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on Monetary Economics |
| By: | Césaire A. Meh; José-Victor Rios-Rull; Yaz Terajima |
| Abstract: | Since the work of Doepke and Schneider (2006a) and Meh and Terajima (2008), we know that inflation causes major redistribution of wealth - between households and the government, between nationals and foreigners, and between households within the same country. Two types of monetary policy, inflation targeting (IT) and price level targeting (PT), have very different implications for the price level path subsequent to a price-level shock, and consequently, have different redistributional properties which is what we explore in this paper. For Canada, we show that the magnitude of redistributions of an unexpected 1% price-level increase under IT is about three times larger than under PT. Households' and foreigners' wealth losses from a price level increase is matched by the gains of the government. Even though this redistribution is zero-sum, we observe positive effects on GDP due to the wealth loss, the lower value of the debt and its associated fiscal adjustment, and the non-linear effects on work effort of the redistribution of wealth across households. Finally, the direction of the change in the weighted welfare of households depends on the fiscal policy. |
| Keywords: | Economic models; Monetary policy framework; Sectoral balance sheet; Inflation: costs and benefits; Inflation targets; Inflation and prices |
| JEL: | D31 E21 E31 E44 E52 E63 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-31&r=mon |
| By: | Melecky, Martin; Rodrıguez Palenzuela, Diego; Soderstrom, Ulf |
| Abstract: | We quantify the effects of monetary policy transparency and credibility on macroeconomic volatility in an estimated model of the euro area economy. In our model, private agents are unable to distinguish between temporary shocks to the central bank’s monetary policy rule and persistent shifts in the inflation target, and therefore use optimal filtering techniques to construct estimates of the future monetary policy stance. We find that the macroeconomic benefits of credibly announcing the current level of the time-varying inflation target are reasonably small as long as private agents correctly understand the stochastic processes governing the inflation target and the temporary policy shock. If, on the other hand, private agents overestimate the volatility of the inflation target, the overall gains of announcing the target can be substantial. We also show that the central bank to some extent can help private agents in their learning process by responding more aggressively to deviations of inflation from the target. |
| Keywords: | Credibility; Transparency; Inflation targeting; Imperfect information; Private sector learning. |
| JEL: | E32 E58 E52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10545&r=mon |
| By: | Harashima, Taiji |
| Abstract: | Recently, it has been argued that trend inflation may be the solution to the puzzle of inflation persistence in the New Keynesian Phillips curve (NKPC). However, incorporating trend inflation into the NKPC raises another serious problem—it lacks a microfoundation. The paper presents a microfoundation for trend inflation, which indicates that trend inflation is a natural consequence of simultaneous optimization by the government and households. A purely forward-looking model is constructed based on the microfoundation presented. The model enables a unified explanation for various types of inflation. It also indicates that, if inflation is assumed to follow an autoregressive process without considering trend inflation, many measures of inflation persistence will spuriously indicate that inflation is intrinsically substantially persistent and has a backward-looking property. |
| Keywords: | Inflation persistence; The New Keynesian Phillips curve; Central bank independence; Trend inflation; The fiscal theory of the price level |
| JEL: | E58 E31 E63 |
| Date: | 2008–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10668&r=mon |
| By: | Jörg Döpke (University of Applied Sciences, Department Economics, Geusaer Strasse, 06217 Merseburg, Germany.); Jonas Dovern (Kiel Institute for the World Economy (IfW Kiel), Düsternbrooker Weg 120, 24105 Kiel, Germany.); Ulrich Fritsche (University Hamburg, Department of Economics and Politics and DIW Berlin, Von-Melle-Park 9, 20146 Hamburg, Germany.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We estimate the sticky information Phillips curve model of Mankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months. JEL Classification: D84, E31. |
| Keywords: | Inflation expectations, sticky information, Phillips curve, inflation persistence. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080930&r=mon |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria) |
