|
on Monetary Economics |
| By: | Schmidt, Sandra; Nautz, Dieter |
| Abstract: | This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's interest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis. -- |
| Keywords: | Central bank communication,Interest rate forecasts,Survey expectations,Panel random coefficient model |
| JEL: | E47 E52 E58 C23 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201029&r=mon |
| By: | Reade, J. James; Volz, Ulrich |
| Abstract: | This paper investigates to what extent Chinese monetary policy is constrained by the dollar peg. To this end, we use a cointegration framework to examine whether Chinese interest rates are driven by the Fed's policy. In a second step, we estimate a monetary model for China, in which we include also other monetary policy tools besides the central bank interest rate, namely reserve requirement ratios and open market operations. Our results suggest China has been relatively successful in isolating its monetary policy from the US policy and that the interest rate tool has not been effectively made use of. We therefore conclude that by employing capital controls and relying on other instruments than the interest rate China has been able to exert relatively autonomous monetary policy. -- |
| Keywords: | Chinese monetary policy,monetary independence,cointegration |
| JEL: | C32 E52 F33 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201035&r=mon |
| By: | Guillaume Rocheteau |
| Abstract: | I apply mechanism design to quantify the cost of inflation that can be attributed to monetary frictions alone. In an environment with pairwise meetings, the money demand that is consistent with a constrained-efficient allocation takes the form of a continuous correspondence that can fit the data over the period 1900-2006. For such parameterizations, the cost of moderate inflation is zero. This result is robust to different assumptions regarding the observability of money holdings, the introduction of match-specific heterogeneity, and endogeneous participation decisions. |
| Keywords: | Inflation (Finance) - Mathematical models ; Demand for money ; Monetary theory |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1103&r=mon |
| By: | Olivier Coibion (Department of Economics, College of William and Mary); Yuriy Gorodnichenko (Department of Economics, University of California, Berkeley) |
| Abstract: | We investigate the source of the high persistence in the Federal Funds Rate relative to the predictions of simple Taylor rules. While much of the literature assumes that this reflects interest-smoothing on the part of monetary policy-makers, an alternative explanation is that it represents persistent monetary policy shocks. Applying real-time data of the Federal Reserve’s macroeconomic forecasts, we document that the empirical evidence strongly favors the interestsmoothing explanation. This result obtains in nested specifications with higher order interest smoothing and persistent shocks, a feature missing in previous work. We also show that policy inertia is present in response to economic fluctuations not driven by exogenous monetary policy shocks. Finally, we argue that the predictability of future interest rates by Greenbook forecasts supports the policy inertia interpretation of historical monetary policy actions. |
| Keywords: | Taylor rules, interest rate smoothing, monetary policy shocks. |
| JEL: | E3 E4 E5 |
| Date: | 2011–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:cwm:wpaper:106&r=mon |
| By: | Jaromír Baxa (Institute of Economic Studies, Charles University, Prague and Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic); Roman Horváth (Czech National Bank and Institute of Economic Studies, Charles University, Prague); Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) |
| Abstract: | We examine whether and how main central banks responded to episodes of financial stress over the last three decades. We employ a new methodology for monetary policy rules estimation, which allows for time-varying response coefficients as well as corrects for endogeneity. This flexible framework applied to the U.S., U.K., Australia, Canada and Sweden together with a new financial stress dataset developed by the International Monetary Fund allows not only testing whether the central banks responded to financial stress but also detects the periods and type of stress that were the most worrying for monetary authorities and to quantify the intensity of policy response. Our findings suggest that central banks often change policy rates: mainly decreasing it in the face of high financial stress. However, the size of a policy response varies substantially over time as well as across countries, with the 2008-2009 financial crisis being the period of the most severe and generalized response. With regards to the specific components of financial stress, most central banks seemed to respond to stock market stress and bank stress, while exchange rate stress is found to drive the reaction of central banks only in more open economies. |
| Keywords: | financial stress, Taylor rule, monetary policy, time-varying parameter model, endogenous regressors. |
| JEL: | E43 E52 E58 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea1101&r=mon |
| By: | Guillaume Rocheteau |
| Abstract: | This paper adopts mechanism design to tackle the central issue in monetary theory, namely, the coexistence of money and higher-return assets. I describe an economy with pairwise meetings, where fiat money and risk-free capital compete as means of payment. Whenever fiat money has an essential role, any constrained-efficient allocation is such that capital commands a higher rate of return than fiat money. |
