|
on Central Banking |
| By: | William A. Branch; John B. Carlson; George W. Evans; Bruce McGough |
| Abstract: | This paper develops an adaptive learning formulation of an extension to the Ball, Mankiw, and Reis (2005) sticky information model that incorporates endogenous inattention. We show that, following an exogenous increase in the policymaker’s preferences for price vs. output stability, the learning process can converge to a new equilibrium in which both output and price volatility are lower. |
| Keywords: | Monetary policy ; Information theory |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0610&r=cba |
| By: | John C. Williams |
| Abstract: | In theory, monetary policies that target the price level, as opposed to the inflation rate, should be highly effective at stabilizing the economy and avoiding deflation in the presence of the zero lower bound on nominal interest rates. With such a policy, if the short-term interest rate is constrained at zero and the inflation rate declines below its trend, the public expects that policy will eventually engineer a period of above-trend inflation that restores the price level to its target level. Expectations of future monetary accommodation stimulate output and inflation today, mitigating the effects of the zero bound. The effectiveness of such a policy strategy depends crucially on the alignment of the public's and the central bank's expectations of future policy actions. In this paper, we consider an environment where private agents have imperfect knowledge of the economy and therefore continuously reestimate the forecasting model that they use to form expectations. We find that imperfect knowledge on the part of the public, especially regarding monetary policy, can undermine the effectiveness of price-level-targeting strategies that would work well if the public had complete knowledge. For low inflation targets, the zero lower bound can cause a dramatic deterioration in macroeconomic performance with severe recessions occurring with alarming frequency. However, effective communication of the policy strategy that reduces the public's confusion about the future course of monetary policy significantly reduces the stabilization costs associated with the zero bound. Finally, the combination of learning and the zero bound implies the need for a stronger policy response to movements in the price level than would otherwise be optimal and such a rule is effective at stabilizing both inflation and output in the presence of learning and the zero bound even with a low inflation target. |
| Keywords: | Monetary policy ; Inflation (Finance) |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-30&r=cba |
| By: | Fuhrer, Jeffrey |
| Abstract: | In the conventional view of inflation, the New Keynesian Phillips curve (NKPC) captures most of the persistence in inflation. The sources of persistence are twofold. First, the "driving process" for inflation is quite persistent, and the NKPC implies that inflation must "inherit" this persistence. Second, backward-looking or indexing behavior imparts some "intrinsic" persistence to inflation. This paper shows that, in practice, inflation in the NKPC inherits very little of the persistence of the driving process, and it is intrinsic persistence that constitutes the dominant source of persistence. The reasons are that, first, the coefficient on the driving process is small, and, second, the shock that disturbs the NKPC is large. |
| JEL: | G00 G0 |
| Date: | 2006–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:805&r=cba |
| By: | Maurice Obstfeld |
| Abstract: | Even when the exchange-rate plays no expenditure-switching role, countries may wish to have flexible exchange rates in order to free the domestic interest rate as a stabilization tool. In a setting with nontraded goods, exchange-rate movements may also enhance international risk sharing. |
| JEL: | F41 F42 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12699&r=cba |
| By: | Glenn D. Rudebusch; John C. Williams |
| Abstract: | The modern view of monetary policy stresses its role in shaping the entire yield curve of interest rates in order to achieve various macroeconomic objectives. A crucial element of this process involves guiding financial market expectations of future central bank actions. Recently, a few central banks have started to explicitly signal their future policy intentions to the public, and two of these banks have even begun publishing their internal interest rate projections. We examine the macroeconomic effects of direct revelation of a central bank's expectations about the future path of the policy rate. We show that, in an economy where private agents have imperfect information about the determination of monetary policy, central bank communication of interest rate projections can help shape financial market expectations and may improve macroeconomic performance. |
| Keywords: | Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-31&r=cba |
| By: | Laurence M. Ball |
| Abstract: | Many observers suggest that the "globalization" of the U.S. economy has changed the behavior of inflation. This essay examines this idea, focusing on several questions: (1) Has globalization reduced the long-run level of inflation? (2) Has it affected the structure of inflation dynamics, as captured by the Phillips curve? (3) Has it contributed substantial negative shocks to the inflation process? The answers to these questions are no, no, and no. |
| JEL: | E31 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12687&r=cba |
| By: | Adalid, Ramon; Coenen, Gunter; McAdam, Peter; Siviero, Stefano |
| Abstract: | In this paper, we examine the performance and robustness of optimized interest-rate rules in four models of the euro area that differ considerably in terms of size, degree of aggregation, relevance of forward-looking behavioral elements, and adherence to microfoundations. Our findings are broadly consistent with results documented for models of the U.S. economy: backward-looking models require relatively more aggressive policies with, at most, moderate inertia; rules that are optimized for such models tend to perform reasonably well in forward-looking models, while the reverse is not necessarily true; and, hence, the operating characteristics of robust rules (i.e., rules that perform satisfactorily in all models) are heavily weighted towards those required by backward-looking models. |
| Keywords: | macroeconomic modelling; model uncertainty; monetary policy rules; robustness; euro area |
| JEL: | G00 G0 |
| Date: | 2005–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:821&r=cba |
| By: | Sbordone, Argia M |
| Abstract: | This paper analyzes the dynamics of prices and wages using a limited-information approach to estimation. I estimate a two-equation model for the determination of prices and wages derived from an optimization-based dynamic model, where both goods and labor markets are monopolistically competitive, prices and wages can be reoptimized only at random intervals, and, when not reoptimized, can be partially adjusted to previous-period aggregate inflation. The estimation procedure is a two-step minimum-distance estimation, which exploits the restrictions that the model imposes on a time-series representation of the data. In the first step I estimate an unrestricted autoregressive representation of the variables of interest. In the second step, I express the model solution in the form of a constrained autoregressive representation of the data and define the distance between unconstrained and constrained representations as a function of the structural parameters that characterize the joint dynamics of inflation and labor share. This function summarizes the cross-equation restrictions between the model and the time-series representations of the data: I then estimate the parameters of interest by minimizing a quadratic function of that distance. I find that the estimated dynamics of prices and wages track actual dynamics quite well, and that the estimated parameters are consistent with the observed length of nominal contracts. |
| JEL: | G00 G0 |
| Date: | 2006–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:811&r=cba |
| By: | Erceg, Christopher; Guerriei, Luca; Gust, Christopher |
| Abstract: | In this paper, we describe a new multicountry open economy SDGE model named "SIGMA" that we have developed as a quantitative tool for policy analysis. We compare SIGMA's implications to those of an estimated large-scale econometric policy model (the FRB/Global model) for an array of shocks that are often examined in policy simulations. We show that SIGMA's implications for the near-term responses of key variables are generally similar to those of FRB/Global. Nevertheless, some quantitative disparities between the two models remain due to certain restrictive aspects of SIGMA's optimization-based framework. We conclude by using long-term simulations to illustrate some areas of comparative advantage of our SDGE modeling framework. |
| JEL: | G00 G0 |
| Date: | 2006–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:813&r=cba |
| By: | Roberts, John M |
