|
on Central Banking |
| By: | Charles Engel; John H. Rogers |
| Abstract: | Survey data show that the expected growth rates of consumption across countries vary widely and are not highly correlated. This data contradicts the simplest of open-economy models in which there is a freely traded non- state-contingent bond and purchasing power parity holds. We explore two alternative explanations for the finding: that households in each country in effect face different ex ante real interest rates or that there are significant credit constraints, so that expected consumption growth rates are driven largely by expected income growth. The empirical evidence strongly supports the latter hypothesis. These findings challenge the modeling of consumption that is at the heart of many, if not most, macroeconomic models. |
| Keywords: | Capital market ; Econometric models ; International finance |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:949&r=cba |
| By: | James M. Nason; John H. Rogers |
| Abstract: | Exchange rates have raised the ire of economists for more than 20 years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts. Engel and West (2005) show that these failures can be explained by the standard-present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West (EW) hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The EW hypothesis is shown to hold for a canonical open economy DSGE model. We show that all the predictions of the standard-PVM carry over to the DSGE-PVM. The DSGE-PVM also yields an unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian-U.S. sample. Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one implying the Canadian dollar-U.S. dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks. |
| Keywords: | Foreign exchange rates |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:948&r=cba |
| By: | Timothy J. Kehoe; Kim J. Ruhl |
| Abstract: | A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994?95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables. |
| Keywords: | Financial crises |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:414&r=cba |
| By: | Tobias Adrian; Hyun Song Shin |
| Abstract: | In a market-based financial system, banking and capital market developments are inseparable. We document evidence that balance sheets of market-based financial intermediaries provide a window on the transmission of monetary policy through capital market conditions. Short-term interest rates are determinants of the cost of leverage and are found to be important in influencing the size of financial intermediary balance sheets. However, except for periods of crises, higher balance-sheet growth tends to be followed by lower interest rates, and slower balance-sheet growth is followed by higher interest rates. This suggests that consideration might be given to a monetary policy that anticipates the potential disorderly unwinding of leverage. In this sense, monetary policy and financial stability policies are closely linked. |
| Keywords: | Monetary policy ; Capital market ; Intermediation (Finance) ; Interest rates |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:346&r=cba |
| By: | Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Günter Coenen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Anders Warne (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we outline a version of the New Area-Wide Model (NAWM) of the euro area designed for use in the (Broad) Macroeconomic Projection Exercises regularly undertaken by ECB/Eurosystem staff. We present estimation results for the NAWM that are obtained by employing Bayesian inference methods and document the properties of the estimated model by reporting its impulse-response functions and forecast-error-variance decompositions, by inspecting the model-based sample moments, and by examining the model’s forecasting performance relative to a number of benchmarks, including a Bayesian VAR. We finally consider several applications to illustrate the potential contributions the NAWM can make to forecasting and policy analysis. JEL Classification: C11, C32, E32, E37. |
| Keywords: | DSGE modelling, open-economy macroeconomics, Bayesian inference, forecasting, policy analysis, euro area. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080944&r=cba |
| By: | Elena Angelini (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Gonzalo Camba-Méndez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Domenico Giannone (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Gerhard Rünstler (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (London Business School, Regent’s Park, London NW1 4SA, United Kingdom.) |
| Abstract: | This paper evaluates models that exploit timely monthly releases to compute early estimates of current quarter GDP (now-casting) in the euro area. We compare traditional methods used at institutions with a new method proposed by Giannone, Reichlin, and Small (2005). The method consists in bridging quarterly GDP with monthly data via a regression on factors extracted from a large panel of monthly series with different publication lags. We show that bridging via factors produces more accurate estimates than traditional bridge equations. We also show that survey data and other ‘soft’ information are valuable for now-casting. JEL Classification: E52, C33, C53. |
| Keywords: | Forecasting, Monetary Policy, Factor Model, Real Time Data, Large datasets, News. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080949&r=cba |
| By: | Elena Angelini (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marta Bańbura (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Gerhard Rünstler (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We estimate and forecast growth in euro area monthly GDP and its components from a dynamic factor model due to Doz et al. (2005), which handles unbalanced data sets in an efficient way. We extend the model to integrate interpolation and forecasting together with cross-equation accounting identities. A pseudo real-time forecasting exercise indicates that the model outperforms various benchmarks, such as quarterly time series models and bridge equations in forecasting growth in quarterly GDP and its components. JEL Classification: E37, C53. |
