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on Central Banking |
| By: | Gonzalo Fernández de Córdoba; Timothy J. Kehoe |
| Abstract: | Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:421&r=cba |
| By: | Ansgar Belke |
| Abstract: | Policymakers in the EU member states are currently shaping rescue packages to prevent the financial crisis hitting their economies with unmitigated force. Each government is responding to the emerging problems with a country-specific set of measures. Given the global nature of the crisis, would coordinated action at the European level not be a better approach?Was the German government – much-criticized for its initial reluctance to adopt massive fiscal stimulation measures – right after all to exploit the option value of waiting in a situation of high uncertainty? The answer to the second question is a qualified “yes”. However, the answer to the first one is more complex and crucially depends on how reasonable it appears to model the impact of the economic crisis as an exogenous demand shock which has hit the euro area countries. |
| Keywords: | Policy co-ordination, fiscal multiplier, fiscal stimulus package, liquidity constraint, option value of waiting, uncertainty |
| JEL: | E62 F42 H62 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0088&r=cba |
| By: | Giovanni L. Violante; Jonathan Heathcote; Kjetil Storesletten |
| Abstract: | Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynamics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household heterogeneity, with a special emphasis on the “standard” incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals’ key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk? |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:420&r=cba |
| By: | Tobias Adrian; Erkko Etula; Hyun Song Shin |
| Abstract: | We present evidence that fluctuations in the aggregate balance sheets of financial intermediaries forecast exchange rate returns - at weekly, monthly, and quarterly frequencies, both in and out of sample, and for a large set of countries. We estimate prices of risk using a cross-sectional, arbitrage-free asset pricing approach and show that balance sheets forecast exchange rates because of the latter's association with fluctuations in risk premia. We provide a rationale for an intertemporal equilibrium pricing theory in which intermediaries are subject to balance sheet constraints. |
| Keywords: | Intermediation (Finance) ; Asset pricing ; Foreign exchange rates ; International finance ; Financial institutions ; Investment banking |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:361&r=cba |
| By: | Rime, Dagfinn; Sarno, Lucio; Sojli, Elvira |
| Abstract: | This paper adds to the research efforts that aim to bridge the divide between macro and micro approaches to exchange rate economics by examining the linkages between exchange rate movements, order flow and expectations of macroeconomic variables. The basic hypothesis tested is that if order flow reflects heterogeneous expectations about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data collected via a live feed from Reuters for three major exchange rates, we find that: i) order flow is intimately related to a broad set of current and expected macroeconomic fundamentals; ii) more importantly, order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise, on the basis of economic value criteria such as Sharpe ratios and performance fees implied by utility calculations. |
| Keywords: | exchange rates; forecasting; macroeconomic news; microstructure; order flow |
| JEL: | F31 F41 G10 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7225&r=cba |
| By: | Nergiz Dincer; Barry Eichengreen |
| Abstract: | We present updated estimates of central bank for 100 countries up through 2006 and use them to analyze both the determinants and consequences of monetary policy transparency in an integrated econometric framework. We establish that there has been significant movement in the direction of greater central bank transparency in recent years. Transparent monetary policy arrangements are more likely in countries with strong and stable political institutions. They are more likely in democracies, with their culture of transparency. Using these political determinants as instruments for transparency, we show that more transparency monetary policy operating procedures is associated with less inflation variability though not also with less inflation persistence. |
| JEL: | E0 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14791&r=cba |
| By: | Campbell Leith; Simon Wren-Lewis |
