nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒04‒23
thirty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Robust monetary policy in a new Keynesian model with imperfect interest rate pass-through By Gerke, Rafael; Hammermann, Felix
  2. The Credit Channel and Monetary Transmission in Brazil and Chile: A Structural VAR Approach By Luis Catão;; Adrian Pagan
  3. The accuracy of a forecast targeting central bank By Falch, Nina Skrove; Nymoen, Ragnar
  4. Evidence on the variability of the monetary policy inertia for inflation-targeting countries By Benjamín García
  5. Welfare costs of inflation and the circulation of US currency abroad By Alessandro Calza; Andrea Zaghini
  6. Sovereign Default and the Stability of Inflation Targeting Regimes By Andreas Schabert; Sweder J.G. van Wijnbergen
  7. Averting Currency Crises: The Pros and Cons of Financial Openness By Gus, Garita; Chen, Zhou
  8. Monetary Policy after the Crisis: Some Issues Regarding Targets and Instruments By Rodrigo Vergara
  9. Heterodox Central Banking By Luis Felipe Céspedes; Roberto Chang; Javier García-Cicco
  10. Market-specific and Currency-specific Risk During the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London By Shin-ichi Fukuda
  11. A Monetary Theory with Non-Degenerate Distributions By Guido Menzio; Shouyong Shi; Hongfei Sun
  12. Anchors Away: How Fiscal Policy Can Undermine "Good" Monetary Policy By Eric Leeper
  13. The Financial Accelerator Under Learning and The Role of Monetary Policy By Rodrigo Caputo; Juan Pablo Medina; Claudio Soto.
  14. The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment By James D. Hamilton; Jing Cynthia Wu
  15. An Estimated (Closed Economy) Dynamic Stochastic General Equilibrium Model for the Philippines: Are There Credibility Gains from Committing to an Inflation Targeting Rule? By Majuca, Ruperto P.
  16. Cyclical risk aversion, precautionary saving and monetary policy By De Paoli, Bianca; Zabczyk, Pawel
  17. Price Level Targeting and Inflation Targeting: a Review By Sofía Bauducco; Rodrigo Caputo
  18. U.S. Intervention During the Bretton Woods Era: 1962-1973 By Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
  19. Propagation of Inflationary Shocks in Chile and an International Comparison of Progagation of Shocks to food and Energy Prices. By Michael Pedersen
  20. Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries By Juan Carlos Berganza; Carmen Broto
  21. Monetary Policy Under Financial Turbulence: an Overview By Luis Felipe Céspedes; Roberto Chang; Diego Saravia
  22. Fiscal Deficits, Debt, and Monetary Policy in a Liquidity Trap By Michael Devereux
  23. A global model of international yield curves: no-arbitrage term structure approach By Kaminska, Iryna; Meldrum, Andrew; Smith, James
  24. The Role of Central Banks after the Financial Crisis By José De Gregorio
  25. Forward premium puzzle and term structure of interest rates: the case of New Zealand By Carmen Gloria Silva
  26. Interest Rates and Inflation By Michael Coopersmith
  27. The Debate about the Revived Bretton-Woods Regime: A Survey and Extension of the Literature* By Stephen Hall; George S. Tavlas
  28. The changing international transmission of financial shocks: evidence from a classical time-varying FAVAR By Eickmeier, Sandra; Lemke, Wolfgang; Marcellino, Massimiliano
  29. Nowcasting inflation using high frequency data By Michele Modugno
  30. On the Quantitative Effects of Unconventional Monetary Policies By Javier García-Cicco

  1. By: Gerke, Rafael; Hammermann, Felix
    Abstract: We use robust control to study how a central bank in an economy with imperfect interest rate pass-through conducts monetary policy if it fears that its model could be misspecified. The effects of the central bank's concern for robustness can be summarised as follows. First, depending on the shock, robust optimal monetary policy under commitment responds either more cautiously or more aggressively. Second, such robustness comes at a cost: the central bank dampens volatility in the inflation rate preemptively, but accepts higher volatility in the output gap and the loan rate. Third, if the central bank faces uncertainty only in the IS equation or the loan rate equation, the robust policy shifts its concern for stabilisation away from inflation. --
    Keywords: optimal monetary policy,commitment,model uncertainty
    JEL: E44 E58 E32
    Date: 2011
  2. By: Luis Catão;; Adrian Pagan
    Abstract: We use an expectation-augmented SVAR representation of an open economy New Keynesian model to study monetary transmission in Brazil and Chile. The underlying structural model incorporates key structural features of Emerging Market economies, notably the role of a bank-credit channel. We find that interest rate changes have swifter effects on output and inflation in both countries compared to advanced economies and that exchange rate dynamics plays an important role in monetary transmission, as currency movements are highly responsive to changes in policy-controlled interest rates. We also find the typical size of credit shocks to have large effects on output and inflation in the two economies, being stronger in Chile where bank penetration is higher.
