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on Central Banking |
| By: | Carmen M. Reinhart (University of Maryland and the NBER, USA); Kenneth S. Rogoff (Harvard University and the NBER, USA) |
| Abstract: | Is the 2007-2008 U.S. sub-prime mortgage financial crisis truly a new and different phenomena? Our examination of the longer historical record finds stunning qualitative and quantitative parallels to 18 earlier post-war banking crises in industrialized countries. Specifically, the run-up in U.S. equity and housing prices (which, for countries experiencing large capital inflows, stands out as the best leading indicator in the financial crisis literature) closely tracks the average of the earlier crises. Another important parallel is the inverted v-shape curve for output growth the U.S. experienced as its economy slowed in the eve of the crisis. Among other indicators, the run-up in U.S. public debt and is actually somewhat below the average of other episodes, and its pre-crisis inflation level is also lower. On the other hand, the United States current account deficit trajectory is worse than average. A critical question is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which case growth may fall significantly below trend for an extended period. Or will it prove like one of the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response. |
| Keywords: | Financial crises, Economic growth, Public debt |
| JEL: | E44 F30 N20 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200931&r=cba |
| By: | Fabio Ghironi (Boston College); Jaewoo Lee (International Monetary Fund); Alessandro Rebucci (Inter-American Development Bank) |
| Abstract: | International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the "valuation channel" of external adjustment, namely capital gains and losses on the country's external assets and liabilities. We examine this valuation channel theoretically in a dynamic equilibrium portfolio model with international trade in equity that encompasses complete and incomplete asset market scenarios. By separating asset prices and quantities in the definition of net foreign assets, we can characterize the first-order dynamics of both valuation effects and net foreign equity holdings. First-order excess returns are unanticipated and i.i.d. in our model, but capital gains and losses on equity positions feature persistent, anticipated dynamics in response to productivity shocks. The separation of prices and quantities in net foreign assets also enables us to characterize fully the role of capital gains and losses versus the current account in the dynamics of macroeconomic aggregates. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete, showing how these different channels contribute to dampening (or amplifying) the impact response of the cross-country consumption differential to shocks and to keeping it constant in subsequent periods. |
| Keywords: | Current account; Equity; Net foreign assets; Risk sharing; Valuation |
| JEL: | F32 F41 G11 G15 |
| Date: | 2009–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:722&r=cba |
| By: | Dixon, Huw (Cardiff Business School) |
| Abstract: | This paper argues that the cross-sectional approach to durations is essential to understand nominal rigidity because this captures the fact that price-spells are generated by firms' price-setting behavior. Since the distribution of durations is dominated by a proliferation of short contracts, the cross-sectional measure corrects for this by length-biased sampling. Modelling the price-spell durations in this way enables us to see how Taylor, Calvo and their generalizations relate to each other, and enable us to compare price-setting behavior for a given distribution of durations. We also show how the micro-data can be directly related to the macroeconomic pricing models in this setting. |
| Keywords: | Price-spell; steady state; hazard rate; Calvo; Taylor |
| JEL: | E50 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2009/20&r=cba |
| By: | Kim , Insu |
| Abstract: | This paper investigates wage dynamics assuming the potential presence of dual wage stickiness: with respect to both the frequency as well as the size of wage adjustments. In particular, this paper proposes a structural model of wage inflation dynamics assuming that although workers adjust wage contracts at discrete time intervals, they are limited in their abilities to adjust wages as much as they might desire. The dual wage stickiness model nests the baseline model, based on Calvo-type wage stickiness, as a particular case. Empirical results favor the dual sticky wage model over the baseline model that assumes only one type of wage stickiness in several dimensions. In particular, it outperforms the baseline model in terms of goodness of fitness as well as in the ability to explain the observed dynamic correlation between wage inflation and the output gap - which the baseline model fails to capture. |
| Keywords: | Wage inflation; sticky wages; sticky prices; new Keynesian; hybrid. |
| JEL: | E32 E31 J30 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:18345&r=cba |
| By: | Minford, Patrick (Cardiff Business School); Srinivasan, Naveen |
