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on Central Banking |
| By: | Michael B. Devereux (Department of Economics, University of British Columbia, 997-1873 East Mall, Vancouver, BC V6T 1Z1, Canada.); Charles Engel (University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706-1393, USA.) |
| Abstract: | This paper develops a view of exchange rate policy as a trade-off between the desire to smooth fluctuations in real exchange rates so as to reduce distortions in consumption allocations, and the need to allow flexibility in the nominal exchange rate so as to facilitate terms of trade adjustment. We show that optimal nominal exchange rate volatility will reflect these competing objectives. The key determinants of how much the exchange rate should respond to shocks will depend on the extent and source of price stickiness, as well as the elasticity of substitution between home and foreign goods. Quantitatively, we find the optimal exchange rate volatility should be significantly less than would be inferred based solely on terms of trade considerations. Moreover, we find that the relationship between price stickiness and optimal exchange rate volatility may be non-monotonic. |
| Keywords: | Exchange rates, monetary policy, expenditure switching. |
| JEL: | F41 E52 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060614&r=cba |
| By: | Antonio Fatás (INSEAD, Boulevard de Constance, 77305 Fontainebleau, France.); Ilian Mihov (INSEAD, Boulevard de Constance, 77305 Fontainebleau, France.); Andrew K. Rose (Haas School of Business, University of California, Berkeley, CA 94720-1900, USA.) |
| Abstract: | We study empirically the macroeconomic effects of an explicit de jure quantitative goal for monetary policy. Quantitative goals take three forms: exchange rates, money growth rates, and inflation targets. We analyze the effects on inflation of both having a quantitative target, and of hitting a declared target; we also consider effects on output volatility. Our empirical work uses an annual data set covering 42 countries between 1960 and 2000, and takes account of other determinants of inflation (such as fiscal policy, the business cycle, and openness to international trade), and the endogeneity of the monetary policy regime. We find that both having and hitting quantitative targets for monetary policy is systematically and robustly associated with lower inflation. The exact form of the monetary target matters somewhat (especially for the sustainability of the monetary regime), but is less important than having some quantitative target. Successfully achieving a quantitative monetary goal is also associated with less volatile output. |
| Keywords: | Transparency; exchange; rate; money; growth; inflation; target; business cycle. |
| JEL: | E52 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060615&r=cba |
| By: | Sibert, Anne |
| Abstract: | I analyse central bank transparency when the central bank's objective function is its private information. Non-transparency exists when the public does not observe the action of the central bank and an unobservable component of the inflation-control error keeps the public from using its observation of inflation to infer perfectly the central bank's action, and hence, the central bank's objective. The degree of transparency is defined as the fraction of the inflation-control error that is observable. This notion is similar to that of Cukierman and Meltzer [9], Faust and Svensson [15], [16] and others. I find a number of results; some are different than what previous authors have found and others are novel. I demonstrate that non-transparent central banks with private information inflate less than central banks in a regime with perfect information. Moreover, in contrast to transparent central banks with private information, non-transparent banks with private information respond optimally to shocks; lower inflation is not at the expense of flexibility. Increased transparency lowers planned inflation, but surprisingly, it can worsen the public's ability to infer the central bank's objective function. I find that, no matter what their preferences, central banks and societies are made better off by more transparency. I further demonstrate that the transparent regime is not the same as the non-transparent regime when non-transparency goes to zero. I show that planned inflation is not necessarily lower in the transparent regime than in the non-transparent regime. However, numerical results suggest that all central banks and societies are better off in the transparent regime. |
| Keywords: | monetary policy; signalling; transparency |
| JEL: | E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5641&r=cba |
| By: | Sibert, Anne |
| Abstract: | There is a small, but growing, economics literature on the importance and effects of having monetary policy made by a committee, rather than by an individual. Complimenting this is an older and larger body of literature on groups in the other social sciences, particular in social psychology. This paper provides a review of some of this work, focussing on two important features of committees: the effect of their size on performance and whether or not they are more moderate than the members who make them up. The results of the literature on committee size and committee polarization suggest that the ideal monetary policy committee may not have many more than five members. It should have a well-defined objective and it should publish the votes of its members. It should be structured so that members do not act as part of a group, perhaps by having short terms in office and members from outside the central bank. External scrutiny of the decision-making process should be encouraged. |
| Keywords: | committee size; groupthink; social loafing |
| JEL: | E50 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5626&r=cba |
| By: | Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper shows that US monetary policy has been an important determinant of global equity markets. Analysing 50 equity markets worldwide, we find that returns fall on average around 3.8% in response to a 100 basis point tightening of US monetary policy, ranging from a zero response in some to a reaction of 10% or more in other countries, as well as significant cross-sector heterogeneity. Distinguishing different transmission channels, we find that in particular the transmission via US and foreign short-term interest rates and the exchange rate play an important role. As to the determinants of the strength of transmission to individual countries, we test the relevance of their macroeconomic policies and the degree of real and financial integration, thus linking the strength of asset price transmission to underlying trade and asset holdings, and find that in particular the degree of global integration of countries – and not a country’s bilateral integration with the United States – is a key determinant for the transmission process. |
