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on Monetary Economics |
| By: | Rossi, Lorenza; Mattesini, Fabrizio |
| Abstract: | This paper presents a New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The bargaining process between unions and firms introduces real wage rigidity and creates an endogenous trade-off between inflation and output stabilization. Under an optimal discretionary monetary policy a negative productivity shock requires an increase in the nominal interest rate. Moreover, an operational instrument rule will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the efficient rate of interest. The model calibration studies the response of the unionzed economy to productivity shocks under different monetary policy rules. Download Info |
| JEL: | E24 E52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8414&r=mon |
| By: | Tobias Blattner (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco Catenaro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rolf Strauch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Current best practice in central banking views a high level of monetary policy predictability as desirable. A clear distinction, however, has to be made between short-term and longer-term predictability. While short-term predictability can be narrowly defined as the ability of the public to anticipate monetary policy decisions correctly over short horizons, the broader, ultimately more meaningful concept of longerterm predictability also encompasses the ability of the private sector to understand the monetary policy framework of a central bank, i.e. its objectives and systematic behaviour in reacting to different circumstances and contingencies. In this broader sense, longer-term predictability is also closely related to the credibility of the central bank. This paper reviews the main conceptual issues relating to predictability, both in its short and longer-term dimensions, and discusses how a transparent monetary policy strategy can be – and indeed has been – instrumental in achieving this purpose. This latter aspect is investigated in an overview of the empirical literature, highlighting how financial markets have been increasingly able to correctly anticipate monetary policy decisions for a number of large central banks, including the ECB. The paper also reviews several possible empirical proxies for the less-explored concept of longer-term predictability, which is inherently more diffi cult to measure. JEL Classification: E52, E58, E61. |
| Keywords: | Predictability, central bank transparency, central bank communication. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080083&r=mon |
| By: | Marcus Hagedorn (Institut for Empirical Research (IEW), University of Zurich, Blümlisalpstrasse 10, CH-8006 Zürich, Switzerland.) |
| Abstract: | Central bankers’ conventional wisdom suggests that nominal interest rates should be raised to implement a lower inflation target. In contrast, I show that the standard New Keynesian monetary model predicts that nominal interest rates should be decreased to attain this goal. Real interest rates, however, are virtually unchanged. These results also hold in recent vintages of New Keynesian models with sticky wages, price and wage indexation and habit formation in consumption. JEL Classification: |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080878&r=mon |
| By: | Spencer, Christopher; Harris, Mark; Brooks, Robert |
| Abstract: | Even in the face of a continuously changing economic environment, interest rates often remain unadjusted for long periods. When rates are moved, the norm is for a series of small unidirectional discrete basis-point changes. To explain these phenomena we suggest a two-equation system combining a “long-run” equation explaining a binary decision to change or not change the interest-rate, and a “shortrun” one based on a simple monetary policy rule. We account for unobserved heterogeneity in both equations, applying the model to unique unit-record level data on the voting preferences of Bank of England Monetary Policy Committee (MPC) members. |
| Keywords: | Interest rates; voting; discrete data; ordered models; inflated outcomes; monetary policy committee |
| JEL: | E5 C2 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8509&r=mon |
| By: | Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stéphane Adjemian (Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.) |
| Abstract: | The objective of this paper is to examine the main features of optimal monetary policy cooperation within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a two-country dynamic stochastic general equilibrium (DSGE) model for the United States (US) and the euro area (EA). The main features of the new open economy macroeconomics (NOEM) are embodied in our framework: in particular, imperfect exchange rate pass-through and incomplete financial markets internationally. Each country model incorporates the wide range of nominal and real frictions found in the closed-economy literature: staggered price and wage settings, variable capital utilization and fixed costs in production. Then, using the estimated parameters and disturbances, we study the properties of the optimal monetary policy cooperation through welfare analysis, impulse responses and variance decompositions. JEL Classification: E4, E5, F4. |
| Keywords: | DSGE models, Optimal monetary policy, New open economy macroeconomics, Bayesian estimation. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080884&r=mon |
| By: | Amstad, Marlene (Swiss National Bank); Fischer, Andreas (CEPR) |
| Abstract: | Are weekly inflation forecasts informative? Although several central banks review and discuss monetary policy issues on a bi-weekly basis, there have been few attempts by analysts to construct systematic estimates of core inflation that supports such a decision-making schedule. The timeliness of news releases and macroeconomic revisions are recognized to be an important information source in real-time estimation. We incorporate real-time information from macroeconomic releases and revisions into our weekly updates of monthly Swiss core inflation using a common factor procedure. The weekly estimates for Swiss core inflation find that it is worthwhile to update the forecast at least twice a month. |
| Keywords: | Inflation; Common Factors; Sequential Information Flow |
| JEL: | E52 E58 |
| Date: | 2008–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2008_005&r=mon |
