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on Macroeconomics |
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Issue of 2011‒01‒23
twenty-one papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Juha Tervala |
| Abstract: | This paper examines the implications of monetary policy rules for exchange rate dynamics. I extend a standard New Open Economy Macroeconomics model with the introduction of a simple money supply rule, whereby central banks change their monetary policy if output diverges from potential output or if inflation diverges from the target inflation. A key result is that, in the case of permanent technology and monetary shocks, the nominal exchange rate does not follow a random walk; instead, the exchange rate undershoots its long-run value. An undershooting of the exchange rate derives from the active monetary policy that both countries conduct. |
| Keywords: | Monetary policy rules, open economy macroeconomics, exchange rate |
| JEL: | E5 F3 F4 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp62&r=mac |
| By: | Daniel Kienzler; Kai Daniel Schmid |
| Abstract: | In contrast to the present consensus view of stabilization policy, theoretical and empirical research strongly support the consideration of supply-side adjustment to pronounced variations of factor-utilization in order to trace a more realistic pattern of macroeconomic adjustment dynamics within simulation studies. Against this background, our paper seeks to illuminate the relevance of endogenous supply-side adjustment for monetary policy research. We modify a basic New Keynesian model by explicitly considering demand-side stimulus on the evolution of productive capacity and analyze stability, impulse response, and welfare issues if the central bank follows a simple monetary policy rule. Thereby, we control for the robustness of our policy implications by various states of output gap mismeasurement the central bank might be confronted with. We find that, in contrast to a basic New Keynesian Model, output gap stabilization plays a more prominent role when potential output is endogenous. |
| Keywords: | monetary policy, factor-utilization, endogenous potential output, output gap mismeasurement |
| JEL: | E32 E50 E52 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:hoh:hohdip:324&r=mac |
| By: | Fiodendji, Komlan |
| Abstract: | Although the Bank of Canada admits asset prices are considered in its policy deliberations because of their effects on inflation or output gap, the Bank of Canada denies trying to stabilize asset prices around fundamental values. However, since the start of the Bank of Canada we have seen a boom as well as a bust in the stock market. Are we to believe that the Bank of Canada did not react to these stock market fluctuations, apart from their impact consequences on economy? We investigate this issue by using a structural model based on the New Keynesian framework that is augmented by a stock market variable. We use an econometric method that allows us to distinguish the direct effect of stock prices on Bank of Canada policy rates from indirect effects via inflation or GDP. Our results suggest that stock market stabilization plays a larger role in Bank of Canada interest rate decisions than it is willing to admit. Furthermore, these results should give new relevant insights into the influence of stock market index prices on monetary policy in Canada and should provide relevant insights regarding the opportunities and limitations of incorporating financial indicators in monetary policy decision making. They should give financial market participants, such as analysts, bankers and traders, a better understanding of the impact of stock market index prices on the Bank of Canada policy. The results imply that the preferences of the monetary authority have changed between the different subperiods. In particular, the parameter associated with the implicit target of inflation has been reduced significantly. The findings suggest that the introduction of inflation targeting in Canada was accompanied by a fundamental change in the objectives of monetary policy, not only with respect to the average target, but also in terms of precautions taken to keep inflation in check in the face of uncertainty about the economy. |
| Keywords: | Asset prices; Monetary policy; Central bank preferences; inflation targeting |
| JEL: | E0 E5 E52 |
| Date: | 2011–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27942&r=mac |
| By: | FIodendji, Komlan |
| Abstract: | Although the Bank of Canada admits asset prices are considered in its policy deliberations because of their effects on inflation or output gap, the Bank of Canada denies trying to stabilize asset prices around fundamental values. However, since the start of the Bank of Canada we have seen a boom as well as a bust in the stock market. Are we to believe that the Bank of Canada did not react to these stock market fluctuations, apart from their impact consequences on economy? We investigate this issue by using a structural model based on the New Keynesian framework that is augmented by a stock market variable. We use an econometric method that allows us to distinguish the direct effect of stock prices on Bank of Canada policy rates from indirect effects via inflation or GDP. Our results suggest that stock market stabilization plays a larger role in Bank of Canada interest rate decisions than it is willing to admit. Furthermore, these results should give new relevant insights into the influence of stock market index prices on monetary