| Keywords: | Global financial markets, monetary policy, transmission, financial integration, United States, advanced economies, emerging market economies. |
| JEL: | F36 F30 G15 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060616&r=cba |
| By: | Stephanie Schmitt-Grohé (Duke University, Durham, NC 27708, United States.); Martín Uribe (Duke University, Durham, NC 27708, United States.) |
| Abstract: | In this paper, we study Ramsey-optimal fiscal and monetary policy in a mediumscale model of the U.S. business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations. The main result of the paper is that price stability appears to be a central goal of optimal monetary policy. The optimal rate of inflation under an income tax regime is half a percent per year with a volatility of 1.1 percent. This result is surprising given that the model features a number of frictions that in isolation would call for a volatile rate of inflation—particularly nonstate-contingent nominal public debt, no lump-sum taxes, and sticky wages. Under an income-tax regime, the optimal income tax rate is quite stable, with a mean of 30 percent and a standard deviation of 1.1 percent. |
| Keywords: | Ramsey Policy, Inflation Stabilization, Tax Smoothing, Time to Tax, Nominal and Real Rigidities. |
| JEL: | E52 E61 E63 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060612&r=cba |
| By: | James Bullard (Research Division, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442, United States.); Eric Schaling (Department of Economics University of Johannesburg, and CentER for Economic Research, Tilburg University. Address: P.O. Box 524, 2006, Auckland Park, Johannesburg, Republic of South Africa.) |
| Abstract: | We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique rational expectations equilibrium worldwide which can be learned by market participants. We study cases in which optimal policies are being pursued country by country as well as some forms of cooperation. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation. |
| Keywords: | Indeterminacy, monetary policy rules, new open economy macroeconomics, international policy coordination. |
| JEL: | E52 F33 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060611&r=cba |
| By: | Buiter, Willem H; Sibert, Anne |
| Abstract: | In an attempt to clean up an unruly literature, we specify the necessary and sufficient conditions for household optimality in a model where money is the only financial asset and provide the relevant proofs. We use our results to analyse when deflationary bubbles can and cannot exist. Our findings are in contrast to the results in several prominent contributions to the literature. We argue for particular specifications of the no-Ponzi-game restrictions on the household's and government's intertemporal budget constraints in a model with money and bonds. Using the restriction on the household we derive the necessary and sufficient conditions for household optimality. The resulting equilibrium terminal conditions are then used to demonstrate that the existence of bonds does not affect when deflationary bubbles can and cannot occur. This result differs from that in other recent works. |
| Keywords: | deflationary bubbles; transversatility conditions |
| JEL: | D91 E31 E40 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5637&r=cba |
| By: | Robert J. Tetlow (Contact address: Federal Reserve Board, Division of Research and Statistics 20th and Constitution Avenue NW, Washington, D.C. 20551, United States.); Brian Ironside (Safeco Insurance Companies, Safeco Plaza, SPI Actuarial, T-14, Seattle, WA 98185-0001, United States.) |
| Abstract: | We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model’s inception in July 1996 until November 2003. The period of study was one of important changes in the U.S. economy with a productivity boom, a stock market boom and bust, a recession, the Asia crisis, the Russian debt default, and an abrupt change in fiscal policy. We document the surprisingly large and consequential changes in model properties that occurred during this period and compute optimal Taylor-type rules for each vintage. We compare these optimal rules against plausible alternatives. Model uncertainty is shown to be a substantial problem; the efficacy of purportedly optimal policy rules should not be taken on faith. |
| Keywords: | Monetary policy, uncertainty, real-time analysis. |
| JEL: | E37 E5 C5 C6 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060610&r=cba |
| By: | Claudia Kwapil (Oesterreichische Nationalbank, Economic Analysis Division); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | In this paper we analyze equilibrium determinacy in a sticky price model in which the pass-through from policy rates to retail interest rates is sluggish and potentially incomplete. In addition, we empirically characterize and compare the interest rate pass-through process in the euro area and the U.S. We find that if the pass-through is incomplete in the long run, the standard Taylor principle is insufficient to guarantee equilibrium determinacy. Our empirical analysis indicates that this result might be particularly relevant for bank-based financial systems as for instance that in the euro area. |
| Keywords: | Interest Rate Pass-Through, Interest Rate Rules, Equilibrium Determinacy, Stability |
| JEL: | E32 E52 E58 |
| Date: | 2006–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:118&r=cba |
