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on Central Banking |
| By: | George W. Evans (University of Oregon Economics Department and University of St. Andrews); William A.Branch (University of Califorina, Irvine) |
| Abstract: | This paper studies the implications for monetary policy of heterogeneous expectations in a New Keynesian model. The assumption of rational expec- tations is replaced with parsimonious forecasting models where agents select between predictors that are underparameterized. In a Misspecification Equilib- rium agents only select the best-performing statistical models. We demonstrate that, even when monetary policy rules satisfy the Taylor principle by adjusting nominal interest rates more than one for one with inflation, there may exist equilibria with Intrinsic Heterogeneity. Under certain conditions, there may exist multiple misspecification equilibria. We show that these findings have im- portant implications for business cycle dynamics and for the design of monetary policy. |
| Keywords: | Heterogeneous expectations, monetary policy, multiple equilibria, adaptive learning. |
| JEL: | G12 G14 D82 D83 |
| Date: | 2010–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:ore:uoecwp:2010-4&r=cba |
| By: | George W. Evans (University of Oregon Economics Department and University of St. Andrews); Seppo Honkapohja (Bank of Finland, Helsinki, Finland) |
| Abstract: | We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), we find that under normal monetary and fiscal policy the intended steady state is locally but not globally stable. Unstable deflationary paths can arise after large pessimistic shocks to expectations. For large expectation shocks pushing interest rates to the zero lower bound, temporary increases in government spending can be used to insulate the economy from deflation traps. |
| Keywords: | Adaptive Learning, Monetary Policy, Fiscal Policy, Zero Interest Rate Lower Bound |
| JEL: | E63 E52 E58 |
| Date: | 2010–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:ore:uoecwp:2010-5&r=cba |
| By: | George W. Evans (University of Oregon Economics Department and University of St. Andrews); Seppo Honkapohja (Bank of Finland, Helsinki, Finland; University of St. Andrews) |
| Abstract: | This paper considers the Ricardian Equivalence proposition when expectations are not rational and are instead formed using adaptive learning rules. We show that Ricardian Equivalence continues to hold provided suitable additional conditions on learning dynamics are satisfied. However, new cases of failure can also emerge under learning. In particular, for Ricardian Equivalence to obtain, agents’ expectations must not depend on government’s financial variables under deficit financing. |
| Keywords: | Taxation, expectations, Ramsey model, Ricardian equivalence. |
| JEL: | E62 D84 E21 E43 |
| Date: | 2010–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:ore:uoecwp:2010-3&r=cba |
| By: | George W. Evans (University of Oregon Economics Department and University of St. Andrews) |
| Abstract: | In Evans, Guse, and Honkapohja (2008) the intended steady state is locally but not globally stable under adaptive learning, and unstable deflationary paths can arise after large pessimistic shocks to expectations. In the current paper a modified model is presented that includes a locally stable stagnation regime as a possible outcome arising from large expectation shocks. Policy implications are examined. Sufficiently large temporary increases in government spending can dislodge the economy from the stagnation regime and restore the natural stabilizing dynamics. More specific policy proposals are presented and discussed. |
| Keywords: | Stagnation, fiscal and monetary policy, deflation trap |
| JEL: | E63 E52 E58 |
| Date: | 2010–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:ore:uoecwp:2010-6&r=cba |
| By: | Philippe Bacchetta, Cedric Tille, Eric van Wincoop (IUHEID, The Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | Recent crises have seen very large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics based on self-fulfilling shifts in risk made possible by a negative link between the current asset price and risk about the future asset price. This link implies that risk about tomorrow’s asset price depends on uncertainty about risk tomorrow. This dynamic mapping of risk into itself gives rise to the possibility of multiple equilibria and self-fulfilling shifts in risk. We show that this can generate risk panics. The impact of the panic is larger when the shift from a low to a high risk equilibrium takes place in an environment of weak fundamentals. The sharp increase in risk leads to a large drop in the asset price, decreased leverage and reduced market liquidity. We show that the model can account well for the developments during the recent financial crisis. |
| Date: | 2010–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp17-2010&r=cba |
| By: | Alfred Maussner (University of Augsburg, Department of Economics) |
