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on Central Banking |
| By: | Vasco Cúrdia; Michael Woodford |
| Abstract: | While many analyses of monetary policy consider only a target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We first extend a standard New Keynesian model to allow a role for the central bank’s balance sheet in equilibrium determination and then consider the connections between these alternative policy dimensions and traditional interest rate policy. We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, arguing that, according to our model, while the former is likely to be ineffective at all times, the latter can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times. |
| Keywords: | Banks and banking, Central ; Monetary policy ; Interest rates ; Bank reserves |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:463&r=cba |
| By: | Steven B. Kamin |
| Abstract: | This paper reviews the available evidence and previous research on potential effects of financial globalization, that is, the international integration of financial markets. In particular, we address the questions: Has financial globalization materially increased the influence of external developments on domestic monetary conditions? And, has it reduced the influence of central banks over financial and economic conditions in their own country? We find that central banks with floating currencies retain the ability to independently determine short-term interest rates and thus influence broader financial conditions and macroeconomic performance in their economies. However, domestic financial conditions appear to have become more vulnerable to a wide range of external shocks, complicating the task of making appropriate monetary policy decisions. Moreover, the financial crisis has highlighted the importance of cross-border channels for the transmission of liquidity and credit shocks. With financial transactions increasingly being undertaken in vehicle currencies such as dollars and euros, the liquidity provision and the lender-of-last resort functions of many central banks are being challenged. Accordingly, international arrangements for liquidity provision may become increasingly important in the future. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1002&r=cba |
| By: | John Duffy; Michele Berardi |
| Abstract: | We explore real time, adaptive nonlinear learning dynamics in stochastic macroeconomic systems. Rather than linearizing nonlinear Euler equations where expectations play a role around a steady state, we instead approximate the nonlinear expected values using the method of parameterized expectations. Further we suppose that these approximated expectations are updated in real time as new data become available. We explore whether this method of real-time parameterized expectations learning provides a plausible alternative to real-time adaptive learning dynamics under linearized versions of the same nonlinear system. |
| JEL: | C62 D83 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:400&r=cba |
| By: | Christopher Gust; David Lopez-Salido |
| Abstract: | We use a DSGE model that generates endogenous movements in risk premia to examine the positive and normative implications of alternative monetary policy rules. As emphasized by the microfinance literature, variation in risk arises because households face fixed costs of transferring cash across financial accounts, implying that some households rebalance their portfolios infrequently. We show that the model can account for the mean returns on equity and the risk-free rate, and in line with empirical evidence generates a decline in the equity premium following an unanticipated easing of monetary policy. An important result that emerges from our analysis is that countercyclical monetary policy generates higher average welfare than constant money growth or zero inflation policies. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:999&r=cba |
| By: | Martin Bodenstein; James Hebden; Ricardo Nunes |
| Abstract: | When the nominal interest rate reaches its zero lower bound, credibility is crucial for conducting forward guidance. We determine optimal policy in a New Keynesian model when the central bank has imperfect credibility and cannot set the nominal interest rate below zero. In our model, an announcement of a low interest rate for an extended period does not necessarily reflect high credibility. Even if the central bank does not face a temptation to act discretionarily in the current period, policy commitments should not be postponed. In reality, central banks are often reluctant to allow a recovery path with output and inflation temporarily above target. From the perspective of our model such a policy reflects a low degree of credibility. We find increased forecast uncertainty in inflation and the output gap at the zero lower bound while interest rate uncertainty is reduced. Furthermore, misalignments between announced interest rate paths and market expectations are found to be best explained by lack of credibility. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1001&r=cba |
| By: | Stefan Gerlach; John Lewis |
| Abstract: | This paper estimates a monetary policy reaction function for the ECB over the period 1999-2009. To allow for a potential shift in interest rate setting during the financial crisis, we permit a smooth transition from one set of parameters to another. The estimates show a swift change in the months following the collapse of Lehman brothers. They suggest that the ECB cut rates more aggressively than expected solely on the basis of the worsening of macroeconomic conditions, consistent with the theoretical literature on optimal monetary policy in the vicinity of the zero bound. |
