nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒12‒19
29 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy Rules in Central and Eastern European Countries: Does the Exchange Rate Matter? By M. FRÖMMEL; G. GARABEDIAN; F. SCHOBERT
  2. Why inflation targeting central banks seem to follow a standard Taylor rule By Kühn Stefan; Muysken Joan
  3. Interest Rate Dynamics and Monetary Policy Implementation in Switzerland By Puriya Abbassi; Dieter Nautz; Christian J. Offermanns
  4. Monetary Policy in a Currency Union with Heterogeneous Limited Asset Markets Participation By Fabian Eser
  5. The Conduct of Monetary Policy in Turkey in the Pre- and Post-crisis Period of 2001 in Comparative Perspective: a Case for Central Bank Independence By Alper, Emre; Hatipoglu, Ozan
  6. Real Interest Rates, Bubbles and Monetary Policy in the GCC countries By Razzak, Weshah; Bentour, E M
  7. Central bank independence: The case of Croatia By Tomislav Ćorić; Dajana Cvrlje
  8. The triffin dilemma again By Campanella, Edoardo
  9. Does the Fed Respond to Oil Price Shocks? By Kilian, Lutz; Lewis, Logan
  10. The role of central bank transparency for guiding private sector forecasts By Ehrmann, Michael; Eijffinger, Sylvester C. W.; Fratzscher, Marcel
  11. Exchange rate pass-through to domestic prices in the Central European countries By Mirdala, Rajmund
  12. "Non-Traditional Monetary Polices: G7 Central Banks during 2007-2009 and the Bank of Japan during 1998-2006" By Kazuo Ueda
  13. Inflation and investment in monetary growth models By Ciżkowicz, Piotr; Hołda, Marcin; Rzońca, Andrzej
  14. Interest rate convergence in the EMS prior to European Monetary Union By M. FRÖMMEL; R. KRUSE
  15. Reversing unconventional monetary policy: technical and political considerations By Buiter, Willem H.
  16. The origins of a paper money economy - the case of Norway By Lars Fredrik Øksendal
  17. Managed Floats to Damp Shocks like 1982-5 and 2006-9: Field and Laboratory Evidence for Chinese Interest in a Single World Currency By Robin Pope, ,; Reinhard Selten,; Sebastian Kube,; Jürgen von Hagen
  18. Exchange Rate Pass-Through and Inflation: A Nonlinear Time Series Analysis By Mototsugu Shintani; Akiko Terada-Hagiwara; Tomoyoshi Yabu
  19. Monetary effects on nominal oil prices By Max Gillman; Anton Nakov
  20. Distortionary tax instruments and implementable monetary policy By L. Marattin; M. Marzo; P. Zagaglia
  21. New time series evidence for the causality relationship between inflation and inflation uncertainty in the Turkish economy By Korap, Levent; Saatçioğlu, Cem
  22. Estimating the Evolution of Money's Role in the U.S. Monetary Business Cycle By Efrem Castelnuovo
  23. Combining VAR and DSGE forecast densities By Ida Wolden Bache; Anne Sofie Jore; James Mitchell; Shaun P. Vahey
  24. Money and uncertainty in democratised financial markets By Browne, Frank; Kelly, Robert
  25. Understanding Central Bank Loss Functions: Implied and Delegated Targets By Huiping Yuan; Stephen M. Miller
  26. Japan's Lost Decade: Does Money have a Role? By Canova, Fabio; Menz, Tobias
  27. Macroeconomic News, Announcements, and Stock Market Jump Intensity Dynamics By José Gonzalo Rangel
  28. An Equilibrium Model of the Term Structure of Interest Rates: Recursive Preferences at Play By Gonzalez-Astudillo, Manuel
  29. Global Imbalances and the Financial Crisis: Products of Common Causes By Obstfeld, Maurice; Rogoff, Kenneth

    Abstract: We estimate monetary policy rules for six central and eastern European countries (CEEC) during the period, when they prepared for membership to the EU and monetary union. By taking changes in the policy settings explicitly into account and by introducing several new methodological features we significantly improve estimation results for monetary policy rules in CEEC. We find that in the Czech Republic, Hungary and Poland the focus of the interest rate setting behaviour switched from defending the peg to targeting inflation. For Slovakia, however, there still seemed to be on ongoing focus on the exchange rate. For Slovenia and only after a policy switch for Romania we find a solid relation with inflation as well.