| Abstract: | This paper introduces the reader into the apparatus behind the popularNew Keynesian Phillips (NKPC) curve. It derives several log-linear versionsof this curve and recursive formulations of the Calvo-Yun price staggeringmodel that is behind this curve. These formulations can be used for higher-orderapproximations of the NKPC or for implementations that use othernon-linear solution techniques, as, e.g., projection methods. |
| Keywords: | inflation, New Keynesian Phillips curve, projection methods |
| JEL: | E31 E37 E43 E47 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:aug:augsbe:0313&r=cba |
| By: | Martin Bodenstein; Luca Guerrieri; Christopher Gust |
| Abstract: | Beginning in 2009, in many advanced economies, policy rates reached their zero lower bound (ZLB). Almost at the same time, oil prices started rising again. We analyze how the ZLB affects the propagation of oil shocks. As these shocks move inflation and output in opposite directions, their effects on economic activity are cushioned when monetary policy is constrained. The burst of inflation from an oil price increase lowers real interest rates at the ZLB and stimulates the interest-sensitive component of GDP, offsetting the usual contractionary effects. In fact, if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1009&r=cba |
| By: | Peter Hördahl; Oreste Tristani |
| Abstract: | We use a joint model of macroeconomic and term structure dynamics to estimate inflation risk premia in the United States and the euro area. To sharpen our estimation, we include in the information set macro data and survey data on inflation and interest rate expectations at various future horizons, as well as term structure data from both nominal and index-linked bonds. Our results show that, in both currency areas, inflation risk premia are relatively small, positive, and increasing in maturity. The cyclical dynamics of long-term inflation risk premia are mostly associated with changes in output gaps, while their high-frequency fluctuations seem to be aligned with variations in inflation. However, the cyclicality of inflation premia differs between the US and the euro area. Long term inflation premia are countercyclical in the euro area, while they are procyclical in the US. |
| Keywords: | term structure of interest rates, inflation risk premia, central bank credibility |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:325&r=cba |
| By: | Faust, Jon; Gupta, Abhishek |
| Abstract: | In this paper, we develop and apply certain tools to evaluate the strengths and weaknesses of dynamic stochastic general equilibrium (DSGE) models. In particular, this paper makes three contributions: One, it argues the need for such tools to evaluate the usefulness of the these models; two, it defines these tools which take the form of prior and particularly posterior predictive analysis and provides illustrations; and three, it provides a justification for the use of these tools in the DSGE context in defense against the standard criticisms for the use of these tools. |
| Keywords: | Prior and posterior predictive analysis; DSGE Model Evaluation; Monetary Policy. |
| JEL: | C52 E1 C11 |
| Date: | 2010–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26721&r=cba |
| By: | Gupta, Abhishek |
| Abstract: | This paper evaluates the strengths and weaknesses of dynamic stochastic general equilibrium (DSGE) models from the standpoint of their usefulness in doing monetary policy analysis. The paper isolates features most relevant for monetary policymaking and uses the diagnostic tools of posterior predictive analysis to evaluate these features. The paper provides a diagnosis of the observed flaws in the model with regards to these features that helps in identifying the structural flaws in the model. The paper finds that model misspecification causes certain pairs of structural shocks in the model to be correlated in order to fit the observed data. |
| Keywords: | Posterior predictive analysis; DSGE; Monetary Policy; Forecast Errors; Model Evaluation. |
| JEL: | E58 C52 E1 C11 |
| Date: | 2010–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26718&r=cba |
| By: | Sebastian Hauptmeier (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Jesus Sanchez Fuentes (Universidad Complutense Madrid, Ciudad Universitaria - 28040 Madrid, Spain.); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | The study looks at primary expenditure developments in the euro area, its three largest members and four “macro-imbalances” countries for the period 1999-2009. It compares actual expenditure trends with those that would have prevailed if countries had followed neutral policies based on expenditure rules since the start of EMU. It also calculates the implications for debt trends. It finds that, all sample countries except Germany applied expansionary expenditure policies. This resulted in much higher expenditure and debt paths compared to a counterfactual neutral expenditure stance. Simple and prudent rules-based spending policies could have led to much safer fiscal positions much more in line with the EU’s Stability and Growth Pact rules. JEL Classification: E17, E61, E65, H50, H60. |
| Keywords: | Expenditure policies, public debt, expenditure rules, sustainability, fiscal stance. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101266&r=cba |
| By: | Daniel L. Thornton |
