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on Macroeconomics |
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Issue of 2006‒05‒06
47 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | This paper investigates the business cycle implications of limited pass-through to retail interest rates based on a calibrated sticky price model. Although limited interest rate pass-through can in principle reduce output and inflation volatility at the same time, large reductions in output volatility are likely to be accompanied by a more volatile inflation rate. Limited pass-through gives rise to two counteracting effects: It partially insulates the economy from adverse liquidity shocks and thereby leads to lower output volatility. However, it also reduces the stabilizing effect of monetary policy which implies higher inflation volatility. |
| Keywords: | Financial Systems, Interest Rate Pass-Through, Business Cycle |
| JEL: | E32 E44 E52 |
| Date: | 2006–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:117&r=mac |
| By: | Antonio Fatás (INSEAD, Boulevard de Constance, 77305 Fontainebleau, France.); Ilian Mihov (INSEAD, Boulevard de Constance, 77305 Fontainebleau, France.); Andrew K. Rose (Haas School of Business, University of California, Berkeley, CA 94720-1900, USA.) |
| Abstract: | We study empirically the macroeconomic effects of an explicit de jure quantitative goal for monetary policy. Quantitative goals take three forms: exchange rates, money growth rates, and inflation targets. We analyze the effects on inflation of both having a quantitative target, and of hitting a declared target; we also consider effects on output volatility. Our empirical work uses an annual data set covering 42 countries between 1960 and 2000, and takes account of other determinants of inflation (such as fiscal policy, the business cycle, and openness to international trade), and the endogeneity of the monetary policy regime. We find that both having and hitting quantitative targets for monetary policy is systematically and robustly associated with lower inflation. The exact form of the monetary target matters somewhat (especially for the sustainability of the monetary regime), but is less important than having some quantitative target. Successfully achieving a quantitative monetary goal is also associated with less volatile output. |
| Keywords: | Transparency; exchange; rate; money; growth; inflation; target; business cycle. |
| JEL: | E52 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060615&r=mac |
| By: | Stephanie Schmitt-Grohé (Duke University, Durham, NC 27708, United States.); Martín Uribe (Duke University, Durham, NC 27708, United States.) |
| Abstract: | In this paper, we study Ramsey-optimal fiscal and monetary policy in a mediumscale model of the U.S. business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations. The main result of the paper is that price stability appears to be a central goal of optimal monetary policy. The optimal rate of inflation under an income tax regime is half a percent per year with a volatility of 1.1 percent. This result is surprising given that the model features a number of frictions that in isolation would call for a volatile rate of inflation—particularly nonstate-contingent nominal public debt, no lump-sum taxes, and sticky wages. Under an income-tax regime, the optimal income tax rate is quite stable, with a mean of 30 percent and a standard deviation of 1.1 percent. |
| Keywords: | Ramsey Policy, Inflation Stabilization, Tax Smoothing, Time to Tax, Nominal and Real Rigidities. |
| JEL: | E52 E61 E63 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060612&r=mac |
| By: | Claudia Kwapil (Oesterreichische Nationalbank, Economic Analysis Division); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | In this paper we analyze equilibrium determinacy in a sticky price model in which the pass-through from policy rates to retail interest rates is sluggish and potentially incomplete. In addition, we empirically characterize and compare the interest rate pass-through process in the euro area and the U.S. We find that if the pass-through is incomplete in the long run, the standard Taylor principle is insufficient to guarantee equilibrium determinacy. Our empirical analysis indicates that this result might be particularly relevant for bank-based financial systems as for instance that in the euro area. |
| Keywords: | Interest Rate Pass-Through, Interest Rate Rules, Equilibrium Determinacy, Stability |
| JEL: | E32 E52 E58 |
| Date: | 2006–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:118&r=mac |
| By: | Ignazio Angeloni (The Department of the Treasury, Italian Ministry of Economy and Finance, Via XX Settembre, 97, 00187 Rome, Italy.); Luc Aucremanne (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Surprisingly it did not, or at least not directly. Using micro data on consumer prices and sectoral inflation rates from 6 euro area countries, spanning several years before and after the introduction of the euro, we look at whether EMU has altered the behaviour of retail price setting and/or inflation dynamics. We find no evidence that anything has changed around 1999 – if anything, persistence may have slightly increased. At the end of 2001 and in the beginning of 2002 (period surrounding the euro cash changeover) retail price adjustment frequencies, both up and down, increased substantially, while the magnitude of the price adjustment, also both up and down, was smaller than otherwise. However, both settled quickly back to the earlier patterns. On the contrary, we do find evidence of a decline in the persistence of the inflation process in the mid-1990s. This could be due to a structural change in private inflationary expectations due, at least in part, to policies linked to the preparation of EMU; however, this interpretation is weakened by the fact that a similar decline occurred also in the US. |
| Keywords: | Price setting, Inflation persistence, Aggregate and Sectoral Inflation, EMU. |
| JEL: | E31 E42 E52 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060597&r=mac |
