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on Central Banking |
| By: | Peter N. Ireland (Boston College) |
| Abstract: | Post-1980 U.S. data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semi-elasticity of 1.79. Integrating under this money demand curve yields estimates of the welfare cost of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule. |
| Keywords: | inflation, welfare cost, money demand, Friedman rule |
| JEL: | E31 E41 E52 |
| Date: | 2007–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:662&r=cba |
| By: | Dagfinn Rime (Norges Bank (Central Bank of Norway)); Lucio Sarno (Universty of Warwick and CEPR); Elvira Sojli (Universty of Warwick) |
| Abstract: | This paper investigates the empirical relation between order flow and macroeconomic information in the foreign exchange market, and the ability of microstructure models based on order flow to outperform a naive random walk benchmark. If order flow reflects heterogeneous beliefs about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data for three major exchange rates, we demonstrate that order flow is intimately related to a broad set of current and expected macroeconomic fundamentals. More importantly, we find that order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise. The Sharpe ratio obtained from allocating funds using forecasts generated by an order flow model is generally above unity and substantially higher than the Sharpe ratios obtained from alternative models, including the random walk model. |
| Keywords: | Exchange rate, Microstructure, Order flow, Forecasting, Macroeconomic news. |
| JEL: | F31 F41 G10 |
| Date: | 2007–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2007_02&r=cba |
| By: | Guy Meredith |
| Abstract: | We use a general-equilibrium model to explain the rise in global trade and payments imbalances since the mid-1990s, and then to construct adjustment paths to a steady state. Assuming that the shocks giving rise to the imbalances do not suddenly reverse, simulated movements in the U.S. trade deficit and exchange rate are smaller and more gradual than suggested by partial-equilibrium analyses. An important factor reducing the size of the adjustments is a simulated real interest rate on U.S. external liabilities that is below both the interest rate on external assets and the U.S. real economic growth rate. In addition, the adjustment takes place over an extended period without significantly raising the share of U.S. assets in foreign portfolios, in part because depreciation of the dollar requires continued foreign accumulation of U.S. assets just to keep their portfolio share constant. |
| Keywords: | Debt dynamics; global imbalances; international adjustment , |
| Date: | 2007–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/4&r=cba |
| By: | Jean-Francois Segalotto; Martin Sommer; Marco Arnone; Bernard Laurens |
| Abstract: | We calculate indexes of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indexes for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of central bank autonomy that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. |
| Keywords: | Central bank autonomy , political autonomy , economic autonomy , |
| Date: | 2007–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/88&r=cba |
| By: | Eric Le Borgne; Gauti B. Eggertsson |
| Abstract: | This paper proposes a theory to explain why a politician delegates policy tasks to a technocrat in an independent institution. It formalizes the rationales for delegation highlighted by Hamilton (1788) and by Blinder (1998). Delegation trades-off the cost of having a possibly incompetent technocrat with a long-term job contract against the benefit of having a technocrat who (i) invests more effort into the specialized policy task and (ii) is better insulated from the whims of public opinion. One natural application of the theory is in the field of monetary policy where the model provides a new theory of central bank independence. |
| Keywords: | Delegation , elections , career concerns , learning-by-doing , insulation , Central Bank Independence , |
| Date: | 2007–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/91&r=cba |
| By: | Helge Berger; Volker Nitsch; Tonny Lybek |
| Abstract: | This paper analyzes empirically differences in the size of central bank boards across countries. Defining a board as the body that changes monetary instruments to achieve a specified target, we discuss the possible determinants of a board's size. The empirical relevance of these factors is examined using a new dataset that covers the de jure membership size of 84 central bank boards at the end of 2003. We find that larger and more heterogeneous countries, countries with stronger democratic institutions, countries with floating exchange rate regimes, and independent central banks with more staff tend to have larger boards. |
| Keywords: | Committee , council , governance , decision making , monetary policy , Central banks , Governance , Monetary policy , |
| Date: | 2006–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/281&r=cba |
| By: | Marie-Thérèse Camilleri Gilson; Tonny Lybek; Kenneth Sullivan |