| Abstract: | The New-Keynesian Taylor-Rule model of inflation determination with no role for money is incomplete. As Cochrane (2007a) argues, it has no credible mechanism for ruling out bubbles and as a result fails to provide a reason for private agents to pick a unique stable path. We propose a way forward. Our proposal is in effect that the New-Keynesian model should be formulated with a money demand and money supply function. It should also embody a terminal condition for money supply behaviour. If an unstable path occurred the central bank would switch to a money supply Rule explicitly designed to stop it via the terminal condition. This would be therefore a 'threat/trigger strategy' complementing the Taylor Rule - only to be invoked if inflation misbehaved. Thus we answer the criticisms levelled at the Taylor Rule that it has no credible mechanism for ruling out bubbles. However it does imply that money cannot be avoided in the new Keynesian set-up, contrary to Woodford (2008). |
| Keywords: | New-Keynesian; Taylor Rule; Determinacy |
| JEL: | E31 E52 E58 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2009/21&r=cba |
| By: | Le, Vo Phuong Mai (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael |
| Abstract: | We review the methods used in many papers to evaluate DSGE models by comparing their simulated moments with data moments. We compare these with the method of Indirect Inference to which they are closely related. We illustrate the comparison with contrasting assessments of a two-country model in two recent papers. We conclude that Indirect Inference is the proper end point of the puzzles methodology. |
| Keywords: | Bootstrap; US-EU model; DSGE; VAR; indirect inference; Wald statistic; anomaly; puzzle |
| JEL: | C12 C32 C52 E1 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2009/22&r=cba |
| By: | Dubecq, S.; Mojon, B.; Ragot, X. |
| Abstract: | We set up a model where asset price bubbles due to risk shifting can be moderated by capital requirements. However, imperfect information about the ratio of required capital, or, in the context of the sub-prime crisis, the extent of regulatory arbitrage, introduces uncertainty about the risk exposure of intermediaries. Underestimation of regulatory arbitrage may induce households to infer that higher asset prices are due to a decline of risk. First, this mechanism can explain why the risk premia paid by US financial intermediaries did not increase between 2000 and 2007 in spite of its increasing leverage. Second, we provide a theory of the risk taking channel of monetary policy: in the model, the underestimation of risk is larger the lower the level of the risk free interest rate. |
| Keywords: | Capital requirements, Imperfect Information, Risk-taking Channel of monetary policy. |
| JEL: | E5 G12 G18 G32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:254&r=cba |
| By: | Vivien Lewis (National Bank of Belgium, Research Department; Ghent University, Department of Financial Economics) |
| Abstract: | This paper describes optimal monetary policy in an economy with monopolistic competition, endogenous firm entry, a cash-in-advance constraint and pre-set wages. Firms must make profits in order to cover entry costs; thus a mark-up on goods prices is necessary. Without this mark-up, profits would be zero and no firm would enter the market, resulting in zero production. Therefore, the mark-up should not be removed. In this economy with market entrants, goods are more expensive than in a competitive economy with marginal cost pricing. This leads to a misallocation of resources, because leisure is not sold at a mark-up. Goods and leisure are two sources of utility that households trade off against each other. Thus, they may buy too much leisure instead of consumption goods. The consequence is that labour supply and production are sub-optimally low. Due to the labour requirement at market entry stage, insufficient labour supply also implies too little entry and too few firms in equilibrium. In the absence of fiscal instruments such as labour income subsidies, the optimal monetary policy under sticky wages achieves higher welfare than under flexible wages. The policy-maker uses the money supply instrument to raise the real wage - the cost of leisure - above its flexible-wage level, in response to expansionary shocks. This induces a rise in labour supply, more production of goods and more new firms |
| Keywords: | entry, optimal policy |
| JEL: | E52 E63 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200910-23&r=cba |
| By: | Kajal Lahiri; Xuguang Sheng |
| Abstract: | Using a Bayesian learning model with heterogeneity across agents, our study aims to identify the relative importance of alternative pathways through which professional forecasters disagree and reach consensus on the term structure of inflation and real GDP forecasts, resulting in different patterns of forecast accuracy. Forecast disagreement arises from two primary sources in our model: differences in the initial prior beliefs, and differences in the interpretation of new public information. Estimated model parameters, together with two separate case studies on (i) the dynamics of forecast disagreement in the aftermath of the 9/11 terrorist attack in the U.S. and (ii) the successful inflation targeting experience in Italy after 1997, firmly establish the importance of these two pathways to expert disagreement, and help to explain the relative forecasting accuracy of these two macroeconomic variables. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:09-05&r=cba |
| By: | Kajal Lahiri; Fushang Liu |
