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on Central Banking |
| By: | Ellen R McGrattan; Edward C Prescott |
| Date: | 2008–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000001827&r=cba |
| By: | Philip R. Lane and Gian Maria Milesi-Ferretti |
| Abstract: | The deterioration in the U.S. net external position in recent years has been much smaller than the extensive net borrowing associated with large current account deficits would have suggested. This paper examines the sources of discrepancies between net borrowing and accumulation of net liabilities for the U.S. economy over the past 25 years. In particular, it highlights and quantifies the role played by net capital gains on the U.S. external portfolio and ‘residual adjustments’ in explaining this discrepancy. It discusses whether these ‘residual adjustments’ are likely to be originating from measurement errors in external assets and liabilities, financial flows, or capital gains, and explores the implications of these conjectures for the U.S. financial account and external position. |
| Date: | 2008–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp239&r=cba |
| By: | Daniel Laskar |
| Abstract: | The existing literature has shown that less political uncertainty, or more central bank transparency, may worsen macroeconomic performance by raising the nominal wage. We extend this analysis to a non-bayesian framework, where there is some aversion to ambiguity. We show that the result found in the literature under the bayesian approach does not hold when the distance from the bayesian case is large enough, or when a reduction in "Knigtian uncertainty" is considered. Then, less uncertainty, or more transparency of the central bank, does not raise the nominal wage and, as a consequence, macroeconomic performance is not worsened (and is in general strictly improved). |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2008-01&r=cba |
| By: | Philip Arestis (Department of Land Economy, University of Cambridge); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under ‘normal’ circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in ‘exceptional’ circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of ‘rules versus discretion’ has, thus, reappeared as the synthesis of ‘rules cum discretion’, in essence as inflation-forecast targeting. |
| Keywords: | optimal monetary policy, flexible rules, constrained discretion, central bank independence, inflation targeting |
| JEL: | E52 E58 E61 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:em-dp2007-53&r=cba |
| By: | Stephen McKnight (Department of Economics, University of Reading); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper re-considers the importance of trade openness for equilibrium determinacy when monetary policy is characterized by interest-rate rules. We develop a two-country, sticky-price model where money enters the utility function in a non-separable manner. Forward- and current-looking policy rules that react to domestic or consumer price inflation are analyzed. It is shown that the introduction of real balance effects substantially limits the validity of the Taylor principle and challenges recent conclusions concerning the relative desirability of the inflation indicator targeted. |
| Keywords: | Real indeterminacy; Open-economy macroeconomics; Interest-rate rules; Monetary policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:em-dp2007-52&r=cba |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the conditions under which interest-rate rules induce real equilibrium indeterminacy in a two-country, sticky-price, monetary model. Using a discrete-time framework, we employ the two most commonly used timing assumptions on which money balances enter into the utility function. This paper shows that the tim- ing equivalence result derived for a closed-economy no longer holds for open economies. This arises because modifications in the trading environment impact on the behavior of the real exchange rate. Consequently this helps explain the seemingly contradictory findings in the literature on real indeterminacy in open economies. Furthermore it challenges the belief that domestic inflation targeting is superior to consumer price inflation targeting, in minimizing aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:earg-wp2007-09&r=cba |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper presents a two-country sticky-price model that allows for capital and investment spending. It analyzes the conditions for equilibrium determinacy under alternative interest-rate rules that react to either domestic or consumer price inflation. It is shown that in the presence of investment, real indeterminacy is considerably easier to obtain once trade openness is permitted. Consequently we argue that sufficiently open economies should adopt a backward-looking rule and sufficiently closed economies should employ a current-looking rule, in order to minimize policy induced aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:em-dp2007-51&r=cba |
| By: | Paul Hallwood (University of Connecticut); Ronald MacDonald (University of Glasgow) |