| Keywords: | Dynamic factor models, interpolation, nowcasting. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080953&r=cba |
| By: | William Barnett (Department of Economics, The University of Kansas); Evgeniya Aleksandrovna Duzhak (Baruch College, City University of New York) |
| Abstract: | As is well known in systems theory, the parameter space of most dynamic models is stratified into subsets, each of which supports a different kind of dynamic solution. Since we do not know the parameters with certainty, knowledge of the location of the bifurcation boundaries is of fundamental importance. Without knowledge of the location of such boundaries, there is no way to know whether the confidence region about the parameters’ point estimates might be crossed by one or more such boundaries. If there are intersections between bifurcation boundaries and a confidence region, the resulting stratification of the confidence region damages inference robustness about dynamics, when such dynamical inferences are produced by the usual simulations at the point estimates only. Recently, interest in policy in some circles has moved to New Keynesian models, which have become common in monetary policy formulations. As a result, we explore bifurcations within the class of New Keynesian models. We study different specifications of monetary policy rules within the New Keynesian functional structure. In initial research in this area, Barnett and Duzhak (2008) found a New Keynesian Hopf bifurcation boundary, with the setting of the policy parameters influencing the existence and location of the bifurcation boundary. Hopf bifurcation is the most commonly encountered type of bifurcation boundary found among economic models, since the existence of a Hopf bifurcation boundary is accompanied by regular oscillations within a neighborhood of the bifurcation boundary. Now, following a more extensive and systematic search of the parameter space, we also find the existence of Period Doubling (flip) bifurcation boundaries in the class of models. Central results in this research are our theorems on the existence and location of Hopf bifurcation boundaries in each of the considered cases. We also solve numerically for the location and properties of the Period Doubling bifurcation boundaries and their dependence upon policy-rule parameter settings. |
| Keywords: | Bifurcation, dynamic general equilibrium, Hopf bifurcation, flip bifurcation, period doubling bifurcation, robustness, New Keynesian macroeconometrics, Taylor rule, inflation targeting. |
| JEL: | C14 C22 E37 E32 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:200811&r=cba |
| By: | Alexander Mihailov; Fabio Rumler; Johann Scharler |
| Abstract: | This paper applies GMMestimation to assess empirically the small open-economy New Keynesian Phillips Curve derived in Galí and Monacelli (2005). We obtain a testable specification where fluctuations in the terms of trade enter explicitly, thus allowing a comparison of the relevance of domestic versus external determinants of CPI inflation dynamics. For most countries in our sample the expected relative change in the terms of trade emerges as a more relevant inflation driver than the contemporaneous domestic output gap. Overall, our results indicate some, albeit moderate, support for the tested relationship based on data from ten OECD countries typically classified as open economies. |
| Keywords: | New Keynesian Phillips Curve, small open economies, terms of trade fluctuations, inflation dynamics, GMM estimation |
| JEL: | C32 C52 E31 F41 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2008_17&r=cba |
| By: | Lena Vogel (Department for Economics and Politics, University of Hamburg) |
| Abstract: | New Keynesian models of the Phillips curve in the spirit of Galí and Gertler (1999) generally assume a short-run trade-off between inflation and a measure of excess demand due to nominal rigidities, while in the long run inflation is constant at the Non-Accelerating Inflation Rate of Unemployment (NAIRU). By contrast, Gordon (1997) in his "triangle model" of inflation models a time-varying NAIRU. We combine both approaches and estimate state-space models of the hybrid New Keynesian Phillips curve (NKPC), where excess demand is measured by the unemployment gap and the NAIRU is allowed to vary over time as in Gordon (1997). Moreover, inflation expectations are measured directly from surveys on household?s inflation expectations and not instrumented for. Our model is estimated for the US, the UK, Italy and Spain and we find considerable variation in the NAIRU over time with NAIRU estimates significantly different from HP-filter derived measures such as usually employed in dynamic stochastic general equilibrium (DSGE) models. In contrast to GMM results for the hybrid NKPC, we find that backward looking behaviour generally seems to be quantitatively more important for inflation than forward looking behaviour. |
| Keywords: | Hybrid New Keynesian Phillips curve, time-varying NAIRU, state-space models |
| JEL: | C32 E31 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:200803&r=cba |
| By: | Carrillo Julio A. (METEOR) |
| Abstract: | Cochrane (2007) points out that the Taylor rule parameters in New-Keynesian models are not identified, and thus trying to estimate them through single-equation regressions is pointless. This paper shows in contrast that this observation holds only for economies that do not display inflation inertia or habit formation. These inherent features of aggregate data allow to correctly identify the parameters of the monetary policy rule by single-equation analysis. |
