|
on Central Banking |
| By: | Paolo Vitale (Department of Economics and Land History, Gabriele D‘Annunzio University, Viale Pindaro 42, 65127 Pescara (Italy).) |
| Abstract: | We formulate a market microstructure model of exchange determination we employ to investigate the impact of foreign exchange intervention on exchange rates and on foreign exchange (FX) market conditions. With our formulation we show i) how foreign exchange intervention influences exchange rates via both a portfolio-balance and a signalling channel and ii) derive a series of testable implications which are coherent with a large body of empirical research. Our investigation also proposes some normative recommendations, as we show i) that in extreme circumstances large scale foreign exchange intervention can have destabilizing effects for the functioning of FX markets and ii) that the route chosen for the implementation of official intervention has important implications for its impact on exchange rates and on market conditions. |
| Keywords: | Official Intervention, Order Flow, Foreign Exchange Micro Structure, Exchange Rate Dynamics. |
| JEL: | D82 G14 G15 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060629&r=cba |
| By: | M. Martin Boyer; Simon van Norden |
| Abstract: | Several recent papers have underlined the importance of the microstructure effects in understanding exchange rate behavior by documenting stable long-run relationships between cumulated order flows and spot exchange rates. This stands in contrast to the widely-studied failure of exchange rates to conform to the long-run behavior implied by “conventional” macroeconomic models and is consistent with the prediction of micro-structure models. We reexamine the evidence for stable long-run relationships. We find that such evidence exists only for a small number of the major currencies we examine and that is it statistically fragile. We conclude that this implication of microstructure models does not fit the data as well as previous studies suggest. <P>Plusieurs études récentes ont souligné l’importance de la microstructure des marchés pour la compréhension des comportements des taux de change en documentant les relations stables à long terme entre les flux des commandes cumulées et les taux de change courants. Les résultats contrastent avec ceux de nombreuses études sur l’échec des taux de change de se conformer au comportement à long terme que supposent les modèles macroéconomiques « conventionnels » et sont conformes à la prédiction des modèles microstructurels. Nous réexaminons l’évidence de relations stables à long terme et constatons que celle-ci n’existe que dans un petit nombre des taux de change étudiés et qu’elle est fragile du point de vue statistique. Nous concluons que l’implication des modèles microstructurels ne correspond pas aux données aussi bien que des études précédentes laissent supposer. |
| Keywords: | cointegration, foreign exchange rates, order flow, microstructure, cointégration, flux de commandes, microstructure, taux de change |
| JEL: | F31 G15 |
| Date: | 2006–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2006s-07&r=cba |
| By: | Nicholai Benalal (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Juan Luis Diaz del Hoyo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Beatrice Pierluigi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Nikiforos Vidalis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | The aim of this study is to investigate the extent to which the dispersion of real GDP growth rates has changed over the past few years and whether the synchronisation of business cycles has increased among the euro area countries. The study is divided into two main parts. The f irst focuses on the dispersion of real GDP growth rates across the euro area countries, while the second studies the synchronisation of business cycles within the euro area. The study shows first that dispersion of real GDP growth rates across the euro area countries in both unweighted and weighted terms has no apparent upward or downward trend during the period 1970-2004 as a whole. Second, since the beginning of the 1990s, the dispersion of real GDP growth rates across the euro area countries has largely reflected lasting trend growth differences, and less so cyclical differences, with some countries persistently exhibiting output growth either above or below the euro area average. Among other things, this might be due to different trends in demographics, as well as to differences in structural reforms undertaken in the past. Thirdly, the degree of synchronisation of business cycles across the euro area countries seems to have increased since the beginning of the 1990s. This f inding holds for various measures of synchronisation applied to overall activity and to the cyclical component, for annual and quarterly data, as well as for various country groupings. In particular, the degree of correlation currently appears to be at a historical high. In addition to these main findings, certain other stylised facts on dispersion and synchronisation are presented. JEL Classification: C10; E32; O40. |
| Keywords: | Dispersion of GDP growth across the euro area countries; trend and cycle; synchronisation of business cycles within the euro area. |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20060045&r=cba |
| By: | Alessia Campolmi (Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005, Barcelona, Spain.); Ester Faia (Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005, Barcelona, Spain.) |
| Abstract: | This paper relates the size of the cyclical inflation differentials, currently observed for euro area countries, to the differences in labor market institutions across the same set of countries. It does that by using a DSGE model for a currency area with sticky prices and labor market frictions. We show that differences in labor market institutions account well for cyclical inflation differentials. The proposed mechanism is a supply side one in which differences in labor market institutions generate different dynamics in real wages and consequently in marginal costs and inflations. We test this mechanism in the data and find that the model replicates well the empirical facts. |
| Keywords: | Cyclical inflation divergence, labor market institutions, EMU. |
| JEL: | E52 E24 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060619&r=cba |
| By: | M. Hashem Pesaran; Ron P. Smith; Takashi Yamagata; Liudmyla Hvozdyk |
| Abstract: | In this paper we adopt a new approach to testing for purchasing power parity, PPP, that is robust to base country effects, cross-section dependence, and aggregation. Given data on N +1 countries, i, j = 0, 1, 2, ..., N, the standard procedure is to apply unit root or stationarity tests to N relative prices against a base country, 0, e.g. the US. The evidence is that such tests are sensitive to the choice of base country. In addition, the analysis is subject to a high degree of cross section dependence which is difficult to deal with particularly when N is large. In this paper we test for PPP applying a pairwise approach to the disaggregated data set recently analysed by Imbs, Mumtaz, Ravan and Rey (2005, QJE). We consider a variety of tests applied to all possible N(N +1)/2 pairs of real exchange rate pairs between the N + 1 countries and estimate the proportion of the pairs that are stationary, for the aggregates and each of the 19 commodity groups. This approach is invariant to base country effects and the proportion that are non-stationary can be consistently estimated even if there is cross-sectional dependence. To deal with small sample problems and residual cross section dependence, we use a factor augmented sieve bootstrap approach and present bootstrap pairwise estimates of the proportions that are stationary. The bootstrapped rejection frequencies at 26%-49% based on unit root tests suggest some evidence in favour of the PPP in the case of the disaggregate data as compared to 6%-14% based on aggregate price series. |
| Keywords: | purchasing power parity, panel data, pairwise approach, cross section dependence |
| JEL: | C23 F31 F41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1704&r=cba |
| By: | Patrick Lünnemann (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983 Luxembourg, Luxembourg.); Thomas Y. Mathä (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983 Luxembourg, Luxembourg.) |
| 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 forwardlooking, 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. |
| Keywords: | Survey data, price setting, price rigidity, adjustment speed. |
| JEL: | C21 C22 C14 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060617&r=cba |
| By: | Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Josep Maria Puigvert Gutiérrez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this study we apply cluster analysis techniques, including a novel smoothing method, to detect some basic patterns and trends in the euro area banking sector in terms of the degree of homogeneity of countries. We find that in the period 1998-2004 the banking sectors in the euro area countries seem to have become somewhat more homogeneous, although the results are not unequivocal and considerable differences remain, leaving scope for further integration. In terms of clustering, the Western and Central European countries (like Germany, France, Belgium, and to some extent also the Netherlands, Austria and Italy) tend to cluster together, while Spain and Portugal and more recently also Greece usually are in the same distinct cluster. Ireland and Finland form separate clusters, but overall tend to be closer to the Western and Central European cluster. |