| By: | Ignazio Angeloni (The Department of the Treasury, Italian Ministry of Economy and Finance, Via XX Settembre, 97, 00187 Rome, Italy.); Luc Aucremanne (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Surprisingly it did not, or at least not directly. Using micro data on consumer prices and sectoral inflation rates from 6 euro area countries, spanning several years before and after the introduction of the euro, we look at whether EMU has altered the behaviour of retail price setting and/or inflation dynamics. We find no evidence that anything has changed around 1999 – if anything, persistence may have slightly increased. At the end of 2001 and in the beginning of 2002 (period surrounding the euro cash changeover) retail price adjustment frequencies, both up and down, increased substantially, while the magnitude of the price adjustment, also both up and down, was smaller than otherwise. However, both settled quickly back to the earlier patterns. On the contrary, we do find evidence of a decline in the persistence of the inflation process in the mid-1990s. This could be due to a structural change in private inflationary expectations due, at least in part, to policies linked to the preparation of EMU; however, this interpretation is weakened by the fact that a similar decline occurred also in the US. |
| Keywords: | Price setting, Inflation persistence, Aggregate and Sectoral Inflation, EMU. |
| JEL: | E31 E42 E52 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060597&r=cba |
| By: | Lorenzo Cappiello (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Peter Hördahl (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arjan Kadareja (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Simone Manganelli (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We assess whether the euro had an impact first on the degree of integration of European financial markets, and, second, on the euro area term structure. We propose two methodologies to measure integration - one relies on time-varying GARCH correlations, and the other one on a regression quantile-based codependence measure. We document an overall increase in co-movements in both equity and bond euro area markets, suggesting that integration has progressed since the introduction of the euro. However, while the correlations in bond markets reaches almost one for all euro area countries, co-movements in equity markets are much lower and the increase is limited to large euro area economies only. In the second part of the paper, we focus on the asset pricing implications of the euro. Specifically, we use a dynamic no-arbitrage term structure model to examine the risk ? return trade-off in the term structure of interest rates before and after the introduction of the euro. The analysis shows that while the average level of term premia seems little changed following the euro introduction, the variability of premia has been reduced as a result of smaller macro shocks during the euro period. Moreover, the macro factors that were found to be important in explaining the dynamics of premia before the introduction of the euro continue to play a key role in this respect also thereafter. |
| Keywords: | Financial markets, euro, financial integration, volatility, conditional correlation, term structure, fundamentals, risk premia. |
| JEL: | F36 G12 E43 E44 C22 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060598&r=cba |
| By: | Eduardo Levy Yeyati; Sergio Luis Schmukler; Neeltje Van Horen |
| Abstract: | This paper argues that the cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of international financial integration, reflecting accurately the factors that segment markets and inhibit price arbitrage. Applying to equity markets recent methodological developments in the purchasing power parity (PPP) literature, we show that non-linear Threshold Autoregressive (TAR) models properly capture the behavior of the crossmarket premium. The estimates reveal the presence of narrow non-arbitrage bands and indicate that price differences outside these bands are rapidly arbitraged away, much faster than what has been documented for good markets. Moreover, we find that financial integration increases with market liquidity. Capital controls, when binding, contribute to segment financial markets by widening the non-arbitrage bands and making price disparities more persistent. Crisis episodes are associated with higher volatility, rather than by more persistent deviations from the law of one price. |
| Keywords: | capital market integration, market segmentation, TAR, PPP, capital controls, crisis |
| JEL: | F30 F36 G15 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpbsdt:2006-01&r=cba |
| By: | Campa, José Manuel; Goldberg, Linda S |
| Abstract: | Border prices of traded goods are highly sensitive to exchange rates, but the CPI, and the retail prices of these goods, are more stable. Our paper decomposes the sources of this stability for twenty-one OECD countries, focusing on the important roles of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported inputs used in different categories of consumption goods, and weights in consumption of nontradables, home tradables and imported goods. While distribution margins damp the sensitivity of consumption prices of tradable goods to exchange rates, they also lead to enhanced pass through when nontraded goods prices are sensitive to exchange rates. Such price sensitivity arises because imported inputs are used in production of home nontradables. Calibration exercises show that, at under 5 percent, the United States has the lowest expected CPI sensitivity to exchange rates of all countries examined. On average, calibrated exchange rate pass through into CPIs is expected to be closer to 15 percent. |
| Keywords: | distribution margins; exchange rate; import prices; pass through |
| JEL: | F3 F4 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5650&r=cba |
| By: | Paul Mizen; Cihan Yalcin |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0601&r=cba |
| By: | Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | In this paper we study the role of financial systems for the cost channel transmission of monetary policy in a calibrated business cycle model. We analyze the different effects that monetary policy has on the economy, in particular on output and inflation, which are due to differences in country-specific financial systems. For a plausible calibration of the model, differences in financial systems have a rather limited effect on the transmission mechanism and do not appear to give rise to cross country differences in the strength of the cost channel. |
| Keywords: | Financial Systems, Cost Channel, Transmission Mechanism |
| JEL: | E40 E50 |