| Abstract: | Since the early 1980s, the U.S. economy has changed in some important ways: inflation now rises considerably less when unemployment is low, and the volatility of output and inflation have fallen sharply. This paper examines whether changes in monetary policy can account for these changes in the economy. The results suggest that changes in monetary policy can account for most or all of the change in the inflationunemployment relationship. In addition, changes in policy can explain a large proportion of the reduction in the volatility of the output gap. |
| JEL: | G00 G0 |
| Date: | 2006–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:812&r=cba |
| By: | Charles Engel; John H. Rogers |
| Abstract: | We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which the current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries--more modest than the growth over the past 20 years--the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. A test of current account sustainability suggests that the U.S. is not keeping on a long-run sustainable path. A direct test of our model finds that the dynamics of the U.S. current account--the increasing deficits over the past decade--are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender--though not the only legitimate contender--for explaining the U.S. current account deficit. |
| Keywords: | Budget deficits ; Balance of trade |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-38&r=cba |
| By: | Kenneth Rogoff; M. Ayhan Kose; Eswar Prasad; Shang-Jin Wei |
| Abstract: | The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels and with a variety of apparently conflicting results. For instance, there is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth. Similarly, evidence based on microeconomic (firm- or industry-level) data shows some benefits of financial integration and the distortionary effects of capital controls, while the macroeconomic evidence remains inconclusive. We attempt to provide a unified conceptual framework for organizing this vast and growing literature. This framework allows us to provide a fresh synthetic perspective on the macroeconomic effects of financial globalization, in terms of both growth and volatility. Overall, our critical reading of the recent empirical literature is that it lends some qualified support to the view that developing countries can benefit from financial globalization, but with many nuances. On the other hand, there is little systematic evidence to support widely cited claims that financial globalization by itself leads to deeper and more costly developing country growth crises. |
| Keywords: | Capital account liberalization , financial integration , growth and volatility , financial crises , developing countries , Globalization , Capital account liberalization , Financial crisis , Developing countries , |
| Date: | 2006–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/189&r=cba |
| By: | Andrew K. Rose |
| Abstract: | A stable international monetary system has emerged since the early 1990s. A large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks. These countries place few restrictions on capital mobility and allow their exchange rates to float. The domestic focus of monetary policy in these countries does not have any obvious international cost. Inflation targeters have lower exchange rate volatility and less frequent “sudden stops” of capital flows than similar countries that do not target inflation. Inflation targeting countries also do not have current accounts or international reserves that look different from other countries. This system was not planned and does not rely on international coordination. There is no role for a center country, the IMF, or gold. It is durable; in contrast to other monetary regimes, no country has been forced to abandon an inflation-targeting regime. Succinctly, it is the diametric opposite of the post-war system; Bretton Woods, reversed. |
| JEL: | F02 F33 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12711&r=cba |
| By: | Douglas Laxton; Papa N'Diaye; Paolo Pesenti |
| Abstract: | The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions on whether the zero interest floor (ZIF) is binding. It uses a two-country general-equilibrium simulation model calibrated to the Japanese economy vis-a-vis the rest of the world. Negative demand shocks have more prolonged and startling effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. More open economies hit the ZIF for a shorter period of time, and with less harmful effects. Deflationary supply shocks have different implications according to whether they are concentrated in the tradables rather than the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding. |
| JEL: | E17 E52 F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12703&r=cba |
| By: | Preston, Bruce |
| Abstract: | This paper considers the implications of an important source of model misspecification for the design of monetary policy rules: the assumed manner of expectations formation. In the model considered here, private agents seek to maximize their objectives subject to standard constraints and the restriction of using an econometric model to make inferences about future uncertainty. Because agents solve a multiperiod decision problem, their actions depend on forecasts of macroeconomic conditions many periods into the future, unlike the analysis of Bullard and Mitra (2002) and Evans and Honkapohja (2002). A Taylor rule ensures convergence to the rational expectations equilibrium associated with this policy if the so-called Taylor principle is satisfied. This suggests the Taylor rule to be desirable from the point of view of eliminating instability due to self-fulfilling expectations. |
| JEL: | G00 G0 |
| Date: | 2005–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:830&r=cba |
| By: | Michael B. Devereux; Amartya Lahiri; Ke Pang |
| Abstract: | The rising current account deficit in the USA has attracted considerable attention in recent years. We use the "business cycle accounting" methodology to identify the principal distortions that have affected the external accounts of the US. In particular, we measure distortions in the optimality conditions of a simple two-country general equilibrium model using data from the US and the other G7 countries. We then feed these measured distortions into the model individually and use the simulated counterfactual paths of the current account to determine the contribution of each of these "wedges" to the overall external imbalance of the USA. We find that no single wedge in isolation can account closely for the observed current account. However, a combination of productivity differences and deviations from risk-sharing between the US and the rest of the G7 does the best job in accounting for most of the measured movement of the US current account. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-40&r=cba |
| By: | Gurkaynak, Refet S; Sack, Brian; Swanson, Eric T |
| Abstract: | We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with Federal Open Market Committee statements.We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields. |
| Keywords: | Monetary Policy; Asset Prices; Factor Analysis; Multi-dimensional Policy |
| JEL: | G00 G0 |
| Date: | 2005–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:820&r=cba |
| By: | Romain Ranciere; Olivier Jeanne |
| Abstract: | We present a model of the optimal level of international reserves for a small open economy that is vulnerable to sudden stops in capital flows. Reserves allow the country to smooth domestic absorption in response to sudden stops, but yield a lower return than the interest rate on the country's long-term debt. We derive a formula for the optimal level of reserves, and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. However, the recent buildup of reserves in Asia seems in excess of what would be implied by an insurance motive against sudden stops. |
| Keywords: | Foreign exchange reserves , balance of payments crises , sudden stops , capital flows , |
| Date: | 2006–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/229&r=cba |
| By: | Jean-Francois Segalotto; Marco Arnone; Bernard Laurens |
| Abstract: | This paper presents an update of the Grilli-Masciandaro-Tabellini (GMT) index of central bank (CB) autonomy, based on CB legislation as of end-2003. The index is applied to a set of OECD and developing countries, and emerging market economies. For a smaller set of countries, the paper presents a reconstruction of the GMT index based on Cukierman (1992) and assesses changes in CB autonomy between 1992 and 2003. The results point to a significant increase in CB autonomy, in particular for developing countries. In most cases, this improvement has involved a three-stage process: an initial stage in which the political foundations for CB autonomy are laid; a second stage in which operational autonomy develops; and a final stage in which CBs gain further political autonomy in terms of policy formulation and the appointment of senior management. |
| Keywords: | Central bank autonomy , political autonomy , economic autonomy , |
| Date: | 2006–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/228&r=cba |
| By: | Jean-Francois Segalotto; Marco Arnone; Bernard Laurens |
