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on Central Banking |
| By: | Domenico Giannone; Lucrezia Reichlin; Luca Sala |
| Abstract: | We analyse the panel of the Greenbook forecasts (sample 1970-1996) and a large panel of monthly variables for the US (sample 1970-2003) and show that the bulk of dynamics of both the variables and their forecasts is explained by two shocks. Moreover, a two factor model which exploits, in real time, information on many time series to extract a two dimensional signal, produces a degree of forecasting accuracy of the federal funds rate similar to that of the markets, and, for output and inflation, similar to that of the Greenbook forecasts. This leads us to conclude that the stochastic dimension of the US economy is two. We also show that dimension two is generated by a real and nominal shock, with output mainly driven by the real shock and inflation by the nominal shock. The implication is that, by tracking any forecastable measure of real activity and price dynamics, the Central Bank can track all fundamental dynamics in the economy. |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:284&r=cba |
| By: | Nunziata, Luca (Nuffield College, Oxford, University of Milan and IZA Bonn); Bowdler, Christopher (Nuffield College, Oxford) |
| Abstract: | An empirical analysis of the impact of labour market structures on the response of inflation to macroeconomic shocks is presented. Results based on a 20 country panel show that if labour market coordination is high, the effect on inflation of movements in unemployment, import prices, tax rates and productivity is dampened, both on impact and dynamically. In contrast, monopoly power in labour supply, measured by the percentage unionisation of the workforce, appears to amplify the response of inflation to its reduced form determinants. These findings are attributed to the behaviour of wages following movements in demand- and supply-side conditions. |
| Keywords: | inflation, input price shocks, labour market coordination, trade union density |
| JEL: | E31 J51 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1510&r=cba |
| By: | Gianluca Di Lorenzo; Giuseppe Marotta |
| Abstract: | A new approach to search for structural breaks in the retail lending rates pass-through in the wake of EMU is proposed and implemented for Italy and Portugal. The econometric exercise shows that breakpoints cluster in the second semester 1999 and that the pass-through on short term lending is, in contrast with earlier research, sizeably lower in the post-break period. The recently proposed distinction between monetary policy and cost-of-funds approaches in the passthrough analysis does not yield different breakpoints. These results challenge the widely held view that EMU has in its wake enhanced the effectiveness of monetary transmission via the banking sector and made it more uniform across countries, because of rising and converging PTs. A strengthened relationship lending could at least partly explain the reduced passthrough in the Italian case. |
| Keywords: | Interest rates; Monetary policy; European Monetary Union; Relationship lending; Cointegration analysis; Structural breaks |
| JEL: | E43 E52 E58 F36 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:mod:modena:0503&r=cba |
| By: | Michael Ehrmann; Marcel Fratzscher; Roberto Rigobon |
| Abstract: | The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, and that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets: US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years: prior to EMU, the paper finds smaller international spillovers. |
| JEL: | E44 F3 C5 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11166&r=cba |
| By: | Lars E.O. Svensson |
| Abstract: | "Forecast targeting," forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking and one backward looking. A complicated infinite-horizon central-bank projection model of the economy can be closely approximated by a simple finite system of linear equations, which is easily solved for the optimal policy projections. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complicated function of all inputs in the monetary-policy decision process, including the central bank's judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit. |
| JEL: | E42 E52 E58 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11167&r=cba |
| By: | Simon Wren-Lewis (Reserve Bank of New Zealand) |
| Abstract: | This paper extends the `Five Area Bilateral Equilibrium Exchange Rate' (FABEER) model used in Wren-Lewis (2003) to include New Zealand and Australia. This model calculates medium term exchange rates conditional on assumptions for `sustainable' current accounts. The model suggests that the equilibrium value of both currencies has been declining over the last ten years and that both currencies were near fair value (on average) during 2002. Equilibrium values against the US dollar are estimated to be around 0.50 (New Zealand) and 0.59 (Australia), although these estimates are sensitive to the assumed equilibrium values for variables like commodity prices and the current account. |
| JEL: | E17 E61 F31 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2004/07&r=cba |
| By: | Nikolay Nenovsky; Yorgos Rizopoulos |
| Abstract: | The paper explores the possibilities to measure the institutional change in the monetary field. A political economy theoretical framework is built up, where the change of the monetary regime is analyzed as the outcome of the debtors - creditors interactions. In this perspective, the value of some traditional monetary variables during the period before and after the introduction of the Currency Board in Bulgaria, in 1997, reveals the main actors' evolving relative positions. |
| Keywords: | institutional change, monetary regime, Currency Board, transition, Bulgar |
| JEL: | E42 E52 O10 P30 |
| Date: | 2004–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-732&r=cba |