, Inflation, Structural VAR |
| JEL: | E31 |
| Date: | 2004–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040301&r=mac |
| By: | Patrick Lünnemann (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983, Luxembourg, Luxembourg); Thomas Y. Mathä (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983, Luxembourg, Luxembourg) |
| Abstract: | This paper analyses the degree of price rigidity and of inflation persistence across different product categories with particular focus on regulated prices and services for the individual EU15 countries, as well as for the EU15 and the euro area aggregates. We show that services and HICP sub-indices considered being subject to price regulation exhibit larger degrees of nominal price rigidities, with less frequent but larger price index changes as well as stronger asymmetries between price index increases and decreases. With regard to what extent services and regulated prices contribute to the degree of overall inflation persistence, we find that, for most of the EU15 countries as well as for the EU15 and the euro area aggregates, excluding services from the full HICP results in a reduction in the measured degree of inflation persistence; for regulated indices such an effect is also discernible, albeit to a lesser extent. |
| Keywords: | Price rigidity; inflation persistence; regulated prices; services. |
| JEL: | E31 C22 C23 C43 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050466&r=mac |
| By: | Andrea Ferrero (Department of Economics, New York University, 269 Mercer Street – 7th floor, New York, NY 10003, USA) |
| Abstract: | This paper addresses the question of the joint conduct of fiscal and monetary policy in a currency union. The problem is studied using a two-country DSGE framework with staggered price setting, monopolistic competition in the goods market, distortionary taxation and nominal debt. The two countries form a currency union but retain fiscal policy independence. The policy problem can be cast in terms of a tractable linear-quadratic setup. The stabilization properties and the welfare implications of the optimal commitment plan are compared with the outcome obtained under simple implementable rules. The central result is that fiscal policy plays a key role to smooth appropriately the impact of idiosyncratic exogenous shocks. Fiscal rules that respond to a measure of real activity have the potential to approximate accurately the optimal plan and lead to large welfare gains as compared to balanced budget rules. Monetary policy shall focus on maintaining price stability. |
| Keywords: | Currency Union; Optimal Policy; Flexibility; Welfare. |
| JEL: | E63 F33 F42 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050502&r=mac |
| By: | Guido Ascari (Dipartimento di Economia Politica e Metodi Quantitativi, University degli Studi di Pavia,Via S. Felice, 5, 27100 Pavia, Italy.); Neil Rankin (Department of Economics, University of Warwick, Coventry CV4 7AL, UK.) |
| Abstract: | In the “perpetual youth” overlapping-generations model of Blanchard and Yaari, if leisure is a “normal” good then some agents will have negative labour supply. We suggest a solution to this problem by using a modified version of Greenwood, Hercowitz and Huffman’s utility function. The modification incorporates real money balances, so that the model may be used to analyse monetary as well as fiscal policy. In a Walrasian version of the economy, we show that increased government debt and increased government spending raise the interest rate and lower output, while an open-market operation to increase the money supply lowers the interest rate and raises output. |
| Keywords: | Blanchard-Yaari overlapping generations, endogenous labour supply. |
| JEL: | D91 E63 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040346&r=mac |
| By: | Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Fabrizio Zampolli |
| Abstract: | This paper examines the welfare implications of a country joining a currency union as opposed to operating in a flexible exchange rate regime. At the country level, the suboptimal response to domestic and foreign shocks and the inability of setting inflation at the desired level may be offset by a positive impact on potential output. We show that for entry to be welfare enhancing, the potential output gain must be the larger, the smaller the country, the larger the difference between the standard deviation of supply shocks across the participating countries, the smaller the correlation of countries’ supply shocks and the larger the variance of real exchange rate shocks. |
| Keywords: | Balassa-Samuelson Effect; Currency Union; Monetary Policy; Welfare. |
| JEL: | E52 E58 F33 F40 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050445&r=mac |
| By: | Peter Hördahl (DG Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oreste Tristani (Corresponding author: DG Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); David Vestin (DG Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We construct and estimate a joint model of macroeconomic and yield curve dynamics. A small-scale rational expectations model describes the macroeconomy. Bond yields are affine functions of the state variables of the macromodel, and are derived assuming absence of arbitrage opportunities and a flexible price of risk specification. While maintaining the tractability of the affine set-up, our approach provides a way to interpret yield dynamics in terms of macroeconomic fundamentals; time-varying risk premia, in particular, are associated with the fundamental sources of risk in the economy. In an application to German data, the model is able to capture the salient features of the term structure of interest rates and its forecasting performance is often superior to that of the best available models based on latent factors. The model has also considerable success in accounting for features of the data that represent a puzzle for the expectations hypothesis. |
| Keywords: | Affine term-structure models; policy rules; new neo-classical synthesis. |
| JEL: | E43 E44 E47 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040405&r=mac |
| By: | Vítor Gaspar (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany.); Gabriel Pérez Quirós (Banco de España and CEPR); Hugo Rodríguez Mendizábal (Universitat Autònoma de Barcelona and CENTRA) |
| Abstract: | The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities are also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data. |
| Keywords: | Overnight interest rate; Monetary policy instruments; Eonia panel. |
| JEL: | E52 E58 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040351&r=mac |
| By: | Fabrice Collard (CNRS-GREMAQ, Manufacture des Tabacs, bât. F, 21 allée de Brienne, 31000 Toulouse, France.); Harris Dellas (Department of Economics, University of Bern, CEPR, IMOP. Address:VWI, Gesellschaftsstrasse 49, CH 3012 Bern, Switzerland.) |
| Abstract: | Was the high inflation of the 1970s mostly due to incomplete information about the structure of the economy (an unavoidable mistake as suggested by Orphanides, 2000)? Or, to weak reaction to expected inflation and/or excessive policy activism that led to indeterminacies (a policy mistake, a scenario suggested by Clarida, Gali and Gertler, 2000)? We study this question within the NNS model with policy commitment and imperfect information, requiring that the model have satisfactory overall empirical performance. We find that both explanations do a good job in accounting for the great inflation. Even with the commonly used specification of the interest policy rule, high and persistent inflation can occur following a significant productivity slowdown if policymakers significantly and persistently underestimate ”core” inflation. |
| Keywords: | Inflation; imperfect information; Kalman filter; policy rule; indeterminacy. |
| JEL: | E32 E52 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040336&r=mac |
| By: | Silvia Ardagna (Wellesley College, Department of Economics, 106 Central Street Wellesley, MA 02481, USA.) |
| Abstract: | Using a panel of OECD countries from 1960 to 2002, this paper shows that financial markets value fiscal discipline. Interest rates, particularly those of long-term government bonds, decrease when countries' fiscal position improves and increase around periods of budget deteriorations. Stock market prices surge around times of substantial fiscal tightening and plunge in periods of very loose fiscal policy. In addition, the paper shows that results depend on countries' initial fiscal conditions and on the type of fiscal consolidations. Fiscal adjustments that occur in country-years with high levels of government deficit, that are implemented by cutting government spending, and that generate a permanent and substantial decrease in government debt are associated with larger reductions in interest rates and increases in stock market prices. |
| Keywords: | Fiscal stabilizations; fiscal expansions; interest rates; stock market prices. |
| JEL: | E62 E44 H62 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040390&r=mac |
| By: | Robert-Paul Berben (De Nederlandsche Bank, Monetary and Economic Policy Department, Westeinde 1, P.O. Box 98, 1017 ZN Amsterdam, Netherlands.); Alberto Locarno (Banca d´Italia,Via Nazionale 91, 00184 Rome, Italy.); Julian Morgan (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Javier Valles (Banco de España, Research Department, Alcalá 50, 28014 Madrid, Spain.) |
| Abstract: | This paper examines possible explanations for observed differences in the transmission of euro area monetary policy in central bank large-scale macroeconomic models. In particular it considers the extent to which these differences are due to differences in the underlying economies or (possibly unrelated) differences in the modelling strategies adopted for each country. It finds that, against most yardsticks, the cross-country variations in the results are found to be plausible in the sense that they correspond with other evidence or observed characteristics of the economies in question. Nevertheless, the role of differing modelling strategies may also play a role. Important features of the models - for instance in the treatment of expectations or wealth - can have a major bearing on the results that may not necessarily reflect differences in the underlying economies. |
| Keywords: | Monetary transmission; macroeconometric models; euro area differences. |
| JEL: | C53 E52 E37 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040400&r=mac |
| By: | Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division, Otto Wagner Platz 3,A-1090 Vienna, Austria;) |
| Abstract: | This paper extends the existing literature on the open economy New Keynesian Phillips Curve by incorporating three different factors of production, domestic labor and imported as well as domestically produced intermediate goods, into a general model which nests existing closed economy and open economy models as special cases. The model is then estimated for 9 euro area countries and the euro area aggregate. We find that structural price rigidity is systematically lower in the open economy specification of the model than in the closed economy specification indicating that when firms face more variable input costs they tend to adjust their prices more frequently. However, when the model is estimated in its general specification including also domestic intermediate inputs, price rigidity increases again compared to the open economy specification without domestic intermediate inputs. |
| Keywords: | New Keynesian Phillips Curve, Open Economy, GMM. |
| JEL: | E31 C22 E12 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050496&r=mac |
| By: | Andreas Beyer (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Roger E. A. Farmer (UCLA, Dept. of Economics, 8283 Bunche Hall, Box 951477, Los Angeles, CA 90095-147,USA) |
| Abstract: | We study identification in a class of three-equation monetary models. We argue that these models are typically not identified. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to provide four examples of the consequences of lack of identification. In our first two examples we show that it is not possible to tell whether the policy rule or the Phillips curve is forward or backward looking. In example 3 we establish an equivalence between a class of models proposed by Benhabib and Farmer [1] and the standard new-Keynesian model. This result is disturbing since equi- libria in the Benhabib-Farmer model are typically indeterminate for a class of policy rules that generate determinate outcomes in the new-Keynesian model. In example 4, we show that there is an equivalence between determi- nate and indeterminate models even if one knows the structural equations of the model. |
| Keywords: | Identification; Indeterminacy; Transparency; New-Keynesian model. |
| JEL: | C39 C62 D51 E52 E58 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040323&r=mac |
| By: | António Afonso (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany and ISEG/UTL - Technical University of Lisbon; CISEP – Research Centre on the Portuguese Economy, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal); Christiane Nickel (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany); Philipp Rother (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | We study fiscal consolidations in the Central and Eastern European countries and what determines the probability of their success. We define consolidation events as substantive improvements in fiscal balances adjusting for the impact of cyclical effects. We use Logit models for the period 1991–2003 to assess the determinants of the success of a fiscal adjustment. The results seem to suggest that for these countries expenditure based consolidations have tended to be more successful. By contrast, revenue based consolidations have a tendency to be less successful. |
| Keywords: | Fiscal policy; fiscal episodes; Central and Eastern Europe; Logit models. |
| JEL: | C25 E62 H62 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050473&r=mac |
| By: | Silvia Ardagna (Department of Economics, Harvard University, Littauer Center, Cambridge, MA 02138, USA.); Francesco Caselli (Department of Economics, Harvard University, Littauer Center, Cambridge, MA 02138, USA.); Timothy Lane (Policy Development and Review Department, IMF, 700 19th St.NW,Washington, DC 20431, USA.) |
| Abstract: | We use a panel of 16 OECD countries over several decades to investigate the effects of gov- ernment debts and deficits on long-term interest rates. In simple static specifications, a one-percentage-point increase in the primary deficit relative to GDP increases contempora- neous long-term interest rates by about 10 basis points. In a vector autoregression (VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10 years. The effect of debt on interest rates is non-linear: only for countries with above-average levels of debt does an increase in debt affect the interest rate. World fiscal policy is also important: an increase in total OECD-government borrowing increases each country's interest rates. How- ever, domestic fiscal policy continues to affect domestic interest rates even after controlling for worldwide debts and deficits. |
| Keywords: | Government deficit; public debt; long-term interest rates. |
| JEL: | E62 E44 H62 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040411&r=mac |
| By: | Christian Ewerhart (Institute for Empirical Research in Economics (IEW), University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland.); Nuno Cassola (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany); Steen Ejerskov (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany); Natacha Valla (Banque de France, Paris, France) |
| Abstract: | On several occasions during the period 2001-2003, the European Central Bank (ECB) decided to deviate from its “neutral” benchmark allotment rule, with the effect of not alleviating a temporary liquidity shortage in the banking system. This is remarkable because it implied the possibility of short-term interest rates raising significantly above the main policy rate. In the present paper, we show that when the monetary authority cares for both liquidity and interest rate conditions, the optimal allotment policy may entail a discontinuous reaction to initial conditions. More precisely, we prove that there is a threshold level for the accumulated aggregate liquidity position in the banking system prior to the last operation in a given maintenance period, so that the benchmark allotment is optimal whenever liquidity conditions are above the threshold, and a tight allotment is optimal whenever liquidity conditions are below the threshold. |
| Keywords: | euro; monetary policy instruments; operational framework; refinancing operations. |
| JEL: | E43 E52 |
| Date: | 2003–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030295&r=mac |
| By: | Keith Küster (Johann-Wolfgang-Goethe Universität, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany); Volker Wieland (Professur für Geldtheorie und -politik, Johann-Wolfgang-Goethe Universität, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany) |
| Abstract: | In this paper, we examine the cost of insurance against model uncertainty for the Euro area considering four alternative reference models, all of which are used for policy-analysis at the ECB. We find that maximal insurance across this model range in terms of a Minimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion. These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context. |
| Keywords: | Model uncertainty; robustness; monetary policy rules; minimax; euro area. |
| JEL: | E52 E58 E61 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050480&r=mac |
| By: | Christopher Bowdler (Nuffield College New Road Oxford OX1 1NF, United Kingdom); Eilev S. Jansen |
| Abstract: | Equilibrium correction models of the price level are often used to model inflation. Such models assume that the long-run markup of prices over costs is fixed, but this may not be true for the Euro area economy, which has undergone major structural reforms over the last 25 years. We allow for shifts in the markup factor through estimating an equation that includes a timevarying intercept. The model fits the data better than a linear alternative, and suggests that a reduction in the price-cost markup contributed to disinflation in the Euro area during the 1980s. |