    Keywords: monetary policy, Taylor rules, transition economies, CEEC, inflation targeting
    JEL: E52 E58 P20
    Date: 2009–08
  2. By: Kühn Stefan; Muysken Joan (METEOR)
    Abstract: Studies on central bank reaction functions find that central banks only caring about inflation stability, like the ECB, seem to follow a standard Taylor rule in the sense that the interest rate reacts significantly to variations in the output gap. We explain this result by claiming that the alleged reaction to the output gap could in fact be a reaction of the nominal interest rate to variations in the natural real rate of interest, which monetary policy should take into account. This provides a rationale for central banks to observe the output gap in the conduct of purely inflation targeting monetary policy.
    Keywords: monetary economics ;
    Date: 2009
  3. By: Puriya Abbassi; Dieter Nautz; Christian J. Offermanns
    Abstract: The maturity of the operational target of monetary policy is a distinguishing feature of the SNB's operational framework of monetary policy. While most central banks use targets for the overnight rate to signal the policy-intended interest rate level, the SNB announces a target range for the three-month Libor. This paper investigates the working and the consequences of the SNB's unique operational framework for the behavior of Swiss money market rates before and during the financial crisis.
    Keywords: Implementation of Monetary Policy, Operational Targets of Monetary Policy, Three-Month Rate Targeting, Financial Crisis
    JEL: E52 E58
    Date: 2009–12
  4. By: Fabian Eser
    Abstract: This paper examines monetary policy in a currency union whose member countries exhibit heterogeneous rates of limited asset markets participation (LAMP). As a result risk sharing among member countries is imperfect and the monetary transmission mechanism can differ across countries. In the limit the elasticity of output to the union-wide nominal interest rate can be of opposite sign in different countries. I develop a tractable model in which the dispersion of asset markets participation (AMP) becomes a key parameter. While monetary policy can gaurantee determinacy by following an active or passive rule depending on the sign of the interest-elasticity of output, ignoring dispersion can lead to incorrect computation of the sign and the size of the latter. Taking the heterogeneity into account is thus central for sound policy. Furthermore, due to the failure of risk sharing, determinacy for union-aggregates does not guarantee determinacy in every member country. However, the more open a country is in trade terms, the greater the rate of LAMP for which the country still displays equilibrium determinacy. For complete openness, determinacy is guaranteed. This underlines the importance of risk sharing and trade integration for the functioning of a currency union. Considering the optimal union-wide targeting rule, a higher mean and dispersion of LAMP increase the desired inflation volatility. The implied optimal Taylor rule shows that subject to the Taylor principle, the higher are mean and dispersion of LAMP, the softer should be the response of the nominal interest rate to expected inflation.
    Keywords: Monetary union, Limited asset markets participation, Heterogeneity, (Optimal) monetary policy, Real (in)determinacy, Sticky prices
    JEL: E52 F41 E44
    Date: 2009
  5. By: Alper, Emre; Hatipoglu, Ozan
    Abstract: We document the role of independence for Central Bank of Republic of Turkey (CBRT) as it matters to successful implementation of monetary policy. We compare the implementation of monetary policy pre- and post-crisis periods within an empirical framework which allows us to measure the role of independence quantitatively. We estimate a Taylor rule with time varying coefficients by employing a dual extended Kalman filter. We find that the coefficient of inflation gap has increased substantially since CBRT gained de-juro independence.