| Keywords: | Monetary theory |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1104&r=mon |
| By: | Fredy Alejandro Gamboa Estrada |
| Abstract: | This research studies the forecasting performance of conventional and more recent exchange rate models in Colombia. The purpose is to explain which have been the main exchange rate determinants under an Inflation Targeting regime and a completely floating exchange rate scheme. Compared to similar studies, this paper includes conventional specifications and Taylor rule approaches that assume exogenous and endogenous monetary policy respectively. Based on the Johansen multivariate cointegration methodology, the results provide evidence for the existence of cointegration in all specifications except in the Sticky-Price Monetary Model and the Taylor Rule model that includes the real exchange rate. In addition, out of sample forecasting performance is analyzed in order to compare if all specifications outperform the drift less random walk model. All models outperform the random walk at one month horizon. However, the Flexible Price Monetary Model and the Uncovered Interest Parity Condition have superior predictive power for longer horizons. |
| Date: | 2011–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:007870&r=mon |
| By: | Frankel, Jeffrey (Harvard Kennedy School) |
| Abstract: | The characteristics that distinguish most developing countries, compared to large industrialized countries, include: greater exposure to supply shocks in general and trade volatility in particular, procyclicality of both domestic fiscal policy and international finance, lower credibility with respect to both price stability and default risk, and other imperfect institutions. These characteristics warrant appropriate models. Models of dynamic inconsistency in monetary policy and the need for central bank independence and commitment to nominal targets apply even more strongly to developing countries. But because most developing countries are price-takers on world markets, the small open economy model, with nontraded goods, is often more useful than the two-country two-good model. Contractionary effects of devaluation are also far more important for developing countries, particularly the balance sheet effects that arise from currency mismatch. The exchange rate was the favored nominal anchor for monetary policy in inflation stabilizations of the late 1980s and early 1990s. After the currency crises of 1994-2001, the conventional wisdom anointed Inflation Targeting as the preferred monetary regime in place of exchange rate targets. But events associated with the global crisis of 2007-09 have revealed limitations to the choice of CPI for the role of price index. The participation of emerging markets in global finance is a major reason why they have by now earned their own large body of research, but it also means that they remain highly prone to problems of asymmetric information, illiquidity, default risk, moral hazard and imperfect institutions. Many of the models designed to fit emerging market countries were built around such financial market imperfections; few economists thought this inappropriate. With the global crisis of 2007-09, the tables have turned: economists should now consider drawing on the models of emerging market crises to try to understand the unexpected imperfections and failures of advanced-country financial markets. |
| JEL: | E00 E50 F41 O16 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp11-003&r=mon |
| By: | Marco Airaudo; Luis-Felipe Zanna |
| Abstract: | In this paper we present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to changes in inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on particular characteristics of open economies, including the degree of trade openness and the degree of exchange rate pass-through into import prices. For instance, in our model, we find that a rule that responds to expected future inflation is more prone to induce endogenous cyclical and chaotic dynamics the more open the economy and the higher the degree of exchange rate pass-through. |
| Keywords: | Small Open Economy; Interest Rate Rules; Taylor Rules; Multiple Equilibria; Chaos; Endogenous Fluctuations |
| JEL: | E32 E52 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:171&r=mon |
| By: | Guillaume Rocheteau; Pierre-Olivier Weill |
| Abstract: | On November 14-15, 2008, the Federal Reserve Bank of Cleveland hosted a conference on “Liquidity in Frictional Asset Markets.” In this paper we review the literature on asset markets with trading frictions in both finance and monetary theory using a simple search-theoretic model, and we discuss the papers presented at the conference in the context of this literature. We will show the diversity of topics covered in this literature, e.g., the dynamics of housing and credit markets, the functioning of payment systems, optimal monetary policy and the cost of inflation, the role of banks, the effect of informational frictions on asset trading. |
| Keywords: | Liquidity (Economics) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1105&r=mon |
| By: | Gerberding, Christina; Gerke, Rafael; Hammermann, Felix |
