nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒05‒04
thirty-two papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Inflation-Targeting, Flexible Exchange Rates and Macroeconomic Performance since the Great Recession By Barnebeck Andersen, Thomas; Malchow-Møller, Nikolaj; Nordvig, Jens
  2. Sectoral shocks and monetary policy in the United Kingdom By Dixon, Huw; Franklin, Jeremy; Millard, Stephen
  3. Effects of Mineral-Commodity Price Shocks on Monetary Policy in Developed Countries By Atsushi Sekine
  4. Bank Lending, Risk Taking, and the Transmission of Monetary Policy: New Evidence for Colombia By Nidia Ruth Reyes; José Eduardo Gómez G.; Jair Ojeda Joya
  5. What Asset Prices Should be Targeted by a Central Bank? By Kengo Nutahara
  6. The Impact of Different Types of Foreign Exchange Intervention: An Event Study Approach By Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
  7. Policy Regime Change against Chronic Deflation? Policy option under a long-term liquidity trap By FUJIWARA Ippei; NAKAZONO Yoshiyuki; UEDA Kozo
  8. Ben Bernanke: Theory and Practice By Alexander J. Gill
  9. An exploration on interbank markets and the operational framework of monetary policy in Colombia By Camilo González; Luisa F. Silva; Carmiña O. Vargas; Andrés M. Velasco
  10. Price-Level Targeting: an omelette that requires breaking some Inflation-Targeting eggs? By Julian A. Parra-Polania; Luisa F. Acuña-Roa
  11. Bond Market Exposures to Macroeconomic and Monetary Policy Risks By Dongho Song
  12. A model of viability for a monetary economy By Saint-Pierre, Patrick; Cartelier, Jean
  13. Globalization and Inflation: A Swiss Perspective By John A. Tatom
  14. Bond Markets, Stock Markets and Exchange Rates: A Dynamic Relationship By Suleyman Hilmi Kal; Ferhat Arslaner; Nuran Arslaner
  15. Electronic Money and Payments: Recent Developments and Issues By Ben Fung; Miguel Molico; Gerald Stuber
  16. The EMS Crisis of the 1990s: Parallels with the present crisis? By Gros, Daniel
  17. The single supervisory mechanism or “SSM”, part one of the Banking Union By Eddy Wymeersch
  18. Adding financial flows to a CGE model of PNG By Peter Dixon; Maureen Rimmer; Louise Roos
  19. Labour Market and Monetary Policy Reforms in the UK: a Structural Interpretation of the Implications By Francesco Zanetti
  20. Identifying central bank liquidity super-spreaders in interbank funds networks By Carlos León; Clara Machado; Miguel Sarmiento
  21. The FRBNY staff underlying inflation gauge: UIG By Amstad, Marlene; Potter, Simon M.; Rich, Robert W.
  22. Accuracy, Speed and Robustness of Policy Function Iteration By Todd B. Walker; Alexander W. Richter; Nathaniel A. Throckmorton
  23. The role of financial intermediaries in monetary policy transmission By Thorsten Beck; Andrea Colciago; Damjan Pfajfar
  24. Forecasting South African Inflation Using Non-Linear Models: A Weighted Loss-Based Evaluation By Pejman Bahramian; Mehmet Balcilar; Rangan Gupta; Patrick T. kanda
  25. Asset Price Targeting Government Spending and Equilibrium Indeterminacy in A Sticky-Price Economy By Kengo Nutahara
  26. A macroeconomic model of liquidity crises By Keiichiro Kobayashi; Tomoyuki Nakajima
  27. On the optimality of the Friedman Rule in a New Monetarist Model By Ryoji Hiraguchi; Keiichiro Kobayashi
  28. Forward guidance (with reference to Monty Python, Odysseus, Apollo, Paul Fisher, Deng Xiaoping and Mario Draghi's Old Man) By Fisher, Richard W.