| Keywords: | ECB, reaction functions; zero lower bound; smooth transition |
| JEL: | C2 E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:254&r=cba |
| By: | Rasmus Fatum |
| Abstract: | The Japanese zero-interest rate period provides a "natural experiment" for investigating the effectiveness and transmission channels of sterilized intervention when traditional monetary policy options are constrained. This paper takes advantage of the fact that all interventions in the JPY/USD market during the zero-interest rate period are sterilized sales of JPY and, therefore, none of these interventions can signal a future interest rate decrease. In order to further assess through which transmission channel these interventions work, the analysis integrates official daily Japanese intervention data with a comprehensive set of rumors data that capture interventions of which the market is aware. Market awareness is a necessary condition for intervention to disseminate information and work through channels other than the portfolio balance channel. The results of the time series analysis show that intervention, on average, induces a statistically and economically significant same-day depreciation of the JPY. Market awareness is shown to be unimportant. Consequently, the effects of Japanese interventions during the zero-interest rate period are consistent only with the portfolio balance channel. This is a remarkable finding, demonstrating that sterilized intervention is, in principle, an independent policy instrument. |
| Keywords: | Monetary policy - Japan ; Transmission mechanism (Monetary policy) ; Foreign exchange ; Financial markets ; Interest rates - Japan |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:57&r=cba |
| By: | Rasmus Fatum (School of Business, University of Alberta) |
| Abstract: | The Japanese zero-interest rate period provides a “natural experiment” for investigating the effectiveness and transmission channels of sterilized intervention when traditional monetary policy options are constrained. This paper takes advantage of the fact that all interventions in the JPY/USD market during the zero-interest rate period are sterilized sales of JPY and, therefore, none of these interventions can signal a future interest rate decrease. In order to further assess through which transmission channel these interventions work, the analysis integrates official daily Japanese intervention data with a comprehensive set of rumors data that capture interventions of which the market is aware. Market awareness is a necessary condition for intervention to disseminate information and work through channels other than the portfolio balance channel. The results of the time series analysis show that intervention, on average, induces a statistically and economically significant same-day depreciation of the JPY. Market awareness is shown to be unimportant. Consequently, the effects of Japanese interventions during the zero-interest rate period are consistent only with the portfolio balance channel. This is a remarkable finding, demonstrating that sterilized intervention is, in principle, an independent policy instrument. |
| Keywords: | exchange rates; foreign exchange market intervention; channels of transmission |
| JEL: | E52 F31 G14 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:10-07&r=cba |
| By: | Pietro Catte (Banca d'Italia); Pietro Cova (Banca d'Italia); Patrizio Pagano (Banca d'Italia); Ignazio Visco (Banca d'Italia) |
| Abstract: | This paper argues that the lack of timely and decisive policy action to correct domestic and external imbalances contributed crucially to the build-up of financial excesses that led to the financial crisis and the Great Recession. We focus on 2002-07 and perform a number of counterfactual simulations to investigate two central elements of the story, namely: (a) an over-expansionary US monetary policy and the absence of effective macro-prudential supervision, which permitted a prolonged expansion of debt-financed consumer spending; (b) the decision of China and other emerging countries to pursue an export-led growth strategy supported by pegging their currencies to the US dollar, resulting in a huge build-up of their official reserves, in conjunction with sluggish domestic demand in surplus advanced economies characterized by low potential output growth. The results of the simulations lend support to the view that if substantial, globally coordinated demand rebalancing had been undertaken in a timely manner, the macroeconomic and financial imbalances would not have accumulated to the extent that they did and the financial turmoil might have had less drastic global consequences. |
| Keywords: | global imbalances, financial crisis, monetary policy, macroprudential regulation, structural reforms. |
| JEL: | E52 F42 F43 F47 G15 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_69_10&r=cba |
| By: | Libero Monteforte (Bank of Italy); Gianluca Moretti (Bank of Italy) |
| Abstract: | We present a mixed-frequency model for daily forecasts of euro area inflation. The model combines a monthly index of core inflation with daily data from financial markets; estimates are carried out with the MIDAS regression approach. The forecasting ability of the model in real-time is compared with that of standard VARs and of daily quotes of economic derivatives on euro area inflation. We find that the inclusion of daily variables helps to reduce forecast errors with respect to models that consider only monthly variables. The mixed-frequency model also displays superior predictive performance with respect to forecasts solely based on economic derivatives. |
| Keywords: | forecasting inflation, real time forecasts, dynamic factor models, MIDAS regression, economic derivatives |
