|
on Central Banking |
| By: | Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Svensson, Lars E O |
| Abstract: | We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function. |
| Keywords: | Instrument rules; Open-economy DSGE models; Optimal monetary policy; Optimal policy projections |
| JEL: | E52 E58 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6907&r=cba |
| By: | Jean Boivin; Marc P. Giannoni; Benoît Mojon |
| Abstract: | This paper characterizes the transmission mechanism of monetary shocks across countries of the euro area, documents how this mechanism has changed with the introduction of the euro, and explores some potential explanations. The factor-augmented VAR (FAVAR) framework used is sufficiently rich to jointly model the euro area dynamics while permitting the transmission of shocks to be different across countries. We find important heterogeneity across countries in the effect of monetary shocks before the launch of the euro. In particular, we find that German interest-rate shocks triggered stronger responses of interest rates and consumption in some countries such as Italy and Spain than in Germany itself. According to our estimates, the creation of the euro has contributed 1) to a greater homogeneity of the transmission mechanism across countries, and 2) to an overall reduction in the effects of monetary shocks. Using a structural open-economy model, we argue that the combination of a change in the policy reaction function -- mainly toward a more aggressive response to inflation and output -- and the elimination of an exchange-rate risk can explain the evolution of the monetary transmission mechanism observed empirically. |
| JEL: | C3 D2 E31 E4 E5 F4 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14190&r=cba |
| By: | Yuriy Gorodnichenko |
| Abstract: | This paper develops a model where firms make state-dependent decisions on both pricing and acquisition of information. It is shown that when information is not perfect, menu costs combined with the aggregate price level serving as an endogenous public signal generate rigidity in price setting even when there is no real rigidity. Specifically, firms reveal their information to other firms by changing their prices. Because the cost of changing price is borne by a firm but the benefit from better information goes to other firms, firms have an incentive to postpone price changes until more information is revealed by other firms via the price level. The information externality and menu costs reinforce each other in delaying price adjustment. As a result, the response of inflation to nominal shocks is both sluggish and hump-shaped. The model can also qualitatively capture a number of stylized facts about price setting at the micro level and inflation at the macro level. |
| JEL: | D82 D83 E31 E52 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14184&r=cba |
| By: | Menzie D. Chinn; Michael J. Moore |
| Abstract: | We propose an exchange rate model which is a hybrid of the conventional specification with monetary fundamentals and the Evans-Lyons microstructure approach. It argues that the failure of the monetary model is principally due to private preference shocks which render the demand for money unstable. These shocks to liquidity preference are revealed through order flow. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on inter-dealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or "hybrid", model exhibits out of sample forecasting improvement over the basic macroeconomic and random walk specifications. |
| JEL: | D82 F31 F41 F47 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14175&r=cba |
| By: | Tatiana Damjanovic; Charles Nolan |
| Abstract: | What is the seigniorage-maximizing level of inflation? Four models formulae for the seigniorage maximizing inflation rate (SMIR) are compared. Two sticky-price models arrive at very different quantitative recommendations although both predict somewhat lower SMIRs than Cagan’s formula and a variant of a .ex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labour market: The Calvo model implies that inflation and output are negatively related and that output is falling in price stickiness whilst the Rotemberg cost-of-price-adjustment model implies exactly the opposite. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the USA and the UK may be quite close to the SMIR. |
| Keywords: | Price stickiness; Revenue maximizing inflation; Inflation tax; Seigniorage; price dispersion. |
| JEL: | E4 E52 E61 E63 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0807&r=cba |
| By: | Stehn, Sven Jari; Vines, David |