| Abstract: | This paper reviews the tasks and design of audit committees, increasingly recommended as a way to strengthen financial accountability and good central bank governance. It outlines the motivations for the establishment of audit committees in commercial corporations and public sector entities, and explains how audit committees interact with other governance bodies within a central bank. The paper focuses on the functions of an audit committee, since the terminology of the governance structure is often country-specific. It summarizes operational issues to consider in designing an effective audit committee and discusses the implications for central bank legislation. |
| Keywords: | Central Bank governance , audit committees , |
| Date: | 2007–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/73&r=cba |
| By: | Michael Kumhof; Irina Yakadina |
| Abstract: | Why do governments issue large amounts of debt? In what sense and for whom is such a policy optimal? We show that twisting the optimal taxation paradigm produces very reasonable predictions for debt and real interest rates. Adding an extra dimension of uncertainty about the political planning horizon gives rise to a positive and very plausible government debt-to-GDP ratio of about 55 percent in a model that otherwise predicts negative government debt. We quantify the impact of political uncertainty on steady state and business cycle dynamics. We illustrate how populist tax cuts can cause business cycle fluctuations. |
| Keywords: | Optimal Fiscal Policy , Incomplete Asset Markets , Political economy , government debt bias , Fiscal policy , Public debt , Gross domestic product , Political economy , Tax changes , Business cycles , |
| Date: | 2007–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/68&r=cba |
| By: | Christopher W. Crowe |
| Abstract: | I test whether inflation targeting (IT) enhances transparency using inflation forecast data for 11 IT adoption countries. IT adoption promotes convergence in forecast errors, suggesting that it enhances transparency. This effect is robust to dropping observations, is strengthened by using instrumental variable estimation to eliminate mean-reversion, and is absent in placebo regressions (where IT adoption is shifted by a year). This result supports Morris and Shin's (2002) contention that better public information is most beneficial for forecasters with bad private information. However, it does not support their hypothesis that better public information could make private forecasts less accurate. |
| Keywords: | Inflation targeting , inflation forecasts , Central Bank transparency , propensity score matching , Inflation targeting , Inflation , Economic forecasting , Central banks , Transparency , Private sector , Forecasting models , Economic models , |
| Date: | 2007–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/289&r=cba |
| By: | Marcel Peter; Geoffrey Heenan; Scott Roger |
| Abstract: | Transparency is a central element in most aspects of the design and operation of inflation targeting regimes. This paper focuses on three elements of inflation targeting most closely associated with transparency: (i) the institutional arrangements supporting inflation targeting; (ii) the specification of the inflation target; and (iii) the central bank's policy communications. The paper is primarily aimed at providing practical advice to countries planning to develop an inflation targeting framework, but many of the issues are relevant for any credible, independent monetary policy. |
| Keywords: | Monetary policy , inflation targeting , Inflation targeting , Monetary policy , |
| Date: | 2006–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/278&r=cba |
| By: | Michael Kumhof; Stijn van Nieuwerburgh |
| Abstract: | Standard theory shows that sterilized foreign exchange interventions do not affect equilibrium prices and quantities, and that domestic and foreign currency denominated bonds are perfect substitutes. This paper shows that when fiscal policy is not sufficiently flexible in response to spending shocks, perfect substitutability breaks down and uncovered interest rate parity no longer holds. Government balance sheet operations can be used as an independent policy instrument to target interest rates. Sterilized foreign exchange interventions should be most effective in developing countries, where fiscal volatility is large and where the fraction of domestic currency denominated government liabilities is small. |
| Keywords: | Sterilized foreign exchange intervention , imperfect asset substitutability , uncovered interest parity , portfolio balance theory , |
| Date: | 2007–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/72&r=cba |
| By: | Dora M. Iakova |
| Abstract: | Over the past decade, inflation has become less responsive to domestic demand pressures in many industrial countries. This development has been attributed, in part, to globalization forces. A small macroeconomic model, estimated on UK data using Bayesian estimation, is used to analyze the monetary policy implications of this structural change. The focus is on the implications of a globalization-related flattening of the Phillips curve for the trade-off between inflation and output gap variability and for the efficient monetary policy response rule. |
| Keywords: | Phillips curve , efficient monetary policy rules , globalization , |
| Date: | 2007–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/76&r=cba |
| By: | Michael Kumhof; Shujing Li; Isabel K. Yan |