| JEL: | C13 C51 C53 E37 G19 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_767_10&r=cba |
| By: | Yochanan Shachmurove (Department of Economics, the City Collge of the City University of New York) |
| Abstract: | The examination of U.S. crises reveals that the current financial crisis follows past patterns. An investment bubble creates excess demand for new financing instruments. During the railroad bubbles of the nineteenth century loans were issued at a pace higher than many companies could pay back. The current housing bubble originated from issuing sub-prime mortgages that assume that housing prices would only rise. The increased demand for credit induces financial innovations and instruments that circumvent existing regulations. Inevitably, the bubble bursts. The history of financial crises teaches that policy reforms and new regulations cannot prevent future financial crises. |
| Keywords: | Financial Crises; Financial Regulations and Reforms; Banking Panics; Banking Runs; Nineteenth and Twentieth Century Crises; Bankruptcies; Federal Reserve Bank; Subprime Mortgage; Troubled Asset Relief Program (TARP); Collateralized Debt Obligations (CDO); Mortgage Backed Securities (MBO); Glass-Steagall Act; J.P. Morgan Chase; Bear Stearns; Augustus Heinze; Timothy Geithner; Paul Volcker |
| JEL: | E0 E3 E44 E5 E6 N0 N1 N2 G0 G18 G38 |
| Date: | 2010–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:10-027&r=cba |
| By: | Burton A. Abrams (Department of Economics,University of Delaware) |
| Abstract: | The financial crisis and recession of 2008-2010 have witnessed the biggest reduction in money-supply multipliers in U.S. history. In contrast to what occurred during the Great Depression, the Fed has avoided decreases in monetary aggregates by dramatically increasing the monetary base. A variation of the Bernanke-Blinder credit-view model is shown to reveal that holding the money supply constant following an autonomous fall in the money multiplier is insufficient to prevent aggregate demand from falling. This helps to explain the severity of the 2008-2010 recession despite growing monetary aggregates and expansionary fiscal policy |
| Keywords: | credit-view model, monetary policy, money-supply model |
| JEL: | F41 E51 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:10-05.&r=cba |
| By: | Tobias Adrian; Erkko Etula; Jan J. J. Groen |
| Abstract: | Theories of systemic risk suggest that financial intermediaries’ balance-sheet constraints amplify fundamental shocks. We provide supporting evidence for such theories by decomposing the U.S. dollar risk premium into components associated with macroeconomic fundamentals and a component associated with financial intermediaries’ balance sheets. Relative to the benchmark model with only macroeconomic state variables, balance sheets amplify the U.S. dollar risk premium. We discuss applications to systemic risk monitoring. |
| Keywords: | Systemic risk ; Intermediation (Finance) ; Foreign exchange ; Assets (Accounting) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:461&r=cba |
| By: | Ippei Fujiwara; Nao Sudo; Tomoyuki Nakajima; Yuki Teranishi |
| Abstract: | In this paper we consider a two-country New Open Economy Macroeconomics model, and analyze the optimal monetary policy when countries cooperate in the face of a "global liquidity trap"--i.e., a situation where the two countries are simultaneously caught in liquidity traps. The notable features of the optimal policy in the face of a global liquidity trap are history dependence and international dependence. The optimality of history dependent policy is confirmed as in local liquidity trap. A new feature of monetary policy in global liquidity trap is whether or not a country's nominal interest rate is hitting the zero bound affects the target inflation rate of the other country. The direction of the effect depends on whether goods produced in the two countries are Edgeworth complements or substitutes. We also compare several classes of simple interest-rate rules. Our finding is that targeting the price level yields higher welfare than targeting the inflation rate, and that it is desirable to let the policy rate of each country respond not only to its own price level and output gap, but also to those in the other country. |
| Keywords: | Monetary policy - Mathematical models ; Liquidity (Economics) ; Inflation targeting ; Interest rates ; Price levels ; International trade |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:56&r=cba |
| By: | Guido Cazzavillan (Department of Economics, University Of Venice Cà Foscari); Michael Donadelli (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | The goal of this project is to deeply investigate on the main causes of the global economic and financial crises and, based on a theoretical framework, to describe a suitable optimal monetary policy. According to our empirical analysis (basically based on US data) we will prove that a mix of extraordinary conditions have been crucial for the origin, develop and growth of the recent crisis. In finding what has been the main cause of such collapse we will prove that the credit crunch has played a crucial role, especially as a sort of contractionary monetary policy. We will also discuss the quantitative easing policies implemented by the Central Banks. Finally, we will seek to establish, by using an existing theoretical model and given extraordinary market conditions, in what central banks were wrong, and if so, where they made mistakes. |
| Keywords: | Economic and Financial Crisis, Credit Crunch, Optimal Monetary Policy |
| JEL: | E01 E41 E44 E52 E58 E61 G15 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2010_18&r=cba |
