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on Monetary Economics |
| By: | Baltensperger, Ernst; Fischer, Andreas M; Jordan, Thomas J. |
| Abstract: | Inflation targeting has become the monetary policy framework of the nineties. At the other extreme, several central banks have recently adopted key elements of the inflation targeter's toolkit, but at the same time they have made formal declarations that they are not inflation targeters. Such a position may appear surprising. It indirectly suggests that a reneging strategy is beneficial for some. The paper considers reasons why it may be advantageous for some central banks to distinguish themselves from the inflation targeting strategy. Most importantly, we argue that explicit inflation targets can potentially undermine the goal independence of a central bank. |
| Keywords: | inflation targeting; medium and strong goal independence; weak |
| JEL: | E50 E52 E58 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5915&r=mon |
| By: | Adam Geršl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank, Prague, Czech Republic) |
| Abstract: | As the independence of national central banks in the European Union is one of the main institutional features of the monetary constitution of the EU, the paper tries to find out whether central banks are factually independent in their decisions about interest rates if they face political pressure. The Havrilesky (1993) methodology of the political pressure on central banks is applied to the Czech National Bank, a central bank of one of the new EU Member States, in order to test whether the conducted monetary policy has been influenced by political pressure from various interest groups. |
| Keywords: | political economy; monetary policy; pressure groups |
| JEL: | E52 D78 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2006_08&r=mon |
| By: | Bekaert, Geert; Cho, Seonghoon; Moreno, Antonio |
| Abstract: | This article complements the structural New-Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro-model with unobservable processes for the inflation target and the natural rate of output which are filtered from macro and term structure data. We find that term structure information helps generate large and significant estimates of the Phillips curve and real interest rate response parameters. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. The inflation target dominates the variation in the 'level factor' whereas monetary policy shocks dominate the variation in the 'slope and curvature factors'. |
| Keywords: | inflation target; monetary policy; Phillips curve; term structure of interest rates |
| JEL: | E31 E32 E43 E52 G12 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5956&r=mon |
| By: | Johann Burgstaller (Department of Economics, Johannes Kepler University Linz, Austria) |
| Abstract: | The empirical literature on interest rate transmission presents diverse and sometimes conflicting estimates. By discussing methodological and specification-related issues, the results of this paper contribute to the understanding of these differences. Eleven Austrian bank lending and deposit rates are utilized to illustrate the pass-through of impulses from monetary policy and banks’ cost of funds. Results from vector autoregressions suggest that the long-run pass-through is higher for movements in the bond market than of changes in money market rates. Deposit rates have no predictive content for lending rates beyond that of market interest rates. |
| Keywords: | Monetary policy transmission; interest rate pass-through; retail interest rates; vector autoregression; impulse-response functions |
| JEL: | E43 E52 G21 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2005_10&r=mon |
| By: | Michel Beine (DULBEA, Free University of Brussels,University of Luxemburg and CESifo.); Oscar Bernal (DULBEA, Free University of Brussels); Jean-Yves Gnabo (University of Namur); Christelle Lecourt (University of Namur) |
| Abstract: | Intervening in the FX market implies a complex decision process for central banks. Monetary authorities have to decide whether to intervene or not, and if so, when and how. Since the successive steps of this procedure are likely to be highly interdependent, we adopt a nested logit approach to capture their relationships and to characterize the prominent features of the various steps of the intervention decision. Our findings shed some light on the determinants of central bank interventions, on the so-called secrecy puzzle and on the identification of the variables influencing the detection of foreign exchange transactions by market traders. |
| Keywords: | Central bank interventions; Exchange rates market; Secrecy puzzle; Nested logit |
| JEL: | E58 F31 G15 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:dul:wpaper:06-15rs&r=mon |
| By: | Jaromir Hurnik; Aleš Bulir |