| Keywords: | monetary economics ; |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2008034&r=cba |
| By: | Takushi Kurozumi; Willem Van Zandweghe |
| Abstract: | We investigate implications of search and matching frictions in the labor market for in ation targeting interest rate policy in terms of equilibrium stability. When the interest rate is set in response to past or present in ation, determinacy of equilibrium is ensured similarly to comparable previous studies with frictionless labor markets. In stark contrast to these studies, indeterminacy is very likely if the interest rate is adjusted in response solely to expected future in ation. This is due to a vacancy channel of monetary policy that stems from the labor market frictions and renders in ation expectations self-ful lling. The indeterminacy can be overcome once the interest rate is adjusted in response also to output or the unemployment rate or if the policy contains interest rate smoothing. When E-stability is adopted as an equilibrium selection criterion, a unique E-stable fundamental rational expectations equilibrium is generated under active, but not too strong, policy responses only to expected future in ation. This suggests that the problem is not critical from the perspective of learnability of the fundamental equilibrium. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-03&r=cba |
| By: | Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | In past years, imperfect competition has been introduced in several dynamic models to show how mark-up variability, increasing returns (decreasing marginal cost), and monopoly profits affect the occurrence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies: consumers' taste for variety due to endogenous product diversity. Introducing monopolistic competition (Dixit and Stiglitz (1977), Bénassy (1996)) in an overlapping generations model where consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions: a high substitution between capital and labor, increasing returns arbitrarily small and a not too elastic labor supply. The key mechanism for this result is based on the fact that, due to taste for variety, the aggregate price decreases with the pro-cyclical product diversity, which has a direct influence on the real wage and the real interest rate. |
| Keywords: | Endogenous fluctuations; taste for variety; imperfect competition. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00266722_v1&r=cba |
| By: | Stefano Bosi (EPEE - Centre d'Etudes des Politiques Economiques - Université d'Evry-Val d'Essonne, EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université des Sciences et Technologies de Lille - Lille I); Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | While most of the literature concerned with indeterminacy and endogenous cycles is based on the restrictive assumption of a representative consumer,some recent contributions have investigated the role of heterogeneous agents in dynamics. This paper adds to this latter strand of the literature by highlighting the effects of heterogeneity in consumers' preferences within an overlapping generations economy with capital accumulation, endogenous labor supply and consumption in both periods. Using a mean-preserving approach to heterogeneity, we show that increasing the dispersion of propensity to save decreases macroeconomic volatility, by narrowing down the range of parameter values compatible with indeterminacy and ruling out expectations-driven fluctuations under a sufficiently large heterogeneity. |
| Keywords: | Endogenous fluctuations; heterogeneouspreferences; mean-preserving dispersion; overlapping generations. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00266713_v1&r=cba |
| By: | Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France) |
| Abstract: | Dans cet article, nous montrons que l'incomplétude des marchés dans une union monétaire caractérisée par des chocs asymétriques et des rigidités nominales génère des gains de bien-être. L'existence de marchés incomplets relâche la pression sur les termes de l'échange, ce qui réduit la volatilité des taux d'inflation nationaux. Les gains associés µa cette baisse dépassent les coûts de l'imparfait partage des risques. L'effet net est positif et les gains correspondants peuvent atteindre 0.05% de consommation permanente. |
| Keywords: | union monétaire, chocs asymétriques, prix rigides, bien-être, marchés financiers incomplets |
| JEL: | E51 E58 F36 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:08-13&r=cba |
| By: | Jean-Olivier Hairault (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Thepthida Sopraseuth (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales - Ecole Nationale des Ponts et Chaussées - Ecole Normale Supérieure de Paris) |
| Abstract: | Cet article propose une revue de la littérature des MEGIS en économie ouverte. Le MEGIS international de base est incapable de rendre compte de la synchronisation cyclique des PIB observée dans les données, de la faible corrélation croisée des consommations et des fortes variations du taux de change. Ces énigmes empiriques ont donné lieu à une suite d’enrichissements théoriques visant à rendre ces modèles plus conformes aux données. La contribution d’Obstfeld & Rogoff (1995) s’impose comme un modèle de référence car offrant des fondements microéconomiques à une cadre keynésien en économie ouverte. Les travaux récents tentent de dépasser le modèle néo-keynésien en intégrant des éléments provenant des théories du commerce international ou de choix de portefeuille. |