| Abstract: | We discuss the effectiveness of pegged exchange rate regimes from an historical perspective, drawing conclusions for their effectiveness today. Starting with the classical gold standard period, we point out that a succession of pegged regimes have ended in failure; except for the first, which was ended by the outbreak of World War I, all of the others we discuss have been ended by adverse economic developments for which the regimes themselves were partly responsible. Prior to World War II the main problem was a shortage of monetary gold that we argue is implicated as a cause of the Great Depression. After World War II, more particularly from the late-1960s, the main problem has been a surfeit of the main international reserve asset, the US dollar. This has led to generalized inflation in the 1970s and into the 1980s. Today, excessive dollar international base money creation is again a problem that could have serious consequences for world economic stability. |
| Keywords: | Bretton Woods, exchange rate expectations gold standard, new Bretton Woods, realignment expectations, pegged exchange rates, target zone, world economic instability |
| JEL: | F31 F33 N20 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2008-02&r=cba |
| By: | Tervala, Juha (University of Helsinki and HECER) |
| Abstract: | This paper analyses the international transmission of monetary policy in a case where all export prices are set in US dollars. ‘Dollar pricing’ implies that the international effects of US monetary shocks are different to those of European shocks because of asymmetric exchange rate pass-through to import prices. A dollar pricing model can explain the observed asymmetry in the transmission of monetary policy: US monetary policy affects US output more than European monetary policy affects European output. I also show that the dollar pricing model reintroduces the current account as an important channel through which monetary policy affects welfare in the short run. The paper concludes that under dollar pricing monetary expansion is a beggar-thy-neighbour policy. |
| Keywords: | open economy macroeconomics; monetary policy; international policy transmission |
| JEL: | F30 F41 F42 |
| Date: | 2007–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_029&r=cba |
| By: | Mierzejewski, Fernando |
| Abstract: | The money-demand of the economy is characterised, when national output is random and investors cannot attract any level of debt at any moment without incurring in additional costs. The optimal cash balance is then expressed as the probability-quantile (or Value-at-Risk) of the series of capital returns on income, and in this way, it is explicitly determined by risk. As a consequence, the interest-rate-elasticity depends on the kind of risks and expectations, in such a way that the more unstable the economy, the greater the interest-rate-elasticity of the money-demand. Therefore, the effectiveness of monetary policy is increased by diminishing the variability of output. Moreover, since flows of capital can affect the riskiness of financial securities by modifying the amounts involved in transactions, part of the adjustment to reestablish the short-run monetary equilibrium can be performed through volatility shocks. Finally, for different parametrisations of risks, aggregated parameters are expressed as the weighted average of sectorial estimations, so that multiple equilibria of the economy are allowed. |
| Keywords: | Money demand; Monetary policy; Economic capital; Distorted risk principle; Value-at-Risk. |
| JEL: | G11 E52 E44 E41 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6688&r=cba |
| By: | Michal Horvath |
| Abstract: | We analyze the characteristics of optimal dynamics in an economy in which neither prices nor wages adjust instantaneously and lump-sum taxes are unavailable as a source of government finance. We then propose that monetar and fiscal policy should be coordinated to satisfy a pair of simple specific targeting rules, a rule for (wage) inflation and a relationship that links the growth of real wages to past price and wage developments, and output gap dynamics. We show that such simple rule-based conduct of policy can do remarkably well in replicating the dynamics of the economy under optimal policy following a given shock. |
| Keywords: | Optimal Monetary and Fiscal Policy, Timeless Perspective, Nominal Rigidity, Simple Targeting Rules. |
| JEL: | E52 E61 E63 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0801&r=cba |
| By: | Stéphane Auray (GREMARS - University of Lille 3); Aurélien Eyquem (CREM – CNRS - University of Rennes 1) |
| Abstract: | In this paper, we measure the welfare costs/gains associated with financial market incompleteness in a monetary union. To do this, we build on a two-country model of a monetary union with sticky prices subject to asymmetric productivity shocks. For most plausible values of price stickiness, we show that asymmetric shocks under incomplete financial markets give rise to a lower volatility of national infation rates, which proves welfare improving with respect to the situation of complete financial markets. The corresponding welfare gains are equivalent to an average increase of 1.8% of permanent consumption. |
| Keywords: | monetary union, asymmetric shocks, price stickiness, financial market incompleteness, welfare |