| Abstract: | Recent attempts to incorporate optimal fiscal policy into New Keynesian models subject to nominal inertia, have tended to assume that policy makers are benevolent and have access to a commitment technology. A separate literature, on the New Political Economy, has focused on real economies where there is strategic use of policy instruments in a world of political conflict. In this paper we combine these literatures and assume that policy is set in a New Keynesian economy by one of two policy makers facing electoral uncertainty (in terms of infrequent elections and an endogenous voting mechanism). The policy makers generally share the social welfare function, but differ in their preferences over fiscal expenditure (in its size and/or composition). Given the environment, policy shall be realistically constrained to be time-consistent. In a sticky-price economy, such heterogeneity gives rise to the possibility of one policy maker utilising (nominal) debt strategically to tie the hands of the other party, and influence the outcome of any future elections. This can give rise to a deficit bias, implying a sub-optimally high level of steady-state debt, and can also imply a sub-optimal response to shocks. The steady-state distortions and inflation bias this generates, combined with the volatility induced by the electoral cycle in a sticky-price environment, can significantly raise the costs of having a less thankfully benevolent policy maker. |
| Keywords: | New Keynesian Model; Government Debt; Monetary Policy; Fiscal Policy, Electoral Uncertainty, Time Consistency. |
| JEL: | E62 E63 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_11&r=cba |
| By: | Tobias Adrian; Hao Wu |
| Abstract: | We present estimates of the term structure of inflation expectations, derived from an affine model of real and nominal yield curves. The model features stochastic covariation of inflation with the real pricing kernel, enabling us to extract a time-varying inflation risk premium. We fit the model not only to yields, but also to the yields' variance-covariance matrix, thus increasing identification power. We find that model-implied inflation expectations can differ substantially from break-even inflation rates when market volatility is high. Our model's ability to be updated weekly makes it suitable for real-time monetary policy analysis. |
| Keywords: | Inflation risk ; Asset pricing ; Financial markets ; Stochastic analysis |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:362&r=cba |
| By: | Michael B. Devereux; Gregor W. Smith; James Yetman |
| Abstract: | Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciation across countries. The striking lack of evidence for this link the consumption/real-exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to resolve the anomaly. |
| JEL: | F37 F41 F47 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14795&r=cba |
| By: | Todd E. Clark; Troy Davig |
| Abstract: | The level and volatility of survey-based measures of long-term inflation expectations have come down dramatically over the past several decades. To capture these changes in inflation dynamics, we embed both short- and long-term expectations into a medium-scale VAR with stochastic volatility. The model documents a marked decline in the volatility of expectations, but also reveals a shift in the factors driving their movement. Throughout the 1980s and early 1990s, the majority of the variance in long-term expectations were driven by 'own' shocks. Beginning in the mid-1990s, however, the factors explaining the variance of long-term expectations began shifting amidst an overall decline in volatility. At the end of the sample in 2008, innovations to measures of inflation and output account for the majority of the remaining low-level of volatility in long-term expectations. We document a shift in monetary policy towards more systematic behavior that precedes the shift in the factors driving long-term expectations. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-05&r=cba |
| By: | Ronald MacDonald; Lukas Menkhoff; Rafael R. Rebitzky |
| Abstract: | IThis paper sheds new light on a long-standing puzzle in the international finance literature, namely, that exchange rate expectations appear inaccurate and even irrational. We find for a comprehensive dataset that individual forecasters’ performance is skill-based. ‘Superior’ fore-casters show consistent ability as their forecasting success holds across currencies. They seem to possess knowledge on the role of fundamentals in explaining exchange rate behavior, as indicated by better interest rate forecasts. Superior forecasters are more experienced than the median forecaster and have fewer personnel responsibilities. Accordingly, foreign exchange markets may function in less puzzling and irrational ways than is often thought. |
| Keywords: | Foreign exchange market; individual exchange rate forecasts; interest rate forecasts; forecaster experience |
| JEL: | F31 G14 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_13&r=cba |
| By: | Ester Faia; Lorenza Rossi |
| Abstract: | We study the design of optimal monetary policy (Ramsey policies) in a model with sticky prices and unionized labour markets. Collective wage bargaining and unions monopoly power tend to dampen wage fluctuations and to amplify employment fluctuations relatively to a DNK model with walrasian labour markets. The optimal monetary policy must trade-off counteracting forces. On the one side deviations from zero inflation allow the policy maker to smooth inefficient employment fluctuations. On other side, the presence of wage mark-ups and wage stickiness produce inflationary pressures that require aggressive inflation targeting. Overall we find that the Ramsey planner deviates from full price stability and that an optimal rule targets inflation the real economic activity alongside inflation |