| Keywords: | Financial integration, cluster analysis, banking sector. |
| JEL: | C49 F36 G21 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060627&r=cba |
| By: | Christian Dreger (German Institute for Economic Research (DIW) Berlin, 14191 Berlin, Germany.); Hans-Eggert Reimers (Hochschule Wismar, University of Technology, Business and Design, PF 1210, 23952 Wismar, Germany.); Barbara Roffia (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Generally speaking, money demand models represent a natural benchmark against which monetary developments can be assessed. In particular, the existence of a well-specified and stable relationship between money and prices can be perceived as a prerequisite for the use of monetary aggregates in the conduct of monetary policy. In this study a money demand analysis in the new Member States of the European Union (EU) is conducted using panel cointegration methods. A well-behaved long-run money demand relationship can be identified only if the exchange rate as part of the opportunity cost is included. In the long-run cointegrating vector the income elasticity exceeds unity. Moreover, over the whole sample period the exchange rates vis-à-vis the US dollar turn out to be significant and a more appropriate variable in the money demand than the euro exchange rate. The present analysis is of importance for the new EU Member States as they are expected to join in the future years the euro area, where money is deemed to be highly relevant - within the two-pillar monetary strategy of the European Central Bank (ECB) - in order to detect risks to price stability over the medium term. |
| Keywords: | Money demand, new EU Member States, exchange rate, panel cointegration. |
| JEL: | C23 E41 E52 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060628&r=cba |
| By: | Frait, Jan (Czech National Bank, Prague); Komarek, Lubos (Czech National Bank, Prague and Prague School of Economics) |
| Abstract: | The paper deals with the relationship between monetary policy and asset prices. Besides surveying the general discussion, it attempts to extend it to recent developments in the new Member States of the EU (NMS), namely the Czech Republic, Hungary, Poland and Slovakia (the EU4). After a brief description of the current macroeconomic situation in the NMS, the appropriate reaction of monetary policy to asset price bubbles is dealt with and the main pros and cons associated with this reaction are summarised. Afterwards, the risks of asset market bubbles in the EU4 countries are evaluated. Since the capital markets are still underdeveloped and the real estate price boom seems to be a natural reaction to the initial undervaluation, the risks are viewed as rather small. The conclusion is thus that it is crucial for central banks in mature economies as well as in the NMS to conduct their monetary policies as well as their supervisory and regulatory roles in a way that does not promote the build-up of asset market bubbles. In exceptional times, central banks of small open economies must be ready to use monetary policy steps as a kind of insurance against the adverse effects of potential asset market bubbles. |
| Keywords: | Monetary Policy ; Asset Markets ; Central Banking ; New EU Member States |
| JEL: | E52 E58 G12 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:738&r=cba |
| By: | Georgios E. Chortareas (University of Essex); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas) |
| Abstract: | Candel-Sánchez and Campoy-Miñarro (2004) argue that the Walsh linear inflation contract does not prove optimal when the government concerns itself about the cost of the central bank contract. This result relies on the authors. assumption that the participation constraint does not represent an effective constraint on the central banker's decision. Instead, the government can "impose" or "force" the contract on the central banker, even though the contract violates the participation constraint. We argue that such a contract does not make sense. The government can impose it, but it does not affect the central banker's incentives. The policy outcomes do not match those of commitment. Then we show that the Walsh linear inflation contract does produce the optimal outcome, even when the government cares about the cost of the contract. |
| Keywords: | central banks, contracts, Walsh |
| JEL: | E42 E52 E58 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2006-14&r=cba |
| By: | Efrem Castelnuovo (University of Padua); Paolo Surico (University of Bari and Bank of England) |
| Abstract: | This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs and two different identification strategies based on zero restrictions and sign restrictions, we find that the positive response of price to a monetary policy shock is historically limited to the sub-samples associated with a weak central bank response to inflation. These sub-samples correspond to the pre-Volcker period for the US and the pre-inflation targeting regime for the UK. Using a micro-founded New Keynesian monetary policy model for the US economy, we then show that the structural VARs are capable of reproducing the price puzzle on artificial data only when monetary policy is passive and hence multiple equilibria arise. In contrast, this model never generates on impact a positive inflation response to a policy shock. The omission in the VARs of a variable capturing the high persistence of expected inflation under indeterminacy is found to account for the price puzzle observed on actual data. |
| JEL: | E30 E52 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0016&r=cba |
| By: | Peter Welz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyses the empirical performance of a New Keynesian sticky-price model with delayed effects of monetary impulses on inflation and output for the German pre-EMU economy. The model is augmented with rule-of-thumb behaviour in consumption and price setting. Using recently developed Bayesian estimation techniques, endogenous persistence is found to play a dominant role in consumption whereas forward-looking behaviour is greater for inflation. The model’s dynamics following a monetary shock and a preference shock are comparable to those of an identified VAR model. |
| Keywords: | DSGE-Model, identified VAR, predetermined expectations, Bayesian estimation. |
| JEL: | E43 E52 C51 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060621&r=cba |
| By: | Sophie Claeys,; Gleb Lanine; Koen Schoors |
| Abstract: | We focus on the conflict between two central bank objectives, namely individual bank stability and systemic stability. We study the licensing policy of the Central Bank of Russia (CBR) in 1999-2002. Banks in poorly banked regions, banks that are too big to be disciplined adequately and banks that are active on the interbank market enjoy protection from license withdrawal, showing a tacit concern for systemic stability. The CBR is also reluctant to withdraw licenses from banks that violate the individuals’ deposits to capital ratio, because this conflicts with the tacit CBR objective to secure depositor trust and systemic stability. |
| Keywords: | Bank supervision, bank crisis, Russia. |
| JEL: | G2 N2 E5 |
| Date: | 2005–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-778&r=cba |
| By: | Magnus Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lars Jul Hansen (Danmarks Nationalbank, Havnegade 5, 1093 Copenhagen, Denmark); Szabolcs Sebestyén (Department of Fundamentos del Análisis Económico, University of Alicante, 03080 San Vicente del Raspeig, Spain.) |
| Abstract: | This paper explores a long dataset (1999-2005) of intraday prices on German long-term bond futures and examines market responses to major macroeconomic announcements and ECB monetary policy releases. In general, adjustments in prices are quick and new information is usually incorporated into prices within five minutes of announcements. The volatility adjustment is more long-lasting than that in the conditional mean, and excess volatility can be observed up to 30 minutes after the releases. Overall, German bond markets tend to react more strongly to the surprise component in US macro releases compared to euro area and domestic releases, and the strength of those reactions to US releases has increased over the period considered. The paper also provides evidence that the outcome of German unemployment figures has been known to investors ahead of the prescheduled release. |
| Keywords: | Monetary policy, intraday data, macroeconomic announcements. |
| JEL: | E43 E44 E58 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060631&r=cba |
| By: | Joachim Coche (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matti Koivu (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ken Nyholm (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vesa Poikonen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper studies the implications of introducing an explicit policy objective to the management of foreign reserves at a central bank. A dynamic model is developed which links together reserves management and the exchange rate by foreign exchange interventions. The exchange rate is modelled as a mean-reverting autoregressive process incorporating a linear response to interventions. The premise is that it is the objective of the central bank to prevent undervaluation of its currency. Given this objective, the model is formulated in a one- and a multi-period setting and solved to find the optimal asset allocation. The results show that asset allocation can significantly help in achieving the desired policy objective. |
| Keywords: | Foreign reserves management, foreign exchange intervention, exchange rate modelling, optimal asset allocation. |