    Keywords: Taylor Rule; Kalman Filter; Monetary Policy
    JEL: E58 E52 E00 C11
    Date: 2009–01
  6. By: Razzak, Weshah; Bentour, E M
    Abstract: The Gulf Cooperation Council countries (GCC) include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. Their monetary policy objective is to stabilize the foreign price, i.e., exchange rate instead of the domestic price level, where the nominal interest rate is equalized with the US federal fund rate, but the inflation rates are independent. High oil prices and the depreciating US dollar caused inflation to rise and real interest rates to be persistently negative in the UAE and Qatar. Asset prices bubbles formed then burst creating large loses. They could have moderated the effect of, or avoided, the bubble had they floated the currency and stabilized domestic prices.
    Keywords: inflation; real interest rate; bubbles
    JEL: E31 E58 E37
    Date: 2009–12–01
  7. By: Tomislav Ćorić (Department of Economics, School of Business Administration, Fort Lewis College); Dajana Cvrlje (Faculty of Economics and Business, University of Zagreb)
    Abstract: A trend of increasing role of central bank's independence took place in the most of modern economies. The central bank independence (CBI) is seen as a way of bringing economy to a higher level. It is argued that an independent central bank is more credible and moreover, that the higher degree of central bank independence facilitates central bank to identify signals of financial problems and alert financial markets. Furthermore, an independent central bank is less likely to be exposed to the inflationary bias, inherent in monetary policy, and is more aware of the inflation costs of expansionary monetary policy. This is in line with Friedman’s theoretical concept that the phenomenon of inflation is to be regulated by controlling the amount of money poured into the national economy by the central bank. In order to achieve the main goal; price stability, it is essential for a central bank to be connected to government as little as possible. However, governments generally have a certain influence over central banks, even in the case of banks who claim to be independent. The first part of the paper offers theoretical background for the central bank independence (CBI concept). The empirical evidence on the relationship between central bank independence and economic variables suggests negative relationship between central bank independence and inflation. The strong evidence of central bank independence influence on other macroeconomic variables so far has not been found. The analysis of the independence of Croatian national bank was made using 3 different methods; 1) central bank governor turnover rate (TOR), 2) Petursson G. Thorarinn criterion and 3) Cukierman, Webb and Neyapti (CWN) questionnaire. The obtained results affirm high level of central bank independence in Croatia.
    Keywords: monetary policy, central bank independence
    JEL: E58
    Date: 2009–11–12
  8. By: Campanella, Edoardo
    Abstract: Tiny changes in the American monetary policy can have dramatic effects on the rest of the world because of its double role of national and international currency. This is what I call the Triffin dilemma, an ever green concept in international finance. In the paper I show how it works through three examples: price of commodities, dollarization, and the international financial position of the US. I argue that to solve this situation, it would be important to create a more democratic monetary system, in which all the countries have a decision weight. In particular, I think that globalization and regionalization should be the two forces leading towards the new monetary system. The main economies should adopt the same currency through a system of fixed exchange rates (global money); developing countries should create regional monetary unions (regional money), preserving the real exchange rate as real shock absorber, but gaining in terms of time consistency and credibility. --
    Keywords: Triffin dilemma,global currency,regional monetary union,dollarization
    JEL: F33
    Date: 2009
  9. By: Kilian, Lutz; Lewis, Logan
    Abstract: Since Bernanke, Gertler and Watson (1997), a common view in the literature has been that systematic monetary policy responses to the inflation triggered by oil price shocks are an important source of aggregate fluctuations in the U.S. economy. We show that there is no evidence of systematic monetary policy responses to oil price shocks after 1987 and that this lack of a policy response is unlikely to be explained by reduced real wage rigidities. Prior to 1987, according to standard VAR models, the Federal Reserve was not responding to the inflation triggered by oil price shocks, as commonly presumed, but rather to the oil price shocks directly, consistent with a preemptive move by the Federal Reserve to counteract potential inflationary pressures. There are indications that this response is poorly identified, however, and there is no evidence that this policy response in the pre-1987 period caused substantial fluctuations in the Federal Funds rate or in real output. Our analysis suggests that the traditional monetary policy reaction framework explored by BGW and incorporated in subsequent DSGE models should be replaced by DSGE models that take account of the endogeneity of the real price of oil and that allow policy responses to depend on the underlying causes of oil price shocks.
