nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒11‒17
25 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary and Fiscal Policy in Times of Crises: A New Keynesian Perspective in Continuous Time By Bernd Hayo; Britta Niehof
  2. Exchange Rate Flexibility under the Zero Lower Bound By Cook, David; Devereux, Michael B.
  3. Inflation Targeting As a Monetary Policy Rule: Experience and Prospects By Manai Daboussi, Olfa
  4. Drifting Inflation Targets and Monetary Stagflation By Knotek, Edward S.; Khan, Shujaat
  5. Is South Africa's inflation target too persistent for monetary policy conduct? By Faul, Joseph; Khumalo, Bridgette; Pashe, Mpho; Khuzwayo, Miranda; Banda, Kamogelo; Jali, Senzo; Myeni, Bathandekile; Pule, Retlaodirela; Mosito, Boitshoko; Jack, Lona-u-Thando; Phiri, Andrew
  6. In Lands of Foreign Currency Credit, Bank Lending Channels Run Through? The Effects of Monetary Policy at Home and Abroad on the Currency Denomination of the Supply of Credit By Steven Ongena; Ibolya Schindele; Dzsamila Vonnak
  7. Lessons learned for monetary policy from the recent crisis By Michael D. Bordo
  8. Optimal monetary policy in the presence of human capital depreciation during unemployment By Laureys, Lien
  9. The effects of intraday foreign exchange market operations in Latin America: results for Chile, Colombia, Mexico and Peru By Miguel Fuentes; Pablo Pincheira; Juan Manuel Julio; Hernán Rincón
  10. The Return of the Original Phillips curve? An Assessment of Lars E. O. Svensson's Critique of the Riksbank's Inflation Targeting, 1997-2012 By Andersson, Fredrik N. G.; Jonung, Lars
  11. Currency Manipulation By Weithing Zhang; Thomas Mertens; Tarek Hassan
  12. 'Financial Regulation, Credit and Liquidity Policy and the Business Cycle' By George J. Bratsiotis; William J. Tayler; Roy Zilberman
  13. Early Public Banks By Roberds, William; Velde, Francois R.
  14. The offshore renminbi exchange rate: Microstructure and links to the onshore market By Cheung, Yin-Wong; Rime , Dagfinn
  15. Monetary Policy, the Composition of GDP, and Crisis Duration in Europe By Nicolas Cachanosky; Andreas Hoffmann
  16. Central Banks: Powerful, Political and Unaccountable? By Buiter, Willem
  17. Bubbles and Central Banks: Historical Perspectives By Markus K. Brunnermeier; Isabel Schnabel
  18. The Nexus between Inflation and Inflation Uncertainty via Wavelet Approach: Some Lessons from Egyptian Case By Bouoiyour, Jamal; Selmi, Refk
  19. Non-Linear Exchange Rate Relationships: An Automated Model Selection Approach with Indicator Saturation By Josh R. Stillwagon
  20. Using Online Prices to Anticipate Official CPI Inflation By Manuel Bertoloto; Alberto Cavallo; Roberto Rigobon
  21. What do we know about the effects of macroprudential policy? By Gabriele Galati; Richhild Moessner
  22. Intra-Safe Haven Currency Behavior During the Global Financial Crisis By Fatum, Rasmus; Yamamoto, Yohei
  23. Explaining the Differences between Local Currency versus FX-denominated Loans and Deposits in the Central-Eastern European Economies By Judit Temesváry
  24. Governing by Panic: The Politics of the Eurozone Crisis By David M. Woodruff
  25. Extreme Events and the Origin of Central Bank Priors By Chollete, Loran; Schmeidler, David

  1. By: Bernd Hayo (University of Marburg); Britta Niehof (University of Marburg)
    Abstract: To analyse the interdependence between monetary and fiscal policy during a financial crisis, we develop an open-economy DSGE model with monetary and fiscal policy as well as financial markets in a continuous-time framework based on stochastic differential equations. Monetary policy is modelled using both a standard and a modified Taylor rule and fiscal policy is modelled as either expansionary or austere. In addition, we differentiate between open economies and monetary union members. We find evidence that the modified Taylor rule notably reduces the likelihood that the financial market crisis affects the real economy. But if we assume that households are averse with respect to outstanding government debt, we find that a combination of expansionary monetary policy and austere fiscal policy provides better stabilisation of both domestic and foreign economies in terms of both output and inflation. In the case of a monetary union, we find that stabilisation of output in the country where the financial shock originates is no longer as easy and, in terms of prices, there is now deflation in the country where the crisis originated and a positive inflation rate in the other country.