| By: | Sandra Gomes (Bank of Portugal); Pascal Jacquinot (European Central Bank); Massimiliano Pisani (Bank of Italy) |
| Abstract: | Building on the New Area Wide Model, we develop a 4-region macroeconomic model of the euro area and the world economy. The model (EAGLE, Euro Area and GLobal Economy model) is microfounded and designed for conducting quantitative policy analysis of macroeconomic interdependence across regions belonging to the euro area and between euro area regions and the world economy. Simulation analysis shows the transmission mechanism of region-specific or common shocks, originating in the euro area and abroad. |
| Keywords: | Open-economy macroeconomics, DSGE models, econometric models, policy analysis |
| JEL: | C53 E32 E52 F47 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_770_10&r=cba |
| By: | Jessica Wachter |
| Abstract: | This review article describes recent literature on asset allocation, covering both static and dynamic models. The article focuses on the bond--stock decision and on the implications of return predictability. In the static setting, investors are assumed to be Bayesian, and the role of various prior beliefs and specifications of the likelihood are explored. In the dynamic setting, recursive utility is assumed, and attention is paid to obtaining analytical results when possible. Results under both full and limited-information assumptions are discussed. |
| JEL: | C11 G11 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16255&r=cba |
| By: | Pels (Institute for International Integration Studies, Trinity College Dublin); |
| Abstract: | The establishment of a monetary union in Europe in 1999 has eliminated exchange rate risk within the euro area and has led to a more unified financial framework. It has been established in the literature that the euro has led to a disproportional increase in bilateral asset holdings within the euro area. This paper builds on this evidence and answers the question whether this has been a one-off effect, or whether the euro effect in intra-euro area bilateral asset holdings has changed over time. We show, using a gravity framework, that the proportional increase in bilateral asset holdings took place in the early years of the European monetary union and was a unique event. The data used are bilateral data on equity and bond holdings, provided by the Coordinated Portfolio Investment Survey of the IMF for the years 1997, and 2001 until 2006. |
| Keywords: | international asset trade; gravity equation; euro |
| JEL: | F30 F36 F41 G11 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp331&r=cba |
| By: | Ellis W. Tallman; Elmus R. Wicker |
| Abstract: | This paper assesses the validity of comparisons between the current financial crisis and past crises in the United States. We highlight aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) that are relevant for comparison with the Panic of 2008. In 1873, overinvestment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, precursor to the modern investment bank. During the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which had only indirect access to the existing lender of last resort, similar to investment banks in 2008. The popular press has made numerous references to the banking crises of the Great Depression as relevant comparisons to the recent crisis. This paper argues that such an analogy is inaccurate. The previous banking crises in U.S. history reflected widespread depositor withdrawals whereas the recent panic arose from counterparty solvency fears and large counterparty exposures among large complex financial intermediaries. In historical incidents, monitoring counterparty exposures was standard banking practice and the exposures were smaller. From this perspective, the lessons from the past appear less directly relevant for the current crisis. |
| Keywords: | Financial crises - United States ; Systemic risk |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1009&r=cba |
| By: | Sangeeta Pratap (Hunter College); Carlos Urrutia (Instituto Tecnologico Autonomo de Mexico) |
| Abstract: | The financial crises or “sudden stops” of the last decade in emerging economies were accompanied by a large fall in total factor productivity. In this paper we explore the role of financial frictions in exacerbating the misallocation of resources and explaining this drop in TFP. We build a dynamic two-sector model of a small open economy with a cash in advance constraint where firms have to finance a part of their purchase of intermediate goods prior to production. The model is calibrated to the Mexican economy before the 1995 crisis and subject to an unexpected shock to interest rates. The financial friction can generate an endogenous fall in TFP of about 3.5 percent and can explain 74 percent of the observed fall in GDP per worker. Adding a cost of adjusting labor between the two sectors and sectoral specificity of capital also generates the sectoral patterns of output and resource use observed in the data after the sudden stop. The results highlight the interaction between interest rates and allocative inefficiencies as an explanation of the real effects of the financial crisis. |
| Keywords: | Financial frictions, labor market turbulence, adjustment costs, sudden stops, total factor productivity, output fluctuations |
| JEL: | D14 D43 D91 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:htr:hcecon:429&r=cba |
| By: | Alessio Anzuini (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco J. Lombardi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Patrizio Pagano (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.) |
