|
on Central Banking |
| By: | Alastair Cunningham (Bank of England); Jana Eklund (Bank of England); Chris Jeffery (Bank of England); George Kapetanios (Queen Mary, University of London and Bank of England); Vincent Labhard (European Central Bank) |
| Abstract: | Most macroeconomic data are uncertain - they are estimates rather than perfect measures of underlying economic variables. One symptom of that uncertainty is the propensity of statistical agencies to revise their estimates in the light of new information or methodological advances. This paper sets out an approach for extracting the signal from uncertain data. It describes a two-step estimation procedure in which the history of past revisions are first used to estimate the parameters of a measurement equation describing the official published estimates. These parameters are then imposed in a maximum likelihood estimation of a state space model for the macroeconomic variable. |
| Keywords: | Real-time data analysis, State space models, Data uncertainty, Data revisions |
| JEL: | C32 C53 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp637&r=cba |
| By: | Demirguc-Kunt, Asli (The World Bank); Serven, Luis (The World Bank) |
| Abstract: | The recent global financial crisis has shaken the confidence of developed and developing countries alike in the very blueprint of financial and macro policies that underlie the western capitalist systems. In an effort to contain the crisis from spreading, the authorities in the US and many European governments have taken unprecedented steps of providing extensive liquidity, giving assurances to bank depositors and creditors that include blanket guarantees, and structuring bail-out programs that include taking large ownership stakes in financial institutions, in addition to establishing programs for direct provision of credit to non-financial institutions. Emphasizing the importance of incentives and tensions between short term and longer term policy responses to crisis management, this paper draws on a large body of research evidence and country experiences to discuss the implications of the current crisis for financial and macroeconomic policies going forward. |
| Keywords: | Financial crisis; Regulation and Supervision; Safety Nets; Role of State in Finance; Monetary Policy; Asset Bubbles; Capital Controls |
| JEL: | E52 E58 F32 G21 G28 G32 |
| Date: | 2009–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4807&r=cba |
| By: | Honkapohja, Seppo (Bank of Finland) |
| Abstract: | The current financial crisis, which has lasted almost one and a half years, is the 19th such crisis in the post-war period in advanced economies. Recent literature classifies the Nordic crises in Norway, Sweden and Finland in late 1980's and early 1990’s among the Big Five crises that have happened before the current crisis, which is now of a global nature. This paper outlines the developments of the Nordic crises, reasons behind them and crisis management by the authorities. Relatively more emphasis is placed on the Finnish crisis, as it was the deepest one. The paper concludes by considering the lessons that can be drawn from the Nordic crises. |
| Keywords: | financial deregulation; bank lending; overheating; financial crisis |
| JEL: | E44 G21 |
| Date: | 2009–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_005&r=cba |
| By: | Reinhart, Carmen |
| Abstract: | Global financial markets are showing strains on a scale and scope not witnessed in the past three-quarters of a century. What started with elevated losses on U.S.-subprime mortgages has spread beyond the borders of the United States and the confines of the mortgage market. Many risk spreads have ballooned, liquidity in some market segments has dried up, and large complex financial institutions have admitted significant losses. Bank runs are no longer the subject exclusively of history.These events have challenged policymakers, and the responses have varied across region. The European Central Bank has injected reserves in unprecedented volumes. The Bank of England participated in the bail-out and, ultimately, the nationalization of a depository, Northern Rock. The U.S. Federal Reserve has introduced a variety of new facilities and extended its support beyond the depository sector. These events have also challenged economists to explain why the crisis developed, how it is unfolding, and what can be done. This volume compiles contributions by leading economists in VoxEU over the past year that attempt to answer these questions. We have grouped these contributions into three sections corresponding to those three critical questions. |
| Keywords: | financial crisis subprime mortgages monetary policy |
| JEL: | E0 F3 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13288&r=cba |
| By: | Reinhart, Carmen; Vegh, Carlos; Velasco, Andres |
