nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒08‒09
27 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Inflation Forecast Contracts By Hans Gersbach; Volker Hahn
  2. Dual-Track Interest Rates and the Conduct of Monetary Policy in China By Dong He; Honglin Wang
  3. Will the SARB always succeed in fighting inflation with contractionary policy? By Guangling (Dave) Liu
  4. The International Transmission of Euro Area Monetary Policy Shocks By Nils Jannsen; Melanie Klein
  5. Monetary Policy, Determinacy, and the Natural Rate Hypothesis By Alexander Meyer-Gohde
  6. Financial frictions and optimal monetary policy in an open economy By Marcin Kolasa; Giovanni Lombardo
  7. The federal funds rate in the post-Volcker era: evidence from Basic VAR By Jamilov, Rustam
  8. Have market views on the sustainability of fiscal burdens influenced monetary authorities' credibility? By Gabriele Galati; John Lewis; Steven Poelhekke; Chen Zhou
  9. Evolving UK and US macroeconomic dynamics through the lens of a model of deterministic structural change By Kapetanios, George; Yates, Tony
  10. The Demonetization of Gold: Transactions and the Change in Control By Thomas Quint; Martin Shubik
  11. The fiscal theory of the price level and the backing theory of money By Sproul, Michael
  12. A SVECM Model of the UK Economy and The Term Premium By MARDI DUNGEY; M.TUGRUL VEHBI
  13. On Measuring the Efficiency of Monetary Policy By Walter Briec; Emmanuelle Gabillon; Laurence Lasselle; Hermann Ratsimbanierana
  14. Optimal monetary policy in an operational medium-sized DSGE model By Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
  15. Bayesian Analysis of Time-Varying Parameter Vector Autoregressive Model with the Ordering of Variables for the Japanese Economy and Monetary Policy By Jouchi Nakajima; Toshiaki Watanabe
  16. Dollar illiquidity and central bank swap arrangements during the global financial crisis By Andrew K. Rose; Mark M. Spiegel
  17. A model of commodity money with minting and melting By Angela Redish; Warren E. Weber
  18. Preferred-habitat investors and the US term structure of real rates By Kaminska, Iryna; Vayanos, Dimitri; Zinna, Gabriele
  19. Monetary-fiscal-trade policy and economic growth in Pakistan: Time series empirical investigation By Jawaid, Syed Tehseen; Faisal Sultan Qadri, Faisal; Ali, Nasir
  20. How have global shocks impacted the real effective exchange rates of individual euro area countries since the euro's creation? By Bussière, M.; Chudik, A.; Mehl, A.
  21. An unobserved components common cycle for Australasia? Implications for a common currency By Hall, Viv B; McDermott, C John
  22. Properties of Foreign Exchange Risk Premiums By Sarno, Lucio; Schneider, Paul; Wagner, Christian
  23. Balance sheet effect in the Polish economy By Szymon Grabowski
  24. Asymmetric Price Impacts of Order Flow on Exchange Rate Dynamics By Viet Hoang Nguyen; Yongcheol Shin
  25. What's Next for the Dollar? By Martin S. Feldstein
  26. Understanding and forecasting aggregate and disaggregate price dynamics By Colin Bermingham; Antonello D’Agostino
  27. Sailing through this Storm? Capital Flows in Asia during the Crisis By Cˆmdric TILLE

  1. By: Hans Gersbach (ETH Zurich, Switzerland); Volker Hahn (ETH Zurich, Switzerland)
    Abstract: We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers’ remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare.
    Keywords: central banks, incentive contracts, transparency, inflation targeting, inflation forecast targeting, intermediate targets
    JEL: E58
    Date: 2011–07
  2. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Honglin Wang (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research)
    Abstract: China has a dual-track interest-rate system: bank deposit and lending rates are regulated, but money and bond market rates are market-determined. At the same time, the central bank also imposes an indicative target, which may not be binding at all times, on total credit in the banking system. We develop and calibrate a theoretical model to illustrate the conduct of monetary policy within the framework of dual-track interest rates and a juxtaposition of both price- and quantity-based policy instruments. We model the transmission of monetary policy instruments to market interest rates, which, together with the quantitative credit target in the banking system, ultimately serve as the lever by which monetary policy affects the real economy. The model shows that market interest rates are most sensitive to changes in the benchmark deposit interest rates, significantly responsive to changes in the reserve requirements, but not particularly reactive to open market operations. These theoretical predictions are verified and supported by both linear and GARCH models using daily money and bond market data. Overall, the results of this study help us understand why the central bank conducts monetary policy in China the way it does: a combination of price and quantitative instruments, with various degrees of potency in terms of their influence on the cost of credit.
