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on Central Banking |
| By: | Richard H. Clarida; Manuela Goretti; Mark P. Taylor |
| Abstract: | We find evidence of threshold behavior in current account adjustment for the G7 countries, such that the dynamics of adjustment towards equilibrium depend upon whether the current-account/ net-output ratio breaches estimated, country specific current account surplus or deficit thresholds. Both the speeds of adjustment and the size of the thresholds are found to differ significantly across countries. In addition, we also find evidence of shifts in means and variances of exchange rate changes, stock returns, and interest differentials that coincide with the current account adjustment regimes identified by the model. |
| JEL: | F3 F4 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12193&r=cba |
| By: | Richard H. Clarida |
| Abstract: | This volume collects the eleven original papers that were written for the NBER Project on G7 Current Account Imbalances. Four major themes emerged from the papers written for the project. First, there was broad agreement that the current account imbalances that prevailed among the G7 countries as of June 2005 would ultimately decline, although there was no consensus on when or how this would occur . Second, there was agreement that adjustments in global currency markets would likely be associated with the shifts in global saving and investment patterns that would be required to bring about the ultimate decline in G7 current account imbalances. Third, while the focus of the conference was on current account imbalances in the G7 countries, it was recognized that the aggregate excess of saving over investment that existed among the emerging market economies at the time of the conference, as well as the currency intervention policies of some of these countries, were contributing to the current imbalances in the G7 that prevailed as of June 2005. Fourth, there was a consensus that re-valuation of the evolving foreign asset and liability positions of the G7 countries would play a role during process by which current account imbalances narrowed, although there was range of opinion concerning how large a role such revaluation effects would play. |
| JEL: | F3 F4 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12194&r=cba |
| By: | Michael Bordo; Harold James |
| Abstract: | The case for monetary simplification and unification has been made since the middle of the nineteenth century. It rests on four principal arguments ;reduced transaction costs; establishing credibility; preventing bad policy in other states; political integration via money. In this paper we argue that the case for monetary integration is becoming increasingly less persuasive. In making our case we posit a different concept of money to the one that underlay the nineteenth century discussions which we term "Newtonian" since it was based on the assumption of a single reference external to the state reflected in the definition of value in terms of precious metals. In the twentieth century, views of money have shifted to a more " Einsteinian" or relativistic conception. Measures of value that move relative to each other are helpful in terms of dealing with large shifts in relative prices that affect different countries very differently. In the current age of globalization, "Einsteinian" money is capable of accommodating shifts that were politically destructive in the " Newtonian" world. |
| JEL: | N20 F33 E42 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12189&r=cba |
| By: | Horst Entorf (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Jochen Moebert (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Katja Sonderhof (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)) |
| Abstract: | Following the well-known approach by Adler and Dumas (1984), we evaluate the foreign exchange rate exposure of nations. Results based on data from 27 countries show that national foreign exchange rate exposures are significantly related to the current balance variables of corresponding economies. |
| Keywords: | Exchange rate exposure, international trade, current balance. |
| JEL: | G15 F31 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:tud:ddpiec:169&r=cba |
| By: | John Y. Campbell; Yves Nosbusch |
| Abstract: | In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital. |
| JEL: | G1 H3 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12204&r=cba |
| By: | Jan F. Qvigstad (Norges Bank (Central Bank of Norway)) |
| Abstract: | Svensson (2004) suggested that a monetary policy committee of a central bank (MPC) should “find an instrument-rate path such that projections of inflation and output gap ‘look good’.” Academic literature on monetary policy gives guidance as to what the words “look good” means. However, there is a need for a translation of the theoretical framework into concrete criteria when an MPC shall evaluate interest rate paths in practice. Six criteria for an appropri-ate interest rate path are presented. In the November 2005 Inflation Report, Norges Bank presented for the first time an optimal interest rate path including a fan chart illustrating the uncertainty of the forecast using these criteria. Ex-amples used in explaining the criteria are drawn from Norwegian experiences. |