| Keywords: | Inflation; Price-cost markup; Cointegration; Time-varying intercept; Dynamic modelling. |
| JEL: | C22 C32 E31 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040306&r=mac |
| By: | Alessandro Calza (European Central Bank, Postfach 160319, 60066 Frankfurt am Main, Germany); João Sousa (Economic and Research Department, Banco de Portugal,Av. Almirante Reis nº 71, 1150-012 Lisbon, Portugal) |
| Abstract: | This paper investigates whether output and inflation respond asymmetrically to credit shocks in the euro area. The methodology, based on a non-linear VAR system, follows work by Balke (2000) for the US. The results reveal evidence of threshold effects related to credit conditions in the economy. Consistent with this finding, the impulse responses show some signs of asymmetric responses over the lending cycle. |
| Keywords: | Credit; euro area; asymmetric shocks; non-linearities. |
| JEL: | E51 C15 C32 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050481&r=mac |
| By: | Jérôme Henry (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Pablo Hernández de Cos (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Sandro Momigliano (Banca d´Italia, Economic Research Department, Via Nazionale 91, 00184 Rome, Italy.) |
| Abstract: | This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal variables and assesses it against new results from harmonised simulations, conducted with six well-established econometric models used by the ECB and five national central banks (NCBs) of the Eurosystem. The outcome is also compared with results from the European Commission and the OECD models. Overall, a broad consensus appears on the impact on prices of changes in individual government budget items in the euro area. In all cases, changes in government demand and in direct taxes paid by households have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers? social security contributions have a relatively large impact. The second year results show that the effects on prices usually take some time to materialise fully; in particular, they often become large for the public consumption shock. |
| Keywords: | Euro area; model simulations; fiscal policy; prices. |
| JEL: | E17 E31 E62 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040396&r=mac |
| By: | Javier J. Pérez (Centro de Estudios Andaluces (centrA), c/ Bailén 50, 41001 Seville, Spain) |
| Abstract: | In this paper I evaluate the usefulness of a set of fiscal indicators as early-warning-signal tools for annual General Government Net Lending developments for some EMU countries (Belgium, Germany, Spain, France, Italy, The Netherlands, Ireland, Austria, Finland) and an EMU aggregate. The indicators are mainly based on monthly and quarterly public accounts’ figures. I illustrate how the dynamics of the indicators show a remarkable performance when anticipating general government accounts’ movements, both in qualitative and in quantitative terms. |
| Keywords: | Leading indicators; Fiscal forecasting and monitoring; General Government Deficit; European Monetary Union. |
| JEL: | C53 E6 H6 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050497&r=mac |
| By: | Ricardo Llaudes (The Johns Hopkins University, Department of Economics, 3400 N. Charles Street, Baltimore, MD 21218, USA.) |
| Abstract: | This paper studies the role of long-term unemployment in the determination of prices and wages. Labor market theories such as insider-outsider models predict that this type of unemployed are less relevant in the wage formation process than the newly unemployed. This paper looks for evidence of this behavior in a set of OECD countries. For this purpose, I propose a new specification of the Phillips Curve that contains different unemployment lengths in a time-varying NAIRU setting. This is done by constructing an index of unemployment that assigns different weights to the unemployed based on the length of their spell. The results show that unemployment duration matters in the determination of prices and wages, and that a smaller weight ought to be given to the long-term unemployed. This modified model has important implications for the policy maker: It produces more accurate forecasts of inflation and more precise estimates of the NAIRU. |
| Keywords: | Long-term unemployment; Phillips curve; NAIRU; Kalman filter. |
| JEL: | C22 E31 E50 J64 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050441&r=mac |
| By: | Emmanuel Dhyne (Banque Nationale de Belgique, bd.de Berlaimont 14, B-1000 Bruxelles.); Luis J. Álvarez; Hervé Le Bihan; Giovanni Veronese; Daniel Dias; Johannes Hoffmann; Nicole Jonker; Patrick Lünnemann; Fabio Rumler; Jouko Vilmunen |
| Abstract: | This paper documents patterns of price setting at the retail level in the euro area, summarized in six stylized facts. First, the average euro area monthly frequency of price adjustment is 15 p.c., compared to about 25 p.c. in the US. Second, the frequency of price changes is characterized by substantial cross product heterogeneity - prices of oil and unprocessed food products change very often, while price adjustments are less frequent for processed food, non energy industrial goods and services. Third, cross country heterogeneity exists but is less pronounced. Fourth, price decreases are not uncommon. Fifth, price increases and decreases are sizeable compared to aggregate and sectoral inflation rates. Sixth, price changes are not highly synchronized across retailers. Moreover, the frequency of price changes in the euro area is related to several factors, such as seasonality, outlet type, indirect taxation, pricing practices as well as aggregate or product specific inflation. |
| Keywords: | Pricesetting; consumer price; frequency of price change. |
| JEL: | E31 D40 C25 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050524&r=mac |
| By: | Fabio Canova (Universitat Pompeu Fabra, Department of Economics and Business, Jaume I building, Ramon Trias Fargas, 25-27 E-08005-Barcelona (Spain)); Matteo Ciccarelli (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Eva Ortega (Research Department, Bank of Canada, 234 Wellington, Ottawa, ON K1A 0G9, Canada.) |
| Abstract: | This paper examines the properties of G-7 cycles using a multicountry Bayesian panel VAR model with time variations, unit specific dynamics and cross country interdependences. We demonstrate the presence of a significant world cycle and show that country specific indicators play a much smaller role. We detect differences across business cycle phases but, apart from an increase in synchronicity in the late 1990s, find little evidence of major structural changes. We also find no evidence of the existence of an Euro area specific cycle or of its emergence in the 1990s.. |
| Keywords: | Business cycle; Indicators; Panel Data; Bayesian methods |
| JEL: | C11 C33 E32 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040312&r=mac |
| By: | Rolf Strauch (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt/Main, Germany); Mark Hallerberg (Emory University, Department of Political Science, 201 Dowman Drive, Atlanta, GA 30322.); Jürgen von Hagen (ZEI Zentrum für Europäische Integrationsforschung /Center for European Integration Studies, Rheinische Friedrich-Wilhelms-Universität Bonn) |
| Abstract: | We analyse the performance of budgetary and growth forecasts of all stability and convergence programmes submitted by EU member states over the last decade. Differences emerge for the bias in budgetary projections across countries. As a second step we explore whether economic, political and institutional factors can explain this pattern. Our analysis indicates that the cyclical position and the form of fiscal governance are major determinants of forecast biases. Projected changes in the budgetary position are mainly affected by the cycle, the need of convergence before EMU and by electoral cycles. |
| Keywords: | Fiscal forecasting; Forecast evaluation; Budget processes; Stability and Growth Pact. |
| JEL: | C53 E17 H62 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040307&r=mac |
| By: | Rebeca Jiménez-Rodríguez (CSEF-Department of Economics and Statistics, University of Salerno, 84084 Fisiano (SA),Italy.); Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper assesses empirically the effects of oil price shocks on the real economic activity of the main industrialised countries. Multivariate VAR analysis is carried out using both linear and non-linear models. The latter category includes three approaches employed in the literature, namely, the asymmetric, scaled and net specifications. We find evidence of a non-linear impact of oil prices on real GDP. In particular, oil price increases are found to have an impact on GDP growth of a larger magnitude than that of oil price price increases are found to have a negative impact on economic activity in all cases but Japan. Moreover, the effect of oil shocks on GDP growth differs between the two oil exporting countries in our sample, with oil price increases affecting the UK negatively and Norway positively. |
| Keywords: | Macroeconomic fluctuations; Oil price shock; Non-linear models. |
| JEL: | E32 Q43 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040362&r=mac |
| By: | W. Jos Jansen (Corresponding author. Monetary and Economic Policy Department, De Nederlandsche Bank, P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Ad C.J. Stokman (Research Department, De Nederlandsche Bank, P.O. Box 98, 1000 AB Amsterdam, The Netherlands.) |
| Abstract: | This paper investigates the relationship between bilateral FDI positions and cross-country business cycle correlations in the period 1982–2001. We find that countries that have comparatively intensive FDI relations also have more synchronized business cycles during 1995–2001. Before 1995, we also find a positive association between FDI linkages and output comovement, but this may partly reflect the effects of trade relations. Moreover, more intensive FDI links are also associated with a greater vulnerability to lagged output spillovers from abroad, whereas trade links are not. Policy implications of our research are (1) that there is an underlying tendency for business cycles to exhibit greater comovement in the future, and (2) that policy makers need to incorporate the FDI linkage among economies in their models and analytical framework for policy analysis.. |
| Keywords: | Foreign direct investment; business cycle synchronization; international linkages; spillovers. |
| JEL: | E32 F21 J23 J31 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040401&r=mac |
| By: | Frédéric Boissay (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jean-Pierre Villetelle (Banque de France-General, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.) |
| Abstract: | This paper presents the French country block of the ESCB Multi-Country Model for the euro area, which has been built in collaboration by the ECB and the Banque de France. The theoretical structure of the model is in line with most current macroeconometric models, i.e. supply factors determine the long-run equilibrium, while in the short run aggregate demand determines aggregate output. The paper is structured as follows. We first present the theoretical background of the model. Then we review the long run relationships as well as the estimated short term dynamic equations. Finally, we simulate the effects of six exogenous shocks to the economy and discuss the dynamic properties of the model. |
| Keywords: | Macro-econometric Modelling; France. |
| JEL: | C3 C5 E1 E2 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050456&r=mac |
| By: | Robert Inklaar; Richard Jong-A-Pin; Jakob de Haan |
| Abstract: | This paper re-examines the relationship between trade intensity and business cycle synchronization for 21 OECD countries during 1970-2003. Instead of using instrumental variables, we estimate a multivariate model including variables capturing specialisation, financial integration, and similarity of economic policies. We confirm that trade intensity affects business cycle synchronization, but the effect is much smaller than previously reported. Other factors in our model have a similar impact on business cycle synchronization as trade intensity. Finally, we find that the effect of trade on business cycle synchronisation is not driven by outliers and does not suffer from parameter heterogeneity. |
| Keywords: | business cycles, trade, synchronization of business cycles |
| JEL: | E32 F42 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1546&r=mac |
| By: | Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roberto Rigobon (Massachusetts Institute of Technology, Cambridge MA 02142-1347, USA.) |
| Abstract: | The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, and that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets - US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years - prior to EMU, the paper finds smaller international spillovers. |
| Keywords: | International financial markets; integration; transmission; financial market linkages; identification; heteroskedasticity; asset pricing; United States; euro area. |
| JEL: | E44 F3 C5 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050452&r=mac |
| By: | Marcin Przybyla (EU Countries Division, Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany); Moreno Roma (Corresponding author: European Central Bank, Directorate General Economics, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper we explore the link between the intensity of product market competition and inflation rates across EU countries and sectors. We consider long-term averages of inflation rates in order to remove the cyclical behavior of inflation over time and as alternative proxies of competition we use the level of mark-up, profit margin, the profit rate and a survey based “intensity of competition” variable. Results for both aggregate and sectoral panels show that the extent of product market competition, as proxied by the level of mark-up in particular, is an important driver of inflation. Notwithstanding some caveats associated with the measurement of the proxies of competition used, our findings suggest that higher product market competition reduces average inflation rates for a prolonged period of time. Moreover, results both at the aggregate and sectoral level are generally confirmed by a wide set of robustness tests. |
| Keywords: | Inflation; Competition; Estimation and Panel Data Analysis. |
| JEL: | C21 C23 E31 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050453&r=mac |
| By: | Timothy Cogley (Department of Economics, University of California, Davis, O ne Shields Avenue, CA 95615, USA); Thomas J. Sargent (Corresponding author: Department of Economics, New York University, 269 Mercer Street, 7th Floor, New York,) |
| Abstract: | Previous studies have interpreted the rise and fall of U.S. in ation after World War II in terms of the Fed's changing views about the natural rate hypothesis but have left an important question unanswered. Why was the Fed so slow to implement the low-in ation policy recommended by a natural rate model even after economists had developed statistical evidence strongly in its favor? Our answer features model uncertainty. Each period a central bank sets the systematic part of the in ation rate in light of updated probabilities that it assigns to three competing models of the Phillips curve. Cautious behavior induced by model uncertainty can explain why the central bank presided over the in ation of the 1970s even after the data had convinced it to place much the highest probability on the natural rate model. |
| Keywords: | Natural unemployment rate; Phillips curve; Bayes' law; anticipated utility; robustness. |
| JEL: | E31 E58 E65 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050478&r=mac |
| By: | Andreas Beyer (European Central Bank); Roger E. A. Farmer (UCLA, Dept. of Economics, 8283 Bunche Hall, Box 951477, Los Angeles, CA 90095-1477, USA); Jérôme Henry (European Central Bank, Postfach 16 03 19, D-60066, Frankfurt am Main, Germany); Massimiliano Marcellino (IEP-Bocconi University, IGIER and CEPR) |
| Abstract: | New-Keynesian models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack of identification of the parameters, misspecifi- cation of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the validity of commonly used instruments to achieve identification. In this paper we analyze the practical relevance of these problems and we propose remedies to weak identifi- cation based on recent developments in factor analysis for information extraction from large data sets. Using these techniques, we evaluate the robustness of recent findings on the importance of forward looking components in the equations of the New-Keynesian model. |
| Keywords: | New-Keynesian Phillips curve; forward looking output equation; Taylor rule; rational expectations; factor analysis; determinacy of equilibrium. |
| JEL: | E5 E52 E58 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050510&r=mac |
| By: | Carlos Robalo Marques (Bank of Portugal) |
| Abstract: | This paper addresses some issues concerning the definition and measurement of inflation persistence in the context of the univariate approach. First, it is stressed that any estimate of persistence should be seen as conditional on the given assumption for the long run level of inflation and that such long run level should be allowed to vary through time. Second, a non-parametric measure of persistence is suggested which explores the relation between persistence and mean reversion. Third, inflation persistence in the U.S. and the Euro Area is re-evaluated allowing for a time varying mean and it is found that estimates of persistence crucially depend on the function used to proxy the mean of inflation. In particular, the widespread belief that inflation has been more persistent in the sixties and seventies than in the last twenty years is shown to obtain only for the U.S. and for the special case of a constant mean. |
| Keywords: | Inflation persistence; univariate approach; time varying mean; mean reversion. |