| By: | Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper estimates a hybrid New Keynesian model on euro area data and evaluates the performance of different simple policy rules and of the optimal unconstrained rule under commitment. The study reaches two main conclusions. First, inflation is found to be mainly forward-looking in the euro area, which implies the optimal policy reaction to cost push shocks is a muted one. Second, a "speed limit" rule of the type recently proposed by Walsh (2003) is able to closely approximate the performance of the optimal rule under commitment. The optimal speed limit rule is also characterised by super-inertia, making it a first difference rule similar to those recently proposed as a possible solution to measurement problems in the level of the natural interest rate and of potential output. |
| Keywords: | Euro area, hybrid New Keynesian model, monetary policy rules, commitment, speed limit policies. |
| JEL: | E52 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060600&r=mac |
| By: | Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | In this paper we study the role of financial systems for the cost channel transmission of monetary policy in a calibrated business cycle model. We analyze the different effects that monetary policy has on the economy, in particular on output and inflation, which are due to differences in country-specific financial systems. For a plausible calibration of the model, differences in financial systems have a rather limited effect on the transmission mechanism and do not appear to give rise to cross country differences in the strength of the cost channel. |
| Keywords: | Financial Systems, Cost Channel, Transmission Mechanism |
| JEL: | E40 E50 |
| Date: | 2006–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:116&r=mac |
| By: | Antonello D’Agostino (Address for correspondence: Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Departmant, PO Box 559 - Dame Street, Dublin 2, Ireland.); Domenico Giannone (ECARES, Université Libre de Bruxelles - CP 114 - av. Jeanne, 44, B-1050, Brussels, Belgium.); Paolo Surico (Monetary Assessment and Strategy, Bank of England, Threadneedle street - EC2R 8AH - London, United Kingdom.) |
| Abstract: | This paper documents a new stylized fact of the greater macroeconomic stability of the U.S. economy over the last two decades. Using 131 monthly time series, three popular statistical methods and the forecasts of the Federal Reserve’s Greenbook and the Survey of Professional Forecasters, we show that the ability to predict several measures of inflation and real activity declined remarkably, relative to naive forecasts, since the mid-1980s. This break down in forecast ability appears to be an inherent feature of the most recent period and thus represents a new challenge for competing explanations of the ‘Great Moderation’. |
| Keywords: | Predictive accuracy, macroeconomic stability, forecasting models, sub-sample analysis, Fed Greenbook. |
| JEL: | E37 E47 C22 C53 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060605&r=mac |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper compares the link between exchange rates and interest rates under full information and two alternative asymmetric information approaches. It also distinguishes between cases of expansionary and contractionary depreciations. Full information results are not robust to the presence of informational frictions. For economies exhibiting expansionary or strongly contractionary depreciations, such frictions lead to two optimal deviations from full information outcomes: i) under asymmetric information with signal extraction, the realisation of a relatively less frequent shock leads the central bank to behave as if a more likely disturbance had instead taken place; and ii) under asymmetric information without signal extraction, the monetary authority does not react on impact to shocks. Finally, in the case of mildly contractionary depreciations, both asymmetric information models predict a lack of response of the central bank to aggregate demand shocks, as opposed to an offsetting movement in interest rates under full information. |
| Keywords: | Transmission mechanism, Emerging market economies, Exchange rate, Monetary policy, Imperfect information. |
| JEL: | E52 E58 F31 F41 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060608&r=mac |
| By: | James Bullard (Research Division, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442, United States.); Eric Schaling (Department of Economics University of Johannesburg, and CentER for Economic Research, Tilburg University. Address: P.O. Box 524, 2006, Auckland Park, Johannesburg, Republic of South Africa.) |
| Abstract: | We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique rational expectations equilibrium worldwide which can be learned by market participants. We study cases in which optimal policies are being pursued country by country as well as some forms of cooperation. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation. |
| Keywords: | Indeterminacy, monetary policy rules, new open economy macroeconomics, international policy coordination. |
| JEL: | E52 F33 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060611&r=mac |
| By: | Robert J. Tetlow (Contact address: Federal Reserve Board, Division of Research and Statistics 20th and Constitution Avenue NW, Washington, D.C. 20551, United States.); Brian Ironside (Safeco Insurance Companies, Safeco Plaza, SPI Actuarial, T-14, Seattle, WA 98185-0001, United States.) |
| Abstract: | We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model’s inception in July 1996 until November 2003. The period of study was one of important changes in the U.S. economy with a productivity boom, a stock market boom and bust, a recession, the Asia crisis, the Russian debt default, and an abrupt change in fiscal policy. We document the surprisingly large and consequential changes in model properties that occurred during this period and compute optimal Taylor-type rules for each vintage. We compare these optimal rules against plausible alternatives. Model uncertainty is shown to be a substantial problem; the efficacy of purportedly optimal policy rules should not be taken on faith. |