    Keywords: Counterfactual; Oil; Recessions; Systematic Monetary Policy; Temporal Instability
    JEL: E31 E32 E52 Q43
    Date: 2009–12
  10. By: Ehrmann, Michael; Eijffinger, Sylvester C. W.; Fratzscher, Marcel
    Abstract: There is a broad consensus in the literature that costs of information processing and acquisition may generate costly disagreements in expectations among economic agents, and that central banks may play a central role in reducing such dispersion in expectations. This paper analyses empirically whether enhanced central bank transparency lowers dispersion among professional forecasters of key economic variables, using a large set of proxies for central bank transparency in 12 advanced economies. It finds evidence for a significant and sizeable effect of central bank transparency on forecast dispersion, be it by means of announcing a quantified inflation objective, other forms of communication, or by publishing central banks’ inflation and output forecasts. However, there also appear to be limits to central bank transparency, with decreasing marginal returns to enhancing (economic) transparency, and given our findings that disagreement among inflation expectations in the general public is not affected by the various central bank transparency measures analyzed in this paper.
    Keywords: central bank communication; central banking; disagreement; forecasting; inflation targeting; monetary policy; survey expectations; transparency
    JEL: C53 E37 E52
    Date: 2009–12
  11. By: Mirdala, Rajmund
    Abstract: Exchange rate plays an important role in transmitting pressures from the external shocks to the domestic economy. Development of inflation in the domestic economy is significantly determined by the ability of exchange rate to transmit external price related pressures to the domestic market. Considering the new EU member countries obligation to adopt euro the loss of the monetary sovereignty should be analyzed not only in the view of the direct positive and negative effects of this decision but also in the view of many indirect effects. While the exchange rates of majority of the EMU candidate countries are strongly affected by the euro exchange rate on the international markets there is still room for them to float partially reflecting changes in the national economic development. Ability of the exchange rate to transfer external shocks to the national economy remains one of the most discussed areas relating to the current stage of the monetary integration process in the European single market. In the paper we analyze the ability of the exchange rate to weaken or eventually to strengthen the transmission of the external inflation pressures to the national economy in the Czech republic, Hungary, Poland and the Slovak republic. In order to meet this objective we estimate a vector autoregression (VAR) model correctly identified by the Cholesky decomposition of innovations that allows us to identify structural shocks hitting the model. Variance decomposition and impulse-response functions are computed in order to estimate the exchange rate pass-through from the foreign prices of import to the domestic consumer price indexes in the Visegrad countries. Ordering of the endogenous variables in the model is also considered allowing us to check the robustness of the empirical results.
    Keywords: exchange rate; inflation; VAR; Cholesky decomposition; variance decomposition; impulse-response function
    JEL: C32 E52
    Date: 2009–07
  12. By: Kazuo Ueda (Faculty of Economics, University of Tokyo)
    Abstract: This paper offers a brief summary of non-traditional monetary policy measures currently adopted by G7 central banks and their provisional evaluation in the light of the Bank of Japan (BOJ)'s experience during the period of 1998-2006. The paper points out that although unprecedented measures seem to have been adopted by major central banks since 2007, many of them have been tried in one way or another in earlier episodes of financial crises, especially by the BOJ during 1998-2006 and are in this sense not new. We summarize the BOJ's and G7 central banks' policies based on a typology of policies that can be used even when interest rates are very low. Non-traditional policy measures can be classified into managing interest rate expectations, targeted asset purchases and quantitative easing, all of which were used by the BOJ. The so-called credit easing can be considered to be a part of targeted asset purchases. In the current episode, targeted asset purchases or credit easing has been employed by most central banks, while expectations management and (strong forms of) quantitative easing have not been widely used. We explore reasons for such a choice of policy strategy in the current period. In addition, some important lessons can be learned about the effectiveness of non-traditional policies from what the BOJ and the Japanese government did and did not do during the early to mid 1990s and its ultimate failure to avoid deflation.