| Keywords: | MEGIS, fluctuations internationales, taux de change |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00270284_v1&r=cba |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper assesses the extent to which the Group of Seven (G7) has been successful in its management of major currencies since the 1970s. Using an event-study approach, the paper finds evidence that the G7 has been overall effective in moving the US dollar, yen and euro in the intended direction at horizons of up to three months after G7 meetings, but not at longer horizons. While the success of the G7 is partly dependent on the market environment, it is also to a significant degree endogenous to the policy process itself. The findings indicate that the reputation and credibility of the G7, as well as its ability to form and communicate a consensus among individual G7 members, are important determinants for the G7’s ability to manage major currencies. The paper concludes by analyzing the factors that help the G7 build reputation and consensus, and by discussing the implications for global economic governance. JEL Classification: F31, F33, F50. |
| Keywords: | Group of Seven, G7, exchange rate, communication, policy, adjustment, success, event-study methodology, US dollar, yen, euro. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080952&r=cba |
| By: | Gabriel Fagan (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Vitor Gaspar (Bureau of European Policy Advisers, European Commission, Rue de la Loi 100, B-1049 Brussels, Belgium.) |
| Abstract: | The move to monetary union in Europe led to convergence of interest rates among the participating countries. This was associated with notable cross-country differences in the behaviour of key macroeconomic aggregates. Compared to the low interest rate countries, former high interest rate countries experienced a boom in domestic demand, a deterioration of the current account and appreciation of the real exchange rate. This paper documents the key stylised facts of this experience and provides a compact two-country model, based on the Blanchard-Yaari setup, to analyze this phenomenon. This model, though simple, is able to broadly capture the main qualitative features of the adjustment. Using this model, we show that the creation of the monetary union leads to an increase in welfare for all generations in both country groups. JEL Classification: F36, E21, F32. |
| Keywords: | euro area, interest rate convergence, overlapping generations model. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080946&r=cba |
| By: | António Afonso (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Luca Agnello (University of Palermo, Department of Economics, Viale delle Scienze, 90128 Palermo, Sicily, Italy.); Davide Furceri (OECD, 2, rue André Pascal, F-75775 Paris Cedex 16, France.) |
| Abstract: | We decompose fiscal policy in three components: i) responsiveness, ii) persistence and iii) discretion. Using a sample of 132 countries, our results point out that fiscal policy tends to be more persistent than to respond to output conditions. We also found that while the effect of cross-country covariates is positive (negative) for discretion, it is negative (positive) for persistence thereby suggesting that countries with higher persistence have lower discretion and vice versa. In particular, while government size, country size and income have negative effects on the discretion component of fiscal policy, they tend to increase fiscal policy persistence. JEL Classification: E62, H50. |
| Keywords: | Fiscal Policy, Fiscal Volatility. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080954&r=cba |
| By: | Thierry Bracke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Martin Schmitz (Trinity College Dublin, Department of Economics and Institute for International Integration Studies, College Green, Dublin 2, Ireland.) |
| Abstract: | Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative)when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening. JEL Classification: F21, F30, F36. |
| Keywords: | International risk sharing, International portfolio diversification, Consumption smoothing, Cross-border investment, Valuation effects. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080938&r=cba |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | The aim of this chapter is to dsicuss the contagionbetween the financial sphere and the real sphere. We define the concept of contagion, then we introduce some parametric models used to detect the contagion phenomenum, then we introduce some non-parametric tools focusing on copulas. Interdependence between national economies is investigated through these tools. Finally we investigate the interdependence between the financial and the real spheres. |
| Keywords: | Contagion – Setar – markov switching – Copulas – real sphere – financial sphere. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00185373_v1&r=cba |
| By: | Stephanie E. Curcuru; Charles P. Thomas; Francis E. Warnock |
| Abstract: | The sustainability of the large and persistent U.S. current account deficits is one of the biggest issues currently being confronted by international macroeconomists. Some very plausible theories suggest that the substantial global imbalances can continue in a benign manner, other equally plausible theories predict a disorderly resolution, and in general it is very difficult to discern between competing theories. To inform the debates, we view competing theories through the perspective of the relative reliability of the data the theories rely on. Our analysis of the dark matter theory is cursory; from a relative reliability perspective, it fails as it is built on the assumption that an item that is largely unmeasured is the most accurate component of the entire set of international accounts. Similarly, the best data currently available suggest that U.S. returns differentials are much smaller than implied by the exorbitant privilege theory. Our analysis opens up questions about potential inconsistencies in the international accounts, which we address by providing rough estimates of various holes in the accounts. |
| Keywords: | International finance ; International trade |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:947&r=cba |