| Abstract: | In this paper, using the Fisher and Seater (1993) long-horizon approach, we estimate the long-run equilibrium relationship between money balance as a ratio of income and the Treasury bill rate for South Africa over the period of 1965:02 to 2007:01, and, in turn, use the obtained estimates of the interest elasticity and the semi-elasticity to derive the welfare cost estimates of inflation, using both Bailey’s (1956) consumer surplus approach, as well, as Lucas’s (2000) compensating variation approach. When, the results are compared to welfare cost estimates obtained recently by Gupta and Uwilingiye (2008), using the same data set, but based on Johansen’s (1991, 1995) cointegration technique, the values are less by more than half in size than those obtained in the latter study, with the same being utmost ranging between 0.16 percent to 0.36 percent of GDP for the target-band of 3 percent to 6 percent of inflation. The paper, thus, highlights the fact that welfare cost estimates of inflation are sensitive to the methodology used to estimate the long-run equilibrium money demand relationships. |
| Keywords: | Long Horizon Regression, Money Demand, Welfare Cost of Inflation |
| JEL: | E31 E41 E52 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200809&r=mon |
| By: | Stefano Eusepi |
| Abstract: | Central bank communication plays an important role in shaping market participants' expectations. This paper studies a simple nonlinear model of monetary policy in which agents have incomplete information about the economic environment. It shows that agents' learning and the dynamics of the economy are heavily affected by central bank transparency about its policy rule. A central bank that does not communicate its rule can induce "learning equilibria" in which the economy alternates between periods of deflation coupled with low output and periods of high economic activity with excessive inflation. More generally, initial beliefs that are arbitrarily close to the inflation target equilibrium can result in complex economic dynamics, resulting in welfare-reducing fluctuations. On the contrary, central bank communication of policy rules helps stabilize expectations around the inflation target equilibrium. |
| Keywords: | Banks and banking, Central ; Monetary policy ; Inflation (Finance) ; Inflation targeting ; Disclosure of information |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:342&r=mon |
| By: | Jerry Marmen Simanjuntak (College of Business and Economics The Australian National University, Australia & ABFI Institute PERBANAS, Jakarta, Indonesia) |
| Abstract: | The ‘excess sensitivity’ as the method of estimating the underground economy by using currency modeling is found to be unreliable. In general, there are two major weaknesses in the method. First, the key assumption, in assuming the equality of velocity of money between the official economy and the underground economy, is very unrealistic. Second, the method is found to be non robust due to the unit measurement and scale change. More specifically, the application of the excess sensitivity method using the single-step error correction model (ECM) in Bajada’s paper is very weak because there is no cointegration analysis as the prerequisite of ECM modeling. In conclusion, the possibility of using a currency demand approach in estimating the size of the underground economy is still unclear like ‘black box’, and in particular, the excess sensitivity method should be thoroughly revised. |
| Keywords: | underground economy, currency demand, econometric models |
| JEL: | C51 E26 E41 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:200806&r=mon |
| By: | Kin-Yip Ho (Department of Economics, Cornell University, Ithaca, USA); Albert K Tsui (Department of Economics, National University of Singapore) |
| Abstract: | Singapore dollar are analyzed in this paper. Our approach can simultaneously capture the empirical regularities of persistent and asymmetric effects in volatility and timevarying correlations of financial time series. Consistent with the results of Tse and Tsui (1997), there is only some weak support for asymmetric volatility in the case of the Malaysian ringgit when the two currencies are measured against the US dollar. However, there is strong evidence that depreciation shocks have a greater impact on future volatility levels compared with appreciation shocks of the same magnitude when both currencies measured against the yen. Moreover, evidence of time-varying correlation is highly significant when both currencies are measured against the yen. Regardless of the choice of the numeraire currency and the volatility models, shocks to exchange rate volatility are found to be significantly persistent. |
| Keywords: | Constant correlations; Exchange rate volatility; Fractional integration; Long memory; Bivariate asymmetric GARCH; Varying correlations |
| JEL: | C12 G15 |
| Date: | 2008–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:sca:scaewp:0805&r=mon |
| By: | Leong, Choi-Meng; Puah, Chin-Hong; Abu Mansor, Shazali; Evan, Lau |
| Abstract: | The capability of monetary aggregates to generate stable link with fundamental economic indicators verifies the effectiveness of monetary targeting. However, traditional monetary aggregates have become flawed when financial reforms take place. As official monetary aggregates fail to maintain stable link with crucial economic indicators in Malaysia, monetary targeting has been substituted by interest rate targeting. Therefore, Divisia monetary aggregates, which are considered more superior than the simple sum counterparts are used in the investigation for the case of Malaysia. The findings imply that Divisia M2 money demand is stable and is capable to generate appropriate coefficients with correct signs for the variables included. Thus, Divisia money has shed new light on the usefulness of monetary targeting in formulating monetary policy in Malaysia. |