| Date: | 2006–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:116&r=cba |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper compares the link between exchange rates and interest rates under full information and two alternative asymmetric information approaches. It also distinguishes between cases of expansionary and contractionary depreciations. Full information results are not robust to the presence of informational frictions. For economies exhibiting expansionary or strongly contractionary depreciations, such frictions lead to two optimal deviations from full information outcomes: i) under asymmetric information with signal extraction, the realisation of a relatively less frequent shock leads the central bank to behave as if a more likely disturbance had instead taken place; and ii) under asymmetric information without signal extraction, the monetary authority does not react on impact to shocks. Finally, in the case of mildly contractionary depreciations, both asymmetric information models predict a lack of response of the central bank to aggregate demand shocks, as opposed to an offsetting movement in interest rates under full information. |
| Keywords: | Transmission mechanism, Emerging market economies, Exchange rate, Monetary policy, Imperfect information. |
| JEL: | E52 E58 F31 F41 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060608&r=cba |
| By: | Matias Vernengo |
| Abstract: | Marriner Eccles is often seen as an early defender of Keynesian ideas. In that respect, it is generally accepted that he considered monetary policy of secondary importance, and that as a result he allowed the Federal Reserve to be submitted to the interests of the Treasury. In this view, the Federal Reserve after 1935 acquired new instruments to command monetary policy, but it did not change its behavior significantly. Further, his defense of the Federal Reserve-Treasury accord in 1951 is sometimes seen as a reversal of his previous policy stances. This paper claims that proper understanding of Eccles’ views is necessary to appreciate the changes in monetary policy during the Great Depression and World War II. Rather than a hands-off central banker, that submitted the Fed to the Treasury, a more proper depiction of Eccles tenure at the Fed would be as a Main Street chairman. |
| Keywords: | History of Thought, Keynesians, Federal Reserve History |
| JEL: | B22 B31 E12 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2006_04&r=cba |
| By: | Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper estimates a hybrid New Keynesian model on euro area data and evaluates the performance of different simple policy rules and of the optimal unconstrained rule under commitment. The study reaches two main conclusions. First, inflation is found to be mainly forward-looking in the euro area, which implies the optimal policy reaction to cost push shocks is a muted one. Second, a "speed limit" rule of the type recently proposed by Walsh (2003) is able to closely approximate the performance of the optimal rule under commitment. The optimal speed limit rule is also characterised by super-inertia, making it a first difference rule similar to those recently proposed as a possible solution to measurement problems in the level of the natural interest rate and of potential output. |
| Keywords: | Euro area, hybrid New Keynesian model, monetary policy rules, commitment, speed limit policies. |
| JEL: | E52 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060600&r=cba |
| By: | Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | This paper investigates the business cycle implications of limited pass-through to retail interest rates based on a calibrated sticky price model. Although limited interest rate pass-through can in principle reduce output and inflation volatility at the same time, large reductions in output volatility are likely to be accompanied by a more volatile inflation rate. Limited pass-through gives rise to two counteracting effects: It partially insulates the economy from adverse liquidity shocks and thereby leads to lower output volatility. However, it also reduces the stabilizing effect of monetary policy which implies higher inflation volatility. |
| Keywords: | Financial Systems, Interest Rate Pass-Through, Business Cycle |
| JEL: | E32 E44 E52 |
| Date: | 2006–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:117&r=cba |
| By: | Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan Luis Vega (Banco de España, Alcalá, 48, 28014 Madrid, Spain.) |
| Abstract: | This paper addresses the effects of the European Economic and Monetary Union (EMU) since the introduction of the euro - on economic and financial structures, institutions and performance. What type of changes is the euro fostering? What forces is it setting in motion that were not there before? Six years after the launch of the euro, was an appropriate time to start taking stock of these effects. For this purpose, in June 2005, the ECB held a workshop on “What effects is EMU having on the euro area and its member countries?” The workshop was organised in five areas: 1. trade integration, 2. business cycles synchronisation, economic specialisation and risk sharing, 3. financial integration, 4. structural reforms in product and labour markets, and 5. inflation persistence. This paper sets the workshop in the context of the current debate on the effects of EMU and brings together several of the issues raised by the leading presentations: i.e., this paper serves as an overview. Overall, the effects of the euro observed are beneficial. However, progress has been uneven in the above areas. Many potential concerns preceding the launch of the euro have been dispelled. Moreover, it will take more time for the full effects of the euro to unravel. |
| Keywords: | Optimum Currency Area, Economic and Monetary Integration, EMU. |
| JEL: | E42 F13 F33 F42 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060599&r=cba |
| By: | Efrem Castelnuovo (University of Padua) |
| Abstract: | We assess the stability of open economy backward-looking Phillips curves estimated over two different exchange rate regimes. We calibrate a new-Keynesian monetary policy model and employ it for producing artificial data. A monetary policy break replicating the move from a Target-Zone regime to a Free-Floating regime implemented in Sweden in 1992 is modeled. We employ two different, plausibly calibrated Taylor rules to describe the Swedish monetary policy conduct, and fit a reduced-form Phillips curve to the artificial data. While not rejecting the statistical relevance of the Lucas critique, we find that its economic importance does not seem to be overwhelming. |
