nep-mon New Economics Papers
on Monetary Economics
Issue of 2007‒10‒13
24 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Stability of the Euro-Demand Function By King Banaian; Artatrana Ratha
  2. Central Bank transparency and the U.S. interest rates level and volatility response to U.S. news By TUYSUZ, Sukriye
  3. The effects of a greater central bank credibility on interest rates level and volatility response to news in the U.K. By Tuysuz, Sukriye
  4. Endogenous Monetary Policy Credibility in a Small Macro Model of Israel By Philippe D Karam; Natan P. Epstein; Eyal Argov; Douglas Laxton; David Rose
  5. The Taylor Rule and the Macroeconomic Performance in Pakistan By Wasim Shahid Malik; Ather Maqsood Ahmed
  6. The Effects of Monetary Policy in the Czech Republic: An Empirical Study By Magdalena Morgese Borys; Roman Horváth
  7. A Theory of the Supply of Inside Money By William Coleman
  8. Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk? By Jiménez, Gabriel; Ongena, Steven; Peydró-Alcalde, José Luis; Saurina, Jesús
  9. Interactions between interest rates and the transmission of monetary and economic news: the cases of US and UK. By Tuysuz, Sukriye; Kuhry, Yves
  10. Dynamics of Sticky Information and Sticky Price Models in a New Keynesian DSGE Framework By Arslan, M.Murat
  11. Threshold Autoregressive Model of Exchange Rate Pass through Effect: The Case of Croatia By Petra Posedel; Josip Tica
  12. The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime By Julian di Giovanni; Jay C. Shambaugh
  13. Sticky Information vs. Sticky Prices: A Horse Race in a DSGE Framework By Trabandt, Mathias
  14. U.K. Inflation and Relative Prices Over the Last Decade: How Important was Globalization? By Ben Hunt
  15. Entry rates and risks of the misalignment in EU8 By Tatiana Fic; Ray Barrell; Dawn Holland
  16. The Common Monetary Area in Southern Africa: Shocks, Adjustment, and Policy Challenges By Iyabo Masha; Kazuko Shirono; Leighton Harris; Jian-Ye Wang
  17. Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs By Maurice J. Roche; Michael J. Moore
  18. Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets - An Overinvestment View By Schnabl, Gunther; Hoffmann, Andreas
  19. Testing Uncovered Interest Parity: A Continuous-Time Approach By Diez de los Rios, Antonio; Sentana, Enrique
  20. Macroeconomic policy mix, employment and inflation in a Post-Keynesian alternative to the New Consensus Model By Eckhard Hein; Engelbert Stockhammer
  21. Derivation and Estimation of a Phillips Curve with Sticky Prices and Sticky Information By Arslan, Mesut Murat
  22. Which nonlinearity in the Phillips curve? The absence of accelerating deflation in Japan By Emmanuel De Veirman
  23. Global Yield Curve Dynamics and Interactions: A Dynamic Nelson-Siegel Approach By Francis X. Diebold; Canlin Li; Vivian Z. Yue
  24. Fiscal and Monetary Policies and the Cost of Sudden Stops By Michael M. Hutchison; Ilan Noy; Lidan Wang

  1. By: King Banaian; Artatrana Ratha (Department of Economics, St. Cloud State University)
    Abstract: While the empirical literature on money demand is vast by any standards, it is relatively silent when it comes to the Euro, a major currency in the world. This hampers efforts, for example, to determine whether or not the European Central Bank can target monetary aggregates for inflation control. The difficulty has come from the lack of information about euro-wide monetary behavior, relying instead on speculative techniques for aggregating country-level data from previous periods of the European exchange rate mechanism. Now that we have six years of monthly data points, we investigate the stability of various Euro-zone monetary aggregates using the Bound Testing Procedure of Cointegration proposed by Pesaran et al. (2001) and study their policy implications.