| Abstract: | This paper presents a survey of the literature on the measurement of central bank autonomy. We distinguish inputs that constitute the building blocks in the literature, and the literature that builds on them. Issues including sensitivity analysis, robustness, and endogeneity are discussed. The review shows that empirical evidence regarding the beneficial effects of central bank autonomy is substantial, although some technical issues still remain for further research. In particular, central bank autonomy raises the issue of subjecting the monetary authorities to democratic control; this calls for additional research on the linkages between central bank autonomy and accountability and transparency. Additional empirical analysis on the relationship between the financial strength of the central bank and its de facto autonomy, and between its autonomy and financial stability, would also be desirable. |
| Keywords: | Central bank autonomy , political autonomy , economic autonomy , |
| Date: | 2006–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/227&r=cba |
| By: | Milani, Fabio |
| Abstract: | This paper estimates a monetary DSGE model with learning introduced from the primitive assumptions. The model nests infinite-horizon learning and features, such as habit formation in consumption and inflation indexation, that are essential for the model fit under rational expectations. I estimate the DSGE model by Bayesian methods, obtaining estimates of the main learning parameter, the constant gain, jointly with the deep parameters of the economy. The results show that relaxing the assumption of rational expectations in favor of learning may render mechanical sources of persistence superfluous. In particular, learning appears to be a crucial determinant of inflation inertia. |
| JEL: | G00 G0 |
| Date: | 2006–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:809&r=cba |
| By: | Philippe Bacchetta; Eric van Wincoop |
| Abstract: | The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle implies that excess returns on foreign currency investments are predictable. In this paper we investigate to what extent incomplete information processing can explain this puzzle. We consider two types of incompleteness: infrequent and partial information processing. We calibrate a two-country general equilibrium model to the data and show that incomplete information processing can fully match the empirical evidence. It can also account for several related empirical phenomena, including that of "delayed overshooting." We show that incomplete information processing is consistent both with evidence that little capital is devoted to actively managing short-term currency positions and with a small welfare gain from active portfolio management. The gain is small because exchange rate changes are very hard to predict. The welfare gain is easily outweighed by a small cost of active portfolio management. |
| Keywords: | Foreign exchange |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-35&r=cba |
| By: | Evans, Martin D |
| Abstract: | This paper describes a method for calculating daily realtime estimates of the current state of the U.S. economy. The estimates are computed from data on scheduled U.S. macroeconomic announcements using an econometric model that allows for variable reporting lags, temporal aggregation, and other complications in the data. The model can be applied to find real-time estimates of GDP, inflation, unemployment, or any other macroeconomic variable of interest. In this paper, I focus on the problem of estimating the current level of and growth rate in GDP. I construct daily real-time estimates of GDP that incorporate public information known on the day in question. The real-time estimates produced by the model are uniquely suited to studying how perceived developments in the macroeconomy are linked to asset prices over a wide range of frequencies. The estimates also provide, for the first time, daily time series that can be used in practical policy decisions. |
| JEL: | G00 G0 |
| Date: | 2005–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:831&r=cba |
| By: | Rudiger Ahrend; Pietro Catte; Robert Price |
| Abstract: | This paper assesses how and in what circumstances, fiscal consolidations are affected by monetary conditions, using data covering 24 OECD countries over the past 25 years, Focusing on fiscal consolidation “episodes”, it is found that these tend to occur when large budget deficits threaten sustainability and usually when other macroeconomic indicators -- inflation, the exchange rate and unemployment -- suggest a “crisis” situation. After controlling for these factors, the paper finds strong econometric evidence that consolidation efforts are more likely to be pursued and to succeed if the monetary policy stance is eased in the initial stages of the episode, thus contributing to offsetting the contractionary impact of fiscal tightening. However, the link is far from mechanical and there are also counter-examples where monetary easing was followed by aborted consolidation efforts. Central bank independence explicitly precludes direct responses of monetary policy to fiscal actions. However, the paper also provides evidence that the indirect reaction of monetary policy and financial markets to fiscal consolidation may be influenced by the quality of fiscal adjustment, as short and long-term interest rates are more likely to fall during episodes characterised by greater reliance on current expenditure cuts. While this means that causality runs both ways, the paper provides evidence that, even after controlling for this proxy of fiscal adjustment quality, changes in monetary stance do affect the chances that a fiscal retrenchment plan will be successfully pursued. <P>Interactions entre la politique monétaire et budgétaire : L’effet des conditions monétaires sur les consolidations budgétaires <BR>Cet article, utilisant des données relatives à 24 pays de l’OCDE sur les 25 dernières années, examine comment et dans quelles circonstances des ajustements budgétaires sont affectés par les conditions monétaires. Les ajustements budgétaires interviennent le plus souvent lorsque d’importants déficits menacent la soutenabilité des finances publiques, ou lorsque d'autres indicateurs macroéconomiques -- inflation, taux de change ou niveau de chômage -- sont très dégradés. En contrôlant ces variables, l’article apporte des preuves économétriques robustes suivant lesquelles les efforts de consolidation budgétaire ont davantage de chance d’être mis en oeuvre et couronnés de succès si la politique monétaire est accommodante dans la période initiale de l’ajustement, contribuant ainsi à amortir l’effet défavorable pour la croissance du resserrement budgétaire. Le lien n’est cependant pas mécanique, comme l’atteste l’existence d’épisodes de desserrement monétaire suivis d’un abandon des efforts d’ajustement fiscal. Par ailleurs, si l’indépendance des banques centrales fait explicitement obstacle à une réponse directe de la politique monétaire aux opérations budgétaires, l’article montre que la qualité de l’ajustement fiscal peut indirectement influer sur les banques centrales et les marches financiers. Par exemple, les taux d'intérêt à court et long terme semblent se replier davantage si l’ajustement budgétaire prend la forme d’une maîtrise stricte des dépenses courantes. Au total, l’influence entre l’ajustement budgétaire et la conduite de la politique monétaire est réciproque mais l’article montre que, même en contrôlant la qualité d'ajustement budgétaire, la politique monétaire continue à influencer la probabilité d’une consolidation des finances publiques d’être menée à bien. |
| Keywords: | financial markets, marchés financiers, fiscal policy, politique budgétaire, monetary policy, politique monétaire, fiscal adjustment, fiscal consolidation, interest rate, taux d'intérêt, fiscal stance, monetary conditions, conditions monétaires, central bank, banque centrale, quality of fiscal adjustment, modalités de l'ajustement budgétaire, policy co-ordination, coordination des politiques économiques, ajustement budgétaire, consolidation budgétaire |
| JEL: | E58 E63 G12 H62 |
| Date: | 2006–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:521-en&r=cba |
| By: | Reschreiter, Andreas (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria) |
| Abstract: | This paper investigates the impact of revisions in inflation expectations on the prices of UK inflation-indexed and conventional government bonds with a vector autoregressive (VAR) model. Downwards revisions of inflation expectations are associated with unexpected increases in the prices of conventional bonds, but the prices of indexed bonds are not significantly affected. This suggests that indexed bonds protect investors against inflation while nominal bonds are exposed to changing monetary conditions. This is consistent with the view that indexed bonds avoid the inflation risk premium of conventional bonds and reduce the government's long-run borrowing costs. |
| Keywords: | Conventional and indexed bonds, Inflation, Macroeconomy, VAR |