| Abstract: | Most of the chapters in this volume were prepared for a conference in honor of Guillermo Calvo, organized by the International Monetary Fund’s Research Department and held at Fund headquarters in Washington, DC, on April 15–16,2004. At the editors’ request, a couple of chapters were specially prepared after the conference for inclusion in this volume. The Fund was a natural and gracious host since Guillermo had a distinguished affiliation with the Fund’s Research Department from 1987 to 1994. Under his intellectual leadership, the Research Department carried out path-breaking research on, among other issues, capital flows, debt maturity, and inflation stabilization. Guillermo also made important contributions to the internal discussion and formulation of Fund policies, particularly in Eastern Europe, the former Soviet Union, and Latin America. |
| Keywords: | crises inflation exchange rates debt transition |
| JEL: | F3 E4 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13232&r=cba |
| By: | Shin-Ichi Nishiyama |
| Abstract: | Although the concept of monetary policy lag has historical roots deep in the monetary economics literature, relatively little attention has been paid to the idea. In this paper, we build on Svensson’s (1997) inflation targeting framework by explicitly taking into account the lagged effect of monetary policy and characterize the optimal monetary policy reaction function both in the absence and in the presence of the zero lower bound on the nominal interest rate. We numerically show the function to be more aggressive and more pre-emptive with the lagged effect than without it. We also characterize the long-run stabilization cost to the central bank by explicitly taking into account the lagged effect of monetary policy. It turns out that, in the presence of the zero lower bound constraint, the long-run stabilization cost is higher with the lagged effect than the case without it. This result suggests that the central bank and/or the government should set a relatively high inflation target when confronted with a relatively long monetary policy lag. This can be interpreted as another justification for targeting a positive inflation rate in the long-run. |
| Keywords: | Inflation targets; Monetary policy framework; Monetary policy implementation |
| JEL: | E52 E58 C63 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-2&r=cba |
| By: | Gianluca Benigno; Bianca De Paoli |
| Abstract: | This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices can reduce the optimal volatility of taxes. |
| Keywords: | optimal policy, fiscal policy, small open economy |
| JEL: | E62 E63 F41 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0905&r=cba |
| By: | Fabrizio Balassone (Banca d'Italia); Jorge Cunha (Banco de Portugal); Geert Langenus (National Bank of Belgium, Research Department); Bernhard Manzke (Deutsche Bundesbank); Jeanne Pavot (Banque de France); Doris Prammer (Oesterreichische Nationalbank; European Commission); Pietro Tommasino (Banca d'Italia) |
| Abstract: | In this paper we examine the sustainability of euro area public finances against the backdrop of population ageing. We critically assess the widely used projections of the Working Group on Ageing Populations (AWG) of the EU's Economic Policy Committee and argue that ageing costs may be higher than projected in the AWG reference scenario. Taking into account adjusted headline estimates for ageing costs, largely based upon the sensitivity analysis carried out by the AWG, we consider alternative indicators to quantify sustainability gaps for euro area countries. With respect to the policy implications, we assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon the lifetime contribution to the government's primary balance of different generations suggests that an important degree of pre-funding of the ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate way to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised stability and growth pact would ideally need to be revised upwards to significant surpluses. |
| Keywords: | population ageing, fiscal sustainability, generational accounting, medium-term objectives for fiscal policy |
| JEL: | H55 H60 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200901-21&r=cba |
| By: | Yi Zheng |
| Abstract: | Treating imports as intermediate inputs to domestic production, the author adopts the translog function approach to model real gross domestic income (GDI) in Canada over the 1961-2006 period. She explores the role of price ratios, such as terms of trade and the real effective exchange rate, in explaining changes in real GDI, trade openness, trade balance, and labour share of income, after controlling for factor endowments and technological improvements. Models are developed for both the total economy and the business sector, with alternative assumptions about the flexibility of labour input, user cost of capital, and the representation of technological changes. |
| Keywords: | Productivity; Econometric and statistical methods |