| JEL: | E31 C22 E52 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040371&r=mac |
| By: | Carsten Detken (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Vítor Gaspar (BANCO DE PORTUGAL, Avenida Almirante Reis, 71- 8º, 1150-012 LISBOA - PORTUGAL); Bernhard Winkler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | We show how in a Blanchard-Yaari, overlapping generations framework, perfect substitutability of government bonds in Monetary Union tempts governments to exploit the enlarged common pool of savings. In Nash equilibrium all governments increase their bond financed transfers to current generations (prosperity effect) at the expense of future generations (posterity effect). The resulting deficit bias occurs even if one assumes that before Monetary Union countries had eliminated their deficit bias by designing appropriate domestic institutions. The paper provides a rationale for an increased focus on fiscal discipline in Monetary Union, without the need to assume imperfect credibility of existing Treaty provisions or to refer to extreme situations involving sovereign default. We draw on existing empirical evidence to argue that the degree of government bond substitutability within the European Monetary Union is an order of magnitude larger than in the global economy. |
| Keywords: | Fiscal spillover effects; common pool; overlapping generations; bond market integration; fiscal discipline; fiscal rules; European Monetary Union. |
| JEL: | D62 E61 E63 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040420&r=mac |
| By: | Yunus Aksoy (Birkbeck, University of London); Miguel A. León-Ledesma (Department of Economics, University of Kent) |
| Abstract: | In this paper we argue that both statistics and economic theory-based evidence largely indicate the absence of long run relationships between the real output and the most relevant monetary indicator for the U.K. and the U.S, short term interest rates. These findings are not only a full sample result, but also valid in most of the sub-samples throughout the second half of the 20th century and are robust to the inclusion of possible omitted real variables. |
| Keywords: | information value, long term relationship, cointegration, bounds tests |
| JEL: | E3 E4 E5 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050434&r=mac |
| By: | Paul McNelis (Department of Economics, Georgetown University,Washington, DC 20057); Peter McAdam (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany.) |
| Abstract: | This paper applies linear and neural network-based “thick” models for forecasting inflation based on Phillips–curve formulations in the USA, Japan and the euro area. Thick models represent “trimmed mean” forecasts from several neural network models. They outperform the best performing linear models for “real-time” and “bootstrap” forecasts for service indices for the euro area, and do well, sometimes better, for the more general consumer and producer price indices across a variety of countries. |
| Keywords: | Neural Networks; Thick Models; Phillips curves; real-time forecasting; bootstrap. |
| JEL: | C12 E31 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040352&r=mac |
| By: | Danny Pitzel; Lenno Uusküla |
| Abstract: | Several papers have looked at the relationship between country-specific factors and the strength of monetary transmission. Cecchetti (1999) concentrated on legal aspects, De Grauwe and Storti (2004) more on the financial structure of the economy. The objective of this paper is to measure how financial development variables influence the strength of monetary transmission in European countries. This paper employs a meta-analysis technique that has gained much popularity in recent years. According to the results, monetary transmission in Europe is strongly influenced by financial depth and structure. |
| Keywords: | monetary transmission, financial depth, meta-analysis |
| JEL: | E3 E4 E5 E6 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2005-10&r=mac |
| By: | Eilev S. Jansen (Norges Bank, Norwegian University of Science and Technology) |
| Abstract: | The paper presents an incomplete competition model (ICM), where inflation is determined jointly with unit labour cost growth. The ICM is estimated on data for the Euro area and evaluated against existing models, i.e. the implicit inflation equation of the Area Wide model (AWM) - cf. Fagan, Henry and Mestre (2001) - and estimated versions of the (single equation) P* model and a hybrid New Keynesian Phillips curve. The evidence from these comparisons does not invite decisive conclusions. There is, however, some support in favour of the (reduced form) AWM inflation equation. It is the only model that encompasses a general unrestricted model and it forecast encompasses the competitors when tested on 20 quarters of one step ahead forecasts. |
| Keywords: | Bayesian Analysis; DSGE Models; Model Misspecification. |
| JEL: | C32 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040322&r=mac |
| By: | Philippe Michel (National Center for Scientific Research (CNRS)); Emmanuel Thibault (University of Perpignan (GEREM)); Jean-Pierre Vidal (European Central Bank, DG Economics) |
| Abstract: | This paper surveys intergenerational altruism in neoclassical growth models. It first examines Barro's approach to intergenerational altruism, whereby successive generations are linked by recursive altruistic preferences. Individuals have an altruistic concern only for their children, who in turn also have altruistic feelings for their own children. The conditions under which the Ricardian equivalence (debt neutrality) theorem applies are specified. The effectiveness of fiscal policy is further analysed in the context of an economy populated by heterogeneous families differing with respect to their degree of intergenerational altruism. Other forms of altruism, referred to as ad hoc altruism, are also examined, along with their implications for fiscal policy. |
| Keywords: | Neoclassical general aggregative models, Altruism, Fiscal Policy. |
| JEL: | E13 D64 E62 C60 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040386&r=mac |
| By: | Christian Ewerhart (Institute for Empirical Research in Economics (IEW)); Nuno Cassola (European Central Bank, DG Market Operations); Steen Ejerskov (Danmarks Nationalbank, Economics); Natacha Valla (Banque de France (Bank of France)) |
| Abstract: | We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank just trades to compensate its liquidity imbalance, while a sophisticated bank will exploit its private information about the liquidity situation in the market. It is shown that with positive probability, the liquidity effect (Hamilton, 1997) is reversed, i.e., a liquidity drainage from the banking system may generate an overall decrease in the market rate. The phenomenon does not disappear when the number of banks increases. We also show that private information mitigates the effect of an unexpected liquidity shock on the market rate, suggesting a conservative information policy from a central bank perspective. |
| Keywords: | Liquidity effect, asymmetric information, monetary policy implementation. |
| JEL: | G14 G21 E52 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040378&r=mac |
| By: | Fabio Moneta (Finance Department, Carroll School of Management, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467-3808.) |
| Abstract: | This paper studies the informational content of the slope of the yield curve as a predictor of recessions in the euro area. In particular, the historical predictive power of ten yield spreads, for different segments of the yield curve, is tested using a probit model. The yield spread between the ten-year government bond rate and the threemonth interbank rate outperforms all the other spreads in predicting recessions in the euro area. The result is confirmed when the autoregressive series of the state of the economy is added in the same model. The forecast accuracy of the spread between 10-year and 3-month interest rates is explored in an exercise of out-of-sample forecasting. This yield spread appears to contain information which goes beyond the information already available in the history of output, providing further evidence of the potential usefulness of this indicator for monetary policy purposes. |
| Keywords: | Probit model; forecasting; recessions; yield curve. |
| JEL: | E44 E52 C53 |
| Date: | 2003–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030294&r=mac |
| By: | Andrea Vaona (School of Economics, Mathematics & Statistics, Birkbeck College) |
| Abstract: | In the New-Neoclassical Synthesis literature it is customary to use additively separable preferences, very often not campatible with long-run productivity growth and trend infation. The present paper shows that using multiplicatively separable preferences it is possible to gain further insight on the persistence mechanics of this class of models. In particular it is showed that the more leisure and the money-consumption bundle are Edgeworth complement and the less persistent are output deviations after a monetary shock. The basic intuition for this result is that an increase in money supply not only induces economic agents to increase their labour supply, but also raises the opportunity cost for this choice given that agents with more money in their pockets and greater consumption would like to have more leisure too. In addition, empirical estimates not only support multiplicatively and not additively separable preferences, but highlight new problems for the New-Neoclassical Synthesis given that leisure and money (consumption) appear to be Edgeworth complements and not substitutes. |
| Keywords: | Output persistence, multiplicatively separable preferences |
| JEL: | E31 E40 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0511&r=mac |
| By: | Kevin X.D. Huang (Economic Research Department, Federal Reserve Bank of Kansas City, 925 Grand Boulevard, Kansas City, MO 64198, USA;); Zheng Liu (Department of Economics, Emory University, Atlanta, GA 30322, USA;) |
| Abstract: | The international welfare effects of a country's monetary policy shocks have been controversial in the new open economy macro (i.e., NOEM) literature. While a unilateral monetary expansion increases the production efficiency in each country, it affects the terms of trade in favor of one country against another depending on the currencies of price setting. In this paper, we incorporate multiple stages of production and trade into a standard NEOM model to capture world production interdependence, and show that increased world production interdependence tends to magnify the efficiency-improvement effect while dampening the terms-of-trade effect. As a consequence, a unilateral monetary expansion can be mutually beneficial regardless of in which currency prices are set. In this sense, international monetary policy transmission may not be a source of potential conflict in a world with production interdependence. |
| Keywords: | Stages of processing; Monopolistic competition; Local currency pricing; Welfare. |
| JEL: | E32 F31 F41 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040355&r=mac |
| By: | Michael Ehrmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | The paper assesses the communication strategies of the Federal Reserve, the Bank of England and the European Central Bank and their effectiveness. We find that the effectiveness of communication is not independent from the decisionmaking process in the committee. The paper shows that the Federal Reserve has been pursuing a rather individualistic communication strategy amid a collegial approach to decision-making, while the Bank of England is using a collegial communication strategy and highly individualistic decision-making. The ECB has chosen a collegial approach both in its communication and in its decisionmaking. Assessing these strategies, we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the Federal Reserve and the ECB. This suggests that there may not be a single best approach to designing a central bank communication and decisionmaking strategy. |
| Keywords: | Communication; monetary policy; committee; effectiveness; strategies; Federal Reserve; Bank of England; European Central Bank. |
| JEL: | E43 E52 E58 G12 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050488&r=mac |
| By: | Carlos Bernadell (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany); Joachim Coche (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany); Ken Nyholm (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | This paper presents a new framework allowing strategic investors to generate yield curve projections contingent on expectations about future macroeconomic scenarios. By consistently linking the shape and location of yield curves to the state of the economy our method generates predictions for the full yield-curve distribution under different assumptions on the future state of the economy. On the technical side, our model represents a regimeswitching expansion of Diebold and Li (2003) and hence rests on the Nelson-Siegel functional form set in state-space form. We allow transition probabilities in the regimeswitching set-up to depend on observed macroeconomic variables and thus create a link between the macro economy and the shape and location of yield curves and their time-series evolution. The model is successfully applied to US yield curve data covering the period from 1953 to 2004 and encouraging out-of-sample results are obtained, in particular at forecasting horizons longer than 24 months. |
| Keywords: | Regime switching; scenario analysis; yield curve distributions; state space model. |
| JEL: | C51 C53 E44 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050472&r=mac |
| By: | Claire Loupias (Corresponding author: Centre de Recherche, Banque de France, DGEI-DEER-CRECH, 41-1391, 31 rue Croix-des-Petits-Champs, 75 049 Paris Cedex 01, France); Roland Ricart (Service des Synthèses Conjoncturelles, Banque de France, DGEI-DEER-CRECH, 41-1391, 31 rue Croix-des-Petits-Champs, 75 049 Paris Cedex 01, France) |
| Abstract: | This paper reports the results of a survey conducted by the Banque de France during Winter 2003-2004 to investigate the price-setting behavior of French manufacturing companies. Prices are found to adjust infrequently; the median firm modifies its price only once a year. Price reviews are more frequent than price changes; the median firm reviews its price quarterly. Firms are found to follow either time-dependent, state-dependent or both pricing rules. Moreover, the chosen interval of price reviews depends on the probability that changes in the firms’ environment occur. Coordination failure and nominal contracts (either written or implicit) are the most important sources of price stickiness, while pricing thresholds and physical menu costs appear to be totally unimportant. Asymmetries in price stickiness are found to be different for cost shocks compared to demand shocks - prices are more rigid downward than upward for cost shocks, while the reverse is true for demand shocks. |
| Keywords: | Price rigidity; price-setting behavior; inflation persistence; survey data. |
| JEL: | E31 D40 L11 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040423&r=mac |
| By: | Roel M.W. J. Beetsma (Department of Economics, University of Amsterdam); Xavier Debrun (Fiscal Affairs Department, International Monetary Fund) |
| Abstract: | The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater "procedural" flexibility in the implementation of existing rules may improve welfare, thus increasing the Pact’s political acceptability. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays. |
| Keywords: | Fiscal rules, Stability and Growth Pact, procedural flexibility, deficits, structural reforms. |
| JEL: | E62 H6 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050433&r=mac |
| By: | Luc Aucremanne (Research Department, National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium); Emmanuel Dhyne (Research Department, National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium and and UMH, Centre de Recherche Warocqué) |
| Abstract: | Using Logistic Normal regressions, we model the price-setting behaviour for a large sample of Belgian consumer prices over the January 1989 - January 2001 period. Our results indicate that time-dependent features are very important, particularly an infinite mixture of Calvo pricing rules and truncation at specific horizons. Truncation is mainly a characteristic of pricing in the service sector where it mostly takes the form of annual Taylor contracts typically renewed at the end of December. Several other variables, including some that can be considered as state variables, are also found to be statistically significant. This is particularly so for accumulated sectoral inflation since the last price change. Once heterogeneity and the role of accumulated inflation are acknowledged, hazard functions become mildly upward-sloping, even in a low inflation regime. The contribution of the state-dependent variables to the pseudo-R2 of our equations is, however, not particularly important. |
| Keywords: | Consumer prices; time-dependent pricing; state-dependent pricing; Calvo model; Truncated Calvo model; Taylor contracts. |
| JEL: | C23 C25 D40 E31 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050462&r=mac |
| By: | Mónica Dias (Banco do Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal); Daniel Dias (Banco do Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal); Pedro D. Neves (Banco do Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal; Universidade Católica Portuguesa, Lisbon.) |
| Abstract: | This paper identifies the empirical stylized features of price setting behaviour in Portugal using the micro-datasets underlying the consumer and the producer price indexes. The main conclusions are the following: 1 in every 4 prices change each month; there is a considerable degree of heterogeneity in price setting practices; consumer prices of goods change more often than consumer prices of services; producer prices of consumption goods vary more often than producer prices of intermediate goods; for comparable commodities, consumer prices change more often than producer prices; price reductions are common, as they account for around 40 per cent of total price changes; price changes are, in general, sizeable; finally, the price setting patterns at the consumer level seem to depend on the level of inflation as well as on the type of outlet. |