| JEL: | E51 E58 F36 F4 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:200802&r=cba |
| By: | Raffaele Rossi |
| Abstract: | This paper analyzes a New Keynesian model with Rule-of-Thumb consumers (ROTC) as in Galí et al.(2007) and a fiscal policy which levies a proportional income tax. We nd that, when the share of ROTC is above a specified threshold and di¤erently from the usual Leeper (1991) result, the determinacy condition requires for both monetary and fiscal policy to be either active of passive. Furthermore we show that the introduction of a set of ROTC can reverse the traditional predictions of a change in government spending on the economy as a whole: under a reasonable parametrization of the model, an increase in government spending can lead, against the common Keynesian wisdom, to a decrease in total output. Finally we point out that with the introduction of a distortive fiscal policy and independently of the parametrization used, private consumption responds negatively to a positive government spending shock. |
| Keywords: | Rule-of-thumb-consumers, monetary-fiscal policy interactions, distortive taxation, public spend- ing, private consumption. |
| JEL: | E32 E62 H30 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2007_44&r=cba |
| By: | Yolanda Santana-Jiménez (Universidad de Las Palmas de Gran Canaria); Jorge V. Pérez-Rodríguez (Universidad de Las Palmas de Gran Canaria) |
| Abstract: | This paper studies the exchange rate risk of Euro, Pound and Yen against US Dollar before and after the EMU. The key question is to analyse the impact of the Euro to exchange rate risks. The risk is measured by estimating risk price coefficient (RPC) from an excess return equation. A conditional heteroskedastic variance model with time-varying mean is estimated for this purpose. Recursive estimates are used to examine the evolution of the parameters and to find out time-varying risk premia. Results show that after a period of adaptation following the introduction of the Euro, the Euro/US Dollar RPC decreased. |
| Keywords: | Exchange rate risk, GARCH-M, risk-price, times series, recursive estimation |
| JEL: | G15 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:0706&r=cba |
| By: | Marta Gómez-Puig (Universitat de Barcelona) |
| Abstract: | Yield spreads over 10-year German government securities of the EU-15 countries converged dramatically in the seven years after the beginning of Monetary Integration. In this paper, we investigate the relative influence of systemic and idiosyncratic risk factors on their behaviour. Our conclusions suggest that in EMU-countries the relative importance of domestic risk factors (both credit and liquidity risk factors) is higher than that of international factors, which appear to play a secondary but significant role in non-EMU countries. |
| Keywords: | Monetary integration, sovereign securities markets, systemic and idiosyncratic risk |
| JEL: | E44 F36 G15 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:0703&r=cba |
| By: | John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA) |
| Abstract: | Falling exchange rates reduce the purchasing power of the dollar, increasing import prices. Higher import prices have two effects. (1) A substitution effect that shifts demand from imported to domestically produced goods. (2) An income effect that reduces the total amount of real income available for spending on domestic goods and foreign goods. Based on U.S. 1960 - 2000 data, this paper estimates an econometric model that finds that the income effects of falling exchange rates overwhelms the substitution effects, causing a net negative influence on the GDP and income. Results indicate demand for both imported and domestic consumer and investment goods is adversely affected because the income effect is so dominant.. For investment goods, there was virtually no substitution effect out of imported goods when import prices rose due to a falling exchange rate. Declining real income also caused decreased demand for domestically produced investment goods. For consumer goods, the substitution effect stimulated domestic demand, but was more than offset by the negative effect of declining income. The decrease in demand for domestic goods and services was 3.6 times as large as the decrease in demand for imports. Therefore, the trade deficit fell far less in dollars than the GDP. The study estimates that, other things equal, the trade deficit would fall from 4.3% to 2.1% of the GDP as a result of a large twenty percent weakening of the dollar, such as occurred 2000-07. Had the exchange rate not fallen during this period, we estimate the average annual growth rate of the U.S. economy would have been 3.7%, not the 2.7% it has actually averaged, assuming sufficient capital and labor availability to do so. Finally, we find that a falling trade deficit induced by falling exchange rates, reduces the size of the annual transfer of U.S. assets to foreigners needed to finance the deficit, but does not result in a faster rate of net growth for U.S. assets, because declining income also reduces domestic savings by a comparable amount. |
| JEL: | E00 F40 F43 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rpi:rpiwpe:0801&r=cba |