| JEL: | E43 G12 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:199&r=cba |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | In Bayesian analysis of dynamic stochastic general equilibrium (DSGE) models, prior distributions for some of the taste-and-technology parameters can be obtained from microeconometric or presample evidence, but it is difficult to elicit priors for the parameters that govern the law of motion of unobservable exogenous processes. Moreover, since it is challenging to formulate beliefs about the correlation of parameters, most researchers assume that all model parameters are independent of each other. We provide a simple method of constructing prior distributions for a subset of DSGE model parameters from beliefs about the moments of the endogenous variables. We use our approach to investigate the importance of nominal rigidities and show how the specification of prior distributions affects our assessment of the relative importance of different frictions. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-16&r=cba |
| By: | Lawrence J. Christiano; Joshua M. Davis |
| Abstract: | Using “business cycle accounting,” Chari, Kehoe, and McGrattan (2006) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of business cycle accounting overturn Chari, Kehoe, and McGrattan’s conclusions. Second, one way that shocks to the intertemporal wedge affect the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal-wedge shocks is not identified under business cycle accounting. Chari, Kehoe, and McGrattan potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero. |
| Keywords: | Business cycles |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0612&r=cba |
| By: | Monique Florenzano (Centre d'Economie de la Sorbonne); Stella Kanellopoulou (Centre d'Economie de la Sorbonne); Yannis Vailakis (Centre d'Economie de la Sorbonne) |
| Abstract: | This paper studies a simple stochastic two-period general equilibrium model with money, an incomplete market of nominal assets, and a competitive banking system, intermediate between consumers and a Central Bank. There is a finite number of agents, consumers and banks. Default is not permitted. The public policy instruments are, besides real taxes implicit in the model, public debt and creation of money, both implemented at the first period. The equilibrium existence is established under a "Gains to trade" hypothesis and the assumption that banks have a nonzero endowment of money at each date-event of the model. |
| Keywords: | Competitive banking system, incomplete markets, nominal assets, money, monetary equilibrium, cash-in-advance constraints, public debt. |
| JEL: | C61 C62 D20 D46 D51 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:b06068&r=cba |
| By: | Fabrizio Perri; Alessandra Fogli |
| Abstract: | The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the "great moderation") and the large and persistent US external imbalance. In this paper we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance. |
| JEL: | F32 F34 F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12708&r=cba |
| By: | Jean-Philippe Cayen; Amy Corbett; Patrick Perrier |
| Abstract: | The authors propose a monetary policy rule for the Terms-of-Trade Economic Model (ToTEM), the Bank of Canada's new projection and policy-analysis model for the Canadian economy. They consider simple instrument rules such as Taylor-type and inflation-forecast-based rules. The proposed rule minimizes a loss function that reflects the assumed preferences of the monetary authority over inflation and output, as well as over the variability of its instrument. The authors also investigate how robust the proposed rule is with respect to a particular realization of shocks that differs from the historical distribution used to find the optimized rule. |
| Keywords: | Economic models; Monetary policy framework; Transmission of monetary policy |
| JEL: | E5 E52 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-41&r=cba |
| By: | Emil Stavrev |
| Abstract: | The paper evaluates the 24-month ahead inflation forecasting performance of various indicators of underlying inflation and structural models. The inflation forecast errors resulting from model misspecification are larger than the errors resulting from forecasting of exogenous variables. Also, measures derived using the generalized dynamic factor model (GDFM) overperform other measures over the monetary policy horizon and are leading indicators of headline inflation. Trimmed means, although weaker than GDFM indicators, have good forecasting performance, while indicators by permanent exclusion underperform but provide useful information about short-term dynamics. The forecasting performance of theoretically-founded models that relate monetary aggregates, the output gap, and inflation improves with the time horizon but generally falls short of that of the GDFM. A composite measure of underlying inflation, derived by averaging the statistical indicators and the model-based estimates, improves forecast accuracy by eliminating bias and offers valuable insight about the distribution of risks. |
| Keywords: | Underlying inflation , forecast evaluation , composite indicators , forecast risk assessment , Inflation , Euro area , Monetary policy , Economic models , |
| Date: | 2006–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/197&r=cba |
| By: | Francis Y. Kumah |
| Abstract: | Adequate modeling of the seasonal structure of consumer prices is essential for inflation forecasting. This paper suggests a new econometric approach for jointly determining inflation forecasts and monetary policy stances, particularly where seasonal fluctuations of economic activity and prices are pronounced. In an application of the framework, the paper characterizes and investigates the stability of the seasonal pattern of consumer prices in the Kyrgyz Republic and estimates optimal money growth and implied exchange rate paths along with a jointly determined inflation forecast. The approach uses two broad specifications of an augmented error-correction model-with and without seasonal components. Findings from the paper confirm empirical superiority (in terms of information content and contributions to policymaking) of augmented error-correction models of inflation over single-equation, Box-Jenkins-type general autoregressive seasonal models. Simulations of the estimated errorcorrection models yield optimal monetary policy paths for achieving inflation targets and demonstrate the empirical significance of seasonality and monetary policy in inflation forecasting. |
| Keywords: | Inflation forecasting , seasonal unit roots , monetary policy stance , erroro-correction models and VAR , Monetary policy , Inflation , Forecasting models , |
| Date: | 2006–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/175&r=cba |
| By: | Pau Rabanal; Vicente Tuesta |
| Abstract: | We use a Bayesian approach to estimate a standard two-country New Open Economy Macroeconomics model using data for the United States and the euro area, and we perform model comparisons to study the importance of departing from the law of one price and complete markets assumptions. Our results can be summarized as follows. First, we find that the baseline model does a good job in explaining real exchange rate volatility but at the cost of overestimating volatility in output and consumption. Second, the introduction of incomplete markets allows the model to better match the volatilities of all real variables. Third, introducing sticky prices in Local Currency Pricing improves the fit of the baseline model but does not improve the fit as much as introducing incomplete markets. Finally, we show that monetary shocks have played a minor role in explaining the behavior of the real exchange rate, while both demand and technology shocks have been important. |
| Keywords: | Real exchange rates , Bayesian estimation , model comparison , Euro , U.S. dollar , Real effective exchange rates , Economic models , |
| Date: | 2006–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/177&r=cba |
| By: | Martin, Chris; Milas, Costas |
| Abstract: | The Opportunistic Approach to Monetary Policy is an influential but untested model of optimal monetary policy. We provide the first tests of the model, using US data from 1983Q1-2004Q1. Our results support the Opportunistic Approach. We find that policymakers respond to the gap between inflation and an intermediate target that reflects the recent history of inflation. We find that there is no response of interest rates to inflation when inflation is within 1% of the intermediate target but a strong response when inflation is further from the intermediate target. |
| JEL: | E52 |
| Date: | 2006–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:849&r=cba |
| By: | Michel Normandin (IEA, HEC Montréal) |