| Keywords: | Divisia money; Money demand; Error-correction model |
| JEL: | C43 C22 E41 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10568&r=mon |
| By: | Carlos Capistrán; Allan Timmermann (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | Disagreement in inflation expectations observed from survey data varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters’ costs of over- and under-predicting inflation. Our model implies (i) biased forecasts; (ii) positive serial correlation in forecast errors; (iii) a cross-sectional dispersion that rises with the level and the variance of the inflation rate; and (iv) predictability of forecast errors at different horizons by means of the spread between the short- and long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters. A constant bias component, not explained by asymmetric loss and rational expectations, is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982. |
| Keywords: | asymmetric loss, real-time data, survey expectations |
| JEL: | C53 C82 E31 E37 |
| Date: | 2008–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2008-56&r=mon |
| By: | Andrew Coleman; Özer Karagedikli (Reserve Bank of New Zealand) |
| Abstract: | This paper examines the relative size of the effects of New Zealand monetary policy and macroeconomic data surprises on the spot exchange rate, 2 and 5 year swap rate differentials, and the synthetic forward exchange rate schedule. We find that the spot exchange rate and 5 year swap rates respond by a similar magnitude to monetary surprises, implying there is little response of the forward exchange rate to this type of news. In contrast, the spot exchange rate responds by nearly three times as much as 5 year interest rates to CPI and GDP surprises, implying that forward rates appreciate to higher than expected CPI or GDP news. This is in contrast to standard theoretical models and US evidence. Lastly, we show that exchange rates but not interest rates respond to current account news. The implications of these results for monetary policy are considered. Classification-E50, J61, R21, R23 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2008/12&r=mon |
| By: | Christian Dreger |
| Abstract: | The real interest partity (RIP) condition combines two cornerstones in international finance, uncovered interest parity (UIP) and ex ante purchasing power parity (PPP). The extent of deviation from RIP is therefore an indicator of the lack of product and financial market integration. This paper investigates whether the nominal exchange rate regime has an impact on RIP. The analysis is based on 15 annual real interest rates and covers a long time span, 1870-2006. Four subperiods are distinguished and linked to fixed and flexible exchange rate regimes: the Gold Standard, the interwar float, the Bretton Woods system and the current managed float. Panel integration techniques are used to increase the power of the tests. Cross section correlation is embedded via common factor structures. The results suggest that RIP holds as a long run condition irrespectively of the exchange rate regimes. Adjustment towards RIP is affected by the institutional framework and the historical episode. Half lives of shocks tend to be lower under fixed exchange rates and in the first part of the sample, probably due to higher price flexibility before WWII. Although barriers to foreign trade and capital controls were substantially removed after the collapse of the Bretton Woods system, they did not lead to lower half lives during the managed float. |
| Keywords: | Real interest parity, nominal exchange rate regime, panel unit roots, common factors |
| JEL: | C32 F21 F31 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp819&r=mon |
| By: | Anthony Garratt; Gary Koop; Emi Mise; Shaun Vahey (Reserve Bank of New Zealand) |
| Abstract: | A popular account for the demise of the UK’s monetary targeting regime in the 1980s blames the fluctuating predictive relationships between broad money and inflation and real output growth. Yet ex post policy analysis based on heavily-revised data suggests no fluctuations in the predictive content of money. In this paper, we investigate the predictive relationships for inflation and output growth using both real-time and heavily-revised data. We consider a large set of recursively estimated Vector Autoregressive (VAR) and Vector Error Correction models (VECM). These models differ in terms of lag length and the number of cointegrating relationships. We use Bayesian model averaging (BMA) to demonstrate that real-time monetary policymakers faced considerable model uncertainty. The in-sample predictive content of money fluctuated during the 1980s as a result of data revisions in the presence of model uncertainty. This feature is only apparent with real-time data as heavily-revised data obscure these fluctuations. Out of sample predictive evaluations rarely suggest that money matters for either inflation or real output. We conclude that both data revisions and model uncertainty contributed to the demise of the UK’s monetary targeting regime. Classification-C11, C32, C53, E51, E52 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2008/13&r=mon |