    Date: 2010–05
  3. By: Falch, Nina Skrove; Nymoen, Ragnar
    Abstract: This paper evaluates inflation forecasts made by Norges Bank which is recognized as a successful forecast targeting central bank. It is reasonable to expect that Norges Bank produces inflation forecasts that are on average better than other forecasts, both 'naïve' forecasts, and forecasts from econometric models outside the central bank. The authors find that the superiority of the Bank's forecast cannot be asserted, when compared with genuine ex-ante real time forecasts from an independent econometric model. The 1-step Monetary Policy Report forecasts are preferable to the 1-step forecasts from the outside model, but for the policy relevant horizons (4 to 9 quarters ahead), the forecasts from the outsider model are preferred with a wider margin. An explanation in terms of too high speed of adjustment to the inflation target is supported by the evidence. Norges Bank's forecasts are convincingly better than 'naïve' forecasts over the second half of our sample, but not over the whole sample, which includes a change in the mean of inflation. --
    Keywords: inflation forecasts,monetary policy,forecast comparison,forecast targeting central bank,econometric models
    JEL: C32 C53 E37 E44 E47 E52 E58 E65
    Date: 2011
  4. By: Benjamín García
    Abstract: In this paper we develop an alternative Taylor rule where the level of inertia depends on the gap between the actual and desired interest rates. This rule is estimated for six inflation-targeting countries, namely Chile, Colombia, Mexico, New Zealand, Peru, and South Korea. Evidence of a varying inertia is found for all the tested countries. While for the sample with stable interest rate movements this rule exhibits a fit similar to a classic Taylor rule, it provides a better fit for the post financial crisis sub-sample.
    Date: 2010–09
  5. By: Alessandro Calza (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Andrea Zaghini (Banca d’Italia, Research Department, Via Nazionale 91, I-00184 Rome, Italy.)
    Abstract: Empirical studies of the "shoe-leather" costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using monetary data adjusted for US dollars abroad, we show that the failure to control for currency held by non residents may lead to significantly overestimating the shoe-leather costs for the domestic economy. In particular, our estimates of shoe-leather costs are minimized for a positive but moderate value of the inflation rate, thereby justifying a deviation from the Friedman rule in favour of the Fed's current policy. JEL Classification: F16, J31.
    Keywords: Wage Structure, Inter-industry Wage Differentials, International Trade, Matched Employer-employee Data.
    Date: 2011–04
  6. By: Andreas Schabert (TU Dortmund University , University of Amsterdam); Sweder J.G. van Wijnbergen (University of Amsterdam)
    Abstract: We analyse the impact of interactions between monetary and fiscal policy on macroeconomic stability. We find that in the presence of sovereign default beliefs a monetary policy, which aims to stabilize inflation through an active interest rate policy, will destabilize the economy if the feedback from debt surprises back to the primary surplus is too weak. This result, which relies on endogenous changes in the default premium, is at odds with the results in an environment without default risk, where an active monetary policy guarantees macroeconomic stability. The results are highly relevant for the design of fiscal and monetary policy in emerging markets where sovereign credibility is not well established. Recent debt developments in Western Europe and in the US suggest these results might become relevant for more mature financial markets too.
    Keywords: Inflation targeting; fiscal-monetary policy interactions; sovereign default risk; foreign debt
    JEL: E52 E63 F41
    Date: 2011–04–12
  7. By: Gus, Garita; Chen, Zhou
    Abstract: We identify the benefits and costs of financial openness in terms of currency crises based on a novel quantification of the systemic impact of currency (financial) crises. We find that systemic currency crises mainly exist regionally, and that financial openness helps diminish the probability of a currency crisis after controlling for their systemic impact. To clarify further the effect of financial openness, we decompose it into the various types of capital inflows. We find that the reduction of the probability of a currency crisis depends on the type of capital and on the region. Finally yet importantly, we find that monetary policy geared towards price stability, through a flexible inflation target that takes into account systemic impact, reduces the probability of a currency crisis.
