nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒12‒05
five papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Trend Growth and Learning About Monetary Policy Rules By Mewael Tesfaselassie
  2. The improbable renaissance of the Phillips curve: The crisis and euro area inflation dynamics By Lourdes Acedo Montoya; Björn Döhring
  3. Monetary policy, financial stability, and the distribution of risk By Evan F. Koenig
  4. Leading Indicators of Real Activity and Inflation for Turkey, 2001-2010 By Sumru Altug; Erhan Uluceviz
  5. Household savings and mortgage decisions: the role of the "down-payment channel" in the euro area By Narcissa Balta; Eric Ruscher

  1. By: Mewael Tesfaselassie
    Abstract: The paper examines the effect of trend productivity growth on the determinacy and learnability of equilibria under alternative monetary policy rules. It shows that under a policy rule that responds to current period inflation and the output gap a higher trend growth rate relaxes the conditions for determinacy and learnability. Results are mixed for other policy rules. Under the expectations-based rule, trend growth reduces the scope for determinacy but it relaxes the conditions for learnability. Under the lagged-data-based rule rule trend growth reduces the scope for determinacy and learnability
    Keywords: trend growth, learning, monetary policy, determinacy, expectational stability
    JEL: E4 E5
    Date: 2011–11
  2. By: Lourdes Acedo Montoya; Björn Döhring
    Abstract: Why has euro area (core) inflation not fallen further during and after the "great recession"? How different are inflation dynamics across Member States? This paper analyses core inflation dynamics in the euro area and its Member States using a hybrid specification of the Phillips curve. Inflation expectations are directly observed from an expert survey, so no assumptions need to be imposed about expectations formation. The choice of the hybrid Phillips curve framework is vindicated, as the data clearly indicate the relevance of both backward-looking inflation and inflation expectations. The impact of the output gap on core inflation is significant but not large. The combination of stable inflation expectations, sluggish price adjustment and an only moderate impact of the output gap on inflation helps understanding the stability of core inflation despite large and persistent output gaps in the aftermath of the crisis. Although the heterogeneity of Phillips curve relationships across Member States is not large, the exceptionally large output gap caused by the crisis is one driver (among others) of the recently observed inflation differentials in the euro area.
    JEL: E31 E32
    Date: 2011–10
  3. By: Evan F. Koenig
    Abstract: In an economy in which debt obligations are fixed in nominal terms, but there are otherwise no nominal rigidities, a monetary policy that targets inflation inefficiently concentrates risk, tending to increase the financial distress that accompanies adverse real shocks. Nominal-income targeting spreads risk more evenly across borrowers and lenders, reproducing the equilibrium that one would observe if there were perfect capital markets. Empirically, inflation surprises have no independent influence on measures of financial strain once one controls for shocks to nominal GDP.
    Keywords: Debt ; Inflation risk
    Date: 2011
  4. By: Sumru Altug (Koç University and CEPR); Erhan Uluceviz (Istanbul Bilgi University)
    Abstract: This paper develops a set of leading indicators of industrial production growth and consumer price inflation for the period 2001-2010. The choice of indicators is based on pseudo out-of-sample forecasting exercise implemented by Stock and Watson (2003), amongst others. We find that asset prices that reflect expectational factors or interest rates that capture the costs of borrowing for the Turkish economy tend to have the greatest predictive power for future real activity and inflation. Our findings provide evidence on the factors determining real activity and inflation in a period of disinflation and normalization for the Turkish economy.
    Keywords: Real activity, inflation, leading indicators, out-of-sample forecasting, combination forecasts, inflation targeting, Turkey
    JEL: E1 E32 E37 E58 F43 O52
    Date: 2011–11
  5. By: Narcissa Balta; Eric Ruscher
    Abstract: This paper analyses the interactions between household wealth, mortgage decisions and savings in a single empirical framework and identifies an important role for a "down-payment channel" in the euro area. Contrary to the traditional housing wealth channel, the "down-payment channel" posits a positive relation between household savings and house prices: a rise in house prices forces credit-constrained households who wish to acquire a house to accumulate more savings in order to cover a higher down-payment (i.e. the share of the housing acquisition value that is not covered by a mortgage). The overall effect of a rise in house prices on private consumption can be seen as the result of two offsetting forces: a rise in house prices tends to push up consumption via the traditional housing wealth channel but it also tends to depress the consumption of credit-constrained households who wish to acquire a house via the down-payment channel. Estimates based on a structural VEC model for the euro area suggest that the down-payment effect tends to dominate in the medium term, translating into an overall negative impact of higher house prices on consumption in the euro area.
    JEL: E21 E44 D12
    Date: 2011–09

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