| Keywords: | Monetary policy, uncertainty, real-time analysis. |
| JEL: | E37 E5 C5 C6 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060610&r=mac |
| By: | Centoni, Marco; Cubadda, Gianluca; Hecq, Alain |
| Abstract: | We analyze herein the importance of four types of shocks in contributing to the business cycles of the G7 economies. After disentangling the common permanent and transitory shocks in the G7 outputs, we identify the domestic and foreign components of such shocks for each country. This provides us with quite a flexible palette for understanding the degree of openness of the G7 countries, useful information for the analysis of the strengths and weaknesses of each national economy. Our empirical analysis reveals that the cycles of most of the G7 outputs are dominated by their domestic components and that the foreign components are almost entirely due to permanent shocks. |
| Keywords: | International business cycles, Permanent-Transitory decompositions, serial correlation common features, Frequency domain analysis. |
| JEL: | C32 E32 |
| Date: | 2006–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:mol:ecsdps:esdp06028&r=mac |
| By: | Altissimo, Filippo; Cristadoro, Riccardo; Forni, Mario; Lippi, Marco; Veronese, Giovanni |
| Abstract: | This paper presents ideas and methods underlying the construction of a timely coincident index that tracks euro-area GDP growth, but, unlike GDP growth, (i) is updated monthly and almost in real time; (ii) is free from seasonal and shorter-run dynamics. We take as target the medium- long-run component of the GDP growth, defined in the frequency domain as including only waves of period larger than one year. We estimate the target by projecting it on generalized principal components extracted from a large panel of monthly macroeconomic series. The main contribution of the paper is that current values of our principal components, derived from a dynamic factor model, act as proxies for future values of GDP growth. In this way we improve with respect to the end-of-sample poor estimation which is typical with band-pass filters. Moreover, as it is defined as an estimate of a target which is observable (although with delay), the performance of our index at the end of the sample can be measured. |
| Keywords: | band-pass filter; coincident index; generalized principal components; large dataset factor models |
| JEL: | C51 E32 O30 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5633&r=mac |
| By: | Matias Vernengo |
| Abstract: | Marriner Eccles is often seen as an early defender of Keynesian ideas. In that respect, it is generally accepted that he considered monetary policy of secondary importance, and that as a result he allowed the Federal Reserve to be submitted to the interests of the Treasury. In this view, the Federal Reserve after 1935 acquired new instruments to command monetary policy, but it did not change its behavior significantly. Further, his defense of the Federal Reserve-Treasury accord in 1951 is sometimes seen as a reversal of his previous policy stances. This paper claims that proper understanding of Eccles’ views is necessary to appreciate the changes in monetary policy during the Great Depression and World War II. Rather than a hands-off central banker, that submitted the Fed to the Treasury, a more proper depiction of Eccles tenure at the Fed would be as a Main Street chairman. |
| Keywords: | History of Thought, Keynesians, Federal Reserve History |
| JEL: | B22 B31 E12 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2006_04&r=mac |
| By: | Heather M. Anderson; George Athanasopoulos; Farshid Vahid |
| Abstract: | This paper studies linear and nonlinear autoregressive leading indicator models of business cycles in G7 countries. Our models use the spread between short-term and long-term interest rates as leading indicators for GDP. We examine data admissability by determining whether these models have the ability to produce time series with classical cycles that resemble the observed classical cycles in the data, and then we ask if this data admissability lends itself to better predictions of the probability of recession. |
| JEL: | C22 C23 E17 E37 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-14&r=mac |
| By: | Paul Mizen; Cihan Yalcin |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0601&r=mac |
| By: | Efrem Castelnuovo (University of Padua) |
| Abstract: | We assess the stability of open economy backward-looking Phillips curves estimated over two different exchange rate regimes. We calibrate a new-Keynesian monetary policy model and employ it for producing artificial data. A monetary policy break replicating the move from a Target-Zone regime to a Free-Floating regime implemented in Sweden in 1992 is modeled. We employ two different, plausibly calibrated Taylor rules to describe the Swedish monetary policy conduct, and fit a reduced-form Phillips curve to the artificial data. While not rejecting the statistical relevance of the Lucas critique, we find that its economic importance does not seem to be overwhelming. |
| JEL: | E17 E52 F41 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0015&r=mac |
| By: | Sibert, Anne |
| Abstract: | I analyse central bank transparency when the central bank's objective function is its private information. Non-transparency exists when the public does not observe the action of the central bank and an unobservable component of the inflation-control error keeps the public from using its observation of inflation to infer perfectly the central bank's action, and hence, the central bank's objective. The degree of transparency is defined as the fraction of the inflation-control error that is observable. This notion is similar to that of Cukierman and Meltzer [9], Faust and Svensson [15], [16] and others. I find a number of results; some are different than what previous authors have found and others are novel. I demonstrate that non-transparent central banks with private information inflate less than central banks in a regime with perfect information. Moreover, in contrast to transparent central banks with private information, non-transparent banks with private information respond optimally to shocks; lower inflation is not at the expense of flexibility. Increased transparency lowers planned inflation, but surprisingly, it can worsen the public's ability to infer the central bank's objective function. I find that, no matter what their preferences, central banks and societies are made better off by more transparency. I further demonstrate that the transparent regime is not the same as the non-transparent regime when non-transparency goes to zero. I show that planned inflation is not necessarily lower in the transparent regime than in the non-transparent regime. However, numerical results suggest that all central banks and societies are better off in the transparent regime. |