| Abstract: | We analyse optimal discretionary games between a benevolent central bank and a myopic government in a New Keynesian model. First, when lump-sum taxes are available and public debt is absent, we show that a Nash game results in too much government spending and excessively high interest rates, while fiscal leadership reinstates the cooperative outcome under discretion. Second, we show that this familiar result breaks down when lump-sum taxes are unavailable. With government debt, the Nash equilibrium still entails too much public spending but leads to lower interest rates than the cooperative policy, because debt has to be adjusted back to its pre-shock level to ensure time consistency. A setup of fiscal leadership does not avoid this socially costly outcome. Imposing a debt penalty onto the myopic government under either Nash or fiscal leadership raises welfare substantially, while appointing a conservative central bank is less effective. |
| Keywords: | Non-cooperative games; Optimal Fiscal Policy; Optimal Monetary Policy; Policy Myopia; Stabilisation Bias |
| JEL: | E52 E60 E61 E63 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6913&r=cba |
| By: | Hau, Harald; Rey, Hélène |
| Abstract: | The dramatic increase in gross stock of foreign assets and liability has revived interest in the portfolio balance theory of international investment. Evidence on the validity of this theory has always been scarce and inconclusive. The current paper derives testable empirical implications from microeconomic foundations, which we confront with a new comprehensive data set on the stock allocations of approximately 6,500 international equity funds domiciled in four different currency areas. The disaggregated data structure allows us to examine whether foreign exchange and equity risk measures trigger the predicted rebalancing behavior at the fund and stock level. The data provide strong support for portfolio rebalancing behavior aimed at reducing both exchange rate and equity risk exposure. |
| Keywords: | capital flows; home bias; International Finance |
| JEL: | F32 G15 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6901&r=cba |
| By: | Gita Gopinath; Oleg Itskhoki |
| Abstract: | A common finding across empirical studies of price adjustment is that there is large heterogeneity in the frequency of price adjustment. However, there is little evidence of how distant prices are from the desired flexible price. Without this evidence, it is difficult to discern what the frequency measure implies for the transmission of shocks or to understand why some firms adjust more frequently than others. We exploit the open economy environment, which provides a well-identified and sizeable cost shock namely the exchange rate shock to shed light on these questions. First, we empirically document that high frequency adjusters have a long-run pass-through that is at least twice as high as low frequency adjusters in the data. Next, we show theoretically that long-run pass-through is determined by the same primitives that shape the curvature of the profit function and, hence, also affect frequency. In an environment with variable mark-ups or variable marginal costs, theory predicts a positive relation between frequency and pass-through, as documented in the data. Consequently, estimates of long-run pass-through shed light on the determinants of the duration of prices. The standard workhorse model with constant elasticity of demand and Calvo or state dependent pricing generates long-run pass-through that is uncorrelated with frequency, contrary to the data. Lastly, we calibrate a dynamic menu-cost model and show that variable mark-ups chosen to match the variation in pass-through in the data can generate substantial variation in price duration, equivalent to one third of the observed variation in the data. |
| JEL: | E3 E31 F41 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14200&r=cba |
| By: | Anufriev, M. (Universiteit van Amsterdam); Assenza, T. (Universiteit van Amsterdam); Hommes, C.H. (Universiteit van Amsterdam); Massaro, D. (Universiteit van Amsterdam) |
| Abstract: | Recent macroeconomic literature stressed the importance of expectations heterogeneity in the formulation of monetary policy. We use a stylized macro model of Howitt (1992) to investigate the dynamical consequences of alternative interest rate rules when agents have heterogeneous expectations and update their beliefs over time along the lines of Brock and Hommes (1997). We find that the outcome of different monetary policies in terms of stability crucially depends on the ecology of forecasting rules and on the intensity of choice among different predictors. We also show that, when agents have heterogeneous expectations, an interest rate rule that obeys the Taylor principle does not always lead the system to converge to the rational expectations equilibrium but multiple equilibria may persist. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ams:ndfwpp:08-08&r=cba |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. In a real business cycle model, the theoretical framework amplifies and propagates technology shocks. Improved correspondence with data arises from dynamics in beliefs being themselves persistent and because they generate strong intertemporal substitution effects in consumption and leisure. Output volatility is comparable with a rational expectations analysis with a standard deviation of technology shock that is 20 percent smaller, and has substantially more volatility in investment and hours. Persistence in these series is captured, unlike in standard models. Inherited from real business cycle theory, the benchmark model suffers a comovement problem between consumption, hours, output and investment. An augmented model that is consistent with expectations-driven business cycles, in the sense of Beaudry and Portier (2006), resolves these counterfactual predictions. |