    Keywords: money demand, euro, cointegration
    JEL: E41
    Date: 2007–08
  2. By: TUYSUZ, Sukriye
    Abstract: This paper investigates the impact of U.S. macroeconomic and monetary news on market interest rate level and volatility. These news relate to Federal Reserve System (FED) target variables and unexpected policy rate changes. It examines whether the fact that FED announces its policy rate decisions immediately after each Federal Open Market Committee (FOMC) meeting alters the market rate response. These meetings occur regularly at scheduled time since February 1994. It also checks if this transparency measure (i.e. announcing the policy rate immediately after the meetings and regularly at scheduled time) has increased the predictability of FED's rates by the market. The results reveal that after 1994, financial markets can better foresee monetary policy decisions compared to the period when the policy rate was announced with a delay of 45 days after the meetings. Moreover, U.S. interest rate volatility is less affected by the announcements on FED target variables after 1994. In the same way, unexpected monetary policy decisions influence less interest rate level. These results suggest that, in accordance with theory, a greater transparency improves market participants' understanding of the Federal Reserve's monetary policy reaction function. Interestingly, the date on which FED announces the policy rate decision has a greater impact on U.S. interest rate volatility after 1994. This observation suggests that the FED's credibility might have decreased after 1994. However, it is not related to the immediate diffusion of policy rate decisions.
    Keywords: Monetary policy; news announcements; transparency; term structure of interest rates; EGARCH
    JEL: E44 E58 E43
    Date: 2007–09–15
  3. By: Tuysuz, Sukriye
    Abstract: This paper investigates the impact of British macroeconomic and monetary news on English interest rates level and volatility. These news correspond to Bank of England (BoE) target variables news and to unexpected monetary policy rate changes. It analyzes whether the market rate response to these news has changed since the Bank of England (BoE) was granted operational independence in May 1997. It also checks if this credibility measure has increased the predictability of BoE decisions by the market. The results reveal that after May 1997, financial markets appears better able to anticipe BoE policy decisions than before May 1997. However, Bank of England target variable news announcements and policy rate changes diffusion influence more English interest rate volatility after May 1997. This results suggests that the credibility and/or transparency of BoE might have decreased after 1997. However, the closer evolution of the realized inflation around the target fixed by the BoE and the evolution of the transparency and credibility index suggest that the BoE transparency and credibility degree increase since 1997 compare to the period prior to 1997. One possible explanation of this last results rests on uncertainty created by the several financial crises (the Asian crisis (July 1997), the Russian crisis (August 1998), the bursting of the technology and internet bubble in 2002 in USA).
    Keywords: Monetary policy; announcements; news; credibility; transparency; term structure of interest rates; GARCH
    JEL: E44 C5 E43
    Date: 2007–09–01
  4. By: Philippe D Karam; Natan P. Epstein; Eyal Argov; Douglas Laxton; David Rose
    Abstract: This paper extends a small linear model of the Israeli economy to allow for nonlinearities in the inflation-output process that arise from convexity in the Phillips curve and endogenous monetary policy credibility. We find that the dynamic responses to shocks in the extended model more closely resemble features in the data from the period 2001?03. In particular, the extended model does a much better job in accounting for the deterioration in monetary policy credibility and the output costs of regaining monetary policy credibility once it has been lost.
    Keywords: Monetary policy , Israel , Inflation targeting , Economic models , Working Paper ,
    Date: 2007–08–30
  5. By: Wasim Shahid Malik (Pakistan Institute of Development Economics, Islamabad.); Ather Maqsood Ahmed (Central Board of Revenue, Islamabad.)
    Abstract: A widely agreed proposition in modern economics is that policy rules have greater advantage over discretion in improving economic performance. Simple monetary policy instrument rules are feasible options for developing countries lacking the pre-requisites for more sophisticated targeting rules. Notwithstanding the focus of modern literature on the issue, the State Bank of Pakistan (SBP) has never declared itself to be following any type of rule. Surprisingly, this topic has remained out of research focus (among the academia and the practitioners) in Pakistan. This is the first attempt to deal with a rule-based monetary policy strategy in the case of the SBP. We have estimated the Taylor rule and simulated the economy using this rule as a monetary policy strategy. Our results indicate that the SBP has not been following the Taylor rule. In fact, the actual policy can be taken as an extreme deviation from it. On the other hand, counterfactual simulation confirms that macroeconomic performance can be improved, in terms of stability in inflation and output, when a simple Taylor rule is adopted. In this regard the parameter values (especially the inflation target) in the rule must be set according to the conditions of the economy under consideration rather than by relying on the ones suggested by the Taylor rule.
