nep-mon New Economics Papers
on Monetary Economics
Issue of 2006‒10‒21
25 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Robustness in monetary policymaking: a case for the Friedman rule By Kilponen, Juha; Leitemo, Kai
  2. Optimal Interest Rate Stabilization in a Basic Sticky-Price Model By Matthias Paustian; Christian Stoltenberg
  3. Inflation persistence and price-setting behaviour in the euro area : a summary of the Inflation Persistence Network evidence By Filippo Altissimo; Michael Ehrmann; Frank Smets
  4. Robust monetary policy in a small open economy By Leitemo , Kai; Söderström , Ulf
  5. Why the marginal MRO rate exceeds the ECB policy rate? By Välimäki , Tuomas
  7. The Interplay between Money Market Development and Changes in Monetary Policy Operations in Small European Countries, 1980–2000 By Forssbaeck, Jens; Oxelheim, Lars
  8. Monetary Policy and Inflation Expectations in Latin America: Long-run Effects and Volatility Spillovers By OECD
  9. The role of expectations in the inflation process in the euro area By Paloviita , Maritta; Virén , Matti
  10. Open market operations: beyond the new consensus By Toporowski , Jan
  11. Real Balance Effects, Timing and Equilibrium Determination By Christian Stoltenberg
  12. Identifying the interdependence between US monetary policy and the stock market By Bjørnland , Hilde; Leitemo, Kai
  13. Money market volatility, A simulation study By Kempa , Michal
  14. Policy words and policy deeds: the ECB and the euro By Siklos, Pierre; Bohl , Martin
  15. Producer Prices in the Transition to a Common Currency By Andrén, Niclas; Oxelheim, Lars
  16. Bank interest rates in a small European economy: Some exploratory macro level analyses using Finnish data By Kauko , Karlo
  17. International economic spillovers and the liquidity trap By Tarkka , Juha; Kortelainen , Mika
  18. Inflation expectations and regime shifts in the euro area By Virén , Matti
  19. Dynamics and monetary policy in a fair wage model of the business cycle By David de la Croix; Gregory de Walque; Rafael Wouters
  20. Fundamentals and technical trading: behaviour of exchange rates in the CEECs By Bask , Mikael; Fidrmuc , Jarko
  21. Monetary Equilibria in a Baumol-Tobin Economy By Ingolf Schwarz
  22. Exchange rate volatility without the contrivance of fundamentals and the failure of PPP By Bask, Mikael
  23. The demand for money market mutual funds By Kauko , Karlo
  24. Comparing alternative Phillips curve specifications: European results with survey-based expectations By Paloviita , Maritta
  25. The structural dynamics of output growth and inflation: some international evidence By Fabio Canova; Luca Gambetti; Evi Pappa

  1. By: Kilponen, Juha (Bank of Finland Research); Leitemo, Kai (Norwegian School of Management (BI))
    Abstract: Inflation targeting involves using all available information in stabilizing inflation around some target rate (Svensson, 2003). Inflation is typically at the very end of the transmission mechanism and hence its de-termination is subject to much model uncertainty which the central bank will want to guard against using robust policies. Such robustness comes however with the cost of increased social loss under the most likely description of the economy. We show that with a sufficiently high degree of model uncertainty, ad-herence to the Friedman rule of increasing the money stock by k percent will be superior as the price paid for robustness is smaller.
    Keywords: policy robustness; money growth targeting; inflation targeting; Friedman rule
    JEL: E42 E52 E58 E61
    Date: 2006–04–19
  2. By: Matthias Paustian; Christian Stoltenberg
    Abstract: This paper studies optimal monetary policy with the nominal interest rate as the single policy instrument in an economy, where firms set prices in a staggered way without indexation and real money balances contribute separately to households' utility. The optimal deterministic steady state under commitment is the Friedman rule - even if the importance assigned to the utility of money is small relative to consumption and leisure. We approximate the model around the optimal steady state as the long-run policy target. Optimal monetary policy is characterized by stabilization of the nominal interest rate instead of inflation stabilization as the predominant principle.