| Abstract: | Abstract: We consider how to use information from reported density forecasts from surveys to identify asymmetry in forecasters' loss functions. We show that, for the three common loss functions - Lin-Lin, Linex, and Quad-Quad - we can infer the direction of loss asymmetry by just comparing point forecasts and the central tendency (mean or median) of the underlying density forecasts. If we know the entire distribution of the density forecast, we can calculate the loss function parameters based on the first order condition of forecast optimality. This method is applied to forecasts for annual real output growth and inflation obtained from the Survey of Professional Forecasters (SPF). We find that forecasters treat underprediction of real output growth more dearly than overprediction, reverse is true for inflation. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:09-03&r=cba |
| By: | Kajal Lahiri; Xuguang Sheng |
| Abstract: | Using a standard decomposition of forecasts errors into common and idiosyncratic shocks, we show that aggregate forecast uncertainty can be expressed as the disagreement among the forecasters plus the perceived variability of future aggregate shocks. Thus, the reliability of disagreement as a proxy for uncertainty will be determined by the stability of the forecasting environment, and the length of the forecast horizon. Using density forecasts from the Survey of Professional Forecasters, we find direct evidence in support of our hypothesis. Our results support the use of GARCH-type models, rather than the ex post squared errors in consensus forecasts, to estimate the ex ante variability of aggregate shocks as a component of aggregate uncertainty. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:09-06&r=cba |
| By: | Robinson Kruse (Aarhus University and CREATES); Michael Frömmel (Ghent University); Lukas Menkhoff (Leibniz University Hannover); Philipp Sibbertsen (Leibniz University Hannover) |
| Abstract: | This research points to the serious problem of potentially misspecified alternative hypotheses when testing for unit roots in real exchange rates. We apply a popular unit root test against nonlinear ESTAR and develop a Markov Switching unit root test. The empirical power of these tests against correctly and misspecified non-linear alternatives is analyzed by means of a Monte Carlo study. The chosen parametrization is obtained by real-life exchange rates. The test against ESTAR has low power against all alternatives whereas the proposed unit root test against a Markov Switching autoregressive model performs clearly better. An empirical application of these tests suggests that real exchange rates may indeed be explained by Markov-Switching dynamics. |
| Keywords: | real exchange rates, unit root test, ESTAR, Markov Switching, PPP |
| JEL: | C12 C22 F31 |
| Date: | 2009–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-50&r=cba |
| By: | Keiichi Morimoto (Graduate School of Economics, Osaka University) |
| Abstract: | This paper explores an optimal personnel organization problem of monetary policy committees. First, I construct an analytically tractable model for monetary policy analysis which starts from decision-making in the monetary policy committee. Using the model, I investigate the relationship between preference heterogeneity among the committee members and the optimal structure of the monetary policy committee. The result shows that it is optimal in general cases to appoint not only inflation-minded (hawkish) persons but also output-minded (dovish) persons. This is a justification for the fact that the actual monetary policy committees (e.g. MPC of Bank of England and FOMC) usually consist of both type members as the empirical researches suggest. |
| Keywords: | monetary policy, committee, delegation, imperfect information |
| JEL: | D71 D84 E58 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0936&r=cba |
| By: | Davide Ferrari; Barbara Pistoresi; Francesco Salsano |
| Abstract: | We build on earlier studies regarding Central Bank independence (CBI) by relating it to political, institutional and economic variables. The data suggest that CBI is positively related to the presence of federalism, the features of the electoral system and parties, the correlation between the shocks to the level of economic activity in the countries included in the sample and, for a sub-sample of economies, the convergence criteria to join the European Monetary Union (EMU). |
| Keywords: | ICentral Bank independence; institutional systems; variable selection |
| JEL: | E5 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:mod:depeco:0616&r=cba |
| By: | Anthony Garratt; Kevin Lee; Kalvinder Shields (School of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | An output gap measure is suggested based on the Beveridge-Nelson decomposition of output using a vector-autoregressive model that includes data on actual output and on expected output obtained from surveys. The paper explains the advantages of using survey data in business cycle analysis and the gap is provided economic meaning by relating it to the natural level of output defined in Dynamic Stochastic General Equilibrium models. The measure is applied to quarterly US data over the period 1970q1-2007q4 and the resultant gap estimates are shown to have sensible statistical properties and perform well in explaining inflation in estimates of New Keynesian Phillips curves. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0911&r=cba |