| JEL: | D83 D84 E32 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14181&r=cba |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. In a real business cycle model, the theoretical framework amplifies and propagates technology shocks. Improved correspondence with data arises from dynamics in beliefs being themselves persistent and because they generate strong intertemporal substitution effects in consumption and leisure. Output volatility is comparable with a rational expectations analysis with a standard deviation of technology shock that is 20 percent smaller, and has substantially more volatility in investment and hours. Persistence in these series is captured, unlike in standard models. Inherited from real business cycle theory, the benchmark model suffers a comovement problem between consumption, hours, output and investment. An augmented model that is consistent with expectations-driven business cycles, in the sense of Beaudry and Portier (2006), resolves these counterfactual predictions. |
| JEL: | E32 D83 D84 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-20&r=cba |
| By: | Jan Libich; Petr Stehlik |
| Abstract: | The paper analyzes the interactions between monetary and fiscal policies. Its emphasis is on a monetary union; one in which (some of) the governments are excessively ambitious. In contrast to conventional games, our novel game theoretic framework allows for stochastic timing of policy actions. The fact that moves occur with some ex-ante probability distribution (rather than certainty every period) enables us to model various degrees of fiscal rigidity and indiscipline that are heterogeneous across the member countries. We examine a number of specifications in discrete and continuous time, such as the widely-used Calvo (1983) timing, as well as a fully general probability distribution of the timing of policy actions. We derive the necessary and sufficient degree of monetary commitment that eliminates socially inferior (subgame perfect Nash) equilibria. This degree is shown to be increasing in (i) the degree of fiscal rigidity of each member country, (ii) their relative economic size, (iii) the structure of the economy (that determines eg inflation and output variability costs), and (iv) the degree of the central banker's impatience. Interestingly, such a strong monetary commitment - interpretable as a sufficiently explicit numerical inflation target - does not only ensure high credibility of the central bank, but it also indirectly "disciplines" the fiscal policymaker(s). As such, it leads to an improvement in monetary-fiscal policy cooperation and outcomes of both policies. We conclude by calibrating the model with European Monetary Union data. This exercise aims at providing some quantitative predictions regarding the required explicitness of the European Central Bank's commitment to an inflation target. |
| JEL: | E42 E61 C70 C72 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-22&r=cba |
| By: | Eugenio Gaiotti (Bank of Italy, Economic Outlook and Monetary Policy Department) |
| Abstract: | The flattening of the Phillips curve observed in the industrial countries has been attributed to globalisation, while the traditional explanation centres on monetary policy credibility. The empirical literature is not conclusive, since macroeconomic data are affected by substantial identification problems. This paper argues that recourse to micro data is needed to identify structural changes in the slope of the Phillips curve. Taking advantage of a unique dataset including about 2,000 Italian firms, the paper tests whether a change in the link between capacity utilisation and prices is confirmed at company level, after controlling for inflation expectations, and whether it is concentrated among those firms that are more exposed to globalisation on either the product or the labour market. The answer is negative in all cases. The results do not support the view that the flattening of the Phillips curve is due to globalisation. |
| Keywords: | Phillips curve, globalisation, inflation, monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_676_08&r=cba |
| By: | Isabell Koske; Nigel Pain |