    Keywords: Exchange market pressure; systemic risk; capital flows
    JEL: F42 E52 F41 F31 F36
    Date: 2011–04–08
  8. By: Rodrigo Vergara
    Date: 2010–10
  9. By: Luis Felipe Céspedes; Roberto Chang; Javier García-Cicco
    Abstract: This paper discusses theoretical and practical aspects of the various unconventional central bank policies during the 2008-2009 crisis. In terms of theory, we first discuss the role of credibility in the attainment of inflationary goals once the nominal interest rate is at a lower bound, paying particular attention to the role of the central bank’s balance sheet. Additionally, we present a model which has at its core a financial imperfection that highlights the role of bank’s capital as well as the relevance of alternative credit policies that can be used to deal with financial distress. On the other hand, we review evidence regarding the recent experience. We discuss the timing and type of observed unconventional policies. We then explore alternative measures to assess the stance of monetary policy in a situation when the policy rate has reached its lower bound. Finally, we present some descriptive evidence on the effect of the applied policies on the shape of the yield curve and the lending-deposit spread.
    Date: 2010–07
  10. By: Shin-ichi Fukuda
    Abstract: This paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets.
    JEL: E44 F32 F36
    Date: 2011–04
  11. By: Guido Menzio (Department of Economics, University of Pennsylvania); Shouyong Shi (Department of Economics, University of Toronto); Hongfei Sun (Department of Economics, Queens University)
    Abstract: Dispersion of money balances among individuals is the basis for a range of policies but it has been abstracted from in monetary theory for tractability reasons. In this paper, we fill in this gap by constructing a tractable search model of money with a non-degenerate distribution of money holdings. We assume search to be directed in the sense that buyers know the terms of trade before visiting particular sellers. Directed search makes the monetary steady state block recursive in the sense that individuals’ policy functions, value functions and the market tightness function are all independent of the distribution of individuals over money balances, although the distribution affects the aggregate activity by itself. Block recursivity enables us to characterize the equilibrium analytically. By adapting lattice-theoretic techniques, we characterize individuals’ policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists. Moreover, we provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate and analyze the properties of this distribution.
    Keywords: Money; Distribution; Search; Lattice-Theoretic
    JEL: E00 E4 C6
    Date: 2011–03–11
  12. By: Eric Leeper
    Abstract: Slow moving demographics are aging populations around the world and pushing many countries into an extended period of heightened fiscal stress. In some countries, taxes alone cannot or likely will not fully fund projected pension and health care expenditures. If economic agents place sufficient probability on the economy hitting its ”fiscal limit” at some point in the future, after which further tax revenues are not forthcoming, it may no longer be possible for “good” monetary policy—behavior that obeys the Taylor principle—to control inflation or anchor inflation expectations. In the period leading up to the fiscal limit, the more aggressively that monetary policy leans against inflationary winds, the more expected inflation becomes unhinged from the inflation target. Problems confronting monetary policy are exacerbated when policy institutions leave fiscal objectives and targets unspecified and, therefore, fiscal expectations unanchored. In light of this theory, the paper contrasts monetary-fiscal policy frameworks in the United States and Chile.
    Date: 2010–05
  13. By: Rodrigo Caputo; Juan Pablo Medina; Claudio Soto.
    Abstract: Financial frictions have been shown to play an important role amplifying business cycles fluctuations. In this paper we show that the financial accelerator mechanism, analyzed by Bernanke, Gertler and Gilrchrist (1999), combined with adaptive learning can amplify business cycle fluctuations significantly as the balance sheet channel interacts with the presence of endogenous asset price “bubbles”. These large business cycle fluctuations are amplified in a non-linear way by the size of the shocks and by the degree of financial fragility in the economy determined by its leverage. Our preliminary results indicate that even in the presence of endogenous bubbles, responding aggressively to inflation reduces output and inflation volatility. If the central bank adjusts its policy instrument in response to asset price fluctuations, it may reduce output volatility and even inflation volatility in the short run. However, that monetary policy conduct leads to a surge in inflation several periods after the shocks. A policy that aggressively responds to changes in asset prices may marginally reduce output volatility with respect to a policy that reacts aggressively to inflation, but also at the cost of generating inflationary pressures.