| Abstract: | Recent research has shown that optimal monetary policy may display considerable price-level drift. Proponents of price-level targeting have argued that the costs of eliminating the price-level drift may be reduced if the central bank responds flexibly by returning the price level only gradually to the target path (Gaspar et al., 2010). We revisit this argument in two variants of the New Keynesian model. We show that in a two-sector version of the model which allows for changes in relative prices across sectors, the costs of stabilisation under price-level targeting remain much higher than under inflation targeting for all policy-relevant horizons. Our conclusion is that extending the policy horizon is not a panacea to reduce the costs of eliminating pricelevel drift. -- |
| Keywords: | price-level targeting,optimal monetary policy,commitment |
| JEL: | E58 E42 E31 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201023&r=mon |
| By: | Mária Vojtková (University of Economics in Bratislava, Faculty of National Economy, Department of Banking and International Finance) |
| Abstract: | In the study we focus on theoretical and practical aspects of the role of the U.S. dollar in current international monetary system. We shortly describe the historical evolution of monetary system when it comes to the dollar position in it. Subsequently, we assess current status of the U.S. dollar in financial markets and its share on international foreign exchange reserves. In the application part, we examine how changes in the U.S. dollar exchange rate affect countries operating in the pegged exchange regime. At the same time, we focus on the problem of current account deficit of the U.S. balance of payments and its relationship to the export-oriented countries pegged to the U.S. dollar. |
| Keywords: | Bretton-Wood monetary system, U.S. dollar, pegged exchange regime, fixed exchange regime, balance of payment, terms of trade |
| JEL: | E42 E52 F30 F33 |
| Date: | 2011–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:brt:wpaper:002&r=mon |
| By: | Hasan, Zubair |
| Abstract: | This paper deals with familiar facts in monetary economics from an unfamiliar angle. It argues that it is not factual to regard the legal tender money and bank credit as of different genus: they work in tandem to the same ends in an economy, conventional or Islamic. Also, it does not matter what serves as money – solid gold or flimsy paper – for keeping its value stable; only the blind would argue that staff is indispensable for walking. Money is just an instrument: it was never nor can ever be classified into Islamic and non-Islamic. What it does – good or bad – depends on how we use it. Money does not generate crises; its mismanagement does. It follows that the refuge the world is searching today from recurring financial crises does not lie in money substance: history testifies that national economies could not remain turmoil-free during the centuries of the yellow metal sway over the monetary scene. The paper concludes that it is the human factor that has been the source of good or evil for mankind including money matters. And the quality of human factor true religion can alone improve: morality without faith is rudderless. |
| Keywords: | Key words: Monetary policies; Gold standard; managed currency; Islamic banking; Central banks |
| JEL: | E62 E42 E58 B50 B25 |
| Date: | 2011–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28366&r=mon |
| By: | Ibrahim Elbadawi; Raimundo Soto Author-X-Name-First: Raimundo |
| Abstract: | This paper asks the question as to whether the choice of the exchange rate regime matters for post-conflict economic recovery and macro stabilization. Though an important aspect of the macroeconomic agenda for post-conflict, it has however, been largely ignored by the literature. We identify three main exchange rate regimes (fixed, managed floating and free float) and estimate their marginal contributions to post-conflict economic recovery and macro stabilization in the context of fully specified models of four pivotal macroeconomic variables: per capita GDP and export growth, the demand for money balances and inflation. The paper estimates extended versions of these models in a panel over 1970-2008 covering 132 countries, including the 38 post-conflict countries and 94 peaceful ones as a control group. The evidence suggests that the managed floating regime appears to have an edge on some critical areas of economic performance for post-conflict reconstruction. |
| Keywords: | Monetary Policy, Civil Wars, Transition, Economic Growth. |
| JEL: | E52 O43 N40 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:392&r=mon |
| By: | Authors: Warren B. Hrung; Jason S. Seligman |
| Abstract: | Several programs have been introduced by U.S. fiscal and monetary authorities in response to the financial crisis. We examine the responses involving Treasury debt—the Term Securities Lending Facility (TSLF), the Supplemental Financing Program, increases in Treasury issuance, and open market operations—and their impacts on the overnight Treasury general collateral repo rate, a key money market rate. Our contribution is to consider each policy in light of the others, both to help guide policy responses to future crises and to emphasize policy interactions. Only the TSLF was designed to directly address stresses in short-term money markets by temporarily changing the supply of Treasury collateral in the marketplace. We find that the TSLF is uniquely effective relative to other policies and that, while changes in Treasury collateral do affect repo rates, the impacts are not equivalent across sources of Treasury collateral. |