| JEL: | G11 F31 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060624&r=cba |
| By: | Marco G. Ercolani and Jayasri Dutta |
| Abstract: | Though anecdotal evidence suggests that retail price inflation increased tem- porarily in January 2002 when Euro notes and coins were introduced, the evi- dence from official statistics largely refutes this. We test for the presence of a sudden temporary increase in inflation for Euro-changeover countries. We use the countries that did not join the Euro: Denmark, Sweden and the UK; as a control group. Though the results are sensitive to the estimation method, we do uncover weak evidence of a minor increase in aggregate inflation in January 2002 for the countries that did join the Euro. Similar tests for the Restaurant sector find a strong Euro-changeover effect on temporary inflation. Summary tests for 129 other price sub-categories are also discussed. |
| JEL: | D12 D40 D84 E31 E52 E63 L89 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:06-03&r=cba |
| By: | Eilev S. Jansen (Norges Bank and Norwegian University of Science and Technology) |
| Abstract: | The paper presents an incomplete competition model (ICM), where inflation is determined jointly with unit labour cost growth. The ICM is estimated on data for the Euro area and evaluated against existing models, i.e. the implicit inflation equation of the Area Wide model (AWM) - cf. Fagan, Henry and Mestre (2001) - and estimated versions of the (single equation) P* model and a hybrid New Keynesian Phillips curve. The evidence from these comparisons does not invite decisive conclusions. There is, however, some support in favour of the (reduced form) AWM inflation equation. It is the only model that encompasses a general unrestricted model and it forecast encompasses the competitors when tested on 20 quarters of one step ahead forecasts. |
| Keywords: | inflation, incomplete competition model, Area Wide model, P*-model, New Keynesian Phillips curve, model evaluation, forecast encompassing. |
| JEL: | C22 C32 C52 C53 E31 |
| Date: | 2004–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2004_10&r=cba |
| By: | John Duffy; Maxim Nikitin |
| Abstract: | We study unofficial dollarization, i.e., the use of foreign money alongside the domestic currency, in an environment where spatial separation and limited communication create a role for currency and banks arise endogenously to provide insurance against liquidity preference shocks. Unofficial dollarization has been a common phenomenon in emerging market economies during high inflations. However, successful disinflations have not necessarily been followed by dedollarization. In particular, Argentina, Bolivia, Peru, Russia, and Ukraine remained highly dollarized long after the inflation rate was reduced to single digits. We refer to this phenomenon as a "dollarization hysteresis paradox." It has also been observed in these economies that higher inflation has a negative impact on output and financial intermediation, that dollarization and capital flight adversely affect capital accumulation, and that post-stabilization output growth is impeded by dollarization. This paper presents an overlapping-generations model with random relocation of agents between two locations that explains the dollarization hysteresis paradox and several other stylized facts. The key link between inflation, dollarization, and capital accumulation in the model is that high inflation undermines financial intermediation, which leads to the adoption of a less efficient production technology. As a result, it is possible for economies to become stuck in low output "development traps," where the marginal product of capital is the same as the return from holding dollars. In such an environment, we show how dollarization can preclude further capital accumulation, even in the presence of successful inflation stabilization policies. We complement previous work on dollarization by allowing the "hard" currency to compete with domestic capital as a store of value instead of focusing on either currency substitution (where the use of a "hard" currency replaces the domestic currency as a medium of exchange) or official dollarization (where the domestic currency is abandoned altogether and replaced with the US dollar). We assume that in the first period of life, agents inelastically supply labor and receive the competitive market wage. A given fraction of agents will be relocated to another location, and they can take only domestic currency with them. Competitive banks arise endogenously in this environment to insure against liquidity (relocation) shock. They issue demand deposits and hold portfolios of domestic currency and the capital market assets, which may include productive capital and dollars. There are two different productive technologies that banks can invest in. The first one is a primitive autarkic technology that they can use directly. The second one is an advanced technology that requires the use of a financial center. The financial center is a profit-maximizing natural monopoly. Its profit depends positively on the scale of intermediation and production. Our model predicts that an increase in inflation will reduce the capital stock, output and the scale of intermediation. If inflation is low enough, the financial center makes a positive profit, and the advanced technology is used. However, when inflation exceeds a certain threshold, the profit of the center falls below zero, and it shuts down. Hence competitive banks switch to the inefficient autarkic technology. Even though the capital stock falls, the marginal product of capital falls as well due to the switch in technology. This creates the possibility of a "dollarization trap," in which dollars are held as a store of value alongside the autarkic productive capital. The arbitrage condition between the return on dollars and the marginal product of capital determines the capital stock and output. A subsequent disinflation does not affect this arbitrage condition, and thus has no effect on capital accumulation. Therefore, as long as the economy gets stuck in the dollarization trap during a high inflation episode, a successful stabilization of inflation is followed neither by dedollarization nor by output recovery. |
| Keywords: | Dollarization, Inflation, Financial Intermediation, Asset Substitution, Hysteresis |
| JEL: | E40 E50 F41 |
| Date: | 2004–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecm:latm04:196&r=cba |
| By: | Charlotte Lespagnol (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]) |
| Abstract: | Théoriquement, les actions de politique monétaire \textit{via} le maniement des taux courts nominaux se transmettent à l'économie le long de la structure par terme des taux d'intérêt. L'absence de vérification empirique de ces relations entre les taux à différentes maturités, et partant de la transmission de la politique monétaire, remet en cause l'efficacité même des interventions des banques centrales. On peut cependant soutenir que les tests empiriques usuels qui remettent en cause la structure des taux peuvent être sujets à caution. En effet, ils utilisent seulement le passé des taux d'intérêt pour construire les anticipations de taux courts servant à calculer les taux longs théoriques qui sont ensuite comparés aux taux longs historiques. Or, il est commun à présent d'utiliser les règles de politiques monétaires pour modéliser l'action des banques centrales, en observant les évolutions de l'inflation et de l'activité. Nous tentons donc à l'aide d'un modèle macroéconomique et d'une règle monétaire <<~de type Taylor~>> de réconcilier l'idée d'une transmission de la politique monétaire des taux courts aux taux à plus long terme. Dans un premier temps, nous cherchons à déterminer un modèle macroéconomique simplifié de l'Allemagne de 1985 à 1998. Ensuite, nous simulons des séries de taux courts anticipés afin d'en déduire des taux à plus longue maturité. De la proximité constatée entre les taux observés à différentes échéances et les résultats des simulations, nous pourrons alors traiter de la pertinence de la théorie des anticipations de la structure par terme des taux. |
| Keywords: | Structure par terme des taux ; test de la théorie des anticipations ; modèle macroéconomique ; règle monétaire ; simulations stochastiques |
| Date: | 2006–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00077365_v1&r=cba |
| By: | Sumon Kumar Bhaumik; Jenifer Piesse; |
| Abstract: | Using bank-level data from India, for nine years (1995-96 to 2003-04), we examine banks’ behavior in the context of emerging credit markets. Our results indicate that the credit market behavior of banks in emerging markets is determined by past trends, the diversity of the potential pool of borrowers to whom a bank can lend, and regulations regarding treatment of NPA and lending restrictions imposed by the Reserve Bank of India. Finally, we find evidence that suggest that credit disbursal by banks can be facilitated by regulatory and institutional changes that help banks mitigate the problems associated with enforcement of debt covenants and treatment of NPA on the balance sheets. On the basis of these results, we speculate on some possible policy recommendations. |
| Keywords: | Indian banking, Development, Credit-to-deposit ratio, Risk aversion |
| JEL: | G21 O16 |
| Date: | 2005–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-774&r=cba |
| By: | Australian Prudential Regulation Authority (Australian Prudential Regulation Authority) |
| Date: | 2005–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:apr:aprpdp:dp0015&r=cba |
| By: | Maria Concetta Chiuri (Dipartimento di Scienze Economiche - Università di Bari); Giovanni Ferri (Dipartimento di Scienze Economiche - Università di Bari); Giovanni Majnoni (World Bank) |