| Keywords: | optimal monetary policy, labour market unionization, threat points |
| JEL: | E0 E4 E5 E6 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1490&r=cba |
| By: | Marlene Amstad; Andreas M. Fischer |
| Abstract: | This paper estimates monthly pass-through ratios from import prices to consumer prices in real time. Conventional time series methods impose restrictions to generate exogenous shocks on exchange rates or import prices when estimating pass-through coefficients. Instead, a natural experiment based on data releases defines our shock to foreign prices. Our estimation strategy follows an event-study approach based on monthly releases in import prices. Projections from a dynamic common factor model with daily panels before and after monthly releases of import prices define the shock. This information shock allows us to recover a monthly pass-through ratio. We apply our identification procedure to Swiss prices and find strong evidence that the monthly pass-through ratio is around 0.3. Our real-time estimates yield higher pass-through ratios than time series estimates. |
| Keywords: | Monetary policy ; Econometric models ; Foreign exchange rates ; Prices |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:26&r=cba |
| By: | Raphael Auer; Thomas Chaney |
| Abstract: | This paper extends the Mussa and Rosen (1978) model of quality-pricing under perfect competition. Exporters sell goods of different qualities to consumers who have heterogeneous preferences for quality. Production is subject to decreasing returns to scale and, therefore, supply and the toughness of competition react to cost changes brought about by exchange rate fluctuations. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods. We test these predictions using highly disaggregated price and quantity U.S. import data. We find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods. Therefore, exchange rate passthrough rates that are measured using aggregate data will tend to overstate the actual extent of pass-through. |
| Keywords: | Foreign exchange rates ; Econometric models ; International trade |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:23&r=cba |
| By: | Huiping Yuan (Department of Finance, Xiamen University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | We observe that the inconsistency of optimal policy comes from inconsistency of the social loss function with respect to the economic structure. Accordingly, this paper designs the central bank loss functions and rules, which are consistent with the economic structure and serve as mechanisms to implement optimal policy. We minimize the social loss function and use the idea of implementation theory, in designing the central bank loss functions and policy rules. Both ways result in identical central bank loss functions and policy rules. We also examine four equivalent methods of implementing optimal monetary policy, committing to the social loss function, using discretion with the central bank long-run and short-run loss functions, and following monetary policy rules. The same outcomes emerge from these different policymaking methods because the central bank actually follows the same (similar) policy rules. To some extent, policy rules appear more basic and flexible than social and central bank loss functions. In addition, we observe that the short-run natural employment target eliminates both the average and the state-contingent inflation biases, and a liberal, not conservative, preference eliminates the stabilization bias. As a result, under the designed central bank loss function discretionary policy proves optimal for social welfare. In conclusion, the social loss function, the central bank long-run and short-run loss functions, and monetary policy rules imply a complete regime for implementing optimal policy. |
| Keywords: | Optimal Policy, Central Bank Loss Functions, Policy Rules |
| JEL: | E42 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0911&r=cba |
| By: | Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Huiping Yuan (Department of Finance, Xiamen University) |
| Abstract: | Kydland and Prescott (1977) consider the issue of the time-inconsistency of optimal policy and its source. Our paper provides additional insight on this issue. They develop a simple model of monetary policy making, where the central bank needs some commitment technique to achieve optimal monetary policy over time. Although not their main focus, they illustrate the difference between consistent and optimal policy in a sequential-decision one-period world. In our solution, the government appoints a central bank or delegates to the central bank an objective function that differs from the social welfare function. The central bank’s welfare function causes the consistent policy implemented by the central bank to prove optimal for society. The optimal institutional design for the Kydland-Prescott sequential-decision one-period model requires the appointment or delegation to a completely conservative central banker. |