| JEL: | F10 O47 C43 D33 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:09-4&r=cba |
| By: | Oleksiy Kryvtsov; Virgiliu Midrigan |
| Abstract: | Real rigidities that limit the responsiveness of real marginal cost to output are a key ingredient of sticky price models necessary to account for the dynamics of output and inflation. We argue here, in the spirit of Bils and Kahn (2000), that the behavior of marginal cost over the cycle is directly related to that of inventories, data on which is readily available.We study a menu cost economy in which firms hold inventories in order to avoid stockouts and to economize on fixed ordering costs. We find that, for low rates of depreciation similar to those in the data, inventories are highly sensitive to changes in the cost of holding and acquiring them over the cycle. This implies that the model requires an elasticity of real marginal cost to output approximately equal to the inverse of the elasticity of intertemporal substitution in order to account for the countercyclical inventory-to-sales ratio in the data. Stronger real rigidities lower the cost of acquiring and holding inventories during booms and counterfactually predict a procyclical inventory-to-sales ratio. |
| Keywords: | Business fluctuations and cycles; Transmission of monetary policy |
| JEL: | E31 F12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-6&r=cba |
| By: | Calista Cheung |
| Abstract: | Commodity prices have increased dramatically and persistently over the past several years, followed by a sharp reversal in recent months. These large and persistent movements in commodity prices raise questions about their implications for global inflation. The process of globalization has motivated much debate over whether global factors have become more important in driving the inflation process. Since commodity prices respond to global demand and supply conditions, they are a potential channel through which foreign shocks could influence domestic inflation. The author assesses whether commodity prices can be used as effective leading indicators of inflation by evaluating their predictive content in seven major industrialized economies. She finds that, since the mid-1990s in those economies, commodity prices have provided significant signals for inflation. While short-term increases in commodity prices can signal inflationary pressures as early as the following quarter, the size of this link is relatively small and declines over time. The results suggest that monetary policy has generally accommodated the direct effects of short-term commodity price movements on total inflation. While indirect effects of short-term commodity price movements on core inflation have remained relatively muted, more persistent movements appear to influence inflation expectations and signal changes in both total and core inflation at horizons relevant for monetary policy. The results also suggest that commodity price movements may provide larger signals for inflation in the commodity-exporting countries examined than in the commodity-importing economies. |
| Keywords: | Business fluctuations and cycles; Economic models; Inflation and prices; International topics; Transmission of monetary policy |
| JEL: | E3 E52 E58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:09-5&r=cba |
| By: | Abo-Zaid, Salem |
| Abstract: | This paper studies optimal monetary policy in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that the right index to target depends on the structure of the individual economy. When wages are fully flexible, the consumer price index (CPI) is better to target given low to moderate levels of pass-through. On the other hand, assuming complete pass-through, economies with relatively high degrees of wage rigidity and wage indexation should either target their CPIs or fully stabilize nominal wages. Also, CPI targeting and nominal wage targeting are superior to targeting the Producer Price Index (DPI) in relatively high degrees of pass-through given that wages are relatively rigid and indexation degrees are high. The results of the paper suggest that, by committing to a common monetary policy in a common-currency area, some countries may not be conducting monetary policy optimally. |
| Keywords: | Optimal Monetary Policy; Incomplete Pass-Through; Sticky Wages; Inflation Targeting; Conumer Price Index; Domestic Price Index |
| JEL: | E12 E31 E52 E4 F31 |
| Date: | 2009–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13177&r=cba |
| By: | James Feigenbaum (University of Pittsburgh); Frank N. Caliendo (Department of Economics and Finance, Utah State University); Emin Gahramanov (Deakin University) |