| By: | Juan David Prada Sarmiento |
| Abstract: | This paper analyses the role of a costly financial system in the transmission of monetary policy. The new-keynesian model for a small open economy is extended with a simple financial system based in Hamann and Oviedo (2006). The presence of the financial intermediation naturally allows the introduction of standard policy instruments: the repo interest rate and the compulsory requirement of reserves. The model is calibrated to match key steady-state ratios of Colombia and is used to evaluate the alternative policy instruments. The financial system plays an important role in the transmission mechanism of the monetary policy, and determines the final effects on aggregated demand and inflation rates of exogenous modifications of the policy instruments. The monetary policy conducted through the repo interest rate has the standard effects predicted by the new-keynesian framework. But changes in the compulsory reserve requirement rate may generate, under different scenarios, totally different reactions on economic activity, and little quantitative effects on inflation rates and aggregate demand. Therefore this last policy instrument appears to be uneffective and unreliable. |
| Date: | 2008–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005010&r=mon |
| By: | Colin Rogers (School of Economics, University of Adelaide) |
| Abstract: | There has been no Keynesian Revolution in economic theory but there has been an unacknowledged Keynes's Revolution in economic policy. Keynes's theoretical revolution rested on the adoption of monetary analysis and the application of the principle of effective demand to demonstrate the existence of multiple long-period equilibria. Keynes's policies –creating a role for `Big Government' and the ‘Big Bank'- follow from his theory and have changed the structure of the laissez faire economy. Many Keynesians fail to acknowledge either of these issues and continue the classical tradition of real analysis and the assumption of unique long-period equilibrium. Real analysis, as a special case of Keynes's monetary analysis, provides a distorted perspective of the responsibilities of monetary policy which largely accounts for the increasing fragility and volatility exhibited by financial markets over the past two decades. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2008-05&r=mon |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper analyzes how the formation of expectations constrains monetary and fiscal policy design. Economic agents have imperfect knowledge about the economic environment and the policy regime in place. Households and firms learn about the policy regime using historical data. Regime uncertainty substantially narrows, relative to a rational expectations analysis of the model, the menu of policies consistent with expectations stabilization. When agents are learning about the policy regime, there is greater need for policy coordination: the specific choice of monetary policy limits the set of fiscal policies consistent with macroeconomic stability - and simple Taylor-type rules frequently lead to expectations-driven instability. In contrast, non-Ricardian fiscal policies combined with an interest rate peg promote stability. Resolving uncertainty about the prevailing monetary policy regime improves stabilization policy, enlarging the menu of policy options consistent with stability. However, there are limitsto the benefits of communicating the monetary policy regime: the more heavily indebted the economy, the greater is the likelihood of expectations-driven instability. More generally, regardless of agents' knowledge of the policy regime, when expectations are anchored in the long term, short-term dynamics display greater volatility than under rational expectations. |
| Keywords: | Fiscal policy ; Monetary policy ; Rational expectations (Economic theory) ; Taylor's rule ; Economic stabilization ; Financial stability |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:343&r=mon |
| By: | Carlos De Resende; Nooman Rebei |
| Abstract: | This paper studies the interdependence between fiscal and monetary policy in a DSGE model with sticky prices and non-zero trend inflation. We characterize the fiscal and monetary policies by a rule whereby a given fraction k of the government debt must be backed by the discounted value of current and future primary surpluses. The remaining fraction of debt is backed by seigniorage revenues. When k = 1, there is no fiscal dominance, since the fiscal authority backs all debt and accommodates (independent) monetary policy, by adjusting current or future primary surpluses to satisfy the government’s intertemporal budget constraint. If k = 0, all debt is backed by the monetary authority and there is complete fiscal dominance. A continuum of possibilities lies between these two polar cases. We numerically show that: 1) the degree of fiscal dominance, as measured by (1 - k), is positively related to trend inflation, and 2) when prices are sticky, k has significant effects on the business cycle dynamics. The model is estimated using Bayesian techniques. Estimates of k imply a high degree of fiscal dominance in both Mexico and South Korea, but almost no fiscal dominance in Canada and the U.S. The country-specific estimates of the structural parameters are used in a second-order approximation of the equilibrium around the deterministic steady-state to evaluate the welfare costs of fiscal dominance. Results suggest significant welfare losses for countries with high degrees of fiscal dominance. |