    Keywords: New Keynesian Models, Financial Crisis, Dynamic Stochastic General Equilibrium Models, Continuous Time Model, Fiscal Policy, Monetary Policy
    JEL: C63 E44 E47 E52 E62 F41
    Date: 2014
  2. By: Cook, David (Hong Kong University of Science and Technology); Devereux, Michael B. (University of British Columbia)
    Abstract: An independent currency and a flexible exchange rate generally helps a country in adjusting to macroeconomic shocks. But recently in many countries, interest rates have been pushed down close to the lower bound, limiting the ability of policy-makers to accommodate shocks, even in countries with flexible exchange rates. This paper argues that if the zero bound constraint is binding and policy lacks an effective ‘forward guidance’ mechanism, a flexible exchange rate system may be inferior to a single currency area. With monetary policy constrained by the zero bound, under flexible exchange rates, the exchange rate exacerbates the impact of shocks. Remarkably, this may hold true even if only a subset of countries are constrained by the zero bound, and other countries freely adjust their interest rates under an optimal targeting rule. In a zero lower bound environment, in order for a regime of multiple currencies to dominate a single currency, it is necessary to have effective forward guidance in monetary policy.
    JEL: E2 E5 E6
    Date: 2014–09–01
  3. By: Manai Daboussi, Olfa
    Abstract: This paper examines the inflation targeting experience in developing countries. Based on panel data of 53 developing countries, of which 20 those have adopted inflation targeting policy by the end of 2007, the purpose is to show the effects of inflation targeting on macroeconomic performance in these economies. We use the Great Moderation approach of Pétursson (2005) to analyze the relationship between inflation targeting and macroeconomic performance over the period 1980-2012. A key lesson from this experience is that this monetary policy realizes macroeconomic performance and contributes to the reduction of inflation, especially in developing countries with hyperinflation.
    Keywords: Monetary policy, inflation targeting, macroeconomic performance, developing economies.
    JEL: E52 E58
    Date: 2014–09–14
  4. By: Knotek, Edward S. (Federal Reserve Bank of Cleveland); Khan, Shujaat (Johns Hopkins University)
    Abstract: This paper revisits the phenomenon of stagflation. Using a standard New Keynesian dynamic, stochastic general equilibrium model, we show that stagflation from monetary policy alone is a very common occurrence when the economy is subject to both deviations from the policy rule and a drifting inflation target. Once the inflation target is fixed, the incidence of stagflation in the baseline model is essentially eliminated. In contrast with several other recent papers that have focused on the connection between monetary policy and stagflation, we show that while high uncertainty about monetary policy actions can be conducive to the occurrence of stagflation, imperfect information more generally is not a requisite channel to generate stagflation.
    Keywords: stagflation; inflation; time-varying inflation target; onetary policy; rules; imperfect nformation
    JEL: E31 E52
    Date: 2014–11–03
  5. By: Faul, Joseph; Khumalo, Bridgette; Pashe, Mpho; Khuzwayo, Miranda; Banda, Kamogelo; Jali, Senzo; Myeni, Bathandekile; Pule, Retlaodirela; Mosito, Boitshoko; Jack, Lona-u-Thando; Phiri, Andrew
    Abstract: Can the South African Reserve Bank’s (SARB) substantially control inflation within their set target of 3-6 percent? We sought to investigate this phenomenon by examining multiple threshold effects in the persistence levels of quarterly aggregated inflation data collected between 2003 and 2014. To this end, we employ the three-regime threshold autoregressive (TAR) model of Hansen (2000). We favour this approach over other conventional linear econometric models as it permits us to test for varying persistency within the autoregressive (AR) components of the inflation process. Our empirical explorations reveal that the SARB’s set target does indeed lie within a range in which inflation is found to be most persistent. Overall and more importantly, our results suggest that the SARB should either consider revising their set inflation target by redefining the inflation target range to accommodate higher inflation rates or the Reserve Bank should consider abandoning the inflation targeting regime altogether.