| Abstract: | Measures of the gap between actual and potential activity are used frequently as indicators of the economic cycle and play a vital role in the conduct of monetary and fiscal policy. Given that output and unemployment gap estimates are often subject to considerable revision over time, this paper investigates the uncertainty surrounding projections and early outturn estimates of such gaps and evaluates their usefulness for policy making in real time. Current-year projections and initial outturn estimates of the gaps both appear to provide a reasonably good picture of the business cycle over the period studied, but one-year-ahead projections perform rather poorly. Projections made at cyclical turning points are subject to greater revision than those made at other times. Revisions to output gaps appear to stem primarily from revisions to actual rather than potential GDP. Empirical results show that output gaps remain a significant influence on inflation, but their influence is now weaker than in the past, and the usefulness of output gap estimates for real-time inflation projections is limited. Revisions to real-time output gaps also generate revisions to real-time estimates of the fiscal stance, although typically these are relatively moderate. Despite the uncertainty attached to gap estimates, they remain useful for policymakers, helping to situate current economic developments. <P>L’utilité de l’écart de production pour l’analyse de politique macroéconomique <BR>Les estimations de l’écart entre l’activité courante et potentielle sont fréquemment utilisées comme indicateurs du cycle économique et jouent un rôle crucial dans la conduite des politiques monétaire et budgétaire. Étant donné, qu’au fil du temps les estimations des écarts de croissance et de chômage sont souvent révisées, ce papier évalue l’incertitude qui entoure les prévisions ainsi que les premières estimations de ces écarts pour l’année écoulée et analyse leur utilité pour les décisions de politique économique en temps réel. Les prévisions pour l’année en cours et les premières estimations pour l’année écoulée des écarts donnent une image assez représentative du cycle sur la période étudiée tandis que les prévisions à un an sont plutôt médiocres. Les prévisions qui sont faites lors d’un retournement de cycle sont sujettes á de plus fortes révisions que celles réalisées á d’autres périodes. Les révisions des écarts de production viennent d’abord des révisions du PIB courant plutôt que du potentiel. Les résultats empiriques montrent que les écarts de production continuent d’influer sur l’inflation même si leur effet est moindre que par le passé et que ’ utilité des estimations des écarts de production pour les prévisions de l’inflation en cours est limitée. Les révisions des écarts de production courants génèrent aussi des révisions des estimations de la situation fiscale courante, même si ceux-ci sont relativement modérés. Malgré l’incertitude liée aux estimations des écarts de croissance, ces dernières demeurent utiles pour les décideurs politiques dans la mesure où elles les aident à évaluer la situation économique courante. |
| Keywords: | incertitude, Uncertainty, output gap, inflation forecasting, cyclically-adjusted budget balance, prévision d’inflation, solde budgétaire ajusté du cycle, écart de production |
| JEL: | E31 E32 E52 E62 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:621-en&r=cba |
| By: | Di Bartolomeo Giovanni; Acocella Nicola; Patrizio Tirelli |
| Abstract: | In New Keynesian models nominal rigidities determine socially inefficient outcomes. Our paper reverses this view: properly designed monetary policies may take advantage of predetermined nominal wages to discipline monopolistic wage setters. This, in turn, requires accepting a non-zero inflation rate. Discretionary monetary policy is effective when wage setters are non atomistic. Inflation targeting has real effects irrespective of the degree of labor market centralization. |
| Keywords: | Inflation bias, discretionary monetary policy, non-zero inflation targeting, unemployment, strategic wage setter, labor unions |
| JEL: | E52 E58 J51 E24 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0043&r=cba |
| By: | Nikola A Tarashev |
| Abstract: | Confronted with a speculative attack on its currency peg, an authority weighs the short-term benefit of giving in and fine tuning the economy against the long-term benefit of credibility-enhancing resistance. In turn, speculators with heterogeneous beliefs face strategic uncertainty that peaks at the time of the attack, when the fate of the peg is unclear, and then declines, as the economy settles in a stable currency regime. In this environment, a less conservative authority - i.e. one that stabilises less the exchange rate once a peg is abandoned - may be more likely to withstand an attack on the peg. This result, which strengthens as speculators' risk aversion declines, casts doubt on the conventional wisdom that greater conservatism enhances welfare. |