| By: | Maurizio Michael Habib (European Central Bank, Directorate General International and European Relations, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Mark Joy (University of Glasgow, Department of Economics, Adam Smith Building, Glasgow, United Kingdom;.) |
| Abstract: | Using count-data techniques, this paper studies the determinants of currency choice in the issuance of foreign-currency-denominated bonds. In particular, we investigate whether bond issuers choose their issuance currency in order to exploit the borrowing-cost savings associated with deviations from uncovered and covered interest parity. Our sample includes issuers from both the public sector and private sector. Our findings show that the choice of issuance currency is sensitive to deviations from uncovered interest parity but insensitive, in general, to deviations from covered interest parity. Furthermore, the influence of deviations from uncovered interest parity is stronger for financial issuers than for nonfinancial issuers. JEL Classification: F31, F36, G14, G15, G32. |
| Keywords: | Foreign exchange, currency choice, international debt securities, bonds, interest-rate parity. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080947&r=cba |
| By: | Matthieu Bussière (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tuomas Peltonen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper estimates export and import price equations for 41 countries –including 28 emerging market economies. Further, it relates the estimated elasticities to structural factors and tests for statistical breaks in the relation between trade prices and exchange rates. Results indicate that (i) the elasticity of trade prices in emerging markets is sizeable, but not significantly higher than in advanced economies; (ii) such elasticity is primarily influenced by macroeconomic factors such as the exchange rate regime and the inflationary environment, although microeconomic factors such as product differentiation also play a role; (iii) export and import price elasticities tend to be strongly correlated across countries; (iv) pass-through to import prices has declined in some advanced economies, noticeably the United States; this is consistent with a rise in pricing-to-market in several EMEs and especially with a change in the geographical composition of U.S. imports. JEL Classification: F10, F30, F41. |
| Keywords: | emerging market economies, exchange rate pass-through, pricing-to-market, local and producer currency pricing, exchange rate regime. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080951&r=cba |
| By: | Christian Bordes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Samuel Maveyraud (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - CNRS : UMR5113 - Université Montesquieu - Bordeaux IV) |
| Abstract: | This paper o¤ers to investigate both the Friedman's and Mishkin's hypotheses on the consequences of inflation on output growth. To this end, we first base these hypotheses in a unified framework. Second, in an empirical work based on OECD countries, we distinguish between short-medium and long run and between headline and core inflation. We get two main results. First, nominal uncertainty and inflation are positively linked. Second, headline inflation negatively Granger causes out- put gap (US, Japan, France) but has no effect on potential output growth (US excepted) whereas core inflation impacts potential output growth (UK, Germany) but not output gap (US excepted). |
| Keywords: | Inflation, uncertainty, output growth, GARCH, CF filter |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:hal-00308571_v1&r=cba |
| By: | Ansgar Belke; Daniel Gros |
| Abstract: | It is widely assumed that a common currency makes it desirable to have also a common fiscal policy. However, if fiscal policy is a source of shocks, independent national fiscal policies are generally preferable because they allow for risk diversification. |
| Keywords: | Currency union, fiscal policy coordination, stabilisation |
| JEL: | E63 F42 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0062&r=cba |
| By: | Edward S. Knotek II |
| Abstract: | This paper provides cross-sectional evidence of convenient prices--prices that simplify and expedite transactions and thereby reduce the time costs from physically making a transaction. I propose that firms may wish to set convenient prices for items that: (1) are typically purchased with cash; (2) are sold alone or with a few similar items; and (3) are high-traffic transactions, i.e., require queuing or are purchased very frequently. I find broad support for the use of convenient prices in locations where making a rapid transaction is important. Convenience also appears to predominantly affect goods and services with above-average price rigidity. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-04&r=cba |
| By: | OECD |
| Abstract: | This paper examines the nature and the length of economic adjustments to selected structural reforms, drawing on a variety of approaches: descriptive analysis and simulations using Dynamic General Equilibrium and macro-economic neo-Keynesian models. The descriptive analysis suggests that the correlation between reforms, including a change in the tax wedge, the replacement ratio or anti-competitive product market regulation and the structural unemployment rate peaks only after 5 to 10 years. Lowering employment and price adjustment costs in the euro area to their respective US levels would only have a relatively limited effect on the speed of adjustment to labour market and tax reforms. Monetary policy reaction can speed up the adjustment to a new equilibrium, though to a varying degree in the different OECD countries or regions. In particular, reforms in individual euro area countries are likely to trigger only little or no policy reaction, unless there is an area-wide effort to implement reforms. <P>Vitesse d’ajustement à des réformes sur le marché du travail et de la fiscalité <BR>Cet article examine la nature et la durée des ajustements économiques à un