    Keywords: Taylor Rule, Macroeconomic Performance, Counterfactual Simulation
    JEL: E47 E31 E52
    Date: 2007
  6. By: Magdalena Morgese Borys (CERGE-EI); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank)
    Abstract: In this paper, we examine the effects of Czech monetary policy on the economy within VAR and the structural VAR framework. We document well-functioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that contractionary monetary policy shock has a negative effect on the degree of economic activity and price level, both with a peak response after one year or so. Regarding the prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price persistence. There is a rationale in using the real-time output gap instead of current GDP growth as using the former results in much more precise estimates. There is no evidence for price puzzle within the system. The results indicate a rather persistent appreciation of domestic currency after monetary tightening with a gradual depreciation afterwards.
    Keywords: transmission, VAR, real-time data, sectoral prices
    JEL: E52 E58 E31
    Date: 2007–10
  7. By: William Coleman
    Abstract: This paper advances a theory of the supply of inside money that is squarely based on optimisation, and which sets out from the question, 'As outside money has an opportunity cost that a mere promise to pay outside money does not, why is outside money used at all?'. The theory identifies the nominal rate of return on capital as the key determinant of the supply of inside money. So just as the nominal rate of return on capital is the cost of demanding money, so the nominal rate of return is identified here as the reward for supplying (inside) money. And just as the demand for money is negatively related to the nominal rate of return on capital, so the supply of inside money is positively related to the nominal rate of return on capital.
    JEL: E42 E51
    Date: 2007–09
  8. By: Jiménez, Gabriel; Ongena, Steven; Peydró-Alcalde, José Luis; Saurina, Jesús
    Abstract: We investigate the impact of the stance and path of monetary policy on the level of credit risk of individual bank loans and on lending standards. We employ the Credit Register of the Bank of Spain that contains detailed monthly information on virtually all loans granted by all credit institutions operating in Spain during the last twenty-two years – generating almost twenty-three million bank loan records in total. Spanish monetary conditions were exogenously determined during the entire sample period. Using a variety of duration models we find that lower short-term interest rates prior to loan origination result in banks granting more risky new loans. Banks also soften their lending standards – they lend more to borrowers with a bad credit history and with high uncertainty. Lower interest rates, by contrast, reduce the credit risk of outstanding loans. Loan credit risk is maximized when both interest rates are very low prior to loan origination and interest rates are very high over the life of the loan. Our results suggest that low interest rates increase bank risk-taking, reduce credit risk in banks in the very short run but worsen it in the medium run. Risk-taking is not equal for all type of banks: Small banks, banks with fewer lending opportunities, banks with less sophisticated depositors, and savings or cooperative banks take on more extra risk than other banks when interest rates are lower. Higher GDP growth reduces credit risk on both new and outstanding loans, in stark contrast to the differential effects of monetary policy.
    Keywords: bank organization; business cycle; credit risk; duration analysis; financial stability; lending standards; low interest rates; monetary policy; risk-taking
    JEL: E44 G21 L14
    Date: 2007–10
  9. By: Tuysuz, Sukriye; Kuhry, Yves
    Abstract: In recent years, economies have become more and more interdependent. The constitution of commercial and monetary unions has increased the level of coordination of public decisions. On the other hand, some countries still have an strong influence at the world or regional levels. This paper studies the evolutions of UK and USA interest rates markets as well as their interactions during the last decade. Thus, we determine empirically the main determinants of interest rates in both countries using several explanatory variables among which, macroeconomic, monetary and financial variables. In particular, it is of interest to determine whether interest rates react and how to the publication of key economic and financial figures. We thus considered in this paper the effects of news, as measured by the difference between anticipated and observed data, on the interest rates means and volatilities. Determining the interest rates dynamics from their national determinants also allow us to evaluate the degrees of transparency and credibility of central banks in both countries. Second, we are interested in measuring the degree of integration of American and British economies by analyzing the spillover and feedback effects between interest rates as well as news spillover effects. In order to take into account the evolutions of interest rates values as well as their volatilities, we use a VAR model where the error term is specified as a multivariate GARCH. Contrary to previous papers in the same area, we do not assume that there is a "small" and a "big" country as we allow any causality to be determined by the data. We find that factors that account for most variations in interest rates are, for both countries, the monetary policy decisions, the price levels and the rate of unemployment. Moreover, the reaction of UK interest rates to US variables tend to be less important in recent years, while we observe the contrary the other way round. Those seemingly contradictory results can gain sense if one takes into account the emergence of EMU as a new economic power.