policy in Canada and should provide relevant insights regarding the opportunities and limitations of incorporating financial indicators in monetary policy decision making. They should give financial market participants, such as analysts, bankers and traders, a better understanding of the impact of stock market index prices on the Bank of Canada policy. The results imply that the preferences of the monetary authority have changed between the different subperiods. In particular, the parameter associated with the implicit target of inflation has been reduced significantly. The findings suggest that the introduction of inflation targeting in Canada was accompanied by a fundamental change in the objectives of monetary policy, not only with respect to the average target, but also in terms of precautions taken to keep inflation in check in the face of uncertainty about the economy. |
| Keywords: | Asset prices; Central bank preferences; Bank of Canada; Inflation targeting |
| JEL: | E0 E58 E31 E5 E52 |
| Date: | 2011–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28039&r=mac |
| By: | Nautz, Dieter; Rondorf, Ulrike |
| Abstract: | The instability of standard money demand functions has undermined the role of monetary aggregates for monetary policy analysis in the euro area. This paper uses country-specific monetary aggregates to shed more light on the economics behind the instability of euro area money demand. Our results obtained from panel estimation indicate that the observed instability of standard money demand functions could be explained by omitted variables like e.g. technological progress that are important for money demand but constant across member countries. -- |
| Keywords: | Money demand,cross-country analysis,panel error correction model,euro area |
| JEL: | E41 E51 E52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201017&r=mac |
| By: | Ignazio Angeloni; Ester Faia; Roland Winkler |
| Abstract: | We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using the model of Angeloni and Faia (2010), that combines a standard DSGE framework with a fragile banking sector, suitably modified and calibrated for the euro area. Credibly announced and fast fiscal consolidations dominate – based on simple criteria – alternative strategies incorporating various degrees of gradualism and surprise. The fiscal adjustment should be based on spending cuts or else be relatively skewed towards consumption taxes. The phasing out of monetary accommodation should be simultaneous or slightly delayed. We also find that, contrary to widespread belief, Basel III may well have an expansionary macroeconomic effect |
| Keywords: | exit strategies, debt consolidation, fiscal policy, monetary policy, capital requirements, bank runs |
| JEL: | E63 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1676&r=mac |
| By: | Domenico Giannone (Université Libre de Bruxelles – ECARES, Avenue Roosevelt CP 114 Brussels, Belgium.); Michele Lenza (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Huw Pill (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (London Business School) |
| Abstract: | Standard accounts of the Great Depression attribute an important causal role to monetary policy errors in accounting for the catastrophic collapse in economic activity observed in the early 1930s. While views vary on the relative importance of money versus credit contraction in the propagation of this policy error to the wider economy and ultimately price developments, a broad consensus exists in the economics profession around the view that the collapse in financial intermediation was a crucial intermediary step. What lessons have monetary policy makers taken from this episode? And how have they informed the conduct of monetary policy by leading central banks in recent times? This paper sets out to address these questions, in the context of the financial crisis of 2008-09 and with application to the euro area. It concludes that the Eurosystem’s non-standard monetary policy measures have supported monetary policy transmission and avoided the calamity of the 1930s. JEL Classification: E5, E4, E32. |
| Keywords: | Non-standard monetary policy, monetary policy shocks, Great Recession, money and credit. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111290&r=mac |
| By: | Pierre L. Siklos (Wilfrid Laurier University and Viessmann European Research Centre, Waterloo, ON, Canada; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy) |
| Abstract: | This paper examines the communications challenges facing central banks who will be sharing responsibilities with other agencies for macro-prudential objectives, in addition to conventional monetary policy goals. Following a description and analysis of surveys of central banks, and the attributes that make up an index of central bank transparency, some policy proposals are made. It is argued that a hybrid of inflation and price level targeting, combined with a requirement by the macro-prudential regulators to issue press releases much like central banks publish an announcement and rationale for the setting of monetary policy instruments, may improve the central bank communication in a post-crisis world. |
| Keywords: | central bank communication, transparency, price level targeting |
| JEL: | E52 E58 E65 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:04_11&r=mac |
| By: | Novella Maugeri |