| Abstract: | We test for emerging economies the hypothesis - previously verified for G-10 countries only - that the enforcement of bank capital asset requirements (CARs) exerts a detrimental effect on the supply of credit. The econometric analysis on individual bank data suggests three main results. First, CAR enforcement - according to the 1988 Basel standard - significantly curtailed credit supply, particularly at less-well capitalized banks. Second, such negative impact was larger for countries enforcing CARs in the aftermath of a currency/financial crisis. Third, the adverse impact of CARs on the credit supply was significantly smaller for foreign-owned banks, suggesting that opening up to foreign investors may be an effective way to partly shield the domestic banking sector from negative shocks. Overall, CAR enforcement - by inducing banks to reduce their lending - may well have induced an aggregate credit slowdown or contraction in the examined emerging countries. This paper is relevant to the ongoing debate on the impact of the revision of bank CARs, as contemplated by the 1999 Basel proposal. Our results suggest that in several emerging economies the revision of bank CARs could well induce a credit supply retrenchment, which should not be underestimated. |
| Keywords: | bank capital asset requirements, capital crunch |
| JEL: | G18 G21 G28 |
| URL: | http://d.repec.org/n?u=RePEc:bai:series:wp0002&r=cba |
| By: | James Twaddle; David Hargreaves; Tim Hampton (Reserve Bank of New Zealand) |
| Abstract: | We use the Reserve Bank of New Zealand's macroeconomic model (FPS) to look at the feasibility of using monetary policy to reduce variability in output, the exchange rate and interest rates while maintaining an inflation target. Our experiment suggests that policy could be altered to increase the stability of interest rates, the exchange rate, inflation, or output, relative to the base case reaction function in FPS, but such a policy would incur some cost in terms of the variability of the other variables. In particular, we find that greater exchange rate stability would have relatively large costs in terms of the stability of all three other variables, primarily because monetary policy that leans too dramatically against exchange rate disturbances can create significant real economy variability. Relative to West (2003), we find larger costs of operating monetary policy to achieve exchange rate stabilisation. We attribute this finding to the relatively inertial inflation expectation process in FPS. |
| JEL: | E52 E58 F47 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/04&r=cba |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We examine the implications of monetary union for macroeconomic stabilisation in catching up participating countries. We allow member states’supply conditions to differ inside the union, especially with regard to sectoral characteristics. Sectoral productivity shocks on balance hamper the stabilisation properties of a currency union. In the face of aggregate supply disturbances, the stabilisation costs of renouncing monetary autonomy diminish with a flatter output-inflation tradeoff and - barring idiosyncratic shocks - with a larger reference country size, more homogeneous supply slopes and a higher preference for price stability. |
| Keywords: | Monetary union, Balassa-Samuelson effect, Exchange rates, Price stability. |
| JEL: | E52 E58 F33 F40 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060630&r=cba |
| By: | Michael Ehrmann; Marcel Fratzscher |
| 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: | F30 F36 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1710&r=cba |
| By: | Philip Liu (Reserve Bank of New Zealand) |
| Abstract: | This paper investigate whether a small open economy DSGE-based New Keynesian model can provide a reasonable description of key features of the New Zealand economy, in particular the transmission mechanism of monetary policy. The main objective is to design a simple, compact, and transparent tool for basic policy simulations. The structure of the model is largely motivated by recent developments in the area of DSGE modelling. Combining prior information and the historical data using Bayesian simulation techniques, we arrive at a set of parameters that largely reflect New Zealand's experience over the stable inflation-targeting period. The resultant model can be used to simulate monetary policy paths and help analyze the robustness of policy conclusions to model uncertainty. |
| JEL: | C15 C51 E12 E17 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/03&r=cba |
| By: | Juan de Dios Tena; A. R. Tremayne |
| Abstract: | This paper studies the transmission of monetary policy to industrial output in the UK. In order to capture asymmetries, a system of threshold equations is considered. However, unlike previous research, endogenous threshold parameters are allowed to be different for each equation. This approach is consistent with economic intuition and is shown to be of tangible importance after suitable econometric evaluation. Results show evidence of cross-sectional differences across industries and asymmetries in some sectors. These findings contribute to the debate about the importance of alternative economic theories to explain these asymmetries and support the use of a sectorally disaggregated approach to the analysis of monetary transmission. |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws062911&r=cba |
| By: | Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Bruno Gérard (Norwegian School of Management BI, Elias Smiths vei 18, Box 580 N-1302 Sandvika, Norway.) |
| Abstract: | We investigate the determinants of bilateral international equity and bond portfolio reallocation across a large cross section of countries over the 1997 to 2001 period. We first argue that financial integration is not a global phenomenon, as equity and bond home biases declined significantly only among European countries, Australia, New Zealand and Singapore. Then, we show that the European Economic and Monetary Union (EMU) eased the access to the equity market and, to a larger extent, the bond market; thereby, enhancing regional financial integration in the euro area. Beside the effect of the EMU, the strongest determinants of the changes in portfolio weights are expected diversification benefits and the initial degree of underweight. |
| Keywords: | Home bias, Risk diversification, International portfolio weights, EMU. |
| JEL: | C13 C21 F37 G11 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060626&r=cba |
| By: | Carlos Usabiaga; María Ángeles Caraballo |
| Abstract: | In this work we centre on the menu cost models of new keynesian economics and, more concretely, on the empirical testing line proposed by Ball and Mankiw (1994, 1995), authors that confront in a monopolistic competition model the explanation of why a shock that affects relative prices also affects mean inflation. Their conclusion is that if mean inflation is near to zero the inflation-skewness relation is stronger than the inflation-variability relation, whereas in the case of a high mean inflation the inflation-variability relation is stronger. Following their approach in our analysis mean inflation is the explained variable, whereas skewness and variability of the distribution of price changes are the main explanatory variables. Our type of analysis has different applications. Firstly, in the case that we confront a relative price shock, if variability and skewness, or some of their transformations, affect inflation it means that our economy is vulnerable, so it makes especially difficult to control inflation. A second application refers to a feasible way to measure core inflation, eliminating from inflation the transitory effects introduced by skewness. Finally, this approach can contribute to test if downward price rigidity is an exogenous phenomenon or the response of optimizing agents that confront menu costs in an inflationary context. Despite these utilities, the Ball and Mankiw (1995) approximation has been rarely applied to Spanish economy.In essence, our work tries to answer whether menu costs à la Ball and Mankiw are plausible for Spanish economy, and whether exists homogeneity of the Spanish regions at this respect. The structure of the work is the following: a) exposition of the basic data and variables, the methodology followed, and the results of our first approximation to Ball and Mankiw (1995); b) consideration of alternative measures of variability and skewness; c) analysis of the role of kurtosis and introduction of two real variables (unemployment and production) as control variables; d) analysis of the causality problem; and e) after the analysis at regional level, we study whether the regions jointly present an homogeneous behavior in this area. Our period of analysis is 1994.01-2001.12. We have chosen this low inflation period because around an annual 4-5% is placed the upper limit for which the model predicts a strong inflation-skewness relation. The essential data that we use come from the series of monthly variation rate of consumer price index, disaggregated by regions and goods and services (33 subgroups), elaborated by the Instituto Nacional de Estadística (INE). In general, we observe an homogeneous behavior of the "structure" of inflation for the Spanish regions. Our analysis corroborates the results of Ball and Mankiw (1995) about the importance of the skewness of the distribution of price changes. Their results in the line that the variability coefficient is higher than the skewness coefficient, and that the estimations containing skewness present a higher coefficient of determination are also confirmed. The significance of skewness and variability at regional level shows the vulnerability of Spanish inflation in terms of relative price shocks. |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa04p12&r=cba |