| Keywords: | monetary policy; signalling; transparency |
| JEL: | E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5641&r=mac |
| By: | Marianne Baxter (Institute for Economic Development, Boston University); Michael A. Kouparitsas (Federal Reserve Bank of Chicago) |
| Keywords: | Terms of Trade; International business cycles |
| JEL: | E32 F41 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-112&r=mac |
| By: | Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan Luis Vega (Banco de España, Alcalá, 48, 28014 Madrid, Spain.) |
| Abstract: | This paper addresses the effects of the European Economic and Monetary Union (EMU) since the introduction of the euro - on economic and financial structures, institutions and performance. What type of changes is the euro fostering? What forces is it setting in motion that were not there before? Six years after the launch of the euro, was an appropriate time to start taking stock of these effects. For this purpose, in June 2005, the ECB held a workshop on “What effects is EMU having on the euro area and its member countries?” The workshop was organised in five areas: 1. trade integration, 2. business cycles synchronisation, economic specialisation and risk sharing, 3. financial integration, 4. structural reforms in product and labour markets, and 5. inflation persistence. This paper sets the workshop in the context of the current debate on the effects of EMU and brings together several of the issues raised by the leading presentations: i.e., this paper serves as an overview. Overall, the effects of the euro observed are beneficial. However, progress has been uneven in the above areas. Many potential concerns preceding the launch of the euro have been dispelled. Moreover, it will take more time for the full effects of the euro to unravel. |
| Keywords: | Optimum Currency Area, Economic and Monetary Integration, EMU. |
| JEL: | E42 F13 F33 F42 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060599&r=mac |
| By: | Michael B. Devereux (Department of Economics, University of British Columbia, 997-1873 East Mall, Vancouver, BC V6T 1Z1, Canada.); Charles Engel (University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706-1393, USA.) |
| Abstract: | This paper develops a view of exchange rate policy as a trade-off between the desire to smooth fluctuations in real exchange rates so as to reduce distortions in consumption allocations, and the need to allow flexibility in the nominal exchange rate so as to facilitate terms of trade adjustment. We show that optimal nominal exchange rate volatility will reflect these competing objectives. The key determinants of how much the exchange rate should respond to shocks will depend on the extent and source of price stickiness, as well as the elasticity of substitution between home and foreign goods. Quantitatively, we find the optimal exchange rate volatility should be significantly less than would be inferred based solely on terms of trade considerations. Moreover, we find that the relationship between price stickiness and optimal exchange rate volatility may be non-monotonic. |
| Keywords: | Exchange rates, monetary policy, expenditure switching. |
| JEL: | F41 E52 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060614&r=mac |
| By: | Sirimaneetham, Vatcharin; Temple, Jonathan |
| Abstract: | We examine the view that high-quality macroeconomic policy is a necessary, but not sufficient, condition for economic growth. We first construct a new index of the quality of macroeconomic policy. We then directly compare growth rate distributions across countries with good and bad policies; use Bayesian methods to examine the partial correlation between policy and growth; and outline how growth and steady-state income levels might have differed, had all countries achieved good policy outcomes. One finding is that bad macroeconomic policies can be offset by other factors, but the fastest-growing countries in our sample all shared high-quality macroeconomic management. |
| Keywords: | Bayesian Model Averaging; counterfactuals; economic growth; macroeconomic policy; Washington Consensus |
| JEL: | O23 O40 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5642&r=mac |
| By: | Peter N. Ireland (Boston College); Scott Schuh (Federal Reserve Bank of Boston) |
| Abstract: | A two-sector real business cycle model, estimated with postwar U.S. data, identifies shocks to the levels and growth rates of total factor productivity in distinct consumption- and investment-goods-producing technologies. This model attributes most of the productivity slowdown of the 1970s to the consumption-goods sector; it suggests that a slowdown in the investment-goods sector occurred later and was much less persistent. Against this broader backdrop, the model interprets the more recent episode of robust investment and investment-specific technological change during the 1990s largely as a catch-up in levels that is unlikely to persist or be repeated anytime soon. |
| Keywords: | productivity, real business cycle |
| JEL: | E32 O41 O47 |
| Date: | 2006–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:642&r=mac |
| By: | Marco Hoeberichts (De Nederlandsche Bank, Research Department P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Ad Stokman (De Nederlandsche Bank, Research Department P.O. Box 98, 1000 AB Amsterdam, The Netherlands.) |