| Abstract: | The Maastricht inflation criterion, designed in the early 1990s to bring "high-inflation" EU countries in line with "low-inflation" countries prior to the introduction of the euro, poses challenges for both new EU member countries and the European Central Bank. While the criterion has positively influenced the public stance toward low inflation, it has biased the choice of the disinflation strategy toward short-run, fiat measures-rather than adopting structural reforms with longer-term benefits-with unpleasant consequences for the efficiency of the eurozone transmission mechanism. The criterion is also unnecessarily tight for new member countries as it mainly reflects cyclical developments. |
| Date: | 2006–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/154&r=mon |
| By: | Doepke, Matthias; Schneider, Martin |
| Abstract: | Episodes of unanticipated inflation reduce the real value of nominal claims and thus redistribute wealth from lenders to borrowers. In this study, we consider redistribution as a channel for aggregate and welfare effects of inflation. We model an inflation episode as an unanticipated shock to the wealth distribution in a quantitative overlapping-generations model of the U.S. economy. While the redistribution shock is zero sum, households react asymmetrically, mostly because borrowers are younger on average than lenders. As a result, inflation generates a decrease in labour supply as well as an increase in savings. Even though inflation-induced redistribution has a persistent negative effect on output, it improves the weighted welfare of domestic households. |
| Keywords: | aggregate effects; inflation; redistribution; welfare |
| JEL: | D31 D58 E31 E50 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5939&r=mon |
| By: | Ali Al-Eyd; Stephen Hall |
| Abstract: | This paper extends a standard open-economy New Keynesian model to examine the efficiency of alternative monetary policy rules (both fixed and nonlinear) during a period of financial crisis. A third-generation “balance sheet effect” is made operational through an endogenous risk premium which impacts on investment. Special attention is given to alternative expectations structures and our findings under both rational expectations and adaptive learning establish the Taylor rule as the dominant policy. Moreover, under adaptive learning, we find additional policy traction and less instrument variability in rules augmented with the exchange rate. Building on the nonlinear policy rule framework, we illustrate the debate stemming from the Asian crisis regarding the prescription of monetary policy in the presence of liability dollarization. Interestingly, under rational expectations, “Traditionalist” (or IMF-prescribed) policy is most effective at mitigating exchange rate variability, while “Revisionist” policy is most effective at mitigating real output variability. All rules in this study, however, advocate a sharp initial interest rate response to the crisis. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:272&r=mon |
| By: | Rabanal, Pau; Tuesta Reátegui, Vicente |
| Abstract: | Central puzzles in international macroeconomics are why fluctuations of the real exchange rate are so volatile with respect to other macroeconomic variables, and the contradiction of efficient risk-sharing. Several theoretical contributions have evaluated alternative forms of pricing under nominal rigidities along with different asset markets structures to explain real exchange dynamics. In this paper, we use a Bayesian approach to estimate a standard two-country New Open Economy Macroeconomics (NOEM) using data for the United States and the Euro Area, and perform model comparisons to study the importance of departing from the law of one price and complete markets assumptions. Our results can be summarized as follows. First, we find that the baseline model does a good job in explaining real exchange rate volatility, but at the cost of implying too high volatility in output and consumption. Second, the introduction of incomplete markets allows the model to better match the volatilities of all real variables. Third, introducing sticky prices in local currency pricing (LCP) improves the fit of the baseline model, but not by as much as by introducing incomplete markets. Finally, we show that monetary shocks have played a minor role in explaining the behaviour of the real exchange rate, while both demand and technology shocks have been important. |
| Keywords: | Bayesian estimation; model comparison; real exchange rates |
| JEL: | C11 F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5957&r=mon |
| By: | Farmer, Roger E A; Waggoner, Daniel F; Zha, Tao |