| JEL: | E17 E52 F41 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0015&r=cba |
| By: | Georges Pineau (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Ettore Dorrucci (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | In a number of countries, especially emerging market economies, the public sector has in recent years been accumulating sizeable cross-border financial assets, mainly in the form of official foreign exchange reserves. World reserves have risen from USD 1.2 trillion in January 1995 to above USD 4 trillion in September 2005, growing particularly rapidly since 2002. This paper investigates the features, drivers, risks and costs of such recent reserve accumulation, as well as the other uses that certain countries have been making of their accumulated foreign assets. The main trends in central bank reserve management are also reviewed. Finally, the paper provides some evidence for the impact of reserve accumulation on yields and asset prices. |
| Keywords: | Foreign exchange reserves, exchange rates, emerging market economies. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20060043&r=cba |
| By: | Áron Gereben (Magyar Nemzeti Bank); György Gyomai (Magyar Nemzeti Bank (at the time of writing this study)); Norbert Kiss M. (Magyar Nemzeti Bank) |
| Abstract: | The application of the market microstructure theory to foreign exchange markets in the last few years has introduced a new approach to the analysis of exchange rates. The most important variable of the microstructure analysis, the so-called order flow has proven to be suitable for explaining a significant part of exchange rate changes, not only for high frequency data, but also at longer time horizons that are relevant for macro-economic analysis. Microstructure theory is thus extremely successful from an empirical point of view, especially when compared to traditional exchange rate models. The aim of our study is to provide an introduction to the microstructure-based analysis of exchange rates, emphasising those aspects which may be the most relevant for central banks. In addition to an introduction to the theoretical background of the microstructure approach and the presentation of the key empirical results, we also intend to cast light upon the questions which are important for central banks and which can be tackled successfully using this framework. On the basis of the literature's findings, we present the answers given by the microstructure approach to, among others, questions concerning the efficiency of central bank intervention, the effects of economic news on exchange rates, and the role of different currency market participants in exchange rate developments. |
| Keywords: | exchange rate, order flow, microstructure. |
| JEL: | F31 G15 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2005/42&r=cba |
| By: | Marco Hoeberichts (De Nederlandsche Bank, Research Department P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Ad Stokman (De Nederlandsche Bank, Research Department P.O. Box 98, 1000 AB Amsterdam, The Netherlands.) |
| Abstract: | This paper presents the results of a survey among Dutch firms on price setting behaviour in the Netherlands. It aims to identify how sticky prices are, which prices are sticky and why they are sticky. It is part of the Eurosystem Inflation Persistence Network (IPN). The most distinctive feature of the Dutch survey is its broad coverage of the business community (seven sectors and seven size classes). Our primary finding is that price setting behaviour depends critically on both a firm’s size and the competitive environment it faces. Small firms in particular adopt more rigid pricing policies, and the weaker the competition a firm faces, the stickier a company’s price will be. Furthermore, we find that wholesale and retail prices are more flexible than those for business-to-business services. The survey suggests that explicit and informal contracting are the most important sources of price stickiness. Menu costs and psychological pricing – two prominent explanations of price stickiness in the literature – are of minor importance. Finally, there is clear evidence of asymmetries in shocks driving price increases and decreases. |
| Keywords: | Price setting, nominal rigidity, survey data. |
| JEL: | E30 D40 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060607&r=cba |
| By: | Centoni, Marco; Cubadda, Gianluca; Hecq, Alain |
| Abstract: | We analyze herein the importance of four types of shocks in contributing to the business cycles of the G7 economies. After disentangling the common permanent and transitory shocks in the G7 outputs, we identify the domestic and foreign components of such shocks for each country. This provides us with quite a flexible palette for understanding the degree of openness of the G7 countries, useful information for the analysis of the strengths and weaknesses of each national economy. Our empirical analysis reveals that the cycles of most of the G7 outputs are dominated by their domestic components and that the foreign components are almost entirely due to permanent shocks. |
| Keywords: | International business cycles, Permanent-Transitory decompositions, serial correlation common features, Frequency domain analysis. |
| JEL: | C32 E32 |
| Date: | 2006–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:mol:ecsdps:esdp06028&r=cba |
| By: | Xiao, Wei (University of New Orleans) |
| Abstract: | We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of Taylor-type interest rate rules. With very mild increasing returns supported by empirical research, the conventional wisdom regarding the design of interest rate rules can be overturned. In particular, the "Taylor principle" no longer guarantees either determinacy or E-stability of the rational expectations equilibrium. |
| Keywords: | Increasing returns, Indeterminacy, E-stability, Taylor principle |
| JEL: | E32 E52 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-08&r=cba |