| Keywords: | Consistent policy, Optimal policy, Consistent targets |
| JEL: | E42 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0908&r=cba |
| By: | Huiping Yuan (Department of Finance, Xiamen University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. As a result, the social loss function cannot serve as a direct loss function for the central bank. Accordingly, we employ implementation theory to design a central bank loss function (mechanism design) with consistent targets, while the social loss function serves as a social welfare criterion. That is, with the correct mechanism design for the central bank loss function, optimal policy and consistent policy become identical. In other words, optimal policy proves implementable (consistent). |
| Keywords: | Optimal policy, Consistent policy, Implementation theory |
| JEL: | E42 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0910&r=cba |
| By: | Huiping Yuan (Department of Finance, Xiamen University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Langnan Chen (Institute for Economics, Sun Yat-sen University) |
| Abstract: | This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. Control theory can identify the optimal plan and, thus, the optimal economic outcomes. Then, we can seek a consistent plan that coincides with the optimal plan through institutional design. That is, the optimal plan can indicate how to design the optimal institution, through which we implement the optimal plan with a consistent plan. |
| Keywords: | Optimal policy, Consistent policy, Institutional design |
| JEL: | E42 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0909&r=cba |
| By: | Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna,); Alfred Stiglbauer (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,) |
| Abstract: | In this paper we present an extension of the Taylor model with staggered wages in which wage-setting is also influenced by reference norms (i.e. by benchmark wages). We show that reference norms can considerably increase the persistence of inflation and the extent of real wage rigidity but that these effects depend on the definition of reference norms (e.g. how backward-looking they are) and on whether the importance of norms differs between sectors. Using data on collectively bargained wages in Austria from 1980 to 2006 we show that wage-setting is strongly influenced by reference norms, that the wages of other sectors seem to matter more than own past wages and that there is a clear indication for the existence of wage leadership (i.e. asymmetries in reference norms). |
| Keywords: | Inflation Persistence, Real Wage Rigidity, Staggered Contracts, Wage Leadership. |
| JEL: | E31 E32 E24 J51 |
| Date: | 2009–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:153&r=cba |
| By: | Enrique Martinez-Garcia; Jens Sondergaard |
| Abstract: | This paper develops a tractable two-country DSGE model with sticky prices à la Calvo (1983) and local-currency pricing. We analyze the capital investment decision in the presence of adjustment costs of two types, the capital adjustment cost (CAC) specification and the investment adjustment cost (IAC) specification. We compare the investment and trade patterns with adjustment costs against those of a model without adjustment costs and with (quasi-) flexible prices. We show that having adjustment costs results into more volatile consumption and net exports, and less volatile investment. We document three important facts on U.S. trade: a) the S-shaped cross-correlation function between real GDP and the real net exports share, b) the J-curve between terms of trade and net exports, and c) the weak and S-shaped cross-correlation between real GDP and terms of trade. We find that adding adjustment costs tends to reduce the model's ability to match these stylized facts. Nominal rigidities cannot account for these features either. |
| Keywords: | Macroeconomics - Econometric models ; Capital investments ; International trade ; Foreign exchange |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:28&r=cba |
| By: | Carsten Hefeker (University of Siegen, Department of Economics, Hoelderlinstrasse 3, 57068 Siegen, Germany); Blandine Zimmer (University of Siegen, Department of Economics, Hoelderlinstrasse 3, 57068 Siegen, Germany) |
| Abstract: | We examine monetary and fiscal interactions in a monetary union model with uncertainty due to imperfect central bank transparency. It is first shown that monetary uncertainty discourages excessive taxation and may thus reduce average inflation and output distortions. However, as countries enter the monetary union, this tax-restraining effect of uncertainty is mitigated. The monetary union may hence lead to higher fiscal distortions in some member countries, depending on governments’ spending targets and on the change in the degree of uncertainty implied by common monetary policy. |
| Keywords: | Monetary union, fiscal policy, transparency of monetary policy, asymmetries |
| JEL: | E58 E63 F36 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200913&r=cba |
| By: | Carsten Hefeker (University of Siegen, Department of Economics, Hoelderlinstrasse 3, 57068 Siegen, Germany) |