| Abstract: | This paper is about the properties of Markov switching rational expectations (MSRE) models. We present a simple monetary policy model that switches between two regimes with known transition probabilities. The first regime, treated in isolation, has a unique determinate rational expectations equilibrium and the second contains a set of indeterminate sunspot equilibria. We show that the Markov switching model, which randomizes between these two regimes, may contain a continuum of indeterminate equilibria. We provide examples of stationary sunspot equilibria and bounded sunspot equilibria which exist even when the MSRE model satisfies a 'generalized Taylor principle'. Our result suggests that it may be more difficult to rule out non-fundamental equilibria in MRSE models than in the single regime case where the Taylor principle is known to guarantee local uniqueness. |
| Keywords: | indeterminacy; regime switching; Taylor Principle |
| JEL: | C3 E4 E5 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5919&r=mon |
| By: | Ivan Tchakarov; Selim Elekdag |
| Abstract: | Emerging market countries have enjoyed an exceptionally favorable economic environment throughout 2004, 2005, and early 2006. In particular, accommodative U.S. monetary policy in recent years has helped create an environment of low interest rates in international capital markets. However, if world interest rates were to take a sudden upward course, this would lead to less hospitable financing conditions for emerging market countries. The purpose of this paper is to measure the effects of world interest rate shocks on real activity in Thailand. The analysis incorporates balance sheet related credit market frictions into the IMF’s Global Economy Model (GEM) and finds that Thailand would best minimize the adverse effects of rising world interest rates if it were to follow a flexible exchange rate regime. |
| Keywords: | Interest rates , Thailand , Business cycles , Emerging markets , Exchange rate regimes , International trade , Economic models , |
| Date: | 2006–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/110&r=mon |
| By: | Monacelli, Tommaso |
| Abstract: | Econometric evidence suggests that, in response to monetary policy shocks, durable and non-durable spending comove positively, and durable spending exhibits a much larger sensitivity to the policy shocks. A standard two-sector New Keynesian model with free borrowing persistently exhibits a co-movement problem: if spending contracts in one sector, it expands in the other. We argue that, even when durable prices are flexible, the introduction of a collateral constraint on borrowing and the consideration of durables as collateral assets generate both a correct sectoral co-movement and a procyclical response of durable consumption to policy shocks. In this vein, collateral constraints act as a substitute of nominal rigidity in durable prices. However, since in the model nominal non-indexed debt and the collateral constraint generate alternative channels for monetary non-neutrality, our framework leaves room for relaxing the assumption of price stickiness also for nondurable goods prices, in line with some recent micro-based evidence. In a limit case of fully flexible prices in both sectors, a policy shock still generates a sizeable degree of monetary non-neutrality, as well as the correct sectoral co-movement. In this vein, collateral constraints act as a substitute of price stickiness altogether. |
| Keywords: | collateral constraint; durable goods; sticky prices |
| JEL: | E52 E62 F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5916&r=mon |
| By: | Christoph Wunder; Johannes Schwarze; Gerhard Krug; Bodo Herzog |
| Abstract: | Using merged data from the British Household Panel Survey (BHPS) and the German Socio-Economic Panel (SOEP), this paper applies a parametric difference-in-differences approach to assess the real effects of the introduction of the Euro on subjective well-being. A complementary nonparametric approach is also used to analyze the impact of difficulties with the new currency on well-being. The results indicate a severe loss in well-being associated with the introduction of the new currency, with the predicted probability that a person is contented with his/her household income diminishing by 9.7 percentage points. We calculate a compensating income variation of approximately one-third. That is, an increase in postgovernment household income of more than 30% is needed to compensate for the rather drastic decline in well-being. The reasons for the negative impact are threefold. First, perceived inflation overestimates the real increase in prices resulting in suboptimal consumption decisions. Second, money illusion causes a false assessment of the budget constraint. Third, individuals have to bear the costs from the conversion and the adjustment to the new currency. Moreover, it is thought that losses are smaller when financial ability is higher. However, the impact of difficulties in using and converting the new currency is rather small, and the initial problems were overcome within one year of the introduction of euro cash. |
| Keywords: | Subjective well-being, euro cash changeover, perceived inflation, difference-indifferences |
| JEL: | E31 I31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp646&r=mon |