| Abstract: | Global monetary conditions have often been cited as a driving factor of commodity prices. This paper investigates the empirical relationship between US monetary policy and commodity prices by means of a standard VAR system, commonly used in analysing the effects of monetary policy shocks. The results suggest that expansionary US monetary policy shocks drove up the broad commodity price index and all of its components. While these effects are significant, they however do not appear to be overwhelmingly large. This finding is also confirmed under different identification strategies for the monetary policy shock. JEL Classification: E31, E40, C32. |
| Keywords: | Monetary policy Shock, Oil Price, VAR. |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101232&r=cba |
| By: | Gita Gopinath; Oleg Itskhoki |
| Abstract: | The closed and open economy literatures both work on evaluating the role of real rigidities, but in parallel. This paper brings the two literatures together. We use international price data and exchange rate shocks to evaluate the importance of real rigidities in price setting. We show that, consistent with the presence of real rigidities, the response of reset-price inflation to exchange rate shocks exhibits significant persistence. Individual import prices, conditional on changing, respond to exchange rate shocks prior to the last price change. At the same time, aggregate reset-price inflation for imports, like that for consumer prices, exhibits little persistence. Competitor prices affect firm pricing, and exchange rate pass-through into import prices is greater in response to trade-weighted, as opposed to bilateral, exchange rate shocks. We quantitatively evaluate sticky-price models (Calvo and menu cost) with variable markups at the wholesale level and constant markups at the retail level, consistent with empirical evidence. Variable markups alone generate price sluggishness at the aggregate level, while they fall short of matching price persistence at the micro level. Finally, variable markups magnify the size of the contract multiplier, but their absolute effects are modest unless they are coupled with exogenous sources of persistence. |
| Keywords: | Prices ; Imports - Prices ; Foreign exchange rates |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:10-9&r=cba |
| By: | Ansgar Belke |
| Abstract: | After the dramatic rescue package for the euro area, the governing council of the European Central Bank decided to purchase European government bonds - to ensure an "orderly monetary policy transmission mechanism". Many observers argued that, by bond purchases, national fiscal policies could from now on dominate the common monetary policy. This note argues that they are quite right. The ECB has indeed become more dependent in political and financial terms. The ECB has decided to sterilise its bond purchases - compensating those purchases through sales of other bonds or money market instruments to keep the overall money supply unaffected. This is to counter accusations that the ECB is monetizing government debt. This note addresses how effective these sterilisation policies are. One problem inherent in the sterilization approach is that it reshuffles only the liability side of the ECB's balance sheet. It is not well-suited to either diminish the bloated ECB balance sheet or to remove the potentially toxic covered or sovereign bonds from it. In addition, the intake of potentially toxic assets as collateral and by outright purchases in the central bank balance sheet artificially keeps the asset prices up and does not prevent the (quite intransparent) risk transfer from one group of countries to another to occur. Finally, sterilization takes place in a setting of still ultra-lax monetary policies, i.e. of new liquidity-enhancing operations with unlimited allotment, and, hence, does not appear to be overly irrelevant. A credible strategy to deal with the financial crisis should deal primarily with the asset side of the ECB balance sheet. [...]<br /> |
| Keywords: | Accountability, bail-out, bond purchases, central bank independence, insolvency risk, Securities Markets Programme, transparency |
| JEL: | G32 E42 E51 E58 E63 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1040&r=cba |
| By: | Janine Aron; John V. Duca; John Muellbauer; Keiko Murata; Anthony Murphy |
| Abstract: | The consumption behaviour of U.K., U.S. and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for U.K. and U.S. but not Japanese households has undergone large shifts since 1980. The average consumption-to-income ratio shifted up in the U.K. and U.S. as mortgage downpayment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is roughly similar in the U.S. and U.K., while land prices in Japan still have a negative effect on consumer spending. Together with evidence for negative real interest rate effects in the U.K. and U.S. and positive ones in Japan, this suggests important differences in the transmission of monetary and credit shocks between Japan and the U.S., U.K. and other credit-liberalized economies. |
| Keywords: | Households - Economic aspects ; Consumption (Economics) ; Credit ; Business cycles ; Financial markets ; Economic conditions - United States ; Economic conditions - Japan ; Economic conditions - Great Britain |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1002&r=cba |
| By: | Balazs Egert |
| Abstract: | This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel’s Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-makret service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistant and that commodity prices have a stronger effect on inflation in a higher inflation environment. |
| Keywords: | European Union, inflation, Balassa-Samuelson, real convergence,catching up, Bayesian model average, non-linearity. |