| Abstract: | This paper analyzes a small open economy model under inflation targeting. It shows why such a monetary regime is vulnerable to speculative attacks that take place over a short period rather than instantaneously. The speed at which the regime collapses, and the extent of reserve losses, are increasing in the central bank's explicit or implicit commitment to intervene in the foreign exchange market. Attacks are therefore ranked, from most to least severe, as follows: Exchange rate targeting, CPI inflation targeting, domestic nontradables inflation targeting, and money targeting. Under inflation targeting the size of the attack is increasing in the tradables consumption share. |
| Keywords: | Balance of payments crisis , inflation targeting , exchange rate targeting , foreign exchange intervention , flow speculative attack , |
| Date: | 2007–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/84&r=cba |
| By: | Gilbert Koenig; Irem Zeyneloglu |
| Abstract: | Cet article se place dans le cadre de la nouvelle macroéconomie internationale en proposant un modèle d’équilibre général en concurrence imparfaite. Ce modèle décrit une union monétaire qui, comme l’UEM, n’a pas réalisé une intégration financière complète malgré l’adoption d’une monnaie unique. Il est utilisé pour analyser l’impact du degré d’intégration financière sur l’efficacité et sur les canaux de transmission des chocs budgétaires. A cette fin on introduit une intégration financière imparfaite dans la version du modèle de Obstfeld et de Rogoff (1995, 1996) décrivant des pays soumis à un régime de changes fixes et on l’adapte à la description d’une union monétaire. On se place ainsi dans le prolongement des travaux initiés par Sutherland (1996) et destinés à décrire les cas des économies en régime de changes flexibles. Mais on se distingue de ces travaux en substituant à leurs résultats numériques des solutions analytiques. Les résultats montrent que dans le cas d’une expansion budgétaire financée par impôts dans un pays membre de l’union, une hausse du degré d’intégration financière réduit la volatilité du taux d’intérêt et de la consommation à court terme dans les deux pays. Cet effet est inversé à long terme. Par contre, le bien-être est indépendant du degré d’intégration financière. |
| Keywords: | Nouvelle macroéconomie internationale, politique budgétaire, intégration financière, union monétaire. |
| JEL: | F41 E44 E62 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2007-13&r=cba |
| By: | Simone Manganelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Guido Wolswijk (Fiscal Policies Division of DG-Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper studies the determinants of interest rate spreads of euro area 10 year government bonds against the benchmark, the German bund, after the introduction of the euro. In particular, it pays attention to the question whether market discipline is advanced or obstructed by financial integration and by fiscal rules like the Stability and Growth Pact. We first argue that financial integration – by improving market efficiency – is instrumental for markets to exert their disciplinary role. Next, we discuss the relationships between market discipline and fiscal rules, arguing that these in principle may reinforce each other. Finally, we provide strong empirical evidence that spreads depend on the ratings of the underlying bond and to a large extent are driven by the level of short-term interest rates. JEL Classification: G12, G18, C23. |
| Keywords: | Bond spreads, credit risk, liquidity risk. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070745&r=cba |
| By: | Auray, Stephane (Universite Lille 3, GREMARS and CIRPEE, Villeneuve d'Acsq cedex, France); de Blas, Beatriz (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.) |
| Abstract: | This paper shows that a model which combines sticky price and sticky wages with investment in the cash-in-advance constraint generates business cycle dynamics consistent with empirical evidence. The model reproduces the responses of the key macroeconomic variables to technology and money supply shocks. In particular, the model generates enough output and inflation persistence with standard stickiness parameters. This setup is also able to generate the liquidity effect after a money injection, overcoming other standard new Keynesian models. |
| Keywords: | sticky prices; sticky wages; monetary facts; labor market facts; cash-in-advance |
| JEL: | E32 E41 E52 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:uam:wpaper:200705&r=cba |
| By: | Dudley Cooke (University of Essex) |
| Abstract: | This paper studies the short-run transmission of foreign shocks in a small open economy with capital controls and a fixed exchange rate. Capital controls alter the transmission of shocks because endogenous changes in the domestic nominal interest rate affect savings and investment decisions. The economy's reaction to export shocks hinges on how the government chooses to restrict capital flows; that is, whether inflows or outflows are restricted. For foreign interest rate shocks, private capital flows are important, but so are the government's holdings of foreign exchange reserves. Finally, a simple graphical apparatus is developed to provide a contrast to the case when capital flows are unrestricted. |
| Keywords: | capital controls; foreign shocks |
| JEL: | E58 F32 F41 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:07-02&r=cba |
| By: | Jaewoo Lee; Joshua Aizenman |