    Keywords: Monetary Policy, People's Bank of China, Dual-Track Interest Rates, Interest Rate Liberalization
    JEL: E52 E58 C25 C32
    Date: 2011–07
  3. By: Guangling (Dave) Liu (Department of Economics)
    Abstract: The conventional view is that a monetary policy shock has both supply-side and demand-side effects, at least in the short run. Barth and Ramey (2001) show that the supply-side effect of a monetary policy shock may be greater than the demand-side effect. We argue that it is crucial for monetary authorities to understand whether an increase in expected future inflation is due to supply shocks or demand shocks before applying contractionary policy to forestall inflation. Using a standard New Keynesian dynamic stochastic general equilibrium model with the cost-channel of monetary transmission, we show that whether the South African Reserve Bank should apply contractionary policy to fight inflation depends critically on the nature of the disturbance. If an increase in expected future inflation is mainly due to supply shocks, the South African Reserve Bank should not apply contractionary policy to fight inflation, as this would lead to a persistent increase in inflation and a greater loss in output.
    Keywords: Monetary policy, price puzzle, inflation targeting, New Keynesian model
    JEL: E52 E31 E58 E12
    Date: 2011
  4. By: Nils Jannsen; Melanie Klein
    Abstract: This paper analyzes the international transmission effects of euro area monetary policy shocks in to other western European countries, namely the United Kingdom, Sweden, Switzerland, Denmark, and Norway. For this purpose, we use a structural VAR model of the euro area and augment it consecutively by the foreign variables of interest. We find that a monetary policy shock in the euro area leads to a largely similar change in the interest rate and in GDP in these other western European countries. The effects on their exchange rates are limited and their trade balances usually are unaffected. Our results suggest that the income absorption effect to be more important than the expenditure switching effect in the international transmission of monetary policy and that exchange rate stabilization seems to be of some concern to monetary policy makers in small open economies
    Keywords: Monetary policy, international transmission, euro area, vector autoregression
    JEL: C32 E52 F41
    Date: 2011–07
  5. By: Alexander Meyer-Gohde
    Abstract: Imposing the natural rate hypothesis (NRH) can dramatically alter the determinacy bounds on monetary policy by closing the output gap in the long run. I show that the hypothesis eliminates any role for the output gap in determinacy and renders the conditions for determinacy identical for all conforming supply equations. Specializing further to IS demand, determinacy depends only on the parameters in the interest rate rule and a pure forward or backward-looking inflation target is inconsistent with determinacy. Monetary policy that embodies the Taylor principle with respect to contemporaneous inflation delivers a determinate equilibrium in all models that satisfy the NRH.
    Keywords: Time Series,Natural rate hypothesis; Phillips curve; Taylor Principle
    JEL: C62 E31 E43 E52
    Date: 2011–08
  6. By: Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Giovanni Lombardo (European Central Bank)
    Abstract: A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement.
    Keywords: financial frictions, open economy, optimal monetary policy
    JEL: E52 E61 E44 F36 F41
    Date: 2011
  7. By: Jamilov, Rustam
    Abstract: This paper proposes a comparative analysis of the federal funds rate. The analysis is based on the results of an empirical study, conducted using the econometrics of Vector Auto Regressions. The results are compared across two time periods: 1960-1979 and 1983-2002, the intervals representing the pre and post-Volcker monetary eras. The study examines the degree of exogeneity of the federal funds rate and its power to explain and predict variations in macroeconomic aggregates. The paper concludes that for the post-Volcker era the federal funds rate has become more exogenous; that the federal funds rate has remained a strong economic indicator; that the notion of “lean against the wind” monetary policy continues to be relevant and appropriate; that the “price effect” of the response of inflation to innovations in the federal funds rate has become smaller. The paper also suggests that the Federal Reserve has since the 1980s initiated the practice of countercyclical monetary policy, and that economic cycles have tightened during the post-Volcker era.