    Keywords: Optimal monetary policy, commitment, timeless perspective, optimal steady state, staggered price setting, monetary friction, Friedman's rule
    JEL: E32 E52 E58
    Date: 2006–10
  3. By: Filippo Altissimo (European Central Bank); Michael Ehrmann (European Central Bank); Frank Smets (European Central Bank)
    Abstract: This paper provides a summary of current knowledge on inflation persistence and price stickiness in the euro area, based on research findings that have been produced in the context of the Inflation Persistence Network. The main findings are: i) Under the current monetary policy regime, the estimated degree of inflation persistence in the euro area is moderate; ii) Retail prices in the euro area are more sticky than in the US; iii) There is significant sectoral heterogeneity in the degree of price stickiness; iv) Price decreases are not uncommon. The paper also investigates some of the policy implications of these findings
    Keywords: price-setting; inflation persistence; monetary policy; EMU
    JEL: E31 E42 E52
    Date: 2006–10
  4. By: Leitemo , Kai (Norwegian School of Management (BI)); Söderström , Ulf (Department of Economics and IGIER, Università Bocconi)
    Abstract: This paper studies how a central bank’s preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy. Due to the simple model structure, we are able to solve analytically solve the optimal robust policy rule, and separately ana-lyze the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate. We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification.
    Keywords: Knightian uncertainty; model uncertainty; robust control; min-max policies
    JEL: E52 E58 F41
    Date: 2005–10–11
  5. By: Välimäki , Tuomas (Bank of Finland)
    Abstract: In the Eurosystem, banks’ interest rate expectations should no longer have resulted in a non-zero tender spread, the difference between marginal and minimum price for liquidity, when the ECB reformed its op-erational framework for monetary policy implementation in March 2004 so that the policy rates remain constant within reserves maintenance periods. Yet, the tender spread was wider in 2005 than in any single year after 2000, when the ECB switched from fixed to variable rate tenders. Parts of the relevant literature have argued that because of the ECB’s asymmetric preferences over deviations of the market rates up and down from the policy rate, the shortest euro interest rates persistently exceed the policy rate This paper argues, however, that when the central bank applies a quantity oriented liquidity policy, a positive tender spread may result from money market inefficiencies and banks’ risk aversion even if the central bank preferences are symmetric and the markets do not anticipate any changes in the policy rates. In such a case, the driving force behind the tender spread is banks’ uncertainty about their individual allotments at the marginal rate for the Eurosystem main refinancing operations (MROs). Furthermore, the allotment uncertainty is shown to be significantly related to the amount of liquidity supplied in each operation. Hence, the expansion in the MRO volumes experienced since 2002 may have had a major contribution to the emergence and observed growth of the tender spread.
    Keywords: main refinancing operations; liquidity; tender spread; allotments
    JEL: D44 E58
    Date: 2006–10–03
  6. By: Hsiao Chink Tang
    Abstract: This paper investigates the relative strength of four monetary policy transmission channels (exchange rate, asset price, interest rate and credit) in Malaysia using a 12-variable open economy VAR model. By comparing the baseline impulse response with the constrained impulse response where a particular channel is being switched off, the interest rate channel is found to be the most important in influencing output and inflation in the horizon of about two years, and the credit channel beyond that. The asset price channel is also relevant in the shorter-horizon, more so than the exchange rate channel, particularly in influencing output. For inflation, the exchange rate channel is more relevant than the asset price channel.
    Date: 2006–08
  7. By: Forssbaeck, Jens (Lund Institute of Economics Research); Oxelheim, Lars (Research Institute of Industrial Economics)
    Abstract: We study the interplay between money market development and changes in monetary policy operating procedures in 11 European countries from c. 1980 up to the launch of EMU. Aspects of money market development such as the size and structure of different market segments, and institutional and regulatory changes, are addressed. We recount and empirically examine the extent of reorientation of monetary policy instruments away from quantitative direct control instruments toward indirect market-based instruments. The process of financial deregulation is uniform across the countries. The path of money market development varies substantially, whereas changes in central bank instruments show both similarities and differences. We hypothesise a relationship between the two processes and provide tentative evidence.