| By: | Balázs Égert; Amalia Morales-Zumaquero; |
| Abstract: | This paper attempts to analyze the direct impact of exchange rate volatility on the export performance of ten Central and Eastern European transition economies as well as its indirect impact via changes in exchange rate regimes. Not only aggregate but also bilateral and sectoral export ows are studied. To this end, we rst analyze shifts in exchange rate volatility linked to changes in the exchange rate regimes and second, use these changes to construct dummy variables we include in our export function. The results suggest that the size and the direction of the impact of forex volatility and of regime changes on exports vary considerably across sectors and countries and that they may be related to specic periods. |
| Keywords: | exchange rate volatility, export, trade, transition, structural breaks |
| JEL: | F31 |
| Date: | 2005–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-782&r=cba |
| By: | Ronald Ian McKinnon; Gunther Schnabl |
| Abstract: | China keeps its exchange rate tightly fixed to the dollar. Its productivity growth and trade surplus have been high, and it continues to accumulate large dollar reserves. Many observers take this as evidence that the renminbi is undervalued and should be appreciated to reduce the Chinese trade surplus. We argue that an appreciation of the renminbi need not reduce China’s trade surplus but could cause serious deflation in China. To show this, we consider international adjustment between China and the United States from both an asset-market and a labor-market perspective, and compare this to Japan’s unsuccessful appreciation of the yen. |
| Keywords: | China, exchange rate, adjustment, assets markets, labour markets |
| JEL: | F15 F31 F33 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1720&r=cba |
| By: | Paul De Grauwe; Agnieszka Markiewicz |
| Abstract: | In this paper, we investigate the behavior of the exchange rate within the framework of an asset pricing model. We assume boundedly rational agents who use simple rules to forecast the future exchange rate. They test these rules continuously using two learning mechanisms. The first one, the fitness method, assumes that agents evaluate forecasts by computing their past profitability. In the second mechanism, agents learn to improve these rules using statistical methods. First, we find that both learning mechanisms reveal the fundamental value of the exchange rate in the steady state. Second, both mechanisms mimic regularities observed in the foreign exchange markets, namely exchange rate disconnect and excess volatility. Fitness learning rule generates the disconnection at different frequencies, while the statistical method has this ability only at the high frequencies. Statistical learning can produce excess volatility of magnitude closer to reality than fitness learning but can also lead to explosive solutions. |
| JEL: | C32 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1717&r=cba |
| By: | Daniel Daianu; Ella Kallai; |
| Abstract: | Disinflation has been pursued successfully in Romania in recent years. Inflation came down from over 40 per cent in 2001 to 14 per cent in 2003 and is expected to be cca 9.5 per cent in 2004. By 2007 it should come down to around 3%. The benefits of a lowinflation environment are unquestionable, as price stability is the ultimate objective of monetary policy. In addition, low inflation is a pre-condition for EU accession. There only remains the other critical question, namely, what is the proper strategy to achieve the ultimate objective. Different central banks have adopted strategies which place different emphasize on the various pieces of information, or elements of their decision-making process or different aspects of their communication policies. Inflation targeting (IT) is one of those strategies. |
| Keywords: | inflation-targeting, transition economy, EU accession |
| JEL: | E52 F41 P44 |
| Date: | 2005–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-789&r=cba |
| By: | Athena T. Theodorou; Neville R. Francis; Michael T. Owyang |
| Abstract: | Structural vector autoregressions (SVARs) have become a standard tool used to determine the roles of monetary policy shocks in generating cyclical fluctuations in the United States. Using both long- and short-run identifying restrictions, various authors have explored the empirical response of the economy to exogenous monetary innovations. While the majority of the studies of monetary policy have focused on the effect of exogenous money growth or interest rate shocks, recent research has begun to investigate the effect of endogenous monetary policy -- that is, the central bank's reaction to non-monetary shocks. One exogenous shock that many economists believe contributes to the business cycle fluctuations that feed into the Taylor rule is the technology shock. In an effort to identify the empirical effects of technology shocks, Gali (1999) estimated two models: a bivariate model of productivity and hours and a five-variable model adding money, inflation, and interest rates. His identification estimates a decomposition of productivity and hours into innovations to technology and non-technology components by assuming that only the former can have long-run effects on labor productivity. Empirical identification of the technology shock was a key first step in developing a unified reduced-form framework with which to examine the role that monetary policy has played in smoothing economic fluctuations. Along these lines, Gali, Lopez-Salido, and Valles (2003 -- henceforth GLV) examined the endogenous response of monetary policy to identified technology shocks in the United States. GLV examine a four-variable structural VAR for the United States with labor productivity, labor hours, the real interest rate, and inflation. Using the Gali (1999) identification, they find that during the Volcker-Greenspan (VG) era the Fed's response to the technology shock is to raise the nominal interest rate, while during the Martin-Burns-Miller (MBM) era the Fed lowers the nominal rate. Moreover, they find that the inflation and hours responses in the two periods differ in sign. Our goal is to expand the scope of GLV to an international context to determine whether the effect of technology shocks is consistent across the major industrialized countries. In particular, we are interested in how the different central banks respond to technology shocks. We investigate the possibility that technology shocks in different countries produce fundamentally different inflation and employment responses and to what extent those effects alter the monetary response. Using a theoretical model adapted from King and Wolman (1996), we find that the empirical responses can be matched with theoretical responses. Differences in these theoretical responses can be attributed to alternative policy rules and changes in the cost of capital adjustment. Further tests verify that these country characteristics could, indeed, have some explanatory power. Our results are by no means conclusive; however, they do suggest a number of theoretically consistent similarities across countries in each subgroup. While we believe more investigation into these cross-country comparisons is warranted, the initial indication is that the manner in which monetary policy is conducted and the degree of rigidity in capital markets may be determining factors in a country's response to technology shocks. Gali, Jordi (1999). "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?" American Economic Review, March 1999, 89(1), pp. 249-271. Gali, Jordi; Lopez-Salido, J. David; and Valles, Javier (2003). "Technology Shocks and Monetary Policy: Assessing the Fed's Performance." Journal of Monetary Economics, May 2003, 50(4), pp. 723-743. King, Robert G., and Wolman, Alexander L. (1996). "Inflation Targetting in a St. Louis Model of the 21st Century." Federal Reserve Bank of St. Louis Review, May/June 1996, 78(3), pp. 83-107. |
| Keywords: | Technology, Productivity, Monetary Policy, Taylor Rule, Capital Adjustment Costs |
| JEL: | C32 E2 E52 |
| Date: | 2004–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecm:nasm04:444&r=cba |
| By: | John H. A. Munro |
