|
on Central Banking |
| By: | Andrea Ferrero; Mark Gertler; Lars E.O. Svensson |
| Abstract: | We explore the implications of current account adjustment for monetary policy within a simple two-country DSGE model. Our framework nests Obstfeld and Rogoff's (2005) static model of exchange rate responsiveness to current account reversals. It extends this approach by endogenizing the dynamic adjustment path and by incorporating production and nominal price rigidities in order to study the role of monetary policy. We consider two different adjustment scenarios. The first is a "slow burn" where the adjustment of the current account deficit of the home country is smooth and slow. The second is a "fast burn" where, owing to a sudden shift in expectations of relative growth rates, there is a rapid reversal of the home country's current account. We examine several different monetary policy regimes under each of these scenarios. Our principal finding is that the behavior of the domestic variables (for instance, output, inflation) is quite sensitive to the monetary regime, while the behavior of the international variables (for instance, the current account and the real exchange rate) is less so. Among different policy rules, domestic inflation targeting achieves the best stabilization outcome of aggregate variables. This result is robust to the presence of imperfect pass-through on import prices, although in this case stabilization of consumer price inflation performs similarly well. |
| JEL: | E0 F0 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13906&r=cba |
| By: | Alan S. Blinder; Michael Ehrmann; Marcel Fratzscher; Jakob De Haan; David-Jan Jansen |
| Abstract: | Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication -- mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy. |
| JEL: | E52 E58 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13932&r=cba |
| By: | Menzie D. Chinn; Jeffrey A. Frankel |
| Abstract: | The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2015. |
| JEL: | E42 F0 F02 F31 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13909&r=cba |
| By: | John D Hey; Gianna Lotito; Anna Maffioletti |
| Abstract: | In this paper we examine the performance of theories of decision making under uncertainty/ambiguity from the perspective of their descriptive and predictive power, taking into account the relative parsimony of the various theories. To this end, we employ an innovative experimental design which enables us to reproduce ambiguity in the laboratory in a transparent and non-probabilistic way. We find that judging theories on the basis of their theoretical appeal, or on their ability to do well in testing contexts, is not the same as judging them on the basis of their explanatory and predictive power. We also find that the more elegant theoretical models do not perform as well as simple rules of thumb. |
| Keywords: | Ambiguity, Bingo Blower, Choquet Expected Utility, Decision Field Theory, Decision Making, Expected Utility, Hurwicz Criterion, (Gilboa and Schmeidler) MaxMin EU, (Gilboa and Schmeidler) MaxMax EU, (Ghirardato) Alpha-Model, MaxMin, MaxMax, Minimum Regret, Prospect Theory, Uncertainty. |
| JEL: | D81 C91 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:08/04&r=cba |
| By: | S. Boragan Aruoba (Department of Economics, University of Maryland); Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER); Chiara Scotti (Federal Reserve Board, Division of International Finance) |
| Abstract: | We construct a framework for measuring economic activity at high frequency, potentially in real time. We use a variety of stock and flow data observed at mixed frequencies (including very high frequencies), and we use a dynamic factor model that permits exact filtering. We illustrate the framework in a prototype empirical example and a simulation study calibrated to the example. |
| Keywords: | Business cycle, Expansion, Recession, State space model, Macroeconomic forecasting, Dynamic factor model, Contraction, Turning point |
| JEL: | E32 E37 C01 C22 |
| Date: | 2007–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:08-011&r=cba |
| By: | Aleksander Berentsen; Guido Menzio; Randall Wright |
| Abstract: | We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting a strong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit microfoundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior. The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment -- by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century. |
| JEL: | E24 E52 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13924&r=cba |
| By: | William R White |
| Abstract: | The remarkable stability of low domestic inflation in many countries requires explanation. In this paper, a number of competing hypotheses are evaluated on a stand-alone basis, and all are found to be inadequate. This includes the view that this outcome has been solely the result of more effective disinflationary monetary policies. However, a combination of these hypotheses (including a significant role for increased global competition) seems to provide a plausible explanation, not only for continuing low inflation, but also its coexistence with rapid growth and low real interest rates. Unfortunately, the analysis also leads to the conclusion that rising inflation, unwinding financial imbalances, or both, could easily follow the welcome stability seen to date. |
| Keywords: | inflation, monetary policy, globalisation, Phillips curve |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:250&r=cba |
| By: | Michael Krause; David Lopez-Salido; Thomas Lubik |