| Abstract: | This paper provides further evidence in favor of less than fully rational expectations by making use two instruments, one quite well known, and the other more novel, namely survey data on inflation expectations and Smooth Transition Error Correction Models (STECMs). We use the so called ‘probabilistic approach’ to derive a quantitative measure of expected inflation from qualitative survey data for France, Italy and the UK. The United States are also included by means of the Michigan Survey of Consumers’ expectations series. First, we perform the standard tests to assess the ‘degree of rationality’ of consumers’ inflation forecasts. Afterwards, we specify a STECM of the forecast error, and we quantify the strategic stickiness in the long-run adjustment process of expectations stemming from money illusion. Our evidence is that consumers’ expectations do not generally conform to the prescriptions of the rational expectations hypothesis. In particular, we find that the adjustment process towards the long-run equilibrium is highly nonlinear and it is asymmetric with respect to the size of the past forecast errors. We interpret these findings as supporting the money illusion hypothesis. |
| Keywords: | Nonlinear error correction, inflation expectations, sticky expectations |
| JEL: | C22 D84 E31 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:606&r=mac |
| By: | Reda, Cherif; Fuad, Hasanov |
| Abstract: | We study the dynamics of U.S. public debt in a parsimonious VAR. We find that including debt feedback ensures the stationarity of debt while standard VARs excluding debt may imply an explosive debt path. We also find that the response of debt to inflation or interest shocks is not robust and depends on the policy regime. The recent past suggests that a positive shock to inflation increases debt while the same to interest rate decreases it. Positive shocks to growth and primary surplus unambiguously reduce debt. |
| Keywords: | debt; fiscal policy; growth; VAR; generalized impulse responses |
| JEL: | E62 C32 H60 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27918&r=mac |
| By: | Alexander Meyer-Gohde |
| Abstract: | The infinite-dimensional sticky-information Phillips curve is cast as a finite-dimensional timevarying system of difference equations in order to directly assess determinacy in the model with demand given by the forward-looking IS equation and monetary policy by an interest rate rule. An equivalence to the model without lagged expectations holds (albeit tenuously) for the particular specification and a common truncation method produces spurious determinacy. |
| Keywords: | Determinacy, Taylor rule, Sticky Information, Time-Varying Difference Equations |
| JEL: | C62 E31 E43 E52 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-006&r=mac |
| By: | Domenico Giannone; Michèle Lenza; Huw Pill; Lucrezia Reichlin |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/73400&r=mac |
| By: | Nautz, Dieter; Scheithauer, Jan |
| Abstract: | Overnight money market rates are the predominant operational target of monetary policy. As a consequence, central banks have redesigned the implementation of monetary policy to keep the deviations of the overnight rate from the key policy rate small and short-lived. This paper uses fractional integration techniques to explore how the operational framework of four major central banks affects the persistence of overnight rates. Our results suggest that a well-communicated and transparent interest rate target of the central bank is a particularly important condition for a low degree of overnight rate persistence. -- |
| Keywords: | Controllability and Persistence of Interest Rates,Operational Framework of Central Banks,Long Memory and Fractional Integration |
| JEL: | E52 C22 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201026&r=mac |
| By: | Heiner Ganßmann (Institut für Soziologie, Freie Universität Berlin) |
| Abstract: | Recent search theoretical models of monetary economies promise micro-foundations and thus a decisive improvement in the theory of money compared to the traditional mainstream approach that starts from a Walrasian general equilibrium framework to introduce money exogenously at the macro level. The promise of micro-foundations is not fulfilled, however. It can be shown that search models implicitly refer to central, most likely collective, agents doing essential work to sustain the monetary economy. |
| Keywords: | micro-foundations, multi-agent modelling, model, macro, monetary economy, money, information, network |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:kas:poabec:2010-9&r=mac |
| By: | Rafał Woźniak (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland) |
| Abstract: | In the paper, two indicators, the coincident and the leading indicator, are proposed to represent the aggregated economic activity in Poland. The indicators are constructed with stochastic cycle and trend model. Not only does the presented approach solve the problem of existence of stochastic trends in the observed series, but it also allows to account for a different data span of each series in dataset. |
| Keywords: | business cycles, leading indicators, coincident indicators, dynamic factor model, stochastic cycle, stochastic trend |
| JEL: | C32 E32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2011-01&r=mac |
| By: | Paradiso, Antonio; Rao, B. Bhaskara |
| Abstract: | We investigate whether the mortgage equity withdrawal (MEW) mechanism is useful for explaining the large declines in the US personal saving ratio in the last two decades. MEW depends on house price inflation and mortgage rates. In addition stock prices may affect saving ratio. Therefore, we estimate a VEC model with these four variables. The impulse response analysis shows that saving ratio decreases with positive shocks to asset prices and increases with positive shocks to mortgage rates. |