| Abstract: | This paper investigates the effectiveness of one of the Fed’s unconventional monetary policy tools, the term auction facility (TAF). At issue is whether the TAF reduced the spread between LIBOR rates and equivalent-term Treasury rates by reducing the liquidity premium embedded in LIBOR rates. This paper suggests that rather than reducing the liquidity premium in LIBOR rates, the announcement of the TAF increased the risk premium in financial and other bond rates because market participants interpreted the announcement by the Fed and other central banks as a sign that the financial crisis was worse than previously thought. Evidence is presented that supports this hypothesis.> |
| Keywords: | Liquidity (Economics) ; Monetary policy ; Financial risk management |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-044&r=cba |
| By: | Patrick Lenain; Robert Hagemann; David Carey |
| Abstract: | The United States faces challenging budgetary prospects, as do most other OECD countries. The federal budget deficit widened considerably during the recession, reaching about 10% of GDP in both 2009 and 2010, reflecting the operation of automatic stabilizers and the policy response to the crisis. Consequently, public debt now stands at its highest level since the early–1950s. The Administration has proposed the objective of stabilising the debt-GDP ratio by 2015, which is realistic in scope and ambition, though it requires fiscal tightening measures which are yet to be identified. In the next decade, the effects of population ageing on entitlement spending will be increasingly felt and the fiscal situation could deteriorate significantly in the absence of structural reforms of pension and, especially, health-care programmes.<P>États-Unis : Rétablir la stabilité budgétaire<BR>Comme la quasi-totalité des autres pays de l'OCDE, les États-Unis sont confrontés à des perspectives budgétaires difficiles. Le déficit du budget fédéral s'est considérablement creusé au cours de la récession, pour atteindre environ 10 % du PIB tant en 2009 qu'en 2010, du fait du jeu des stabilisateurs automatiques et des mesures prises par les pouvoirs publics face à la crise. En conséquence, la dette publique s'établit maintenant à son plus haut niveau depuis le début des années 1950. Le gouvernement a proposé de viser une stabilisation du ratio dette/PIB d'ici à 2015, ce qui représente un objectif ambitieux mais réaliste, même si sa concrétisation passe par un durcissement de la politique budgétaire dont les modalités restent à préciser. Au cours des dix prochaines années, le vieillissement de la population fera de plus en plus sentir ses effets sur les dépenses correspondant à des droits à prestations, et la situation budgétaire risque de se dégrader nettement en l'absence de réformes structurelles du système de retraite et, surtout, du système de santé. La récente réforme du système de santé vise à freiner cette croissance des dépenses. La réforme sera plus efficace en réalisant des économies budgétaires à condition que les futures administrations et congrès ne remplacent pas les dispositions de la présente loi. |
| Keywords: | budgets, fiscal policy, health care, ageing populations, sustainability, deficit, debt, VAT, tax expenditures, United States 2010, budget, politique budgétaire, vieillissement de la population, système de santé, dépense fiscale, déficit, dette, TVA, États-Unis 2010 |
| JEL: | B20 H51 H55 H60 H68 H75 |
| Date: | 2010–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:806-en&r=cba |
| By: | Tobias Cwik (House of Finance, Goethe University of Frankfurt, Grueneburgplatz 1, D-60323 Frankfurt am Main, Germany.); Volker Wieland (House of Finance, Goethe University of Frankfurt, Grueneburgplatz 1, D-60323 Frankfurt am Main, Germany.) |
| Abstract: | The global financial crisis has lead to a renewed interest in discretionary fiscal stimulus. Advocates of discretionary measures emphasize that government spending can stimulate additional private spending — the Keynesian multiplier effect. Thus, we investigate whether the spending package announced by Euro area governments for 2009 and 2010 is likely to boost GDP by more than one for one. Because of modeling uncertainty, it is essential that such policy evaluations be robust to alternative modeling assumptions and parameterizations. We use five different empirical macroeconomic models with Keynesian features such as price and wage rigidities to evaluate the impact of the fiscal stimulus. Four of them suggest that the planned increase in government spending will reduce private consumption and investment significantly. Only a model that largely ignores the forward-looking behavioral response of consumers and firms implies crowding-in of private spending. We review a range of issues that may play a role in the recession of 2008-2009. Implementation lags are found to reinforce crowding-out and may even cause an initial contraction. Zero-bound effects may lead the central bank to abstain from interest rate hikes and increase the GDP impact of government spending. Crowding-in, however, requires an immediate anticipation of at least two years at the zero bound. Using a multi-country model, we find that spillovers between euro area countries are negligible or even negative, because direct demand effects are offset by the indirect effect of an euro appreciation. New-Keynesian DSGE models provide a strong case for government savings packages. Announced with sufficient lead time, spending cuts induce a significant short-run stimulus and crowding-in of private spending. JEL Classification: E62, E63, H31. |