    Keywords: Federal Funds Rate; Bernanke and Blinder; Basic VAR; Funds Rate Exogeneity; Monetary Transmissions; Post-Volcker; Pre-Volcker
    JEL: E5
    Date: 2011–06–20
  8. By: Gabriele Galati; John Lewis; Steven Poelhekke; Chen Zhou
    Abstract: During the Great Crisis, most governments in industrial countries supported their domestic financial sector under stress and responded to strong declines in output growth with fiscal stimulus packages. Starting in 2010, attention focused on the sustainability of the resulting debt burdens. We conduct an empirical study to test whether in the United States, the euro area and the United Kingdom, views on the sustainability of fiscal burdens have influenced markets’ assessment of central banks’ commitment to price stability. Using a daily measure of inflation expectations extracted from nominal and indexed-linked government bonds, or inflation swaps, we test whether these react to alternative measures of fiscal burdens. These include rescue package announcements, credit default swap (CDS) spreads and changes in either the outlook or the credit rating of governments. We find no evidence of a significant effect of market participants’ perceptions of fiscal burdens on long-term inflation expectations in the United States, the euro area and the United Kingdom. These results are broadly consistent with the view that long term inflation expectations have remained well anchored.
    Keywords: fiscal policy; monetary policy; inflation and inflation compensation; anchors for expectations; crisis
    JEL: E31 E44 E52 H63 H68
    Date: 2011–07
  9. By: Kapetanios, George (Queen Mary and Westfield College and Bank of England); Yates, Tony (Bank of England)
    Abstract: Using a model of deterministic structural change, we revisit several topics in inflation dynamics explored previously using stochastic, time-varying parameter models. We document significant reductions in inflation persistence and predictability. We estimate that changes in the volatility of shocks were decisive in accounting for the great moderations of the United States and the United Kingdom. We also show that the magnitude and the persistence of the response of inflation and output to monetary policy shocks has fallen in these two countries. These findings should be of interest in those seeking to resolve theoretical debates about the sources of apparent nominal and real frictions in the macroeconomy, and the causes of the Great Moderation.
    JEL: C10 C14
    Date: 2011–07–28
  10. By: Thomas Quint (Dept. of Mathematics, University of Nevada, Reno); Martin Shubik (Cowles Foundation, Yale University)
    Abstract: Three models of a monetary economy are considered, in order to show the effects of a gold demonetization: the first with a gold money, the second with demonetized gold but no central bank, and the third with demonetized gold, but with a central bank. The distinctions between ownership and control are discussed.
    Keywords: Gold demonetization, Gold backed paper, Reserves
    JEL: C72 E50 E58
    Date: 2011–08
  11. By: Sproul, Michael
    Abstract: A numerical example of privately issued money is used to illustrate the fiscal theory of the price level, and to show that the fiscal theory is best understood as a subset of the backing theory of money. Government issuance of money or debt is shown to be potentially inflationary only when the government’s net worth is negative, and when the government’s assets do not rise in step with its liabilities. The backing theory is used to examine whether inflation can be avoided by a sufficiently tough central bank, and to criticize the view that fiscal policies affect inflation through their wealth effects.
    Keywords: Money; price level; fiscal; real bills; backing theory
    JEL: E50
    Date: 2011–07
    Abstract: The term premium is estimated from an empirically coherent open economy VAR model of the UK economy where the model specifically accounts for the mixed nature of the data and cointegration between some variables. Using this framework the estimated negative term premia for 1980-2007 is decomposed into its contributing shocks, where the role of inflation and monetary policy shocks are shown to be dominant in the evolution of the term premium. Projecting into the 2008 crisis period reveals the extent of the shocks to the UK economy, and also shows the similarities in term premia behaviour with those experienced during the 1998 Russian crisis.