| Abstract: | Contrary to the usual presumption that welfare is maximized if consumers behave rationally, we show in a two-period overlapping generations model that there always exists a rule of thumb that can weakly improve upon the lifecycle/permanent-income rule in general equilibrium with irrational households. The market-clearing mechanism introduces a pecuniary externality that individual rational households do not consider when making decisions, but a publically shared rule of thumb can exploit this effect. For typical calibrations, the improvement of the welfare of irrational households is robust to the introduction of rational agents. Generalizing to a more realistic lifecycle model, we find in particular that the Save More Tomorrow(TM) (SMarT) Plan can confer higher lifetime utility than the permanent-income rule in general equilibrium. |
| Keywords: | consumption, saving, coordination, lifecycle/permanent-income hypothesis, SMarT Plan, general equilibrium, rules of thumb, pecuniary externality |
| JEL: | C61 D11 E21 |
| Date: | 2009–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:uth:wpaper:200901&r=cba |
| By: | Gabriel Enrique Alberola (Banco de España); José María Serena (Banco de España) |
| Abstract: | Sovereign external assets (SEAs) comprise foreign exchange reserves and sovereign wealth funds (SWFs). The global stock of reserves reached 7 $trn in the second quarter of 2008, but data on SWF are rather elusive. Our estimation puts the SWFs at around 2,5 $trn dollars by 2007 and in the last years they have grown at a high pace, fostered by high commodity prices. Therefore, SEAs have surpassed the 10 $trn mark (around 5% of global assets and 15% of global GDP). This paper argues that reserves and SWF assets should be jointly considered for the assessment of global imbalances. Both are official capital outflows from developing to developed countries, both hinder internal adjustment in current account surplus countries, both help to cover the financing needs of deficit countries, in particular in the US, and, therefore, both contribute to sustain global imbalances. The importance of SEAs in financing the external imbalances of the US has been widely recognised but scantly measured. Our rule-of-thumb calculations suggests that they have greatly increased their importance in the last years, having surpassed the US$ trillion increase in 2007; relative to US financing needs, this amount represents around a 135% and 50% of net and gross needs, respectively, in 2007. Reserves have in the last years contributed 80% and SWFs 20%.Looking ahead, two main conclusions can be put forward: 1) the relative importance SWFs in the financing of the US deficits and global imbalances is set to increase (also relative to reserves), but this is conditional to commodity prices remaining at high levels. On the one hand, the economic motivation of SWFs -intertemporal smoothing- is more palatable than that of reserves (exchange rate management), despite political concerns on SWFs; on the other hand, SWFs do not have significant internal costs, contrary to reserves, whose monetary and fiscal costs are increasing in the margin; 2) SEAs can well buttress US financial needs in the years ahead, providing resilience to the global imbalances. Dramatic shifts in the pace of SEAs accumulation -due for instance to an adjustment of commodity prices- or in the investment allocation would jeopardise these prospects. |
| Keywords: | international reserves, sovereign wealth funds, global imbalances, exchange rates |
| JEL: | E58 F21 F36 G15 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0834&r=cba |
| By: | Yunus Aksoy; Henrique S Basso; Javier Coto Matinez (School of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | We study liquidity effects and cost channels within a model of nominal rigidities and imperfect competition that gives explicit role for money-credit markets and investment decisions. We find that cost channels matter for monetary transmission, amplifying the impact of supply shocks and dampening the effects of demand shocks. Liquidity effects only obtain when the policy is specified by an interest rate policy rule and money-credit conditions are determined endogenously. We also find that determinacy issues are particularly relevant when models include the cost channel and explicit money-credit markets.’s score is variable along its life cycle or if he search process uses resources. It is shown that the discount effect of gradual recognition of popularity tends to reduce growth. Hence, growth is enhanced if the search engine is less sensitive to popularity. Also, growth is lower when the search engine rewards "web page quality" better because of the resources diverted away from R and D into advertising. But these mechanisms generate opposite level effects on the average quality selected by consumers. As a result the net effect on welfare is ambiguous. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0902&r=cba |
| By: | Milne , Alistair (Cass Business School, UK and Monetary Policy and Research Department, Bank of Finland); Wood, Geoffrey (Cass Business School, UK and Monetary Policy and Research Department, Bank of Finland) |