| Keywords: | fiscal policy, government spending multipliers, model uncertainty, New-Keynesian models. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101267&r=cba |
| By: | Brad E. Strum |
| Abstract: | This paper studies the implications of inflation persistence (generated by backward-looking price setters) for monetary policy in a New Keynesian "input-output" model--a model with sticky prices in both intermediate and final goods sectors. Optimal policy under commitment depends on the degree of inflation persistence in both sectors. Under discretion, speed-limit targeting--targeting the change in the output gap--outperforms price-level and inflation targeting in the presence of inflation persistence. If inflation persistence is low in the intermediate goods sector, price-level targeting outperforms inflation targeting despite high inflation persistence in the final goods sector. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-55&r=cba |
| By: | Andrea Vaona (Department of Economics (University of Verona)) |
| Abstract: | The present paper explores the connection between money growth and unemployment in the long run in different models with fair wages. Under customary assumptions regarding the sign of the parameters of the effort function, more money growth (equal to inflation) lowers the unemployment rate, though to a declining extent. This is because firms respond to inflation - that spurs effort by decreasing the reference wage - by increasing employment, so to maintain the effort level constant, as implied by the Solow condition. Under wage staggering this effect is stronger because wage dispersion magnifies the impact of inflation on effort. Therefore, we provide a new theoretical foundation for recent empirical contributions finding a negative long-run relationship between unemployment and inflation. |
| Keywords: | efficiency wages, money growth, long-run Phillips curve, trend inflation, wage staggering |
| JEL: | E3 E20 E40 E50 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:17/2010&r=cba |
| By: | Paul Alagidede; Simeon Coleman; Juan Carlos Cuestas |
| Abstract: | Plans are far advanced to form a second monetary union, the West African Monetary Zone (WAMZ), in Africa. While much attention is being placed on convergence criteria and preparedness of the five aspiring member states, less attention is being placed on how the dynamics of inflation in individual countries are (dis)similar. This paper aims to stimulate debate on the long term sustainability of the union by examining the dynamics of inflation within these countries. Using Fractional Integration (FI) methods, we establish that some significant differences exist among the countries. Shocks to inflation in Sierra Leone are non mean reverting; results for The Gambia, Ghana and Guinea-Bissau suggest some inflation persistence, despite being mean reverting. Some policy implications are discussed and possible outstanding policy questions are also raised. |
| Keywords: | Inflationary shocks, fractional integration, stationarity, West Africa, Monetary unions. |
| JEL: | C14 E31 E58 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbs:wpaper:2010/8&r=cba |
| By: | Elena Andreou; Eric Ghysels; Andros Kourtellos |
| Abstract: | We introduce easy to implement regression-based methods for predicting quarterly real economic activity that use daily financial data and rely on forecast combinations of MIDAS regressions. Our analysis is designed to elucidate the value of daily information and provide real-time forecast updates of the current (nowcasting) and future quarters. Our findings show that while on average the predictive ability of all models worsens substantially following the financial crisis, the models we propose suffer relatively less losses than the traditional ones. Moreover, these predictive gains are primarily driven by the classes of government securities, equities, and especially corporate risk. |
| Keywords: | MIDAS, macro forecasting, leads, daily financial information, daily factors. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:9-2010&r=cba |
| By: | Christopher Gust; Sylvain Leduc; Robert Vigfusson |