| Abstract: | This paper presents the results of a survey among Dutch firms on price setting behaviour in the Netherlands. It aims to identify how sticky prices are, which prices are sticky and why they are sticky. It is part of the Eurosystem Inflation Persistence Network (IPN). The most distinctive feature of the Dutch survey is its broad coverage of the business community (seven sectors and seven size classes). Our primary finding is that price setting behaviour depends critically on both a firm’s size and the competitive environment it faces. Small firms in particular adopt more rigid pricing policies, and the weaker the competition a firm faces, the stickier a company’s price will be. Furthermore, we find that wholesale and retail prices are more flexible than those for business-to-business services. The survey suggests that explicit and informal contracting are the most important sources of price stickiness. Menu costs and psychological pricing – two prominent explanations of price stickiness in the literature – are of minor importance. Finally, there is clear evidence of asymmetries in shocks driving price increases and decreases. |
| Keywords: | Price setting, nominal rigidity, survey data. |
| JEL: | E30 D40 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060607&r=mac |
| By: | Xiao, Wei (University of New Orleans) |
| Abstract: | We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of Taylor-type interest rate rules. With very mild increasing returns supported by empirical research, the conventional wisdom regarding the design of interest rate rules can be overturned. In particular, the "Taylor principle" no longer guarantees either determinacy or E-stability of the rational expectations equilibrium. |
| Keywords: | Increasing returns, Indeterminacy, E-stability, Taylor principle |
| JEL: | E32 E52 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-08&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: | The paper shows that US monetary policy has been an important determinant of global equity markets. Analysing 50 equity markets worldwide, we find that returns fall on average around 3.8% in response to a 100 basis point tightening of US monetary policy, ranging from a zero response in some to a reaction of 10% or more in other countries, as well as significant cross-sector heterogeneity. Distinguishing different transmission channels, we find that in particular the transmission via US and foreign short-term interest rates and the exchange rate play an important role. As to the determinants of the strength of transmission to individual countries, we test the relevance of their macroeconomic policies and the degree of real and financial integration, thus linking the strength of asset price transmission to underlying trade and asset holdings, and find that in particular the degree of global integration of countries – and not a country’s bilateral integration with the United States – is a key determinant for the transmission process. |
| Keywords: | Global financial markets, monetary policy, transmission, financial integration, United States, advanced economies, emerging market economies. |
| JEL: | F36 F30 G15 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060616&r=mac |
| By: | Carceles-Poveda, Eva; Giannitsarou, Chryssi |
| Abstract: | We analyse some practical aspects of implementing adaptive learning in the context of forward-looking linear models. In particular, we focus on how to set initial conditions for three popular algorithms, namely recursive least squares, stochastic gradient and constant gain learning. We propose three ways of initializing, one that uses randomly generated data, a second that is ad-hoc and a third that uses an appropriate distribution. We illustrate, via standard examples, that the behaviour and evolution of macroeconomic variables not only depend on the learning algorithm, but on the initial conditions as well. Furthermore, we provide a computing toolbox for analysing the quantitative properties of dynamic stochastic macroeconomic models under adaptive learning. |
| Keywords: | adaptive learning; computational methods; least square estimations; short-run dynamics |
| JEL: | C63 D83 E10 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5627&r=mac |
| By: | Fabio Canova (Universitat Pompeu Fabra, Department of Economics and Business, Jaume I building, Ramon Trias Fargas, 25-27, 08005-Barcelona, Spain.); Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper describes a methodology to estimate the coefficients, to test specification hypotheses and to conduct policy exercises in multi-country VAR models with cross unit interdependencies, unit specific dynamics and time variations in the coefficients. The framework of analysis is Bayesian: a prior flexibly reduces the dimensionality of the model and puts structure on the time variations; MCMC methods are used to obtain posterior distributions; and marginal likelihoods to check the fit of various specifications. Impulse responses and conditional forecasts are obtained with the output of MCMC routine. The transmission of certain shocks across G7 countries is analyzed. |
| Keywords: | Multi country VAR, Markov Chain Monte Carlo methods, Flexible priors, Internationalv transmission. |
| JEL: | C3 C5 E5 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060603&r=mac |
| By: | Shigeki Morinobu (MOF - Ministry of Finance Japan) |
| Abstract: | In Japan, the so-called bubble economy started from the latter half of the 1980s. Then the bubble burst and Japan entered the “lost decade” of the 90s - a long-lasting period of depression and deflation not experienced by any other country since World War II. This paper picks out some lessons that should be learnt from Japan’s experiences, by studying the factors and political problems that powered the bubble economy. |
| Keywords: | land prices, taxation, bubble economy, asset value |
| JEL: | E62 Q15 R52 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:701&r=mac |