| Abstract: | It has been widely accepted that constraints on the wholesale funding of bank balance sheets amplify the transmission of monetary policy through what is called the ‘bank lending channel’. We show that the effect of such bank balance sheet constraints on monetary transmission is in fact theoretically ambiguous, with the prior expectation, based on standard theoretical models of household and corporate portfolios, that the bank lending channel attenuates monetary policy transmission. We examine macroeconomic data for the G8 countries and find no evidence that banking sector deposits respond negatively and more than lending to tightening of monetary policy, as the accepted view of the bank lending channel requires. The overall picture is mixed, but these data generally suggest that deposits fluctuate procyclically and somewhat less over the business cycle than bank lending, and that total bank deposits, unlike bank lending, show little direct response to changes in interest rates. This suggests it is very unlikely that the bank lending channel amplifies monetary policy. Our paper has thus corrected a misunderstanding about the role of banks in monetary policy transmission that has persisted in the literature for some two decades. |
| Keywords: | credit channel; monetary transmission; bank financing constraints |
| JEL: | E44 E52 G32 |
| Date: | 2009–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_002&r=cba |
| By: | Dressler, Scott J. |
| Abstract: | This paper quantitatively investigates equilibrium indeterminacy due to economies of scale (ES) in financial intermediation. Financial intermediation provides deposits (inside money) which can substitute with currency to purchase consumption, and depositing decisions are susceptible to non-fundamental confidence (sunspot) shocks. With the intermediation sector calibrated to match US data: (i) indeterminacy arises for small degrees of ES; (ii) sunspot shocks qualitatively resemble monetary shocks; and (iii) monetary policies can stabilize the real impact of sunspot shocks, but only under complete information. The analysis also assesses the removal of these shocks on the volatility decline observed during the US Great Moderation. |
| Keywords: | Financial Intermediation; Inside Money; Indeterminacy; Business Cycles |
| JEL: | E32 C68 E44 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13310&r=cba |
| By: | Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR) |
| Abstract: | We adapt the basic principles of the Keynes Plan and argue for the creation of a supranational bank money that would coexist along side national currencies and for the establishment of a new international clearing union (NICU). These principles remain timely because the fundamental causes of the instability of the international monetary system are as valid today as they were in the early Forties. The new international money would be created against domestic earning assets of the Fed and the ECB. The quantity of this supranational bank money would be demand driven and thus would differ from the helicopter-money Special Drawing Rights. NICU would not hold open positions in assets denominated in national currency and consequently would not bear exchange rate risk. NICU would be more than an office where to record credit and debit entries of the supranational bank money. The financial tsunami that has hit the United States in 2007-2008 provides a unique opportunity for a coordinated strategy. |
| Keywords: | Keynes Plan, exchange rates, external imbalances, international monetary system, key currency, supranational banl money |
| JEL: | E42 E52 F33 F36 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:1&r=cba |
| By: | Michael Bordo; Tamara Gomes; Lawrence Schembri |
| Abstract: | Canada played an important role in the postwar establishment of the International Monetary Fund (IMF), yet it was also the first major member to challenge the orthodoxy of the BrettonWoods par value system by abandoning it in 1950 in favour of a floating, market-determined exchange rate. Although the IMF heavily criticized this decision, Canada's trail-blazing experience demonstrated that a flexible exchange rate could operate in a stable and effective manner under a high degree of capital mobility. Equally important, it showed that monetary policy needs to be conducted differently under a flexible exchange rate and capital mobility. The remarkable stability of the dollar during the 1950s contradicted previous wisdom on floating exchange rates, which had predicted significant volatility. In May of 1962, Canada returned to the BrettonWoods system as a "prodigal son" after a period of controversial monetary policy and a failed attempt to depreciate the value of the Canadian dollar. The authors critically analyze the interaction between Canadian and IMF officials regarding Canada's exchange rate policy in view of the economic circumstances and the prevailing wisdom at the time. They also examine the impact on IMF research and policy, because the Canadian experience influenced the work of Rudolf Rhomberg as well as Robert Mundell and Marcus Fleming, resulting in the development of the Mundell–Fleming model. Thus, the Canadian experience with a floating exchange rate not only had important implications for the IMF and the BrettonWoods system, but also for macroeconomic theory and policy in open economies. |