| Abstract: | The New Keynesian Phillips curve explains inflation dynamics as being driven by current and expected future real marginal costs. In competitive labor markets, the labor share can serve as a proxy for the latter. In this paper, we study the role of real marginal cost components implied by search frictions in the labor market. We construct a measure of real marginal costs by using newly available labor market data on worker finding rates. Over the business cycle, the measure is highly correlated with the labor share. Estimates of the Phillips curve using GMM reveal that the marginal cost measure remains significant, and that inflation dynamics are mainly driven by the forward-looking component. Bayesian estimation of the full New Keynesian model with search frictions helps us disentangle which shocks are driving the economy to generate the observed unit labor cost dynamics. We find that mark-up shocks are the dominant force in labor market fluctuations. |
| JEL: | E24 E32 J64 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-06&r=cba |
| By: | Wolfgang Lechthaler; Christian Merkl; Dennis Snower |
| Abstract: | It is common knowledge that the standard New Keynesian model is not able to generate a persistent response in output to temporary monetary shocks. We show that this shortcoming can be remedied in a simple and intuitively appealing way through the introduction of labor turnover costs (such as hiring and firing costs). Assuming that it is costly to hire and fire workers implies that the employment rate is slow to converge to its steady state value after a monetary shock. Under reasonable calibrations, the after-effects of a shock continue to exert an effect on the labor market even long after the shock is over. The sluggishness of the labor market translates to the product market and thus the output effects of the monetary shock become more persistent. Our model is able to generate a hump-shaped response in output, if the monetary shock includes a moderate autoregressive component. This is another empirically well known feature, which the standard model is not able to replicate. |
| Keywords: | Monetary Persistence, Labor Market, Hiring and Firing Costs |
| JEL: | O4 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1409&r=cba |
| By: | Hans Gersbach (CER-ETH Center of Economic Research at ETH Zurich, Switzerland); Volker Hahn (CER-ETH Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | In this paper we assess whether forward guidance for monetary policy regarding the future path of interest rates is desirable. We distinguish between two cases where forward guidance for monetary policy may be helpful. First, forward guidance may reveal private information of the central bank. We argue that vague, non-binding statements may be desirable. Second, forward guidance may be used as a commitment device. In this case, policy forecasts may be desirable in a classic inflation-bias framework but not in a New Keynesian framework. |
| Keywords: | central banks, transparency, commitment, Federal Reserve, policy inclinations, signaling |
| JEL: | E58 D70 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:08-84&r=cba |
| By: | Berriel, Tiago; Sinigaglia, Daniel |
| Abstract: | This paper characterizes optimal fiscal and monetary policy in a new-keynesian model with sectorial heterogeneity in price stickiness. In particular, we (i) derive a purely quadratic welfare-based loss function from an approximation of the consumer's utility function and (ii) provide the optimal target rule for fiscal and monetary policy. Differently from the homogeneous case, the loss function includes sectorial inflation variances instead of aggregate inflation variance, with weights on the variance of sectorial inflation proportional to the degree of price stickiness. The optimal policy response to a sector-specific cost-push shock leads to movement in output gap, inflation and taxation in all sectors. Optimal taxes are more responsive to shocks in sectors with stickier prices. |
| Keywords: | optimal taxation; optimal monetary policy, heterogeneity in price-stickiness; |
| JEL: | E52 E63 |
| Date: | 2008–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8040&r=cba |
| By: | Joseph P. Daniels (Center for Global and Economic Studies, Marquette University); David D. VanHoose (Hanmaker School of Business, Baylor University) |
| Abstract: | Considerable recent work has reached mixed conclusions about whether and how globalization affects the inflation-output trade-off and realized inflation rates. In this paper, we utilize cross-country data to provide evidence of interacting effects between a greater extent of exchange-rate pass through and openness to international trade as factors that we find both contribute to lower inflation. The interplay between the inflation effects of pass through and openness suggest that both factors may influence the terms of the output-inflation trade-off. We develop a simple theoretical model showing how both pass through and openness can interact to influence the sacrifice ratio, and we empirically explore the nature of the interplay between the two variables as factors influencing the sacrifice ratio. Our results indicate that a greater extent of pass through depresses the sacrifice ratio and that once the extent of pass through is taken into account alongside other factors that affect the sacrifice ratio, the degree of openness to international trade exerts an empirically ambiguous effect on the sacrifice ratio. |
| Keywords: | Pass Through, Openness, Sacrifice Ratio |
| JEL: | F40 F41 F43 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mrq:wpaper:0805&r=cba |
| By: | Katrin Assenmacher-Wesche; Stefan Gerlach |
| Abstract: | This paper studies the responses of residential property and equity prices, inflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006. We estimate VARs for individual economies and panel VARs in which we distinguish between groups of countries on the basis of the characteristics of their financial systems. The results suggest that using monetary policy to offset asset price movements in order to guard against financial instability may have large effects on economic activity. Furthermore, while financial structure influences the impact of policy on asset prices, its importance appears limited. |