| Abstract: | The degree of exchange-rate pass-through to import prices is low. An average pass-through estimate for the 1980s would be roughly 50 percent for the United States implying that, following a 10 percent depreciation of the dollar, a foreign exporter selling to the U.S. market would raise its price in the United States by 5 percent. Moreover, substantial evidence indicates that the degree of pass-through has since declined to about 30 percent. ; Gust, Leduc, and Vigfusson (2010) demonstrate that, in the presence of pricing complementarity, trade integration spurred by lower costs for importers can account for a significant portion of the decline in pass-through. In our framework, pass-through declines solely because of markup adjustments along the intensive margin. ; In this paper, we model how the entry and exit decisions of exporting firms affect pass-through. This is particularly important since the decline in pass-through has occurred as a greater concentration of foreign firms are exporting to the United States. ; We find that the effect of entry on pass-through is quantitatively small and is more than offset by the adjustment of markups that arise only along the intensive margin. Even though entry has a relatively small impact on pass-through, it nevertheless plays an important role in accounting for the secular rise in imports relative to GDP. In particular, our model suggests that over 3/4 of the rise in the U.S. import share since the early 1980s is due to trade in new goods. Thus, a key insight of this paper is that adjustment of markups that occur along the intensive margin are quantitatively more important in accounting for secular changes in pass-through than adjustments that occur along the extensive margin. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1008&r=cba |
| By: | Tödter, Karl-Heinz |
| Abstract: | The carry-over effect is the advance contribution of the old year to growth in the new year. Among practitioners the informative content of the carry-over effect for short-term forecasting is undisputed and is used routinely in economic forecasting. In this paper, the carry-over effect is analysed 'statistically' and it is shown how it reduces the uncertainty of short-term economic forecasts. This is followed by an empirical analysis of the carry-over effect using simple forecast models as well as Bundesbank and Consensus projections. -- |
| Keywords: | forecast uncertainty,growth rates,carry-over effect,variance contribution,Chebyshev density |
| JEL: | C53 E37 C16 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201021&r=cba |
| By: | Vitor Castro (Faculdade de Economia, Universidade de Coimbra, Portugal / NIPE); Ricardo M. Sousa (University of Minho, NIPE, London School of Economics and FMG) |
| Abstract: | We assess the response of monetary policy to developments in asset markets in the Euro Area, the US and the UK. We estimate the reaction of monetary policy to wealth composition and asset prices using: (i) a linear framework based on a fully simultaneous system approach in a Bayesian environment; and (ii) a nonlinear specification that relies on a smooth transition regression model. The linear framework suggests that wealth composition is indeed important in the formulation of monetary policy. However, the attempts of central banks to mitigate undesirable fluctuations in say, financial wealth, may disrupt housing wealth. A similar result can be found when we assess the reaction of monetary authority to asset prices, although concerns about "price" effects are smaller. The nonlinear model confirms these findings. However, the concerns over wealth and its components are stronger once inflation is under control, i.e. below a certain target. Some disruptions between financial and housing wealth effects are still present. They can also be found in the reaction to asset prices, despite being less intense. |
| Keywords: | monetary policy rules, wealth composition, asset prices. |
| JEL: | E37 E52 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2010-19&r=cba |
| By: | Miguel Casares (Departamento de Economía-UPNA); Antonio Moreno (Departamento de Economía. Universidad de Navarra); Jesús Vázquez (Departamento FAE II, Universidad del País Vasco.) |
| Abstract: | As one alternative to search frictions, wage stickiness is introduced in a New-Keynesian model to generate endogenous unemployment fluctuations due to mismatches between labor supply and labor demand. The effects on an estimated New-Keynesian model for the U.S. economy are: i) the Calvo-type probability on wage stickiness rises, ii) the labor supply elasticity falls, iii) the implied second-moment statistics of the unemployment rate provide a reasonable match with those observed in the data, and iv) wage-push shocks, demand shifts and monetary policy shocks are the three major determinants of unemployment fluctuations. |
| Keywords: | sticky wages, unemployment, business cycles, New-Keynesian models. |
| JEL: | C32 E30 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nav:ecupna:1003&r=cba |
| By: | Guillermo Benavides |
| Abstract: | In this research paper ARCH-type models are applied in order to estimate the Value-at-Risk (VaR)of an inflation-index futures portfolio for several time-horizons. The empirical analysis is carried out for Mexican inflation-indexed futures traded at the Mexican Derivatives Exchange (MEXDER). To analyze the VaR with time horizons of more than one trading day bootstrapping simulations were applied. The results show that these models are relatively accurate for time horizons of one trading day. However, the volatility persistence of ARCH-type models is reflected with relatively high VaR estimates for longer time horizons. These results have implications for short-term inflation forecasts. By estimating confidence intervals in the VaR, it is possible to have certain confidence about the future range of inflation (or extreme inflation values) for a specified time horizon. |