| Keywords: | Price setting; Consumer prices; Producer prices; Frequency of price changes. |
| JEL: | E31 E32 L11 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040332&r=mac |
| By: | Kerstin Bernoth (Research Division, De Nederlandsche Bank); Jürgen von Hagen (Center for European Integration Studies); Ludger Schuknecht (DG Economics, European Central Bank) |
| Abstract: | This paper provides a study of bond yield differentials among EU eurobonds issued between 1991 and 2002. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premia which increase with the debt, deficit and debt-service ratio and depend positively on the issuer’s relative bond market size. Global investors’ attitude towards credit risk, measured as the yield spread between low grade US corporate bonds and government bonds, also affects bond yield spreads between EU countries and Germany/USA. The start of the European Monetary Union had significant effects on the bond pricing of the member states. |
| Keywords: | asset pricing, determination of interest rates, fiscal policy, government debt. |
| JEL: | G12 E43 E62 H63 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040369&r=mac |
| By: | Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Benoit Mojon (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Natacha Valla (Banque de France, B.P. 140-01, 75049 Paris Cedex 01, France.) |
| Abstract: | This paper analyses the pricing of bank loans and deposits in euro area countries. We show that retail bank interest rates adjust not only to changes in short-term interest rates but also to long-term interest rates. This result, which is arguably intuitive for long-term retail bank rates, is also confirmed for bank interest rates on short-term instruments. The transmission of changes in short-term market interest rates along the yield curve is found to be a key factor explaining the sluggishness of retail bank interest rates. We also show that in the cases where we cannot reject that the adjustment of retail rates has changed since the introduction of the euro, this adjustment has become faster. |
| Keywords: | Retail bank interest rates; market interest rates; euro area countries. |
| JEL: | E43 G21 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050518&r=mac |
| By: | Thomas Warmedinger (European Central Bank, Directorate General Research) |
| Abstract: | Pricing-to-market (PTM) behaviour implies that exporters adjust their prices to the prevailing prices in their export markets. For the importing country, PTM effects can be interpreted as a measure of the stability of domestic prices against foreign price and exchange rate developments. PTM behaviour can be attributed to the level of competitiveness and price stickiness in the importing country. This paper investigates PTM behaviour in the euro area from the importing country’s perspective, for both individual countries and the euro area as a whole. Analysis firstly involves the estimation of PTM effects in the five largest euro area countries. Secondly, PTM effects in the euro area as a whole are estimated to be slightly higher than one half. The results from illustrative simulations suggest that the increase in euro-area inflation during the first two years of monetary union can be largely attributed to oil price and exchange rate developments. |
| Keywords: | Printing-to-market, import prices, exchange-rate pass-through, euro area. |
| JEL: | C32 E31 F14 F47 |
| Date: | 2004–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040299&r=mac |
| By: | Nicholai Benalal (European Central Bank, Directorate General Economics); Juan Luis Diaz del Hoyo (European Central Bank, Directorate General Economics); Bettina Landau (European Central Bank, Directorate General Economics); Moreno Roma (European Central Bank, Directorate General Economics); Frauke Skudelny (European Central Bank, Directorate General Economics) |
| Abstract: | In this paper we investigate whether the forecast of the HICP components (indirect approach) improves upon the forecast of overall HICP (direct approach) and whether the aggregation of country forecasts improves upon the forecast of the euro-area as a whole, considering the four largest euro area countries. The direct approach provides clearly better results than the indirect approach for 12 and 18 steps ahead for the overall HICP, while for shorter horizons the results are mixed. For the euro area HICP excluding unprocessed food and energy (HICPX), the indirect forecast outperforms the direct whereas the differences are only marginal for the countries. The aggregation of country forecasts does not seem to improve upon the forecast of the euro area HICP and HICPX. This result has however to be taken with caution as differences appear to be rather small and due to the limited country coverage. |
| Keywords: | Forecasting short-term inflation, HICP sub-components/aggregation, Bayesian VARs, Model Selection |
| JEL: | C11 C32 C53 E31 E37 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040374&r=mac |
| By: | Mattias Villani (Sveriges Riksbank, Research Department, SE-103 37 Stockholm, Sweden, and Department of Statistics, Stockholm University.); Anders Warne (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany) |
| Abstract: | Structural VARs have been extensively used in empirical macroeconomics during the last two decades, particularly in analyses of monetary policy. Existing Bayesian procedures for structural VARs are at best confined to a severly limited handling of cointegration restrictions. This paper extends the Bayesian analysis of structural VARs to cover cointegrated processes with an arbitrary number of cointegrating relations and general linear restrictions on the cointegration space. A reference prior distribution with an optional small open economy effect is proposed and a Gibbs sampler is derived for a straightforward evaluation of the posterior distribution. The methods are used to analyze the effects of monetary policy in Sweden. |
| Keywords: | Structural; Vector autoregression; Monetary policy; Impulse responses; Counterfactual experiments. |
| JEL: | C11 C32 E52 |
| Date: | 2003–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030296&r=mac |
| By: | Karl Whelan (Central Bank and Financial Services Authority of Ireland.) |
| Abstract: | Despite their popularity as theoretical tools for illustrating the e ects of nominal rigidities, some have questioned whether models based on Taylor-style staggered contracts can match the persistence of the empirical in ation process. This paper presents some general theoretical results about Taylor-style models. It is shown that these models do not have a problem matching high autocorrelations for in ation. However, they fail to explain a key feature of reduced-form Phillips-curve regressions: The positive dependence of in ation on its own lags. It is shown that staggered price contracting models instead predict that the coefficients on these lag terms should be negative. |
| Keywords: | Inflation Persistence; Staggered Contracts. |
| JEL: | E31 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040417&r=mac |
| By: | Daniel A. Dias (Banco de Portugal); Carlos Robalo Marques (Banco de Portugal); João M. C. Santos Silva (ISEG/Universidade Técnica de Lisboa) |
| Abstract: | In this paper we analyse the ability of time and state dependent price setting rules to explain durations of price spells or the probability of changing prices. Our results suggest that simple time dependent models cannot be seen as providing a reasonable approximation to the data and that state dependent models are required to fully characterise the price setting behaviour of Portuguese firms. Inflation, the level of economic activity and the magnitude of the last price change emerge as relevant variables affecting the probability of changing prices. Moreover, it is seen that the impact differs for negative and positive values of these covariates. |
| Keywords: | CPI data; Hazard functions; Inflation. |
| JEL: | C41 D40 E31 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050511&r=mac |
| By: | Paul De Grauwe (Kathoelike Universiteit Leuven, International Economics, aamsestraat 69, 3000 Leuven, Belgium); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | This paper brings together several strands of the literature on the endogenous effects of monetary integration, i.e., whether sharing a single currency may set in motion forces bringing countries closer together. The start of EMU has spurred a new interest in this debate. Four areas are analysed: the endogeneity of economic integration, in which we look primarily at evidence on prices and trade; the endogeneity of financial integration or equivalently of insurance schemes based on capital markets; the endogeneity of symmetry of shocks; and the endogeneity of product and labour market flexibility. We present diverse arguments and, where possible, explore the incipient empirical literature focussing on the euro area. Our preliminary conclusion is one of moderate optimism. The different endogeneities that exist in the dynamics towards optimum currency areas are at work. How strong these endogeneities are and how quickly they will do their work remains to be seen. |
| Keywords: | Optimum Currency Area; Economic and Monetary Integration; EMU. |
| JEL: | E42 F13 F33 F42 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050468&r=mac |
| By: | Jürgen Wiemers; Ulrike Neyer |
| Abstract: | The interbank money market plays a key role in the execution of monetary policy. Hence, it is important to know the functioning of this market and the determinants of the interbank money market rate. In this paper, we develop an interbank money market model with a heterogeneous banking sector. We show that besides for balancing daily liquidity fluctuations banks participate in the interbank market because they have different marginal costs of obtaining funds from the central bank. In the euro area, which we refer to, these cost differences occur because banks have different marginal cost of collateral which they need to hold to obtain funds from the central bank. Banks with relatively low marginal costs act as intermediaries between the central bank and banks with relatively high marginal costs. The necessary positive spread between the interbank market rate and the central bank rate is determined by transaction costs and credit risk in the interbank market, total liquidity needs of the banking sector, costs of obtaining funds from the central bank, and the distribution of the latter across banks. |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:182&r=mac |
| By: | Matthieu Bussière (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Gernot J. Müller (Goethe University Frankfurt, Mertonstr. 17, D-60325 Frankfurt am Main, Germany) |
| Abstract: | Currently the U.S. is experiencing record budget and current account deficits, a phenomenon familiar from the "Twin Deficits" discussion of the 1980s. In contrast, during the 1990s productivity growth has been identified as the primary cause of the US current account deficit. We suggest a theoretical framework which allows to evaluate empirically the relative importance of budget deficits and productivity shocks for the determination of the current account. Using a sample of 21 OECD countries and time series data from 1960 to 2003 we find little evidence for a contemporaneous effect of budget deficits on the current account, while country-specific productivity shocks appear to play a key role. |
| Keywords: | Current account, productivity, investment, budget deficit. |
| JEL: | E62 F32 F41 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050509&r=mac |
| By: | Andrzej Rzonca (National Bank of Poland, ul. Swietokrzyska 11/21, 00-919 Warszawa, Poland.); Piotr Cizkowicz (National Bank of Poland, ul. Swietokrzyska 11/21, 00-919 Warszawa, Poland.) |
| Abstract: | Many economists are convinced that longer-term benefits from fiscal consolidation are in a trade-off with short-term deceleration in output growth. However, more recent research suggests that curbing fiscal imbalances contributes to faster growth already in the short term. This paper is about such non-Keynesian effects. Section two systematizes theoretical explanations. Section three reviews previous empirical research. Section four uses panel estimation techniques to examine the consequences of fiscal consolidation in New Member States. This analysis provides evidence that in those countries fiscal consolidation contributed substantially to the acceleration of output growth even in the short term. However, the exact channels through which non- Keynesian effects occurred could not be unambiguously identified in the paper. Section five takes the new step of a qualitative analysis of the outcomes of strong fiscal adjustments in the countries under consideration. That analysis shows that their experiences were quite similar to those of developed countries. |
| Keywords: | Fiscal consolidation; non-Keynesian effects; new member states. |
| JEL: | E62 E65 C33 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050519&r=mac |
| By: | Andrew T. Levin (Federal Reserve Board, Stop 70,Washington, DC 20551 USA,); Jeremy M. Piger (Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166 USA,) |
| Abstract: | We apply both classical and Bayesian econometric methods to characterize the dynamic behavior of inflation for twelve industrial countries over the period 1984-2003, using four different price indices for each country. In particular, we estimate a univariate autoregressive (AR) model for each series, and consider the possibility of a structural break at an unknown date. For many of these countries, we find strong evidence for a break in the intercept of the AR equation in the late 1980s or early 1990s. Allowing for a break in intercept, the inflation measures generally exhibit relatively low inflation persistence. Evidently, high inflation persistence is not an inherent characteristic of industrial economies. |
| Keywords: | Inflation dynamics; Bayesian econometrics; Largest autoregressive root. |
| JEL: | C11 C22 E31 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040334&r=mac |
| By: | Laurent Baudry (University of Lille I); Hervé Le Bihan (Banque de France); Patrick Sevestre (Université Paris XII); Sylvie Tarrieu (Banque de France - Centre de Recherche) |
| Abstract: | Based upon a large fraction of the price records used for computing the French CPI, we document consumer price rigidity in France. We first provide a methodological discussion of issues involved in estimating average price duration with micro-data. The average duration of prices in the sectors covered by the database (65% of CPI) is then found to be around 8 months. A strong heterogeneity across sectors both in the average duration of prices and in the pattern of price setting is reported. There is no clear evidence of downward nominal rigidity, since price cuts are almost as frequent as price rises. Moreover, the average size of a change in price is quite large in both cases. Overall, while our results do not entail a clear conclusion about the existence of menu costs, there is evidence of both time-dependent and state-dependent price setting behaviors by retailers. |
| Keywords: | Price stickiness, duration of prices, consumer price index, frequency of price change. |
| JEL: | E31 D43 L11 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040384&r=mac |
| By: | Antonio Matas Mir (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Denise R Osborn (Centre for Growth and Business Cycle Research, School of Economic Studies, University of Manchester, UK) |
| Abstract: | To date, there has been little investigation of the impact of seasonal adjustment on the detection of business cycle expansion and recession regimes. We study this question both analytically and through Monte Carlo simulations. Analytically, we view the occurrence of a single business cycle regime as a structural break that is later reversed, showing that the effect of the linear symmetric X-11 filter differs with the duration of the regime. Through the use of Markov switching models for regime identification, the simulation analysis shows that seasonal adjustment has desirable properties in clarifying the true regime when this is well underway, but it distorts regime inference around turning points, with this being especially marked after the end of recessions and when the one-sided X-11 filter is employed. |
| Keywords: | Seasonal adjustment; business cycles; Markov switching models. |
| JEL: | E32 C22 C80 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040357&r=mac |
| By: | Luis J. Álvarez (Banco de España, Alcalá 48, 28014 Madrid, Spain.); Ignacio Hernando (Banco de España, Alcalá 48, 28014 Madrid, Spain.) |
| Abstract: | This paper identifies the basic features of the price setting mechanism in the Spanish economy, using a large dataset that contains over 1.1 million price records and covers around 70% of the expenditure on the CPI basket. In particular, the paper identifies differences in the frequency and size of price adjustments across types of products and explores how these general features are affected by certain specific factors: seasonality, the level of inflation, changes in indirect taxation and the practice of using psychological and round prices. We find that prices do not change often but do so by a large amount, although there is a marked heterogeneity across products. Moreover, the high frequency of price reductions suggests that there is no strong downward rigidity. Our evidence also supports the use of time and state-dependent pricing strategies. |
| Keywords: | Price setting; consumer prices; frequency of price changes. |
| JEL: | E31 D40 C25 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040416&r=mac |
| By: | Trevor Breusch (Australian National University) |