| By: | Jean-Pierre DANTHINE; André KURMANN |
| Abstract: | We develop a reciprocity-based model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wage policy, rent-sharing (between workers and firms) and a measure of wage entitlement are critical to fit the dynamic responses of hours, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers' outside option), on the other hand, are found to play only a negligible role in wage setting. These results are broadly consistent with micro-studies on reciprocity in labor relations but contrast with traditional efficiency wage models which emphasize aggregate labor market variables as the main determinant of wage setting. Overall, the empirical fit of the estimated model is at least as good as the fit of models postulating nominal wage contracts. In particular, the reciprocity model is more successful in generating the sharp and significant fall of inflation and nominal wage growth in response to a neutral technology shock. |
| Keywords: | efficiency wages; reciprocity; estimated DSGE models |
| JEL: | E24 E31 E32 E52 J50 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:07.12&r=cba |
| By: | Szilárd Erhart (Central Bank of Hungary); Jose Luis Vasquez-Paz (Banco Central de Reserva del Perú) |
| Abstract: | Theoretical and empirical studies of different sciences suggest that an optimal committee consists of roughly 5-9 members, although it can swell mildly under specific circumstances. This paper develops a conceptual model in order to analyze the issue in case of monetary policy formulation. The number of monetary policy committee (MPC) size varies according to the size of the monetary zone and overall economic stability. Our conceptual model is backed up with econometric evidence using a 2006 survey of 85 countries. The survey is available for further research and published on the web. The MPC size of large monetary zones (EMU, USA, Japan) is close to the estimated optimal level, but there exist several smaller countries with too many or too few MPC members. |
| Keywords: | Monetary policy. |
| JEL: | E50 E58 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2008-001&r=cba |
| By: | José García-Solanes (Universidad de Murcia); Jesús Rodríguez (Universidad Pablo de Olavide); José L. Torres (Universidad de Málaga) |
| Abstract: | This paper studies the current account dynamics in the G-7 countries plus Spain. We estimate a SVAR model which allows us to identify three different shocks: supply shocks, real demand shocks and nominal shocks. We use a different identification procedure from previous work based on a microfounded stochastic open-economy model in which the real exchange rate is a determinant of the Phillips curve. Estimates from a structural VAR show that real demand shocks explain most of the variability of current account imbalances, whereas, contrary to previous findings, nominal shocks play no role. The results we obtain are consistent with the predictions of a widely set of open-economy models and illustrate that demand policies are the main responsible of trade imbalances. |
| Keywords: | Current account, SVAR |
| JEL: | F3 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:0704&r=cba |
| By: | Laura Povoledo (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a “New Open Economy” model having prices sticky in the producer’s currency can reproduce the observed fluctuations qualitatively. The answer is positive: the model-implied standard deviations are consistent with the pattern in the data. In particular, tradeable output is more volatile than nontradeable output. A key role in generating this result is played by the greater responsiveness of tradeable output to monetary shocks. Parameter estimates are obtained by Generalised Method of Moments. |
| Keywords: | New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles |
| JEL: | F41 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:em-dp2007-47&r=cba |
| By: | Simón Sosvilla-Rivero (FEDEA and Universidad Complutense de Madrid); Francisco Pérez-Bermejo (KPMG-Spain) |
| Abstract: | This paper analyses the functioning of the European Exchange Rate Mechanism (ERM). To that end, we apply duration models to estimate an augmented target-zone model, explicitly incorporating political and institutional factors into the explanation of European exchange rate policies. The estimations are based on quarterly data of eight currencies participating in the ERM, covering the complete history of the European Monetary System. Our results suggest that both economic and political factors are important determinants of the ERM currency policies. Concerning economic factors, the money supply, the real exchange rate, the interest in Germany and the central parity deviation would have negatively affected the duration of a given central parity, while credibility and the price level in Germany would have positively influenced such duration. Regarding political variables, elections, central bank independence and left-wing administrations would have increased the probability of maintaining the current regime, while unstable governments would have been associated with more frequent regime changes. Moreover, we show how the political augmented model outperforms, both in terms of explanatory power and goodness of fit, the model which just incorporates pure economic determinants. |