| Keywords: | Global games of regime change, Strategic uncertainty, Coordination, Currency crises |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:254&r=cba |
| By: | Riccardo Cristadoro (Bank of Italy, Economic Research Department); Fabrizio Venditti (Bank of Italy, Economic Research Department); Giuseppe Saporito (Bank of Italy, Cagliari) |
| Abstract: | The ECB objective of price stability is given a quantitative content as a year-on-year growth rate in the euro area HICP close but below 2% over the medium term. While this objective is referred to area-wide price developments, in anticipating monetary policy moves, market analysts pay considerable attention to national data. In this paper we use the Generalized Dynamic Factor Model to derive a set of core inflation indicators that, combining national with area-wide data, allow us to answer two related questions: whether country-specific data are actually relevant to the future path of area-wide inflation once the information contained in area-wide data has been exploited, and whether it is useful, in order to track ECB monetary policy decisions, to factor in national and not only area-wide statistics. In both cases, our findings suggest that, when area-wide information is properly taken into account, there is little to be gained by considering national idiosyncratic developments. |
| Keywords: | Forecast, Dynamic factor model, inflation, monetary policy |
| JEL: | C25 E37 E52 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_677_08&r=cba |
| By: | Zeno Enders (University of Bonn, Bonn Graduate School of Economics); Gernot J. Müller (Goethe University Frankfurt); Almut Scholl (Goethe University Frankfurt) |
| Abstract: | Using vector autoregressions on U.S. time series relative to an aggregate of industrialized countries, this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade. To achieve identi¬fication, we derive robust restrictions on the sign of several impulse responses from a two-country general equilibrium model. We find that both the real exchange rate and the terms of trade – whose responses are left unrestricted – depreciate in response to expansionary govern¬ment spending shocks and appreciate in response to positive technology shocks. |
| Keywords: | Real Exchange Rate, Terms of Trade, International Transmission Mechanism, Government Spending Shocks, Technology Shocks, VAR, Sign Restrictions |
| JEL: | F41 F42 E32 |
| Date: | 2008–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200822&r=cba |
| By: | Niola Amendola (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | According to Engineer and Shi (1998, 2001) and Berentsen and Rocheteau (2003), the double coincidence of wants problem seems to be not essential to rationalize the use of money in a search theoretic framework. This paper analyzes an endogenous price search model of money where there is universal double coincidence of wants. The existence of a monetary equilibrium depends, essentially, on the asymmetry in the role played by economic agents in the exchange and production processes. In particular, entrepreneurs are assumed to produce a fixed amount of a divisible consumption good by means of labour services provided by workers. Entrepreneurs can offer a co-operative (barter) contract or a monetary contract to workers. Under the co-operative contract real wages are determined in the labour exchange sector, while in the monetary regime real wages are determined in the commodity exchange sector. The monetary contract is proved to be an equilibrium strategy provided that: (i) the workers' labour disutility is sufficiently high and/or (ii) the entrepreneurs' bargaining power in the commodity market is sufficiently large relative to their bargaining power in the labour market. The rationale for money comes from the fact that entrepreneurs use it as an instrument to maximize their output share. |
| Keywords: | Money, Search, Double Coincidence, Bargaining |
| JEL: | D E |
| Date: | 2008–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:126&r=cba |
| By: | Athina Zervoyianni (University of Patras, Greece and The Rimini Centre for Economic Analysis) |
| Abstract: | This paper explores the relation between trade flows and cross-country symmetry of supply and demand shocks using data from the EU27 countries. Increased bilateral trade intensity is found to have a positive impact on the correlation of both demand and supply shocks. Intra-industry trade is found to be positively linked to correlations of supply-side shocks but negatively linked to correlation of demand shocks. Our results thus provide support for the argument that aggregate demand spill-overs and intra-industry trade, rather than specialization, dominate in the process through which trade flows affect the cross-country transmission of shocks in Europe. At the same time, our estimates suggest that monetary-policy convergence in Europe (the circulation of the euro), while having increased symmetry of supply-side shocks, has had no direct favourable impact on symmetry of demand shocks. By contrast, the process of fiscal-policy convergence is found to have resulted in more correlated demand shocks across the EU member states. Classification-JEL: F4, F15, E32 |