    Date: 2009–11
  13. By: Ciżkowicz, Piotr; Hołda, Marcin; Rzońca, Andrzej
    Abstract: The article contains a review of monetary growth models. We analyze the ways in which money is introduced into these models and the models’ conclusions about the impact of inflation on investment. We find that the models differ widely with respect to the ways in which they account for money and its functions in the economy as well as with respect to the “technical” assumptions, about e.g. the form of the utility function or the production function. Despite these differences most models fail to adequately capture money’s role and are highly sensitive to changes in the assumptions. Moreover, the models differ in their predictions about inflation’s impact on capital accumulation, with some models offering conclusions that are not only counterintuitive but also inconsistent with empirical evidence.
    Keywords: investment, inflation, monetary models of growth, monetary search theoretic models
    JEL: O42 E31 E22 E52
    Date: 2009–11
  14. By: M. FRÖMMEL; R. KRUSE
    Abstract: In this paper we analyze the convergence of interest rates in the European Monetary System (EMS) in a framework of changing persistence. This allows us to estimate the exact date of full convergence from the data. A change in persistence means that a time series switches from stationarity to non-stationarity, or vice versa. It is often argued that due to the specific historical situation in the EMS the interest rate differential was non-stationary before the full convergence of interest rates was achieved and stationary afterwards. Our empirical results suggest that the convergence date has been very different for Belgium, France, the Netherlands and Italy and are in line with the conclusions one would draw from a narrative approach. We compare three different estimators for the convergence date and find that the results are quite robust. Our results therefore stress the importance of credibility for monetary policy.
    Keywords: Interest rates, convergence, changing persistence, EMS, EMU
    JEL: C22 F33 F36
    Date: 2009–05
  15. By: Buiter, Willem H.
    Abstract: There are few if any technical problems involved in reversing the unconventional monetary policies - quantitative easing, credit easing and enhanced credit support - implemented by central banks around the world as short-term nominal interest rates became constrained by the zero lower bound. The two main obstacles to an early and easy exit from unconventional monetary policies are political. The first is a potential conflict between the central bank and the fiscal authority about the role of monetary financing in the fiscal-financial-monetary programme of the state. If there is a conflict about the role of seigniorage in closing the government’s solvency gap, the likely outcome is a win for the fiscal authority, except in the case of the ECB. The second political impediment to a prompt and painless exit from unconventional monetary policy is that scaling down the size of the central bank’s balance sheet and the scale and scope of its other interventions in financial markets and institutions is likely to reveal the true extent of the central bank’s quasi-fiscal activities during the crisis and its aftermath. The large-scale ex-ante and ex-post quasi-fiscal subsidies handed out by the Fed and to a lesser extent by the other leading central banks, and the sheer magnitude of the redistribution of wealth and income among private agents that the central banks have engaged in could (and in my view should) cause a political storm. Delay in the dropping of the veil is therefore likely.
    Keywords: Credit easing; Enhanced credit support; Quantitative easing; quasi-fiscal policy; regulatory capture
    JEL: E4 E5 E6 G1 H6
    Date: 2009–12
  16. By: Lars Fredrik Øksendal (Norwegian School of Economics and Business Administration (NHH))
    Abstract: This article sketches the origins of paper money in Norway back to the last half of the 18th century and asks why there was no circulation of full-bodied coins even after notes had become convertible into silver at par in 1842. The argument put forward is that the choice of fiat paper money reflected the relative economic backwardness of the country. Although Gresham’s law also applied for Norway, the most important reason paper money caught on and maintained that position as the most important part of the money stock was the chronic shortage of means of payment. In such a situation, bad money was not that bad after all. Moreover, times of war and political havoc besides, paper money managed to stay fairly stable and fulfil an essential function as a store of wealth. With time, paper money became institutionalised in the Norwegian economy, overwhelmingly dominating the domestic circulation and functioning as the key monetary reference (unit of account). Thus, convertibility in 1842 linked the domestic currency with international money at fixed rates, but had hardly any bearing on the domestic function of money.