| Abstract: | The paper analyzes the relation between institutional quality, such as corruption, in a country and its monetary regime. It is shown that a credibly fixed exchange rate to a low inflation country, like a currency board, can reduce corruption and improve the fiscal system. A monetary union, however, has ambiguous effects. I find that that there is convergence between countries with regard to the level of corruption. |
| Keywords: | Exchange Rate Regime, Monetary Policy, Fiscal Policy, Seigniorage, Corruption, Developing and Transition Countries. |
| JEL: | D72 E63 F33 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200911&r=cba |
| By: | Marcel Fratzscher |
| 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. |
| Keywords: | Group of Seven countries ; Foreign exchange rates ; International economic relations ; Monetary policy |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:24&r=cba |
| By: | Rochelle M. Edge; Michael T. Kiley; Jean-Philippe Laforte |
| Abstract: | This paper considers the "real-time" forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model--the Federal Reserve Board's new Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 through 2005, thereby examining over 70 forecasts presented to the Federal Open Market Committee (FOMC). Our analysis builds on previous real-time forecasting exercises along two dimensions. First, we consider time-series models, a structural DSGE model that has been employed to answer policy questions quite different from forecasting, and the forecasts produced by the staff at the Federal Reserve Board. In addition, we examine forecasting performance of our DSGE model at a relatively detailed level by separately considering the forecasts for various components of consumer expenditures and private investment. The results provide significant support to the notion that richly specified DSGE models belong in the forecasting toolbox of a central bank. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-10&r=cba |
| By: | Taeyoung Doh |
| Abstract: | What moves the yield curve? This paper specifies and estimates a dynamic stochastic general equilibrium (DSGE) model solved using a second order approximation to equilibrium conditions to answer this question. From the empirical analysis of U.S. data from 1983:Q1 to 2007:Q4, I find that the monetary policy response to the inflation gap defined by the difference between expected inflation and the inflation target of the central bank is a key channel transmitting macro shocks to the yield curve and that the degree of nominal rigidity determines which macro shocks are more important determinants of the yield curve. With the low degree of nominal rigidity, the inflation target of the central bank drives persistent movements of inflation and the yield curve while fluctuations of markups do so with the high degree of nominal rigidity. Although the estimated linear model puts nearly zero probability on the low degree of nominal rigidity, there is a positive probability mass in the nonlinear model. The analysis in this paper suggests caution on interpreting estimation results in which nonlinear terms of the DSGE model solution are ignored. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-04&r=cba |
| By: | Aleksandra Maslowska (Department of Economics and Public Choice Research Centre, University of Turku) |
| Abstract: | In this paper we trace changes in monetary policy caused by institutional amendments in legal acts of central banks. We estimate coefficients of the Taylor Rule for central banks of Sweden, United Kingdom, Switzerland and EU15 to shed some light on monetary policy ex ante and ex post significant improvements in central bank independence. Results presented suggest differences in accommodating monetary policy in countries and support the idea that initial level of CBI matters for reactions to variability both of inflation and output gap. A preindependence period characterizes with strong inflation targeting features, whereas a post-independence time resembles more discretionary type of monetary policy. As a spin-off from our original idea, we find that changing properties of inflation in the last decade make econometric analysis more difficult |
| Keywords: | Taylor rule, central bank independence, interest rate rules |
| JEL: | E52 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp46&r=cba |
| By: | Mario Cerrato; Hyunsok Kim; Ronald MacDonald |
| Abstract: | The breakdown of the Bretton Woods system and the adoption of generalised floating exchange rates ushered in a new era of exchange rate volatility and uncertainty. This increased volatility lead economists to search for economic models able to describe observed exchange rate behavior. In the present paper we propose more general STAR transition functions which encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another, and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to three different exchange rate data-sets, one for developing countries, and official nominal exchange rates, and the second for emerging market economies using black market exchange rates and the third for OECD economies. |