| Keywords: | Saving ratio MEW VEC asset prices interest rates |
| JEL: | C32 E21 |
| Date: | 2011–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28023&r=mac |
| By: | Daniele Franco (editor) (Bank of Italy) |
| Abstract: | The volume collects the essays presented at the 11th Workshop on Public Finance organised by Banca d'Italia in Perugia on 26-28 March 2009. The workshop examined the issue of pension reform with the purpose of highlighting the recent analytical developments and the most relevant policy issues. Session 1 examined the impact of pension reforms on the labour market and their effects on investments in human capital and productivity growth. Session 2 was devoted to the impact of pension reforms on capital markets, and specifically on the effects of funded schemes. Section 3 considered the impact of reforms on income distribution, within and across generations, and macroeconomic developments. Section 4 dealt="" with the political economy of pension reforms and their role in the broader fiscal policy context. |
| Keywords: | pension reform, fiscal policy |
| JEL: | E32 E62 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:workpa:sec_3&r=mac |
| By: | Andrei Markevich (New Economic School (Moscow), University of Warwick); Mark Harrison (University of Warwick, University of Birmingham, Hoover Institution on War, Revolution, and Peace, Stanford University) |
| Abstract: | The last remaining gap in the national accounts of Russia and the USSR in the twentieth century, 1913 to 1928, includes the Great War, the Civil War, and postwar recovery. Filling this gap, we find that the Russian economy did somewhat better in the Great War than was previously thought; in the Civil War it did correspondingly worse; war losses persisted into peacetime, and were not fully restored under the New Economic Policy. We compare this experience across regions and over time. The Great War and Civil War produced the deepest economic trauma of Russia’s troubled twentieth century. |
| Keywords: | Civil War, GDP, Russia, Soviet Union, World War I |
| JEL: | E20 N14 N44 O52 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0146&r=mac |
| By: | Thomas Moutos (DIEES, AUEB); Sarantis Kalyvitis (DIEES, AUEB); Margarita Katsimi (DIEES, AUEB) |
| Abstract: | Received wisdom suggests that �excessive� wages, defined as the part of real wages that do not follow labour productivity developments, are adversely associated with the return on capital. This paper argues that excessive wages and profits are better thought as responses to changes in the economic, political and institutional environment and there is no a priori reason for a negative relationship between them. We thus investigate whether there is a causal effect of excessive wages on capital return using aggregate panel data for 19 OECD countries for the period 1970-2000. We account for the endogeneity of excessive wages by exploiting variations in institutional and labour market characteristics. Our main finding is that excessive wages do not affect the return on capital. This result remains robust to alternative empirical specifications and to alternative definitions of profitability and excessive wages, and questions the standard advice by international economic organizations on wage moderation. |
| Keywords: | capital return, �excessive� wages, productivity, endogeneity. |
| JEL: | E24 E25 |
| Date: | 2011–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:aue:wpaper:1104&r=mac |
| By: | Markus Brückner (School of Economics, University of Adelaide) |
| Abstract: | Consistent estimation of the tax revenue elasticity is complicated by the endogenous response of GDP to changes in tax rates and measurement error in national accounts statistics. This paper exploits the significant response of real GDP growth of Sub-Saharan African countries to exogenous international commodity price and rainfall shocks to construct instrumental variables estimates of the tax revenue elasticity parameter. IV estimates yield that a 1 percent increase in GDP increases tax revenues by up to 2.5 percent. IV estimates therefore point to large responses in the tax revenues collected by Sub-Saharan African governments. |
| Keywords: | tax revenues, growth, instrumental variables |
| JEL: | E62 H20 H60 O55 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2011-09&r=mac |
| By: | Stark, Oded; Fan, C. Simon |
| Abstract: | An increase in the probability of work abroad, where the returns to schooling are higher than at home, induces more individuals in a developing country to acquire education, which leads to an increase in the supply of educated workers in the domestic labor market. Where there is a sticky wage-rate, the demand for labor at home will be constant. With a rising supply and constant demand, the rate of unemployment of educated workers in the domestic labor market will increase. Thus, the prospect of employment abroad causes involuntary âeducated unemploymentâ at home. A government that is concerned about âeducated unemploymentâ and might therefore be expected to encourage unemployed educated people to migrate will nevertheless, under certain conditions, elect to restrict the extent of the migration of educated individuals. |
| Keywords: | Labor and Human Capital, E24, F22, J24, O15, |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ags:ubzefd:98572&r=mac |