| By: | Lorenzo Cappiello (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Peter Hördahl (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arjan Kadareja (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Simone Manganelli (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We assess whether the euro had an impact first on the degree of integration of European financial markets, and, second, on the euro area term structure. We propose two methodologies to measure integration - one relies on time-varying GARCH correlations, and the other one on a regression quantile-based codependence measure. We document an overall increase in co-movements in both equity and bond euro area markets, suggesting that integration has progressed since the introduction of the euro. However, while the correlations in bond markets reaches almost one for all euro area countries, co-movements in equity markets are much lower and the increase is limited to large euro area economies only. In the second part of the paper, we focus on the asset pricing implications of the euro. Specifically, we use a dynamic no-arbitrage term structure model to examine the risk ? return trade-off in the term structure of interest rates before and after the introduction of the euro. The analysis shows that while the average level of term premia seems little changed following the euro introduction, the variability of premia has been reduced as a result of smaller macro shocks during the euro period. Moreover, the macro factors that were found to be important in explaining the dynamics of premia before the introduction of the euro continue to play a key role in this respect also thereafter. |
| Keywords: | Financial markets, euro, financial integration, volatility, conditional correlation, term structure, fundamentals, risk premia. |
| JEL: | F36 G12 E43 E44 C22 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060598&r=mac |
| By: | Marianne Baxter (Institute for Economic Development, Boston University); Michael A. Koupritsas (Federal Reserve Bank of Chicago) |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-127&r=mac |
| By: | Siu, Henry |
| Abstract: | I consider the role of conscription as a fiscal shock absorber in times of war. Conscription of military personnel allows the fiscal authority to minimize wartime government expenditure, and hence, minimize tax distortions associated with war finance. I develop a simple dynamic general equilibrium model to articulate this view, and calibrate the model to mimic the U.S. World War II experience. Analysis of the calibrated model indicates that the value of conscription as a fiscal policy tool is quantitatively large. |
| Date: | 2006–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:bricol:siu-06-04-26-12-42-20&r=mac |
| By: | Simon Gilchrist (Institute for Economic Development, Boston University); John C. Williams (Board of Governors, Federal Reserve System) |
| Abstract: | We consider a neoclassical interpretation of Germany and Japan’s rapid postwar growth that relies on a catch-up mechanism through capital accumulation where technology is embodied in new capital goods. Using a putty-clay model of production and investment, we are able to capture many of the key empirical properties of Germany and Japan’s postwar transitions, including persistently high but declining rates of labor and total-factor productivity growth, a U-shaped response of the capital-output ratio, rising rates of investment and employment, and moderate rates of return to capital. |
| Keywords: | putty-clay, embodied technology, productivity growth, convergence |
| JEL: | D24 E22 N10 O41 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-113&r=mac |
| By: | Sibert, Anne |
| Abstract: | There is a small, but growing, economics literature on the importance and effects of having monetary policy made by a committee, rather than by an individual. Complimenting this is an older and larger body of literature on groups in the other social sciences, particular in social psychology. This paper provides a review of some of this work, focussing on two important features of committees: the effect of their size on performance and whether or not they are more moderate than the members who make them up. The results of the literature on committee size and committee polarization suggest that the ideal monetary policy committee may not have many more than five members. It should have a well-defined objective and it should publish the votes of its members. It should be structured so that members do not act as part of a group, perhaps by having short terms in office and members from outside the central bank. External scrutiny of the decision-making process should be encouraged. |
| Keywords: | committee size; groupthink; social loafing |
| JEL: | E50 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5626&r=mac |
| By: | Buiter, Willem H; Sibert, Anne |
| Abstract: | In an attempt to clean up an unruly literature, we specify the necessary and sufficient conditions for household optimality in a model where money is the only financial asset and provide the relevant proofs. We use our results to analyse when deflationary bubbles can and cannot exist. Our findings are in contrast to the results in several prominent contributions to the literature. We argue for particular specifications of the no-Ponzi-game restrictions on the household's and government's intertemporal budget constraints in a model with money and bonds. Using the restriction on the household we derive the necessary and sufficient conditions for household optimality. The resulting equilibrium terminal conditions are then used to demonstrate that the existence of bonds does not affect when deflationary bubbles can and cannot occur. This result differs from that in other recent works. |
| Keywords: | deflationary bubbles; transversatility conditions |
| JEL: | D91 E31 E40 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5637&r=mac |
| By: | Thorsten Koeppl (Department of Economics, Queen‘s University, Kingston, Ontario K7L 3N6, Canada.); Cyril Monnet (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ted Temzelides (Department of Economics, University of Pittsburgh, 4715 WWPH, 230 S Bouquet Street, Pittsburgh, PA 15260, USA.) |