| Abstract: | One of the most common myths in European economic history, and indeed in Economics itself, is that the Black Death of 1347-48, followed by other waves of bubonic plague, led to an abrupt rise in real wages, for both agricultural labourers and urban artisans – one that led to the so-called ‘Golden Age of the English Labourer’, lasting until the early 16th century. While there is no doubt that real-wages in mid- to late- 15th century England did reach a peak far higher than that ever achieved in past centuries, real wages in England did not, in fact, rise in the immediate aftermath of the Black Death. In southern England, real wages of building craftsmen (rural and urban), having plummeted with the natural disaster of the Great Famine (1315-21), thereafter rose to a new peak in 1336-40. But then their real wages fell during the 1340s, and continued their decline after the onslaught of the Black Death, indeed into the 1360s. Not until the later 1370s – almost thirty years after the Black Death – did real wages finally recover and then rapidly surpass the peak achieved in the late 1330s. Thereafter, the rise in real wages was more or less continuous, though at generally slower rates, during the 15th century, reaching a peak in 1476-80 – at a level not thereafter surpassed until 1886-90, by the usual methods of calculating real wages with index numbers: i.e., by NWI/CPI = RWI [nominal wage index divided by the consumer price index equals the real wage index]. Most of the textbooks that still perpetuate the myth about the role of the Black Death in raising real wages, as an almost immediate consequence, employ a demographic model based on Ricardian economics, which predicts (ceteris paribus) that depopulation will result in falling grain prices and thus in falling rents on grain-producing lands (on land in general) and in rising real wages. The fall in population – perhaps as much as 50 percent by the late 15th century (from the 1310 peak) – presumably altered the land:labour ratio sufficiently to increase the marginal productivity of labour and thus its real wage (though in economic theory the real wage is determined by the marginal revenue product of labour). The rise in real wages would also have been a product of the fall in the cost of living, chiefly determined by bread-grain prices, whose decline would have been the inevitable result of both the abandonment of high-cost marginal lands and the rise in the marginal productivity of agricultural labour. But the evidence produced in this study demonstrates that the Black Death was followed, in England, by almost thirty years of high grain prices – high in both nominal and real terms; and that was a principal reason for the post-Plague behaviour of real wages. This study differs from all traditional models by examining the role of monetary forces in producing deflation in the second and final quarters of the fourteenth century, but severe inflation in between those quarters (i.e., from the early 1340s to the mid 1370s). The analysis of the evidence on money, prices, and wages in this study concludes that monetary forces and the consequent behaviour of the price level – in terms of those deflations and intervening inflation – were the most powerful determinant of the level of real wages (i.e., in terms of the formula: NWI/CPI = RWI). Thus the undisputed rise in nominal or money wages following the Black Death was literally ‘swamped’ by the post-Plague inflation, so that real wages fell. Conversely, the rise of real wages in the second quarter of the fourteenth century was principally due to a deflation in which consumer prices fell much more than did nominal wages. In the final quarter of the century, the even stronger rise in real wages was principally due to another deflation in which consumer prices fell sharply, but one in which, for the first time in recorded English history, nominal wages did not fall: an era that inaugurated the predominance of wage-stickiness in English labour markets for the next six centuries. But that perplexing phenomenon of downward wage-stickiness must be left to other studies. The 14th century is the most violent one before the 20th; and violent disruptions from plague, war, and civil unrest undoubtedly produced severe supply shocks and high (relative) prices. Europe also experienced more severe oscillations in monetary changes and consequently in price levels – i.e., the aforesaid deflations and intervening inflation – during the 14th century than in any other before the 20th. |
| Keywords: | inflation, deflation, coinage debasements, monetary flows, prices, nominal wages, real wages, labour, marginal productivity of labour, Black Death, bubonic plagues, depopulation, agricultural labourers, building craftsmen, labour markets |
| JEL: | E3 E4 E5 I1 I3 J1 J2 J3 J4 N1 N3 N4 |
| Date: | 2005–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:munro-04-04&r=cba |
| By: | Amina Lahrèche-Révil (University of Picardie); Juliette Milgram (Department of Economic Theory and Economic History, University of Granada.) |
| Abstract: | Compared to the new European members (NEM) and to the new candidate countries, the Middle-East and North African (MENA) countries are a very heterogeneous and fragmented EU frontier. As far as monetary issues are concerned, exchange rate regimes are very different and bilateral exchange rates quite volatile. Moreover, weak trade integration and generalized capital controls constitute major obstacles to economic and financial integration. Existing works yet suggest that anchoring to the euro would undoubtedly be the best exchange-rate strategy for most MENA countries. Monetary integration and trade integration are interdependent. This is especially the case when trade flows are sensitive to the volatility of exchange rates or to movements in relative prices. The objective of this paper is to evaluate the potential of monetary integration in the South Mediterranean area, in a context of trade liberalization and of a strong orientation of trade flows towards the EU. The empirical part of the paper would rely on a gravity equation of trade which would include exchange rates volatility and relative prices, in order to gauge the impact of de facto exchange-rate and monetary conditions on trade integration. The sample of countries is large (OECD, NEM, MENA and Asian countries) in order both to have robust estimates and to investigate whether the MENA countries exhibit a specific sensitivity of trade flows to exchange-rate volatility and exchange-rate misalignments. The impact of the competitiveness of third countries will also be investigated. This latter issue is especially important, though seldom assessed, when it comes to the potential trade-diverting effect of the latest EU enlargement on MENA trade wit the EU. The gravity setting also allows simulating the consequences for the trade of MENA countries of a deeper monetary integration, by comparing the impact on trade of a regional monetary integration and of a euro peg. |
| Keywords: | Exchange rate regime, trade, regional integration, Euro, MENA |
| JEL: | F15 F31 F33 |
| Date: | 2006–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:06/07&r=cba |
| By: | Anne-Marie Brook |
| Abstract: | The Maastricht criteria for accession to the euro area can be difficult for any economy to achieve, not least because of the challenges posed by the “impossible trinity”, which suggests that it is not possible to target both a stable exchange rate and stable inflation at the same time as maintaining free capital mobility. But for poorer economies which are catching up to the living standards of the wealthier EMU members, the challenges are magnified. This is because economies with very high productivity growth may have larger Balassa-Samuelson effects, resulting in higher steady state inflation rates as well as gradually appreciating equilibrium real exchange rates. While some nominal appreciation is permitted during ERM-II membership, the rules do not make it easy to signal the magnitude of expected appreciation. This may lead to poorly anchored exchange rates, making the catching-up economies more vulnerable to the challenges of the impossible trinity. Moreover, countries that have recently introduced fully-funded pension pillars which involve high transition costs, may find it difficult to meet the Maastricht criteria for government finances. It is unclear whether recent changes to the Stability and Growth Pact will alleviate the short-term fiscal pressure on countries that have improved the long-term sustainability of their government finances at the cost of short-term deterioration to their fiscal deficits. The example of Slovakia is used to illustrate these points, and a number of policy guidelines are proposed to minimise the risks. This Working Paper relates to the 2005 OECD Economic Survey of the Slovak Republic (www.oecd.org/eco/surveys/slovakia). <P>Problèmes posés aux pays en phase de rattrapage par l'adhésion à l'UME Toute économie peut éprouver des difficultés à répondre aux critères de Maastricht pour adhérer à la zone euro, surtout en raison des problèmes posés par l’«impossible trinité», selon laquelle il n’est pas possible de poursuivre à la fois les objectifs de stabilité du taux de change et de l’inflation tout en maintenant la liberté des mouvements de capitaux. Cependant, pour les économies plus défavorisées qui sont en train de rattraper le niveau de vie des membres les plus riches de l’UME, les difficultés sont encore amplifiées. Cela s’explique par le fait que les économies dont la croissance de la productivité est très rapide peuvent enregistrer des effets Balassa-Samuelson plus marqués, se traduisant par des taux d’inflation constamment plus élevés ainsi que par une appréciation progressive des taux de change réels d’équilibre. Si une certaine appréciation nominale est autorisée durant la phase de participation au MCE-II, les réglementations applicables ne permettent pas aisément d’indiquer l’ampleur de l’appréciation attendue. Cela peut se traduire par une instabilité des taux de change et rendre les économies en phase de rattrapage plus vulnérables aux défis de l’impossible trinité. De plus, les pays qui ont instauré récemment des piliers de système de retraite par capitalisation entraînant des coûts de transition élevés pourraient éprouver des difficultés à respecter les critères de Maastricht en matière de finances publiques. On ne sait pas encore si les modifications récentes du Pacte de stabilité et de croissance allègeront la pression fiscale à court terme sur les pays qui ont amélioré la viabilité à long terme de leurs finances publiques au prix d’une détérioration à court terme de leurs déficits budgétaires. L’exemple de la Slovaquie est utilisé pour illustrer ces points et un certain nombre d’orientations de politique économique sont proposées pour minimiser les risques. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de la République slovaque, 2005 (www.oecd.org/eco/etudes/slovaquie). |