    Keywords: Inflation persistence; TAR Models; Monetary Policy; South African Reserve Bank (SARB); Inflation Targeting; Developing Economy.
    JEL: C22 E30 E31 E52 E58
    Date: 2014–09–01
  6. By: Steven Ongena (University of Zurich, Swiss Finance Institute and CEPR); Ibolya Schindele (BI Norwegian Business School and Central Bank of Hungary); Dzsamila Vonnak (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences)
    Abstract: We analyze the differential impact of domestic and foreign monetary policy on the local supply of bank credit in domestic and foreign currencies. We analyze a novel, supervisory dataset from Hungary that records all bank lending to firms including its currency denomination. Accounting for time-varying firm-specific heterogeneity in loan demand, we find that a lower domestic interest rate expands the supply of credit in the domestic but not in the foreign currency. A lower foreign interest rate on the other hand expands lending by lowly versus highly capitalized banks relatively more in the foreign than in the domestic currency.
    Keywords: bank balance-sheet channel, monetary policy, foreign currency lending
    JEL: E51 F3 G21
    Date: 2014–10
  7. By: Michael D. Bordo
    Date: 2014–07
  8. By: Laureys, Lien (Bank of England)
    Abstract: When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool’s composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexible-price allocation is no longer constrained-efficient even when the standard Hosios condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. But quantitative analysis shows that although optimal price inflation is no longer zero, strict inflation targeting stays close to the optimal policy.
    Keywords: skill erosion; monetary policy; unemployment
    JEL: E24 E52 J64
    Date: 2014–10–24
  9. By: Miguel Fuentes; Pablo Pincheira; Juan Manuel Julio; Hernán Rincón
    Abstract: This paper analyses the effects of sterilised, intraday foreign exchange market operations (non-discretionary and discretionary) on foreign exchange returns and volatility in four inflation targeting economies in Latin America. The distribution of exchange rates during intervention and non-intervention days are first compared, and then event study regressions are used to estimate the impact of intervention (and macro surprises) on exchange rate returns and exchange rate volatility as well as on foreign exchange market turnover (in Colombia). In general, the results suggest that the impact of both non-discretionary and discretionary operations is at times significant but transitory. However, an analysis of Chile’s experience suggests that the announcement effects of even non-discretionary programmes may be significant and persistent.
    Keywords: Exchange rate, central bank intervention, microstructure.
    JEL: E58 F31 G14
    Date: 2014–10–21
  10. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: We examine Lars E O Svensson's prominent critique of the monetary policy of the Sveriges Riksbank (the Swedish central bank) from 1995-2012. Our main objection concerns Svensson's conclusion that the original pre-Friedman/Phelps version of the Phillips curve based on constant inflation expectations has returned for Sweden. Based on estimates of this model, Svensson claims that that the Riksbank's policy has contributed to an average of 38 000 more unemployed a year between 1997-2011. This result is based on Svensson's unrealistic as well as unnecessary assumption of constant inflation expectations anchored at the Riksbank's inflation target of 2 per cent. Data show, however, that the public's inflation expectations have varied between 0 and 4 per cent, thus they have not been anchored. The negative employment effect found by Svensson vanishes once actual data on inflation expectations are included in the estimates of the Phillips curve. The long run non-vertical Phillips curve is transformed into a vertical one, in line with the Friedman/Phelps theory. We have additional objections to Svensson's reasoning. First, we show that the Riksbank has on average met its inflation target between 1995 and 2012. Second, we suggest that the original Phillips curve is too simple a model to draw any firm policy conclusions about unemployment and monetary policy in a small open economy such as Sweden. Third, we do not want to overburden Swedish monetary policy by making the Riksbank responsible for three objectives. It has already two objectives: price stability and financial stability. Criticising the Riksbank for employment losses, as Svensson does, gives priority to a third objective, high employment. Finally, Svensson adopts a short-term perspective by focusing on the period 1995-2011. When we compare the Riksbank's inflation targeting regime with previous monetary policy regimes over the past 100 years, inflation targeting in the past fifteen years is clearly one of the most successful.