| Abstract: | We investigate the role of settlement in a dynamic model of a payment system where the ability of participants to perform certain welfare-improving transactions is subject to random and unobservable shocks. In the absence of settlement, the full information first-best allocation cannot be supported due to incentive constraints. In contrast, this allocation is supportable if settlement is introduced. This, however, requires that settlement takes place with a sufficiently high frequency. |
| Keywords: | Payments, Settlement, Intertemporal Incentives. |
| JEL: | E4 E5 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060604&r=mac |
| By: | Daniel A. Dias (UCLA Anderson School of Management, Box 951481, Los Angeles, CA 90095-1481, USA.); Carlos Robalo Marques (Banco de Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal.); João M. C. Santos Silva (ISEG/Universidade Técnica de Lisboa, R. do Quelhas 6, 1200-781 Lisboa, Portugal.) |
| Abstract: | In this paper we critically reappraise some measures of the importance of time-dependent price setting rules and propose an alternative way to gauge the significance of this type of price setting behaviour. The merits of the proposed measure are highlighted in an application using micro-data. Our results suggest that a large proportion of price trajectories may be compatible with simple time-dependent price setting mechanisms but the strength of this evidence very much depends on the way that is used to evaluate the importance of this type of behaviour. |
| Keywords: | Time-dependent price setting models, uniform staggering, perfect synchronization. |
| JEL: | D40 E31 L11 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060606&r=mac |
| By: | Gerhard Fenz (Oesterreichische Nationalbank, Economic Analysis Division); Martin Spitzer (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | This paper deals with forecasting quarterly Austrian GDP growth using monthly conjunctural indicators and state space models. The latter provide an efficient econometric framework to analyse jointly data with different frequencies. Based on a Kalman filter technique we estimate a monthly GDP growth series as an unobserved component using monthly conjunctural indicators as explanatory variables. From a large data set of more than 150 monthly indicators the following six explanatory variables were selected on the basis of their in-sample fit and out of sample forecast performance: the ifo-index, credit growth, vacancies, the real exchange rate, the number of employees and new car registrations. Subsequently, quarterly GDP figures are derived from the monthly unobserved component using a weighted aggregation scheme. Several tests for forecasting accuracy and forecasting encompassing indicate that the unobserved components model (UOC-model) is able to outperform simple ARIMA and Naïve models. |
| Date: | 2006–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:119&r=mac |
| By: | Paivi Kankaanranta (Department of Economics, University of Turku) |
| Abstract: | Simple life cycle and permanent income hypotheses imply that changes in consumption should be unforecastable. Rational forward-looking agents ought to smooth consumption over the life cycle and exhaust the asset stock accumulated during the working career in retirement. Empirical observations seem not to conform to these predictions of the simple theory of intertemporal choice which has given rise to elaborations on the benchmark model. The theoretical discussion of this paper concentrates on literature dealing with the seemingly problematic empirical regularities and on proposed explanations. The review of literature focuses particularly on the life cycle issues of consumption behaviour. |
| Keywords: | Consumption, Life cycle, Permanent income |
| JEL: | B22 D11 D91 E21 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:utu:wpaper:118&r=mac |
| By: | Christophe Chamley (Institute for Economic Development, Boston University); |
| Keywords: | speculative attach, currency crisis, coordination, informational externalities, social learning |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-119&r=mac |
| By: | Esteban A. Nicolini; Fernando Ramos |
| Abstract: | The study of monetary phenomena and the understanding of price determination in Modern Europe are too often limited by the scarcity of good-quality data sets on the evolution across time of variables like money holdings, income, or wealth. In this paper we show that the information contained in probate inventories can be extremely useful to circumvent that problem. In particular, combining a data set of 114 inventories from Palencia (North of Spain) between 1750 and 1770 with census information (Catastro de Ensenada) we make a cross-section estimation of a money demand which is the first one ever produced for any period before the 19th century. The results provide meaningful insights about the relation between money demand and wealth, urbanization and structural change in a pre-industrial economy and highlight the potential of probate inventories to improve our knowledge of the monetary history of Modern Europe. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cte:whrepe:wh061902&r=mac |
| By: | António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vítor Gaspar (Banco de Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisbon, Portugal.) |
| Abstract: | In this paper we revisit the literature on the economic consequences from inefficiency in public services provision. Following Dupuit (1844) and Pigou (1947) we argue that it is important to take the financing side explicitly into account. The fact that public expenditure financing must rely on distortional taxation implies that both direct and indirect costs are relevant when estimating the economic impacts of inefficiency in public services provision. Using Hicks’ compensating variation (following Diamond and McFadden (1974) and Auerbach (1985)) we show that these magnification mechanisms are not only conceptually relevant, they are also important from a quantitative point of view. Specifically, we rely on a range of estimates of public sector efficiency (from Afonso, Schuknecht and Tanzi (2005, 2006)) to illustrate numerically that the relative importance of indirect costs of public sector provision inefficiency, linked to financing through distortional taxation increases with the magnitude of the inefficiency. |