| Keywords: | Forecasts, flexible inflation targeting, optimal monetary policy |
| JEL: | E42 E52 E58 |
| Date: | 2006–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_05&r=cba |
| By: | Cinzia Alcidi, Alessandro Flamini, Andrea Fracasso (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | Modern monetary policymakers consider a huge amount of information to evaluate events and contingencies. Yet most research on monetary policy relies on simple instrument rules and one relevant underpinning for this choice is the good empirical fit of the Taylor rule. This paper challenges the solidness of this foundation. We investigate the way the coefficients of the Taylor-type rules change over time according to the evolution of general economic conditions. We model the Federal Reserve reaction function during the Greenspan’s tenure as a Logistic Smoothing Transition Regime model in which a series of economic meaningful transition variables drive the transition across monetary regimes. We argue that estimated linear rules are weighted averages of the actual rules working in the diverse monetary regimes, where the weights merely reflect the length and not necessarily the relevance of the regimes. Accordingly, an estimated linear Taylor-type reaction function tends to resemble the rule adopted in the longest regime. Thus, the actual presence of finer monetary policy regimes corrupts the general predictive and descriptive power of linear Taylor-type rules. These latter, by hiding the specific rules at work in the various finer regimes, lose utility directly with the uncertainty in the economy. |
| Keywords: | Instrument Rules, LSTR, Monetary Policy Regime, Risk Management, Taylor Rule |
| Date: | 2005–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp04-2005&r=cba |
| By: | Eiji Ogawa; Junko Shimizu |
| Abstract: | We investigate the extent to which a common currency basket peg would stabilize effective exchange rates of East Asian currencies. We use an AMU (Asian Monetary Unit), which is a weighted average of ASEAN10 plus 3 (Japan, China, and Korea) currencies, as a common currency basket to investigate the stabilization effects. We compare our results with another result on stabilization effects of the common G3 currency (the US dollar, the Japanese yen, and the euro) basket in the East Asian countries (Williamson (2005)). We obtained the following results: first, the AMU peg system would be more effective in reducing fluctuations of the effective exchange rates as more countries applied the AMU peg system in East Asia. Second, the AMU peg system would more effectively stabilize the effective exchange rates than a common G-3 currency basket peg system for four (Indonesia, the Philippines, South Korea and Thailand) of the seven countries. The results suggest that the AMU basket peg would be useful for the East Asian countries whose trade weights on Japan are relatively higher than others. |
| JEL: | E6 F3 F4 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12198&r=cba |
| By: | Paolo Angelini (Bank of Italy, Economic Research Department); Francesco Lippi (Bank of Italy, Economic Research Department) |
| Abstract: | The introduction of the euro notes and coins in the first two months of 2002 was followed by a lively debate on the alleged inflationary effects of the new currency. In Italy, as in the rest of the euro area, survey-based measures signaled a much sharper rise in inflation than measured by the official price indices, whose quality was called into question. In this paper we gather indirect evidence on the behavior of prices from the analysis of cash withdrawals from ATM and their determinants. Since these data do not rely on official inflation statistics, they provide an independent check for the latter. We present a model in which the relationship between aggregate ATM withdrawals and aggregate expenditure is not homogenous of degree one in the price level, a prediction which is strongly supported by the data. This feature allows us to test the hypothesis that, after the introduction of the euro notes and coins, consumer prices underwent an increase not recorded by official inflation statistics. We do not find evidence in support of this hypothesis. |
| Keywords: | banknotes, currency, euro, inflation. |
| JEL: | E41 E31 E51 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_581_06&r=cba |
| By: | Jörg Polzehl; Vladimir Spokoiny; Catalin Starica |