    JEL: E43 E52 C51 C32
    Date: 2011–08
  13. By: Walter Briec; Emmanuelle Gabillon; Laurence Lasselle; Hermann Ratsimbanierana
    Abstract: Cecchetti et al. (2006) develop a method for allocating macroeconomic performance changes among the structure of the economy, variability of supply shocks and monetary policy. We propose a dual approach of their method by borrowing well-known tools from production theory, namely the Farrell measure and the Malmquist index. Following Färe et al (1994) we propose a decomposition of the efficiency of monetary policy. It is shown that the global efficiency changes can be rewritten as the product of the changes in macroeconomic performance, minimum quadratic loss, and efficiency frontier.
    Keywords: efficiency frontier, inflation variability, Farrell measure, Malmquist index.
    JEL: E52 E58
    Date: 2011–01
  14. By: Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
    Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incoporates large international spillover effects.
    Date: 2011
  15. By: Jouchi Nakajima; Toshiaki Watanabe
    Abstract: This paper applies the time-varying parameter vector autoregressive model to the Japanese economy. The both parameters and volatilities, which are assumed to follow a random-walk process, are estimated using a Bayesian method with MCMC. The recursive structure is assumed for identification and the reversible jump MCMC is used for the ordering of variables. The empirical result reveals the time-varying structure of the Japanese economy and monetary policy during the period from 1981 to 2008 and provides evidence that the order of variables may change by the introduction of zero interest rate policy.
    Keywords: Bayesian inference, Monetary policy, Reversible jump Markov chain Monte Carlo, Stochastic volatility, Time-varying parameter VAR
    JEL: C11 C15 E52
    Date: 2011–07
  16. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness.
    Keywords: Global financial crisis ; Liquidity (Economics) ; Dollar
    Date: 2011
  17. By: Angela Redish; Warren E. Weber
    Abstract: We construct a random matching model of a monetary economy with commodity money in the form of potentially different types of silver coins that are distinguishable by the quantity of metal they contain. The quantity of silver in the economy is assumed to be fixed, but agents can mint and melt coins. Coins yield no utility, but can be traded. Uncoined silver yields direct utility to the holder. We find that optimal coin size increases with the probability of trade and with the stock of silver. We use these predictions of our model to analyze the coinage decisions of the monetary authorities in medieval Venice and England. Our model provides theoretical support for the view that decisions about coin sizes and types during the medieval period reflected a desire to improve the economic welfare of the general population, not just the desire for seigniorage revenue.
    Date: 2011
  18. By: Kaminska, Iryna (Bank of England); Vayanos, Dimitri (LSE, CEPR and NBER); Zinna, Gabriele (Bank of England)
    Abstract: We estimate structurally a model of the term structure of interest rates that is consistent with no arbitrage but allows for demand pressures. The term structure in our model is determined through the interaction of risk-averse arbitrageurs and preferred-habitat investors with preferences for specific maturities. The model is estimated on US real rates during the 2000s and allows for two factors: one corresponding to the short rate and one to preferred-habitat demand. We find that the puzzling drop in long rates during 2004-05 (Greenspan conundrum) is driven by the demand factor. International reserves, foreign official holdings of longer-term US Treasuries may all be proxies for the preferred-habitat demand factor. For example, foreign purchases in the year to July 2004 appear to have lowered the ten-year rate by about 100 basis points. Foreign purchases have larger effects following periods when arbitrageurs have lost money.
    Keywords: Foreign reserves; term structure of interest rates; term premium; MCMC
    JEL: F31 G10
    Date: 2011–07–28
  19. By: Jawaid, Syed Tehseen; Faisal Sultan Qadri, Faisal; Ali, Nasir
    Abstract: This study empirically examines the effect of monetary, fiscal and trade policy on economic growth in Pakistan using annual time series data from 1981 to 2009. Money supply, government expenditure and trade openness are used as proxies of monetary, fiscal and trade policy respectively. Cointegration and error correction model indicate the existence of positive significant long run and short run relationship of monetary and fiscal policy with economic growth. Result also indicates that monetary policy is more effective than fiscal policy in Pakistan. In contrast, trade policy has insignificant effect on economic growth both in the short run and in the long run. In light of the findings, it is suggested that the policy makers should focus more on monetary policy in order to ensure economic growth in the country. It is also recommended that further research should be conducted to find out such components of exports and imports which lead to the ineffectiveness of trade policy to enhance economic growth in Pakistan.