| Keywords: | Exchange rate regimes; Exchange rates; Monetary policy framework |
| JEL: | F41 N72 E52 E58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:09-1&r=cba |
| By: | WenShwo Fang (Department of Economics, Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); ChunShen Lee (Department of Economics, Feng Chia University) |
| Abstract: | Recently, Fagiolo et al. (2008) find fat tails in the distribution of economic growth rates after adjusting for outliers, autocorrelation, and heteroskedasticity. This paper employs US quarterly real output growth, showing that this finding of fat tails may reflect the Great Moderation. That is, leptokurtosis disappears after GARCH adjustment once we incorporate the break in the variance equation to account for the Great Moderation. |
| Keywords: | real GDP growth, the Great Moderation, leptokurtosis, GARCH models |
| JEL: | C32 E32 O40 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0903&r=cba |
| By: | Varella Mollick, Andre (University of Texas - Pan American); Torres, Rene Cabral (Escuela de Graduados en Administracion Publica y Politica Publica); Carneiro, Francisco G. (The World Bank) |
| Abstract: | This paper examines the effects of inflation targeting on industrial and emerging economies' output growth over the "globalization years" of 1986-2004. Controlling for trade openness and two indicators of financial globalization, the authors find systematic positive and significant effects of inflation targeting on real output growth. In dynamic models, the findings show strong output persistence in industrial economies, in which partial and full inflation targeting regimes have a positive long-run impact on growth. In emerging markets, only full inflation targeting policies have any output effect in the long-run. The results suggest that strict inflation targeting is needed to make the discipline effect of the disinflation process outweigh the output costs of promoting high interest rates to attract capital flows in a global world. These findings are robust to the treatment of endogenous globalization measures. |
| Keywords: | Economic Growth; Globalization; Inflation Targeting; Panel Data Methods |
| JEL: | F31 F32 F33 F34 |
| Date: | 2008–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4791&r=cba |
| By: | Yu-chin Chen; Kwok Ping Tsang |
| Abstract: | This paper uses information contained in the cross-country yield curves to test the asset-pricing approach to exchange rate determination, which models the nominal exchange rate as the discounted present value of its expected future fundamentals. Research on the term structure of interest rates has long argued that the yield curve contains information about future economic activity such as GDP growth and inflation. Bringing this lesson to the international context, we extract the Nelson-Siegel (1987) factors of relative level, slope, and curvature from cross-country yield differences to proxy expected movements in future exchange rate fundamentals. Using monthly data between 1985-2005 for the United Kingdom, Canada, Japan and the US, we show that the yield curve factors indeed can explain and predict bilateral exchange rate movements and excess currency returns one month to two years ahead. Out-of- sample analysis also shows the yield curve factors to outperform a random walk in forecasting short-term exchange rate returns. |
| Keywords: | Exchange Rate Forecasting, Term Structure of Interest Rates, Uncovered Interest, Parity |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:vpi:wpaper:e07-15&r=cba |
| By: | Yu-chin Chen (University of Washington); Kwok Ping Tsang (Virginia Tech) |
| Abstract: | This paper uses information contained in the cross-country yield curves to test the asset-pricing approach to exchange rate determination, which models the nominal exchange rate as the discounted present value of its expected future fundamentals. Research on the term structure of interest rates has long argued that the yield curve contains information about future economic activity such as GDP growth and inflation. Bringing this lesson to the international context, we extract the Nelson-Siegel (1987) factors of relative level, slope, and curvature from cross-country yield differences to proxy expected movements in future exchange rate fundamentals. Using monthly data between 1985-2005 for the United Kingdom, Canada, Japan and the US, we show that the yield curve factors indeed can explain and predict bilateral exchange rate movements and excess currency returns one month to two years ahead. Out-of-sample analysis also shows the yield curve factors to outperform a random walk in forecasting short-term exchange rate returns. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:udb:wpaper:uwec-2009-04&r=cba |