| Keywords: | stability and growth pact, pacte de stabilité et de croissance, impossible trinity, Balassa-Samuelson effect, EMU accession, Maastricht criteria, impossible trinité, effet Balassa-Samuelson, adhésion à l'UME, critère de Maastricht |
| JEL: | F31 F33 O52 |
| Date: | 2005–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:444-en&r=cba |
| By: | Frait, Jan (Czech National Bank, Prague); Komarek, Lubos (Czech National Bank, Prague); Meleck, Martin (University of New South Wales, Sydney) |
| Abstract: | The paper focuses on the developments of real exchange rates and their fundamental determinants in the five new EU Member States (Czech Republic, Hungary, Poland, Slovakia, and Slovenia). First, the approaches that can be used for estimation of equilibrium real exchange rates are briefly discussed. Then, we use well-established determinants of real exchange rates associated with the behavioral equilibrium exchange rate (BEER) approach to assess misalignments of the real exchange rates for the five new EU Member States. The estimates of the equilibrium exchange rates are obtained by means of both purely statistical approaches (HP filter, band-pass filter) and applying several multivariate estimation methods to our reduced-form BEER model. The results obtained indicate that the tendency towards appreciation of real exchange rates in the economies under consideration have been driven primarily by fundamental determinants. |
| Keywords: | Exchange rate misalignments ; equilibrium exchange rates ; ERM II ; Central European Countries |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:739&r=cba |
| By: | Ian Babetskii; Balázs Égert; |
| Abstract: | This paper investigates the equilibrium exchange rate of the Czech koruna using the reduced form equation of the stock-ow approach advocated, for instance, by Faruqee (1995) and Alberola and others (1999). We investigate whether or not the observed real exchange rate of the Czech koruna is close to its equilibrium value over the period from 1993 to 2004. Our empirical approach is tantamount to the Behavioural Equilibrium Exchange Rate (BEER) popularised by MacDonald (1997) and Clark and MacDonald (1998) in that the Czech real exchange rate vis-à-vis the euro is regressed on the dual productivity differential and the net foreign assets position, based on which actual and total misalignment gures are derived in a time series context. In other words, we check the quality of the Czech BEER. We also study the impact of a possible initial undervaluation on the estimated equilibrium exchange rate. Employing monthly time series from 1993:M1 to 2004:M9 and applying several alternative cointegration techniques, we identify a period of an overvaluation in 1997 and in 1999, an increasing overvaluation till 2002, an undervaluation in 2003 and a correction towards equilibrium in the second half of 2004 |
| Keywords: | Equilibrium exchange rate; real exchange rate; behavioral equilibrium exchange rate; Czech koruna, transition economies; stock-ow approach; productivity. |
| JEL: | F31 |
| Date: | 2005–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-781&r=cba |
| By: | Staszewska, Anna; Aldrich, John |
| Abstract: | This paper examines the experiment in macroeconometrics, the different forms it has taken and the rules that have been proposed for its proper conduct. Here an "experiment" means putting a question to a model and getting an answer. Different types of experiment are distinguished and the justification that can be provided for a particular choice of experiment is discussed. Three types of macroeconometric modelling are considered: the Cowles (system of equations) approach, the vector autoregressive model approach and the computational experiment. Keywords; experiment, impulse response analysis, ceteris paribus, structural invariance JEL classification: B41, C5, E37 |
| URL: | http://d.repec.org/n?u=RePEc:stn:sotoec:0604&r=cba |
| By: | Peter W Jones (Economic Development Institute) |
| Abstract: | We are more than a little bit surprised at the seeming reticence of the central bank's governor, Mr Derrick Latibeaudiere, to the idea of a monetary policy committee, being proposed by the private sector. The suggestion forms part of the package of proposals of the so-called Partners for Progress group, who have been seeking a framework for sustained growth in the Jamaican economy. This group has not only been talking. They have been prepared to back the strength of their convictions with substantial action. Indeed, they have been attempting to convince domestic financial institutions to convert high-cost Jamaican dollar loans to other forms of debt instruments that would ease the short-term interest burden and provide an opportunity for the Government to begin to seriously address the public sector deficit. Reasonably, those who are putting together this programme want to be assured that the administration establishes the environment in which concessions made by the private sector translate into real macro- economic value. One way to help ensure this is through transparency in policy formulation. A monetary policy committee is but one instrument, so far as the partners are concerned, to add value to the idea. Mr Latibeaudiere's reservation, it seems, rests on his argument that such committees usually operate in the context of independent central banks, which are removed from direct political control and which have control over monetary policy formulation. Perhaps! Indeed, this newspaper supports the idea of an independent central bank, whose principal officers are removed from the whim of political control and have the authority, under law, to limit lending to the government. This is an ideal for which we must strive - the sooner the better. However, we do not see an independent central bank and a monetary policy committee in the context of the existing structure of the Bank of Jamaica as mutually exclusive. The truth be told, senior officials who speak of the operation of the BOJ often hail its relative independence and the creative tension which usually exists between the central bank and the finance ministry. In fact, there is a healthy bit of chest-thumping at Nethersole Place. In any event, we would have thought that in the absence of its independence, a monetary policy committee, involving key economic players, would be a development welcomed by the central bank and its top managers. Such a committee would, on the face of it, provide the central bank with some level of insulation from political controllers or politicised and over-reaching bureaucrats at the finance ministry. Indeed, the timely publication of the minutes of the meeting on which the decisions of the committee were made would provide powerful moral authority against a Government that was intent on running roughshod over the wishes of the committee. We, for instance, would like to know the thinking, and technical arguments, behind the decision in the first quarter of last year to push interest rates well beyond 30 per cent to defend the Jamaican dollar. It would be interesting to know what was the stance of the professional central bankers on offering investors such high levels of real return on their money. The fundamental argument is that better decisions are likely to be made in an environment of openness and transparency and on the basis of access to other than a narrow slate of views. Moreover, the kind of committee which is being proposed could well be a fundamental first step to an independent central bank. |
| Keywords: | Central Bank,Jamaica,Jamaica Central bank,Central Bank Jamaica |
| JEL: | O P |
| Date: | 2004–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0411004&r=cba |
| By: | kisu simwaka (Reserve Bank of Malawi) |
| Abstract: | The purpose of this study is therefore twofold. First, to establish the claim that currency in circulation has been rising. Second, to empirically quantify and give a full account of the reasons determining the dynamics and volatility of currency in circulation. Using annual data for the 1965-2004 period, this paper confirms that currency in circulation as a proportion of money stock has increased. From the initial estimation results, the paper establishes strong positive effects of inflation rate, underground economy activities, financial deepening on the CU/M2 ratio, and significant negative effect of interest rates on this ratio. The other highlight result from this study is the positive and significant association between small-scale agriculture produce and CU/M2 ratio. Using annual data, among other things, this study confirms findings from other studies that cash preference is a function of real interest rates. However, one striking finding here is the importance small-scale agriculture as a determinant of currency in circulation. This reflects the agriculture-dependent nature of the economy. Better performance of this sector injects cash in the economy and because of the lack of banking facilities in rural areas, most of the injected cash remains in circulation. The message from empirical results using monthly data is similar, with interest rates, financial deepening, tobacco selling season dummy and inflation rate playing significant roles in determining movements in currency in circulation. As expected, technological innovations in the banking system or payment systems, particularly cash dispensers (ATMs) have a significant impact on the overall level of currency in circulation, whereas no major impact seems to come from the MALSWITCH smart card, however, initial indications reveal its negative effect on the CU/M2 ratio. Policy implications from these results are many. First, of