  29. Forecasting Chilean Inflation with International Factors By Pablo Pincheira; Andrés Gatty
  30. James Tobin and Modern Monetary Theory By Robert W. Dimand
  31. The Elusive Predictive Ability of Global Inflation By Carlos Medel; Michael Pedersen; Pablo Pincheira
  32. Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data By Georges Prat; Remzi Uctum

  1. By: Barnebeck Andersen, Thomas; Malchow-Møller, Nikolaj; Nordvig, Jens
    Abstract: Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates. Part of this difference in growth performance reflects differences in export performance during the initial years of the crisis, which in turn can be explained by real exchange rate depreciations. However, IT seems also to confer other benefits on the countries above and beyond the effects from currency depreciation.
    Date: 2014–03
  2. By: Dixon, Huw (Cardiff Business School); Franklin, Jeremy (Bank of England); Millard, Stephen (Bank of England)
    Abstract: In this paper, we use an open economy model of the United Kingdom to examine the extent to which monetary policy should respond to movements in sectoral inflation rates. To do this we construct a Generalised Taylor model that takes specific account of the sectoral make up of the consumer price index (CPI), where the sectors are based on the COICOP classification the UK CPI microdata. We calibrate the model for each sector using the UK CPI microdata and model the sectoral shocks that drive sectoral inflation rates as white noise processes, as in the UK data. We find that a policy rule that allows for different responses to inflation in different sectors outperforms a rule which just targets aggregate CPI. However, the gain is small and comes from partially looking through movements in aggregate inflation driven by movements in petrol price inflation, which is volatile and tends not to reflect underlying inflationary pressure.
    Keywords: CPI inflation; Sectoral inflation rates; Generalised Taylor economy
    JEL: E17 E31 E52
    Date: 2014–04–17
  3. By: Atsushi Sekine (Graduate School of Economics, Kyoto University)
    Abstract: This paper investigates effects of changes in mineral commodity prices on monetary policy. Using macroeconomic data from five developed countries (Australia, Canada and New Zealand as mineral-producing countries, and the US and the UK as non-mineral-resource countries), I estimate the impulse response functions of the policy interest rates and the core consumer price index (CPI) inflation rates to mineral-commodity price shocks. I find that, in response to an unexpected 10 percent increase in mineral commodity prices, the central banks in the mineral-producing countries are estimated to increase their policy interest rates by approximately one percentage point, and they seem to take anticipatory policy reactions to control core CPI variations triggered by these shocks. Thus, mineral commodity prices appear to be important determinants of the monetary policies in the mineral-producing countries. However, the effects of the increase in their policy interest rates on core CPI inflation are different across the examined mineral-producing countries. I also find that the central banks in the non-mineral- resource countries insignificantly respond to mineral-commodity price shocks because such price shocks have little impact on those countries’ core CPI inflation.
    Keywords: Mineral commodity prices; Systematic monetary policy; Structural vector autoregressions; Impulse responses; Response decompositions; Counterfactual analysis
    JEL: E31 E52 Q02
    Date: 2014–04
  4. By: Nidia Ruth Reyes; José Eduardo Gómez G.; Jair Ojeda Joya
    Abstract: We study the existence of a monetary policy transmission mechanism through banks in Colombia, using monthly banks’ balance sheet data for the period 1996:4 – 2012:12. We obtain results which are consistent with the basic postulates of the bank lending channel (and the risk-taking channel) literature. The impact of short-term interest rates on the growth rate of loans is negative, indicating that increases in these rates lead to reductions in the growth rate of loans. This impact is stronger for consumer loans than for commercial loans. We find important heterogeneity in the monetary policy transmission across banks depending on banks-specific characteristics.
    Keywords: Monetary policy transmission, Bank lending channel, Risk taking channel, Colombia
    JEL: E5 E52 E59 G21
    Date: 2013–06–17
  5. By: Kengo Nutahara
    Abstract: This paper investigates the monetary policy design for restoring equilibrium determinacy. Our interests are whether a central bank should respond to asset price fluctuations, and if so, what asset prices should be targeted. We show that a monetary policy response to the price of a productive tangible asset (capital price) is helpful for equilibrium determinacy, while that to the price of an intangible asset that reflects a firm’s profit (share prices) is a source of equilibrium indeterminacy. This result comes from the two assets’ prices moving in opposite directions in response to a permanent increase in inflation.