certain nombre de réformes structurelles, utilisant plusieurs approches : analyse descriptive et simulations des modèles dynamique d’équilibre général et macro-économiques néo-keynésiens, L’analyse descriptive suggère que la corrélation entre des réformes, notamment une modification du coin fiscal, du taux de remplacement et des régulations anticoncurrentielles sur le marché des produits et le taux de chômage structurel n’atteint son effet maximum qu’après 5 à 10 ans. Diminuer les coûts d’ajustement sur l’emploi et les prix de la zone euro à leur niveau observé aux États-Unis ne se traduirait que par des effets limités sur la vitesse d’ajustements aux réformes sur le marché du travail ou aux réformes fiscales. Une réaction de politique monétaire peut accélérer l’ajustement à un nouvel équilibre, mais de manière plus ou moins marquée dans les différents pays ou régions de l’OCDE. En particulier, les réformes menées au niveau des pays individuels généreront probablement peu ou pas de réaction monétaire, sauf en présence d’un effort concerté de mise en oeuvre de réformes au niveau de la zone. |
| Keywords: | réforme structurelle, United States, États-Unis, monetary policy, politique monétaire, zone Euro, euro area, structural reforms, adjustment, Taylor rule, DSGE model, modèle DSGE |
| JEL: | C5 E00 E5 G10 |
| Date: | 2008–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:647-en&r=cba |
| By: | Alexander Ludwig; Michael Reiter (Mannheim Research Institute for the Economics of Aging (MEA)) |
| Abstract: | We model the optimal reaction of a public PAYG pension system to demographic shocks. We compare the ex-ante first best and second best solution of a Ramsey planner with full commitment to the outcome under simple third best rules that mimic the pension systems observed in the real world. The model, in particular the pension system, is calibrated to the German economy. The objective of the social planner is calibrated such that the size of the German pension system was optimal under the economic and demographic conditions of the 1960s. We find that the German system comes relatively close to the second-best solution, especially when labor market distortions are correctly modelled. Furthermore, the German system and a constant contribution rate lead to a lower variability of lifetime utility than does the second best policy. The recent baby-boom/baby-bust cycle leads to welfare losses of about 5% of lifetime consumption for some cohorts. We argue that it is crucial for these results to model correctly the labor market distortions arising from the pension system. |
| JEL: | E62 H3 H55 |
| Date: | 2008–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:mea:meawpa:08166&r=cba |
| By: | Michael W.M. Roos; Wolfgang J. Luhan |
| Abstract: | Previous experimental investigations have shown that expectations are not perfectly rational due to bias. Traditional adaptive models, however, in many cases do not perfectly describe the formation of expectations either. This paper makes two contributions to the experimental literature on the formation of expectations: First, we investigate whether subjects who have more information about the economic model than in previous studies also form biased expectations. Second, we argue that in some cases macroeconomic expectations might be formed by the anchoring-and-adjustment heuristic, which is well known in psychology. We find that subjects’ expectations are biased although the design might be more favorable to rational expectations.The anchoring- and-adjustment model of expectations gets some support by our data, but the best model encompasses both the anchoring-and-adjustment model and the traditional adaptive model. |
| Keywords: | Expectations, heuristics, beliefs, mental models, macroeconomic experiment |
| JEL: | D84 D83 C99 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0054&r=cba |
| By: | Ricardo Mestre (Corresponding author: European Central Bank, DG Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Peter McAdam (European Central Bank, DG Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We evaluate residual projection strategies in the context of a large-scale macro model of the euro area and smaller benchmark time-series models. The exercises attempt to measure the accuracy of model-based forecasts simulated both out-of-sample and in-sample. Both exercises incorporate alternative residual-projection methods, to assess the importance of unaccounted-for breaks in forecast accuracy and off-model judgment. Conclusions reached are that simple mechanical residual adjustments have a significant impact of forecasting accuracy irrespective of the model in use, ostensibly due to the presence of breaks in trends in the data. The testing procedure and conclusions are applicable to a wide class of models and thus of general interest. JEL Classification: C52, E30, E32, E37. |
| Keywords: | Macro-model, Forecast Projections, Out-of-Sample, In-Sample, Forecast Accuracy, Structural Break. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080950&r=cba |
| By: | Hillinger, Claude |
| Abstract: | I discuss briefly the crisis itself and then give some criteria that should be used in evaluating any policy proposed o deal with it. This is followed by a critical discussion of some of the policy measures that have been suggested. Finally, I give a list of proposals, that I believe best satisfy the stated criteria. In contrast to almost all of the proposals that have been made, mine involve no bailout of the financial sector with public funds. |
| Keywords: | financial crisis |
| Date: | 2008–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:6929&r=cba |
| By: | Olga Bohachova |