| Keywords: | Duration analysis, political variables, exchange rates, European Monetary System |
| JEL: | C41 D72 F31 F33 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:0705&r=cba |
| By: | Peter Claeys (Grup d'Anàlisis Quantitativa Regional(AQR) i Institut de Recerca en Economia Aplicada (IREA), Departament d'Econometria, Estadística i Economia Espanyola. Facultat de Ciències Econòmiques i Empresarials de la Universitat de Barcelona.); Raúl Ramos (Grup d'Anàlisis Quantitativa Regional(AQR) i Institut de Recerca en Economia Aplicada (IREA), Departament d'Econometria, Estadística i Economia Espanyola. Facultat de Ciències Econòmiques i Empresarials de la Universitat de Barcelona.); Jordi Suriñach (Grup d'Anàlisis Quantitativa Regional(AQR) i Institut de Recerca en Economia Aplicada (IREA), Departament d'Econometria, Estadística i Economia Espanyola. Facultat de Ciències Econòmiques i Empresarials de la Universitat de Barcelona.) |
| Abstract: | This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both the federal and regional government. Results for the German Länder show that lower tier governments bear a relatively smaller part of the burden of debt consolidation, if they consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast, both the US federal and state levels contribute to consolidation of public finances. |
| Keywords: | Fiscal policy, fiscal rules, EMU, SGP, fiscal federalism. |
| JEL: | E61 E62 H11 H72 H77 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:xrp:wpaper:xreap2007-14&r=cba |
| By: | Francesco FURLANETTO |
| Abstract: | In this paper we study the impact of a government spending shock on aggregate consumption, building on the GLV (Gali, Lopez-Salido and Valles (2007)) model. We show that the GLV model implies a counterfactual increase in the real wage, the interest rate and the in.ation rate. The introduction of sticky wages solves these problems and preserves the main result of the model, i.e. the positive response of consumption. Moreover, once we relax the common wage assumption, sticky wages are even essential to reproduce the positive response of consumption. |
| Keywords: | sticky wages; rule-of-thumb consumers; fiscal shocks; firm-specific capital |
| JEL: | E32 E62 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:07.11&r=cba |
| By: | J.E. Boscá (University of Valencia, Spain); A. Díaz (Ministry of Economics and Finance, Spain); R. Doménech (Economic Bureau of the Prime Minister, Spain. University of Valencia, Spain); J. Ferri (University of Valencia, Spain); E. Pérez (Ministry of Economics and Finance, Spain); L. Puch (FEDEA, Universidad Complutense and ICAE, Spain) |
| Abstract: | This paper describes a Rational Expectations Model of the Spanish economy, REMS, which is in the tradition of small open economy dynamic general equilibrium models, with a strongly microfounded system of equations. The model is built on standard elements, but incorporates some distinctive features to provide an accurate description of the Spanish economy. We contribute to the existing models of the Spanish economy by adding search and matching rigidities to a small open economy framework. Our model also incorporates habits in consumption and rule-of-thumb households. As Spain is a member of EMU, we model the interaction between a small open economy and monetary policy in a monetary union. The model is primarily constructed to serve as a simulation tool at the Spanish Ministry of Economic Affairs and Finance. As such, it provides a great deal of information regarding the transmission of policy shocks to economic outcomes. The paper describes the structure of the model in detail, as well as the estimation and calibration technique and some examples of simulations. |
| Keywords: | general equilibrium, rigidities, policy simulations |
| JEL: | E24 E32 E62 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:0706&r=cba |
| By: | Renzo Rossini (Central Reserve Bank of Peru); Marco Vega (Central Reserve Bank of Peru) |
| Abstract: | This paper analyzes the changes in the monetary policy transmission mechanism in Peru. A strong conclusion that emerges from this research is that both, the direct interest rate channel and the expectations channel have become more important in the recent years, especially after the Inflation Targeting adoption. The research further explores the implications of financial dollarization for the practice of monetary policy by performing two exercises. First, it compares different degrees of exchange rate flexibility and finds out that the more flexible the exchange rate is, the quicker but weaker the exchange rate pass-through becomes. Second, since financial dollarization may trigger contractionary depreciations, the document studies implications for monetary policy. The conclusion is that the effectiveness of monetary policy can be further improved if the economy becomes less dollarized. |
| Keywords: | Transmission Channels, Financial dollarization, Monetary Policy, Emerging Markets. |
| JEL: | E52 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2007-017&r=cba |