    Date: 2013–08
  6. By: Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
    Abstract: To date, there is still great controversy as to which exchange rate model should be used or which monetary channel should be considered, when measuring the effects of monetary policy. Since most of the literature relies on structural models to address identification problems, the validity of results largely turn on how accurate the assumptions are in describing the full extent of the economy. In this paper we compare the effect of different types of central bank interventions using an event study approach for the Colombian case during the period 2000-2012, without imposing restrictive parametric assumptions or without the need to adopt a structural model. We find that all types of interventions (international reserve accumulation options, volatility options and discretionary) have been successful according to the smoothing criterion. In particular, volatility options seemed to have the strongest effect. We find that results are robust when using different windows sizes and counterfactuals
    Keywords: Central bank intervention, foreign exchange intervention mechanisms, event study.
    JEL: E52 E58 F31
    Date: 2013–10–09
  7. By: FUJIWARA Ippei; NAKAZONO Yoshiyuki; UEDA Kozo
    Abstract: The policy package known as Abenomics appears to have influenced the Japanese economy drastically, in particular, in the financial markets. In this paper, focusing on the aggressive monetary easing of Abenomics, the first arrow, we evaluate its role in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, such as that which Japan has been suffering over the last two decades, policy regime change must be perceived by economic agents. Analysis using the Quarterly Services Survey (QSS) monthly survey data shows that monetary policy reaction to inflation rates has been in a declining trend since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Consequently, no sizable difference in perceptions has been found before and after the introduction of Abenomics. Estimated changes in perceptions are not abrupt enough to satisfy "Sargent's (1982) criteria for regime change" termed by Eggertsson (2008). This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?
    Date: 2014–04
  8. By: Alexander J. Gill
    Abstract: Ben Bernanke researched monetary policy for over 25 years prior to becoming a policymaker, and his two-term career as Chairman of the Federal Reserve featured a severe recession coupled with a nancial crisis, a chief subject of Bernanke's research. His reaction to economic events is noteworthy in its originality and breadth, but its intellectual underpinnings are, with a few exceptions discussed in the paper, not without written precedent. This paper will summarize and connect Bernanke's research and policymaking and show that the two are closely aligned.
    Keywords: Economic thought, history of economic thought, central banking, Fed, Bernanke
    JEL: B31 E58 E65
    Date: 2014
  9. By: Camilo González; Luisa F. Silva; Carmiña O. Vargas; Andrés M. Velasco
    Abstract: We set a dynamic stochastic model for the interbank daily market for funds in Colombia. The framework features exogenous reserve requirements and requirement period, competitive trading among heterogeneous commercial banks, daily open market operations held by the Central Bank (auctions and window facilities), and idiosyncratic demand shocks and uncertainty in the daily auction. The model highlights the institutional framework and the money supply mechanisms for the interbank market. We construct a data base for the Colombian case that incorporates the principal variables of the model and give us some insights about the behavior of them in a typical requirement period. We corroborate the Martingale hypothesis for the interbank interest rate.
    Keywords: Interbank Market; Overnight Rates; Reserve Demand.
    JEL: E44 E52 G21
    Date: 2013–09–18
  10. By: Julian A. Parra-Polania; Luisa F. Acuña-Roa
    Abstract: This manuscript can be divided into two main parts. The first one, using a simple example by Minford (2004) and Hatcher (2011), gives the reader a basic introduction to understand the comparison between two monetary-policy regimes: Inflation Targeting (IT) and Price-Level Targeting (PLT). The second part, using a model with a New Keynesian Phillips curve and a loss function (both of which incorporate partial indexation to lagged inflation), finds that for standard values of underlying parameters (i) the social loss associated to macroeconomic volatility may decrease about 26% by switching from IT to PLT and (ii) only when the initial level of indexation to lagged inflation is higher than 60% then it is better not to switch to PLT.
    Keywords: Inflation targeting, price-level targeting, indexation, macroeconomic stability.