| By: | Ad van Riet (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Moreno Roma (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper analyses the degree of competition in the euro area services sector and its effects on labour productivity and relative prices in that sector over the period 1980-2003. The importance of the euro area services sector has significantly increased over time; it now accounts for around 70% of the euro area’s total nominal value added and employment. Labour productivity growth across the euro area services industries appears to be characterised by a high degree of diversity and the level of services inflation is on average higher than aggregate inflation. Investigating several proxies of market competition for the non-financial business services, the paper finds that limited competition in services tends to hamper labour productivity growth in the services sector. Moreover, results tend to suggest that measures aimed at increasing services market competition may have a dampening impact on relative price changes in some services sectors and thus temporarily on aggregate inflation. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20060044&r=cba |
| By: | Thomas I. Palley |
| Abstract: | Dooley et al. (2003) have argued that today’s international financial system has structural similarities with the earlier Bretton Woods (1946 – 71) arrangements and is stable. This paper argues that the comparison is misplaced and ignores fundamental microeconomic differences, and that today’s system is also vulnerable to a crash. Eichengreen (2004) and Goldstein and Lardy (2005) have also argued that the system is unsustainable. However, their focus is the sustainability of financing to cover the U.S. trade deficit, whereas the current paper focuses on inadequacies on the system’s demand side. The paper concludes with suggestions for a global system of managed exchange rates that should replace the current system – hopefully, before it crashes. |
| Keywords: | Revised Bretton Woods, export-led growth, aggregate demand |
| JEL: | F02 F32 F33 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp114&r=cba |
| By: | Marc Rysman (Department of Economics, Boston University); |
| Abstract: | This paper exploits a unique data set on the payment card industry to study issues associated with network effects and two-sided markets. We show that consumers concentrate their spending on a single payment network (single-homing), although many maintain unused cards that allow the ability to use multiple networks (multi-homing). Further, we establish a regional correlation between consumer usage and merchant acceptance within the four major networks (Visa, Mastercard, American Express and Discover). This correlation is suggestive of the existence of a positive feedback loop between consumer usage and merchant acceptance. |
| Keywords: | payment cards, two-sided markets, network effects |
| JEL: | L14 L80 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2006-002&r=cba |
| By: | Gerhard Fenz (Oesterreichische Nationalbank, Economic Analysis Division); Martin Spitzer (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | This paper deals with forecasting quarterly Austrian GDP growth using monthly conjunctural indicators and state space models. The latter provide an efficient econometric framework to analyse jointly data with different frequencies. Based on a Kalman filter technique we estimate a monthly GDP growth series as an unobserved component using monthly conjunctural indicators as explanatory variables. From a large data set of more than 150 monthly indicators the following six explanatory variables were selected on the basis of their in-sample fit and out of sample forecast performance: the ifo-index, credit growth, vacancies, the real exchange rate, the number of employees and new car registrations. Subsequently, quarterly GDP figures are derived from the monthly unobserved component using a weighted aggregation scheme. Several tests for forecasting accuracy and forecasting encompassing indicate that the unobserved components model (UOC-model) is able to outperform simple ARIMA and Naïve models. |
| Date: | 2006–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:119&r=cba |
| By: | Altissimo, Filippo; Cristadoro, Riccardo; Forni, Mario; Lippi, Marco; Veronese, Giovanni |
| Abstract: | This paper presents ideas and methods underlying the construction of a timely coincident index that tracks euro-area GDP growth, but, unlike GDP growth, (i) is updated monthly and almost in real time; (ii) is free from seasonal and shorter-run dynamics. We take as target the medium- long-run component of the GDP growth, defined in the frequency domain as including only waves of period larger than one year. We estimate the target by projecting it on generalized principal components extracted from a large panel of monthly macroeconomic series. The main contribution of the paper is that current values of our principal components, derived from a dynamic factor model, act as proxies for future values of GDP growth. In this way we improve with respect to the end-of-sample poor estimation which is typical with band-pass filters. Moreover, as it is defined as an estimate of a target which is observable (although with delay), the performance of our index at the end of the sample can be measured. |
| Keywords: | band-pass filter; coincident index; generalized principal components; large dataset factor models |
| JEL: | C51 E32 O30 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5633&r=cba |
| By: | Patrick Lünnemann; Thomas Mathä |
| Abstract: | This paper analyses the pricing behaviour of Luxembourg firms based on survey evidence. Luxembourg firms typically have low market share, many competitors and longstanding customer relationships. Price discrimination is frequently applied. A majority of firms use price review rules that include elements of state dependency. The median firm reviews and changes prices twice a year. The results suggest an almost equal share of firms applying forward-looking, backward-looking and rules of thumb behaviour. The adjustment speed is faster when cost goes up and demand goes down than in the opposite cases. The most relevant theories explaining price rigidity are implicit contracts, cost-based pricing and explicit contracts. Increases in labour and other costs are the most important factors leading to price increases; for price reductions it is price reductions by competitors followed by declining labour costs. |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:cahier_etude_19&r=cba |
| By: | Hussain, M. Ershad (University of New Orleans); Hassan, M. Kabir (University of New Orleans; Drexel University) |