    Keywords: interest rates; news spillovers; multivariate GARCH
    JEL: C52 F3 E44 E43
    Date: 2007–04–15
  10. By: Arslan, M.Murat
    Abstract: Recent literature on monetary policy analysis extensively uses the sticky price model of price adjustment in a New Keynesian Macroeconomic framework. This price setting model, however, has been criticized for producing implausible results regarding inflation and output dynamics. This paper examines and compares dynamic responses of the sticky price and sticky information models to a cost-push shock in a New Keynesian DSGE framework. It finds that the sticky information model produces more reasonable dynamics through lagged, gradual and hump-shaped responses to a shock as observed in data. However, these responses depend on the persistence of the shock.
    Keywords: Monetary policy; Sticky information; Sticky prices; Phillips curve
    JEL: E52 E50
    Date: 2007–08
  11. By: Petra Posedel (Faculty of Economics and Business, University of Zagreb); Josip Tica (Faculty of Economics and Business, University of Zagreb)
    Abstract: In this paper exchange rate pass-through effect in Croatia is estimated with nonlinear (asymmetric) threshold autoregressive model (TAR). In total 12285 regressions is estimated and a strong case of nonlinearity with single threshold is proven. According to our estimation there is a threshold at 2.69% of monthly change of nominal exchange rate of German mark (Euro) and the way in which nominal exchange rate affects inflation is asymmetric around it. Below the threshold, effect of change in nominal exchange rate on inflation is statistically insignificant and above the threshold the effect is strong and significant.
    Keywords: threshold autoregressive model, pass-through effect, exchange rate, inflation, nonlinear econometrics
    JEL: E31 E58 F31
    Date: 2007–10–01
  12. By: Julian di Giovanni; Jay C. Shambaugh
    Abstract: It is often argued that many economies are affected by conditions in foreign countries. This paper explores the connection between interest rates in major industrial countries and annual real output growth in other countries. The results show that high foreign interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates. The paper then examines the potential channels through which major-country interest rates affect other economies. The effect of foreign interest rates on domestic interest rates is the most likely channel when compared with other possibilities, such as a trade effect.
    JEL: F3 F4
    Date: 2007–10
  13. By: Trabandt, Mathias (Research Department, Central Bank of Sweden)
    Abstract: How can we explain the observed behavior of aggregate inflation in response to e.g. monetary policy changes? Mankiw and Reis (2002) have proposed sticky information as an alternative to Calvo sticky prices in order to model the conventional view that i) inflation reacts with delay and gradually to a monetary policy shock, ii) announced and credible disinflations are contractionary and iii) inflation accelerates with vigorous economic activity. I use a fully-fledged DSGE model with sticky information and compare it to Calvo sticky prices, allowing also for dynamic inflation indexation as in Christiano, Eichenbaum, and Evans (2005). I find that sticky information and sticky prices with dynamic inflation indexation do equally well in my DSGE model in delivering the conventional view.
    Keywords: sticky information; sticky prices; inflation indexation; DSGE
    JEL: E00 E30
    Date: 2007–06–01
  14. By: Ben Hunt
    Abstract: In this paper, the IMF's new Global Economy Model (GEM) is used to estimate the relative importance of a number of factors argued to explain the differences in the trends in core inflation and relative prices in the United Kingdom, the Euro Area and the United States. The simulation results indicate that while the direct effect of globalization has had a larger effect in the United Kingdom than in either the United States or the Euro Area, it explains only a portion of the developments and U.K. specific factors played an important role.