| Keywords: | convergence of shocks; trade flows; European integration; cyclical macroeconomic fluctuations |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:15-08&r=cba |
| By: | Maher Khaznaji; Louis Phaneuf |
| Abstract: | We develop and estimate a dynamic stochastic general equilibrium model that features sticky prices, a variable elasticity of demand facing firms and firm-specific labor. While reconciling to a good extent the micro and macro evidence on the behavior of prices, the model offers an accurate account of the dramatic increase in macroeconomic stability from the Great Inflation (1948:1-1979:II) to the Great Moderation (1984:I-2006:II). Reminiscent of the evidence in Shapiro and Watson (1988), the paper shows that labor-supply shocks are the key source of the reduction in the volatility of output growth, followed by investment-specific shocks. However, changes in the behavior of the private sector, a less accommodative monetary policy and smaller shocks explain almost evenly the large decline of the variability in inflation. |
| Keywords: | Great moderation, firm-specific labor, variable demand elasticity, nominal price rigidity |
| JEL: | E31 E32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0812&r=cba |
| By: | Jan Babecky; Fabrizio Coricelli; Roman Horvath |
| Abstract: | The paper provides an empirical analysis of inflation persistence in an inflation targeting country, the Czech Republic, using 412 detailed product-level consumer price indexes underlying the consumer basket over the period from 1994:M1 to 2005:M12. Subject to various sensitivity tests, our results suggest that raw goods and non-durables, followed by services, display smaller inflation persistence than durables and processed goods. Inflation seems to be somewhat less persistent after the adoption of inflation targeting in 1998. There is also evidence for aggregation bias, that is, aggregate inflation is found to be more persistent than the underlying detailed components. Price dispersion, as a proxy for the degree of competition, is found to be negatively related to inflation persistence, suggesting that competition is not conducive to reducing persistence. |
| Keywords: | Inflation dynamics, persistence, inflation targeting. |
| JEL: | D40 E31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp353&r=cba |
| By: | Galstyan, Vahagn A.; Lane, Philip R. |
| Abstract: | We show that the composition of government spending influences the long-run behaviour of the real exchange rate. We develop a two-sector small open economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables. |
| Keywords: | government consumption; government investment; real exchange rate |
| JEL: | E62 F31 F41 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6903&r=cba |
| By: | Lillie Lam (Research Department, Hong Kong Monetary Authority); Laurence Fung (Research Department, Hong Kong Monetary Authority); Ip-wing Yu (Research Department, Hong Kong Monetary Authority) |
| Abstract: | Exchange-rate movement is regularly monitored by central banks for macroeconomic-analysis and market-surveillance purposes. Notwithstanding the pioneering study of Meese and Rogoff (1983), which shows the superiority of the random-walk model in out-of-sample exchange-rate forecast, there is some evidence that exchange-rate movement may be predictable at longer time horizons. This study compares the forecast performance of the Purchasing Power Parity model, Uncovered Interest Rate Parity model, Sticky Price Monetary model, the model based on the Bayesian Model Averaging technique, and a combined forecast of all the above models with benchmarks given by the random-walk model and the historical average return. Empirical results suggest that the combined forecast outperforms the benchmarks and generally yields better results than relying on a single model. |
| Keywords: | Bayesian Analysis, Model Evaluation and Selection, Forecasting and Other Model Application |
| JEL: | C11 C52 C53 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0808&r=cba |
| By: | Thabo Mokoena (South African Reserve Bank, Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria) |
| Abstract: | This paper presents a comprehensive literature review of the theoretical and empirical developments that have taken place over the last two decades in an attempt to address the exchange rate puzzles. Specifically, we discuss non-linear and Bayesian econometric techniques, Dynamic General Equilibrium models, and the Market Microstructure approach that has been designed to address three exchange rate puzzles, namely, the Purchasing Power Parity (PPP) puzzle, the exchange rate disconnect puzzle and the exchange rate determination puzzle. We conclude that the exchange rate puzzles are likely to be less puzzling, if researchers decide to move to non-linear econometric frameworks and microfounded general equilibrium models. |