    Keywords: Banknotes, bullion standard, convertibility, Gresham’s law, paper money
    JEL: E42 E58 N23
    Date: 2009–12–04
  17. By: Robin Pope, ,; Reinhard Selten,; Sebastian Kube,; Jürgen von Hagen
    Abstract: This paper’s field evidence is: (1) many official sectors rapidly forget the damage of the 1982-85 exchange rate liquidity crisis and reverted to what caused that crisis, namely a closed economy clean floats perspective; and (2) the 2006-2008/9 exchange rate liquidity shock would have been more drastic but for central bank currency swaps. This evidence is bolstered by a laboratory experiment that incorporates more aspects of real world complexity and more different sorts of official and private sector agents than are feasible in econometric or algebraic investigations and employs a new central bank cooperation-conflict model of exchange rate determination , and is within an umbrella theory of Pope, namely SKAT, the Stages of Knowledge Ahead Theory. SKAT allows for risk effects from stages omitted in normal models, including those from (a) difficulties of agents in evaluating alternatives in a complex environment in which the assumed maximization of expected utility is impossible; and (b) preference for safety and reliability is not trivialized. Our joint field plus laboratory evidence indicates that official sectors should maintain an international exchange rate oriented perspective, or better yet, a single world currency as recommended by Zhou Xiaochuan, head of the People’s Bank of China. To avoid rapid forgetting of havoc from isolationist clean floats and the value of stable exchange rates, a new syllabus, as under the SKAT umbrella, is fundamental in the education of official sector members in order to furnish them with a coherent alternative intellectual framework to current university education that excludes liquidity crises.
    Keywords: clean float, managed float, IMF imposed conditions, exchange rate regime, exchange rate volatility, experiment, SKAT the Stages of Knowledge Ahead Theory, monetary policy, transparent policy, exchange rate shocks, central bank cooperation, central bank conflict
    JEL: D80 F31
    Date: 2009–10
  18. By: Mototsugu Shintani (Department of Economics, Vanderbilt University); Akiko Terada-Hagiwara (Economics and Reasearch Department, Asian Development Bank); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University)
    Abstract: This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Using a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well-approximated by a class of smooth transition autoregressive (STAR) models with inflation as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to U.S. domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation.
    Keywords: Import prices, inflation indexation, pricing-to-market, smooth transition autoregressive models, sticky prices
    JEL: C22 E31 F31
    Date: 2009–11
  19. By: Max Gillman (Cardiff University Business School); Anton Nakov (Banco de España)
    Abstract: The paper presents a theory of nominal asset prices for competitively owned oil. Focusing on monetary effects, with flexible oil prices the US dollar oil price should follow the aggregate US price level. But with rigid nominal oil prices, the nominal oil price jumps proportionally to nominal interest rate increases. We find evidence for structural breaks in the nominal oil price that are used to illustrate the theory of oil price jumps. The evidence also indicates strong Granger causality of the oil price by US inflation as is consistent with the theory.
    Keywords: oil prices, infl ation, cash-in-advance, multiple structural breaks, Granger causality
    JEL: E31 E4
    Date: 2009–12
  20. By: L. Marattin; M. Marzo; P. Zagaglia
    Abstract: We introduce distortionary taxes on consumption, labor and capital income into a New Keynesian model with Calvo pricing and nominal bonds. We study the relation between tax instruments and optimal monetary policy by computing simple rules for monetary and fiscal policy when one tax instrument at a time varies, while the other two are fixed at their steady-state level. The optimal rules maximize the second-order approximation to intertemporal utility. Three results emerge: (a) when prices are sticky, perfect inflation stabilization is optimal independently from the tax instrument adopted; (b) the optimal degree of responsiveness of monetary policy to output varies depending on which tax instrument induces fluctuations in the average tax rate; (c) when prices are flexible, fiscal rules that prescribe unexpected variations in the price level to support debt changes are always welfare-maximizing.