| Abstract: | This paper explores the links between macroeconomic conditions and individual bank risk. Using capital adequacy ratios as a broad measure of risk sustainability, a linear mixed effects model for a large international panel of banks for the years 2001-2005 is estimated. In OECD countries, banks tend to hold higher capital ratios during business cycle highs, this effect being even stronger for a subsample of EU banks. In non-OECD countries, periods of higher economic growth are associated with lower capital ratios. This indicates procyclical behavior. Banks accumulate risks more rapidly in economically good times and some of these risks materialize as asset quality deteriorates during subsequent recessions. Furthermore, higher inflation rates are associated with higher capital ratios of banks, implying that inflation-induced economic uncertainty stimulates banks to restrict credit. As far as regulatory and institutional environment is concerned, econometric estimates show that banks in non-OECD countries with deposit insurance tend to be more risky, whereas evidence of a negative relationship between concentration of the banking sector and banks’ risk taking is statistically less robust. |
| Keywords: | international banking, macroeconomic conditions, banking risk |
| JEL: | F37 F41 G21 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:iaw:iawdip:44&r=cba |
| By: | Oliver Holtemöller; Torsten Schmidt |
| Abstract: | In this paper, we estimate a small New Keynesian dynamic stochastic general equilibrium (DSGE) model for Germany for the period from 1975 to 1998 and use it to identify the structural shocks, which have driven the business cycle. For this purpose we apply indirect inference methods, that is we specify the parameters of the theoretical model such that simulated data mimics observed data as closely as possible. In addition to the identification of structural shocks, we uncover the unobservable output gap, which is a prominent indicator in business cycle analysis. Furthermore,we show to which extent each identified shock has contributed to the business cycle fluctuations. |
| Keywords: | Business cycle accounting, dynamic stochastic general equilibrium models, Germany, indirect inference, New Keynesian macroeconomics |
| JEL: | C32 C51 E32 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0068&r=cba |
| By: | Chan, Tze-Haw; Khong, Wye Leong Roy |
| Abstract: | Currency crises and financial instability in the 1990s have increased the needs of regional cooperation, hence leading to the proposition of optimal currency area (OCA). But only if shocks are symmetric, the cost of relinquish the flexible monetary policy is to be outweighed by the benefits of forming OCA. To tackle the issue, this paper studies the extent of business cycle correlation and output linkages among fifteen Asia Pacific economies during 1961-2004. The real outputs series which sourced from the Penn World Data were estimated in standardized international dollars to construct business cycles based on the Christiano-Fitzgerald (2003)’s asymmetric band-pass filtering method. On the whole, the selected APEC members (especially ASEANs and NIEs) have achieved some important degree of business cycle co-fluctuations since the 1990s and further enhanced after 1997, most possibly attributed to the improved intra-trading and cross-boarder investments. For the US-Japan-ASEAN5 series, a dynamic analysis was conducted using the Autoregressive Distributed Log bounds test and the Unrestricted Error Correction Model (UECM) representation advanced in Pesaran et al. (2002). Nonetheless, the idiosyncratic and common shocks in ASEAN economies are more identical to the Japanese experience rather than the US’s. The overall finding has signified the brighter likelihood of economic cooperation and regional currency arrangements among APEC members. |
| Keywords: | Business Cycle Correlation; Output linkages; OCA; Asia Pacific; Band-pass Filtering; UECM |
| JEL: | C51 E32 O47 C22 |
| Date: | 2007–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11305&r=cba |
| By: | Arnaud Mehl (European Central Bank - ECB); Julien Reynaud (European Central Bank - ECB, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | This paper explains why public domestic debt composition in emerging economies can be risky, namely in foreign currency, with a short maturity or indexed. It analyses empirically the determinants of these risk sources separately, developing a new large dataset compiled from national sources for 33 emerging economies over 1994-2006. The paper finds that economic size, the breadth of the domestic investor base, inflation and fiscal soundness are all associated with risky public domestic debt compositions, yet to an extent that varies considerably in terms of magnitude and significance across sources of risk. Only inflation impacts all types of risky debt, underscoring the overarching importance of monetary credibility to make domestic debt compositions in emerging economies safer. Given local bond markets' rapid development, monitoring risky public domestic debt compositions in emerging economies becomes increasingly relevant to global financial stability. |
| Keywords: | Public domestic debt, composition, risk, emerging economies. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00332049_v1&r=cba |
| By: | Iuliana Matei (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | This article studies the features of co-movements of prices and production between six CEECs recently joined the EU and the euro zone. More precisely, based partially on the methodology suggested by Alesina, Barro and Tenreyro [2002], we evaluate the size and the persistence of prices and outputs shocks between each CEECs and euro zone. Results will contribute to the debate around the participation of the new members to the EMU. |
| Keywords: | European monetary integration, co-movements, AR models, CEECs. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00335025_v1&r=cba |