| Keywords: | Asset prices, monetary policy, panel VAR |
| JEL: | C23 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:361&r=cba |
| By: | Viktoria Hnatkovska; Amartya Lahiri; Carlos A. Vegh |
| Abstract: | What is the relationship between interest rates and the exchange rate? The empirical literature in this area has been inconclusive. We use an optimizing model of a small open economy to rationalize the mixed empirical findings. The model has three key margins. First, higher domestic interest rates raise the demand for deposits, and, hence, the money base. Second, firms need bank loans to finance the wage bill, which reduces output when domestic interest rates increase. Lastly, higher interest rates raise the government’s fiscal burden, and, therefore, can lead to higher expected inflation. While the first effect tends to appreciate the currency, the remaining two effects tend to depreciate it. We then conduct policy experiments using a calibrated version of the model and show the central result of the paper: the relationship between interest rates and the exchange rate is non-monotonic. In particular, the exchange rate response depends on the size of the interest rate increase and on the initial level of the interest rate. Moreover, we also show that the model can replicate the heterogeneous responses of the exchange rate to interest rate innovations in several developing economies. |
| JEL: | E52 F41 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13925&r=cba |
| By: | J. Isaac Miller (Department of Economics, University of Missouri-Columbia) |
| Abstract: | Standard target zone exchange rate models are based on a nonlinear function of an unobserved economic fundamental, which is defined as the log of the domestic money stock plus exogenous velocity shocks that are generally assumed to follow a random walk. A critical and widespread assumption in the literature is that this fundamental is bounded, similarly to the target zone exchange rates themselves. We use seven techniques to estimate the unobserved fundamentals driving a wide variety of exchange rates that have traded under target zone regimes at different times over the past two decades. Two of these techniques involve a nonlinear filter that is not well-known to econometricians, but which has clear advantages over more well-known filters. We then test the estimated fundamentals for unboundedness, using non-standard unit root tests that have recently been shown to have good power against bounded, nonlinear alternatives. Finally, we use maximum deviations of the estimated fundamentals to show that de facto empirical bands on these estimates generate implausible elasticities. Our empirical results cast serious doubt on the theoretical assumption that such fundamentals are bounded. |
| Keywords: | target zone exchange rates, economic fundamental, Kalman filter, unscented Kalman filter, rescaled range statistic |
| JEL: | C13 C32 |
| Date: | 2008–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:0803&r=cba |
| By: | Kristin J. Forbes |
| Abstract: | Why are foreigners willing to invest almost $2 trillion per year in the United States? The answer affects if the existing pattern of global imbalances can persist and if the United States can continue to finance its current account deficit without a major change in asset prices and returns. This paper tests various hypotheses and finds that standard portfolio allocation models and diversification motives are poor predictors of foreign holdings of U.S. liabilities. Instead, foreigners hold greater shares of their investment portfolios in the United States if they have less developed financial markets. The magnitude of this effect decreases with income per capita. Countries with fewer capital controls and greater trade with the United States also invest more in U.S. equity and bond markets, and foreign investors "chase returns" in their purchases of U.S. equities (although not bonds). The empirical results showing a primary role of financial market development in driving foreign purchases of U.S. portfolio liabilities supports recent theoretical work on global imbalances. |
| JEL: | F2 F3 F4 G1 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13908&r=cba |
| By: | Monzur Hossain (American Internationla University-Bangladesh(AIUB)) |
| Abstract: | This paper reviews the empirical literature on the choice of exchange rate regime. Prominent issues include: (i) the choice based on fundamentals, shocks, financial structure, and political ideology; (ii) the “bipolar view†or “hollowing out hypothesis†and its validity; (iii) regime choice in emerging economies, and (iv) the discrepancy between declared and actual regime, and its consequence on the analysis of currency regime choice. Although much has been learned in each approach, this survey highlights the areas of research in which our understanding of exchange rate regime transition is still incomplete. Observed data rejects the validity of the bipolar view. Moreover, it is seen that a substantial amount of countries diverge from their de jure regime without declaration, which needs to be taken into account for drawing a valid conclusion on the choice of a regime. From the survey it may be concluded that no empirical regularities regarding the choice of a currency regime have emerged yet. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:aiu:abewps:45&r=cba |
| By: | Jón Steinsson |
| Abstract: | Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies. This fact can help explain why existing sticky-price business cycle models have been unable to match the persistence of the real exchange rate. The recent literature has focused on models driven by monetary shocks. These models yield monotonic impulse responses for the real exchange rate. It is extremely difficult for models that have this feature to match the empirical persistence of the real exchange rate. I show that in response to a number of different real shocks a two-country sticky-price business cycle model yields hump-shaped dynamics for the real exchange rate. The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate. |