    Date: 2010–09
  14. By: James D. Hamilton; Jing Cynthia Wu
    Abstract: This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level, slope and curvature term-structure risk. We find these Treasury factors historically were quite helpful for predicting both yields and excess returns over 1990-2007. The historical correlations are consistent with the claim that if in December of 2006, the Fed were to have sold off all its Treasury holdings of less than one-year maturity (about $400 billion) and use the proceeds to retire Treasury debt from the long end, this might have resulted in a 14-basis-point drop in the 10-year rate and an 11-basis-point increase in the 6-month rate. We also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009. Our estimates imply that at the zero lower bound, such a maturity swap would have the same effects as buying $400 billion in long-term maturities outright with newly created reserves, and could reduce the 10-year rate by 13 basis points without raising short-term yields.
    JEL: E43 E52 G12 H63
    Date: 2011–04
  15. By: Majuca, Ruperto P.
    Abstract: <p>We use Bayesian methods to estimate a medium-scale closed economy dynamic stochastic general equilibrium (DSGE) model for the Philippine economy. Bayesian model selection techniques indicate that among the frictions introduced in the model, the investment adjustment costs, habit formation, and the price and wage rigidity features are important in capturing the dynamics of the data, while the variable capital utilization, fixed costs, and the price and wage indexation features are not important.</p> <p>We find that the Philippine macroeconomy is characterized by more instability than the U.S. economy. An analysis of the several subperiods in Philippine economic history also reveals some quantitative evidence that risk aversion increases during crisis periods. Also, we find that the inflation targeting (IT) era is associated with a more stable economy: the standard deviations of the technology shock, the risk-premium shock, and the investment-specific technology shock have significantly lower variability than the pre-IT era, with the last two shocks being reduced by a factor of 5.6 and 2.3, respectively. The IT era is also associated with lower risk aversion. We also find that the adoption of inflation targeting is associated with interest rate smoothing in the monetary reaction function. With a more inertial reaction function, the Bangko Sentral ng Pilipinas (BSP) had achieved greater credibility and consequently, it was able to manage the expectations of forward-looking economic actors, and thereby achieved greater responses of the goal variables to the policy rates, even if the size of interest rates changes are smaller.</p> <p>However, we also find that BSP`s conduct of monetary policy appears to be more procyclical than countercyclical, particularly during the Asian financial crisis, and the recent global financial and economic crisis.</p>
    Keywords: new Keynesian model, Bayesian estimation
    Date: 2011
  16. By: De Paoli, Bianca (Bank of England); Zabczyk, Pawel (Bank of England)
    Abstract: This paper analyses the conduct of monetary policy in an environment in which cyclical swings in risk appetite affect households’ propensity to save. It uses a New Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive following positive shocks.
    Keywords: Precautionary saving; monetary policy; cyclical risk aversion; macro-finance; DSGE models.
    JEL: E32 G12
    Date: 2011–04–12
  17. By: Sofía Bauducco; Rodrigo Caputo
    Abstract: In this paper we discuss the arguments for and against the adoption of price-level targeting. We review recent theoretical contributions, and illustrate the main differences between price-level targeting and inflation targeting in a simple New Keynesian model. We conclude that, contrary to conventional wisdom, price-level targeting can, in some circumstances, deliver better outcomes than inflation targeting. Its main advantage lies on the fact that it acts as a commitment device when the Central Bank is unable to commit to its future actions. However, even in the circumstances under which price-level targeting performs better, there are three caveats to be considered. First, a higher proportion of backward-looking price setters reduces the effectiveness of price-level targeting, because it weakens the expectational channel through which price-level targeting operates. Second, communicating a price-level target may be a difficult task for the Central Bank. Finally, price-level targeting itself is not immune to considerations of time-inconsistency.
    Date: 2010–12
  18. By: Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
    Abstract: By the early 1960s, outstanding U.S. dollar liabilities began to exceed the U.S. gold stock, suggesting that the United States could not completely maintain its pledge to convert dollars into gold at the official price. This raised uncertainty about the Bretton Woods parity grid, and speculation seemed to grow. In response, the Federal Reserve instituted a series of swap lines to provide central banks with cover for unwanted, but temporary accumulations of dollars and to provide foreign central banks with dollar funds to finance their own interventions. The Treasury also began intervening in the market. The operations often forestalled gold losses, but in so doing, delayed the need to solve Bretton Woods’ fundamental underlying problems. In addition, the institutional arrangements forged between the Federal Reserve and the U.S. Treasury raised important questions bearing on Federal Reserve independence.