| Keywords: | unit root tests, threshold autoregressive models, purchasing power parity. |
| JEL: | C16 C22 F31 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_05&r=cba |
| By: | Meixing DAI; Moïse SIDIROPOULOS |
| Abstract: | Recent financial crises and central banks’ interventions to ensure liquidity on the monetary markets around the world have shown that using interest rate as instrument of monetary policy can be insufficient. Using an aggregate dynamic macro-economic model, we study how to combine inflation targeting with monetary targeting to warrant macro-economic and financial stability. A commitment to a long-run money growth rate corresponding to the inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. We show that, using Friedman’s k-percent money growth rule to help anchoring inflation expectations under inflation-targeting regime can generate dynamic instability in output, inflation, assets prices as well as real money demand. Alternatively, a well-specified monetary targeting rule that responds negatively to the evolution of expected inflation allows achieving macro-economic and financial stability. |
| Keywords: | inflation targeting, monetary targeting, stock prices, macro-economic and financial stability, Friedman’s k-percent money growth rule. |
| JEL: | E41 E44 E52 E58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2009-05&r=cba |
| By: | Meixing DAI; Moïse SIDIROPOULOS; Eleftherios Spyromitros |
| Abstract: | Using a New Keynesian small open economy model, we examine the effects of central bank transparency on inflation persistence. We have found that more opacity could reinforce the effect of persistent shocks on the level and variability of endogenous variables if the difference between the interest elasticity of domestic goods demand and the degree of trade openness is sufficiently large or sufficiently low, judging on structural parameters characterising the economy, the central bank preference and its initial degree of opacity. Our result implies that, under perfect capital mobility, a high degree of domestic financial development is a good reason for increasing transparency. |
| Keywords: | Central bank’s transparency, open economy, inflation persistence. |
| JEL: | E52 E58 F41 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2009-08&r=cba |
| By: | Meixing DAI; Moïse SIDIROPOULOS |
| Abstract: | In this paper, we examine the link between political transparency of a common central bank (CCB) and decentralized supply-side fiscal policies in a monetary union. We find that the opacity of a conservative CCB has a restrictive effect on national fiscal policies since each government internalizes the influence of its actions on the common monetary policy and thus reinforces the disciplinary effect of institutional constraints such as the Stability and Growth Pact on national fiscal authorities. However, more opacity could imply higher inflation and unemployment when the union is large enough and induce higher inflation and output-gap variability. An enlargement of the union incites national governments to increase tax rate, and weakens the disciplinary effects of opacity on member countries if fiscal policymaking is relatively decentralized and the CCB quite conservative. It induces an increase in the level of inflation and unemployment, and could increase inflation and outputgap variability. |
| Keywords: | central bank transparency; supply-side fiscal policy; monetary union. |
| JEL: | E50 E52 E58 E63 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2009-06&r=cba |
| By: | Lasse Bork (Aarhus School of Business, University of Aarhus,and CREATES) |
| Abstract: | Economy-wide effects of shocks to the US federal funds rate are estimated in a state space model with 120 US macroeconomic and financial time series driven by the dynamics of the federal funds rate and a few dynamic factors. This state space system is denoted a factor-augmented VAR (FAVAR) by Bernanke et al. (2005). I estimate the FAVAR by the fully parametric one-step EM algorithm as an alternative to the two-step principal component method and the one-step Bayesian method in Bernanke et al. (2005). The EM algorithm which is an iterative maximum likelihood method estimates all the parameters and the dynamic factors simultaneously and allows for classical inference. I demonstrate empirically that the same impulse responses but better fit emerge robustly from a low order FAVAR with eight correlated factors compared to a high order FAVAR with fewer correlated factors, for instance four factors. This empirical result accords with one of the theoretical results from Bai & Ng (2007) in which it is shown that the information in complicated factor dynamics may be substituted by panel information. |
| Keywords: | Monetary policy, large cross-sections, factor-augmented vector autoregression, EM algorithm, state space |
| JEL: | E3 E43 E51 E52 C33 |
| Date: | 2009–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-11&r=cba |