| Abstract: | This paper assesses the plausibility of popular models of the monetary transmission mechanism for the G7 countries. For this purpose, flexible structural vector autoregressions are used to relaxe the restrictions behind the traditional identifying schemes of monetary-policy shocks and their effects on macroececonomic variables, and in particular, on real wages. The estimates reveal that expansionary monetary-policy shocks produce declines of real wages for Canada, France, and the United Kingdom. This is consistent with sticky-wage models and suggests that labor-market frictions constitute prime features of these economies. In constrast, positive monetary-policy shocks yield increases of real wages for Germany, Italy, Japan, and the United States. This is consistent with sticky-price models and limited-participation models, so that goods-market frictions and/or financialmarket frictions seem important characteristics of these economies. Finally, the standard identifying restrictions are often statistically rejected and produce severe distortions of real-wage responses. |
| Keywords: | Conditional heteroscedasticity; monetary-policy indicators; orthogonality conditions. |
| JEL: | C32 E52 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0604&r=cba |
| By: | Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies) |
| Abstract: | This paper developes a theoretical model to analyse the impact of uncertainty about the true state of the economy on monetary policy. The theoretical model is tested on US data since the early 1980s. Our estimates suggest that the effect of uncertainty on interest rates was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1990-91, when uncertainty reduced interest rates by up to 80 basis points and in 1996-2001 when uncertainty reduced interest rates by up to 70 basis points over five years. |
| Keywords: | Monetary Policy, Uncertainty |
| JEL: | C51 C52 E52 E58 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2006/15&r=cba |
| By: | Mariam Camarero; Josep Lluis Carrion-i-Silvestre; Cecilio Tamarit (Universitat de Barcelona) |
| Abstract: | This paper tests for real interest parity (RIRP) among the nineteen major OECD countries over the period 1978:Q2-1998:Q4. The econometric methods applied consist of combining the use of several unit root or stationarity tests designed for panels valid under cross-section dependence and presence of multiple structural breaks. Our results strongly support the fulfilment of the weak version of the RIRP for the studied period once dependence and structural breaks are accounted for. |
| Keywords: | cross-section dependence, economic integration, panel data, real interest rate parity, structural breaks, unit root tests |
| JEL: | C32 C33 F21 F32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2006159&r=cba |
| By: | Ram Sharan Kharel (Brunel University); Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies) |
| Abstract: | We estimate a flexible non-linear monetary policy rule for the UK to examine the response of policymakers to the real exchange rate. We have three main findings. First, policymakers respond to real exchange rate misalignment rather than to the real exchange rate itself. Second, policymakers ignore small deviations of the exchange rate; they only respond to real exchange under-valuations of more than 4\% and over-valuations of more than 5\%. Third, the response of policymakers to inflation is smaller when the exchange rate is over-valued and larger when it is under-valued. None of these responses is allowed for in the widely-used Taylor rule, suggesting that monetary policy is better analysed using a more sophisticated model, such as the one suggested in this paper. |
| Keywords: | Monetary policy, asset prices, nonlinearity |
| JEL: | C51 C52 E52 E58 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2006/17&r=cba |
| By: | Carpenter, Seth; Demiralp, Selva |
| Abstract: | Central banking transparency is now a topic of great interest, but its impact on the implementation of monetary policy has not been studied. This paper documents that anticipated changes in the target federal funds rate complicate open market operations. We provide theoretical and empirical evidence on the behavior of banks and the Open Market Trading Desk. We find a significant shift in demand for funds ahead of expected target rate changes and that the Desk only incompletely accommodates this shift in demand. This anticipation effect, however, does not materially affect other markets. |
| JEL: | G0 |
| Date: | 2006–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:704&r=cba |
| By: | Roland Straub; Florin Bilbiie |
| Abstract: | This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price dynamic stochastic general equilibrium model, which implies that at low asset-market participation rates, the interest rate elasticity of output (the slope of the IS curve) becomes positive - that is, "non-Keynesian." Remarkably, in that case, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare. Consequently, we argue that the policy of the Federal Reserve System in the pre-Volcker era, often associated with a passive monetary policy rule, was closer to optimal than conventional wisdom suggests and may thus have remained unchanged at a fundamental level thereafter. We provide institutional and empirical evidence for our hypothesis, in the latter case using Bayesian estimation techniques, and show that our model is able to explain most features of the "Great Inflation." |
| Keywords: | Great inflation , limited asset market participation , passive monetary policy , |
| Date: | 2006–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/200&r=cba |
| By: | Camille Cornand; Romain Baeriswyl |
| Abstract: | This paper analyzes the welfare effects of economic transparency in the conduct of monetary policy. We propose a model of monopolistic competition with imperfect common knowledge on the shocks affecting the economy where the central bank has no inflationary bias. In this context, monetary policy entails a dual role. The instrument of the central bank is both an action that stabilizes the economy and a public signal that partially reveals to firms the central bank's assessment about the state of the economy. Yet, firms are unable toperfectly disentangle the central bank's signals responsible for the instrument and the central bank optimally balances the action and information purposes of its instrument. We derive the optimal monetary policy and the optimal central bank's disclosure. We define transparency as an announcement by the central bank that allows firms to identify the rationale behind the instrument. It turnsout that transparency is welfare increasing (i) when the degree of strategic complementarities is low, (ii) when the economy is not too affected by mark-up shocks, (iii) when the central bank is more inclined towards price stabilization, (iv) when firms have relatively precise private information, and (v) when the central bank's information is relatively precise on demand shocks and relatively imprecise on mark-up shocks. These results rationalize the increase in trans-parency in the current context of relative low sensitivity of the economy to mark-up shocks and of strong central bank's preference for price stability.JEL classification: E52, E58, D82.Keywords: differential information, monetary policy, transparency. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp569&r=cba |
| By: | Frank Heinemann; Camille Cornand |
| Abstract: | We propose a speculative attack model in which agents receive multiple public signals. It is characterised by its focus on an informational structure, which sets free from the strict separation between public information and private information. Diverse pieces of public information can be taken into account differently by players and are likely to lead to different appreciations ex post. This process defines players’ private value. The main result is to show that equilibrium uniqueness depends on two conditions: (i) signals are sufficiently dispersed (ii) private beliefs about the relative precision of these signals sufficiently differ. We derive some implications for information dissemination policy. Transparency in this context is multi-dimensional: it concerns the publicity of announcements, the number of signals disclosed as well as their precision. Especially, it seems that the central bank has better not publishing its forecast errors in order to maintain stability. An illustration to our analysis is the recent debate concerning the optimal monetary policy committee structure of central banks. Keywords: Speculative attack – coordination game – multiple equilibria – public and private information – transparency. JEL Classification: F31 – D82. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp570&r=cba |
| By: | Roberto Scazzieri; Lilia Costabile |
| Abstract: | <p class="MsoNormal" style="text-align: justify;"><span lang="EN-GB">This paper explores the relationship between economic growth and the welfare state. We argue that: (i) the institutional constraints set by the international monetary system may be at least as effective determinants of growth differentials between countries as the different dimensions of their welfare states. We show </span><span lang="EN-GB">how this international system may impose an asymmetric discipline/flexibility mix on the macreoconomic policies of different countries, thereby influencing their growth performance.; (ii) </span><span lang="EN-GB">the European currency reshapes some of the pre-existing constraints and also open up new opportunities; (iii) in the new international setting, Europe is facing a choice between alternative models. In one alternative, the “welfare system” needs to be reduced to a minimum; in the second, its role should be enhanced and made more active, through an appropriate mix of welfare policies oriented towards the promotion of social well-being and policies oriented towards the promotion of productive capacities.</span><span lang="EN-GB"><span></span></span><b><span lang="EN-GB"></span></b></p> |