| Keywords: | Bootstrapping, inflation, inflation-indexed futures, Mexico, value at risk, volatility persistence. |
| JEL: | C15 C22 C53 E31 E37 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2010-12&r=cba |
| By: | Massimo Guidolin; Stuart Hyde; David McMillan; Sadayuki Ono |
| Abstract: | We perform a comprehensive examination of the recursive, comparative predictive performance of a number of linear and non-linear models for UK stock and bond returns. We estimate Markov switching, threshold autoregressive (TAR), and smooth transition autoregressive (STR) regime switching models, and a range of linear specifications in addition to univariate models in which conditional heteroskedasticity is captured by GARCH type specifications and in which predicted volatilities appear in the conditional mean. The results demonstrate that U.K. asset returns require non-linear dynamics be modeled. In particular, the evidence in favor of adopting a Markov switching framework is strong. Our results appear robust to the choice of sample period, changes in the adopted loss function and to the methodology employed to test the null hypothesis of equal predictive accuracy across competing models.> |
| Keywords: | Forecasting ; Econometric models ; Rate of return ; Great Britain |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-039&r=cba |
| By: | Silvio Contessi |
| Abstract: | I study the aggregate implications of the entry of Multinational Firms (MNFs) in a two country Dynamic Stochastic General Equilibrium model in which firms have heterogeneous productivity in the sense of Ghironi and Melitz (2005). Unlike the extant open economy macroeconomics literature, this model endogenizes both multinational production and exports as possible strategies of internationalization of production, a feature that substantially improves the match between model-simulated moments and business cycle data along two dimensions. First, once I allow for concurrent entry (and exit) of MNFs and exporters over the business cycle, the consumption output anomaly disappears and I can successfully replicate the ranking of cross-country correlations of output and consumption found in the data. Second, I show that the model with heterogeneous MNFs is capable of bringing the simulated volatility of the Real Exchange Rate much closer to the data than previous models with either representative or heterogeneous exporters.> |
| Keywords: | Business cycles ; International business enterprises |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-041&r=cba |
| By: | Gregor Schwerhoff; Mouhamadou Sy |
| Abstract: | The dramatic decline in inflation across the world over the last 20 years has been largely credited to improved monetary policy. The universal nature of the phenomenon and its simultaneity with globalization however indicate that there might also be a "real" side to it. We build a model based on Melitz (2003) in which falling transport cost lead to greater openness, higher productivity and lower inflation. Following a decline in transport cost openness increases and firm selection eliminates the least productive domestic firms. The consequent increase in average productivity leads to falling relative prices for goods. A cash-in-advance constraint allows to analyse how falling relative prices can lead to lower inflation. Using a dataset of macroeconomic variables for 107 countries from all world regions we are able to show that openness-induced productivity growth leads to a significant decline in inflation world wide. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2010-38&r=cba |
| By: | Luciana Juvenal; Paulo Santos Monteiro |
| Abstract: | There is substantial evidence that countries or regions with stronger trade linkages tend to have business cycles which are more synchronized. However, the standard international business cycle framework cannot replicate this finding. In this paper we study a multiple- country model of international trade with imperfect competition and variable markups and embed it into a real business cycle framework by including aggregate technology shocks and allowing for variable labor supply. The model is successful at replicating the empirical relation between trade and business cycle synchronization. High trade costs increase the real exchange rate volatility because firms choose to price-to-market and this volatility decouples countries' business cycle fluctuations. We find empirical evidence supporting this mechanism.> |
| Keywords: | International trade ; Business cycles |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-038&r=cba |
| By: | Aleksander Berentsen; Alessandro Marchesiani; Christopher J. Waller |
| Abstract: | An increasing number of central banks implement monetary policy via two standing facilities: a lending facility and a deposit facility. In this paper we show that it is socially optimal to implement a non-zero interest rate spread. We prove this result in a dynamic general equilibrium model where market participants have heterogeneous liquidity needs and where the central bank requires government bonds as collateral. We also calibrate the model and discuss the behavior of the money market rate and the volumes traded at the ECB’s deposit and lending facilities in response to the recent financial crisis. |