| By: | Österholm, Pär (Department of Economics) |
| Abstract: | Within a decision-making group, such as the monetary-policy committee of a central bank,group members often hold differing views about the future of key economic variables. Such differences of opinion can be thought of as reflecting differing sets of judgement. This paper suggests modelling each agent’s judgement as one scenario in a macroeconomic model. Each judgement set has a specific dynamic impact on the system, and accordingly, a particular predictive density – or fan chart – associated with it. A weighted linear combination of the predictive densities yields a final predictive density that correctly reflects the uncertainty perceived by the agents generating the forecast. In a model-based environment, this framework allows judgement to be incorporated into fan charts in a formalised manner. |
| Keywords: | Forecasts; Predictive density; Linear opinion pool |
| JEL: | C15 C53 E17 E50 |
| Date: | 2006–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2006_030&r=mon |
| By: | Tatiana Fic; Ray Barrell; Dawn Holland |
| Abstract: | New member states will join the EMU in the coming years. Setting the central parity has been and will be a challenging task, as there is a considerable amount of uncertainty, both from a theoretical and an empirical perspective, surrounding the determination of the optimal exchange rate. In effect, the probability of misalignment of the entry rate can be a non-zero one. Given the possible - if not inevitable - misspecification of the equilibrium rate it is thus advisable to focus on the effects of a misalignment of the entry rate for the economy, as it has implications for countries’ both real and nominal convergence. An overvalued exchange rate would have an adverse impact on a country’s competitiveness and its growth, while an undervalued currency would contribute to an overheating of the economy and an excessive inflation. The objective of this paper is to better understand the role of the entry rates for short run inflation and GDP developments and their implications for the inflation criterion and the real convergence process. Having estimated equilibrium exchange rates for eight out of ten countries that entered the EU in May 2004 - Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Slovenia and Slovakia - we conduct simulations showing what their adjustments to equilibrium would be if their entry rates deviated from the optimal ones. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:275&r=mon |
| By: | M.S.Rafiq (Dept of Economics, Loughborough University, United Kingdom) |
| Abstract: | Economic fluctuations in most of the industrialised world have for over the past 30 years been characterised by declining volatility. This decline has also been a trait witnessed for output fluctuations in the Euro Area. This paper has two objectives. The first is to provide a comprehensive characterisation of the decline in volatility using a large number of Euro area economic time series and a variety of methods designed to describe the time-varying time series processes. The second objective is to provide new evidence on the quantitative importance of various explanations for this ‘great moderation’. This paper focuses on the central elements in the literature contending why real output growth has stabilised. Such factors include shifts in the structure of the economy, improved policies, and a ‘good luck’ factor. Further, this paper goes on to investigate whether cross-country linkages in growth have shifted, perhaps in a way that can help rationalise the stabilisation in output. Taken together, the moderation in volatility is attributable to a combination of improved policy (around 5 - 30 percent) and identifiable forms of good luck that manifest themselves as smaller reduced-form forecast errors (40 percent). |
| Keywords: | Output Volatility, Monetary Policy, International shocks. |
| JEL: | E32 E60 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_21&r=mon |
| By: | Philip Liu |
| Abstract: | The importance of the time-consistency poblem depends critically on the model one is working with and its parameterizations. This paper attempts to quantify the magnitude of stabilization bias for a small open economy using an empirically estimated micro-founded dynamic stochastic general equilibrium model. The resultant model is used to investigate the degree to which precommitment policy can improve welfare. Rather than presenting a point estimate of the welfare gain measures, the paper maps out the entire distribution of the welfare gain using the Bayesian posterior distribution of the model's parameters. The welfare improvement is an increasing function of the weight the central bank places on exchange rate variability. However, there is no simple relationship between the gains from precommitment and the degree of openness of the economy. |
| JEL: | C15 C51 E17 E61 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-25&r=mon |