    JEL: E52 E58
    Date: 2013–09–20
  11. By: Dongho Song (Department of Economics, University of Pennsylvania)
    Abstract: I provide empirical evidence of changes in the U.S. Treasury yield curve and related macroeconomic factors, and investigate whether the changes are brought about by external shocks, monetary policy, or by both. To explore this, I characterize bond market exposures to macroeconomic and monetary policy risks, using an equilibrium term structure model with recursive preferences in which inflation dynamics are endogenously determined. In my model, the key risks that affect bond market prices are changes in the correlation between growth and inflation and changes in the conduct of monetary policy. Using a novel estimation technique, I find that the changes in monetary policy affect the volatility of yield spreads, while the changes in the correlation between growth and inflation affect both the level as well as the volatility of yield spreads. Consequently, the changes in the correlation structure are the main contributor to bond risk premia and to bond market volatility. The time variations within a regime and risks associated with moving across regimes lead to the failure of the Expectations Hypothesis and to the excess bond return predictability regression of Cochrane and Piazzesi (2005), as in the data.
    Keywords: Monetary Policy Risks, Regime-Switching Macroeconomic Risks, Stochastic Volatility, Taylor-Rule, Term Structure
    JEL: E43 G12
    Date: 2014–04–30
  12. By: Saint-Pierre, Patrick; Cartelier, Jean
    Keywords: Exchange and Production Economies; Applied General Equilibrium Models; exchange; monetary economy;
    JEL: D58 D51 E52
    Date: 2013–06
  13. By: John A. Tatom
    Abstract: Globalization has given rise to new concerns that domestic inflation is caused by global developments, especially in the state of the global gap in GDP and resource utilization, and whether domestic monetary policy can control it. This paper explores the role of globalization, if any, for inflation, particularly in Switzerland, one of the smallest and most open economies where the globalization hypothesis should be most relevant, but where inflation historically has been among the lowest in the world. Is Switzerland and Swiss monetary policy unique in providing a benchmark for price stability, or is Swiss inflation performance an accident, with Swiss inflation being dictated by global experience or at least by its larger neighbors? It provides tests of whether inflation in Switzerland is causally related to inflation elsewhere. It focuses in more detail on Swiss inflation in a P* model and on whether it is also influenced by inflation in Germany, other countries or by inflation abroad via an import channel. Finally, the paper looks more broadly at other evidence of whether Swiss inflation or that in other industrial countries is influenced by globalization. Swiss inflation is largely made at home. There is evidence presented of a cointegrating relationship of Swiss and German inflation, but this and the high correlation of Swiss and German inflation are more likely due to common inflation objectives.
    Keywords: Inflation, Globalization, Switzerland, GDP gap
    JEL: E31 E32 F4
    Date: 2013–12
  14. By: Suleyman Hilmi Kal; Ferhat Arslaner; Nuran Arslaner
    Abstract: The paper is an investigation concerning whether the deviations of currencies from their fundamental values affects the relationship between economic fundamentals and exchange rates. To this end, a version of the sticky price monetary exchange rate model, which connects the exchange rates to economic fundamentals, is employed. And that model is extended by adding a two state time varying transition probability Markov regime switching process in which transition between regimes is linked to the rate of risk-adjusted excess returns in the currencies. This permits analysis of the transitional dynamics of exchange rates. Quarterly data of the most active four floating currencies are used in the model. These currencies are the Australian dollar, the Canadian dollar, the Japanese yen, and the British pound. The results provide evidence that the Sharpe ratios of debt and equity investments in the currencies influence the evolution of transitional dynamics of the exchange rates’ deviation from their fundamental values. As an extension of this result, it was found that the relationship between economic fundamentals and the nominal exchange rates are subject to change depending on the overvaluation or undervaluation of the currencies relative to their fundamental value.
    Keywords: Bond Price, Stock Price, Sharpe Ratio, Exchange Rates, Time Series Analysis, and Markov Switching Model
    JEL: C22 E44 G12
    Date: 2014–03
  15. By: Ben Fung; Miguel Molico; Gerald Stuber
    Abstract: The authors review recent developments in retail payments in Canada and elsewhere, with a focus on e-money products, and assess their potential public policy implications. In particular, they study how these developments will affect the demand for bank notes, and the central bank’s balance sheet and its seigniorage revenue, which as a result might affect the central bank’s ability to implement and conduct monetary policy and to promote financial stability. Other public policy issues, such as safety and efficiency, and user protection as well as legal, security and law enforcement, are also considered. While the demise of cash is not imminent, it is important for the central bank to continue to evaluate its potential roles with regard to e-money.