| Keywords: | international monetary system; macroeconomic policies; welfare state; welfare policies |
| JEL: | F02 F33 F43 D02 I0 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp117&r=cba |
| By: | Peter Funk; Bettina Kromen |
| Abstract: | This model analyses the interaction between inflation and the long-run levels of employment and output growth in a Schumpeterian growth model with quality improving innovations under nominal price rigidity. At the unique REE steady state equilibrium, both employment and growth are hump-shaped functions of money growth peaking at positive inflation rates. This is due to four effects of money growth under rigidity: Erosion of its relative price through inflation and the optimal initial mark-up set in anticipation of this influence a firm’s profits. Dispersion in relative prices causes inefficient production while the change in the average mark-up influences aggregate demand. |
| Keywords: | Inflation, price rigidity, endogenous growth, employment, long-run Phillips curve |
| JEL: | E24 E31 O31 O42 |
| Date: | 2006–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0029&r=cba |
| By: | Tobias Knedlik |
| Abstract: | Current research discusses various general frameworks for installing an international lender of last resort (ILOLR). However, it remains unclear how the ILOLR should actually operate. This paper discusses six different options of construction of an ILOLR who supports central banks in the case of currency crises. The paper concludes that the cost efficient version of the ILOLR would be direct interventions by the IMF by the use of IMF resources and the right to dispose additional reserves from central banks. The paper considers measures of cost efficiency, such as cost of borrowing, intervention, and sterilization and moral hazard problems. |
| Keywords: | International Lender of Last Resort, International Monetary Fund, currency crises |
| JEL: | F02 F33 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:20-06&r=cba |
| By: | Elchanan Ben-Porath (Department of Economics, Hebrew University); Aviad Heifetz (Department of Economics, The Open University of Israel) |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ads:wpaper:0057&r=cba |
| By: | Ari Aisen; Francisco José Veiga |
| Abstract: | The purpose of this paper is to empirically determine the causes of worldwide diversity of inflation volatility. We show that higher degrees of political instability, ideological polarization, and political fragmentation are associated with higher inflation volatility. |
| Keywords: | Inflation , volatility , political instability , institutions , |
| Date: | 2006–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/212&r=cba |
| By: | Menkhoff, Lukas; Taylor, Mark P. |
| Abstract: | Technical analysis involves the prediction of future exchange rate (or other asset-price) movements from an inductive analysis of past movements. A reading of the large literature on this topic allows us to establish a set of stylised facts, including the facts that technical analysis is an important and widely used method of analysis in the foreign exchange market and that applying certain technical trading rules over a sustained period may lead to significant positive excess returns. We then analyze four arguments that have been put forward to explain the continuing widespread use of technical analysis and its apparent profitability: that the foreign exchange market may be characterised by not-fully-rational behaviour; that technical analysis may exploit the influence of central bank interventions; that technical analysis may be an efficient form of information processing; and finally that it may provide information on non-fundamental influences on foreign exchange movements. Although all of these positions may be relevant to some degree, neither non-rationality nor official interventions seem to be widespread and persistent enough to explain the obstinate passion of foreign exchange professionals for technical analysis. |
| Keywords: | foreign exchange market, technical analysis, market microstructure |
| JEL: | F31 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-352&r=cba |
| By: | Alfonso Palacio-Vera |
| Abstract: | We present a simple theoretical framework that integrates the notion of the natural or neutral interest rate, liquidity preference theory, and the monetary policy practice by modern central banks. We claim that this theory explains the conditions under which an economy will experience an aggregate demand deficiency problem within a modern institutional setting. Contrary to the predictions of the New Consensus View in macroeconomics, the model suggests that ÒstructuralÓ factors such as a high saving rate and, especially, a low ÒnaturalÓ rate of growth increase the chances that an economy experiences an aggregate demand deficiency. Contrary to conventional wisdom, the model predicts that a fall in the NAIRU may lead to a rise in the natural interest rate, and vice versa. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_478&r=cba |
| By: | Baba, Naohiko; Nakashima, Motoharu; Shigemi, Yosuke; Ueda, Kazuo |
| Abstract: | Using the interest rates on negotiable certificates of deposit issued by individual banks, we first show that under the Bank of Japan's zero interest rate policy and quantitative monetary easing policy, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. We next show that the fall in the dispersion of the rates is not fully explained by a fall in the dispersion of credit ratings of the banks. We also present some evidence on the role of the Bank of Japan's monetary policy in reducing risk premiums. |
| Keywords: | Monetary policy; Zero Interest Rate Policy; Quantitative Monetary Easing Policy; Negotiable Certificate of Deposit; Credit Risk Premium |
| JEL: | G00 G0 |
| Date: | 2005–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:816&r=cba |
| By: | Hiroshi Fujiki; Howard J. Wall |
| Abstract: | This paper argues that estimation of the Phillips curve for Japan should take account of the geographic dispersion of labor-market conditions. We find evidence that the relationship between wage inflation and the unemployment rate is convex. With such convexity, wage inflation can occur when unemployment rates across regions become more disperse, even if the aggregate unemployment rate is unchanged. We show that controlling for the geographic dispersion of unemployment rates yields a flatter Phillips curve and a higher natural rate of unemployment. |
| Keywords: | Phillips curve ; Japan ; Labor market |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-057&r=cba |
| By: | R. Spence Hilton; Alessandro Prati; Leonardo Bartolini |
| Abstract: | We use transaction-level data and detailed modeling of the high-frequency behavior of federal funds and Eurodollar yield spreads to provide evidence of strong integration between the federal funds and Eurodollar markets, the two core components of the dollar money market. Our results contrast with previous evidence of segmentation of these two markets, showing them to be well integrated even at high intra-day frequency. We document several patterns in the behavior of federal funds and Eurodollar spreads, including liquidity effects from trading volume to yield spreads volatility. Our analysis supports the view that targeting federal funds rates alone is sufficient to stabilize rates in the, much larger, dollar money market as a whole. |
| Keywords: | Federal funds , Eurodollars , market segmentation , |
| Date: | 2006–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/207&r=cba |
| By: | André Faria; Martín Minnoni; Aleksandar Zaklan; Paolo Mauro |
| Abstract: | We trace the history of where and why investors from the most advanced countries directed funds, ultimately helping finance economic development in emerging market countries. To do this, we analyze the determinants of international investors' willingness to hold the external liabilities issued by emerging market countries, through cross-country regressions for both prices (bond spreads) and quantities (bond market capitalization or stocks of external liabilities) estimated at various points during two waves of financial globalization (1870-1913 and the present time). The data are drawn from primary sources for the historical period, and the much-expanded, new vintage of the Lane and Milesi-Ferretti (2006) data set for the modern period. The results suggest that, throughout the past one and a half centuries, a combination of human capital (including informal human capital) and institutional quality has been a key determinant of emerging market countries' ability to attract international investors. |
| Keywords: | External liabilities , emerging markets , capital flows , international financial integration , |