| By: | Marcello Pericoli (Bank of Italy); Marco Taboga (Bank of Italy) |
| Abstract: | We introduce a two-country no-arbitrage term-structure model to analyse the joint dynamics of bond yields, macroeconomic variables, and the exchange rate. The model allows to understand how exogenous shocks to the exchange rate affect the yield curves, how bond yields co-move in different countries, and how the exchange rate is influenced by the interactions between macroeconomic variables and time-varying bond risk premia. Estimating the model with US and German data, we obtain an excellent fit of the yield curves and we are able to account for up to 75 per cent of the variability of the exchange rate. We find that time-varying risk premia play a non-negligible role in exchange rate fluctuations due to the fact that a currency tends to appreciate when risk premia on long-term bonds denominated in that currency rise. A number of other novel empirical findings emerge. |
| Keywords: | exchange rate, term structure, UIP |
| JEL: | C5 E4 G1 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_699_09&r=cba |
| By: | Anna Kormilitsina (Southern Methodist University) |
| Abstract: | The observed tightening of interest rates in the aftermath of the post-World War II oil price hikes led some to argue that U.S. monetary policy exacerbated the recessions induced by oil price shocks. This paper provides a critical evaluation of this claim. Within an estimated dynamic stochastic general equilibrium model with the demand for oil, I contrast Ramsey optimal with estimated monetary policy. I find that monetary policy amplified the negative effect of the oil price shock. The optimal response to the shock would have been to raise inflation and interest rates above what had been seen in the past. |
| Keywords: | Oil price, Optimal monetary policy, DSGE model. |
| JEL: | C68 E52 Q43 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:smu:ecowpa:0901&r=cba |
| By: | Alessandro Del Boca (University of Brescia); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR); Franco Spinelli (University of Brescia); Carmine Trecroci (University of Brescia) |
| Abstract: | We examine Italian inflation rates and the Phillips curve with a very long-run perspective, one that covers the entire existence of the Italian lira from political unification (1861) to the entry of Italy in the European Monetary Union (end of 1998). We first study the volatility, persistence and stationarity of the Italian inflation rate over the long run and across various exchange-rate regimes that have shaped Italian monetary history. Next, we estimate alternative Phillips equations and investigate the extent to which nonlinearities, asymmetries and structural changes characterize the inflation-output trade-off in the long run. We capture the effects of structural changes and asymmetries on the estimated parameters of the inflation-output trade-off relying partly on sub-sample estimates and partly on time-varying parameters estimated with the Kalman filter. Finally, we investigate causal relationships between inflation rates and output and extend the analysis to include the US and the UK for comparison purposes. The inference is that Italy has experienced a conventional inflation-output trade-off only during times of low inflation and stable aggregate supply. |
| Keywords: | Inflation, Italian Lira, Phillips curve |
| JEL: | E31 E32 E5 N10 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:8&r=cba |
| By: | Ángel Gavilán (Banco de España); Juan A. Rojas (Banco de España) |
| Abstract: | We propose a new numerical method to solve stochastic models that combines the parameterized expectations (PEA) and the Smolyak algorithms. This method is especially convenient to address problems with occasionally binding constraints (a feature inherited from PEA) and/or a large number of state variables (a feature inherited from Smolyak), i.e. DSGE models that incorporate portfolio problems and incomplete markets. We describe the proposed Smolyak-PEA algorithm in the context of a one-country stochastic neoclassical growth model and compare its accuracy with that of a standard PEA collocation algorithm. Despite estimating fewer parameters, the former is able to reach the high accuracy levels of the latter. We further illustrate the working of this algorithm in a two-country neoclassical model with incomplete markets and portfolio choice. Again, the Smolyak-PEA algorithm approximates the solution of the problem with a high degree of accuracy. Finally, we show how this algorithm can efficiently incorporate both occasionally binding constraints and a partial information approach. |
| Keywords: | Portfolio Choice, Dynamic Macroeconomics, Computational Methods |
| JEL: | E2 C68 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0838&r=cba |