| By: | Anthony Garratt; James Mitchell; Shaun P. Vahey (School of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | We propose a methodology for producing density forecasts for the output gap in real time using a large number of vector autoregessions in inflation and output gap measures. Density combination utilizes a linear mixture of experts framework to produce potentially non-Gaussian ensemble densities for the unobserved output gap. In our application, we show that data revisions alter substantially our probabilistic assessments of the output gap using a variety of output gap measures derived from univariate detrending filters. The resulting ensemble produces well-calibrated forecast densities for US inflation in real time, in contrast to those from simple univariate autoregressions which ignore the contribution of the output gap. Combining evidence from both linear trends and more flexible univariate detrending filters induces strong multi-modality in the predictive densities for the unobserved output gap. The peaks associated with these two detrending methodologies indicate output gaps of opposite sign for some observations, reflecting the pervasive nature of model uncertainty in our US data. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0909&r=cba |
| By: | Anthony Garratt; James Mitchell; Shaun P. Vahey; Elizabeth C. Wakerly (School of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | We propose a methodology for producing density forecasts for the output gap in real time using a large number of vector autoregessions in inflation and output gap measures. Density combination utilizes a linear mixture of experts framework to produce potentially non-Gaussian ensemble densities for the unobserved output gap. In our application, we show that data revisions alter substantially our probabilistic assessments of the output gap using a variety of output gap measures derived from univariate detrending filters. The resulting ensemble produces well-calibrated forecast densities for US inflation in real time, in contrast to those from simple univariate autoregressions which ignore the contribution of the output gap. Combining evidence from both linear trends and more flexible univariate detrending filters induces strong multi-modality in the predictive densities for the unobserved output gap. The peaks associated with these two detrending methodologies indicate output gaps of opposite sign for some observations, reflecting the pervasive nature of model uncertainty in our US data. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0910&r=cba |
| By: | Ansgar Rannenberg |
| Abstract: | We introduce duration dependent skill decay among the unemployed into a New-Keynesian model with hiring frictions developed by Blanchard/Gali (2008). If the central bank responds only to (current, lagged or expected future) inflation and quar¬terly skill decay is above a threshold level, determinacy requires a coefficient on infla¬tion smaller than one. The threshold level is plausible with little steady-state hiring and firing ("Continental European Calibration") but implausibly high in the oppo¬site case ("American calibration"). Neither interest rate smoothing nor responding to the output gap helps to restore determinacy if skill decay exceeds the threshold level. However, a modest response to unemployment guarantees determinacy. Moreover, under indeterminacy, both an adverse sunspot shock and an adverse technology shock increase unemployment extremely persistently. |
| Keywords: | monetary policy rules, Taylor principle, NAIRU, unemployment, hysteresis. |
| JEL: | E24 E31 E52 J64 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0909&r=cba |
| By: | Arghyrou, Michael G (Cardiff Business School); Gregoriou, Andros; Pourpourides, Panayiotis M. (Cardiff Business School) |
| Abstract: | Arghyrou, Gregoriou and Pourpourides (2009) argue that exchange rate uncertainty causes deviations from the law of one price. We test this hypothesis on aggregate data from the G7-area. We find that exchange rate uncertainty explains to a significant degree deviations from Purchasing Power Parity. |
| Keywords: | Purchasing power parity; exchange rate uncertainty |
| JEL: | F31 F41 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2009/23&r=cba |
| By: | Frappa, S.; Mésonnier, J-S. |
| Abstract: | The recent boom in housing markets of most developed economies has spurred criticism that inflation targeting central banks may have neglected the build-up of financial imbalances. This paper provides a formal empirical test of such claims, using a standard program evaluation methodology to correct for a possible bias due to self-selection into inflation targeting. We consider 17 industrial economies over 1980-2006, among which nine countries have targeted inflation a some dates. We find robust evidence of a significant positive effect of inflation targeting on real housing price growth and on the housing price to rent ratio. |
| Keywords: | Inflation targeting; Housing prices; Treatment effect; OECD countries. |
| JEL: | E4 E52 E58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:255&r=cba |
| By: | Hashmat Khan (Department of Economics, Carleton University); John Tsoukalas (Department of Economics, University of Nottingham) |