| By: | Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | The cross-country relationship between the relative price level and the relative GDP level is found to be significant and stable for EU member states over the period 1997-2006. The joint dynamics of price and GDP levels tend to gravitate towards the regression line but there is no shorter-term trade-off between fast real convergence and low inflation. Contrary to popular perception high inflation is not necessary for fast convergence. Moreover the trajectories of certain euro area states indicate that giving up one's national currency is risky: it may stop convergence or even precipitate divergence. Problems may also emerge when the initial parity is weak. In addition, the inability to nominally devalue may prove very costly. However retaining one's national currency is not risk-free, even if domestic inflation is low, and even though subsequent corrective devaluations remain possible. While participation in the euro area has proved troublesome for some countries, it is in the interest of all member states to deepen wage and fiscal policy integration in order to help overcome the stagnation experienced in those euro area states that suffer from strongly overvalued price levels. |
| Keywords: | real convergence, relative price level, inflation, euro, EU |
| JEL: | E31 F15 F43 O47 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:49&r=cba |
| By: | Konstantin A. Kholodilin (DIW Berlin, Germany); Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | The paper evaluates the quality of the German national accounting data (GDP and its use-side components) as measured by the magnitude and dispersion of the forecast/ revision errors. It is demonstrated that government consumption series are the least reliable, whereas real GDP and real private consumption data are the most reliable. In addition, early forecasts of GDP, private consumption, and investment growth rates are shown to be systematically upward biased. Finally, early forecasts of all the variables seem to be no more accurate than naïve forecasts based on the historical mean of the final data. |
| Keywords: | Quality of statistical data, real-time data, signal-to-noise ratio, forecasts, revisions |
| JEL: | C53 C89 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:09-215&r=cba |
| By: | David Colander |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:0902&r=cba |
| By: | Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Josef Pöschl (The Vienna Institute for International Economic Studies, wiiw); Anton Mihailov; Waltraut Urban (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Sándor Richter (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Gábor Hunya (The Vienna Institute for International Economic Studies, wiiw); Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Zdenek Lukas (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | The report analyses recent economic developments and short- and medium-term development prospects, covering the countries of Central and Eastern Europe and Southeast Europe including Turkey, together with Russia, Ukraine, Kazakhstan and China. Separate chapters present an overview of developments in the European Union's New Member States and in Southeast European countries, or deal with the global economic environment and the role of the energy sector. |
| Keywords: | Central and East European new EU member states, Southeast Europe, Balkans, former Soviet Union, China, Turkey, economic forecasts, GDP growth, labour productivity, exchange rates, inflation, EU integration |
| JEL: | O52 O57 P24 P27 P33 P52 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:wii:fpaper:fc:3&r=cba |
| By: | Todd E. Clark; Stephen J. Terry |
| Abstract: | From Bayesian estimates of a vector autoregression (VAR) which allows for both coefficient drift and stochastic volatility, we obtain the following three results. First, beginning in approximately 1975, the responsiveness of core inflation to changes in energy prices in the United States fell rapidly and remains muted. Second, this decline in the passthrough of energy inflation to core prices has been sustained through a recent period of markedly higher volatility of shocks to energy inflation. Finally, reduced energy inflation passthrough has persisted in the face of monetary policy which quickly became less responsive to energy inflation starting around 1985. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-06&r=cba |
| By: | Mirdala, Rajmund |
| Abstract: | The stable macroeconomic environment, as one of the primary objectives of the Visegrad countries in the 1990s, was partially supported by the exchange rate policy. Fixed exchange rate systems within gradually widen bands (Czech republic, Slovak republic) and crawling peg system (Hungary, Poland) were replaced by the managed floating in the Czech republic (May 1997), Poland (April 2000), Slovak republic (October 1998) and fixed exchange rate to euro with broad band in Hungary (October 2001). Higher macroeconomic and banking sector stability allowed countries from the Visegrad group to implement the monetary policy strategy based on the interest rate transmission mechanism. Continuous harmonization of the monetary policy framework (with the monetary policy of the ECB) and the increasing sensitivity of the economy agents to the interest rates changes allowed the central banks from the Visegrad countries to implement monetary policy strategy based on the key interest rates determination. In the paper we analyze the impact of the central banks’ monetary policy in the Visegrad countries on the selected macroeconomic variables in the period 1999-2008 implementing SVAR (structural vector autoregression) approach. We expect that the higher sensitivity of the selected macroeconomic indicators of the EMÚ candidate countries to the national monetary policy shocks would indicate the higher exposure of the selected countries to the ECB monetary policy impulses after the euro adoption in the future. |