| Keywords: | Treasury bonds ; Repurchase agreements ; Money market ; Open market operations |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:481&r=mon |
| By: | Christopher J. Erceg; Jesper Lindé |
| Abstract: | This paper investigates the impact of the asymmetric shocks within a currency union in a framework that takes account of the zero bound constraint on policy rates, and also allows for constraints on fiscal policy. In this environment, we document that the usual optimal currency argument showing that the effects of shocks are mitigated to the extent that they are common across member states can be reversed. Countries can be worse off when their neighbors experience similar shocks, including policy-driven reductions in government spending. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1012&r=mon |
| By: | Alexandre Chailloux (IMF); Franziska Ohnsorge (EBRD); David Vavra (OGResearch) |
| Abstract: | Euroisation in Serbia is rooted in a long history of macroeconomic instability. Extreme inflation volatility has undermined trust in the dinar and discouraged dinar savings. At the same time, an abundant supply of foreign capital inflows has provided easy access to foreign currency lending at low interest rates in an environment of perceived exchange rate stability – a perception reinforced by the choice of exchange rate regime. As a result, both the asset and the liability side of banks’ balance sheets, and even those of the non-bank sector, is heavily foreign currency-denominated. This paper documents the forces that promote euroisation in Serbia. The paper argues that, in the wake of the global crisis, a window of opportunity has emerged that could foster a process of de-euroisation. The lack of foreign funding and recent exchange rate volatility has tilted borrower incentives towards local currency borrowing. If disinflationary macroeconomic policies gain credibility, with the possible support of regulatory options, euroisation could drop sharply. |
| JEL: | O1 P2 P5 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ebd:wpaper:120&r=mon |
| By: | Pennings, Steven (Department of Economics); Ramayandi, Arief (Asian Development Bank); Tang, Hsiao Chink (Asian Development Bank) |
| Abstract: | This paper estimates the impact of monetary policy on exchange rates and stock markets for eight small open economies: Australia, Canada, the Republic of Korea, New Zealand, the United Kingdom, Indonesia, Malaysia and Thailand. On average across these countries, a one percentage point surprise rise in official interest rates leads to a 1% appreciation of the exchange rate and a 1% fall in stock market indices. The effect on exchange rates is notably weaker in the non-Organization for Economic Cooperation and Development (OECD) countries with a managed float. For the OECD countries, there is no robust evidence of a change in the effect of policy during the global financial crisis. For the non-OECD countries, there is some evidence of a stronger effect of policy on stock markets during the crisis, although further research is needed to investigate whether this is a result of measurement issues. |
| Keywords: | Monetary policy effectiveness; exchange rate; stock prices; crisis; Asian economies |
| JEL: | E44 E52 G14 |
| Date: | 2011–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0072&r=mon |
| By: | Charles W. Calomiris; Joseph R. Mason; David C. Wheelock |
| Abstract: | In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy. Using microeconomic data to gauge the fundamental reserve demands of Fed member banks, we find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier. To the extent that increases in reserve demand occurred from 1935 to 1937, they reflected fundamental changes in the determinants of reserve demand and not changes in reserve requirements.> |
| Keywords: | Money supply ; Bank reserves ; Recessions |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-002&r=mon |
| By: | Matus Senaj (National Bank of Slovakia, Research Departmen); Milan Vyskrabka (National Bank of Slovakia, Monetary Policy Department); Juraj Zeman (National Bank of Slovakia, Research Department) |
| Abstract: | In this paper, the Bayesian method together with the calibration approach is used to parameterise the DSGE model. We present a medium-scale two-country model. Parameters controlling the steady state of the model are calibrated in order to match the ratios of a few selected variables to their empirical counterparts. The remaining parameters are estimated via Bayesian method. Since Slovakia has been a euro area member country for only two years, the model allows switching from an autonomous monetary policy regime to a monetary union regime. This feature enables us to parameterise the model in the case of independent monetary policy and consequently to simulate the impacts of various structural shocks on the Slovak economy as a part of the monetary union. At the end of the paper, we present the impulse-response functions of the model to selected structural shocks. |
| Keywords: | two-country model, Bayesian methods |
| JEL: | C11 C51 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:svk:wpaper:1010&r=mon |
| By: | Lian An; Jian Wang |