| Abstract: | The paper develops a non-parametric, non-stationary framework for business-cycle dating based on an innovative statistical methodology known as Adaptive Weights Smoothing (AWS). The methodology is used both for the study of the individual macroeconomic time series relevant to the dating of the business cycle as well as for the estimation of their joint dynamic. Since the business cycle is defined as the common dynamic of some set of macroeconomic indicators, its estimation depends fundamentally on the group of series monitored. We apply our dating approach to two sets of US economic indicators including the monthly series of industrial production, nonfarm payroll employment, real income, wholesale-retail trade and gross domestic product (GDP). We find evidence of a change in the methodology of the NBER’s Business-Cycle Dating Committee an extended set of five monthly macroeconomic indicators replaced in the dating of the last recession the set of indicators emphasized by the NBER’s Business- Cycle Dating Committee in recent decades. This change seems to seriously affect the continuity in the outcome of the dating of business cycle. Had the dating been done on the traditional set of indicators, the last recession would have lasted one year and a half longer. We find that, independent of the set of coincident indicators monitored, the last economic contraction began in November 2000, four months before the date of the NBER’s Business-Cycle Dating Committee. |
| Keywords: | business cycle, non-parametric smoothing, non-stationarity |
| JEL: | C14 C16 C32 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-032&r=cba |
| By: | Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies); Ilias Lekkos (Research Department, Eurobank Ergasias, Greece); Theodore Panagiotidis (Department of Economics, Loughborough University, UK) |
| Abstract: | This paper explores the ability of factor models to predict the dynamics of US and UK interest rate swap spreads within a linear and a non-linear framework. We reject linearity for the US and UK swap spreads in favour of a regime-switching smooth transition vector autoregressive (STVAR) model, where the switching between regimes is controlled by the slope of the US term structure of interest rates. We compare the ability of the STVAR model to predict swap spreads with that of a non-linear nearest-neighbours model as well as that of linear AR and VAR models.We find some evidence that the non-linear models predict better than the linear ones. At short horizons, the nearest-neighbours (NN) model predicts better than the STVAR model US swap spreads in periods of increasing risk conditions and UK swap spreads in periods of decreasing risk conditions. At long horizons, the STVAR model increases its forecasting ability over the linear models, whereas the NN model does not outperform the rest of the models. |
| Keywords: | Interest rate swap spreads, term structure of interest rates, factor models, regime switching, smooth transition models, nearest-neighbours, forecasting. |
| JEL: | C51 C52 C53 E43 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2006/05&r=cba |
| By: | Bilin Neyaptý; Nergiz Dinçer |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0503&r=cba |
| By: | Larsson, Anna (Institute for International Economic Studies, Stockholm University) |
| Abstract: | This paper analyses the impact of the monetary regime on labour markets in a small open economy, by considering the game between large wage setters and an independent central bank in a two-sector model with potential labour mobility between sectors. Two monetary regimes are considered: membership in a monetary union and an inflation target combined with a flexible exchange rate. A key result is that when there is perfect labour mobility between sectors, the monetary regime does not matter for real wages, employment or profits. Moreover, introducing labour mobility substantially reduces wages and increases employment. Other findings are that when labour is immobile between sectors: (i) the real wage in the tradables sector is higher under inflation targeting than in a monetary union, while the reverse applies to the non-tradables sector; (ii) inflation targeting generates higher employment and profits than membership in a monetary union; and (iii) both workers and firms in the two sectors in general prefer inflation targeting to membership in a monetary union. |
| Keywords: | Inflation Targeting; Monetary Union; Equilibrium Employment; Labour Mobility |
| JEL: | E24 J50 |
| Date: | 2006–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iiessp:0745&r=cba |
| By: | Ruthira Naraidoo (Keele University, Centre for Economic Research and School of Economic and Management Studies); Patrick Minford (Cardiff Business School, Aberconway Building, Cardiff University) |
| Abstract: | We develop a theoretical nonlinear model of equilibrium unemployment and test its policy implications for a number of OECD countries. The theory here sees the natural rate and the associated equilibrium path of unemployment as endogenous, pushed by the interaction of shocks and the institutional structure of the economy; the channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate of unemployment react to shocks by demanding more or less social protection. The reduced form results from a dozen OECD economies give support to the model and further evidence is obtained by structural estimates for the UK. |
| Keywords: | Equilibrium unemployment, political economy, vicious and virtuous circles, bootstrapping |
| JEL: | C15 C22 E24 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2006/03&r=cba |
| By: | Thierry Warin; Kenneth Donahue |