    Keywords: Sweden; inflation targeting; Phillips curve; inflation expectations; Swedish Riksbank; unemployment
    JEL: C51 D84 E24 E31 E42 E50 E58 N14
    Date: 2014–08–29
  11. By: Weithing Zhang (University of Chicago); Thomas Mertens (New York University); Tarek Hassan (The University of Chicago)
    Abstract: Many central banks manage the stochastic behavior of their currencies' exchange rates by imposing pegs relative to a target currency. We study the effects of such currency manipulation in a multi-country model of exchange rate determination with endogenous capital accumulation. We find that the imposition of an exchange rate peg relative to a given target currency increases the volatility of consumption in the target country and decreases the volatility of the target currency's exchange rate relative to all other currencies in the world. In addition, currency pegs affect the formation of capital across sectors and countries. For example, an economically smaller country (such as Saudi Arabia) pegging its currency to an economically large country (such at the U.S.) decreases capital accumulation in the larger country and increases its real and nominal interest rate
    Date: 2014
  12. By: George J. Bratsiotis; William J. Tayler; Roy Zilberman
    Abstract: The global fi?nancial crisis in 2007 prompted policy makers to introduce a combination of bank regulation and macroprudential policies, including non-conventional monetary policies, such as interest on reserves and changes in required reserves. This paper examines how the combination of such policies can help stabilize the effects of real and ?financial shocks in economies where ?financial frictions are important. Although there is an extensive literature on ?financial regulation and macro-prudiential policy, and more recently some literature on the effects of interest on reserves, these policies are usually examined independently. The results point to the importance of coordination between ?financial regulation and monetary policy in minimizing welfare losses following such shocks. Interest on reserves is shown to be more effective in reducing welfare losses than changes in required reserves and to play a signi?cant role in making stabilization policy more effective. The results also suggest an easing of bank capital requirements during recessions, when output and loans are falling and the risk of default is high.
    Date: 2014
  13. By: Roberds, William (Federal Reserve Bank of Atlanta); Velde, Francois R. (Federal Reserve Bank of Chicago)
    Abstract: Publicly owned or commissioned banks were common in Europe from the 15th century. This survey argues that while the early public banks were characterized by great experimentation in their design, a common goal was to create a liquid and reliable monetary asset in environments where such assets were rare or unavailable. The success of these banks was, however, never guaranteed, and even well-run banks could become unstable over time as their success made them susceptible to fiscal exploitation. The popularization of bearer notes in the 18th century broadened the user base for the public banks' money but was also accompanied by increased fiscal abuse. Wartime demands of the Napoleonic Era resulted in the reorganization or dissolution of many early public banks. A prominent exception was the Bank of England, whose adept management of a fiscally backed money provided a foundation for the development of central banks as they exist today.
    Keywords: central banks; exchange banks; public banks
    JEL: E58 N13
    Date: 2014–08–03
  14. By: Cheung, Yin-Wong (BOFIT); Rime , Dagfinn (BOFIT)
    Abstract: The offshore renminbi (CNH) exchange rate is the exchange rate of the Chinese currency transacted outside China. We study the CNH exchange rate dynamics and its links with onshore exchange rates. Using a specialized microstructure dataset, we find that CNH is significantly affected by its order flow and limit-order imbalance. The offshore CNH exchange rate has an increasing impact on the onshore rate, and significant predictive power for the official RMB central parity rate. The CNH order flow also affects the onshore RMB exchange rate and the central parity rate. The interactions between variables are likely to be time-varying.
    Keywords: foreign exchange market microstructure; order flow; limit-order imbalance; CNH; CNY; central parity rate
    JEL: F31 F33 G14 G15 G21 G28
    Date: 2014–09–29
  15. By: Nicolas Cachanosky; Andreas Hoffmann
    Abstract: This paper analyzes the effects of changes in interest rates on the composition of production in ten European countries during the boom period of the 2000s. We find that output elasticity differs across industries and across countries for similar industries. The paper suggests that in the run-up to the 2008 crisis, the ECB’s low interest rate policy affected the allocation of resources across industries. This may explain the sluggish overall recovery from the crisis in Europe.