| JEL: | F31 F41 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13910&r=cba |
| By: | Kalle Kukk (Department of Economics, Tallinn University of Technology) |
| Abstract: | There are two important aspects to take into account while analysing fiscal policy effects on economic growth. First, it should be made clear whether Keynesian short-run or classical long-run effects are the object of interest. Second, the relations between different fiscal and macroeconomic variables should be identified – all possible simultaneous changes in other fiscal and macroeconomic indicators should be taken account of while analysing the effect of any fiscal policy decision on economic growth. As demonstrated in this article, Keynesian principles do not seem to hold as fiscal policy cannot have any remarkable impact on economy in a short run. But it is confirmed that in the long run, expansionary fiscal policies are not beneficial to the economy generally. For a government it is essential to recognise that changes in different revenue and expenditure categories may have the same impact on budget balance and on total government revenue and expenditure but they have different effects on economic growth in the long run. For example, fiscal policy decisions have different effects depending on whether to save increased revenue, to spend it for current expenditure or to use it for public investment. |
| Keywords: | fiscal policy, economic growth, budget deficit, government revenue, government expenditure, taxes |
| JEL: | H1 H2 H5 H6 E1 O4 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ttu:wpaper:167&r=cba |
| By: | Joshua Aizenman; Yothin Jinjarak |
| Abstract: | This paper studies the association between the current account and real estate valuation across countries, subject to data availability [43 countries, of which 25 are OECD], during 1990-2005. We find robust and strong positive association between current account deficits and the appreciation of the real estate prices/(GDP deflator). Controlling for lagged GDP/capita growth, inflation, financial depth, institution, urban population growth and the real interest rate; a one standard deviation increase of the lagged current account deficits is associated with a real appreciation of the real estate prices by 10%. This real appreciation is magnified by financial depth, and mitigated by the quality of institutions. Intriguingly, the economic importance of current account variations in accounting for the real estate valuation exceeds that of the other variables, including the real interest rate and inflation. Among the OECD countries, we find evidence of a decline overtime in the cross country variation of the real estate/(GDP deflator), consistent with the growing globalization of national real estate markets. Weaker patterns apply to the non-OECD countries in the aftermath of the East Asian crisis. |
| JEL: | F15 F21 F32 R21 R31 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13921&r=cba |
| By: | Richard McKenzie; David Brackfield |
| Abstract: | This paper outlines in detail the methodology and statistical processes used for compiling the outputs of the OECD System of Unit Labour Cost and Related Indicators. This new System has been developed by the OECD in response to concerns from the international community of economic analysts on the limited availability of internationally comparable data concerning labour costs, particularly in activities outside of Manufacturing and on a sub-annual basis. The outputs of this System, which are updated at the end of each quarter, consist of long time series of annual and quarterly unit labour cost and related indicators compiled using a specific methodology to maximise comparability across countries. The related indicators include annual time series for: labour productivity; labour compensation per unit labour input (including PPP adjusted); exchange rate adjusted unit labour costs and; labour income share ratios. Data are available for all OECD Member countries and the Euro area for a wide range of economic activities including Total Economy, Manufacturing & Industry, Market Services and the Business Sector. The release of this new product represents the outcome of four years of development work by the OECD that has benefited from contributions by academia and national consultants, and involved extensive consultation with national statistics offices, national central banks, and the OECD Economics Department. <BR>Cet article décrit de façon détaillée la méthodologie et les procédés statistiques utilisés dans le calcul des résultats du Système OCDE des coûts unitaires de la main d'euvre et d?indicateurs associés. L'OCDE a développé ce nouveau système en réponse aux préoccupations de la communauté internationale des analystes économiques sur la disponibilité limitée de coûts de la main d'oeuvre comparables à l'échelle internationale, notamment sur une base infra-annuelle et pour des activités autres que manufacturières. Les résultats de ce système, mis à jour à la fin de chaque trimestre, sont des séries chronologiques longues de coûts unitaires de la main d'oeuvre trimestriels et annuels et d'indicateurs associés. Ces séries sont calculées selon une méthodologie spécifique maximisant la comparabilité entre les pays. Les indicateurs associés incluent des séries chronologiques annuelles pour : la productivité du travail ; la rémunération du travail par unité de main d'oeuvre (y compris un ajustement par les PPA) ; les coûts unitaires de la main d'oeuvre ajustés des taux de change et la part des revenus du travail dans la valeur ajoutée (ratios). Les donnée sont disponibles pour tous les pays membres de l'OCDE et la Zone euro pour un large éventail d'activités économiques : Économie totale, activités de fabrication et industrie, services marchands et secteur marchand. La publication de ce nouveau produit représente le fruit de quatre années de développement par l'OCDE, qui a bénéficié des contributions de consultants académiques et nationaux, et a impliqué une large consultation avec les instituts statistiques nationaux, les banques centrales nationales et le département des affaires économiques de l'OCDE. |