| Abstract: | The method of "excess sensitivity" of Bajada (1999, 2001, 2002) indicates a large underground economy in Australia, with estimates of unrecorded income around 15 per cent of official GDP. These estimates concern policymakers, especially those agencies responsible for national accounts, tax collection, economic stabilization and law enforcement. We show that the method exhibits a severe form of non-robustness, in which the results change markedly with a simple change in the units of measurement of the variables. There is a separate problem in which a key parameter is set to an unrealistic value that makes the estimates many times too high. |
| Keywords: | underground economy, currency demand, tax evasion, econometric models |
| JEL: | C51 E42 E62 H26 |
| Date: | 2005–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509025&r=mac |
| By: | M. Hashem Pesaran; Til Schuermann; Björn-Jakob Treutler |
| Abstract: | The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. Using a global vector autoregressive macroeconometric model accounting for about 80% of world output, we propose a model for exploring credit risk diversification across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity along with credit rating information matters a great deal for capturing differences in simulated credit loss distributions. Imposing homogeneity results in overly skewed and fat-tailed loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogeneous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity. |
| Keywords: | risk management, default dependence, economic interlinkages, portfolio choice |
| JEL: | C32 E17 G20 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1548&r=mac |
| By: | Sharif Md. Raihan; Yi Wen; Bing Zeng |
| Abstract: | One basic problem in business-cycle studies is how to deal with nonstationary time series. The market economy is an evolutionary system. Economic time series therefore contain stochastic components that are necessarily time dependent. Traditional methods of business cycle analysis, such as the correlation analysis and the spectral analysis, cannot capture such historical information because they do not take the time-varying characteristics of the business cycles into consideration. In this paper, we introduce and apply a new technique to the studies of the business cycle: the wavelet-based time-frequency analysis that has recently been developed in the field of signal processing. This new method allows us to characterize and understand not only the timing of shocks that trigger the business cycle, but also situations where the frequency of the business cycle shifts in time. Our empirical analyses show that 1973 marks a new era for the evolution of the business cycle. |
| Keywords: | Business cycles |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-050&r=mac |
| By: | Claudia Kwapil (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria); Josef Baumgartner (Austrian Institute of Economic Research (WIFO), Arsenal Objekt 20, POB 91, 1103 Vienna, Austria); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria) |
| Abstract: | This paper explores the price-setting behavior of Austrian firms based on survey evidence. Our main result is that customer relationships are a major source of price stickiness in the Austrian economy. We also find that the majority of firms in our sample follows a timedependent pricing strategy. However, a substantial fraction of firms deviates from time-dependent pricing in the case of large shocks and switches to a state-dependent pricing strategy. In addition, we present evidence suggesting that the price response to various shocks is subject to asymmetries. |
| Keywords: | Price-setting behavior; Price rigidity. |
| JEL: | C25 E30 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050464&r=mac |
| By: | Olli Castrén (External Developments Division, DG-Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper uses data on currency options prices for the exchange rates of the three largest new EU member states Poland, Czech Republic and Hungary vis-à-vis the euro and the US dollar to estimate the risk-neutral density (RND) functions and the density interval bands. Analysing the RNDs, we find that only some of the implied moments on the Polish zloty exchange rate systematically move around policy events, while the implied moments on the RNDs on the Czech koruna and Hungarian forint show more systematic changes. Regarding the HUF/EUR currency pair, monetary policy news have a significant impact on all moments, while changes in implied standard deviation signal a higher probability of interest rate changes by the Hungarian central bank. The more marked results for HUF/EUR exchange rate could reflect the fixed exchange rate regime prevailing throughout the sample period. |
| Keywords: | Foreign exchange rate market sentiment; monetary policy news; currency options data. |
| JEL: | E52 F31 G15 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050440&r=mac |
| By: | Silvia Fabiani (Research Department, Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy); Angela Gattulli (Research Department, Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy); Roberto Sabbatini (Research Department, Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy) |
| Abstract: | This study examines price setting behaviour of Italian firms on the basis of the results of a survey conducted by Banca d’Italia in early 2003 on a sample of around 350 firms belonging to all economic sectors. Prices are mostly fixed following standard mark-up rules, although customer-specific characteristics have a role, in particular in manufacturing and services where price discrimination across customers matters. Rival prices mostly affect pricesetting strategies in industrial firms. In reviewing their prices, firms follow either state-dependent rules or a combination of time and state-dependent ones. Concerning the frequency of price adjustments, a considerable degree of stickiness emerges both at the stage in which firms evaluate their pricing strategies and the stage in which they actually implement the price change. In 2002 most firms changed their price only once. Three alternative explanations of nominal rigidity are ranked highest by the firms interviewed: explicit contracts, tacit collusive behaviour and the perception of the temporary nature of the shock. Prices respond asymmetrically to shocks, depending on the direction of the adjustment (positive vs negative) and the source of the shock (demand vs supply). Real rigidities – captured by the degree of market competition, customers’ search costs, the sensitivity of profits to changes in demand – play an important role in determining this asymmetry. Moreover, whereas cost shocks impact more when prices have to be raised than when they have to be reduced, demand decreases are more likely to induce a price change than demand increases. |
| Keywords: | Nominal rigidity; real rigidity; Price-setting; Inflation persistence; Survey data. |
| JEL: | E30 D40 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040333&r=mac |
| By: | Yi Wen |
| Abstract: | The extremely weak propagation mechanisms of real business cycle (RBC) models are well acknowledged, and some effort has been devoted to improving the models on this dimension. This paper builds on these efforts to provide an explicit explanation of why various existing RBC models do not replicate real world business cycles, and discusses modifications necessary to bring real business cycle theory into closer conformity with the data. |
| Keywords: | Business cycles |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-039&r=mac |
| By: | Michael Ehrmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany;); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany;) |
| Abstract: | This paper analyses the effects of US monetary policy on stock markets. We find that, on average, a tightening of 50 basis points reduces returns by about 3%. Moreover, returns react more strongly when no change had been expected, when there is a directional change in the monetary policy stance and during periods of high market uncertainty. We show that individual stocks react in a highly heterogeneous fashion and relate this heterogeneity to financial constraints and Tobin's q. First, we show that there are strong industry-specific effects of US monetary policy. Second, we find that for the individual stocks comprising the S&P500 those with low cashflows, small size, poor credit ratings, low debt to capital ratios, high price-earnings ratios or high Tobin's q are affected significantly more. The use of propensity score matching allows us to distinguish between firmand industry-specific effects, and confirms that both play an important role. |
| Keywords: | monetary policy; stock market; credit channel; Tobin’s q; financial constraints; S&P500; propensity score matching. |
| JEL: | G14 E44 E52 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040354&r=mac |
| By: | Don H. Kim; Jonathan H. Wright |
| Abstract: | This paper reviews a simple three-factor arbitrage-free term structure model estimated by Federal Reserve Board staff and reports results obtained from fitting this model to U.S. Treasury yields since 1990. The model ascribes a large portion of the decline in long-term yields and distant-horizon forward rates since the middle of 2004 to a fall in term premiums. A variant of the model that incorporates inflation data indicates that about two-thirds of the decline in nominal term premiums owes to a fall in real term premiums, but estimated compensation for inflation risk has diminished as well. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-33&r=mac |
| By: | Luc Aucremanne (NBB, Research Department.); Martine Druant (NBB, Research Department.) |
| Abstract: | This paper reports the results of an ad hoc survey on price-setting behaviour conducted in February 2004 among 2,000 Belgian firms. The reported results clearly deviate from a situation of perfect competition and show that firms have some market power. Pricing-to-market is applied by a majority of industrial firms. Prices are rather sticky. The average duration between two consecutive price reviews is 10 months, whereas it amounts to 13 months between two consecutive price changes. Most firms adopt time-dependent price-reviewing under normal circumstances. However, when specific events occur, the majority will adopt a state-dependent behaviour. Evidence is found in favour of both nominal (mainly implicit and explicit contracts) and real rigidities (including flat marginal costs and counter-cyclical movements in desired mark-ups). The survey results point to a non-negligible degree of non-optimal price-setting. |
| Keywords: | Price-setting behaviour; price rigidity; nominal rigidity; real rigidity; survey; timedependent pricing; state-dependent pricing; pricing-to-market. |
| JEL: | D40 E31 L11 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050448&r=mac |
| By: | Yukinobu Kitamura |
| Abstract: | Household consumption and saving behavior have been the central theme of recent macroeconomic literature. Following the work of Robert Hall (1978) and a series of papers by Fumio Hayashi, the focus of the literature has been on dynamic consumption behavior. Using the Family Income and Expenditure Survey (FIES), we conducted a dynamic panel analysis of consumption behavior. We examined intertemporal smoothing and the durability of consumption behavior with or without liquidity constraints. Our results are summarized as follows: (1) households with debt as well as debt-free households with low annual incomes and net savings faced disposable income constraints; (2) for these types of households, parameter values between MLE and GMM are very close and therefore statistically significant and the implications for each remain more or less the same; (3) debt-free households with high annual incomes and net savings also faced a disposable income constraint in MLE.. |
| Keywords: | dynamic consumption, panel data, liquidity constraints |
| JEL: | C23 D12 E21 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d05-116&r=mac |
| By: | Daniel Dias (Banco de Portugal, Research Department.); Carlos Robalo Marques (Corresponding author: Banco de Portugal, Research Department.) |
| Abstract: | This paper elaborates on the alternative measure of persistence recently suggested in Marques (2004), which is based on the idea of mean reversion. A formal distinction between the “unconditional probability of a given process not crossing its mean in period t” and its estimator, is made clear and the relationship between this new measure and the widely used “sum of the autoregressive coefficients”, as alternative measures of persistence, is investigated. Using the law of large numbers and the central limit theorem, properties for the estimator of the new measure of persistence are established, which allow tests of hypotheses to be performed, under very general conditions. Finally, some Monte Carlo experiments are conducted in order to compare the finite sample properties of the estimator for the “unconditional probability of a given process not crossing its mean in period t” and the OLS estimator for the “sum of the autoregressive coefficients”. |
| Keywords: | Inflation persistence; mean reversion; non-parametric estimator. |
| JEL: | E31 C22 E52 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050450&r=mac |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper deals with the very short-term influence of "oral interventions" on the exchange rate of major currencies. The paper finds that official communication, as reported by wire services, are effective in influencing the US dollar-euro and yen-US dollar exchange rates in the desired direction on intervention days. Oral interventions are found to be substantially more effective if they deviate from the prevalent policy "mantra". They also tend to reduce market volatility whereas actual interventions raise volatility. A key result of the paper is that oral interventions are effective independently from the stance and direction of monetary policy as well as the occurrence of actual interventions. This suggests that oral interventions might constitute, on a short-term basis, an effective and largely autonomous policy tool. |
| Keywords: | communication; exchange rate; intervention; policy; United States; euro area; Japan. |
| JEL: | E61 E58 F31 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040363&r=mac |
| By: | Cyril Monnet (DG-Research, European Central Bank) |
| Abstract: | In this paper I show that a lax anti-counterfeiting policy is inconsistent with price stability. I use a deterministic matching model with no commitment and no enforcement. An intrinsically worthless but perfectly durable object called a ‘note’ can be produced by banks at a given cost, but also by nonbanks at a (possibly) higher cost. Counterfeiting occurs when nonbanks produce notes in equilibrium. When it is cheap for nonbanks to produce notes, or the technology used to detect counterfeits is poor, counterfeits are circulating in equilibrium and trade is only implemented with a growing stock of notes (thus creating inflation). Finally, I show that the highest welfare level is achieved when counterfeiting is costly, or when the detection of counterfeits is of high quality. |
| Keywords: | Counterfeiting; Inflation; Money; Limited Commitment. |
| JEL: | D8 E5 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050512&r=mac |
| By: | Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Tobias Linzert (Goethe University Frankfurt, Department of Economics, Mertonstr. 17-21, 60054 Frankfurt am Main, Germany.); Dieter Nautz (Goethe University Frankfurt, Department of Economics, Mertonstr. 17-21, 60054 Frankfurt am Main, Germany.) |
| Abstract: | This paper employs individual bidding data to analyze the empirical performance of the longer term refinancing operations (LTROs) of the European Central Bank (ECB). We investigate how banks’ bidding behavior is related to a series of exogenous variables such as collateral costs, interest rate expectations, market volatility and to individual bank characteristics like country of origin, size, and experience. Panel regressions reveal that a bank’s bidding depends on bank characteristics. Yet, different bidding behavior generally does not translate into differences concerning bidder success. In contrast to the ECB’s main refinancing operations, we find evidence for the winner’s curse effect in LTROs. Our results indicate that LTROs do neither lead to market distortions nor to unfair auction outcomes. |
| Keywords: | Monetary Policy Instruments of the ECB; Auctions; Winner’s Curse; Panel Analysis of Bidding Behavior. |
| JEL: | E52 D44 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040359&r=mac |
| By: | Ester Faia (Universitat Pompeu Fabra, Ramon Trias Fargas 25, Barcelona, Spain.); Tommaso Monacelli (IGIER Universita’ Bocconi,Via Salasco 3/5, 20136 Milan, Italy.) |
| Abstract: | We analyze welfare maximizing monetary policy in a dynamic two-country model with price stickiness and imperfect competition. In this context, a typical terms of trade externality affects policy interaction between independent monetary authorities. Unlike the existing literature, we remain consistent to a public finance approach by an explicit consideration of all the distortions that are relevant to the Ramsey planner. This strategy entails two main advantages. First, it allows an accurate characterization of optimal policy in an economy that evolves around a steady-state which is not necessarily efficient. Second, it allows to describe a full range of alternative dynamic equilibria when price setters in both countries are completely forwardlooking and households’ preferences are not restricted. In this context, we study optimal policy both in the long-run and along a dynamic path, and we compare optimal commitment policy under Nash competition and under cooperation. By deriving a second order accurate solution to the policy functions, we also characterize the welfare gains from international policy cooperation. |
| Keywords: | Optimal Monetary Policy; Ramsey planner; Nash equilibrium; Cooperation; sticky prices; imperfect competition. |
| JEL: | E52 F41 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040344&r=mac |
| By: | Schadler, Susan; Drummond, Paulo Flavio Nacif; Kuijs, Louis; Murgasova, Zuzana; van Elkan, Rachel |