    Keywords: Monetary Policy; Interest Rate Sensitivity; Crisis Duration; GDP Composition
    JEL: E32 E52 E58
    Date: 2014–10
  16. By: Buiter, Willem
    Abstract: Central banks’ economic and political importance has grown in advanced economies since the start of the Great Financial Crisis in 2007. An unwillingness or inability of governments to use countercyclical fiscal policy has made monetary policy the only stabilization tool in town. However, much of the enhanced significance of central banks is due to their lender †of †last †resort and market †maker †of †last †resort roles, providing liquidity to financially distressed and illiquid financial institutions and sovereigns. Supervisory and regulatory functions – often deeply political, have been heaped on central banks. Central bankers also increasingly throw their weight around in the public discussion of and even the design and implementation of fiscal policy and structural reforms †areas which are way beyond their mandates and competence. In this lecture I argue that the preservation of the central bank’s legitimacy requires that a clear line be drawn between the central bank’s provision of liquidity and the Treasury’s solvency support for systemically important financial institutions. All activities of the central bank that expose it to material credit risk should be guaranteed by the Treasury. In addition, central banks must become more accountable by increasing the transparency of their lender †of †last †resort and market maker †of †last resort activities. Central banks ought not to engage in quasi †fiscal activities. Finally, central banks should stick to their knitting and central bankers should not become participants in public debates and deeply political arguments about matters beyond their mandate and competence, including fiscal policy and structural reform.
    Keywords: seigniorage, quasi-fiscal, independence, legitimacy, accountability, monetary policy, regulation, supervision.
    JEL: E02 E42 E5 E52 E58 E6 E62 E63 G18 G28 H63
    Date: 2014
  17. By: Markus K. Brunnermeier (Princeton University); Isabel Schnabel
    Abstract: This paper reviews some of the most prominent asset price bubbles from the past 400 years and documents how central banks (or other institutions) reacted to those bubbles. The historical evidence suggests that the emergence of bubbles is often preceded or accompanied by an expansionary monetary policy, lending booms, capital inflows, and financial innovation or deregulation. We find that the severity of the economic crisis following the bursting of a bubble is less linked to the type of asset than to the financing of the bubble – crises are most severe when they are accompanied by a lending boom, high leverage of market players, and when financial institutions themselves are participating in the buying frenzy. Past experience also suggests that a purely passive “cleaning up the mess” stance towards inflating bubbles in many cases is costly. At the same time, while interest - rate leaning policies and macroprudential tools can and sometimes have helped to deflate bubbles and mitigate the associated economic crises, the correct implementation of such proactive policy approaches remains fraught with difficulties.
    Date: 2014–10–31
  18. By: Bouoiyour, Jamal; Selmi, Refk
    Abstract: The nexus between inflation and its uncertainty has been a topic of wide dispute. Using wavelet decomposition and with special reference to Egypt for the period 1960-2013, we find that the focal relationship varies substantially among the different frequencies involved. In the short-run, inflation expands inflation uncertainty and vice versa. In the medium term, higher inflation leads to greater volatility, while there is no evidence of significant link in the long-run. The main causes of these mixed outcomes have been organized into demand pull factors, cost push ones and the possible reflect of the conflicting underlying objectives pursued to avoid political pitfalls and the great instability that unfolded since 25th January 2011.
    Keywords: Inflation; inflation uncertainty; wavelet approach; Egypt.
    JEL: C1 C6 E3
    Date: 2014–10
  19. By: Josh R. Stillwagon (Department of Economics, Trinity College)
    Abstract: This paper examines whether the explanatory power of exchange rate models can be improved by allowing for cross-country asymmetries and non-linear effects of fundamentals. Both appear to be crucial. The data set looks at the USD versus pound and yen exchange rates from 1982:07-2013:10, and bias-corrected automated model selection is conducted with indicator saturation. Several non-linear effects are significant at the 1% level and reveal that larger changes in fundamentals typically generate changes in the exchange rate at an increasing rate, with the exception of variables eliciting countervailing central bank reactions (for example consumer prices) which exhibit diminishing effects.
    Keywords: Exchange Rates, determination puzzle, non-linearities, cross-country asymmetries, automated model selection, indicator saturation
    JEL: F31
    Date: 2014–10
  20. By: Manuel Bertoloto (PriceStats); Alberto Cavallo (MIT & NBER); Roberto Rigobon (MIT & NBER)
    Date: 2014–10
  21. By: Gabriele Galati; Richhild Moessner
    Abstract: The literature on the effectiveness of macroprudential policy tools is still in its infancy and has so far provided only limited guidance for policy decisions. In recent years, however, increasing efforts have been made to fill this gap. Progress has been made in embedding macroprudential policy in theoretical models. There is increasing empirical work on the effect of some macroprudential tools on a range of target variables, such as quantities and prices of credit, asset prices, and on the amplitude of the financial cycle and financial stability. In this paper we review recent progress in theoretical and empirical research on the effectiveness of macroprudential instruments.
