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on Central Banking |
| By: | Frederic S. Mishkin; Niklas J. Westelius |
| Abstract: | In this paper we examine how target ranges work in the context of a Barro-Gordon (1983) type model, in which the time-inconsistency problem stems from political pressures from the government. We show that target ranges turn out to be an excellent way to cope with the time-inconsistency problem, and achieve many of the benefits that arise under practically less attractive solutions such as the conservative central banker and optimal inflation contracts. Our theoretical model also shows how an inflation targeting range should be set and how it should respond to changes in the nature of shocks to the economy. |
| JEL: | E52 E58 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12384&r=cba |
| By: | Michael D. Bordo |
| Abstract: | The current pattern of sudden stops and financial crises in emerging markets has great resonance to events in the first era of globalization, from 1870-1913. In this paper I present descriptive statistics on capital flows, current account reversals and financial crises during the period 1870-1913 and compare them with the recent experience. I analyze the incidence of crises and measure their effects on real output losses. Furthermore, I consider the influence of openness to trade, original sin and currency mismatches on the pattern of sudden stops and financial crises. I find strikingly similar patterns across both eras of globalization. The pre-1914 sudden stops were associated with significant output losses comparable with the recent events, and their effects differed considerably depending on a country’s economic circumstances, just as they do today. |
| JEL: | E44 F32 N1 N20 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12393&r=cba |
| By: | K. Huang; Z. Liu; L. Phaneuf |
| Abstract: | This paper investigates the contributions of staggered price contracts, staggered wage contracts, and an input-output production structure in generating the observed persistence of real output and inflation, and the weak but persistent response of real wages following monetary shocks. It examines the interactions of these three mechanisms in a dynamic general equilibrium (DGE) environment, with pricing decision and wage setting rules derived from individual optimization. Following a monetary shock, (i) a staggered wage model generates more persistence in both inflation and output than does a staggered price model when intermediate goods are used in production; (ii) adding intermediate goods causes a tradeoff between output persistence and inflation persistence: it magnifies the autocorrelations of output while reducing those of inflation in both the short and medium horizons; (iii) a combination of staggered prices and staggered wages is required to generate the observed weak but persistent response of real wages to a monetary shock, and incorporating intermediate goods in such a model is essential to make the real wage response weakly procyclical. |
| Keywords: | Staggered contracts, input-output structure, business cycle persistence, monetary policy |
| JEL: | E31 F32 F52 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-20&r=cba |
| By: | K. Huang; Z. Liu |
| Abstract: | Staggered price and staggered wage contracts are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks. In this paper, we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework. We show that, although the dynamic price setting and wage setting equations are alike, a key parameter governing persistence is linked to the underlying preferences and technologies in different ways. Under the staggered wage mechanism, an intertemporal smoothing incentive in labor supply creates a real rigidity that is absent under the staggered price mechanism. Consequently, the two mechanisms have different implications on persistence. While the staggered price mechanism by itself does not contribute to, the staggered wage mechanism plays an important role in generating persistence. |
| Keywords: | Staggered contracts, business cycle persistence, monetary policy |
| JEL: | E24 E32 E52 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-08&r=cba |
| By: | Kenneth W. Clements; Renee Fry |
| Abstract: | There is a large literature on the influence of commodity prices on the currencies of countries with a large commodity-based export sector such as Australia, New Zealand and Canada ("commodity currencies"). There is also the idea that because of pricing power, the value of currencies of certain commodity-producing countries affects commodity prices, such as metals, energy, and agricultural-based products ("currency commodities"). This paper merges these two strands of the literature to analyse the simultaneous workings of commodity and currency markets. We implement the approach by using the Kalman filter to jointly estimate the determinants of the prices of these currencies and commodities. Included in the specification is an allowance for spillovers between the two asset types. The methodology is able to determine the extent that currencies are indeed driven by commodities, or that commodities are driven by currencies, over the period 1975 to 2005. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-19&r=cba |
| By: | Camille Cornand (Financial Market Group, London School of Economics and Political Sciences Houghton Street, London WC2A 2AE, United-Kingdom, C.Cornand@lse.ac.uk); Frank Heinemann (Technische Universität Berlin, Sekretariat H 52 Strasse des 17. Juni 135, 10623 Berlin f.heinemann@ww.tu-berlin.de) |
| Abstract: | Financial markets and macroeconomic environments are often characterized by positive externalities. In these environments, transparency may reduce expected welfare from an ex-ante point of view: public announcements serve as a focal point for higher-order beliefs and affect agents’ behaviour more than justified by their informational contents. Some scholars conclude that it might be better to reduce the precision of public signals or entirely withhold information. This paper shows that public information should always be provided with maximum precision, but under certain conditions not to all agents. Restricting the degree of publicity is a better-suited instrument for preventing the negative welfare effects of public announcements than restrictions on their precision are. |