| Abstract: | Upon entry into the European Union (EU), countries become members of the Economic and Monetary Union (EMU), with a derogation from adopting the euro as their currency (that is, each country joining the EU commits to replace its national currency with the euro, but can choose when to request permission to do so). For most of these countries, adopting the euro will entail major economic change. This paper examines likely economic developments and policy challenges for the five former transition countries in central Europe--the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia--that joined the EU in May 2004 and operate independent monetary policies but have not yet achieved policy convergence with the rest of the euro area. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfocp:234&r=mac |
| By: | Michael Ehrmann (European Central Bank); Marcel Fratzscher (European Central Bank) |
| Abstract: | This paper analyses the link between economic fundamentals and exchange rates by investigating the importance of real-time data. We find that such economic news in the United States, Germany and the euro area have indeed been a driving force behind daily US dollar – euro/DEM exchange rate developments in the period 1993-2003. The larger importance of US macroeconomic news is at least partly explained by their earlier release time compared to corresponding German and euro area news. The exchange rate is also shown to respond more strongly to news in periods of large market uncertainty and when negative or large shocks occur. Overall, the model based on real-time data is capable of explaining about 75% of the monthly directional changes of the US dollar-euro exchange rate, although it does not explain well the magnitude of the exchange rate changes. |
| Keywords: | exchange rates; fundamentals; announcements; news; real-time data; United States; euro area; interdependence; US dollar euro; EMU. |
| JEL: | F31 F42 E52 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040365&r=mac |
| By: | Plutarchos Sakellaris (Department of Economics, Athens University of Economics and Business); Focco W. Vijselaar (Monetary and Economic Policy Department, De Nederlandsche Bank N.V.) |
| Abstract: | Capital quality improvement is a general phenomenon. Therefore quality correction is needed in price indexes. There is substantial evidence of biases in the official price indexes of capital equipment. We apply to euro area statistics estimates of these biases based on US data thus deriving quality-adjusted price indexes. Adjusted for quality, productive capital stocks of equipment and software grow on average 3 percentage points faster annually - a doubling of their growth rates. Quality-adjusted output grows 0.46 percentage points faster annually - a 20 percent increase. In terms of growth accounting, quality adjustment subtracts 11 percentage points from the share of TFP in aggregate growth and adds them to the share of equipment stock. For the 1990s only the difference is even higher: 14 percentage points. When all is told, embodied technological change accounts for 46 percent of (quality-adjusted) output growth in the euro area over the period 1982 to 2000. |
| Keywords: | output growth, embodied technological change, equipment investment, investment price deflators, euro area. |
| JEL: | O3 O47 D24 E22 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040368&r=mac |
| By: | Astrid Van Landschoot (National Bank of Belgium and Ghent University.) |
| Abstract: | In this paper, we investigate the determinants of the Euro term structure of credit spreads. More specifically, we analyze whether the sensitivity of credit spread changes to financial and macroeconomic variables depends on bond characteristics such as rating and maturity. According to the structural models and empirical evidence on credit spreads, we find that changes in the level and the slope of the default-free term structure, the market return, implied volatility, and liquidity risk significantly influence credit spread changes. The effect of these factors strongly depends on bond characteristics, especially the rating and to a lesser extent the maturity. Bonds with lower ratings are more affected by financial and macroeconomic news. Furthermore, we find that liquidity risk significantly increases credit spreads, especially on lower rated bonds. |
| Keywords: | Credit risk; Structural models; Nelson-Siegel. |
| JEL: | C22 E47 G15 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040397&r=mac |
| By: | Imbs, Jean; Rancière, Romain |
| Abstract: | We revisit the debt overhang question. We first use non-parametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt ends up lowering (subsequent) growth. On average, significantly negative coefficients appear when debt face value reaches 60% of GDP or 200% of exports, and when its present value reaches 40% of GDP or 140% of exports. Second, we depart from reduced form growth regressions and perform direct tests of the theory on the thus selected sample of overhang countries. In the spirit of event studies, we ask whether, as the overhang level of debt is reached: (i) investment falls precipitously as it should when it becomes optimal to default; (ii) economic policy deteriorates observably, as it should when debt contracts become unable to elicit effort on the part of the debtor; and (iii) the terms of borrowing worsen noticeably, as they should when it becomes optimal for creditors to pre-empt default and exact punitive interest rates. We find a systematic response of investment, particularly when property rights are weakly enforced, some worsening of the policy environment, and a fall in interest rates. This easing of borrowing conditions happens because lending by the private sector virtually disappears in overhang situations, and multilateral agencies step in with concessional rates. Thus, while debt relief is likely to improve economic policy (and especially investment) in overhang countries, it is doubtful that it would ease their terms of borrowing, or the burden of debt. |
| Keywords: | debt contracts; debt overhang; debt relief; investment; kernel estimation |
| JEL: | E62 F34 F43 H63 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5210&r=mac |
| By: | Anindya Banerjee (Corresponding author: Department of Economics, European University Institute, Via della Piazzuola, 43, 50133 Firenze, Italy); Massimiliano Marcellino (IEP-Bocconi University, IGIER, and CEPR,Via Salasco, 5, 20136, Milano, Italy); Igor Masten (Faculty of Economics, University of Ljubljana, Kardeljeva ploscad 17, 1000, Ljubljana, Slovenia) |
| Abstract: | The accession of ten countries into the European Union makes the forecasting of their key macroeconomic indicators an exercise of some importance. Because of the transition period, only short spans of reliable time series are available, suggesting the adoption of simple time series models as forecasting tools. However, despite this constraint on the span of data, a large number of macroeconomic variables (for a given time span) are available, making the class of dynamic factor models a reasonable alternative forecasting tool. The relative performance of these two forecasting approaches is compared by using data for five new Member States. The role of Euro-area information for forecasting and the usefulness of robustifying techniques such as intercept corrections are also evaluated. We find that factor models work well in general, although with marked differences across countries. Robustifying techniques are useful in a few cases, while Euro-area information is virtually irrelevant. |
| Keywords: | Factor models; forecasts; time series models; new Member States. |
| JEL: | C53 C32 E37 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050482&r=mac |
| By: | Giovanni Veronese (Corresponding author: Bank of Italy, Economic Research Department, Via Nazionale 91, 00184 Roma, Italy.); Silvia Fabiani (Bank of Italy, Economic Research Department, Via Nazionale 91, 00184 Roma, Italy.); Roberto Sabbatini (Bank of Italy, Economic Research Department, Via Nazionale 91, 00184 Roma, Italy.) |
| Abstract: | This paper investigates the behaviour of consumer prices in Italy by looking at micro data in the attempt to obtain a quantitative measure of the unconditional degree of price rigidity in the Italian economy. The analysis focuses on the monthly frequency of price changes and on the duration of price spells, also with reference to different types of products and outlets. Prices tend to remain unchanged on average for around 10 months; duration is longer for nonenergy industrial goods and services and much shorter for energy products. Price changes are more frequent upward than downward, in larger stores than in traditional ones. When the geographical location of outlets is accounted for, price changes display considerable synchronisation, in particular in the service sector. |
| Keywords: | Consumer prices; nominal rigidity; frequency of price change. |
| JEL: | D21 D40 E31 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050449&r=mac |
| By: | Zheng Liu (Department of Economics, Emory University,Atlanta, GA 30322, USA, and CIRPÉE, Canada); Evi Pappa (Department of Economics,The London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK, and IGIER – Bocconi University and CEP, Italy) |
| Abstract: | This paper presents a new argument for international monetary policy coordination based on considerations of structural asymmetries across countries. In a two-country world with a traded and a non-traded sector in each country, optimal independent monetary policy cannot replicate the natural-rate allocations. There are potential welfare gains from coordination since the planner under a cooperating regime internalizes a terms-of-trade externality that independent central banks tend to overlook. Yet, with symmetric structures across countries, the gains are quantitatively small. If the size of the traded sector differs across countries, the gains can be sizable and increase with the degree of asymmetry. The planner's optimal policy not only internalizes the terms-of-trade externality, it also creates a terms-of-trade bias in favor the country with a larger traded sector. Further, the planner tries to balance the terms-of-trade bias against the need to stabilize fluctuations in the terms-of-trade gap. |
| Keywords: | International Policy Coordination; Optimal Monetary Policy; Asymmetric Structures; Terms-of-Trade Bias. |
| JEL: | E52 F41 F42 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050514&r=mac |
| By: | Ricardo de O. Cavalcanti; Andrés Erosa; Tod Temzelides (University of Pittsburg.) |
| Abstract: | We build on our earlier model of money in which bank liabilities circulate as medium of exchange, and investigate the provision of liquidity for a range of central-bank regulations dealing with the potential of bank failure. In our model, banks issue inside money under fractional reserves, facing the event of excess redemptions. They monitor the float of their money issue and make reserve-management decisions which affect aggregate liquidity conditions. Numerical examples demonstrate bank failure when returns to banking are low. Central-bank interventions, injecting more funds or making interest payments proportional to holdings of reserves, may improve banks’ returns and society’s welfare, followed by a reduction in bank failure. |
| Keywords: | Private money creation; liquidity. |
| JEL: | E4 E5 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040394&r=mac |
| By: | Gilles Mourre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper examines whether the pattern of growth in euro area employment seen in the period 1997- 2001 differed from that recorded in the past and what could be the reasons for that. First, a standard employment equation is estimated for the euro area as a whole. This shows that the lagged impact of both output growth and real labour cost growth, together with a productivity trend and employment “inertia”, can account for most of the employment developments between 1970 and the early 1990s. Conversely, these traditional determinants can only explain part of the employment development seen in recent years (1997-2001). Second, the paper shows sound evidence of a structural break in the aggregate employment equation in the late 1990s. Third, the paper provides some tentative explanations for this change in aggregate employment developments, using in particular country panels of institutional variables and of active labour market policies but also cross-sectional analyses. Among the relevant factors likely to have contributed to rising aggregate employment in recent years are changes in the sectoral composition of euro area employment, the strong development of part-time jobs, lower labour tax rates and possibly less stringent employment protection legislation and greater subsidies to private employment. |
| Keywords: | Euro area; Aggregate employment; Demand for labour; Labour market institutions; Active labour market policies. |
| JEL: | C2 E24 H50 J23 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040358&r=mac |
| By: | Christopher J. Erceg; Luca Guerrieri; Christopher Gust |
| Abstract: | In this paper, we describe a new multi-country open economy SDGE model named "SIGMA" that we have developed as a quantitative tool for policy analysis. We compare SIGMA's implications to those of an estimated large-scale econometric policy model (the FRB/Global model) for an array of shocks that are often examined in open-economy policy simulations. We show that SIGMA's implications for the near-term (2-3 year) responses of key variables are generally similar to those of FRB/Global. Two features of our modeling framework, including rational expectations with learning, and the inclusion of some non-Ricardian agents, play an important role in giving SIGMA more flexibility to generate responses akin to the econometric policy model; nevertheless, some quantitative disparities between the two models remain due to certain restrictive aspects of SIGMA's optimization-based framework. We conclude by using long-term simulations to illustrate some areas of comparative advantage of our SDGE modeling framework. These include linking model responses to underlying structural features of the economy, and fully articulating the endogenous channels through which "imbalances" arising from various shocks are alleviated. |
| Keywords: | Macroeconomics - Econometric models ; Business cycles - Econometric models |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:835&r=mac |
| By: | Kadri Männasoo; David G Mayes |
| Abstract: | This paper considers the joint role of macro-economic and bankspecific factors in explaining the occurrence of banking problems in the twenty-one Central and East European emerging markets over the recent decade. Using data at the individual bank level we show, using a logit model, that the macroeconomic factors play a central role in determining banking sector instability in the early stages of difficulty, while the bankspecific factors are more important in the later stages and gain more weight as the banking sector develops and the institutional framework becomes mature. |
| Keywords: | banking sector vulnerability, banking crises, early warning indicators, Central and Eastern Europe |
| JEL: | E44 G21 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2005-08&r=mac |
| By: | Anna Sanz de Galdeano (CSEF, University of Salerno, 84084 Fisciano, Salerno, Italy); Jarkko Turunen (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | We present empirical evidence of the extent of wage rigidity in the euro area and European countries derived from longitudinal data on individuals. Wage rigidity is measured by the elasticity of individual real wages with respect to local unemployment. The results suggest that the elasticity is indeed negative, i.e. that real wages are lower in local labour markets with higher unemployment. The size of the elasticity for the euro area is similar to that found in previous studies for a number of countries, including the United States. Furthermore, there is some variation in the unemployment elasticity by worker groups and along the wage distribution. In particular, public sector wages are relatively rigid compared to wages in the private sector, contributing significantly to wage rigidity in the euro area. Country results show some heterogeneity in wage rigidity across European countries and suggest a tentative ranking of countries. |
| Keywords: | Real wages; local unemployment; wage curve; panel data. |
| JEL: | E24 J45 J64 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050471&r=mac |
| By: | Gabe de Bondt (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); David Marqués (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | This study empirically examines the development of the high-yield segment of the corporate bond market in the United States, as a pioneer country, and the United Kingdom and the euro area, as later adopting countries. Estimated diffusion models show for the United States a significant pioneer influence factor and autonomous speed of diffusion. The latter is found to be higher in Europe than in the United States as also macroeconomic factors are considered. The high-yield bond diffusion pattern is significantly affected by financing need variables, e.g. leverage buy-outs, mergers and acquisitions, and industrial production growth, and return or financing cost variables, e.g. stock market return and the spread between the yield on speculative-grade and BBB-rated investment-grade bonds. These findings suggest that the diffusion of new financial products depends on the macroeconomic environment and can be quickly in case of the diffusion from a pioneer country to later adopting countries. |
| Keywords: | High-yield bond market; Financial innovation; Diffusion models |
| JEL: | G32 E44 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040313&r=mac |
| By: | Luis J. Álvarez (Banco de España, Alcalá 48, 28014 Madrid, Spain.); Pablo Burriel (Banco de España, Alcalá 48, 28014 Madrid, Spain.); Ignacio Hernando (Banco de España, Alcalá 48, 28014 Madrid, Spain.) |