| Keywords: | monetary policy, short-term interest rates, structural vector autoregression, variance decomposition, impulse-response function |
| JEL: | C32 E52 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14061&r=cba |
| By: | Bettina Becker (Department of Economics, Loughborough University); Stephen G. Hall (Department of Economics, University of Leicester) |
| Abstract: | We present a common factor framework of convergence which we implement using principal components analysis. We apply this technique to a dataset of monthly inflation rates of EMU and the Eastern European New Member Countries (NMC) over 1996-2007. In the earlier years, the NMC rates moved independently from an average of the three best performing countries over the past twelve months, while they moved somewhat closer in line with them in the later years. Looking at the sample of the EMU and NMC countries as a whole, there is evidence of a formation of convergence clubs across the two groups. |
| Keywords: | Convergence, inflation rates, European Monetary Union, principal components analysis. |
| JEL: | C22 F31 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2009_05&r=cba |
| By: | Marcel Fratzscher; Arnaud Mehl |
| Abstract: | This paper analyses the impact of the shift away from a US dollar focus of systemically important emerging market economies (EMEs) on configurations between the US dollar, the euro and the yen. Given the difficulty that fixed or managed US dollar exchange rate regimes remain pervasive and reserve compositions mostly kept secret, the identification strategy of the paper is to analyse the market impact on major currency pairs of official statements made by EME policy-makers about their exchange rate regime and reserve composition. Developing a novel database for 18 EMEs, we find that such statements not only have a statistically but also an economically significant impact on the euro, and to a lesser extent the yen against the US dollar. The findings suggest that communication hinting at a weakening of EMEs' US dollar focus contributed substantially to the appreciation of the euro against the US dollar in recent years. Interestingly, EME policy-makers appear to have become more cautious in their communication more recently. Overall, the results underscore the growing systemic importance of EMEs for global exchange rate configurations. |
| Keywords: | Foreign exchange rates ; Monetary policy ; International finance ; Financial markets |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:25&r=cba |
| By: | Magdalena Morgese Borys (CERGE-EI); Roman Horvath (Czech National Bank and Charles University, Prague) |
| Abstract: | In this paper, we examine the effects of Czech monetary policy on the economy within the VAR, structural VAR, and factor-augmented VAR frameworks. We document a well-functioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so. Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the real-time output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, Lisbon, Portugal, on May 23, 2008. |
| Date: | 2008–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:bep:itfapp:1109&r=cba |
| By: | Arief Ramayandi (Center for Economics and Development Studies Dept. of Economics, Padjadjaran University) |
| Abstract: | This paper investigates whether or not monetary policy has been conducted efficiently in five selected ASEAN economies. It derives a utility-consistent social loss function, as a metric for welfare, to assess monetary policy efficiency in a small open economy model. An optimal monetary policy that minimises the social loss function is solved using information on structural parameters estimated for a model that represents each of the selected ASEAN-5 countries. The results are largely consistent with common wisdom in the literature, where policies based on credible commitment give the best welfare outcome. The paper further examines the welfare implications of the currently adopted simple monetary policy feedback rule for each of the sample economies. This exercise points out that there is room for improving the performance of monetary policy in each country, and it should be explored further. It also suggests the possibility that monetary authorities in the sample countries may be optimising over an objective function that di§er from the social welfare function derived in the paper. |
| Keywords: | ASEAN, monetary policy, optimal policy rules, social welfare function |
| JEL: | E52 E58 C61 F41 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:200902&r=cba |