| Keywords: | Government efficiency, excess burden, taxes, spending. |
| JEL: | D11 E62 H21 H50 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060601&r=mac |
| By: | Patrick Lünnemann; Thomas Mathä |
| Abstract: | This paper analyses the pricing behaviour of Luxembourg firms based on survey evidence. Luxembourg firms typically have low market share, many competitors and longstanding customer relationships. Price discrimination is frequently applied. A majority of firms use price review rules that include elements of state dependency. The median firm reviews and changes prices twice a year. The results suggest an almost equal share of firms applying forward-looking, backward-looking and rules of thumb behaviour. The adjustment speed is faster when cost goes up and demand goes down than in the opposite cases. The most relevant theories explaining price rigidity are implicit contracts, cost-based pricing and explicit contracts. Increases in labour and other costs are the most important factors leading to price increases; for price reductions it is price reductions by competitors followed by declining labour costs. |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:cahier_etude_19&r=mac |
| By: | Keith H. Coble; J. Corey Miller (Department of Agricultural Economics, Mississippi State University) |
| Abstract: | Producer and other interest groups are beginning to consider farm policy positions in anticipation of hearings and possible serious farm bill debates during late 2006 and 2007. An idea gaining attention and support among some groups is deemphasizing or eliminating the current commodity “price” programs (loan deficiency payments and counter-cyclical payments) and replacing them with programs based on “revenue insurance” designs. Suggested designs include a multi-tiered farm payment program based on individual revenue guarantees and shortfalls in county revenue. Another example of such an alternative design is a whole-farm revenue design that issues program payments when adjusted gross farm revenue falls below a historical five-year baseline. Interestingly, programs quite similar to both proposals have been offered by USDA’s Risk Management Agency (RMA) since 1999 as part of the federal crop insurance program. In this paper, we evaluate the implications of using revenue-based designs as the primary U.S. farm support program. Our analysis considers implementation issues, distributional effects of such a change, and implications for compliance with WTO rules. |
| Keywords: | farm policy, revenue insurance, WTO. |
| JEL: | E32 R10 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:mss:wpaper:9602&r=mac |
| By: | Mototsugu Fukushige (Graduate School of Economics, Osaka University); Noriko Ishikawa (Graduate School of Science and Technology, Kobe University) |
| Abstract: | We propose a method for decomposing interregional differentials in productivities based on the lifecycle permanent income hypothesis and conduct an empirical analysis using data from prefectural economic accounts in Japan to examine the effectiveness of this method. |
| Keywords: | Interregional Differentials in Productivities, Decomposition of Inequality, Consumption Inequality |
| JEL: | R3 D30 H24 E20 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0611&r=mac |
| By: | Hiroyuki Kasahara (University of Western Ontario); Beverly Lapham (Queen's University) |
| Abstract: | This paper develops an open economy model with heterogeneous final goods producers who simultaneously choose whether to export their goods and whether to use imported intermediates. The model highlights mechanisms whereby import policies affect aggregate productivity, resource allocation, and industry export activity along both the extensive and intensive margins. Using the theoretical model, we develop and estimate a structural empirical model that incorporates heterogeneity in productivity and shipping costs using Chilean plant-level manufacturing data. The estimated model is consistent with the key features of the data regarding productivity, exporting, and importing. We perform a variety of counterfactual experiments to assess quantitatively the positive and normative effects of barriers to trade in import and export markets. These experiments suggest that there are substantial aggregate productivity and welfare gains due to trade. Furthermore, because of import and export complementarities, policies which inhibit the importation of foreign intermediates can have a large adverse effect on the exportation of final goods. |
| Keywords: | exporting; importing; firm heterogeneity; aggregate productivity; resource allocation |
| JEL: | O40 F12 E23 C23 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20062&r=mac |
| By: | Albanesi, Stefania |
| Abstract: | This paper studies optimal taxation of entrepreneurial capital and financial assets in economies with private information. Returns to entrepreneurial capital are risky and depend on entrepreneurs’ effort, which is not observed. The presence of idiosyncratic risk in capital returns implies that constrained-efficient allocations display an intertemporal wedge on entrepreneurial capital that can be positive or negative. The properties of optimal marginal taxes on entrepreneurial capital depend on the sign of this wedge. If the wedge is positive, the marginal capital tax should be decreasing in capital returns, while the opposite is true when the wedge is negative. The optimal tax system equalizes after tax returns on all assets, thus reducing the variance of capital returns after tax relative to other assets. If entrepreneurs are allowed to sell shares of their capital to outside investors, returns to externally owned capital are subject to double taxation at the level of the entrepreneur and at the level of the outside investors. Even if entrepreneurs can purchase private insurance against their idiosyncratic risk, optimal asset taxes are essential to implement the constrained-efficient allocation if entrepreneurial portfolios are private information. |
| Keywords: | entrepreneurial capital; optimal taxation; private information |
| JEL: | E6 H2 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5647&r=mac |