    Keywords: Bank notes, E-money, Financial services, Payment clearing and settlement systems
    JEL: E41 E42
    Date: 2014
  16. By: Gros, Daniel
    Abstract: The EMS crisis of the 1990s illustrated the importance of a lack of confidence in price or exchange rate stability, whereas the present crisis illustrates the importance of a lack of confidence in fiscal sustainability. Theoretically the difference between the two should be minor since, in terms of the real return to an investor, the loss of purchasing power can be the same when inflation is unexpectedly high, or when the nominal value of government debt is cut in a formal default. Experience has shown, however, that expropriation via a formal default is much more disruptive than via inflation. The paper starts by providing a brief review of the EMS crisis, emphasising that the most interesting period might be the ‘post-EMS’ crisis of 1993-95. It then reviews in section 2 the crisis factors, comparing the EMS crisis to today’s euro crisis. Section 3 outlines the main analytical issue, namely the potential instability of high public debt within and outside a monetary union. Section 4 then compares the pressure on public finance coming from the crises for the case of Italy. Section 5 uses data on ‘foreign currency’ debt to disentangle expectations of devaluation/inflation from expectations of default. Section 6 concludes.
    Date: 2014–03
  17. By: Eddy Wymeersch (University of Gent, European Corporate Governance Institute)
    Abstract: The Regulation on the Single Supervisory Mechanism mandates the European Central Bank to exercise prudential supervision on the banks located in the Euro area, whether directly by the Bank’s own services for the significant banks, or indirectly by the national prudential supervisors but under the general guidance of the ECB for the less significant banks. The paper gives a detailed analysis of the new regime, its scope, the consequences for the existing supervisory systems, especially the home-host attribution of competences and the cooperation between the ECB and the national supervisors, the consequences for the non-euro Member States and for the third country jurisdictions. This regime is likely to substantially modify the existing supervisory landscape. It is the first step towards the Banking Union and is to be followed by legislative instruments on Bank Recovery and Resolution Directive, the Regulations on a Single Resolution Mechanism and on Deposit Guarantee Schemes. These three measures should allow dealing with defaulting banks without calling on the taxpayers.
    Keywords: Regulation Single Supervisory Mechanism, European Central Bank, European Banking Authority, banking prudential supervision, home-host, banking crisis
    JEL: G20 G28 G38
    Date: 2014–04
  18. By: Peter Dixon; Maureen Rimmer; Louise Roos
    Abstract: Traditionally, CGE models do not include equations modelling the financial sector of a country. Interest rates are therefore set exogenously and often the nominal exchange rate is set as the numeraire. Normally, these models would show that tighter monetary policy (i.e. increase in interest rates) would lead to a fall in investments and a decline in the domestic price level relative to foreign prices. This causes a real devaluation of the currency. The fall in domestic prices would be good for the trade balance because the country becomes more competitive with exports increasing and imports falling. However, there is another mechanism not captured in these models. If interest rates increase, we expect that foreigners would want to hold more domestic assets (due to the higher returns) and domestic agents would want to hold more domestic assets and less foreign assets. We expect a net inflow of capital and an appreciation of the currency. This appreciation would then hurt the trade account. Our task is to develop a financial module and run simulations to investigate the impact of tighter monetary policy in Papua New Guinea (PNG). The financial module is a set of equations that are added, as an extension, to an existing comparative-static model for PNG, see Kauzi (2003). The comparative-static model of PNG is an ORANIG-style model and includes the core economic equations. In this paper we do not explain the equations of the core economic module. For a detailed description of the core module, see Dixon et al. (1982). The financial module is linked to the core CGE model via three conditions. Firstly, the current account deficit is equal to the net inflow of capital. Secondly, the government deficit is equal to the new acquisition of domestic bonds. Thirdly, investment in industry i is set equal to the new acquisition of assets in industry i by agents z. Once these equations are activated, we endogenously determine the nominal exchange rate, domestic bond rate and the change in the cost of funds to industries. In this paper we describe the theory underlying the financial module. We simulate a 1 per cent increase in the interest rate the BPNG pays to the commercial banks for holding deposits with the BPNG. The first two simulations with the comparative-static module are conducted with the financial module inoperative. This means that the financial module is not linked to the core economic module and that the nominal exchange rate and rates of interest are set exogenously. We expect the results of these two simulations to show that tighter monetary policy leads to an improvement in the trade balance. In simulations 3 we activate the first condition where we set the current account balance equal to the net capital inflow. This allows us to endogenously determine the nominal exchange rate. In simulation 4 we activate the second condition where we set the government deficit equal to the issuing of domestic bonds. We can now endogenously determine the domestic bond rate. In simulation 5 we activate the final constraint where we endogenously determine the change in the cost of lending funds to industries. By activating all the conditions we linked the financial module to the core economic module. We expect the results of the final three simulations to show that tighter monetary policy leads to a worsening of the trade balance.