    JEL: E52 E61 E63
    Date: 2009–11
  21. By: Korap, Levent; Saatçioğlu, Cem
    Abstract: This paper aims to investigate the relationship between inflation and inflation uncertainty in the Turkish economy by using contemporaneous Exponential GARCH (EGARCH) estimation methodology. Our findings indicate that inflation leads to inflation uncertainty, and dealing with the information content of this relationship, the conditional variance of inflation reacts more to past positive shocks than to negative innovations of equal size. Causality analysis between inflation and inflation uncertainty reveals that inflation Granger- causes, or in other words, precedes inflation uncertainty, but no clear-cut and significant evidence in the opposite direction can be obtained. Furthermore, generalized impulse response analysis estimated in a vector autoregressive framework yields supportive results to these findings.
    Keywords: Inflation ; Inflation uncertainty; Granger causality analysis ; EGARCH modelling ; Impulse response analysis ;
    JEL: C51 C32 E31
    Date: 2009–07
  22. By: Efrem Castelnuovo (University of Padua)
    Abstract: We assess the time-varying money's role in the post-WWII U.S. business cycle by estimating a new-Keynesian framework featuring nonseparability in real balances and consumption, portfolio adjustment costs, and a systematic reaction of policymakers to money growth. Rolling-window Bayesian estimations a la Canova (2009) are contrasted to a full sample fixed-coefficient investigation. Our results suggest that the assumption of stable parameters is unwarranted. The omission of money may induce biased assessments on the impact of structural shocks to the U.S. macroeconomic aggregates, especially during the great inflation period.
    JEL: E31 E51 E52
    Date: 2009–11
  23. By: Ida Wolden Bache (Norges Bank); Anne Sofie Jore (Norges Bank); James Mitchell (NIESR); Shaun P. Vahey (Melbourne Business School)
    Abstract: A popular macroeconomic forecasting strategy takes combinations across many models to hedge against instabilities of unknown timing; see (among others) Stock and Watson (2004), Clark and McCracken (2010), and Jore et al. (2010). Existing studies of this forecasting strategy exclude Dynamic Stochastic General Equilibrium (DSGE) models, despite the widespread use of these models by monetary policymakers. In this paper, we combine inflation forecast densities utilizing an ensemble system comprising many Vector Autoregressions (VARs), and a policymaking DSGE model. The DSGE receives substantial weight (for short horizons) provided the VAR components exclude structural breaks. In this case, the inflation forecast densities exhibit calibration failure. Allowing for structural breaks in the VARs reduces the weight on the DSGE considerably, and produces well-calibrated forecast densities for inflation.
    Keywords: Ensemble modeling, Forecast densities, Forecast evaluation, VAR models, DSGE models
    JEL: C32 C53 E37
    Date: 2009–11–05
  24. By: Browne, Frank (Central Bank and Financial Services Authority of Ireland); Kelly, Robert (Central Bank and Financial Services Authority of Ireland)
    Abstract: Developments in broad money since the start of the new millennium cannot be explained by the traditional determinants of money demand, namely, income, prices and portfolio effects. Households’ direct and indirect participation in financial markets have led to the widespread democratisation of these markets in the US since the 1970’s. In the pre-democratised era, an increase in uncertainty would have resulted in a fall in the transactions demand for money due to pessimism regarding income and employment prospects. When markets become more democratised, the precautionary, or store-of-value function of money dominates the transactions demand in which case an increase in uncertainty results in a net increase in the demand for money. Our Kalman Filter estimates are consistent with this theory. The money-uncertainty coefficient has been subject to an increasing trend over the whole sample period shifting gradually from significantly negative values up to the mid-to-late-1990s before becoming significantly positive by the early years of the new millennium. There are important repercussions from these new behavioural patterns for both monetary and financial stability which are discussed in this paper.