    JEL: E0 N1
    Date: 2011–04
  19. By: Michael Pedersen
    Abstract: When a specific price is affected by a shock, this may spread to other prices and thus affect the overall inflation rate by more than the initial effect. This phenomenon is known as propagation of inflationary shocks and is the subject investigated in the present paper. It is argued that structural VAR models, with an imposed Cholesky decomposition, are suitable for the propagation analysis when the data vector includes the component affected by the initial shock and the rest of the CPI basket. The empirical analysis with annual Chilean inflation rates suggests that the propagation effects have generally diminished after the implementation of the inflation-targeting regime in September 1999. Propagation of shocks to the division including food prices, however, has increased, albeit with a delay of four months. An analysis of propagation of energy and food price shocks in seven industrialized and four Latin-American countries suggests that the effects in Chile are amongst the largest and, in the case of energy price shocks, with the longest duration.
    Date: 2010–04
  20. By: Juan Carlos Berganza (Banco de España); Carmen Broto (Banco de España)
    Abstract: Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of "strict IT", which imply a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with FX interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, FX interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers.
    Keywords: inflation targeting, exchange rate volatility, foreign exchange interventions, emerging economies
    JEL: E31 E42 E52 E58 F31
    Date: 2011–04
  21. By: Luis Felipe Céspedes; Roberto Chang; Diego Saravia
    Abstract: The last financial crisis revealed that financial imperfections and institutions play a more important role than the literature has assigned them for a long time, and it is possible to ascertain strongly that in the coming years macroeconomic research will be dominated by the study of the relationships between financial frictions, financial systems and aggregate fluctuations. This paper conducts a selective review of existing literature on monetary policy and its interaction with financial variables. It then examines frontier research presented at the XIII Annual Conference of the Central Bank of Chile, which gathers new theoretical results and empirical evidence applicable both in developed countries and in the Chilean economy
    Date: 2010–09
  22. By: Michael Devereux
    Abstract: The macroeconomic response to the economic crisis has revived old debates about the usefulness of monetary and fiscal policy in fighting recessions. Without the ability to further lower interest rates, policy authorities in many countries have turned to expansionary fiscal policies. Recent literature argues that government spending may be very effective in such environments. But a critical element of the stimulus packages in all countries was the use of deficit financing and tax reductions. This paper explores the role of government debt and deficits in an economy constrained by the zero bound on nominal interest rates. Given that the liquidity trap is generated by a large increase in the desire to save on the part of the private sector, the wealth effects of government deficits can provide a critical macroeconomic response to this. Government spending financed by deficits may be far more expansionary than that financed by tax increases in such an environment. In a liquidity trap, tax cuts may be much more effective than during normal times. Finally, monetary policies aimed at directly increasing monetary aggregates may be effective, even if interest rates are unchanged.
    Date: 2010–05
  23. By: Kaminska, Iryna (Bank of England); Meldrum, Andrew (University of Cambridge); Smith, James (Bank of England)
    Abstract: This paper extends a popular no-arbitrage affine term structure model to model jointly bond markets and exchange rates across the United Kingdom, United States and euro area. Using a monthly data set of forward rates from 1992, we first demonstrate that two global factors account for a significant proportion in the variation of bond yields across countries. We also show that, in order to explain country-specific movements in yield curves, local factors are required. Although we implement a very general factor structure, we find that our global factors are related to global inflation and global economic activity, while local factors are closely linked to monetary policy rates. In this respect our results are similar to previous work. But an important advantage of our joint international model is that we are able to decompose interest rates into risk-free rates and risk premia. Additionally, we are able to study the implications for exchange rates. We show that while differences in risk-free rates matter, to a large extent changes in the exchange rate are determined by time-varying exchange rate risk premia.
    Keywords: Term structure models; exchange rates.
    JEL: C33 E43 F31
    Date: 2011–04–12
  24. By: José De Gregorio
    Date: 2010–06
  25. By: Carmen Gloria Silva
    Abstract: Using monthly data for the United States dollar – New Zealand dollar exchange rate, this paper revisits the forward premium puzzle and applies a discrete no-arbitrage affine model of the term structure of interest rates to obtain historical estimates of the time-varying foreign exchange risk premium. The two-factor model is estimated via maximum likelihood for the period 1995-2006. The results of this study demonstrate that the modeled risk premium satisfies the required Fama’s conditions, and its inclusion in an extended GARCH(1,1) model is significant in explaining both the mean and the volatility of the exchange rate. However, consistently with the extant literature, the estimated risk premium does not preclude the presence of the forward premium anomaly. Lastly, out-of-sample forecasts of the exchange rate for different specifications and time periods reveal that predictions of the proposed model for the exchange rate are far from the accuracy of a simple random walk specification.