    Keywords: Monetary policy operations; Money market; European Union; Deregulation
    JEL: E52 E58 G28 N24
    Date: 2006–09–22
  8. By: OECD
    Abstract: The current monetary policy framework in several Latin American countries, combining inflation targeting and a floating exchange-rate regime, has contributed to disinflation by anchoring expectations around low, stable levels. This paper uses co-integration analysis to estimate simultaneously a monetary reaction function and the determinants of expected inflation for Brazil, Chile, Colombia and Mexico in the post-1999 period. It also tests for the presence of volatility spillovers between the monetary stance and inflation expectations based on M-GARCH modelling. The results of the empirical analysis show that: i) there are long-term relationships between the interest rate, expected inflation and the inflation target, suggesting that monetary policy has been conducted in a forward-looking manner and helped anchor inflation expectations in the countries under examination, and ii) greater volatility in the monetary stance leads to higher volatility in expected inflation in Brazil, Colombia and Mexico, suggesting that interest-rate smoothing contributes to reducing inflation expectations volatility. No volatility spillover effect was detected in the case of Chile. <P>Politique monétaire et anticipations d'inflation en Amérique latine : Effets à long terme et spillovers de volatilité <BR>Le cadre courant de la politique monétaire dans plusieurs pays d'Amérique latine, qui combine un ciblage d'inflation et un régime de taux de change flottant, a contribué à la désinflation par ancrage des anticipations d'inflation à un niveau bas et stable. Ce document utilise une analyse de co-intégration pour estimer simultanément une fonction de réaction da la politique monétaire et les déterminants des anticipations d'inflation pour le Brésil, le Chili, la Colombie et le Mexique depuis 1999. Des tests sont aussi présentés sur la présence d'effets de spillover de volatilité entre la politique monétaire et les anticipations d'inflation, en s'appuyant sur le modèle M-GARCH. Les résultats de l'analyse empirique montrent que : i) il existe des relations de long terme entre le taux d'intérêt, les anticipations d'inflation et la cible d'inflation. Cela suggère que la politique monétaire a été conduite selon une méthode prospective et a assuré l'ancrage des anticipations d'inflation; et ii) une plus grande volatilité de la politique monétaire entraîne une plus importante volatilité des anticipations d'inflation au Brésil, en Colombie et au Mexique, cela laisse penser qu'un lissage des taux d'intérêt contribue à une réduction de la volatilité des anticipations d'inflation. Aucun spillover de volatilité n'a été détecté dans le cas du Chili.
    Keywords: Mexico, Mexique, Brazil, Brésil, inflation target, cible d'inflation, Chile, Chili, Colombia, Colombie, multiple co-integration, co-intégration multiple, volatility spillover, spillover de volatilité, M-GARCH modelling, M-GARCH
    JEL: C22 E52 O54
    Date: 2006–10–04
  9. By: Paloviita , Maritta (Bank of Finland Research); Virén , Matti (University of Turku)
    Abstract: This paper analyses the role of inflation expectations in the euro area. On one hand, the question is how inflation expectations affect both inflation and output, and, on the other hand, how inflation expectations reflect developments in these variables. The analyses make use of a simple VAR model of inflation, inflation expectations and the output gap that allows for an analysis of the dynamic interrelationship between these variables. This model is estimated on aggregate euro area data, pooled euro area country data and individual country data for the period 1979–2003. The empirical results give strong support for the idea that inflation expectations are the key ingredient of the inflationary process for the whole euro area and for most individual countries as well. Inflation expectations also have a significant negative impact on output. As for the determination of inflation expectations, it turns out that they are relatively persistent, almost as persistent as output. Even so, and especially in the medium term, inflation expectations adapt to developments in both output and (actual) inflation.
    Keywords: inflation; expectations; monetary policy; Phillips curve
    JEL: E31 E52
    Date: 2005–02–13
  10. By: Toporowski , Jan (SOAS, University of London)
    Abstract: The emergence of the New Consensus in monetary policy has been followed by a renewal of interest in central banks’ operating procedures, and specifically in the role of open market operations. There is a general view that overnight interest rates are most effectively controlled by standing or discount window facilities, rather than open market operations, and this view will probably now extend also to lender-of-last-resort intervention. The paper argues that this reduced role for open market operations is only in the context of controlling overnight rates of interest. In spite of the emphasis on control of overnight interest rates, medium and long-term interest rates remain the crucial instruments in the monetary transmission mechanism. Longer-term interest rates are susceptible to influence by open market operations, and their importance grows with financial development.