| By: | Iuliana Matei (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | This article studies the features of co-movements of prices and production between six CEECs recently joined the EU and the euro zone. More precisely, based partially on the methodology suggested by Alesina, Barro and Tenreyro [2002], we evaluate the size and the persistence of prices and outputs shocks between each CEECs and euro zone. Results will contribute to the debate around the participation of the new members to the EMU. |
| Keywords: | European monetary integration, co-movements, AR models, CEECs. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00335025_v1&r=cba |
| By: | Carlos Robalo Marques (Banco de Portugal, Research Department, R. do Ouro, 27, 1100 Lisboa, Portugal.) |
| Abstract: | This paper investigates the persistence of aggregate wages and prices in Portugal assuming a model of a unionized economy with imperfect competition. An impulse response analysis is conducted where the structural shocks are identified by taking into account the long-run properties of the model, as well as the cointegrating and weak-exogeneity properties of the system. Real wages and wage inflation emerge as especially persistent following an import price shock, while price inflation is more persistent following an unemployment shock. At the business cycle horizon variation in the forecast errors of wages is attributable mainly to unemployment shocks (about 80 percent), whereas variation in the forecast errors of prices is attributable mainly to import price shocks (about 60 percent) and to unemployment shocks (around 20 percent). Productivity shocks explain somewhat less than 10 percent of the variation in forecast errors of wages and prices. JEL Classification: C32, C51, E31, J30. |
| Keywords: | wages, prices, impulse response function, persistence, structural error-correction model. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080945&r=cba |
| By: | Sek, Siok Kun; Kapsalyamova, Zhanna |
| Abstract: | The paper undertakes a comparative empirical analysis on the effects of shocks on domestic prices in four Asian countries before and after the financial crisis of 1997. We apply two different estimation methodologies, namely a structural VAR and a single equation approach. The results of the two methods are consistent, although the magnitude of the elasticities of the exchange rate pass-through are different due to the inclusion of different variables, lag terms and different assumptions made in both methods. The results show that the degrees of the exchange rate pass-through are different across countries and over time. In most cases, the pass-through rates are incomplete. The degree of the exchange rate pass-through is the highest on import prices, moderate on PPI and is the lowest on CPI. In some cases, the pass-through rates on CPI are even negative. The effect of the import price shock is stronger as compared to that of the exchange rate shock in determining the movement of the domestic prices in these countries. Trade openness has a weak correlation with the degree of the exchange rate pass-through. |
| Keywords: | domestic prices; exchange rate pass-through; SVAR; single equation approach |
| JEL: | C32 F41 C22 |
| Date: | 2008–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11130&r=cba |
| By: | Ágnes Lublóy (Corvinus University of Budapest, Institute of Finance and Accounting); Eszter Tanai (Magyar Nemzeti Bank) |
| Abstract: | Central bankers wish to ensure worldwide that large-value transfer systems, as a component of the key market infrastructure, exhibit sufficiently robust levels of operational resilience. We focus on the operational resilience of the Hungarian real time gross settlement system, known as VIBER. The goal of the research is the quantitative assessment of the ability of the system to withstand certain types of operational shocks. Systemically important participants are identified and it is argued that they overlap with endangered participants. An indicative list of participants who might be endangered by a liquidity shock is compiled by analysing proxies for liquidity risk. We shed light on the capacity of the system to function smoothly in the event of operational problems by simulating the technical default of one or two systemically important participants in VIBER. Altogether six plausible scenarios were formed, three entire-day incidents and three incidents involving less time (part-time incidents). The impact of behavioural reactions of technically non-defaulted participants and the application of existing backup procedures are also considered. The disturbance in the payment system was measured by the value of initially not submitted payments, the value of rejected payments, the total value of queued payments, the maximum queue value, the average queue length and the settlement delay. By means of gross and net liquidity deficit indicators, liquidity assistance required to settle all previously rejected transactions is calculated. By comparing the value of unsettled payments with the value of eligible collaterals in the banks’ balance sheet, we can gain insight into whether the liquidity deficit can be financed through normal monetary policy operations. |
| Keywords: | real-time gross settlement, large-value transfer system, operational risk, shock-absorbing capacity. |
| JEL: | E50 G10 G21 L10 L14 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2008/75&r=cba |
| By: | Guerrero, Carlos (Tecnológico de Monterrey, Campus Ciudad de México) |
| Abstract: | Although the use of the plutocratic index is, perhaps, an historical convention, it constitutes a misleading target. Our aim is to construct alternative CPI’s for Mexico using the median of the expenditure distribution. Additionally, considering that 42.6% of Mexican people live in poverty (54.7% in rural and 35.6% in urban areas, figures for 2006), our alternative CPI’s distinguish between areas. In the final part of this paper, the use of a single goal by the Mexican monetary authority is criticized. |
| Keywords: | CPI, Mexico, plutocratic index, inflation |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:ega:docume:200805&r=cba |