    Keywords: Inflation , United Kingdom , Prices , Globalization , Economic models , Working Paper ,
    Date: 2007–08–30
  15. By: Tatiana Fic (National Bank of Poland); Ray Barrell (National Institute of Economic and Social Research, London); Dawn Holland (National Institute of Economic and Social Research, London)
    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 the 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.
  16. By: Iyabo Masha; Kazuko Shirono; Leighton Harris; Jian-Ye Wang
    Abstract: This study assesses the experience of the Common Monetary Area (CMA) based on available empirical evidence over the last two decades. It pays particular attention to member countries' adjustment to economic shocks in recent years and the inter-country linkages, including the spillover effects of policies. The paper draws the main lessons from the CMA experience, identifies key policy challenges, and discusses the issues facing the member countries in their efforts to achieve sustained growth. Implications for further economic integration in a broader regional context are also noted.
    Keywords: Working Paper , Monetary unions , Economic policy , Adjustment process , Financial integration , Financial sector ,
    Date: 2007–07–13
  17. By: Maurice J. Roche (Economics, National University of Ireland, Maynooth); Michael J. Moore (Queen's University Belfast, Northern Ireland)
    Abstract: We present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved. The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Habit persistence is modeled using Campbell Cochrane preferences with 'deep' habits. By deep habits, we mean habits defined over goods rather than countries. The model is simulated using the artificial economy methodology. It offers a neo-classical explanation of the Meese-Rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting. Finally, the model naturally generates the negative slope in the standard forward market regression.
    Keywords: Exchange Rate Puzzles; Forward Foreign Exchange; Habit Persistence
    JEL: F31 F41 G12
    Date: 2007
  18. By: Schnabl, Gunther; Hoffmann, Andreas
    Abstract: Credit booms have globally fuelled hikes in stock, raw material and real estate markets which have culminated in the recent US subprime market crisis. We explain the global asset market booms since the mid 1980s based on the overinvestment theories of Hayek, Wicksell and Schumpeter. We argue that ample liquidity supply originating in the large industrialized countries has contributed to overinvestment cycles in Japan, East Asia, new markets in the industrial countries and many emerging market economies. Expansionary monetary policies in response to the burst of bubbles are argued to have contributed to vagabonding bubbles around the globe.
    Keywords: Bubbles; Boom-Bust Cycles; Hayek; Wicksell; Schumpeter; Emerging Markets; Capital Flows; Overinvestment Theories.
    JEL: E44 E32 B53 E58
    Date: 2007–09–10
  19. By: Diez de los Rios, Antonio; Sentana, Enrique
    Abstract: Nowadays researchers can choose the sampling frequency of exchange rates and interest rates. If the number of observations per contract period is large relative to the sample size, standard GMM asymptotic theory provides unreliable inferences in UIP regression tests. We specify a bivariate continuous-time model for exchange rates and forward premia robust to temporal aggregation, unlike the discrete time models in the literature. We obtain the UIP restrictions on the continuous-time model parameters, which we estimate efficiently, and propose a novel specification test that compares estimators at different frequencies. Our empirical results based on correctly specified models reject UIP.
    Keywords: Exchange Rates; Forward Premium Puzzle; Hausman Test; Interest Rates; Orstein-Uhlenbeck Process; Temporal Aggregation
    JEL: F31 G15
    Date: 2007–10
  20. By: Eckhard Hein (Macroeconomic Policy Institute (IMK), Hans Boeckler Foundation, Duesseldorf); Engelbert Stockhammer (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: New Consensus Models (NCMs) have been criticised by Post-Keynesians (PKs) for a variety of reasons. The paper presents a model that synthesises several of the PK arguments. The model consists of three classes: rentiers, firms and workers. It has a short-run inflation barrier derived from distribution conflict between these classes, which is endogenous in the medium run. Distribution conflict does not only affect inflation but also income shares. On the demand side the income classes have different saving propensities. We apply a Kaleckian investment function with expected sales and internal funds as major determinants. The paper analyses short-run stability and includes medium-run endogeneity channels for the Non-Accelerating-Inflation-Rate-of-Unemployment (NAIRU): persistence mechanisms in the labour market, adaptive wage and profit aspirations, investment in capital stock and cost effects of interest rate changes. The model is used to analyse NCM and PK policy assignments and policy rules. We argue that improved employment without increasing inflation will be possible, if macroeconomic policies are coordinated along the following lines: The central bank targets distribution, wage bargaining parties target inflation and fiscal policies are applied for short- and medium-run real stabilisation purposes.