| Keywords: | Economic models; Fiscal policy; Inflation: costs and benefits; Monetary policy framework |
| JEL: | E31 E42 E50 E63 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-28&r=mon |
| By: | Stéphane Adjemian (Université du Maine, GAINS & CEPREMAP. Contact address: Facultéde Droit et de Sciences Économiques, 72085 LE MANS Cedex 9, France.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stéphane Moyen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Advances in the development of Dynamic Stochastic General Equilibrium (DSGE) models towards medium-scale structural frameworks with satisfying data coherence have considerably enhanced the range of analytical tools well-suited for monetary policy evaluation. The present paper intends to make a step forward in this direction: using US data over the Volker-Greenspan sample, we perform a DGSE-VAR estimation of a medium-scale DSGE model very close to Smets and Wouters [2007] specification, where monetary policy is set according to a Ramsey-planner decision problem. Those results are then contrasted with the DSGE-VAR estimation of the same model featuring a Taylortype interest rate rule. Our results show in particular that the restrictions imposed by the welfare-maximizing Ramsey policy deteriorates the empirical performance with respect to a Taylor rule specification. However, it turns out that, along selected conditional dimensions, and notably for productivity shocks, the Ramsey policy and the estimated Taylor rule deliver similar economic propagation. JEL Classification: E4, E5, F4. |
| Keywords: | DSGE models, Optimal monetary policy, Bayesian estimation. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080942&r=mon |
| By: | Filippo di Mauro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rasmus Rueffer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Irina Bunda (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In addition to its direct effects on the global trading and production structure, the ongoing process of globalisation may have important implications for the interaction of exchange rates and the overall economy. This paper presents evidence regarding possible changes in the role of exchange rates in a more globalised economy. First, it analyses the link between exchange rates and prices, showing that there is at most a moderate decline in exchange rate pass-through for the euro area. Next, it turns to the effect of exchange rate changes on trade flows. The findings indicate that the responsiveness of euro area exports to exchange rate changes may have declined somewhat as a result of globalisation, reflecting mainly shifts in the geographical and sectoral composition of trade flows. The paper also provides a firm-level analysis of the impact of exchange rate changes on corporate profits, which suggests that overall this relationship appears to be relatively stable over time, although there are important crosscountry differences. In addition, it studies the overall impact of exchange rates on GDP and the potential role of valuation effects as a transmission channel in the case of the euro area. JEL Classification: E3, F15, F31. |
| Keywords: | Globalisation, exchange rate, trade exchange rate pass-through, valuation effects. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080094&r=mon |
| By: | Bittencourt, Manoel |
| Abstract: | We examine the impact of inflation on financial development in Brazil and the data available permit us to cover the period between 1985 and 2002. The results ? based initially on time-series and then on panel time-series data and analysis, and robust for different estimators and financial development measures ? suggest that inflation presented deleterious effects on financial development at the time. The main implication of the results is that poor macroeconomic performance has detrimental effects to financial development, a variable that is important for affecting, for example, economic growth and income inequality. Therefore, low and stable inflation, and all that it encompasses, is a necessary first step to achieve a deeper and more active financial sector with all its attached benefits. |
| Keywords: | financial development, inflation, Brazil |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:rp2008-14&r=mon |
| By: | Carmen Martinez-Carrascal (Servicio de Estudios, Banco de España, Alcalá, 50, 28014 Madrid, Spain.); Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyses the impact that firms' financial position has on investment decisions using panel data from a large sample of non-financial corporations (around 120,000 firms)in six euro area countries (Belgium, Germany, France, Italy, the Netherlands and Spain). The results indicate that financial position is important to explain capital expenditures, as financial pressure appears relevant in explaining investment dynamics when it is proxied by cash flow, indebtedness and debt burden. The results also show differences in the sensitivity of investment rates to changes in financial pressure across countries, which appears to be especially large in the Netherlands and Italy and relatively small in Germany. JEL Classification: C33, E22, G32, J23. |