| Abstract: | This paper identifies the basic features of price setting behaviour at the producer level in the Spanish economy using a large dataset containing the micro data underlying the construction of the PPI over the period 1991-1999. It explores how these general features are affected by some specific factors (cost structure, degree of competition, demand conditions, government intervention, level of inflation, seasonality, and the practice of using attractive prices) and presents a comparison of price setting practices at the producer and at the consumer level to ascertain whether the retail sector augments or mitigates price stickiness. We find that prices do not change often but do so by a large amount. The cost structure, proxied by the labour share and the relevance of raw materials, and the degree of competition, proxied by import penetration, affect price flexibility. We also find some evidence that producer prices are more flexible than consumer prices. |
| Keywords: | Price setting; producer prices; frequency of price changes. |
| JEL: | E31 D40 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050522&r=mac |
| By: | Josef Baumgartner (Austrian Institute of Economic Research (WIFO), P.O. Box 91, 1103 Vienna, Austria.); Ernst Glatzer (Oesterreichische Nationalbank, Otto Wagner Platz 3, P.O. Box 61, 1010 Vienna,Austria.); Fabio Rumler (Oesterreichische Nationalbank, Otto Wagner Platz 3, P.O. Box 61, 1010 Vienna,Austria.); Alfred Stiglbauer (Oesterreichische Nationalbank, Otto Wagner Platz 3, P.O. Box 61, 1010 Vienna,Austria.) |
| Abstract: | Based on individual price records collected for the computation of the Austrian CPI, average frequencies of price changes and durations of price spells are estimated to characterize price setting in Austria. Depending on the estimation method, prices are unchanged for 10 to 14 months on average. We find strong heterogeneity across sectors and products. Price increases occur only slightly more often than price decreases. The typical size of a price increase (decrease) is 11 (15) percent. The aggregate hazard function of prices is decreasing with time. Besides heterogeneity across products and price setters, this is due to oversampling of products with a high frequency of price changes. Accounting for unobserved heterogeneity in estimating the probability of a price change with a fixed-effects logit model, we find a positive effect of the duration of a price spell. During the Euro cash changeover the probability of price changes was higher. |
| Keywords: | Consumer prices; sticky prices; frequency and synchronization of price changes; duration of price spells. |
| JEL: | C41 D21 E31 L11 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050523&r=mac |
| By: | Francesca V. Monti |
| Abstract: | This paper examines the feasibility of implementing Linear Quadratic Gaussian (LQG) Control in structural cointegrated VAR models and sheds some light on the two major problems generated by such implementation. The first aspect to be taken into account is the effect of the presence of unit roots in the system on the policymaker’s ability to control it, partially or thoroughly. Different control techniques are proposed according to the extent to which the policymaker can exercise his control on the overall dynamics of the economy, i.e. depending on whether he/she can stabilize the whole system, only part of it or none of it. The second issue involves the structural form of the model. It will be shown in this paper that, in general, a system’s features will change when implementing a new control rule. In particular, a controlled system will generally not retain features that should be intrinsecally invariant to policy changes (e.g., neutrality of money in the long-run). |
| Keywords: | Optimal control; cointegration; policy invariance. |
| JEL: | C32 C61 E52 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030288&r=mac |
| By: | Christian Ewerhart (Postal address for correspondence: Institute for Empirical Research in Economics, Winterthurerstrasse 30, CH-8006 Zurich, Switzerland;.); Nuno Cassola (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Steen Ejerskov; Natacha Valla |
| Abstract: | In certain market environments, a large investor may benefit from building up a futures position first and trading subsequently in the spot market (Kumar and Seppi, 1992). The present paper identifies a variation of this type of manipulation that might occur in money markets with an interest rate corridor. We show that manipulation involving the use of central bank facilities would be observable only sporadically. The probability of manipulation decreases when the central bank uses an active liquidity management. Manipulation can also be reduced by widening the interest rate corridor. |
| Keywords: | Money market; corridor system; manipulation. |
| JEL: | D84 E52 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040399&r=mac |
| By: | Daniel L. Thornton |
| Abstract: | The Fed's ability to control the federal funds rate stems from its ability to alter the supply of liquidity in the overnight market through open market operations. This paper uses daily data compiled by the author from the records of the Trading Desk of the Federal Reserve Bank of New York over the period March 1, 1984, through December 31, 1996, to analyze the Desk's use of its operating procedure in implementing monetary policy, and the extent to which open market operations affect the federal funds rate-the liquidity effect. I find that operating procedure was used to guide daily open market operations; however, there is little evidence of a liquidity effect at the daily frequency and even less evidence at lower frequencies. Consistent with the absence of a liquidity effect, open market operations appear to be a relatively unimportant source of liquidity to the federal funds market. |
| Keywords: | Federal funds rate ; Open market operations |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-063&r=mac |
| By: | Tjeerd Jellema (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Steven Keuning (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Reimund Mink (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | An important part of external or policy shocks is transmitted throughout the economy via various channels of transactions. To analyse such channels and to predict the impact of shocks, it is expedient to know who recently exchanged what with whom and for what purpose. The most appropriate format for presenting intersectoral linkages at the national level is in a National Accounting Matrix (NAM). A NAM is defined as the presentation of a sequence of integrated accounts and balancing items in a matrix that elaborates the linkages between a supply and use table and institutional sector accounts. This paper compiles the first pilot Euro Area Accounting Matrix (EAAM) and considers its usefulness for the euro area’s economic analysis. It also reports on the solution of a number of aggregation and consolidation issues that arise when constructing a multi-country accounting matrix. |
| Keywords: | National Accounts; National Accounting Matrix; Euro Area. |
| JEL: | E00 E19 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040356&r=mac |
| By: | Deroose, Servaas; Turrini, Alessandro |
| Abstract: | The EU fiscal framework has often been criticized for neglecting a possible trade-off between short-term budgetary objectives and the implementation of reforms that could improve public finances in the long term This concern was reflected in the recent reform of the Stability and Growth Pact, which acknowledges that under certain conditions structural reforms can be taken into account both in the preventive and in the corrective arm of the Pact. The aim of the paper is that of making a step forward on the understanding of the empirical relevance of the trade-off between structural reforms in EU countries. The analysis will focus on product and labour market reforms and pension reforms. The main issue investigated will be as follow: which impact do reforms have on budgets in the short term? Results show that, in the aftermath of reforms, budgets do not worsen significantly compared with cases where no reforms occur. However, when the short-term budgetary impact of reforms is evaluated controlling for the response of fiscal authorities to the cycle and debt developments via the estimation of “fiscal reaction functions”, there is evidence that product and market reforms and pension reforms are associated with a deterioration in budgets. The impact appears rather weak (a primary CAB reduced by few decimal GDP points depending on the specific reform considered) and not always statistically significant. |
| Keywords: | deficits; Stability and Growth Pact; structural reforms |
| JEL: | E62 H50 H55 H62 J58 L50 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5217&r=mac |
| By: | Michael Dueker |
| Abstract: | A pair of simple modifications to the Kalman filter recursions makes possible the filtering of models in which one or more state variables is truncated normal. Such recursions are broadly applicable to macroeconometric models that have one or more probit-type equation, such as vector autoregressions and estimated dynamic stochastic general equilibrium models. |
| Keywords: | Macroeconomics - Econometric models |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-057&r=mac |
| By: | Zhang Guoying (school of manangement of Tianjin university); Zheng Pi-e (school of manangement of Tianjin university) |
| Abstract: | The paper introduces the Relationship between energy and economic development first£¬then through analyzing characters of energy consumption all over the world and the basic facts about China¡¯s energy resources, drawing the conclusion that the energy and resources of China is hardly able to meet demand,and puts forward the policy orientation for china¡¯s energy development accordingly. At last, points out the prospect of China¡¯s energy industry. |
| JEL: | E |
| Date: | 2005–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509024&r=mac |
| By: | Marco Del Negro (Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street N.E., Atlanta, GA 30309-4470, USA); Frank Schorfheide (University of Pennsylvania, Department of Economics, 3718 Locust Walk, Philadelphia, PA 19 104, USA); Frank Smets (European Central Bank and CEPR); Raf Wouters (National Bank of Belgium, B-1000 Brussels, Belgium) |
| Abstract: | The paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), and then systematically relax the implied cross-equation restrictions. Let Lambda denote the extent to which the restrictions are being relaxed. We document how the in- and out-of-sample fit of the resulting specification (DSGE-VAR) changes as a function of Lambda. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model’s impulse responses to structural shocks with those of the best-fitting DSGEVAR. We find that the degree of misspecification in large-scale DSGE models is no longer so large to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored. |
| Keywords: | Bayesian Analysis; DSGE Models; Model Evaluation; Vector Autoregressions. |
| JEL: | C11 C32 C53 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050491&r=mac |
| By: | Mark W. French |
| Abstract: | Recent studies of crude oil price formation emphasize the role of interest rates and convenience yield (the adjusted spot-futures spread), confirming that spot prices mean-revert and normally exceed discounted futures. However, these studies don't explain why such "backwardation" is normal. Also, models derived in these studies typically explain only about 1 percent of daily returns, suggesting other factors are important, too. In this paper, I specify a structural oil-market model that links returns to convenience yield, inventory news, and revisions of expected production cost (growth of which is related to backwardation). Although its predictive power is only a marginal improvement, the model fits the data far better. In addition, I find reversion of spot to futures prices only when backwardation is severe. Convenience yield behaves nonlinearly, but price response to convenience yield is also nonlinear. Equivalently, futures are informative about future spot prices only when spot prices substantially exceed futures. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-30&r=mac |
| By: | Claudia M. Buch (Department of Economics, Eberhard Karls Universität Tübingen); John C. Driscoll (Federal Reserve Board); Charlotte Ostergaard (Department of Finance, Norwegian School of Management) |
| Abstract: | Taking the mean-variance portfolio model as a benchmark, we compute the optimally diversified portfolio for banks located in France, Germany, the U.K., and the U.S. under different assumptions about currency hedging. We compare these optimal portfolios to the actual cross-border assets of banks from 1995-1999 and try to explain the deviations. We find that banks over-invest domestically to a considerable extent and that cross-border diversification entails considerable gain. Banks underweight countries which are culturally less similar or have capital controls in place. Capital controls have a strong impact on the degree of underinvestment whereas less political risk increases the degree of over-investment. |
| Keywords: | International banking, portfolio diversification, international integration |
| JEL: | G21 G11 E44 F40 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050429&r=mac |
| By: | Chakriya Bowman (Asia Pacific School of Economics and Government, The Australian National University) |
| Abstract: | Recent political discussions in Australia have suggested that Pacific Island nations should “dollarize” to the Australian dollar. This is seen as a way to stabilise the economies of the region, which have been fraught with both political and economic uncertainty. Standard currency analysis techniques indicate that dollarization to the US dollar may be preferable to dollarization with the Australian dollar, as strong existing links with the US dollar are indicated, while there is less evidence to support existing relationships with the Australian dollar. With Asia likely to overtake Australia as a dominant trading partner for major Pacific Island economies, a discussion of currency reform in the Pacific should at least consider US dollarization, as Australia’s economic influence may not be as significant as previously assumed. |
| Keywords: | foreign exchange, dollarization, monetary relations |
| JEL: | F31 E42 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:546&r=mac |
| By: | Paul Mizen (University of Nottingham, University Park, Nottingham, NG7 2RD, England); Philip Vermeulen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | The excess sensitivity of investment to cash flow has been demonstrated in numerous stud- ies. Recent research has identified differences in the degree of sensitivity across countries, which it ascribes to the nature of the lender-borrower relationship in the financial systems of those countries. In this paper we offer new methods and results to determine whether differences are associated with structural explanations such as the nature of the financial system and industrial composition, or due to other firm-specific determinants such as size or creditworthiness. Unlike previous research we are able to systematically control for competing explanations in our data from more than one country and thereby isolate what drives the relationship. We find that creditworthiness is the main driving force of cash flow sensitivity. |
| Keywords: | Corporate investment; cash flow sensitivity; cross-country investment studies. |
| JEL: | E22 D92 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050485&r=mac |
| By: | Xavier Freixas (Universitat Pompeu Fabra, Barcelona, Spain); Bruno M. Parigi (University of Padova, Italy); Jean-Charles Rochet (University of Toulouse, IDEI, France) |
| Abstract: | The classical Bagehot’s conception of a Lender of Last Resort (LOLR) that lends to illiquid banks has been criticized on two grounds: on the one hand, the distinction between insolvency and illiquidity is not clear cut; on the other a fully collateralized repo market allows Central Banks to provide the adequate aggregated amount of liquidity and leave the responsibility of lending uncollateralized to the banks. The object of this paper is to analyze rigorously these issues by providing a framework where liquidity shocks cannot be distinguished from solvency ones and ask whether there is a need for a LOLR and how should it operate. Determining the optimal LOLR policy requires a careful modeling of the structure of the interbank market and of the closure policy. In our set up, the results depend upon the existence of moral hazard. If the main source of moral hazard is the banks’ lack of incentives to screen loans, then the LOLR may have to intervene to improve the efficiency of an unsecured interbank market; if instead, the main source of moral hazard is loans monitoring, then the interbank market should be secured and the LOLR should never intervene. |
| Keywords: | Lender of Last Resort; Interbank Market; Liquidity. |
| JEL: | E58 G28 |
| Date: | 2003–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030298&r=mac |
| By: | Nicole Jonker (Corresponding author: De Nederlandsche Bank, Payments Policy Department , P.O. Box 98, 1000 AB Amsterdam,The Netherlands.); Carsten Folkertsma (De Nederlandsche Bank, Research Department, P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Harry Blijenberg (Statistics Netherlands, P.O. Box 4000, 2270 JM Voorburg,The Netherlands.) |
| Abstract: | In this paper we examine pricing behaviour of retail firms in the Netherlands during 1998-2003 using a large database with monthly price quotes of 49 articles, representing different product types. We have conducted this study in order to gain in sight in the degree of nominal rigidity of consumer prices in the Netherlands. We find that prices of energy and unprocessed food are most flexible, whereas prices of services are stickiest. A multivariate analysis shows that firm size matters with prices being stickiest in small firms and most flexible in large firms and in retail firms consisting of the owners only. Furthermore, we investigate pass-through effects of VAT changes in prices. We find that VAT increases are almost completely passed on to consumers. Finally, there is some evidence indicating that pricing behaviour of retail firms was different during the introduction of the euro than in the period directly preceding it. |