    JEL: E12 E20 E52 E61
    Date: 2007–10
  21. By: Arslan, Mesut Murat
    Abstract: I develop a structural model of inflation by combining two different models of price setting behavior: the sticky price model of the New Keynesian literature and the sticky information model of Mankiw and Reis. In a framework similar to the Calvo model, I assume that there are two types of firms. One type of firm chooses its prices optimally through forward-looking behavior---as assumed in the sticky price model. It uses all available information when deciding on prices. The other type of firm sets its prices under the constraint that the information it uses is ``sticky''---as assumed in the sticky information model. It collects and processes the information necessary to choose its optimal prices with a delay. This leads to the sticky price-sticky information (SP/SI) Phillips curve that nests the standard sticky price and sticky information models. Estimations of this structural model show that both sticky price and sticky information models are statistically and quantitatively important for price setting. However, the sticky price firms make up the majority of the firms in the economy. The resultant SP/SI Phillips curve models inflation better than either the sticky price or sticky information models. The results are robust to alternative sub-samples and estimation methods.
    Keywords: Inflation; Phillips Curve; Sticky prices; Sticky information;
    JEL: E31 E12 E17
    Date: 2005–05
  22. By: Emmanuel De Veirman (Reserve Bank of New Zealand)
    Abstract: It is standard to model the output-inflation trade-off as a linear relationship with a time-invariant slope. We assess empirical evidence for three types of nonlinearity in the short-run Phillips curve. At an empirical level, we aim to discover why large negative output gaps in Japan during the period 1998-2002 did not lead to accelerating deflation, but instead coincided with stable, albeit moderately negative, inflation. We document that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. Our analysis sheds light on the determinants of the time-variation in the Phillips curve slope. Our results suggest that, in any economy where trend inflation is substantially lower (or substantially higher) today than in past decades, time-variation in the slope of the short-run Phillips curve has become too important to ignore.
    JEL: C22 C32 E31 E32
    Date: 2007–09
  23. By: Francis X. Diebold (Department of Economics, University of Pennsylvania); Canlin Li (Graduate School of Management, University of California, Riverside); Vivian Z. Yue (Department of Economics, New York University)
    Abstract: The popular Nelson-Siegel (1987) yield curve is routinely fit to cross sections of intra-country bond yields, and Diebold and Li (2006) have recently proposed a dynamized version. In this paper we extend Diebold-Li to a global context, modeling a potentially large set of country yield curves in a framework that allows for both global and country-specific factors. In an empirical analysis of term structures of government bond yields for the Germany, Japan, the U.K. and the U.S., we find that global yield factors do indeed exist and are economically important, generally explaining significant fractions of country yield curve dynamics, with interesting differences across countries.
    Keywords: Term Structure, Interest Rate, Dynamic Factor Model, Global Yield, World Yield, Bond Market
    JEL: G1 E4 C5
    Date: 2007–05–30
  24. By: Michael M. Hutchison (Department of Economics, University of California, Santa Cruz); Ilan Noy (Department of Economics, University of Hawaii at Manoa); Lidan Wang (Risk Management, HSBC Credit Card Services, California)
    Abstract: This article investigates the effects of macroeconomic policy (monetary and fiscal) on output growth during financial crises characterized by a “sudden stop” in net capital inflows in developing and emerging market economies. We investigate 83 sudden stop crises in 77 countries over 1982-2003 using a baseline empirical model to control for the various determinants of output losses during sudden stop crises. Extending the baseline model to account for policies-- contractionary as well as expansionary-- we measure the marginal effects of policy on output losses. Simple descriptive statistics indicate no apparent correlation between the costs of financial crises and the economic policies pursed at the time. Once controlling for various pre-conditions and other factors, however, we find that monetary and fiscal tightening at the time of a sudden stop crisis significantly worsens output losses.
    Keywords: Output losses, financial crises, sudden stops, fiscal policy, financial policy
    JEL: E52 E62 F32 F43 O16

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