| Keywords: | Transparency, public information, private information, coordination, strategic complementarity |
| JEL: | C73 D82 F31 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:158&r=cba |
| By: | Asheim, Geir B. (Dept. of Economics, University of Oslo); Mitra, Tapan (Department of Economics, Cornell University); Tungodden, Bertil (Department of Economics, Norwegian School of Economics and Business Administration and Chr. Michelsen Institute,) |
| Abstract: | Koopmans’s (Econometrica 28, 287–309) axiomatization of discounted utilitarianism is based on seemingly compelling conditions, yet this criterion leads to hard-to-justify outcomes. The present analysis considers a class of sustainable recursive social welfare functions within Koopmans’s general framework. This class is axiomatized by means of a weak new equity condition (“Hammond Equity for the Future”) and general existence is established. Any member of the class satisfies the key axioms of Chichilnisky’s (Social Choice and Welfare 13, 231–257) “sustainable preferences”. The analysis singles out one of Koopmans’s original conditions as particularly questionable from an ethical perspective. |
| Keywords: | Intergenerational justice; sustainability; discounted utilitarianism |
| JEL: | D63 D71 Q01 |
| Date: | 2006–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2006_018&r=cba |
| By: | K. Huang; Z. Liu |
| Abstract: | This paper analyzes a two-country general equilibrium model with multiple stages of production and sticky prices. Working through the cross-country input-output relations and endogenous price stickiness, the model generates the observed patterns in international aggregate comovements following monetary shocks. In particular, both output and consumption comove across countries, and output correlation is larger than consumption correlation, as in the data. The model also generates persistent fluctuations of real exchange rates. Thus, vertical international trade plays an important role in propagating monetary shocks in an open economy. |
| Keywords: | Vertical international trade, monetary policy, international comovements, real exchange rate persistence |
| JEL: | E32 F31 F41 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-07&r=cba |
| By: | Ansgar Belke; Daniel Gros |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:hoh:hohdip:271&r=cba |
| By: | K. Huang; Z. Liu |
| Abstract: | Recent empirical studies reveal that monetary shocks cause persistent fluctuations in inflation and aggregate output. In the literature, few mechanisms have been identified to generate such persistence. In this paper, we propose a new mechanism that does so. Our model features an input-output structure and staggered price contracts. Working through the input-output relations and the timing of firms’ pricing decisions, the model generates smaller fluctuations in marginal cost facing firms at later stages than at earlier stages and hence persistent responses of both the inflation rate and aggregate output following a monetary stock. The persistence is larger, the greater the number of production stages. With a sufficient number of stages, the real persistence is arbitrarily large. |
| Keywords: | Input-output structure, staggered price contracts, persistence, monetary policy |
| JEL: | E31 E32 E52 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-10&r=cba |
| By: | Marina Emiris (National Bank of Belgium, Research Department) |
| Abstract: | The paper evaluates the implications of the Smets and Wouters (2004) DSGE model for the US yield curve. Bond prices are modelled in a way that is consistent with the macro model and the resulting risk premium in long term bonds is a function of the macro model parameters exclusively. When the model is estimated under the restriction that the implied average 10-year term premium matches the observed premium, it turns out that risk aversion and habit only need to rise slightly, while the increase in the term premium is achieved by a drop in the monetary policy parameter that governs the aggressiveness of the monetary policy rule. A less aggressive policy increases the persistence of the reaction of inflation and the short interest rate to any shock, reinforces the covariance between the marginal rate of substitution of consumption and bond prices, turns positive the contribution of the inflation premium and drives the term premium up. The paper concludes that by generating persistent inflation the presence of nominal rigidities can help in reconciling the macro model with the yield curve data. |
| Keywords: | term structure of interest rates, policy rules, risk premia |
| JEL: | E43 E44 G12 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200607-2&r=cba |
| By: | L. Randall Wray |
| Abstract: | This paper briefly summarizes the orthodox approach to banking, finance, and money, and then points the way toward an alternative based on socioeconomics. It argues that the alternative approach is better fitted to not only the historical record, but also sheds more light on the nature of money in modern economies. In orthodoxy, money is something that reduces transaction costs, simplifying “economic life” by lubricating the market mechanism. Indeed, this is the unifying theme in virtually all orthodox approaches to banking, finance, and money: banks, financial instruments, and even money itself originate to improve market efficiency. However, the orthodox story of money's origins is rejected by most serious scholars outside the field of economics as historically inaccurate. Further, the orthodox sequence of “commodity (gold) money” to credit and fiat money does not square with the historical record. Finally, historians and anthropologists have long disputed the notion that markets originated spontaneously from some primeval propensity, rather emphasizing the important role played by authorities in creating and organizing markets. By contrast, this paper locates the origin of money in credit and debt relations, with the money of account emphasized as the numeraire in which credits and debts are measured. Importantly, the money of account is chosen by the state, and is enforced through denominating tax liabilities in the state’s own currency. What is the significance of this? It means that the state can take advantage of its role in the monetary system to mobilize resources in the public interest, without worrying about “availability of finance.” The alternative view of money leads to quite different conclusions regarding monetary and fiscal policy, and it rejects even long-run neutrality of money. It also generates interesting insights on exchange rate regimes and international payments systems. