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on Monetary Economics |
| By: | Diana N. Weymark; Mototsugu Shintani |
| Date: | 2006–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:321307000000000321&r=mon |
| By: | Engin Kara (University of York, Heslington, York, YO10 5DD, United Kingdom.) |
| Abstract: | In this paper we use the Generalized Taylor Economy (GTE) framework in which there are many sectors with overlapping contracts of different lengths to analyze the design of monetary policy. We derive a utility based objective function of a central bank for this economy and use it to evaluate the performance of alternative simple rules. We find that a simple rule that targets an index that gives more weight to the sectors which have longer contracts and are more important in the aggregate index yields a welfare outcome nearly identical to the optimal policy. However, we find that potential gains in targeting sector specific inflation rates rather than the aggregate inflation rate is very sensitive to the shape of the distribution. We show that except for the cases where prices/wages are reoptimized very frequently, the performance of the sectoral rule can be closely approximated by a simple rule that targets aggregate inflation. JEL Classification: E32, E52, E58. |
| Keywords: | Inflation targeting, Optimal Monetary Policy. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060673&r=mon |
| By: | Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Øyvind Eitrheim (Norges Bank (Central Bank of Norway)) |
| Abstract: | We investigate empirically whether a central bank can promote financial stability by stabilising inflation and output, and whether additional stabilisation of asset prices and credit growth would enhance financial stability, in particular. We employ an econometric model of the Norwegian economy to investigate the performance of simple interest rate rules that allow a response to asset prices and credit growth, in addition to inflation and output. We find that output stability also promotes financial stability, while inflation stability is achieved at the expense of both output and financial stability. A stabilisation of house prices, equity prices and/or credit growth enhances stability in both inflation and output, but not financial stability. By contrast, stabilisation of the nominal exchange rate induces excess volatility in general. |
| Keywords: | Monetary policy, financial stability, asset prices, interest rate rules. |
| JEL: | C51 C52 C53 E47 E52 |
| Date: | 2006–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_07&r=mon |
| By: | Markku Lanne, Helmut Luetkepohl |
| Abstract: | A central issue of monetary policy analysis is the specification of monetary policy shocks. In a structural vector autoregressive setting there has been some controversy about which restrictions to use for identifying the shocks because standard theories do not provide enough information to fully identify monetary policy shocks. In fact, to compare different theories it would even be desirable to have over-identifying restrictions which would make statistical tests of different theories possible. It is pointed out that some progress towards over-identifying monetary policy shocks can be made by using specific data properties. In particular, it is shown that changes in the volatility of the shocks can be used for identification. Based on monthly US data from 1965-1996 different theories are tested and it is found that associating monetary policy shocks with shocks to nonborrowed reserves leads to a particularly strong rejection of the model whereas assuming that the Fed accommodates demand shocks total reserves cannot be rejected. |
| Keywords: | Monetary policy, structural vector autoregressive analysis, vector autoregressive process, impulse responses |
| JEL: | C32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2006/23&r=mon |
| By: | Marco Realdon |
| Abstract: | This paper presents a tractable bond valuation model, which further develops the approach proposed by Piazzesi (2005). The short term inter-bank interest rate is equal to the target rate set by the central bank plus a spread. Bond yields are driven by the intensities that determine the probabilities that the central bank may raise or cut the target interest rate. Unlike in Piazzesi (2005), negative intensities have a convenient interpretation and do not complicate estimation, and two accurate approximations to the bond pricing equation provide new closed form solutions for discount bond prices that require no numerical integration. Unlike in Piazzesi the target interest rate can be constrained to be non-negative. Yields, especially long term ones, decrease when the central bank is expected to decide more frequent and/or larger average future changes in the target interest rate. The model lends itself to easy calibration and estimation. |
| Keywords: | Bond valuation, target interest rate, closed form solution, yield curve, central banker's meeting |
| JEL: | G13 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:06/15&r=mon |
| By: | Jörg Döpke; Jonas Dovern; Ulrich Fritsche; Jirka Slacalek |
| Abstract: | We estimate the sticky information Phillips curve model of Mankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months. |
| Keywords: | Inflation expectations, sticky information, Phillips curve, inflation persistence |
| JEL: | D84 E31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp615&r=mon |
| By: | Bill Russell, Anindya Banerjee |
| Abstract: | Modern theories of inflation incorporate a vertical long-run Phillips curve and are usually estimated using techniques that ignore the non-stationary behaviour of inflation. Consequently, the estimates obtained are imprecise and are unable to distinguish between competing models of inflation and test the veracity of a vertical long-run Phillips curve. We estimate a Phillips curve model taking into account the non-stationary properties in inflation and identify a small but significant positive relationship between inflation and unemployment. The results provide some evidence that the trade-off between inflation and the unemployment rate in the short-run worsens as the mean rate of inflation increases. |
| Keywords: | Inflation, unemployment, long-run Phillips curve, business cycle, GMM |
| JEL: | C22 C32 C52 D40 E31 E32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2006/16&r=mon |
| By: | Tood Keister (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | This paper shows how expectations-driven contagion of currency crises can arise even if the currency market has a unique equilibrium when viewed in isolation. The model of Morris and Shin (1998) is extended to allow speculators to trade in a second currency market. If speculators believe that a devaluation of this other currency will make a domestic devaluation more likely, they will engage in trades that link the two markets. A sharp devaluation of the other currency will then be propagated to the domestic market and will increase the likelihood of a crisis there, fulfilling the original expectations. Even though this contagion is driven solely by expectations, the model places restrictions on observable variables, and these restrictions are broadly consistent with existing empirical evidence. |
| Date: | 2005–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:0501&r=mon |
| By: | Huw Dixon (Economics Department, University of York, Heslington, York, YO10 5DD, United Kingdom.); Engin Kara (University of York, Heslington, York, YO10 5DD, United Kingdom.) |
| Abstract: | This paper adopts the Impulse-Response methodology to understand inflation persistence. It has often been argued that existing models of pricing fail to explain the persistence that we observe. We adopt a common general framework which allows for an explicit modelling of the distribution of contract lengths and for different types of price setting. In particular, we find that allowing for a distribution of contract lengths can yield a more plausible explanation of inflation persistence than indexation. JEL Classification: E17, E3. |
| Keywords: | DGE models, inflation, persistence, price-setting. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060672&r=mon |