| Date: | 2006–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/205&r=cba |
| By: | Vitek, Francis |
| Abstract: | This paper develops and estimates a dynamic stochastic general equilibrium model of a small open economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive model, while dominating that structural vector autoregressive model in terms of predictive accuracy. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption, adjustment costs in investment, and variable capital utilization. Incomplete exchange rate pass through is generated by monopolistic competition and staggered reoptimization in the import market. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and trend components are jointly estimated with a novel Bayesian full information maximum likelihood procedure. |
| Keywords: | Monetary policy analysis; Inflation targeting; Small open economy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | C11 E52 F41 C13 F47 C32 |
| Date: | 2006–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:800&r=cba |
| By: | Vitek, Francis |
| Abstract: | This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive model, while dominating that structural vector autoregressive model in terms of predictive accuracy. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption, adjustment costs in investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and trend components are jointly estimated with a novel Bayesian full information maximum likelihood procedure. |
| Keywords: | Monetary policy analysis; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | C11 E52 C13 E37 C32 |
| Date: | 2006–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:797&r=cba |
| By: | Vitek, Francis |
| Abstract: | This paper develops and estimates a dynamic stochastic general equilibrium model of a small open economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Incomplete exchange rate pass through is generated by monopolistic competition and staggered reoptimization in the import market. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components. |
| Keywords: | Stance of monetary policy; Small open economy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | C11 E52 F41 C13 F47 C32 |
| Date: | 2006–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:802&r=cba |
| By: | Vitek, Francis |
| Abstract: | This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components. |
| Keywords: | Stance of monetary policy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | C11 E52 C13 E37 C32 |
| Date: | 2006–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:801&r=cba |
| By: | Gadea, Maria; Mayoral, Laura |
| Abstract: | The statistical properties of inflation and, in particular, its degree of persistence and stability over time is a subject of intense debate, and no consensus has been achieved yet. The goal of this paper is to analyze this controversy using a general approach, with the aim of providing a plausible explanation for the existing contradictory results. We consider the inflation rates of twenty-one OECD countries which are modeled as fractionally integrated (FI) processes. First, we show analytically that FI can appear in inflation rates after aggregating individual prices from firms that face different costs of adjusting their prices. Then, we provide robust empirical evidence supporting the FI hypothesis using both classical and Bayesian techniques. Next, we estimate impulse response functions and other scalar measures of persistence, achieving an accurate picture of this property and its variation across countries. It is shown that the application of some popular tools for measuring persistence, such as the sum of the AR coefficients, could lead to erroneous conclusions if fractional integration is present. Finally, we explore the existence of changes in inflation inertia using a novel approach. We conclude that the persistence of inflation is very high (although nonpermanent) in most postindustrial countries and that it has remained basically unchanged over the last four decades. |
| JEL: | G00 G0 |
| Date: | 2005–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:815&r=cba |
| By: | Gian Maria Milesi-Ferretti; Philip R. Lane |
| Abstract: | We examine the evolution of the net external asset positions of Central and Eastern Europe (CEEC) countries over the past decade, with a strong emphasis on the composition of their international balance sheets. We assess the extent of their international financial integration, compared with the advanced economies and other emerging markets, and highlight the 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 country 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. |
| Keywords: | trade balance , rates of return , net external position , FDI , Capital flows , Eastern Europe , Balance of trade , Current account , Foreign direct investment , |
| Date: | 2006–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/188&r=cba |
| By: | Tetsuji Okazaki (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper explores how the Bank of Japan (BOJ) dealt with the trade-off between stability of the financial system and the moral hazard of banks in pre-war Japan. The BOJ concentrated Lender of Last Resort (LLR) loans with those banks that had an established transaction relationship with the BOJ. At the same time, the BOJ carefully selected its transaction counterparts, and did not hesitate to end the relationship if the performance of a counterpart declined. Further, the BOJ was selective in providing LLR loans. Through this policy, the BOJ could avoid the moral hazard that the LLR policy might otherwise have incurred. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2006cf447&r=cba |
| By: | Dean Croushore |
| Abstract: | This paper carries out the task of evaluating inflation forecasts from the Livingston Survey and the Survey of Professional Forecasters, using the real-time data set for macroeconomists as a source of real-time data. The author examines the magnitude and patterns of revisions to the inflation rate based on the output price index and describe what data to use as “actuals” in evaluating forecasts. The author then runs tests on the forecasts from the surveys to see how good they are, using a variety of actuals. The author finds that much of the empirical work from 20 years ago was a misleading guide to the quality of forecasts because of unique events during the earlier sample period. Repeating that empirical work over a longer sample period shows no bias or other problems in the forecasts. The use of real-time data also matters for some key tests on some variables. If a forecaster had used the empirical results from the late 1970s and early 1980s to adjust survey forecasts of inflation, forecast errors would have increased substantially. |
| Keywords: | Inflation (Finance) |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-19&r=cba |
| By: | Giuseppe Fontana |
| Abstract: | One of the greatest achievements of the modern ÒNew ConsensusÓ view in macroeconomics is the assertion of a nonquantity theoretic approach to monetary policy. Leading theorists and practitioners of this view have indeed rejected the quantity theory of money, and defended a return to the old Wicksellian idea of eliminating high levels of inflation by adjusting nominal interest rates to changes in the price level. This paper evaluates these recent developments in the theory and practice of monetary policy in terms of two basic questions: 1) What is the monetary policy instrument controlled by the central bank? and 2) Which macroeconomic variables are affected in the short and long run by monetary policy? |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_476&r=cba |
| By: | Caballero, Ricardo; Krishnamurthy, Arvind |
| Abstract: | Firms in emerging markets are exposed to severe financial frictions and credit constraints that are exacerbated by the sudden stop of capital inflows. Can monetary policy offset this external credit squeeze? We show that although this may be the case during moderate contractions (or in partial equilibrium), the expansionary effect of monetary policy vanishes during severe external crises. The exchange rate jumps to reduce the dollar value of domestic collateral until equilibrium in domestic financial markets is consistent with the external constraint. An expansionary monetary policy in this context raises the value of domestic collateral, but it exacerbates the exchange rate depreciation (beyond the standard interest parity effect) and has little effect on aggregate activity. However, there is a dynamic linkage between monetary policy and sudden stops. The anticipation of a dogged defense of the exchange rate worsens the consequences of sudden stops by distorting the private sector incentive to take precautions against these shocks. For similar general equilibrium reasons, dollarization of liabilities has limited impact during a sudden stop, but it has significant underinsurance consequences. |
| JEL: | G00 G0 |
| Date: | 2005–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:824&r=cba |
| By: | Derek Bond (University of Ulster); Michael J. Harrison (Department of Economics, Trinity College); Edward J. O'Brien (European Central Bank) |