| Abstract: | We estimate exchange rate pass-through (PT) into import, producer and consumer price indexes for nine OECD countries, using a method proposed by Uhlig (2005). In a Vector Autoregression (VAR) model, we identify the exchange rate shock by imposing restrictions on the signs of impulse responses for a small subset of variables. These restrictions are consistent with a large class of theoretical models and previous empirical findings. We find that exchange rate PT is less than one at both short and long horizons. Among three price indexes, exchange rate PT is greatest for import price index and smallest for consumer price index. In addition, greater exchange rate PT is found in an economy which has a smaller size, higher import share, more persistent exchange rate, more volatile monetary policy, higher inflation rate, and less volatile aggregate demand. |
| Keywords: | Vector autoregression ; Price indexes ; Consumer price indexes |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:70&r=mon |
| By: | Marco Airaudo; Luis-Felipe Zanna |
| Abstract: | Empirical evidence suggests that goods are highly heterogeneous with respect to the degree of price rigidity. We develop a DSGE model featuring heterogeneous nominal rigidities across two sectors to study the equilibrium determinacy and stability under adaptive learning for interest rate rules that respond to inflation measures differing in their degree of price stickiness. We find that rules responding to headline inflation measures that assign a positive weight to the inflation of the sector with low price stickiness are more prone to generate macroeconomic instability than rules that respond exclusively to the inflation of the sector with high price stickiness. By this we mean that they are more prone to induce non-learnable fundamental-driven equilibria, learnable self-fulfilling expectations equilibria, and equilibria where fluctuations are unbounded. We discuss how our results depend on the elasticity of substitution across goods, the degree of heterogeneity in price rigidity, as well as on the timing of the rule. |
| Keywords: | Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy; Multiple Sectors |
| JEL: | C62 D83 E32 E52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:170&r=mon |
| By: | Martin Brown (Swiss National Bank, Tilburg University); Ralph De Haas (EBRD) |
| Abstract: | Based on survey data from 193 banks in 20 countries we provide the first bank-level analysis of the determinants of foreign currency (FX) lending in emerging Europe. We find that FX lending by all banks, regardless of their ownership structure, is strongly determined by the macroeconomic environment. We find no evidence of foreign banks ‘pushing’ FX loans indiscriminately because of easier access to wholesale funding in foreign currency. In fact, while foreign banks do lend more in FX to corporate clients, they do not do so to retail clients. We also find that after a take-over by a foreign bank, the acquired bank does not increase its FX lending any faster than a bank which remains in domestic hands. |
| JEL: | O1 P2 P5 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ebd:wpaper:122&r=mon |
| By: | Daniel Laskar (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | According to the literature, in an expectations-augmented Phillips curve model, opacity is always preferred to transparency on central bank forecasts. By modelling the private sector's behavior explicitly, we show that transparency reduces the shocks. Consequently, transparency can be preferred. |
| Keywords: | central bank, transparency, Phillips curve, shocks. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00560261&r=mon |
| By: | Ronald Heijmans; Richard Heuver; Daniëlle Walraven |
| Abstract: | We investigate the euro unsecured interbank money market during the current financial crisis. To identify the loans traded in this market and settled in TARGET2, we extend the algorithm developed by Furfine (1999) and adapt it to the European interbank loan market with maturity up to one year. This paper solves the problem of systematic errors which occur when you only look at overnight loans (as the Furfine algorithm does). These errors especially occur in times of (very) low interest rates. The algorithm allows us to track the actual interest rates rather than quoted interest rates on liquidity trading by participants of the Dutch part of the euro large value payment system (TARGET2-NL). The algorithm enables us to constitute the Dutch part of the EONIA, making it possible to compare the interest rates developments in the Dutch market to the European average ones. Based on the new algorithm, we develop a policy tool to monitor the interbank money market, both at macro level (whole market) and individual bank level (Money Market Monitoring Dashboard). |
| Keywords: | payment systems; financial stability; experiment; decision making |
| JEL: | E42 E44 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:276&r=mon |
| By: | Cem Cebi |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1104&r=mon |
| By: | Jonung, Lars (School of Economics and Management); Lindén, Staffan (Directorate-General Economic and Financial Affairs) |