| Abstract: | The existing literature on political budget cycles looks at the temptation for incumbent governments to run a greater deficit before an election by considering the characteristics of the incumbent. We propose here to look at the signals the incumbent receives from the voters. For this purpose, we consider the votes from the previous national elections and see whether they may influence the incumbent government to run a sound fiscal policy or an expansionary fiscal policy. However, since 1993 Europe has been equipped with two fiscal rules: a deficit and a debt ceiling. In this context, can we find evidence of a “political budget cycle” before 1993, and did the fiscal rules prevent the existence of a “political budget cycle” afterwards? To address these questions, we use a cross-sectional time series analysis of European countries from 1979 to 2005. |
| Keywords: | Stability and Growth Pact, Political Business Cycle, Political budget Cycle, Partisan Theory |
| JEL: | E6 F4 P43 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:0606&r=cba |
| By: | Hakan Berument; Hasan Olgun; Baþak Ceylan |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0607&r=cba |
| By: | Chew Lian Chua (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Sandy Suardi (School of Economics, The University of Queensland) |
| Abstract: | This paper tests for the presence of nonlinear dynamics in selected Asian short rates and employs a regime varying unit root test to detect non-stationarity for distinct regimes. Nonlinearities in the form of Markov-switching dynamics are found in all short rates sample. The mean-reverting behaviour of interest rates is dependent on both the level and volatility of interest rates. The occasional random walk and mean-reverting dynamics of short rates are attributed to the macroeconomic fundamentals, exchange rate regimes and monetary policy objectives in these economies. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n14&r=cba |
| By: | Enzo Weber |
| Abstract: | This paper addresses the question of macroeconomic integration in the Asian Pacific region. Economically, the analysis is based on the notions of stochastic long-run convergence and business cycle coherence. The econometric procedure consists of tests for cointegration, the examination of vector error correction models, several variants of common cycle tests and forecast error variance decompositions. Results in favour of cyclical synchrony can be partly established, and are even exceeded by the broad evidence for equilibrium relations. In these domains, several leading countries are identified. |
| Keywords: | Real Convergence, Cointegration, Common Cycles, Asia Pacific |
| JEL: | E32 F15 C32 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-039&r=cba |
| By: | Marilena Giannetti |
| Abstract: | Some of the concerns about European Union enlargement include the effects that it might have on the economies of the incumbent countries and on the Budget of the Union. Entering an Economic and Monetary Union is not a free lunch for the acceding countries either. In this paper we analyse how the restructuring process of the CEE's economies that started with the fall of the Berlin Wall and that is made even more urgent by their willingness to acquire the full membership of the European Union affect these countries. We also show that EU membership can, paradoxically, reduce the speed of transition by introducing constraints on the use of economic policy instruments. |
| Keywords: | EU enlargement, CEECs, public spending. |
| JEL: | F02 F40 C62 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:sap:wpaper:87&r=cba |
| By: | Márcio Gomes Pinto Garcia (Department of Economics PUC-Rio); Bernando S. de M. Carvalho (Gávea Investimentos) |
| Abstract: | We analyze the Brazilian experience in the 1990s to access the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) lead us to conclude that controls on capital inflows were effective in deterring financial inflows for only a brief period, from two to six months. The hypothesis to explain the ineffectiveness of the controls is that financial institutions performed several operations aimed at avoiding capital controls. We then conducted interviews with market players in order to provide several examples of the financial strategies that were used in this period to invest in the Brazilian fixed income market while bypassing capital controls. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets. Therefore, policy-makers should avoid spending the scarce resources of bank supervision trying to implement them and focus more in improving economic policy. |
| JEL: | E44 F32 F34 F36 G15 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:516&r=cba |
| By: | Gustavo Franco (Department of Economics PUC-Rio) |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:517&r=cba |
| By: | Hakan Berument |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0509&r=cba |
| By: | Hakan Berument; Nergiz Dinçer |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0513&r=cba |
| By: | Hakan Berument; Seyit Mümin Cilasun; Yýlmaz Akdi |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0603&r=cba |