| Abstract: | This paper looks at issues surrounding the testing of purchasing power parity using Irish data. Potential difficulties in placing the analysis in an I(1)/I(0) framework are highlighted. Recent tests for fractional integration and nonlinearity are discussed and used to investigate the behaviour of the Irish exchange rate against the United Kingdom and Germany. Little evidence of fractionality is found but there is strong evidence of nonlinearity from a variety of tests. Importantly, when the nonlinearity is modelled using a random field regression, the data conform well to purchasing power parity theory, in contrast to the findings of previous Irish studies, whose results were very mixed. |
| JEL: | C22 F31 F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep2015&r=cba |
| By: | Horvath, Roman |
| Abstract: | This paper examines (real-time) equilibrium interest rates in the Czech Republic in 2001:1-2005:12 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply structural time-varying coefficient model with endogenous regressors to evaluate fluctuations of equilibrium interest rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the equilibrium interest rates gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium and successful disinflation in the Czech economy. |
| Keywords: | equilibrium interest rates; Taylor rule; augmented Kalman filter |
| JEL: | E58 E43 E52 |
| Date: | 2006–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:845&r=cba |
| By: | Ludvig Söderling; Domenico Fanizza |
| Abstract: | Many countries in the Middle East and North Africa (MENA) region have recently experienced surges in money growth that apparently have not generated significant inflationary pressures. Moreover, several MENA countries have followed monetary policy rules that according to standard monetary theory should have produced macroeconomic instability and possibly hyperinflation. We argue that the Fiscal Theory of the Price Level could usefully provide insights on these developments. Our main conclusion is that a sound fiscal position constitutes a necessary condition for macroeconomic stability whereas "sound" monetary policy is neither sufficient nor necessary. Hence, fiscal policy and public debt deserve particular attention for maintaining macroeconomic stability, by and large consistent with Fund policy advice to MENA countries. |
| Keywords: | Fiscal theory of the price level , Algeria , Egypt , Lebanon , Morocco , Tunisia , |
| Date: | 2006–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/216&r=cba |
| By: | Fidrmuc, Jarko |
| Abstract: | A panel data set for six countries (Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia) is used to estimate money demand with panel cointegration methods over the recent disinflation period. The basic money demand model is able to convincingly explain the long-run dynamics of M2 in the selected countries. However, money demand is found to have been significantly determined by the euro area interest rates and the exchange rate against the euro, which indicates possible instability of money demand functions in the CEECs. Therefore, direct inflation targeting is an appropriate monetary regime before the eventual adoption of the euro. |
| Keywords: | Money demand; panel unit root tests; panel cointegration; direct inflation targeting; CEECs |
| JEL: | E41 E58 C23 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:1232&r=cba |
| By: | Wendell Samuel; Laura Valderrama |
| Abstract: | The paper analyzes the determinants of banking spreads in Barbados, with a view to identifying the role of the monetary policy regime in explaining high spreads. The paper finds that interest rate spreads for Barbados are higher than would be suggested by its macroeconomic performance. Banking concentration and bank-specific variables, including bank size and provisions for nonperforming loans, do not have an important role in explaining variations in bank spreads. Rather, it appears that monetary policy variables, such as reserve requirements and capital controls, are the most important determinants of spreads. |
| Keywords: | Interest rate spreads , monetary policy regime , |
| Date: | 2006–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/211&r=cba |
| By: | Garima Vasishtha; Taimur Baig; Manmohan S. Kumar; Edda Zoli |
| Abstract: | This paper examines two main aspects of the interaction between fiscal and monetary policy in emerging market economies. First, it explores the interest rate-inflation relationship in economies with different levels of external and domestic public debt using panel- and crosssection data. The results show that interest rate-inflation elasticity weakens with debt/GDP and external debt/GDP. Second, it utilizes high-frequency data from Brazil, Turkey, and Poland to examine how market-determined variables react to economic news. The results suggest that when vulnerabilities are high, budget news has the most significant impact on country spreads and interest rates, and the impact of monetary policy is weakened. |
| Keywords: | Public debt , fiscal policy , monetary policy , Emerging markets , Public debt , Fiscal policy , Monetary policy , |
| Date: | 2006–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/184&r=cba |
| By: | Federico S. Mandelman |
| Abstract: | Starting from a variant of the New Keynesian model for a small open economy, I extend the standard credit channel framework to show that the presence of imperfect competition in the banking system propagates external shocks and amplifies the business cycle. This novel modeling of the banking system captures various well-documented facts in developing economies. I show that strategic limit pricing, aimed at protecting retail niches from potential competitors, generates countercyclical bank markups. Markup increments, as a consequence of sudden capital outflows, end up increasing borrowing costs for firms as well as damaging the financial position of firms’ balance sheets. The recognition of monopoly power in banking allows the model to account for the relatively high investment volatility registered in emerging countries, even in the presence of debt that is fully denominated in local currency and flexible exchange rates. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-17&r=cba |
| By: | Nolvia N. Saca; Luis René Cáceres |
| Abstract: | Family remittances are important for El Salvador's economy. This paper analyzes the impact of remittances on El Salvador's economy and the spillover effects on the other Central American countries. A vector autoregression (VAR) model is formulated, consisting of real and monetary variables. The results suggest that in, El Salvador, remittances lead to decreases in economic activity, international reserves, and money supply and increases in the interest rate, imports, and consumer prices. This underscores the need for reorienting economic policy in El Salvador to promote the use of remittances in capital formation activities to maximize the benefit of remittances. |
| Keywords: | Remittances , mechanism of transmission , |
| Date: | 2006–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/250&r=cba |
| By: | Holger Floerkemeier; Era Dabla-Norris |
| Abstract: | This paper examines monetary policy transmission in Armenia in light of the authorities' intention to shift to an inflation-targeting regime over the medium term. We find that the capability of monetary policy to influence economic activity and inflation is still limited, as important channels of monetary transmission are not fully functional. In particular, the interest rate channel remains weak, even though there is some evidence of transmission to prices of changes in the repo rate, the central bank's new operating target for inflation. As in other emerging and transition economies with a high degree of dollarization, the exchange rate channel has a strong impact on the inflation rate. Moreover, we find that inflation does respond to broad money shocks, once foreign currency deposits are included. |
| Keywords: | Armenia , monetary policy , transmission mechanism , |
| Date: | 2006–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/248&r=cba |
| By: | Rodolfo Maino; Balázs Horváth |
| Abstract: | We explore monetary policy transmission by estimating VAR impulse response functions to illustrate the Belarusian economy's response to unexpected changes in policy and exogenous variables. We find a significant exchange rate pass-through to prices, and interest rate policy following, rather than leading, financial market developments. Our estimated monetary policy reaction function shows the central bank striking a balance between real exchange rate stability and containing inflation. We discuss dollarization, administrative interventions, and other features complicating monetary policy transmission, review specific constraints and vulnerabilities, and conclude with observations on possible measures that could raise the effectiveness of monetary policy in Belarus. |
| Keywords: | Monetary policy , inflation , transmission mechanisms , dollarization , |
| Date: | 2006–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/246&r=cba |