    Keywords: Computable general equilibrium (CGE) models, Financial markets, Interest rates, Monetary Policy
    JEL: C68 E44 E47 E52
    Date: 2014–02
  19. By: Francesco Zanetti
    Abstract: This paper estimates�a New Keynesian model to investigate to what extent labour market reforms undertaken by the Thatcher government in the late 1930s and the introduction of a constant inflation target in 1992 might have changed the UK economic outlook if they had been introduced in the early 1970s.� The results suggest that a stronger reaction to deviations of inflation from target have contributed to a more stable economic outlook, while labour market reforms and the introduction of a constant inflation target are unlikely to have produced a different outcome.
    Keywords: Labour market reforms, Search and matching, New Keynesian model
    JEL: E24 E32 E52 J64
    Date: 2014–04–30
  20. By: Carlos León; Clara Machado; Miguel Sarmiento
    Abstract: Evidence suggests that the Colombian interbank funds market is an inhomogeneous and hierarchical network in which a few financial institutions fulfill the role of “super-spreaders” of central bank liquidity among market participants. Results concur with evidence from other interbank markets and other financial networks regarding the flaws of traditional direct financial contagion models based on homogeneous and non-hierarchical networks, and provide further evidence about financial networks’ self-organization emerging from complex adaptive financial systems. Our research work contributes to central bank’s efforts by (i) examining and characterizing the actual connective structure of interbank funds networks; (ii) identifying those financial institutions that may be considered as the most important conduits for monetary policy transmission, and the main drivers of contagion risk within the interbank funds market; (iii) providing new elements for the implementation of monetary policy and for safeguarding financial stability. Classification JEL: E5, G2, L14.
    Date: 2014–04
  21. By: Amstad, Marlene (Federal Reserve Bank of New York); Potter, Simon M. (Federal Reserve Bank of New York); Rich, Robert W. (Federal Reserve Bank of New York)
    Abstract: Monetary policymakers and long-term investors would benefit greatly from a measure of underlying inflation that uses all relevant information, is available in real time, and forecasts inflation better than traditional underlying inflation measures such as core inflation measures. This paper presents the “FRBNY Staff Underlying Inflation Gauge (UIG)” for CPI and PCE. Using a dynamic factor model approach, the UIG is derived from a broad data set that extends beyond price series to include a wide range of nominal, real, and financial variables. It also considers the specific and time-varying persistence of individual subcomponents of an inflation series. An attractive feature of the UIG is that it can be updated on a daily basis, which allows for a close monitoring of changes in underlying inflation. This capability can be very useful when large and sudden economic fluctuations occur, as at the end of 2008. In addition, the UIG displays greater forecast accuracy than traditional measures of core inflation.
    Keywords: expectations; survey forecasts; imperfect information; term structure of disagreement
    JEL: C13 C33 C43 E31
    Date: 2014–04–22
  22. By: Todd B. Walker; Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: Policy function iteration methods for solving and analyzing dynamic stochastic general equilibrium models are powerful from a theoretical and computational perspective. Despite obvious theoretical appeal, significant startup costs and a reliance on grid-based methods have limited the use of policy function iteration as a solution algorithm. We reduce these costs by providing a user-friendly suite of MATLAB functions that introduce multi-core processing and Fortran via MATLAB's executable function. Within the class of policy function iteration methods, we advocate using time iteration with linear interpolation. We examine a canonical real business cycle model and a new Keynesian model that features regime switching in policy parameters, Epstein-Zin preferences, and monetary policy that occasionally hits the zero-lower bound on the nominal interest rate to highlight the attractiveness of our methodology. We compare our advocated approach to other familiar iteration and approximation methods, highlighting the tradeoffs between accuracy, speed and robustness.