| Keywords: | Nominal rigidity of prices; frequency of price change; Cox regression. |
| JEL: | E31 D49 C41 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040413&r=mac |
| By: | Mauricio Cárdenas; Roberto Junguito; Mónica Pachón |
| Abstract: | Abstract: The 1991 Colombian constitution strengthened the checks and balances of the political system by enhancing the role of Congress and the Constitutional Court, while somewhat limiting the powers of the president (who nonetheless remains extremely powerful even for Latin American standards). As a consequence of the larger number of relevant players, and the removal of barriers that restricted political participation, the political system gained in terms of representation. However, political transaction costs increased, making cooperation harder to achieve. We show that this has been typically the case of fiscal policy, where the use of rigid rules, the constitutionalization of some policies, and reduction in legislative success rates -due to the presence of a more divided and fragmented congress- have limited the adaptability and flexibility of policies. In contrast, in other areas of policy -such as monetary policy and regulation of public utilities- that were formally delegated to the technocracy, policies have been more adaptable to economic shocks, delivering better outcomes. |
| Keywords: | Instituciones Políticas |
| JEL: | E61 |
| Date: | 2005–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:col:000147:001320&r=mac |
| By: | Simonetta Rosati (Corresponding author: Directorate General Payment Systems and Market Infrastructure, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stefania Secola (Directorate General Payment Systems and Market Infrastructure, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We analyse the distribution of the TARGET cross-border interbank payment flows, from both a cross section and time series point of view, using average daily data for the period 1999-2002. We find out that first, “location matters”, in the sense that bilateral payment flows seem to reflect an organisation of interbank trading between countries whereby the size of the banking sectors, geographical proximity and cultural similarities play a significant role. This result is confirmed also by a model developed drawing on the gravity models literature. Second, we find that the payment traffic in TARGET is strongly affected by market technical deadlines. In addition, such traffic is positively related mainly to the liquidity conditions and to the turnover of the euro area money market, (particularly the unsecured overnight segment). Our model also provides a good explanation of the determinants of the interbank payments settled in the EURO 1 system. |
| Keywords: | Payment systems; TARGET; EURO 1; location; euro area interbank market. |
| JEL: | E58 G20 G21 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050443&r=mac |
| By: | Richard Disney |
| Abstract: | I argue that the offsetting effect of social security contributions on household retirement saving depends on how closely the social security programme imitates a private retirement saving plan (i.e. the ‘actuarial’ component of the social security programme) – the closer the design of the programme to a private retirement saving plan, the higher the offset. I estimate the determinants of household saving rates in a cross-country panel, augmenting standard measures of social security programme generosity and cost by indicators that proxy the actuarial component of the programme. These indicators affect saving rates as predicted; moreover they also affect labour force participation rates of older women (but not men). The findings are consistent with the view that more actuarially-based public programmes are treated by participants as a mandatory saving programme rather than as a tax-and-transfer system, thereby raising labour force participation rates but also increasing the programme’s substitutability for private retirement saving. |
| Keywords: | social security reform, household saving |
| JEL: | E21 G23 H24 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1541&r=mac |
| By: | Rainer Klump (Johann Wolfgang Goethe University); Peter McAdam (DG Research, European Central Bank); Alpo Willman (DG Research, European Central Bank) |
| Abstract: | Using a normalized CES function with factor-augmenting technical progress, we estimate a supply-side system of the US economy from 1953 to 1998. Avoiding potential estimation biases that have occurred in earlier studies and putting a high emphasis on the consistency of the data set, required by the estimated system, we obtain robust results not only for the aggregate elasticity of substitution but also for the parameters of labor and capital augmenting technical change. We find that the elasticity of substitution is significantly below unity and that the growth rates of technical progress show an asymmetrical pattern where the growth of laboraugmenting technical progress is exponential, while that of capital is hyperbolic or logarithmic. |
| Keywords: | Capital-Labor Substitution, Technological Change, Factor Shares, Normalized CES function, Supply-side system, United States. |
| JEL: | C22 E23 E25 O30 O51 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040367&r=mac |
| By: | Charles Goodhart |
| Abstract: | No abstract available. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp546&r=mac |
| By: | Richard Baldwin (University of Geneva - Graduate Institute of International Studies (HEI), CH-1202 Geneva, Switzerland.); Frauke Skudelny (Corresponding author: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Daria Taglioni (University of Geneva - Graduate Institute of International Studies (HEI), CH-1202 Geneva, Switzerland.) |
| Abstract: | This paper contributes to the literature on the impact of EMU on trade, adding two new elements. First, we propose a theoretical model for explaining how the euro could have increased trade by the large amounts found in the empirical literature. Second, we propose a sectoral dataset to test the insights from the theory. Our theoretical model shows that in a monopolistic competition set-up, the effect of exchange rate uncertainty on trade has nonlinear features, suggesting that EMU and a standard measure for exchange rate uncertainty should be jointly significant. Our empirical results confirm this finding, with a trade creating effect between 108 and 140% in a pooled regression, and between 54 to 88% when sectors are estimated individually. Importantly, we find evidence for a trade creating effect also for trade with third countries. |
| Keywords: | Rose effect; exchange rate volatility; monetary union; sectoral trade; gravity. |
| JEL: | F12 C33 E0 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050446&r=mac |
| By: | Vincent Brousseau (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Andrés Manzanares (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper studies frictions in the euro area interbank deposit overnight market, making use of high frequency individual quote and trade data. The aim of the analysis is to determine, in a quantitative way, how efficient this market is. Besides a comprehensive descriptive analysis, the approach used defines a measure of the friction arising for each single transaction, by which we understand an (small) initial loss accepted by a counterparty, and the corresponding gain made by the other counterparty. The evolution of total daily frictions is then put into perspective comparing it with the frictions arising if flows corresponded to the optimal solution of a “cash transportation problem”. The main conclusions of this exercise are that overall frictions, although small in absolute size, tend to increase strongly whenever the overnight rate becomes volatile. Some tentative explanations for this are given, relying on the introduced methodology. |
| Keywords: | Financial market microstructure; Money Market; Market friction; Network optimization problems. |
| JEL: | D4 E52 C61 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050439&r=mac |
| By: | R. Mohan (Centre for Development Studies); D. Shyjan (Centre for Development Studies) |
| Abstract: | The study analyses whether the growing State Domestic Product (SDP) of Kerala since the latter half of the 1980s, has acted as a larger resource base for the State and finds that it has not. While the inability to fully tap the existing resource potential could be cited as a reason, the paper argues that the main constraint is the limited taxing powers of the States. The Study concludes that the power to tax the services should be devolved from the Centre to the States, lest the fiscal dispossession should affect the sustainability of achievements, which made the development experience of Kerala unique. |
| Keywords: | Revenue Receipts, Tax Effort, SDP |
| JEL: | E62 E69 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ind:cdswpp:375&r=mac |
| By: | Nævdal, Eric (Department of Economics and Resource Management, Norwegian University of Life Science); Wagner, Martin (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria) |
| Abstract: | In this paper we derive the correct solution of optimal closure of the state sector studied in Section 6.4 of Aghion and Blanchard (1994). Aghion and Blanchard only present an 'approximate' solution which entails a constant unemployment rate in what they call a turnpike approximation. We show that optimal unemployment paths have two features. First, unemployment is increasing up to a certain point in time, when, second, the remaining inefficient state sector is closed down. At that point in time, which we may define as the end of transition, unemployment is discontinuous. The approximate solution presented by Aghion and Blanchard is thus found to lead to welfare losses compared to the optimal policy. In particular, the unemployment rate corresponding to the solution presented in Aghion and Blanchard is too low. Our solution is formally based on transforming the dynamic optimization problem to a scrap value problem with free terminal time. |
| Keywords: | Transition, Optimal unemployment rate, Dynamic optimization |
| JEL: | C61 E61 P20 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:175&r=mac |
| By: | Olli Castrén (DG Economics, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper focuses on changes in the currency options market’s assessment of likely future exchange rate developments around the times of official interventions in the JPY/USD exchange rate. We estimate the options-implied risk-neutral density functions (RNDs) using daily OTC quotes for options prices with fixed moneyness that avoids the biases that typically characterise the exchange traded price quotes. We find that the episodes of interventions on the JPY/USD exchange rate coincide with systematic changes in all moments of the estimated RNDs on the JPY/USD currency pair, and in several of the moments of the estimated RNDs on the JPY/EUR and USD/EUR currency pairs. In particular, the operations where Japanese yen is sold coincide with a movement in the mean of the RND towards a weaker yen both against the US dollar and the euro, as well as with an increase in implied standard deviations. Prior to the interventions, the RNDs tend to move into opposite direction suggesting, on the average, increasingly unfavourable market conditions and leaning-against-the wind by the Japanese authorities. |
| Keywords: | Foreign exchange market intervention; option-implied distributions; GARCH estimation. |
| JEL: | E58 F31 F33 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040410&r=mac |
| By: | Luis J. Álvarez (Banco de España, Alcalá 48, 28014 Madrid, Spain); Pablo Burriel (Banco de España, Alcalá 48, 28014 Madrid, Spain); Ignacio Hernando (Banco de España, Alcalá 48, 28014 Madrid, Spain) |
| Abstract: | A common finding in empirical studies using micro data on consumer and producer prices is that hazard functions for price changes are decreasing. This means that a firm will have a lower probability of changing its price the longer it has kept it unchanged. This result is at odds with standard models of price setting. Here a simple explanation is proposed: decreasing hazards may result from aggregating heterogeneous price setters. We show analytically the form of this heterogeneity effect for the most commonly used pricing rules and find that the aggregate hazard is (nearly always) decreasing. Results are illustrated using Spanish producer and consumer price data. We find that a very accurate representation of individual data is obtained by considering just 4 groups of agents: one group of flexible Calvo agents, one group of intermediate Calvo agents and one group of sticky Calvo agents plus an annual Calvo process. |
| Keywords: | Hazard function; price setting models; heterogeneous agents; mixture models.. |
| JEL: | C40 D40 E30 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050461&r=mac |
| By: | Giovanni Lombardo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Alan Sutherland (School of Economics and Finance, University of St Andrews, St Andrews, KY16 9AL, United Kingdom) |
| Abstract: | This paper shows how to compute a second-order accurate solution of a non-linear rational expectation model using algorithms developed for the solution of linear rational expectation models. The result is a state-space representation for the realized values of the variables of the model. This state-space representation can easily be used to compute impulse responses as well as conditional and unconditional forecasts. |
| Keywords: | Second order approximation; Solution method for rational expectation models. |
| JEL: | C63 E0 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050487&r=mac |
| By: | Peter Galos; Kimmo Soramäki (Corresponding author: Directorate General Payment Systems and Market Infrastructures, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | The paper analyses the consequences of an isolated, sudden and unexpected failure of a bank in alternative interbank payment system designs. We assess the exposures and the contagion by a counterfactual analysis assuming that payments currently settled by the pan-European large-value payment system, TARGET, are settled in alternative payment systems - an unsecured end-of-day net settlement system and a secured net settlement system with limits on intraday credit, with collateral and loss-sharing. The results indicate that systemic consequences of one bank's failure on the solvency of other banks can be rather low. If risk management techniques such as legal certainty for multilateral netting, limits on exposures, collateralisation and loss sharing are introduced, the systemic consequences can be mitigated to a high degree. How, and under which circumstances the analyzed failures would render other banks illiquid to meet their payment obligations is outside the scope of the paper. |
| Keywords: | Payment systems, Systemic risk, TARGET, Contagion. |
| JEL: | E42 G21 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050508&r=mac |
| By: | Marc Henrard (Bank for International Settlements) |
| Abstract: | Australian dollar bills futures are very particular, not only on the valuation at expiry but also for the maturity delivery option and the credit delivery option. This note consider only the interest rate part of the futures (marginning and maturity delivery option). An explicit formula for the convexity adjustment realted to the marginning in the HJM gaussian model is proposed. The delivery option is also studied but found to be (almost) worthless. Copyright (c) 2005 by Marc Henrard. |
| Keywords: | Australian dollar bills futures, convexity adjustment, delivery option, HJM one-factor model. |
| JEL: | G13 E43 |
| Date: | 2005–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0509027&r=mac |
| By: | Darcey McVanel |
| Abstract: | Canada's Large Value Transfer System (LVTS) is designed to meet international risk-proofing standards at a minimum cost to participants in terms of collateral requirements. It does so, in part, through collateralized risk-sharing arrangements whereby participants may incur losses if another participant defaults. The LVTS is designed to be robust to defaults. Its rules, however, do not ensure that individual participants are robust to defaults. The author studies participants' robustness to default empirically by creating unanticipated defaults in LVTS, and finds that all participants are able to withstand their loss allocations that result from the largest defaults she can create using actual LVTS data. |
| Keywords: | Financial institutions; Payment, clearing, and settlement systems |
| JEL: | E44 E47 G21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-25&r=mac |
| By: | Henri Pagès (Banque de France – General DGEI 41-1430, 75049 Cedex 01 Paris, France); David Humphrey (Florida State University – Department of Finance,Tallahassee, FL 32306-1042, United States) |
| Abstract: | Target is a real time gross settlement (RTGS) large value payment network operated by European central banks that eliminates systemic risk. Euro1 is a privately operated delayed net settlement (DNS) network that reduces substantially systemic risk but does not eliminate it. This difference makes RTGS networks more expensive to users even if both networks had the same unit operating costs. This provides an incentive for users to shift payments to the more risky network in normal times and back to Target in times of financial market disruption. The estimated extra cost to a DNS network from posting collateral sufficient to cover all exposures (and eliminate systemic risk) is from 15 to 42 cents per transaction. If full cost recovery on an RTGS system were reduced by this amount, user collateral costs but not risks would be equalized between networks. Full collateralization on DNS networks equalizes both user costs and risks. |
| Keywords: | payments; settlement; public good. |
| JEL: | E58 G15 H23 H41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050506&r=mac |