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_459&r=cba |
| By: | Robert Dixon; David Shepherd |
| Abstract: | In this paper we examine the volatility of aggregate output and employment in Australia with the aid of a frequency filtering method (the Butterworth filter) that allows each time series to be decomposed into trend, cycle and noise components. This analysis is compared with more traditional methods based simply on the examination of first differences in the logs of the raw data using cointegration-VAR modelling. We show that the application of univariate AR and bivariate VECM methods to the data results in a detrended series which is dominated by noise rather than cyclical variation and gives break points which are not robust to alternative decomposition methods. Also, our conclusions challenge accepted wisdom in relation to output volatility in Australia which holds that there was a once and for all sustained reduction in output volatility in or around 1984. We do not find any convincing evidence for a sustained reduction in the cyclical volatility of the GDP (or employment) series at that time, but we do find evidence of a sustained reduction in the cyclical volatility of the GDP (and employment) series in 1993/4. We also find that there is a clear association between output volatility and employment volatility. We discuss the key features of the business cycle we have identified as well as some of the policy implications of our results. |
| Keywords: | Business cycles, volatility, inflation targeting, Australia |
| JEL: | E32 E37 E52 C22 C32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:968&r=cba |
| By: | Philip R. Lane |
| Abstract: | We examine the bilateral composition of international bond portfolios for the euro area and the individual EMU member countries. We find considerable support for "euro area" bias: EMU member countries disproportionately invest in one another relative to other country pairs. Another striking pattern is the positive connection between trade linkages and financial linkages in explaining asymmetries across EMU member countries in terms of their outward bond investments vis-a-vis external counterparties. Our empirical results underline the impact of currency union on financial integration and support the notion that financial regionalization is the leading force underlying financial globalization. |
| Date: | 2006–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp168&r=cba |
| By: | Refet S. Gurkaynak; Brian Sack; Jonathan H. Wright |
| Abstract: | The discount function, which determines the value of all future nominal payments, is the most basic building block of finance and is usually inferred from the Treasury yield curve. It is therefore surprising that researchers and practitioners do not have available to them a long history of high-frequency yield curve estimates. This paper fills that void by making public the Treasury yield curve estimates of the Federal Reserve Board at a daily frequency from 1961 to the present. We use a well-known and simple smoothing method that is shown to fit the data very well. The resulting estimates can be used to compute yields or forward rates for any horizon. We hope that the data, which are posted on the website http://www.federalreserve.gov/pubs/feds/2006 and which will be updated periodically, will provide a benchmark yield curve that will be useful to applied economists. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-28&r=cba |
| By: | Ludovic Julien (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Fabrice Tricou (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]) |
| Abstract: | This paper explores the rationale of price-taking and price-making behaviours in the context of Walrasian and Cournotian pure exchange economies. Beside the influence of the number of agents, we underline the role of the structure of preferences. Through three equilibrium variations of the same basic economy, we obtain several results about price manipulation, about asymptotic identifications for large economies and for degenerate preferences, and about welfare comparisons. Perfect competition does not only correspond to the case of large economies, but may also concern economies where market powers are more or less equivalent. |
| Keywords: | Cournot-Walras equilibria, oligopoly, perfect competition |
| Date: | 2006–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00088012_v1&r=cba |
| By: | Kerwin Kofi Charles; Melvin Stephens, Jr. |
| Abstract: | We study how the level and composition of household expenditures changes over the business cycle for households at different positions in the income distribution. Using data from the Consumer Expenditure Survey, we find that transitory, state-specific increases in unemployment causes lower income groups to lower their total expenditure outlays, contrary to the prediction of the textbook account of consumption behavior. In addition, in bad economic times these groups raise the share of their total outlays devoted to relative fixed outlays like home or car payments. These adjustments are primarily concentrated among reductions in outlays devoted to entertainment and personal care expenditures. We find no similar effects for households at higher positions in the income distribution. It is difficult to attribute these differences across households to differences in credit constraints, both because the specific results for credit holdings are imprecisely estimated and because income losses experienced by higher SES households are so small that there is, for them, little need to adjust consumption. |