    Keywords: central banks; monetary policy; open market operations
    JEL: E52 E58
    Date: 2006–06–21
  11. By: Christian Stoltenberg
    Abstract: This paper examines whether the existence and the timing of real balance effects contribute to the determination of the absolute price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. I show that there exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of-period money yields transaction services. Predetermined real money balances can then serve as a state variable, implying that interest rate setting must be passive - a violation of the Taylor-principle - for unique, stable, and non-oscillatory equilibrium sequences. On the contrary, when the end-of-period money stock facilitates transactions, the equilibrium displays nominal indeterminacy and equilibrium uniqueness requires an interest rate setting consistent with the Taylor-principle.
    Keywords: Real balance effects, predetermined money, price level determination, real determinacy, monetary policy rules, flexible prices
    JEL: E32 E41 E52
    Date: 2006–10
  12. By: Bjørnland , Hilde (University of Oslo, Department of Economics); Leitemo, Kai (Department of Economics, Norwegian School of Management BI)
    Abstract: We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative proper-ties of a monetary policy shock found in the established literature (CEE 1999). We find great interde-pendence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 per cent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock in-creasing stock prices by one per cent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks.
    Keywords: VAR; monetary policy; asset prices; identification
    JEL: E43 E52 E61
    Date: 2005–07–11
  13. By: Kempa , Michal (RUESG, University of Helsinki and Bank of Finland)
    Abstract: This paper analyses different operational central bank policies and their impact on the behaviour of the money market interest rate. The model combines profit maximising behaviour by commercial banks with the central bank supplying the liquidity that keeps the market rate on target. It seems that frequent liquid-ity supplying operations represent an efficient tool to control money market rates. An averaging provision reduces the use of standing facilities and interest rates volatility in all days except for the last day of the maintenance period. Whenever banks have different maintenance horizons both the spikes in volatility and use of standing facilities disappear. The paper also compares two different liquidity supply policies and finds that the level of liquidity necessary to keep the rates on target depends on not only the aggregate but also assets values of individual banks.
    Keywords: Interbank market; interest rate volatility; central bank procedures; open market operations
    JEL: E43 E44 E52
    Date: 2006–06–12
  14. By: Siklos, Pierre (Department of Economics and Viessmann Research Centre on Modern Europe, Wilfrid Laurier University); Bohl , Martin (Department of Economics, Westfälische Wilhelms University Münster)
    Abstract: This paper examines the role of the ECB communication activities on daily Eurodollar exchange rate and interest rates. We estimate the relationship between monetary policy and the exchange rate using a technique that explicitly recognises the joint determination of both the levels and volatilities of these variables. We also consider more traditional estimation strategies as a test of the robustness of our main results. We introduce a new indicator of ECB communications policies that focuses on what the ECB says about the future economic outlook for the euro area along five different economic dimensions. The impact of ECB communications policies is more apparent in the time series framework than in the heteroskedasticity estimator approach. Previous studies that conclude that news effects are significant at the daily frequency may have reached such a conclusion because the measurement of news was too highly aggregated. The endogeneity of the exchange rate – interest rate relationship is more apparent when the proxy for monetary policy is the euro area – US differential than when any other proxy for monetary policy is employed. Finally, interest rate changes generally have a much larger impact on exchange rate movements, and their volatility, than do ECB verbal pronouncements.
    Keywords: communication policy; exchange rates; interest rates; volatility
    JEL: E50 E60 F30
    Date: 2006–04–11
  15. By: Andrén, Niclas (Institute of Economic Research); Oxelheim, Lars (Research Institute of Industrial Economics)
    Abstract: We analyze producer price developments in the transition from a national exchange rate regime to a monetary union. The focus is on the European Economic and Monetary Union (EMU). Stylized facts witness about an exploding gaps in producer-price inflation during the years immediately following the completion of the EMU. Price convergence is found to be an important driver throughout the entire euro period (1999-2005), but with no significant differences in speed compared to the pre euro period. Productivity growth had its primary effect in the first years and effective exchange-rate changes in the later years of the euro period.
    Keywords: Producer prices; Relative prices; Price convergence; Euro; Balassa-Samuelson
    JEL: E31 E44 F15 F23 G34
    Date: 2006–09–22
  16. By: Kauko , Karlo (Bank of Finland Research)
    Abstract: This paper presents econometric analyses on the determination of bank deposit and lending rates using longitudinal Finnish data. Interest rate pass-through is very strong, possibly complete, in the case of lending rates; in the case of deposit rates the pass-through is far from complete, even in the long term. The monetary union has benefited customers by decreasing the average rate on new loans. Credit and interest rate risk premiums are clearly observable in banks' lending rates. The impact of money market rates on loan stock rates seems to have been non-linear; no obvious explanation for this phenomenon has been found.