    Keywords: Monetary; Fiscal; Trade; Economic Growth
    JEL: E62 F13 E42 F43
    Date: 2011–06–09
  20. By: Bussière, M.; Chudik, A.; Mehl, A.
    Abstract: This paper uncovers the response pattern to global shocks of euro area countries' real effective exchange rates before and after the start of Economic and Monetary Union (EMU), a largely open ended question when the euro was created. We apply to that end a newly developed methodology based on high dimensional VAR theory. This approach features a dominant unit to a large set of over 60 countries' real effective exchange rates and is based on the comparison of two estimated systems: one before and one after EMU. We find strong evidence that the pattern of responses depends crucially on the nature of global shocks. In particular, post-EMU responses to global US dollar shocks have become similar to Germany's response before EMU, i.e. to that of the economy that used to issue Europe's most credible legacy currency. By contrast, post-EMU responses of euro area countries to global risk aversion shocks have become similar to those of Italy, Portugal or Spain before EMU, i.e. of economies of the euro area's periphery. Our findings also suggest that the divergence in external competitiveness among euro area countries over the last decade, which is at the core of today's debate on the future of the euro area, is more likely due to country-specific shocks than to global shocks.
    Keywords: Euro, Real Effective Exchange Rates, Weak and Strong Cross Sectional Dependence, High-Dimensional VAR, Identification of Shocks.
    JEL: C21 C23
    Date: 2011
  21. By: Hall, Viv B; McDermott, C John
    Abstract: We use unobserved components methodology to establish an Australasian common cycle, and assess the extent to which region-specific cycles of Australian States and New Zealand are additionally important. West Australian and New Zealand region-specific growth cycles have exhibited distinctively different features, relative to the common cycle. For every Australasian region, the region-specific cycle variance dominates that of the common cycle, in contrast to findings for U.S. BEA regions and prior work for Australian States. The distinctiveness of New Zealand’s output and employment cycles is consistent with New Zealand retaining the flexibility of a separate currency and monetary policy, for periods when significant region-specific shocks occur.
    Keywords: Australasian common cycle, regional cycles, Unobserved components, common currency, New Zealand, Australia,
    Date: 2011–03–11
  22. By: Sarno, Lucio; Schneider, Paul; Wagner, Christian
    Abstract: We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates. Estimating affine (multi-currency) term structure models reveals a noticeable tradeoff between matching depreciation rates and accuracy in pricing bonds. Risk premiums implied by our global affine model generate unbiased predictions for currency excess returns and are closely related to global risk aversion, the business cycle, and traditional exchange rate fundamentals.
    Keywords: exchange rates; forward bias; predictability; term structure
    JEL: E43 F31 G10
    Date: 2011–08
  23. By: Szymon Grabowski (Warsaw School of Economics)
    Abstract: Paper refers to the relations between real economic activity and the state of nancial sys- tem. It presents how the balance sheet eect works and how it in uences the real economic activity and the eectiveness of the monetary policy. The empirical part of the paper presents the theoretical model, which is derived from classic assumptions. On the basis of this model, the balance sheet eect in the Polish economy is verifed. The verifcation process is conducted on the basis of individual fnancial statements of 27 730 Polish companies encompassing period between 2002-2007.