| Abstract: | The sizable hoarding of international reserves by several East Asian countries has been frequently attributed to a modern version of monetary mercantilism-hoarding international reserves in order to improve competitiveness. From a long-run perspective, manufacturing exporters in East Asia adopted financial mercantilism-subsidizing the cost of capital- during decades of high growth. They switched to hoarding large international reserves when growth faltered, making it harder to disentangle the monetary mercantilism from a precautionary response to the heritage of past financial mercantilism. Monetary mercantilism also lowers the cost of hoarding through its short-term boost to external competitiveness, but may be associated with negative externalities leading to competitive hoarding. |
| Keywords: | Mercantilism , cost of capital , competitive real depreciations , self insurance , precautionary hoarding , |
| Date: | 2006–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/280&r=cba |
| By: | Alessandro Gambini; Marco Arnone; Salim M. Darbar |
| Abstract: | This paper examines the relationship between the quality of banking supervision and governance of the supervisory agency, based on assessments of the Basel Core Principles and the IMF Code on Transparency in Financial Policies, covering 116 and 53 countries, respectively, with 51 common to both. We find a positive correlation between the transparency of the supervisor and the effectiveness of banking supervision; moreover, better accountability and integrity practices of the banking supervisors are associated with higher independence, which in turn is associated with better compliance with the Basel Core Principles. These results are largely robust to different stages of financial development. |
| Keywords: | Bank supervision , governance , Basel Core Principles , transparency , accountability , |
| Date: | 2007–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/82&r=cba |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Haroon Mumtaz (Monetary Assessment and Strategy Division, Bank of England, Threadneedle Street, London, EC2R 8AH, United Kingdom.) |
| Abstract: | We fit a Bayesian time-varying parameters structural VAR with stochastic volatility to the Federal Funds rate, GDP deflator inflation, real GDP growth, and the rate of growth of M2. We identify 4 shocks–monetary policy, demand non-policy, supply, and money demand–by imposing sign restrictions on the estimated reduced-form VAR on a period-by-period basis. The evolution of the monetary rule in the structural VAR accords well with narrative accounts of post-WWII U.S. economic history, with (e.g.) significant increases in the long-run coefficients on inflation and money growth around the time of the Volcker disinflation. Overall, however, our evidence points towards a dominant role played by good luck in fostering the more stable macroeconomic environment of the last two decades. First, the Great Inflation was due, to a dominant extent, to large demand non-policy shocks, and to a lower extent to supply shocks. Second, imposing either Volcker or Greenspan over the entire sample period would only have had a limited impact on the Great Inflation episode, while imposing Burns and Miller would have resulted in a counterfactual inflation path remarkably close to the actual historical one. Although the systematic component of monetary policy clearly appears to have improved over the sample period, this does not appear to have been the dominant influence in post-WWII U.S. macroeconomic dynamics. JEL Classification: E32, E47, E52, E58. |
| Keywords: | Bayesian VARs, stochastic volatility, identified VARs, time-varying parameters, frequency domain, Great Inflation, Lucas critique. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070746&r=cba |
| By: | David Hauner; Jiri Jonas; Manmohan S. Kumar |
| Abstract: | References to policy credibility, particularly with regard to fiscal policy, are ubiquitous in both economic literature and financial markets, even though it is not directly observable. The case of the EU new member states (NMS)-emerging markets joining a supranational entity that is generally considered to have higher policy credibility-provides a unique experiment to assess the effects of credibility on sovereign credit. This paper examines the impact of EU accession on three key variables that can reflect in varying degrees policy credibility: sovereign ratings, foreign currency spreads, and local currency yields. The results suggest that the NMS appear to have enjoyed higher credibility compared to their peers. |
| Keywords: | Policy credibility , credit spreads , sovereign ratings , EU new member states , Fiscal policy , Europe , European Union , Credit , Currencies , Foreign exchange , Economic models , |
| Date: | 2007–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/1&r=cba |
| By: | Alexander Chudik; Joannes Mongardini |
| Abstract: | This paper presents a methodology to estimate equilibrium real exchange rates (ERER) for Sub-Saharan African (SSA) countries using both single-country and panel estimation techniques. The limited data set hinders single-country estimation for most countries in the sample, but panel estimates are statistically and economically significant, and generally robust to different estimation techniques. The results replicate well the historical experience for a number of countries in the sample. Panel techniques can also be used to derive out of sample estimates for countries with a more limited data set. |
| Keywords: | Equilibrium exchange rates , Africa , panel estimations , |
| Date: | 2007–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/90&r=cba |