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on Central Banking |
| By: | Gino Cateau |
| Abstract: | Policy-makers in the United States over the past 15 to 20 years seem to have been cautious in setting policy: empirical estimates of monetary policy rules such as Taylor's (1993) rule are much less aggressive than those derived from optimizing models. The author analyzes the effect of an aversion to model and data-parameter uncertainty on monetary policy. Model uncertainty arises because a central bank finds three competing models of the economy to be plausible. Data uncertainty arises because real-time data are noisy estimates of the true data. The central bank explicitly models the measurement-error processes for both inflation and the output gap, and it acknowledges that it may not know the parameters of those processes precisely (which leads to data-parameter uncertainty). The central bank chooses policy according to a Taylor rule in a framework that allows an aversion to the distinct risk associated with multiple models and dataparameter configurations. The author finds that, if the central bank cares strongly enough about stabilizing the output gap, this aversion generates significant declines in the coefficients of the Taylor rule, even if the bank's loss function assigns little weight to reducing interest rate variability. He also finds that an aversion to model and data-parameter uncertainty can yield an optimal Taylor rule that matches the empirical Taylor rule. Under some conditions, a small degree of aversion is enough to match the historical rule. |
| Keywords: | Uncertainty and monetary policy |
| JEL: | E5 E58 D8 D81 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-6&r=cba |
| By: | Guglielmo Maria Caporale; Luis A. Gil-Alana |
| Abstract: | This paper examines aggregate money demand relationships in five industrial countries by employing a two-step strategy for testing the null hypothesis of no cointegration against alternatives which are fractionally cointegrated. Fractional cointegration would imply that, although there exists a long-run relationship, the equilibrium errors exhibit slow reversion to zero, i.e. that the error correction term possesses long memory, and hence deviations from equilibrium are highly persistent. It is found that the null hypothesis of no cointegration cannot be rejected for Japan. By contrast, there is some evidence of fractional cointegration for the remaining countries, i.e., Germany, Canada, the US, and the UK (where, however, the negative income elasticity which is found is not theory-consistent). Consequently, it appears that money targeting might be the appropriate policy framework for monetary authorities in the first three countries, but not in Japan or in the UK. |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:bru:bruedp:05-01&r=cba |
| By: | Marco Celentani; J. Ignacio Conde-Ruiz; Klaus Desmet |
| Abstract: | This paper uses an overlapping generations model to analyze monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country's terms of trade of securities, central banks may choose to commit to costly inflation in favorable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation. |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2004-12&r=cba |
| By: | Xavier Labandeira; José M. Labeaga; Miguel Rodríguez |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaeee:196&r=cba |
| By: | Persson , Mats (Institute for International Economic Studies, Stockholm University); Persson , Torsten (Institute for International Economic Studies, Stockholm University); Svensson, Lars E.O. (Department of Economics, Princeton University) |
| Abstract: | This paper demonstrates how time consistency of the Ramsey policy–the optimal fiscal and monetary policy under commitment–can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite a general Ramsey policy, including time varying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004). |
| Keywords: | time consistency; Ramsey policy; surprise inflation |
| JEL: | E31 E52 H21 |
| Date: | 2004–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iiessp:0734&r=cba |
| By: | Forssbaeck, Jens (Institute of Economic Research); Oxelheim, Lars (The Research Institute of Industrial Economics) |
| Abstract: | We investigate monetary-policy autonomy under different exchange-rate regimes in small, open European economies during the 1980s and 1990s. We find no systematic link between ex post monetary-policy autonomy and exchange rate regimes. This result is enforced for countries/periods with alternative nominal targets. Our interpretation of the results is that over the medium and long term following an ‘independent’ target for monetary policy, which does not deviate much from the targets of those countries to which one is closely financially integrated, is as constraining as locking the exchange rate to some particular level |
| Keywords: | Exchange Rate Regimes; Monetary Policy Autonomy; Capital Mobility |
| JEL: | E42 E52 F41 |
| Date: | 2005–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0637&r=cba |
| By: | Ugo Panizza (Research Department, Inter-American Development Bank) |
| Abstract: | This paper surveys possible monetary policy options for emerging market countries. As the paper does not seek to enter into the fix versus flex debate, it only considers monetary policy options for countries with a flexible exchange rate. After making the point that the conduct of monetary policy requires a nominal anchor and surveying different types of nominal anchors, the paper suggests that most academics and policymakers agree on the fact that inflation targeting should be the nominal anchor of choice. Hence, the paper describes the main characteristics of an inflation targeting regime and discusses its applicability to emerging market countries. Next, the paper recognizes the necessity of coordination between fiscal and monetary policy and points out that, in order to conduct countercyclical fiscal policies, emerging market countries need to build fiscal institutions that allow accumulating surpluses during periods of economic expansion. The paper concludes by studying the applicability of inflation targeting to Egypt and finds mixed support for this option. |
| Keywords: | Monetary Policy, Fiscal Policy, Inflation targeting, Egypt |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:1006&r=cba |
| By: | Petar Chobanov; Nikolay Nenovsky |
| Abstract: | Over the last years the efficiency and existence of an automatic adjustment mechanism of currency boards are in the centre of economic discussions. This study is intended to provide an empirical analysis of the volume and interest rate of unsecured overnight deposits at Bulgarian interbank market. Three empirical models are developed in order to explain the behaviour of demand, supply and interest rates. The impact of reserve requirements, operations connected with government budget, transactions in reserve currency (Euro) and some seasonal factors is discussed. The developments of interest rates and volumes are well captured by the employed variables and their statistically significant signs coincide with the theoretical literature. |
| Keywords: | money market, currency board, Bulgaria |
| JEL: | E4 E5 |
| Date: | 2004–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-693&r=cba |