| Keywords: | Financial pressure, fixed investment, balance sheet channel, panel data. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080943&r=mon |
| By: | William Poole; Robert H. Rasche; David C. Wheelock |
| Abstract: | The Shadow Open Market Committee was formed in 1973 in response to rising inflation and the apparent unwillingness of U.S. policymakers to implement policies necessary to maintain price stability. This paper describes how the Committee's policy views differed from those of most Federal Reserve officials and many academic economists at the time. The Shadow argued that price stability should be the primary goal of monetary policy, and favored gradual adjustment of monetary growth to a rate consistent with price stability. The paper evaluates the Shadow's policy rule in the context of the New Keynesian macroeconomic model of Clarida, Gali and Gertler (1999). Simulations of the model suggest that the gradual stabilization of monetary growth favored by the Shadow would have lowered inflation with less impact on output growth, and with less variability in output and inflation, than a one-time reduction in monetary growth. We conclude that the Shadow articulated a sensible policy that would have outperformed the policies actually implemented by the Federal Reserve during the Great Inflation era. |
| Keywords: | Inflation (Finance) ; Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-032&r=mon |
| By: | Juan Carlos Cuestas; Barry Harrison |
| Abstract: | In this paper we provide an insight into the inflation dynamics in a panel of Central and Eastern European countries. These countries are selected because of their increasing importance in the EU and their likely increased future importance in monetary policy decisions inside the euro area. By means of unit root testing and allowing for the possibility of a smooth asymmetric adjustment to equilibrium, we show that inflation rates in more than half of the countries investigated are stationary processes. Our results imply evidence against the persistence hypothesis for them. |
| Keywords: | Inflation persistence, Unit roots, Nonlinearities |
| JEL: | C22 E31 E32 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbs:wpaper:2008/13&r=mon |
| By: | Sinigaglia, Daniel |
| Abstract: | What measure of inflation a Central Bank should respond to? This paper characterizes the optimal targeting index in a multisectorial economy with Calvo-pricing, defined as a composition of sectorial inflations that maximizes a selected welfare criterion. This is a purely quadratic approximation to the representative agent's utility in an environment of distorted steady state and sectorial heterogeneity of price stickiness. The Central Bank is modeled as following a historical Taylor Rule. For most parameter values, weights of sectorial inflations are increasing functions of the degrees of nominal rigidity and productivity volatility and decreasing functions of sectorial wage markup volatilities, resembling most of the conclusions from related literature. Bayesian estimation for the structural model using sectorial quantum and price indexes for Personal Consumption Expenditure (PCE) provides the parameter values that allow constructing the optimal index for the US economy. The result points out towards a price index with similar properties than the PCE, with more weight on services and less weight of inflation from durable goods. I find no evidence that a core index based on the exclusion of food and energy goods is welfare improving. |
| Keywords: | Inflation Targeting; Heterogeneity of price stickiness; Optimal inflation measure |
| JEL: | E52 |
| Date: | 2008–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10569&r=mon |
| By: | Javier Huerga (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper uses index number theory to disentangle changes in aggregate retail interest rates due to changes in individual component rates (“interest rate effect”) from those caused by changes in the weights of each component (“weight effect”), on the basis of the “difference” index numbers recently revisited by Diewert (2005). The paper, first discusses the optimal calculation of a binary index using axiomatic index number theory; on that basis, chain and direct indices are established; finally, the selected decomposition and indices are applied to monthly data on euro area interest rates on loans and deposits (MIR) for the period January 2003 – January 2008. It is concluded that relevant weight effects at euro area level are limited to a few indicators and periods of MIR, and that that the indices on interest rates can be a suitable tool in the analysis of variations in aggregate interest rates. JEL Classification: C43 - Index Numbers and Aggregation, E43 - Determination of Interest Rates, Term Structure of Interest Rates. |
| Keywords: | Index numbers, interest rates, Euro area. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080939&r=mon |