| By: | Michiel van Leuvensteijn (CPB Netherlands Bureau for Economic Policy Analysis, P.O. Box 80510, 2508 GM The Hague, The Netherlands.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jacob A. Bikker (De Nederlandsche Bank (DNB), Supervisory Policy Division, Strategy Department, P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Adrian A.R.J.M. van Rixtel (Banco de España, International Economics and International Relations Department, Alcalá 48, 28014 Madrid, Spain.) |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products. Using an error correction model(ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. JEL Classification: D4, E50, G21, L10. |
| Keywords: | Monetary transmission, banks, retail rates, competition, panel data. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080885&r=mon |
| By: | Michael B. Devereux; Shouyong Shi |
| Abstract: | While in principle, international payments could be carried out using any currency or set of currencies, in practice, the US dollar is predominant in international trade and financial flows. The dollar acts as a `vehicle currency' in the sense that agents in non-dollar economies will generally engage in currency trade indirectly using the US dollar rather than using direct bilateral trade among their own currencies. Indirect trade is desirable when there are transactions costs of exchange. This paper constructs a dynamic general equilibrium model of a vehicle currency. We explore the nature of the efficiency gains arising from a vehicle currency, and show how this depends on the total number of currencies in existence, the size of the vehicle currency economy, and the monetary policy followed by the vehicle currency's government. We find that there can be very large welfare gains to a vehicle currency in a system of many independent currencies. But these gains are asymmetrically weighted towards the residents of the vehicle currency country. The survival of a vehicle currency places natural limits on the monetary policy of the vehicle country. |
| Keywords: | Vehicle currency; Transactions cost; Welfare gains |
| JEL: | F40 F30 E42 |
| Date: | 2008–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-315&r=mon |
| By: | Marco Pagano (Università di Napoli, CSEF and CEPR); Marco Pagano (Università di Napoli, CSEF and CEPR) |
| Abstract: | The single most important policy-induced innovation in the international financial system since the collapse of the Bretton-Woods regime is the institution of the European Monetary Union. This paper provides an account of how the process of financial integration has promoted financial development in the euro area. It starts by defining financial integration and how to measure it, analyzes the barriers that can prevent it and the effects of their removal on financial markets, and assesses whether the euro area has actually become more integrated. It then explores to which extent these changes in financial markets have influenced the performance of the euro-area economy, that is, its growth and investment, as well as its ability to adjust to shocks and to allow risk-sharing. The paper concludes analyzing further steps that are required to consolidate financial integration and enhance the future stability of financial markets. |
| Date: | 2008–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:197&r=mon |
| By: | Arturo Bris; Augusto Rupérez-Micola |
| Abstract: | We study the price convergence of goods and services in the euro area in 2001-2002. To measure the degree of convergence, we compare the prices of around 220 items in 32 European cities. The width of the border is the price di¤erence attributed to the fact that the two cities are in different countries. We find that the 2001 European borders are negative, which suggests that the markets were very integrated before the euro changeover. Moreover, we do not identify an integration effect attributable to the introduction of the euro. We then explore the determinants of the European borders. We find that different languages, wealth and population differences tend to split the markets. Historical inflation, though, tends to lead to price convergence. |
| Keywords: | Euro, economic integration |
| JEL: | F15 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1086&r=mon |
| By: | Roger Guesnerie |
| Abstract: | The "eductive" viewpoint provides a theoretically sophisticated analysis as well as an intuitively plausible shortcut to the study of expectational coordination in economic models. From the review of expectational criteria in a class of dynamical models of macroeconomic theory, the paper shows how such an "eductive" viewpoint completes and deepens rather than contradicts standard analysis. It however argues that the "eductive" approach, when correctly implemented, challenges the conditions of learning in infinite-horizon models with infinitely-lived agents. In particular, in a simple monetary model adopting such a framework, Taylor rules may be stabilizing, in the demanding sense under scrutiny, but only within a small window for the reaction coefficient. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2008-24&r=mon |
| By: | Clive G. Bowsher (Nuffield College, Oxford University); Roland Meeks (Federal Reserve Bank of Dallas) |
| Abstract: | The class of Functional Signal plus Noise (FSN) models is introduced that provides a new, general method for modelling and forecasting time series of economic functions. The underlying, continuous economic function (or `signal') is a natural cubic spline whose dynamic evolution is driven by a cointegrated vector autoregression for the ordinates (or 'y-values') at the knots of the spline. The natural cubic spline provides flexible cross-sectional fit and results in a linear, state space model. This FSN model achieves dimension reduction, provides a coherent description of the observed yield curve and its dynamics as the cross-sectional dimension N becomes large, and can feasibly be estimated and used for forecasting when N is large. The integration and cointegration properties of the model are derived. The FSN models are then applied to forecasting 36-dimensional yield curves for US Treasury bonds at the one month ahead horizon. The method consistently outperforms the Diebold and Li (2006) and random walk forecasts on the basis of both mean square forecast error criteria and economically relevant loss functions derived from the realised profits of pairs trading algorithms. The analysis also highlights in a concrete setting the dangers of attempts to infer the relative economic value of model forecasts on the basis of their associated mean square forecast errors. |
| Keywords: | FSN-ECM models, functional time series, term structure, forecasting interest rates, natural cubic spline, state space form. |
| JEL: | C33 C51 C53 E47 G12 |
| Date: | 2008–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0805&r=mon |