    Keywords: Policy function iteration; Zero lower bound; Epstein-Zin preferences; Markov switching; Chebyshev polynomials; Real business cycle model; New Keynesian model
    JEL: C63 C68 E52 E62
    Date: 2014–04
  23. By: Thorsten Beck; Andrea Colciago; Damjan Pfajfar
    Abstract: The recent financial crisis has stimulated theoretical and empirical research on the propagation mechanisms underlying business cycles, in particular on the role of financial frictions. Many issues concerning the interactions between banking and monetary policy forced policy makers to economic policies, and motivated macroeconomists to focus on the implications of financial intermediation constraints on asset price fluctuations, the behavior of non-financial firms, households, governments and in turn for real macroeconomic performance. This paper surveys research on the role of financial intermediaries and financial frictions in the transmission of monetary policy and discusses how to design both the new banking regulatory and supervisory structures and monetary policy in order to stabilize the economy. It also serves as an introduction to this special issue.
    Keywords: Financial Intermediation; DSGE models; Financial Frictions
    JEL: E40 E50 G20
    Date: 2014–04
  24. By: Pejman Bahramian (Department of Economics, Eastern Mediterranean University, Famagusta, Turkish Republic of Northern Cyprus, via Mersin 10, Turkey); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Turkish Republic of Northern Cyprus, via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Patrick T. kanda (Department of Economics, University of Pretoria)
    Abstract: The conduct of inflation targeting is heavily dependent on accurate inflation forecasts. Non-linear models have increasingly featured, along with linear counterparts, in the forecasting literature. In this study, we focus on forecasting South African infl ation by means of non-linear models and using a long historical dataset of seasonally-adjusted monthly inflation rates spanning from 1921:02 to 2013:01. For an emerging market economy such as South Africa, non-linearities can be a salient feature of such long data, hence the relevance of evaluating non-linear models' forecast performance. In the same vein, given the fact that 1969:10 marks the beginning of a protracted rising trend in South African inflation data, we estimate the models for an in-sample period of 1921:02-1966:09 and evaluate 24 step-ahead forecasts over an out-of-sample period of 1966:10-2013:01. In addition, using a weighted loss function specification, we evaluate the forecast performance of different non-linear models across various extreme economic environments and forecast horizons. In general, we find that no competing model consistently and significantly beats the LoLiMoT's performance in forecasting South African inflation.
    Keywords: Inflation, forecasting, non-linear models, weighted loss function, South Africa
    JEL: C32 E31 E52
    Date: 2014–04
  25. By: Kengo Nutahara
    Abstract: This study investigates aggregate implications of fiscal policy that responds to asset price fluctuations. In our sticky-price model, the monetary authority follows a Taylor rule and the fiscal authority follows a rule that the target of government spending is asset prices and responds negatively to the asset price fluctuations. It is shown that government spending that targets asset prices is a source of equilibrium indeterminacy.
    Date: 2013–05
  26. By: Keiichiro Kobayashi; Tomoyuki Nakajima
    Abstract: We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-ful lling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-ful lling crisis but increases that of fundamental crisis.
    Date: 2014–01
  27. By: Ryoji Hiraguchi; Keiichiro Kobayashi
    Abstract: We study a monetary model in which buyers choose search intensity and prices are considered as given in the decentralized market. In doing so, we indicate that the Friedman rule may not be optimal. Buyers' search intensity is excessively low under the rule, because their surplus is less than the social surplus under the price-taking regime. A deviation from the rule increases buyers' surplus and search intensity, and thus raises welfare and output. Our result differs from Lagos and Rocheteau (International Economic Review 2005) in which the pricing mechanism is either bargaining or price-posting and the Friedman rule is optimal.