| JEL: | D12 E21 E24 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12388&r=cba |
| By: | Balázs Égert (Oesterreichische Nationalbank; EconomiX at the University of Paris X-Nanterre and William Davidson Institute.); Ronald MacDonald (University of Glasgow and CESIfo.) |
| Abstract: | This paper surveys recent advances in the monetary transmission mechanism (MTM). In particular, while laying out the functioning of the separate channels in the MTM, special attention is paid to exploring possible interrelations between different channels through which they may amplify or attenuate each others’ impact on prices and the real economy. We take stock of the empirical findings especially as they relate to countries in Central and Eastern Europe, and compare them to results reported for industrialised countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance and potential development of the different channels. |
| Keywords: | Monetary transmission, transition, Central and Eastern Europe, credit channel, interest rate channel, interest rate pass-through, exchange rate channel, exchange rate pass-through, asset price channel. |
| JEL: | E31 E51 E58 F31 O11 P20 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2006/5&r=cba |
| By: | Takatoshi Ito; Kiyotaka Sato |
| Abstract: | Macroeconomic consequences of a large currency depreciation among the crisis-hit Asian economies had varied from one country to another. Inflation did not soar in most Asian countries, including Thailand and Korea, after the exchange rate depreciated during the crisis. Indonesia, however, suffered very high inflation following a very large nominal depreciation of the rupiah. As a result, price competitive advantage by the rupiah depreciation was lost in the real exchange rate terms. The objective of this paper is to examine the pass-through effects of exchange rate changes on the domestic prices in the East Asian economies using a VAR analysis. Main results are as follows: (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit economies; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large, and statistically significant. Thus, Indonesia’s accommodative monetary policy, coupled with the high degree of the CPI responsiveness to exchange rate changes was an important factor in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period. |
| JEL: | F12 F31 F41 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12395&r=cba |
| By: | Philip R. Lane; Gian Maria Milesi-Ferretti |
| Abstract: | We examine the evolution of the external position in CEE countries over the past decade, with a strong emphasis on the composition of the international balance sheet. We assess the extent of their international financial integration, in comparison to the advanced economies and other emerging markets, and highlight the most salient features of their external capital structure in terms of the relative importance of FDI, portfolio equity, and external debt. In addition, we briefly describe the bilateral and currency composition of their external liabilities. Finally, we explore the implications of the accumulated stock of external liabilities for future trade and current account balances. |
| Date: | 2006–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp161&r=cba |
| By: | Christopher D. Carroll; Miles S. Kimball |
| Abstract: | This is an entry for The New Palgrave Dictionary of Economics, 2nd Ed. |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:530&r=cba |
| By: | Zoltán M. Jakab (Magyar Nemzeti Bank); Viktor Várpalotai (Magyar Nemzeti Bank); Balázs Vonnák (Magyar Nemzeti Bank) |
| Abstract: | This paper assesses the effect of monetary policy on major components of aggregate demand. We use three different macromodels, all estimated on Hungarian data of the past 10 years. All three models indicated that after an unexpected monetary policy tightening investments decrease quickly. The response of consumption is more ambiguous, but it is most likely to increase for several years, which may be explained by the slow adjustment of nominal wages. On the other hand, we could not detect any significant change in net exports during the first couple of years after the shock. The weak response of net exports can be due to the fact that the drop in exports is coupled with a fall in imports of almost the same magnitude, highlighting the relative importance of the income-absorption effect, as opposed to the expenditure-switching effect. |
| Keywords: | monetary transmission mechanism, macromodels, VAR, impulse responses. |
| JEL: | E20 E27 E52 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2006/4&r=cba |
| By: | Alfredo M. Pereira (Department of Economics, College of William and Mary); Oriol Roca Sagales (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) |
| Abstract: | This paper estimates the effects on output of different fiscal policies in the context of a VAR model that includes several public spending and taxation variables. Empirical results suggest that the effects of fiscal policies are within the Keynesian paradigm for both direct and indirect taxes and for some but not all expenditure instruments. Indeed, while the results for public wages and public investment are Keynesian in nature, non-Keynesian effects dominate in the case of public transfers and possibly in the case of intermediate consumption. Finally, public investment shows particularly strong positive effects while direct taxation shows particularly strong negative effects. |
| Keywords: | Fiscal policy, budgetary restraint |
| JEL: | E62 H60 |
| Date: | 2006–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:cwm:wpaper:35&r=cba |