    Keywords: Macroprudential policy; financial regulation
    JEL: E58 G28
    Date: 2014–09
  22. By: Fatum, Rasmus (University of Alberta); Yamamoto, Yohei (Hitotsubashi University)
    Abstract: We investigate intra-safe haven currency behavior during the recent global financial crisis. The currencies we consider are the USD, the JPY, the CHF, the EUR, the GBP, the SEK, and the CAD. We first assess which safe haven currency appreciates the most as market uncertainty increases, i.e. we assess which safe haven currency is the “safestâ€. We then use non-temporal threshold analysis to investigate whether intra-safe haven currency behavior changes, e.g. accelerates or decelerates, as market uncertainty increases. We find that the JPY is the “safest†of safe haven currencies and that only the JPY appreciates as market uncertainty increases regardless of the prevailing level of uncertainty. For all other currencies under study we find significant market uncertainty threshold effects. We extend our analysis to also consider intra-safe haven currency behavior before and after the global financial crisis.
    JEL: F31 G15
    Date: 2014–09–01
  23. By: Judit Temesváry (Department of Economics, Hamilton College)
    Abstract: Foreign currency-based loans and deposits became very popular in Central-Eastern European countries (CEECs) over the 2000-2011 period. This paper employs a structural approach to simultaneously examine the demand-side (consumer-related) and supply-side (bank-related) determinants of the quick spread of FX-based banking. The econometric analysis uses a unique newly constructed dataset on FX and domestic currency loans, deposits and interest rates, covering 16 CEECs overtime. Results show that deregulation and cheap funding from parents abroad helped fuel FX lending. There is substantial heterogeneity across market segments, currencies and maturities. Corporate sector FX lending is fundamentally different from retail and mortgage markets.
    Keywords: Bank lending, Interest rate choices, Discrete choice, Simultaneous equations, Cross-country analysis
    JEL: E44 F31 G21 G28
    Date: 2014–01
  24. By: David M. Woodruff
    Abstract: The Eurozone’s reaction to the economic crisis beginning in late 2008 involved both efforts to mitigate the arbitrarily destructive effects of markets and vigorous pursuit of policies aimed at austerity and deflation. To explain this paradoxical outcome, this paper builds on Karl Polanyi’s account of how politics reached a similar deadlock in the 1930s. Polanyi argued that democratic impulses pushed for the protective response to malfunctioning markets. However, under the gold standard the prospect of currency panic afforded great political influence to bankers, who used it to push for austerity, deflationary policies, and the political marginalization of labor. Only with the achievement of this last would bankers and their political allies countenance surrendering the gold standard. The paper reconstructs Polanyi’s theory of “governing by panic” and uses it to explain the course of the Eurozone policy over three key episodes in the course of 2010-2012. The prospect of panic on sovereign debt markets served as a political weapon capable of limiting a protective response, wielded in this case by the European Central Bank (ECB). Committed to the neoliberal “Brussels-Frankfurt consensus,” the ECB used the threat of staying idle during panic episodes to push policies and institutional changes promoting austerity and deflation. Germany’s Ordoliberalism, and its weight in European affairs, contributed to the credibility of this threat. While in September 2012 the ECB did accept a lender-of-last-resort role for sovereign debt, it did so only after successfully promoting institutional changes that severely complicated any deviation from its preferred policies.
    Keywords: Euro, European Central Bank (ECB), austerity, lender of last resort, Ordoliberalism, gold standard
    Date: 2014–10
  25. By: Chollete, Loran (UiS); Schmeidler, David (Tel Aviv University)
    Abstract: Where do central bank priors come from and how do policymakers evaluate a model before empirical probabilities are available? To address these questions, we analyze two central banks that choose priors about a rare disaster with the help of expert policy teams. Policymakers are misspecification averse when assessing subjective evidence, and therefore hedge in their selection of priors. This hedging results in priors that accommodate a modicum of belief disagreement.
    Keywords: Belief Disagreement; Central Bank; Misspecification Aversion; Rare Disaster; Subjective Evidence
    JEL: A10
    Date: 2014–08–30

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