| Abstract: | The standard way today to obtain measures of inflationary expectations is to use questionnaires to ask a representative group of respondents about their beliefs of the future rate of inflation during the coming 12 months. This type of data on inflationary expectations as well as on inflationary perceptions has been collected in a unified way on an EU-wide basis for several years. By now, probably the largest database on inflationary expectations has been built up in this way. We use this database to explore the forecasting horizons implicitly used by the respondents to questions about the expected rate of inflation during the coming 12 months. The analysis covers all EU member states that have relevant data. We examine the forecast errors, the mean error and the RMSEs, to study if the forecast horizon is truly 12 months as implied by the questionnaires. Our working hypothesis is that the forecast error has a U-shaped pattern, reaching its lowest value on the 12-month horizon. We also study the "backcast" error for inflationary perceptions in a similar way. Our exploratory study reveals large differences across countries. For most countries, we get the expected U-shaped outcome for the forecast errors. The horizon implicitly used by respondents when answering the questions is not related to the explicit time horizon of the questionnaire. On average respondents use the same horizon when answering both questions, e.g. when respondents use a 12-month forecast horizon answering to the question on future inflation, they use the same forward looking horizon when answering to the question on past inflation. We suggest possible explanations for the differences observed. |
| Keywords: | Inflationary expectations; inflationary perceptions; forecasting error; forecasting horizon; EU; euro |
| JEL: | C33 E31 E32 E37 E58 |
| Date: | 2011–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2011_005&r=mon |
| By: | Seppo Honkapohja; Kaushik Mitra; George W. Evans |
| Abstract: | These notes try to clarify some discussions on the formulation of individual intertemporal behavior under adaptive learning in representative agent models. First, we discuss two suggested approaches and related issues in the context of a simple consumption-saving model. Second, we show that the analysis of learning in the NewKeynesian monetary policy model based on "Euler equations" provides a consistent and valid approach. |
| Keywords: | Euler equation, NewKeynesian, Adaptive learning |
| JEL: | E4 E5 E6 E52 E58 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1102&r=mon |
| By: | Magazzino, Cosimo |
| Abstract: | The aim of this article is to assess the empirical evidence of the nexus between public expenditure and inflation for the Mediterranean countries during the period 1970-2009, using a time-series approach. After a brief introduction, a concise survey of the economic literature on this issue is shown, before discussing the data and introducing some econometric techniques. Stationarity tests reveal, generally, that public expenditure/GDP ratio is a I(1) process, while prices index is a I(2) process. Moreover, we find a long-run relationship between the growth of public expenditure and inflation only for Portugal. Furthermore, Granger causality tests results show a short-run evidence of a directional flow from expenditure to inflation for Cyprus, Malta and Spain; of a bidirectional flow for Italy; and from inflation to public expenditure for France. Some notes on the policy implications of our empirical results conclude the paper. |
| Keywords: | Public expenditure; inflation; time-series; unit root; cointegration; causality; Mediterranean countries. |
| JEL: | C32 E62 H50 E31 N44 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28493&r=mon |
| By: | Diana Hancock; Wayne Passmore |
| Abstract: | We employ empirical pricing models for mortgage-backed security (MBS) yields and for mortgage rates to measure deviations from normal market functioning in order to assess how the Federal Reserve MBS purchase program--a 16 month program announced on November 25, 2008 and completed on March 31, 2010--affected risk premiums that were embedded in mortgage and swap markets. Our pricing models suggest that the announcement of the program, which signaled strong and credible government backing for mortgage markets in particular and for the financial system more generally, reduced mortgage rates by about 85 basis points between November 25 and December 31, 2008, even though no MBS had (yet) been purchased by the Federal Reserve ; Once the Federal Reserve's MBS program started purchasing MBS, we estimate that the abnormal risk premiums embedded mortgage rates decreased roughly 50 basis points. However, observed mortgage rates declined only slightly because of generally rising interest rates. ; After May 27, 2009 fairly normal pricing conditions existed in U.S. primary and secondary mortgage markets; that is, the relationship between mortgage rates and its determinants was similar to that observed prior to the financial crisis. After the end of the Federal Reserve's MBS purchase program on March 31, 2010, mortgage rates and interest rates more generally were significantly less than they had been at the beginning. ; In sum, we estimate that the Federal Reserve's MBS purchase program removed substantial risk premiums embedded in mortgage rates because of the financial crisis. The Federal Reserve also re-established a robust secondary mortgage market, which meant that the marginal mortgage borrower was funded by the capital markets and not directly by the banks during the financial crisis-had bank funding been the only source of funds, primary mortgage rates would have been much higher. ; Lastly, many observers have attributed part of the Federal Reserve's effect from purchasing MBS to portfolio rebalancing. We find that if portfolio rebalancing had a substantial effect, it may have had its greatest importance only after the Federal Reserve's purchases ended, but while the Federal Reserve held a substantial portion of the stock of outstanding MBS. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-01&r=mon |
| By: | Juan Pablo Painceira |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:rmf:dpaper:17&r=mon |