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on Monetary Economics |
| By: | Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies) |
| Abstract: | Although policymakers and commentators have repeatedly stressed the impact of uncertainty about the true state of the economy on the setting of interest rates, the academic literature has largely ignored this issue. This paper provides a theoretical analysis of how uncertainty about the true state of the economy affects optimal monetary policy rules and presents empirical evidence using data for the UK since the introduction of inflation targets in October 1992. We find that the impact of inflation on interest rates is smaller when inflation is more uncertain and larger when the output gap is more uncertain; we also find that the impact of the output gap is smaller when the output gap is more uncertain. We also find that uncertainty has reduced the volatility but has not affected the average value of interest rates. |
| Keywords: | Monetary policy, Uncertainty. |
| JEL: | C51 C52 E52 E58 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2006/09&r=mon |
| By: | Hans Wolfgang Brachinger (Department of Quantitative Economics) |
| Abstract: | After the introduction of the euro notes and coins in January 2002, throughout the Economic and Monetary Union member countries there was a widespread feeling that the euro had brought about a significant hike in consumer prices. A substantial discrepancy was evident between inflation as measured by the official consumer price indices (CPI) and the one perceived by the general public. In this paper the German case is treated. First, a short overview is given on the public discussions and the many studies published by the German Federal Statistical Office. Then a newly developed theory of inflation perception is outlined and a corresponding index of perceived inflation (IPI) is developed. This index has been calculated for Germany. In the main part of the paper, the results are presented. The IPI time series for Germany from 1996 through 2006 clearly show a special inflation around the introduction of the Euro notes and coins. During that period, the average perceived inflation was approximately 4 times higher than the official inflation rate. |
| Keywords: | perceived inflation; price index; prospect theory; euro cash changeover |
| JEL: | C43 E31 D81 |
| Date: | 2006–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:fri:dqewps:wp0005&r=mon |
| By: | Frömmel, Michael; Schobert, Franziska |
| Abstract: | We estimate monetary policy rules for six central and eastern European countries (CEEC) by taking changes in the policy settings explicitly into account. Distinguishing rather fixed and more flexible exchange rate arrangements we find that for most countries exchange rates played an important role in monetary policy during the fixed exchange rate regime, whereas their influence disappears after the introduction of floating exchange rate regimes. This indicates that most countries followed their officially announced policy settings. For Slovenia and to some extent for Romania, however, we find evidence for exchange rate targeting, although they officially announced a managed float. |
| Keywords: | monetary policy, Taylor rule, transition economies, CEEC, inflation targeting, interest rate policy |
| JEL: | E52 E58 P20 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-341&r=mon |
| By: | Troy Davig (Federal Reserve Bank of Kansas City); Jeffrey R. Gerlach (Department of Economics, College of William and Mary) |
| Abstract: | Using high-frequency data in a Markov-switching framework, we identify states that imply different responses of the yield curve to unexpected changes in the federal funds target. Empirical estimates reveal a low-volatility state where long-term bonds respond significantly, and in a predictable manner, to unexpected changes in the federal funds target. An alternative state exists with higher volatility, where unexpected changes in the federal funds target raise the short-end of the yield curve, but have no significant effect on the long-end. The low-volatility state for long-term bonds occurs from September 1995 to May 1999 and again from March 2000 to January 2002. The timing of the switches between the two states for long-term bonds coincides with changes in FOMC communication policy - though not all changes in communications policy induce a switch. |
| Keywords: | Monetary Policy, Bond Market, Markov-Switching, Central Bank Communications |
| JEL: | E43 E58 G12 |
| Date: | 2006–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:cwm:wpaper:31&r=mon |
| By: | Bjørnland, Hilde C. (Dept. of Economics, University of Oslo); Brubakk, Leif (Norges Bank); Jore, Anne Sofie (Norges Bank) |
| Abstract: | The output gap (measuring the deviation of output from its potential) is a crucial concept in the monetary policy framework, indicating demand pressure that generates inflation. The output gap is also an important variable in itself, as a measure of economic fluctuations. However, its definition and estimation raise a number of theoretical and empirical questions. This paper evaluates a series of univariate and multivariate methods for extracting the output gap, and compares their value added in predicting inflation. The multivariate measures of the output gap have by far the best predictive power. This is in particular interesting, as they use information from data that are not revised in real time. We therefore compare the predictive power of alternative indicators that are less revised in real time, such as the unemployment rate and other business cycle indicators. Some of the alternative indicators do as well, or better, than the multivariate output gaps in predicting inflation. As uncertainties are particularly pronounced at the end of the calculation periods, assessment of pressures in the economy based on the uncertain output gap could benefit from being supplemented with alternative indicators that are less evised in real time. |
| Keywords: | Output gap; real time indicators; forecasting; Phillips curve |
| JEL: | C32 E31 E32 E37 |
| Date: | 2006–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2006_011&r=mon |
| By: | Frömmel, Michael; Schmidt, Torsten |
| Abstract: | We examine the dynamics of bank lending to the private sector for countries of the Euro area by applying a Markov switching error correction model. We identify for Belgium, Germany, Ireland and Portugal stable, mean reverting regimes and unstable regimes with no tendency to return to the long term credit demand equation, whereas for some other countries there is only weak evidence. Furthermore, for these as well as for other countries we detect in the less stable regimes a strong comovement with the development of the stock market. We interpret this as evidence for constraints in bank lending. In contrast, the banks' capital seems to have only marginal impact on the lending behaviour. |
| Keywords: | bank lending, credit demand, Euro area, Markov switching error correction, credit channel, asset prices, credit rationing |
| JEL: | C32 G21 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-342&r=mon |
| By: | Saadet Kirbas Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Adnan Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Evrim Turgutlu (Department of Economics, Faculty of Business, Dokuz Eylül University) |
| Abstract: | This paper investigates the validity of the Fisher hypothesis using data from 33 developed and developing countries. Conventional cointegration tests do not provide strong evidence on the relationship between nominal interest rates and inflation. Therefore, we use fractional cointegration analysis to test the long-run relationship between the two variables. The results indicate that the long-run relationship between nominal interest rates and inflation do not exist for most countries in the sample when conventional cointegration test is employed. However, fractional cointegration between the two variables is found for a large majority of countries, implying the validity of the Fisher hypothesis. The results also indicate that the equilibrium errors display long memory. |
| Keywords: | Fisher hypothesis, interest rates, fractional cointegration, long memory |
| JEL: | E43 C22 |
| Date: | 2005–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:deu:dpaper:0504&r=mon |