    Date: 2013–11
  28. By: Fisher, Richard W. (Federal Reserve Bank of Dallas)
    Abstract: Those who think we can be more specific in stating our intentions and broadcasting our every next move with complete certainty are, in my opinion, clinging to the myth that economics is a hard science and monetary policy a precise scientific procedure rather than the applied best judgment of cool-headed, unemotional decision-makers.
    Date: 2014–04–22
  29. By: Pablo Pincheira; Andrés Gatty
    Abstract: In this paper we build forecasts for Chilean year-on-year inflation using simple time-series models augmented with different measures of international inflation. Broadly speaking, we construct two families of international inflation factors. The first family is built using year-on-year inflation of 18 Latin American (LA) countries (excluding Chile). The second family is built using year-on-year inflation of 30 OECD countries (excluding Chile). We show sound in-sample and pseudo out-ofsample evidence indicating that these international factors do help forecast Chilean inflation at several horizons. Incorporating the international factors reduce the Root Mean Squared Prediction Error of pure univariate SARIMA models statistically speaking. We also show that the predictive pass-through from international to local inflation has increased in the recent years. As a final exercise we construct another international inflation factor as an average of the inflation of fifteen countries from which Chile gets a high percentage of its imports. With the aid of this factor the models outperform our univariate benchmarks but also underperform the results obtained with the broader factors built with LA or OECD countries, suggesting that imported inflation is not the only channel explaining our findings.
    Date: 2014–02
  30. By: Robert W. Dimand
    Abstract: This paper examines the relationship of the monetary economics of James Tobin to modern monetary theory, which has diverged in many ways from the directions taken by Tobin and his associates (for example, moving away from multi-asset models of financial market equilibrium and from monetary models of long-run economic growth) but which has also built upon aspects of his work (e.g., the use of simulation and calibration in his work on inter-termporal consumption decisions). Particular attention will be paid to Tobin's unpublished series of three Gaston Eyskens Lectures at Leuven on Neo-Keynesian Monetary Theory: A Restatement and Defense, and the paper draws on my forthcoming volume of Tobin for Palgrave Macmillan's series on Great Thinkers in Economics.
    Keywords: James Tobin, modern monetary theory, microeconomic foundations, Keynesian economics, corridor of stability
    JEL: B22 B31 E12
    Date: 2014
  31. By: Carlos Medel; Michael Pedersen; Pablo Pincheira
    Abstract: In this paper we analyze the contribution of international measures of inflation to predict local ones. To that end, we consider the set of current thirty one OECD economies for which inflation data is available at a monthly frequency. By considering this set of countries, a span of time including the post-crisis period and measures of both core and headline inflation, we are extending in three important dimensions the previous literature on this topic. Our main results indicate that on average there is a non-negligible predictive pass-through from international to local inflation both at the core and headline levels. This predictive pass-through has increased in the last period of our sample. Nevertheless, there is heterogeneity in the size and statistical significance of this pass-through which is especially important at the core level. Finally, important reductions in the Root Mean Squared Prediction Error are obtained only for a handful of countries
    Date: 2014–03
  32. By: Georges Prat; Remzi Uctum
    Abstract: Abstract. Using Consensus Economics survey data on JPY/USD and GBP/USD exchange rate expectations for the 3- and 12-month horizons over the period November 1989 – December 2012 we first show that expectations fail to unbiasedness tests and do not exhibit a learning process towards rationality. Our approach is consistent with the economically rational expectations theory (Feige and Pearce, 1976), which states that information costs and agents’ aversion of misestimating future exchange rates determine the optimal amounts of information on which they base their expectations. The time-variability of the cost/aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative, adaptive and regressive processes augmented by a forward market component, whose parameters are allowed to change over time. This mixed expectation model with unstable heterogeneity is validated by our Kalman Filter estimation results for the two currencies and the two horizons considered. Although the chartist behavior, gathering the extrapolative and adaptive components, appears to dominate the fundamentalist behavior, described by the regressive and forward market components, the relative importance of the fundamentalists (chartists) is found to increase (decrease) with the time-horizon.
    Keywords: expectation formation, exchange rates, dynamic heterogeneity, survey data.
    JEL: D84 F31 G14
    Date: 2014–04–22

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