    Keywords: banking; interest rates
    JEL: E43 E44 G21
    Date: 2005–05–11
  17. By: Tarkka , Juha (Bank of Finland Research); Kortelainen , Mika (Bank of Finland Research)
    Abstract: We study the effect of the zero bound constraint of interest rates on international transmission of eco-nomic policy and supply shocks. After some preliminary analysis with a simple theoretical model, we ap-ply a rich two-country simulation model to the problem. The model framework consists of EDGE, Bank of Finland’s dynamic equilibrium model for the euro area, linked to a similar model calibrated to resem-ble the US economy. The models have new Keynesian properties because of price rigidities and forward-looking pricing, consumption and investment behaviour. We assume freely floating exchange rates. Monetary policies are modelled with Taylor type policy rules, taking into account the zero bound con-straint for interest rates. We find that effects of policy and supply side shocks differ significantly from the ‘normal’ situation if one of the countries is in the ‘liquidity trap’, ie if the interest rate is constrained by the zero bound. Being in the liquidity trap amplifies the domestic effects of fiscal policy, but mitigates its spillover to abroad. Changing the long run inflation target, which does not have international spillovers in the normal case, does have effects abroad if the country where the target is changed is in a temporary li-quidity trap. The effects of supply shocks are also very different in the liquidity trap case compared to the normal case.
    Keywords: zero bound; liquidity trap; international spillovers; edge
    JEL: F42 F47
    Date: 2005–07–11
  18. By: Virén , Matti (Bank of Finland and University of Turku)
    Abstract: This paper focuses on the determination of inflation expectations. The following two questions are exam-ined: How much do inflation expectations reflect different economic and institutional regime shifts and in which way do inflation expectations adjust to past inflation? The basic idea in the analysis is an assump-tion that inflation expectations do not mechanically reflect past inflation as may econometric specification de facto assume but rather they depend on the relevant economic regime. Also the adjustment of expecta-tions to past inflation is different in different inflation regimes. The regime analysis is based on panel data from EMU/EU countries for the period 1973–2004, while the inflation adjustment analysis mainly uses the Kalman filter technique for individual countries for the same period. Expectations (forecasts) are de-rived from OECD data. Empirical results strongly favour the regime-sensitivity hypothesis and provide an explanation for the poor performance of conventional estimation procedures in the context of Phillips curves.
    Keywords: inflation expectations; Kalman filter; stability
    JEL: E32 E37
    Date: 2005–10–11
  19. By: David de la Croix (Department of economics, Université catholique de Louvain; CORE); Gregory de Walque (National Bank of Belgium, Research department; Department of Economics, University of Namur); Rafael Wouters (National Bank of Belgium, Research department)
    Abstract: We first build a fair wage model in which effort varies over the business cycle. This mechanism decreases the need for other sources of sluggishness to explain the observed high inflation persistence. Second, we confront empirically our fair wage model with a New Keynesian model based on the standard assumption of monopolistic competition in the labor market. We show that, in terms of overall fit, the fair wage model outperforms the New Keynesian one. The extension of the fair wage model with lagged wage is judged insignificant by the data, but the extension based on a rent sharing argument including firm’s productivity gains in the fair wage is not. Looking at the implications for monetary policy, we conclude that the additional trade-off problem created by the inefficient real wage behavior significantly affects nominal interest rates and inflation outcomes
    Keywords: Efficiency wage, effort, inflation persistence, monetary policy
    JEL: E4 E5
    Date: 2006–10
  20. By: Bask , Mikael (Bank of Finland Research); Fidrmuc , Jarko (Department of Economics, University of Munich, CESifo and Comenius University in Bratislava)
    Abstract: We present a model of exchange rates, which incorporates the monetary approach and technical trading, and we present the reduced form based on the minimal state variable solution, where both fundamentals and backward-looking term determine the spot exchange rates. Finally, we estimate the impact of the monetary fundamentals for a panel of Central and Eastern European countries (Czech Republic, Poland, Romania and Slovakia) in the second half of the 1990s as well as the complete model of exchange rate determination for daily data over the more recent free-floating period.