late the Bank has reduced the bank rate and as is normally the case, all other interest rates were similarly adjusted. While the policy move has or is on course to achieve its intended goals, it has other side repercussions such as deposit taking capabilities by commercial banks. Currently, the minimum saving rate for the four major commercial banks averages around 7.5%. This against the current monthly inflation rate of 12.2 (for October 2004) leaves real savings rate of around –4.7% which rationally discourages savings mobilisation and consequent reduction in the availability of loanable funds for productive investment and economic growth. The public is most likely to hold their assets in cash rather than bank deposit form since the opportunity cost of doing so is essentially zero. However, due to high inflation in the past, savers in Malawi were used to high interest rates so that current demand deposits are considered as unattractive and non-worthwhile form of holding money. It is time the public get used to lower interest rates as in other countries and on the belief that causality direction is from interest rates to inflation, the reduction in the bank rate could eventually lead to a drop in inflation and, therefore, an increase in the real interest rate. Second, if the Bank intends to focus on reducing the CU/M2 ratio, intensification of smart card use and publicity could play an important role. The smart card is a direct alternative of cash as a means of payment so that its widespread use can directly reduce currency in circulation. This, as is the case in other countries could also reduce the positive impact of ATM transactions on the overall level of currency in circulation. Third, the overall civic education on the use of banking facilities, in rural areas as well as to small-scale business men (vendors) is important for increased deposit taking and, therefore, the reduction in the amount of currency in circulation. |
| Keywords: | Currency in circulation, Seasonality, Money demand model |
| JEL: | E |
| Date: | 2005–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0504018&r=cba |
| By: | Kisukyabo Simwaka (Reserve Bank of Malawi, P.O. Box 30063, Lilongwe, Malawi) |
| Abstract: | This study investigates the main determinants of real effective exchange rate in Malawi and South Africa. In our empirical analysis, we conducted unit root and cointegration test in order to determine the time series properties of the data and establish whether there is a long run relationship between real effective exchange rate and explanatory variables. Having ascertained that almost all variables are integrated of order one and cointegrated, an error correction model is formulated and estimated for the two real effective exchange rate equations using the Ordinary Least Square (OLS) method. The empirical results for both Malawi and South Africa are highly supportive of the real exchange rate model. In particular, we find a negative and significant relationship between real effective exchange rate and the degree of openness for both countries. On the other hand, while there is an inverse relationship between real effective exchange rate and governmernt consumption in the case of Malawi, a positive ralationship between real effective exchange rate and government consumption obtains in the case of South Africa. Additionally, whereas there is a positive relationship between real effective exchange rate and international capital flows in the case of Malawi, a negative relationship obtains in the case of South Africa.. However, results from both countries indicate a positive relationship between real exchange rate one hand and excess domestic credit and lagged real effective exchange rate on the other hand. They also indicate a negative relationship between real effective exchange rate and nominal devaluation in both countries. The study yields some policy implications. First, it has been learnt that excessive domestic credit causes the real exchange rate to appreciate for both countries. This therefore calls for prudent fiscal and monetary policy measures. Such measures include mopping out excess liquidity from the market to stem the growth of money supply. For both countries, the most powerful policy is just an intermediate policy and can only be successful if there is fiscal discipline. With fiscal discipline there can be no excess liquidity. Second, the study has found that policies aimed at eliminating trade restrictions depreciate the REER. One policy implication that can be drawn from this finding is that the government should continue implementing trade liberalisation policies that it had already started in 1988. Furthermore, developments in the external sector of the economy (changes in terms of trade, degree of openness anf international capital flows) which are not under the control of domestic authorities seemingly contribute more to changes in real effective exchange rate. The policy implications are that the government ability in influencing the behaviour of real effective exchange rate is limited. This is because the ability of a small open economy like that of Malawi to insulate itself from external shock is limited, at best. In the long- run however, appropriate structural changes and conducive competitive policy could be designed and implemented. These may include export diversification (to counter deteriorating terms of trade in specific commodities) and implementing measures to limit market imperfection. Based on the available evidence, it can be concluded that macroeconomic fundamentals play a vital role in explaining changes in real effective exchange rate in both Malawi and South Africa. Key words: real effective exchange rate, stationarity, cointegration |
| Keywords: | real effective exchange rate, stationarity, cointegration |
| JEL: | F1 F2 |
| Date: | 2004–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpit:0407006&r=cba |
| By: | Kisu Simwaka (Reserve Bank of Malawi, P.O. Box 30063, Lilongwe, Malawi) |
| Abstract: | This study investigates the main determinants of real effective exchange rate in Malawi and South Africa. In our empirical analysis, we conducted unit root and cointegration test in order to determine the time series properties of the data and establish whether there is a long run relationship between real effective exchange rate and explanatory variables. Having ascertained that almost all variiables are integrated of order one and cointegrated, an error correction model is formulated and estimated for the two real effective exchange rate equations using the Ordinary Least Squre (OLS) method. The empirical results for both Malawi and South Africa are highly supportive of the real exchange rate model. In particular, we find a negative and significant relationship between real effective exchange rate and the degree of openness for both countries. On the other hand, while there is an inverse relationship between real effetcive exchange rate and governmernt consumption in the case of Malawi, a positive ralationship between real effective exchange rate and government consumption obtains in the case of South Africa. Additionally, whereas there is a positive relationship between real effetcive exchange rate and international capital flows in the case of Malawi, a negative realtionship obtains in the case of South Africa.. However, results from both countries indicate a positive relationship between real exchange rate one hand and excess domestic credit and lagged real effective exchange rate on the other hand. They also indicate a negative relationship between real effective exchange rate and nominal devaluation in both countries. The study yields some policy implications. First, it has been learnt that excessive domestic credit causes the real exchange rate to appreciate for both countries. This therefore calls for prudent fiscal and monetary policy measures. Such measures include mopping out excess liquidity from the market to stem the growth of money supply. For both countries, the most powerful policy is just an intermediate policy and can only be successful if there is fiscal discipline. With fiscal discipline there can be no excess liquidity. Second, the study has found that policies aimed at eliminating trade restrictions depreciate the REER. One policy implication that can be drawn from this finding is that the government should continue implementing trade liberalisation policies that it had already started in 1988. Furthermore, developments in the external sector of the economy (changes in terms of trade, degree of openness anf international capital flows) which are not under the control of domestic authorities seemingly contribute more to changes in real effective exchange rate. The policy implications are that the government ability in influencing the behaviour of real effective exchange rate is limited. This is because the ability of a small open economy like that of Malawi to insulate itself from external shock is limited, at best. In the long- run however, appropriate structural changes and conducive competitive policy could be designed and implemented. These may include export diversification (to counter deteorating terms of trade in specific commodities) and implementing measures to limit market imperfection. Based on the available evidence, it can be concluded that macroeconomic fundamentals play a vital role in explaining changes in real effective exchange rate in both Malawi and South Africa. Keywords: real effective exchange rate, cointegration; error correction model |
| Keywords: | real effective exchange rate, cointegration; error correction model |
| JEL: | F3 F4 |
| Date: | 2004–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0407009&r=cba |