| Date: | 2008–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:oec:stdaaa:2008/4-en&r=cba |
| By: | Brady, Michael P. (U.S. Department of Agriculture); Wu, Steven Y. (Ohio State University) |
| Abstract: | We use a laboratory gift-exchange game to examine decisions made by groups under three different procedures that dictate how group members interact and reach decisions in comparison to individuals acting alone. We find that group decisions do deviate from those of individuals, but the direction and magnitude of gift exchange depend critically on the procedure. This suggests that no general statements can be made concerning the propensity of groups to exhibit reciprocal or other-regarding behavior relative to individuals. The rules governing how group members can express their preferences and expectations to other group members are critical for determining group outcomes. |
| Keywords: | group behavior, teams, decision making, social preferences |
| JEL: | C91 C92 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3429&r=cba |
| By: | Di Bartolomeo Giovanni; Acocella Nicola; Hughes Hallett Andrew |
| Abstract: | The paper studies the relationship between equilibrium existence in LQ games and the classical theory of economic policy, generalizing some recent results. In particular, by focusing on system controllability instead of the controllability by one or some of the players, we find conditions for the existence of the Nash equilibrium that extend those required by the previous literature. The usefulness of our results is described by some examples in the field of international monetary and trade agreements. |
| JEL: | C72 E52 E61 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0040&r=cba |
| By: | Mathias Hoffmann; Iryna Shcherbakova |
| Abstract: | Consumption risk sharing among U.S. federal states increases in booms and decreases in recessions. We find that small firms' access to financial markets plays an important role in explaining this stylized fact: business cycle fluctuations in aggregate risk sharing are more pronounced in states in which small firms account for a large share of output. In addition, better access of small firms to credit markets in the wake of state-level banking deregulation during the 1980s seems to have loosened the dependence of aggregate risk sharing on the business cycle. Not only do our result support that better access to credit markets may have made it easier for the owners of small firms to smooth income in the face of adverse cash-flows shocks to their business. They also suggest an additional welfare benefit from banking deregulation: access to financial markets has become more reliable and is more easily available when households and firms need it most urgently - in economic downturns. A possible implication of these findings is that the welfare costs of a monetary tightening could have been substantially reduced as a result of the financial liberalization at the state level. |
| Keywords: | Interstate risk sharing, regional business cycle, proprietary income, state banking deregulation |
| JEL: | E32 E44 F3 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:363&r=cba |
| By: | Giuseppe Marotta |
| Abstract: | This paper investigates whether size and speed of the pass-through of market rates into short term business lending rates have increased in the wake of the introduction of the euro. Allowing for multiple unknown structural breaks we find two in four EMU countries, and in the UK as well, and a single one in five other countries. The pattern of dates fits national banking systems adjusting slowly to the new monetary regime and suggests caution in associating structural changes to the introduction of the euro. The estimated equilibrium pass-through in the last break-free period is on average more incomplete, hinting at a reduced effectiveness of the single monetary policy. This results runs against the economic intuition that a reduced volatility in money market rates is bound to mitigate uncertainty and to ease therefore the transfer of policy rate changes to retail rates; the run up to Basel 2 and a deterioration of competition in loan markets could be the motivations. Caution in extrapolating to more recent periods these findings is suggested by the differences between the unharmonized and the new harmonized retail rates. |
| Keywords: | Interest rates; Monetary policy; European Monetary Union (EMU); Cointegration analysis; Taylor principle |
| JEL: | E43 E52 E58 F36 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:08031&r=cba |
| By: | Chun Liu; John M Maheu |
| Abstract: | How to measure and model volatility is an important issue in finance. Recent research uses high frequency intraday data to construct ex post measures of daily volatility. This paper uses a Bayesian model averaging approach to forecast realized volatility. Candidate models include autoregressive and heterogeneous autoregressive (HAR) specifications based on the logarithm of realized volatility, realized power variation, realized bipower variation, a jump and an asymmetric term. Applied to equity and exchange rate volatility over several forecast horizons, Bayesian model averaging provides very competitive density forecasts and modest improvements in point forecasts compared to benchmark models. We discuss the reasons for this, including the importance of using realized power variation as a predictor. Bayesian model averaging provides further improvements to density forecasts when we move away from linear models and average over specifications that allow for GARCH effects in the innovations to log-volatility. |