| Keywords: | Dynamic General Equilibrium Models, Exchange Rate Puzzles, Non-Linear and Bayesian Econometric Models |
| JEL: | C1 C4 F3 F4 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200827&r=cba |
| By: | Fabrizio Balassone (Bank of Italy, Economic Research Department); Maura Francese (Bank of Italy, Economic Research Department); Stefania Zotteri (Bank of Italy, Economic Research Department) |
| Abstract: | In a stylised framework of fiscal policy determination that considers both structural targets and cyclical factors, we find significant cyclical asymmetry in the behaviour of fiscal variables in a sample of fourteen EU countries from 1970 to 2004, with budgetary balances (both overall and primary) deteriorating in contractions but not improving correspondingly in expansions. Analysis of budget components reveals that the asymmetry is due to expenditure, in particular transfers in cash. We find no evidence that the fiscal rules introduced in 1992 with the Treaty of Maastricht affected the cyclical behaviour of the variables examined. Numerical simulations show that cyclical asymmetry inflated average deficit levels, contributing significantly to the accumulation of debt. |
| Keywords: | fiscal stabilisation, government expenditure, government debt, fiscal rules |
| JEL: | E62 H6 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_671_08&r=cba |
| By: | Ethan Ilzetzki; Carlos A. Vegh |
| Abstract: | A large empirical literature has found that fiscal policy in developing countries is procyclical, in contrast to high-income countries where it is countercyclical. The idea that fiscal policy in developing countries is procyclical has all but reached the status of conventional wisdom. This has sparked a growing theoretical literature that attempts to explain such a puzzle. Some authors, however, have suggested that procyclical fiscal policy could be more fiction than truth since, by and large, the current literature has ignored endogeneity problems and may have simply misidentified a standard expansionary effect of fiscal policy. To settle this issue of causality, we build a novel quarterly dataset for 49 countries covering the period 1960-2006, and subject the data to a battery of econometric tests: instrumental variables, simultaneous equations, and time-series methods. We find overwhelming evidence to support the idea that procyclical fiscal policy in developing countries is in fact truth and not fiction. We also find evidence that fiscal policy is expansionary -- a channel disregarded by the existing literature -- lending empirical support to the notion that when "it rains, it pours." |
| JEL: | E62 F41 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14191&r=cba |
| By: | Wolf Schäfer |
| Abstract: | This paper deals with the present undervaluation policy in China in the light of the German experiences with the undervaluation of the Deutschmark under Bretton Woods conditions. In Germany, there was a 20 years lasting academic and public debate on the needs for appreciation because of the high costs of having an undervalued currency. These costs referred, i. a., to inflation import, overheating the economy, and distortion of the internal production structure of the country – this seeming to be a similar situation in present China. From the German experience it is argued that flexible nominal exchange rates for large economies like China could better reduce the costs of the adjustment needs of real exchange rates than adjustments via internal inflation. Furthermore, if China as a new Global Player fulfills some necessary conditions for sound economic performance the RMB could possibly change the international monetary order towards a 3-polar monetary system. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:phu:wpaper:013&r=cba |
| By: | Dong He (Research Department, Hong Kong Monetary Authority); Laurent Pauwels (Research Department, Hong Kong Monetary Authority) |
| Abstract: | In this paper, we model the policy stance of the People¡¦s Bank of China (PBoC) as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBoC. In a second step, we estimate how much of the variation in the PBoC's implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets figured significantly in PBoC's policy changes, but not output gaps. |
| Keywords: | Monetary policy, People's Bank of China, qualitative response models, large factor models |
| JEL: | E52 E58 C25 C32 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0806&r=cba |
| By: | Sylvain Martel |