    Date: 2010–04
  26. By: Michael Coopersmith
    Abstract: A relation between interest rates and inflation is presented using a two component economic model and a simple general principle. Preliminary results indicate a remarkable similarity to classical economic theories, in particular that of Wicksell.
    Date: 2011–04
  27. By: Stephen Hall; George S. Tavlas
    Abstract: This paper surveys the literature dealing with the thesis put forward by Dooley, Folkerts-Landau and Garber (DFG) that the present constellation of global exchange-rate arrangements constitutes a revived Bretton-Woods regime. DFG also argue that the revived regime will be sustainable, despite its large global imbalances. While much of the literature generated by DFG’s thesis points to specific differences between the earlier regime and revived regime that render the latter unstable, we argue that an underlying similarity between the two regimes renders the revived regime unstable. Specifically, to the extent that the present system constitutes a revived Bretton-Woods system, it is vulnerable to the same set of destabilizing forces -- including asset price bubbles and global financial crises -- that marked the latter years of the earlier regime, leading to its breakdown. We extend the Markov switching model to examine the relation between global liquidity and commodity prices. We find evidence of commodity-price bubbles in both the latter stages of the earlier Bretton-Woods regime and the revived regime.
    Keywords: Bretton-Woods regime, international liquidity, price bubbles, Markov switching model
    JEL: C22 F33 N10
    Date: 2011–03
  28. By: Eickmeier, Sandra; Lemke, Wolfgang; Marcellino, Massimiliano
    Abstract: 1971-2009. Financial shocks are defined as unexpected changes of a financial conditions index (FCI), recently developed by Hatzius et al. (2010), for the US. We use a time-varying factor-augmented VAR to model the FCI jointly with a large set of macroeconomic, financial and trade variables for nine major advanced countries. The main findings are as follows. First, positive US financial shocks have a considerable positive impact on growth in the nine countries, and vice versa for negative shocks. Second, the transmission to GDP growth in European countries has increased gradually since the 1980s, consistent with financial globalization. A more marked increase is detected in the early 1980s in the US itself, consistent with changes in the conduct of monetary policy. Third, the size of US financial shocks varies strongly over time, with the `global financial crisis shock' being very large by historical standards and explaining 30 percent of the variation in GDP growth on average over all countries in 2008-2009, compared to a little less than 10 percent over the 1971-2007 period. Finally, large collapses in house prices, exports and TFP are the main drivers of the strong worldwide propagation of US financial shocks during the crisis. --
    Keywords: international business cycles,international transmission channels,financial markets,globalization,financial conditions index,global financial crisis,timevarying FAVAR
    JEL: F1 F4 F15 C3 C5
    Date: 2011
  29. By: Michele Modugno (European Central Bank, DG-R/EMO, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
    Abstract: This paper proposes a methodology to nowcast and forecast inflation using data with sampling frequency higher than monthly. The nowcasting literature has been focused on GDP, typically using monthly indicators in order to produce an accurate estimate for the current and next quarter. This paper exploits data with weekly and daily frequency in order to produce more accurate estimates of inflation for the current and followings months. In particular, this paper uses the Weekly Oil Bulletin Price Statistics for the euro area, the Weekly Retail Gasoline and Diesel Prices for the US and daily World Market Prices of Raw Materials. The data are modeled as a trading day frequency factor model with missing observations in a state space representation. For the estimation we adopt the methodology exposed in Banbura and Modugno (2010). In contrast to other existing approaches, the methodology used in this paper has the advantage of modeling all data within a unified single framework that, nevertheless, allows one to produce forecasts of all variables involved. This offers the advantage of disentangling a model-based measure of ”news” from each data release and subsequently to assess its impact on the forecast revision. The paper provides an illustrative example of this procedure. Overall, the results show that these data improve forecast accuracy over models that exploit data available only at monthly frequency for both countries. JEL Classification: C53, E31, E37.
    Keywords: Factor Models, Forecasting, Inflation, Mixed Frequencies.
    Date: 2011–04
  30. By: Javier García-Cicco
    Abstract: I use a unique micro price data to estimate the pass-through from commodity prices to retail prices in several countries. The paper presents and develops a simple methodology to estimate the pass-through from the prices of different commodities into various sectors across several countries. This is the first exercise of this type. As expected, countries respond differently to the different shocks; and sectors respond differently across countries and commodities. A third of all the explained variation is driven by sectoral characteristics, which is a dimension mostly disregarded by the literature.
    Date: 2010–04

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