| Keywords: | power variation, bipower variation, Gibbs sampling, model risk |
| JEL: | C11 C22 G12 |
| Date: | 2008–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-313&r=cba |
| By: | Cerqueti, Roy; Costantini, Mauro; Gutierrez, Luciano |
| Abstract: | In this paper we propose a set of new panel tests to detect changes in persistence. The test statistics are used to test the null hypothesis of stationarity against the alternative of a change in persistence from I(0) to I(1), from I(1) to I(0) and in an unknown direction. The limiting distributions of the panel tests are derived, and small sample properties are investigated by Monte Carlo experiments under the hypothesis that the individual series are independently cross-section distributed. These tests have a good size and power properties. Cross-sectional dependence is also considered. A procedure of de-factorizing, proposed by Stock and Watson (2002), is applied. The defactored panel tests have good size and power. The empirical results obtained from applying these tests to a panel covering 21 OECD countries observed between 1970 and 2007 suggest that inflation rate changes from I(1) to I(0) when cross-correlation is considered. |
| Keywords: | Persistence, Stationarity, Panel data |
| JEL: | C12 C23 |
| Date: | 2008–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:mol:ecsdps:esdp08043&r=cba |
| By: | Ansgar Belke; Walter Orth |
| Abstract: | The belief that house prices are driven by specific regional and institutional variables and not at all by monetary conditions is so entrenched with some market participants and some commentators that the search for empirical support would seem to be a trivial task. However, this is not the case. This paper investigates the relationship between global excess liquidity and asset prices on a global scale:How important is global liquidity? How are asset (especially house) prices and other important macro variables like consumer prices affected by global monetary conditions? This paper analyses the international transmission of monetary shocks with a special focus on the effects of a global monetary aggregate ("global liquidity") on consumer prices and different asset prices.We estimate a variety of VAR models for the global economy using aggregated data that represent the major OECD countries. The impulse responses show that a positive shock to global liquidity leads to permanent increases in the global GDP deflator and in the global house price index, while the latter reaction is even more distinctive. Moreover, we find that there are subsequent spillovers to consumer prices. In contrast, we are not able to find empirical evidence in favour of the hypothesis that the MSCIWorld index as a measure of stock prices significantly reacts to changes in global liquidity. |
| Keywords: | Global liquidity, inflation control, international spillovers, asset prices, VAR analysis |
| JEL: | E31 E52 F01 F42 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0037&r=cba |
| By: | Babecký, Jan (Czech National Bank ; CES, University of Paris-1 Sorbonne and CERGE-EI, Charles University); Komárek, Luboš (Czech National Bank ; Prague School of Economics); Komárková, Zlatuše (Czech National Bank) |
| Abstract: | The paper considers the empirical dimension of financial integration among stock markets in four new European Union member states (the Czech Republic, Hungary, Poland and Slovakia) in comparison with the euro area. The main objective is to test for the existence and determine the degree of the four states’ financial integration relative to the euro currency union. The analysis is performed at the country level (using national stock exchange indices) and at the sectoral level (considering banking, chemical, electricity and telecommunication indices). Our empirical evaluation consists of (1) an analysis of alignment (by means of standard and rolling correlation analysis) to outline the overall pattern of integration; (2) the application of the concept of beta convergence (through the use of time series, panel and state-space techniques) to identify the speed of integration; and (3) the application of so-called sigma convergence to measure the degree of integration. We find evidence of stock market integration on both the national and sectoral levels between the Czech Republic, Hungary, Poland and the euro area |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:849&r=cba |
| By: | Heckman, James J. (University of Chicago) |
| Abstract: | This paper presents the econometric approach to causal modeling. It is motivated by policy problems. New causal parameters are defined and identified to address specific policy problems. Economists embrace a scientific approach to causality and model the preferences and choices of agents to infer subjective (agent) evaluations as well as objective outcomes. Anticipated and realized subjective and objective outcomes are distinguished. Models for simultaneous causality are developed. The paper contrasts the Neyman-Rubin model of causality with the econometric approach. |
| Keywords: | anticipated vs. realized outcomes, subjective and objective evaluations, Neyman-Rubin model, Roy model, econometrics, causality, counterfactuals, treatment effects |
| JEL: | B41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3425&r=cba |
| By: | John Bryant (Vocat International) |
| Abstract: | This paper develops further a thermodynamic model of a monetary system, first set out as part of a paper by the author, published in 2007, entitled A Thermodynamic Theory of Economics. The model is backed up by statistical analysis of data of the UK economy 1969-2006. The model sets out relationships between price, output volume, velocity of circulation, money supply and interest rates, and develops an equation to measure the rate of entropy loss from an economic system. |
| Keywords: | Monetary model, thermodynamics, economics, entropy, money, UK economy |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:ten32008&r=cba |