| Abstract: | Existing literature has focused attention on the impact of Basle I and similar capital requirement regulations on developed countries where such regulations were found to be effective in increasing capital ratios and reducing portfolio credit risk of commercial banks. In the present study, we study the impact of such capital requirement regulations on commercial banks in 11 developing countries around the world within a cross-section framework with the widely popular simultaneous equations model of Shrieves and Dahl (1992). Surprisingly, we find that such regulations did not increase the capital ratios of banks in the developing countries. This implies that particular attention should be given to the business, environmental, legal, cultural realities of such countries while designing and implementing such policies for developing countries. However, we find evidence that such regulations did reduce portfolio risk of banks. We also find that capital ratios and portfolio risk are inversel. |
| Keywords: | Capital requirement, Commercial banks, Credit risk |
| JEL: | G21 G28 C12 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-01&r=cba |
| By: | Peter N. Ireland (Boston College); Scott Schuh (Federal Reserve Bank of Boston) |
| Abstract: | A two-sector real business cycle model, estimated with postwar U.S. data, identifies shocks to the levels and growth rates of total factor productivity in distinct consumption- and investment-goods-producing technologies. This model attributes most of the productivity slowdown of the 1970s to the consumption-goods sector; it suggests that a slowdown in the investment-goods sector occurred later and was much less persistent. Against this broader backdrop, the model interprets the more recent episode of robust investment and investment-specific technological change during the 1990s largely as a catch-up in levels that is unlikely to persist or be repeated anytime soon. |
| Keywords: | productivity, real business cycle |
| JEL: | E32 O41 O47 |
| Date: | 2006–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:642&r=cba |
| By: | Simon Gilchrist (Institute for Economic Development, Boston University); John C. Williams (Board of Governors, Federal Reserve System) |
| Abstract: | We consider a neoclassical interpretation of Germany and Japan’s rapid postwar growth that relies on a catch-up mechanism through capital accumulation where technology is embodied in new capital goods. Using a putty-clay model of production and investment, we are able to capture many of the key empirical properties of Germany and Japan’s postwar transitions, including persistently high but declining rates of labor and total-factor productivity growth, a U-shaped response of the capital-output ratio, rising rates of investment and employment, and moderate rates of return to capital. |
| Keywords: | putty-clay, embodied technology, productivity growth, convergence |
| JEL: | D24 E22 N10 O41 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-113&r=cba |
| By: | Fabio Canova (Universitat Pompeu Fabra, Department of Economics and Business, Jaume I building, Ramon Trias Fargas, 25-27, 08005-Barcelona, Spain.); Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper describes a methodology to estimate the coefficients, to test specification hypotheses and to conduct policy exercises in multi-country VAR models with cross unit interdependencies, unit specific dynamics and time variations in the coefficients. The framework of analysis is Bayesian: a prior flexibly reduces the dimensionality of the model and puts structure on the time variations; MCMC methods are used to obtain posterior distributions; and marginal likelihoods to check the fit of various specifications. Impulse responses and conditional forecasts are obtained with the output of MCMC routine. The transmission of certain shocks across G7 countries is analyzed. |
| Keywords: | Multi country VAR, Markov Chain Monte Carlo methods, Flexible priors, Internationalv transmission. |
| JEL: | C3 C5 E5 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060603&r=cba |
| By: | Antonello D’Agostino (Address for correspondence: Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Departmant, PO Box 559 - Dame Street, Dublin 2, Ireland.); Domenico Giannone (ECARES, Université Libre de Bruxelles - CP 114 - av. Jeanne, 44, B-1050, Brussels, Belgium.); Paolo Surico (Monetary Assessment and Strategy, Bank of England, Threadneedle street - EC2R 8AH - London, United Kingdom.) |
| Abstract: | This paper documents a new stylized fact of the greater macroeconomic stability of the U.S. economy over the last two decades. Using 131 monthly time series, three popular statistical methods and the forecasts of the Federal Reserve’s Greenbook and the Survey of Professional Forecasters, we show that the ability to predict several measures of inflation and real activity declined remarkably, relative to naive forecasts, since the mid-1980s. This break down in forecast ability appears to be an inherent feature of the most recent period and thus represents a new challenge for competing explanations of the ‘Great Moderation’. |
| Keywords: | Predictive accuracy, macroeconomic stability, forecasting models, sub-sample analysis, Fed Greenbook. |
| JEL: | E37 E47 C22 C53 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060605&r=cba |
| By: | Pierre Perron (Department of Economics, Boston University); Zhongjun Qu (University of Illinois at Urbana-Champaign) |
| Abstract: | The tests introduced by Ng and Perron (2001, Econometrica) have the drawback that for non-local alternatives the power can be very small. The aim of this note is to point out an easy solution to this power reversal problem, which in addition leads to tests having an exact size even closer to nominal size. It involves using OLS instead of GLS detrended data when constructing the modified information criterion. |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2006-010&r=cba |
| By: | Heather M. Anderson; George Athanasopoulos; Farshid Vahid |
| Abstract: | This paper studies linear and nonlinear autoregressive leading indicator models of business cycles in G7 countries. Our models use the spread between short-term and long-term interest rates as leading indicators for GDP. We examine data admissability by determining whether these models have the ability to produce time series with classical cycles that resemble the observed classical cycles in the data, and then we ask if this data admissability lends itself to better predictions of the probability of recession. |
| JEL: | C22 C23 E17 E37 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-14&r=cba |
| By: | Robert Dekle; Hyeok Jeong; Heajin Ryoo |