    Date: 2009–11
  25. By: Huiping Yuan (Xiamen University); Stephen M. Miller (University of Connecticut)
    Abstract: The paper studies the dynamic nature of optimal solutions under commitment in Barro-Gordon and new-Keynesian models and, finds two interesting parameters -- the implied targets and the persistence parameter that governs the adjustment toward the implied targets. The implied targets generally differ from the social ones, but exhibit a trade-off between targets and equal the long-run equilibrium values of target variables. The implied targets prove consistent with the models and the social targets do not. Moreover, the implied targets emerge in the long run according to the persistence parameter. As such, the government delegates to the central bank short-term, state-contingent targets, which guide discretionary policy to evolve along optimal paths as these targets converge to their long-run implied targets. For the Barro-Gordon model with output persistence, the correct delegated targets eliminate the constant average and state-contingent inflation biases, and a weight-liberal central bank removes the stabilization bias. For the new-Keynesian models, delegated targets, combined with the appropriate weight-liberal or -conservative central bank, can eliminate all three biases. The delegated targets may reflect backward- or forward-looking behavior, depending on the model.
    Keywords: Optimal Policy, Central Bank Loss Functions, Policy Rules
    JEL: E42 E52 E58
    Date: 2009–10
  26. By: Canova, Fabio; Menz, Tobias
    Abstract: We study the contribution of the stock of money to the macroeconomic outcomes of the 1990s in Japan using a small scale structural model. Likelihood-based estimates of the parameters are provided and time stabilities of the structural relationships analyzed. Real balances are statistically important for output and inflation fluctuations and their role has changed over time. Models which give money no role give a distorted representation of the sources of cyclical fluctuations. The severe stagnation and the long deflation are driven by different causes.
    Keywords: deflation; Japan's Lost decade; money; structural model
    JEL: E31 E32 E52
    Date: 2009–12
  27. By: José Gonzalo Rangel
    Abstract: This paper examines the effect of macroeconomic releases on stock market volatility through a Poisson-Gaussian-GARCH process with time varying jump intensity, which is allowed to respond to such information. It is found that the day of the announcement, per se, has little impact on jump intensities. Employment releases are an exception. However, when macroeconomic surprises are considered, inflation shocks show persistent effects while monetary policy and employment shocks show only short-lived effects. Also, the jump intensity responds asymmetrically to macroeconomic shocks. Evidence that macroeconomic variables are relevant to explain jump dynamics and improve volatility forecasts on event days is provided.
    Keywords: Conditional jump intensity, conditional volatility, macroeconomic announcements.
    JEL: C22 G14
    Date: 2009–12
  28. By: Gonzalez-Astudillo, Manuel
    Abstract: In this paper we analyze the performance of an equilibrium model of the term structure of the interest rate under Epstein-Zin/Weil preferences in which consumption growth and inflation follow a VAR process with logistic stochastic volatility. We find that the model can successfully reproduce the first moment of yields and their persistence, but fails to reproduce their standard deviation. The filtered stochastic volatility is a good indicator of crises and shows high persistence, but it is not enough to generate a slowly decaying volatility of yields with respect to maturity. Preference parameters are estimated to be about 4 for the coefficient of relative risk aversion and infinity for the elasticity of intertemporal substitution.
    Keywords: Yield curve; Recursive preferences; Logistic stochastic volatility; Nonlinear Kalman filter; Quadrature-based methods.
    JEL: E43 C32 G12
    Date: 2009–12–10
  29. By: Obstfeld, Maurice; Rogoff, Kenneth
    Abstract: This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through U.S. and ultimately through global financial markets. In the U.S., the interaction among the Fed’s monetary stance, global real interest rates, credit market distortions, and financial innovation created the toxic mix of conditions making the U.S. the epicenter of the global financial crisis. Outside the U.S., exchange rate and other economic policies followed by emerging markets such as China contributed to the United States’ ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble.
    Keywords: current account deficit; financial crisis; financial reform; global imbalances; housing bubble
    JEL: E44 E58 F32 F33 F42 G15
    Date: 2009–12

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