| By: | A. Jesus Sanchez Fuentes (Department of Economics, Universidad Pablo de Olavide); Diego Martinez Lopez (Department of Economics, Universidad Pablo de Olavide) |
| Abstract: | This paper describes a new method for solving non-standard constrained optimization problems for which standard methodologies do not work properly. Our method (the Rational Iterative Multisection -RIM- algorithm) consists of different stages that can be interpreted as different requirements of precision by obtaining the optimal solution. We have performed an application of RIM method to the case of public inputs provision. We prove that the RIM approach and comparable standard methodologies achieve the same results with regular optimization problems while the RIM algorithm takes advantage over them when facing non-standard optimization problems. |
| Keywords: | direct search, constrained optimization, multisection, optimal taxation, public input. |
| JEL: | C6 H21 H3 H41 H43 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:08.07&r=cba |
| By: | Geoffrey Heal |
| Abstract: | What have we learned from the outpouring of literature as a result of the Stern Review of the Economics of Climate Change? A lot. We have explored the model space and the parameter space much more thoroughly, though there are still unexplored regions. While there are aspects of the Stern Review's analysis with which we can disagree, it seems fair to say that it has catalyzed a fundamental rethinking of the economic case for action on climate change. We are now in a position to give some conditions that are sufficient to provide a case for strong action on climate change, but need more work before we have a fully satisfactory account of the relevant economics. In particular we need to understand better how climate change affects natural capital - the natural environment and the ecosystems comprising it - and how these affect human welfare. |
| JEL: | D8 D9 Q01 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13927&r=cba |
| By: | Niall Ferguson; Moritz Schularick |
| Abstract: | This paper asks whether developing countries can reap credibility gains from submitting policy to a strict monetary rule. Following earlier work, we look at the gold standard era (1880-1914) as a "natural experiment" to test whether adoption of a rule-based monetary framework such as the gold standard increased policy credibility. On the basis of the largest possible dataset covering almost sixty independent and colonial borrowers in the London market, we challenge the traditional view that gold standard adherence worked as a credible commitment mechanism that was rewarded by financial markets with lower borrowing costs. We demonstrate that in the poor periphery -- where policy credibility is a particularly acute problem -- the market looked behind "the thin film of gold". Our results point to a dichotomy: whereas country risk premia fell after gold adoption in developed countries, there were no credibility gains in the volatile economic and political environments of developing countries. History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors. |
| JEL: | F2 F33 F36 N10 N20 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13918&r=cba |
| By: | Rafal Kierzenkowski; Patrice Ollivaud; Franck Sédillot; Philippe Briard |
| Abstract: | The supply-side framework and related measures of output and unemployment gaps play a leading role in the OECD analysis of short-term conjunctural conditions and long-term determinants of growth. To allow such diagnoses for Poland, this paper develops a comprehensive supply block in accordance with the OECD approach. The structural unemployment rate is derived from a Phillips-curve equation and, along with working age population, is combined with filter-based estimates of trend labour productivity, participation rates and hours worked per employee to generate measures of potential output. The performance of the model in capturing price pressures underlying the growth trajectory of the Polish economy is assessed, and measures of cyclically-adjusted general government net lending are provided. Based on the OECD autumn 2007 projections for 2008 and 2009, out-of-sample simulations derived from the Phillips-curve model suggest that CPI inflation is likely to continue to trend upward, exceeding the central bank?s inflation target by a wide margin. <P>Estimation du bloc offre pour la Pologne <BR>Le bloc d'offre et les mesures associées d'écarts de production et de taux de chômage jouent un rôle de premier plan dans l'analyse des conditions conjoncturelles à court terme et des déterminants de la croissance à long terme faite par l'OCDE. Afin de permettre de tels diagnostics pour la Pologne, cette étude développe un bloc d'offre détaillé selon l'approche de l'OCDE. Le taux de chômage structurel est déduit à partir d'une équation de type Phillips et, conjointement avec la population en âge de travailler, est combiné à des estimations tendancielles de productivité du travail, de taux de participation et des heures travaillées par employé pour donner lieu à une mesure du niveau de production potentiel. La performance du modèle pour rendre compte des pressions de prix sous-jacentes à la trajectoire de croissance de l'économie polonaise est évaluée, et les mesures du déficit budgétaire ajusté du cycle sont fournies. Sur la base des projections de l'OCDE pour les années 2008 et 2009 réalisées à l'automne 2007, des simulations hors échantillon déduites à partir du modèle de la courbe de Phillips mettent en évidence que, selon toute vraisemblance, l'inflation IPC poursuivra sa tendance haussière, dépassant la cible d'inflation de la banque centrale de façon significative. |
| Keywords: | OECD, transition economies, OCDE, Poland, Pologne, économie en transition, production function, potential output, medium-term projections, macroeconomic modelling, modélisation macroéconomique, fonction de production, production potentielle, projections de moyen terme |