| Abstract: | The author constructs a measure of core inflation using a structural vector autoregression containing oil-price growth, output growth, and inflation. This "macro-founded" measure of inflation forecasts total inflation at least as well as other, atheoretical measures. |
| Keywords: | Inflation and prices |
| JEL: | E31 C53 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:08-10&r=cba |
| By: | Fregert, Klas; Jonung, Lars |
| Abstract: | Inflation targeting was adopted by several countries, including Sweden, in the 1990s. We evaluate the Swedish inflation targeting regime since 1995 using a novel approach based on a unique data set on the characteristics of collective wage agreements between 1908 and 2008. First, we establish that the length of wage contracts decreases in response to an increase in “macroeconomic uncertainty” across policy regimes. Second, using contract length as the assessment criteria for regime performance, we find that the inflation targeting regime of 1995–2008 stands out as an exceptionally stable policy regime as judged by the willingness of wage contract-makers to repeatedly commit to three-year non-indexed wage agreements. In addition, inflation targeting gained instant credibility in the sense that the labor market organizations entered long-term wage agreements at the same time as this new regime was announced. Inflation targeting has thus reduced macroeconomic uncertainty compared to previous regimes adopted in Sweden during the 20th century. Our approach to evaluate inflation targeting is different from the traditional one commonly based on cross-section samples comparing inflation outcomes. Instead we focus on the actual decisions of private-sector wage setters under different monetary regimes. Judging from their behavior across a century of observations, inflation targeting in Sweden is a success – at least so far. |
| Keywords: | Inflation targeting, policy regime, contract length, wage indexation, Lucas critique, Sweden, credibility |
| JEL: | E30 E42 E65 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7335&r=cba |
| By: | A. Nazif Catik (Department of Economics, Ege University); Christopher Martin (Department of Economics and Finance, Brunel University); A. Özlem Önder (Department of Economics, Ege University) |
| Abstract: | We argue that relative price changes are a key component of the Phillips curve relationship between inflation and output. Building on work by Ball and Mankiw, we propose including measures of the variances and skewness of relative price adjustment in an otherwise standard model of the Phillips curve. We examine the case of Turkey, where distribution of price changes is especially skewed and where the existence of a Phillips curve has been questioned. We have two main findings: (i) inclusion of measures of the distribution of relative price changes improves our understanding of the Phillips curve trade-off; (ii) there is no evidence of such a trade-off if these measures are not included. |
| Keywords: | Inflation, Philips Curve, Cross-Sectional Moments of Inflation, Relative Price Variability. |
| JEL: | C51 C52 E52 E58 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ege:wpaper:0807&r=cba |
| By: | Salazar, Eduardo |
| Abstract: | This work tries to explain, by means of Phillips's curve (in a simple model), the relation that exists between inflation and rate of unemployment in the period from 1993 to 2006, in addition estimates the natural rate of unemployment for the above mentioned period, here evidence appears in favour of the fulfillment of Phillips's curve, one finds a negative relation between rate of unemployment and variation of the rate of inflation, that is to say that to major rates of unemployment there is a decrease in the rate of inflation. Also one thinks that the rate of national unemployment is below the natural rate of unemployment, this result shows some evidence in favour of which there could be inflationary pressures. |
| Keywords: | Inflación; Tasa de desempleo; Curva de Phillips; Tasa natural de desempleo |
| JEL: | E24 E31 C22 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9527&r=cba |
| By: | Peter Bernholz (Univeristy of Basel) |
| Abstract: | A difference is made between open and hidden or veiled government bankruptcies. The latter are happening if budget deficits are covered by substantial money creation leading to inflation. In this case non-indexed government debt loses its value and is inflated away. This path is not open, if the debt is not denominated in the national but in a stable foreign currency or in units of gold or silver. This is usually the case for debt owed to foreigners. But sometimes both kinds of government bankruptcies are occurring together. In the present paper several general qualitative hypotheses are tested for the Balkan countries and the Ottoman Empire. |
| Keywords: | Government bankruptcies; Foreign debt; Fixed exchange rates |
| JEL: | F34 G33 N23 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:74&r=cba |