| Abstract: | The empirical literature examining aggregate data has generally found small or insignificant effects of exchange rate fluctuations on export volumes. This lack of association between real quantities, such as export volumes and the exchange rate is the so-called “exchange rate disconnect puzzle.” Using firm level data, however, the relationship between export volumes and exchange rates turns to significantly negative. This paper attempts to reconcile these aggregate and firm level findings, using firm level data from Japan. We estimate a simple microeconomic model of exports to show that an appreciation of the exchange rate reduces export volumes at the firm level. After consistent aggregation, the relationship still remains significant at aggregate levels. However, we show that the omission of some key productivity variables, or ignoring the distributions of heterogeneous firm level characteristics biases the elasticity of exports to exchange rates toward zero. |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:06-46&r=cba |
| By: | Krahnen, Jan Pieter; Wilde, Christian |
| Abstract: | Large banks often sell part of their loan portfolio in the form of collateralized debt obligations (CDO) to investors. In this paper we raise the question whether credit asset securitization affects the cyclicality (or commonality) of bank equity values. The commonality of bank equity values reflects a major component of systemic risks in the banking market, caused by correlated defaults of loans in the banks' loan books. Our simulations take into account the major stylized fact of CDO\ transactions, the non-proportional nature of risk sharing that goes along with tranching. We provide a theoretical framework for the risk transfer through securitization that builds on a macro risk factor and an idiosyncratic risk factor, allowing an identification of the types of risk that the individual tranche holders bear. This allows conclusions about the risk positions of issuing banks after risk transfer. Building on the strict subordination of tranches, we first evaluate the correlation properties both within and across risk classes. We then determine the effect of securitization on the systematic risk of all tranches, and derive its effect on the issuing bank's equity beta. The simulation results show that under plausible assumptions concerning bank reinvestment behavior and capital structure choice, the issuing intermediary's systematic risk tends to rise. We discuss the implications of our findings for financial stability supervision. |
| Keywords: | risk transfer; systematic risk; systemic risk |
| JEL: | G28 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5618&r=cba |
| By: | Klingebiel, Daniela; Kroszner, Randall S; Laeven, Luc |
| Abstract: | This paper investigates the growth impact of banking crises on industries with different levels of dependence on external sources of finance to analyze the mechanisms linking financial shocks and real activity. If the banking system is the key element allowing credit constraints to be relaxed, then a sudden loss of these intermediaries in a system where such intermediaries are important should have a disproportionately contractionary impact on the sectors that flourished due to their reliance on banks. Using data from 38 developed and developing countries that experienced financial crises during the last quarter century, we find that sectors highly dependent on external finance tend to experience a substantially greater contraction of value added during a banking crisis in deeper financial systems than in countries with shallower financial systems. On average, in a country experiencing a banking crisis, a sector at the 75th percentile of external dependence and located in a country at the 75th percentile of private credit to GDP would experience a 1.6 percent greater contraction in growth in value added between the crisis and pre-crisis period than a sector at the 25th percentile of external dependence and private credit to GDP. This effect is sizeable compared with an overall mean decline in growth of 3.5 percent between these two periods. Our results, however, do not suggest that on net the externally dependent firms fare worse in deep financial systems. |
| Keywords: | banking and financial crises; credit channel; financial development; financing constraints |
| JEL: | G21 O16 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5623&r=cba |
| By: | Esteban A. Nicolini; Fernando Ramos |
| Abstract: | The study of monetary phenomena and the understanding of price determination in Modern Europe are too often limited by the scarcity of good-quality data sets on the evolution across time of variables like money holdings, income, or wealth. In this paper we show that the information contained in probate inventories can be extremely useful to circumvent that problem. In particular, combining a data set of 114 inventories from Palencia (North of Spain) between 1750 and 1770 with census information (Catastro de Ensenada) we make a cross-section estimation of a money demand which is the first one ever produced for any period before the 19th century. The results provide meaningful insights about the relation between money demand and wealth, urbanization and structural change in a pre-industrial economy and highlight the potential of probate inventories to improve our knowledge of the monetary history of Modern Europe. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cte:whrepe:wh061902&r=cba |
| By: | Al-Zoubi, Haitham A. (Hashemite University); Daal, Elton (University of New Orleans) |
| Abstract: | This study examines whether small sample bias affects the standard inference about the foreign exchange market efficiency hypothesis. Our findings indicate that the bias is large enough to result in rejection of the efficient market hypothesis even when it is true. We use bootstrapping to adjust for the bias and find that the hypothesis cannot be rejected for the Swiss franc and French franc. We also find that the bias plays a significant role in the inference that expectation error causes inefficiency in the foreign exchange markets. After bias adjustment, the rational expectation hypothesis holds even at one month-horizon. |
| Keywords: | Market Efficiency Hypothesis, Rational Expectation Hypothesis, Risk Premium, Small Sample Bias, Bootstrapping |
| JEL: | G14 C12 C22 |
| Date: | 2005–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-06&r=cba |