| JEL: | C53 E22 E23 E27 E52 P24 |
| Date: | 2008–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:601-en&r=cba |
| By: | Frait, Jan (Czech National Bank); Komárek, Luboš (Czech National Bank) |
| Abstract: | The paper aims to enrich the debate on the overvaluation/undervaluation of China yuan Renminbi (CNY) against USD and JPY by applying the concept of the Debt-Adjusted Real Exchange Rate (DARER). This approach is offering to monetary policy makers another indicator for more responsive management of this important economic variable. The general motivation for constructing DARER is the fact that long-term current account surplus (deficits) is linked with capital outflows (inflows), which often leads to real undervaluation (overvaluation) of domestic currency. DARER can signal to the authorities that the real exchange rate is becoming unsustainable in the medium term. Based on the DARER approach we also introduce three indicators of exchange rate misalignment. |
| Keywords: | Exchange rate ; current account ; misalignment ; China ; DARER |
| JEL: | E58 F31 F32 F37 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:850&r=cba |
| By: | Koivu, Tuuli (BOFIT) |
| Abstract: | Chinese authorities have traditionally relied mainly on administrative and quantitative measures in conducting monetary policy, with interest rates playing a less prominent role. Additional support for this view resides in a number of earlier studies that have found that the impact of interest rates on the real economy has been miniscule. However, taking into account numerous reforms in the financial sector and more widely in the Chinese economy, interest rates may have gained some influence in the last few years. It is important to study the effectiveness of interest rates also in light of future reforms of the monetary policy tools in China. Whereas administrative policy measures were effective in guiding the behaviour of state-owned enterprises, the authorities may need to increase the use of more market-oriented monetary policy tools as the share of the economy in private and foreign ownership grows. We use a vector error correction model to study, within a credit demand framework, whether the impact of interest rates in China has become stronger over the last decade. Our results suggest that loan demand has indeed become more dependent on interest rates, albeit the channel from interest rate to the real economy is still weak. |
| Keywords: | China; monetary policy |
| JEL: | E52 P24 |
| Date: | 2008–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_001&r=cba |
| By: | Rod Tyers; Iain Bain |
| Abstract: | With exports almost half of its GDP and most of these directed to Europe and North America, negative financial shocks in those regions might be expected to retard China's growth. Yet mitigating factors include the temporary flight of North American and European savings into Chinese investment and some associated real exchange rate realignments. These issues are explored using a dynamic model of the global economy. A rise in American and European financial intermediation costs is shown to retard neither China's GDP nor its import growth in the short run. Should the Chinese government act to prevent the effects of the investment surge, through tighter inward capital controls or increased reserve accumulation, the associated losses would be compensated by a trade advantage since its real exchange rate would appreciate less against North America than those of other trading partners. The results therefore suggest that, so long as the financial shocks are restricted to North America and Western Europe, China's growth and the imports on which its trading partners rely are unlikely to be significantly hindered. |
| JEL: | C68 E17 F21 F17 F43 F47 O5 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2008-491&r=cba |
| By: | Marcio M. Janot; Márcio G. P. Garcia; Walter Novaes |
| Abstract: | "Third-generation currency crises models" argue that capital losses from exchange-rate depreciation propagate the crises to the productive sector. To test these models, we use a firm-level dataset that allows us to measure currency mismatches around the 2002 Brazilian currency crisis. We find that, between 2001 and 2003, firms that shortly before the crisis had large currency mismatches decreased their investment rates by 8.1 percentual points, relatively to other public firms. Moreover, we show that the currency depreciation implied large competitive gains for the exporters, and yet the investment of exporters with large currency mismatches fell by 12.5 percentual points, relatively to other exporters. The estimated falls in investment are economically very relevant, thereby corroborating the relevance of third generation models negative balance sheet effects. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:162&r=cba |
| By: | Sarantis Tsiaplias (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Chew Lian Chua |
| Abstract: | This paper investigates the forecasting performance of the diffusion index approach for the Australian economy, and considers the forecasting performance of the diffusion index approach relative to composite forecasts. Weighted and unweighted factor forecasts are benchmarked against composite forecasts, and forecasts derived from individual forecasting models. The results suggest that diffusion index forecasts tend to improve on the benchmark AR forecasts. We also observe that weighted factors tend to produce better forecasts than their unweighted counterparts. We find, however, that the size of the forecasting improvement is less marked than previous research, with the diffusion index forecasts typically producing mean square errors of a similar magnitude to the VAR and BVAR approaches. JEL Classification: C22; C53; E17 |
| Keywords: | PDiffusion indexes; Forecasting; Australia. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2008n04&r=cba |