| JEL: | E43 E50 E52 C22 G21 O52 |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-991&r=cba |
| By: | William R. White |
| Abstract: | The macroeconomic theories and models favoured by academics, as well as those used more commonly by policymakers, effectively rule out by assumption economic and financial crises of the sort we are living through. In particular, the longer run dangers posed by the rapid expansion of credit and resulting private sector balance sheet developments were inadequately appreciated. As a result, the current crisis was neither anticipated nor prepared for, and the crisis was also less well managed than it might have been. At the level of macroeconomic theory and modelling, this experience suggests that basic Keynesian insights need to be complemented by some insights from the Austrian school as well as those of Minsky. Demand factors are important, but so too are supply side and financial considerations. Such a synthesis provides a reasonable explanation of the crisis and points to some of the difficulties likely to be faced in emerging from it. As for the policy implications in current circumstances, it needs to be better recognized that policies with positive short run effects can have negative effects over a longer time period. If, as a result, fiscal and monetary expansion have now reached their limits in some countries, supply side policies must be given greater emphasis. These would include measures to encourage investment, both private and public, as well as other structural measures to raise the potential growth rate of the economy. Such measures, along with more decisive efforts to reduce the "headwinds" of over indebtedness, should with time provide the foundations for a sustainable economic recovery. |
| Keywords: | Global financial crisis ; Business cycles - Econometric models ; Financial markets ; Macroeconomics - Econometric models ; Supply-side economics ; Monetary policy ; Fiscal policy |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:54&r=cba |
| By: | John Lewis |
| Abstract: | This paper analyses how the financial crisis has affected task of meeting the Maastricht Criteria for the eight Central and Eastern European Countries which have yet to join the euro. It identifies the channels by which the crisis has fed through to deficits, debt, interest rates and inflation and seeks to provide numerical estimates of these factors. Deficits have worsened, but for most countries the problem is still primarily structural rather than cyclical. Debts have risen, but only in the cases of Latvia and Poland has the crisis changed the outlook for meeting the criterion. Inflation has fallen, particularly in the Baltic states on account of large output gap declines. The depth of the recession is likely to depress inflation rates for several years. Lastly, the interest rate criterion is more challenging because of the rise in spreads since the crisis. |
| Keywords: | New Member States; Convergence Criteria; Euro Adoption; Financial Crisis |
| JEL: | E61 E66 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:253&r=cba |
| By: | Sumon Kumar Bhaumik; Vinh Dang; Ali M. Kutan |
| Abstract: | Many developing and emerging markets have high degrees of state bank ownership. In addition, the recent global financial crisis has led to significant state ownership of banking assets in developed countries such as the United Kingdom. These observations beg the question of whether the effectiveness of monetary policy through a lending channel differs across banks with different ownerships. In this paper, using bank-level data from India, we examine this issue and also test whether the reaction of different types of banks (i.e., private, state and foreign) to monetary policy changes is different in easy and tight policy regimes. Our results suggest that there are considerable differences in the reactions of different types of banks to monetary policy initiatives of the central bank and the bank lending channel of monetary policy might be much more effective in a tight money period than in an easy money period. We also find differences in impact of monetary policy changes on less risky short term and more risky medium term lending We discuss the policy implications of the findings. Our results from India are preliminary and further studies are needed to see whether our findings can be generalized to emerging economies or developing countries in general. |
| Keywords: | bank ownership; credit channel of monetary policy; lending; monetary policy regimes, India. |
| JEL: | E51 E58 G21 G32 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-988&r=cba |
| By: | Mohamed Daly Sfia |
| Abstract: | This paper investigates the possibility of constructing a composite leading indicator (CLI) of Tunisian inflation. For doing so, partial information about future inflation rate provided by a number of basic series is analyzed first. Based on the correlation analysis, a few of these basic series are chosen for construction of composite indicator. Empirical results show that the deviation from long‐term trend of two monetary aggregates (M1 and M3), short‐term interest rate (TMM), real effective exchange rate and crude petroleum production, are important leading indicators for inflation rate in Tunisia. Accordingly, based on monthly data on these basic series, one composite indicator is constructed and its performance is assessed by using turning point analysis, granger causality tests, and impulse response functions. The results indicate that our composite indicator is useful in anticipating changes in inflation rates in Tunisia. |
| Keywords: | Tunisia, Inflation, Leading indicators, Composite index |
| JEL: | E31 E32 E37 |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-980&r=cba |