    Keywords: CCAPM, economic growth, nancial markets, term spreads, expectations
    JEL: G12 E44
    Date: 2011–07–26
  24. By: Viet Hoang Nguyen (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Yongcheol Shin (Leeds University Business School, The University of Leeds)
    Abstract: We generalize the portfolio shifts model advanced by Evans and Lyons (2002a; b), and develop the dynamic asymmetric portfolio shifts (DAPS) model by explicitly allowing for possible market under- and overreactions and for asymmetric pricing impacts of order flows. Using the Reuters D2000-1 daily trading data for eight currency markets over a four-month period from 1 May to 31 August 1996, we find strong evidence of a nonlinear cointegrating relationship between exchange rates and (cumulative) order flows: The price impact of negative order flows (selling pressure) is overwhelmingly stronger than that of the positive ones (buying pressure). Through the dynamic multiplier analysis, we find two typical patterns of the price discovery process. The markets following overreactions tend to display a delayed overshooting and a volatile but faster adjustment towards equilibrium whereas the markets following underreactions are generally characterized by a gradual but persistent adjustment. In our model, these heterogeneous adjustment patterns reflect different liquidity provisions associated with different market conditions following under- and overreactions. In addition, the larger is the mispricing, the faster is the overall adjustment speed, a finding consistent with Abreu and Brunnermeier (2002) and Cai et al. (2011). We also find that underreactions are followed mostly by positive feedback trading while overreactions are characterized by delayed overshooting in the short run but corrected by negative feedback trading at longer horizons, the finding is consistent with Barberis et al. (1998) who show that positive short-run autocorrelations (momentum) signal underreaction while negative long-run autocorrelations (reversal) signal overreaction.
    Keywords: Exchange rate, order flow, under- and overreaction, asymmetric pricing impacts, asymmetric cointegrating relationship and dynamic multipliers
    JEL: C22 F31 G15
    Date: 2011–06
  25. By: Martin S. Feldstein
    Abstract: The real trade weighted value of the dollar fell 11 percent against the Federal Reserve Bank’s index of major currencies during the 12 months through May 2011 and 31 percent during the past ten years. Four strong market forces are likely to cause further declines over the next several years: a portfolio rebalancing by major international investors who regard their portfolios as overweight dollars, the large US current account deficit, a Chinese policy to raise consumption, and interest rate differences that make dollar investments less attractive. A declining dollar could have a powerful positive effect on the short-run performance of the American economy by raising exports (now more than $1.3 trillion) and inducing American consumers to shift from imports to American made products and services. Without a boost to demand from an increase in net exports, the U.S. recovery is likely to remain weak and could run out of steam. There are of course also negative effects of a falling dollar: reducing the real value of any given level of personal incomes by raising the cost to households of the imported products that they consume and creating inflationary pressures as import prices rise.
    JEL: E3 F0 F31 F4
    Date: 2011–07
  26. By: Colin Bermingham (Central Bank of Ireland, Dame Street, Dublin 2, Ireland.); Antonello D’Agostino (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and Central Bank of Ireland.)
    Abstract: The issue of forecast aggregation is to determine whether it is better to forecast a series directly or instead construct forecasts of its components and then sum these component forecasts. Notwithstanding some underlying theoretical results, it is generally accepted that forecast aggregation is an empirical issue. Empirical results in the literature often go unexplained. This leaves forecasters in the dark when confronted with the option of forecast aggregation. We take our empirical exercise a step further by considering the underlying issues in more detail. We analyse two price datasets, one for the United States and one for the Euro Area, which have distinctive dynamics and provide a guide to model choice. We also consider multiple levels of aggregation for each dataset. The models include an autoregressive model, a factor augmented autoregressive model, a large Bayesian VAR and a time-varying model with stochastic volatility. We find that once the appropriate model has been found, forecast aggregation can significantly improve forecast performance. These results are robust to the choice of data transformation. JEL Classification: E17, E31, C11, C38.
    Keywords: Aggregation, Forecasting, Inflation.
    Date: 2011–08
  27. By: Cˆmdric TILLE (Graduate Institute of International and Development Studies and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research)
    Abstract: The current crisis has led to an unprecedented collapse in international capital flows, with substantial heterogeneity across regions. Asian economies were relatively unaffected, despite having been the center of the storm in the crisis of the late 1990s. The contraction in capital flows for Asian countries was limited to the most acute phase of the crisis following the collapse of Lehman Brothers, after which capital flows rebounded. We find that the stronger performance of Asia primarily reflects its more limited reliance on international banking compared to Europe and the United States. We find little evidence that the drivers of capital flows had a differentiated impact in Asia. Finally, we show that while higher initial levels of foreign reserves did not insulate countries from a turnaround in private capital flows, a larger use of reserves at the height of the crisis limited the contraction in gross private outflows.
    Keywords: International Capital Flows, Banking Integration, Crisis
    Date: 2011–07

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