| Abstract: | Recent work based on sticky price-wage estimated dynamic stochastic general equilibrium (DSGE) models suggests investment shocks are the most important drivers of post-World War II US business cycles. Consumption, however, typically falls after an investment shock. This finding sits oddly with the observed business cycle comovement where consumption, along with hours-worked and investment, moves with economic activity. We show that this comovement problem is resolved in an estimated DSGE model when the cost of capital utilization is specified in terms of increased depreciation of capital, as originally proposed by Greenwood et al. (1988) in a neoclassical setting. Traditionally, the cost of utilization is specified in terms of forgone consumption following Christiano et al. (2005), who studied the effects of monetary policy shocks. The alternative specication we consider has two additional implications relative to the traditional one: (i) it has a substantially better fit with the data and (ii) the contribution of investment shocks to the variance of consumption is over three times larger. The contributions to output, investment, and hours, are also relatively higher, suggesting that these shocks may be quantitatively even more important than previous estimates based on the traditional specification. |
| Keywords: | Investment shocks, comovement, estimated DSGE models |
| JEL: | E2 E3 |
| Date: | 2009–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:09-09&r=cba |
| By: | Rajmund Mirdala (Faculty of Economics, Technical University of Košice, Slovakia) |
| 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 in Hungary (January 2000) with broad band (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 higher sensitivity of domestic variables to interest rates shocks can be interpreted as a convergence of monetary policies in candidate countries towards the ECB’s monetary policy. |
| Keywords: | Monetary policy, Short-term interest rates, Structural vector autoregression, Variance decomposition, Impulse-response function |
| JEL: | C32 E52 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200934&r=cba |
| By: | Sigbjørn Atle Berg (Norges Bank (Central Bank of Norway)); Øyvind Eitrheim (Norges Bank (Central Bank of Norway)) |
| Abstract: | The Norwegian experiences of the past thirty years illustrate what we believe are two general tendencies in bank regulation. The first one is that a bank crisis will tend to focus regulators' minds and lead to stricter regulations. The second one is that cycles in regulation tend to interact with the economic cycle, in the sense that the rationale for strong regulation tends to become somewhat blurred when the economy is booming. These patterns appear in the Norwegian experience after the banking crisis of 1988-92, and they can presumably also be recognized in many other jurisdictions. |
| Keywords: | Banking crises, history of bank regulation, capital adequacy, Basel I & II |
| JEL: | G28 N44 |
| Date: | 2009–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_18&r=cba |
| By: | Fabio Masini (Department of Public Institutions, Economics and Society, University of Rome) |
| Abstract: | Increasing trade interdependence among East-Asian countries suggests the urge to design some monetary arrangement to stabilize the macroeconomic framework of an extremely heterogeneously growing area. The paper reviews the literature and analyses several directions of East-Asian integration process, especially in relation to the European model. We argue that a more comprehensive economic and political world-scenario should be considered and a multi-speed policy approach should be implemented in the area. Around the pivotal role of China, a wide agreement should be reached for an Asian single-currency, which might be rapidly issued and provide a reference target for other East-Asian countries. |
| Keywords: | trade, East-Asian countries, East-Asian integration process, European model, Asian singlecurrency |
| JEL: | F33 F59 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cbu:wpaper:14&r=cba |
| By: | Michal Andrle; Tibor Hledik; Ondra Kamenik; Jan Vlcek |
| Abstract: | The purpose of the paper is to introduce the new “g3†structural model of the Czech National Bank and illustrate how it is used for forecasting and policy analysis. As from January 2007 the model was regularly used for shadowing official forecasts, and in July 2008 it became the core model of the CNB. In the paper we highlight the most important and unusual features of the model and discuss tools and procedures that help us in forecasting and assessing the economy with the model. The paper is not meant to provide a full derivation of the model or the complete characteristics of its behavior and should not be regarded as model documentation. Rather, the paper demonstrates how the model is used and how it contributes to policy analysis. |
| Keywords: | DSGE, filtering, forecasting, general equilibrium, monetary policy. |
| JEL: | D58 E32 E58 E47 C53 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2009/2&r=cba |
| By: | Przystupa, Jan; Wróbel, Ewa |
| Abstract: | We propose a complex analysis of the exchange rate pass-through in an open economy. We assess the level, linearity and symmetry of exchange rate pass-through to import and consumer prices in Poland and discuss its implications for the monetary policy. We show that the pass-through is incomplete even in the long run. There is pricing to market behavior both in the long and short run. We do not find a strong evidence of non-linearity in import prices reaction to the exchange rate and reject the hypothesis of an asymmetric response to appreciations and depreciations. On the other hand, we find an asymmetry of CPI responses to the output gap, direction and size of the exchange rate changes and to the magnitude of the exchange rate volatility. The asymmetry is mostly visible after exogenous shocks. We reject the hypothesis of an asymmetric reaction of prices in a high and low inflation environment. |
| Keywords: | Exchange Rate Pass-through; Non-linear Model. |
| JEL: | E52 C22 F31 |
| Date: | 2009–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17660&r=cba |