| By: | Andrle, Michal |
| Abstract: | The paper discusses the role of stochastic trends in DSGE models and effects of stochastic detrending. We argue that explicit structural assumptions on trend behavior is convenient, namely for emerging countries. In emerging countries permanent shocks are an important part of business cycle dynamics. The reason is that permanent shocks spill over the whole frequency range, potentially, including business cycle frequencies. Applying high- or band-pass filter to obtain business cycle dynamics, however, does not eliminate the influence of permanent shocks on comovements of time series. The contribution of the paper is to provide a way how to calculate the role of permanent shocks on the detrended/ filtered business cycle population dynamics in a DSGE model laboratory using the frequency domain methods. |
| Keywords: | detrending; band-pass filter; spectral density; DSGE. |
| JEL: | E32 C53 D58 |
| Date: | 2008–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13289&r=cba |
| By: | Giuliana Passamani |
| Abstract: | The aim of the paper is to analyze the foreign transmission mechanism between each of the Visegrad-4 countries and the eurozone, through an empirical analysis of the basic international parity conditions linking Czech, Hungarian, Polish and Slovakian inflations and interest rates with the ones of the current euro area members. The focus of the analysis is to show the differences among these catching-up economies, with particular attention to their process of convergence towards the eurozone economy. For reasons due to the availability of data, the sample covers the last decade. We use the cointegrated VAR model to define longrun stationary relations as well as common stochastic trends. The methodology adopted is properly apt to uncover the dynamic structure underlying the stochastic behaviour of prices, interest rates and exchange rate. Of particular interest is the empirical finding that the parities do not hold on their own, as expected, but that weaker form of the same parities, or linear combinations of them, hold in our data set, with some differences for each country. Also the process of convergence is different: the Czech Republic seems to have reached a relative convergence, while for the other countries we have that the process show a tendency towards convergence. |
| Keywords: | Visegrad_4 countries, PPP, UIP, RIP, Cointegrated VAR, Convergence |
| JEL: | E31 E43 F31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0825&r=cba |
| By: | Zoltán M. Jakab (Magyar Nemzeti Bank); Balázs Világi (Magyar Nemzeti Bank) |
| Abstract: | This paper presents and estimates a dynamic stochastic general equilibrium (DSGE) small-open-economy model for the Hungarian economy. The model features different types of frictions, real and nominal rigidities which are necessary to replicate the empirical persistence of Hungarian data. Bayesian methods are applied, and the structural break due to changing monetary regime over the studied period is explicitly taken into account in the estimation procedure. A real-time adaptive learning mechanism describes agents’ perception on underlying inflation. This creates an additional inertia in inflation. We describe the properties of the estimated model by impulse-response analysis, variance decomposition and the analysis of identified structural shocks. Our results are compared with that of estimated euro-area DSGE models, and estimated non-DSGE models of the Hungarian economy. As a robustness check, a model without real time adaptive learning is also estimated and it’s results are also compared to those of the original model. |
| Keywords: | New Keynesian models, DSGE models, small open economy, Bayesian econometrics. |
| JEL: | E40 E50 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2008/9&r=cba |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria) |
| Abstract: | Recent empirical evidence on the direct link of inflation targeting and inflation volatility is at best mixed. However, comparing inflation volatility across alternative monetary policy regimes within a country based on conventional ways, used in previous studies, begs the question. The question is not whether the volatility of inflation has changed, but rather whether the volatility is different than it otherwise would have been. In such a backdrop, this paper uses the cosine-squared cepstrum to provide evidence that CPI inflation in South Africa has become more volatile since the first quarter of 2000, when the country moved into an inflation targeting regime, than it would have been had the South African Reserve Bank (SARB) continued with the more eclectic monetary policy approach pursued in the pre-targeting era. |
| Keywords: | Cosine-Squared Cepstrum; Inflation Targeting; Inflation Volatility; Saphe Cracking |
| JEL: | C65 E42 E52 E64 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200906&r=cba |