    Keywords: foreign exchange market; fundamental analysis; panel cointegration; technical analysis
    JEL: C23 F31 F36
    Date: 2006–06–12
  21. By: Ingolf Schwarz (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This paper provides a non-steady state general equilibrium foundation for the transactions demand for money going back to Baumol (1952) and Tobin (1956). In our economy, money competes against real capital as a store of value. We prove existence of a monetary general equilibrium in which both real capital and fiat money are voluntarily held over time. The demand for money is generated by fixed transactions costs. More precisely, we assume that house-holds have two physically separated accounts. On the first account they finance consumption and might want to hold money over time. On the second account households receive their wages, hold claims on capital and earn interest income from renting capital to firms. Every transfer of wealth between the two accounts requires fixed resources. In equilibrium, households space apart the transaction dates in time. Between these transaction dates, money is held as a store of value on the first account for transactions purposes. The number of periods over which money is held is endogenous and the nonconvexity of the problem is explicitly taken into account.
    Keywords: Baumol-Tobin, Monetary Theory, General Equilibrium Theory
    JEL: D50 E40 E41
    Date: 2006–06
  22. By: Bask, Mikael (Bank of Finland Research)
    Abstract: Since the magnitude of exchange rate overshooting may not be the same for different exchange rates of a currency, a monetary expansion or contraction in, for example, the EMU, will affect the exchange rate between the U.S. dollar and the yen, even though there are no changes in monetary fundamentals in the U.S. or Japan. This fact is demonstrated in a sticky-price monetary model due originally to Dornbusch (1976) that is enlarged with currency traders that use Chartism in the form of moving averages. It is also demonstrated that purchasing power parity (PPP) does not necessarily hold in long-run equilibrium. The-se results are interesting since, according to the empirical literature, there are often large movements in nominal exchange rates that are apparently unexplained by macroeconomic fundamentals, and there is also a weak support for PPP.
    Keywords: Chartism; foreign exchange; macroeconomic fundamentals; moving averages; overshooting and PPP
    JEL: F31 F41
    Date: 2006–10–10
  23. By: Kauko , Karlo (Bank of Finland Research)
    Abstract: This paper presents a model on the demand for money market funds (MMFs). These funds are a very close substitute for M1 deposits, except that MMFs do not satisfy immediate transaction requirements. The demand for MMFs strengthens when the intended volume of transactions is low. A high interest rate level makes it expensive to hold M1 deposits. High interest rate volatility, paradoxically, increases the risk of holding M1 deposits stronger than the risk of holding MMFs. The results are largely corroborated by Finnish data.
    Keywords: money market mutual funds; money demand
    JEL: E41 G23 G29
    Date: 2005–07–11
  24. By: Paloviita , Maritta (Bank of Finland Research)
    Abstract: This paper examines inflation dynamics in Europe. Econometric specification tests with pooled European data are used to compare the empirical performance of the New Classical, New Keynesian and Hybrid specifications of the Phillips curve. Instead of imposing any specific form of expectations formation, di-rect measures, ie Consensus Economics survey data are used to proxy economic agents’ inflation expecta-tions. According to the results, the New Classical Phillips curve has satisfactory statistical properties. Moreover, the purely forward-looking New Keynesian Phillips curve is clearly outperformed by the New Classical and Hybrid Phillips curves. We interpret our results as indicating that the European inflation process is not purely forward-looking, and inflation cannot instantaneously adjust to changes in expecta-tions. Consequently, even allowing for possible non-rationality in expectations, a lagged inflation term enters the New Keynesian Phillips curve for inflation dynamics in Europe.
    Keywords: Phillips curve; expectations; Europe
    JEL: C52 E31
    Date: 2005–10–11
  25. By: Fabio Canova; Luca Gambetti; Evi Pappa
    Abstract: We examine the dynamics of output growth and inflation in the US, Euro area and UK using a structural time varying coe¢ cient VAR. There are important similarities in structural inflation dynamics across countries; output growth dynamics differ. Swings in the magnitude of inflation and output growth volatilities and persistences are accounted for by a combination of three structural shocks. Changes over time in the structure of the economy are limited and permanent variations largely absent. Changes in the volatilities of structural shocks matter
    Keywords: Variability, Persistence, Transmission, Structural time varying VARs
    JEL: C11 E12 E32 E62
    Date: 2006–04

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