| Keywords: | Monetary policy, open market operations, standing facilities |
| JEL: | E52 E58 E59 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:517&r=cba |
| By: | Aleksander Berentsen; Alessandro Marchesiani; Christopher J. Waller |
| Abstract: | An increasing number of central banks implement monetary policy via two standing facilities: a lending facility and a deposit facility. In this paper we show that it is socially optimal to implement a non-zero interest rate spread. We prove this result in a dynamic general equilibrium model where market participants have heterogeneous liquidity needs and where the central bank requires government bonds as collateral. We also calibrate the model and discuss the behavior of the money market rate and the volumes traded at the ECB’s deposit and lending facilities in response to the recent financial crisis. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-049&r=cba |
| By: | Juergen von Hagen (University of Bonn); Haiping zhang (School of Economics, Singapore Management University) |
| Abstract: | We develop a tractable multi-country overlapping-generations model and show that cross-country differences in financial development explain three recent empirical patterns of international capital flows. Domestic financial frictions in our model distort interest rates and aggregate output in the less financially developed countries. International capital flows help ameliorate the two distortions.International flows of financial capital and foreign direct investment a ect aggregate output in each country directly through affecting the size of aggregate investment. In addition, they affect aggregate output indirectly through affecting the composition of aggregate investment and the size of aggregate savings. Under certain conditions, the indirect effects may dominate the direct effects so that, despite "uphill" net capital flows, full capital mobility may raise the steady-state aggregate output in the poor country as well as raise world output. However, if foreign direct investment is restricted, "uphill" financial capital flows strictly reduce the steady-state aggregate output in the poor countries and it is more likely that the steady-state world output is lower than under international financial autarky. |
| Keywords: | Capital account liberalization, financial frictions, financial development, foreign direct investment, world output gains |
| JEL: | E44 F41 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:10-2010&r=cba |
| By: | Jean-Louis COMBES (Centre d'Etudes et de Recherches sur le Développement International); Tidiane KINDA (Fonds Monétaire International); Patrick PLANE (Centre d'Etudes et de Recherches sur le Développement International) |
| Abstract: | This paper analyzes the impact of capital inflows and the exchange rate regime on the real effective exchange rate. A wide range of developing countries (42 countries) is considered with estimation based on panel cointegration techniques. The results show that both public and private inflows cause the real effective exchange rate to appreciate. Among private inflows, portfolio investment has the biggest effect on appreciation, almost seven times that of foreign direct investment or bank loans, and private inflows have the smallest effect. Using a de facto measure of exchange rate flexibility, we find that a more flexible exchange rate helps to dampen appreciation of the real effective exchange rate caused by capital inflows. |
| Keywords: | Private capital flows, real effective exchange rate, exchange rate flexibility, emerging markets, low-income countries, pooled mean group estimator |
| JEL: | F32 F31 F21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cdi:wpaper:1216&r=cba |
| By: | Luiz de Mello; Pier Carlo Padoan; Linda Rousová |
| Abstract: | Large shifts in countries’ external current account positions can be disruptive, often reflecting sudden stops in the flows of external finance and leading to exchange rate and banking crises. As a result, an empirical literature has emerged on the sustainability of, and the determinants of large swings in, current account positions. We shed further light on this issue by testing for the presence of unit roots in the current account balance-to-GDP ratios of a large set of mature and emerging-market economies using a methodology that allows for structural breaks in intercepts and trends. We then construct a chronology of current account reversals that is consistent with sustainability of external positions and use it to estimate the factors explaining the likelihood and magnitude of such reversals using a selection model with ordered probit in the first stage. We find that most of the factors that explain the probability of reversals, such as trends in capital flows, in the budget balance and in external positions, also influence their magnitude. But there are a few exceptions. For instance, the stance of monetary policy and the magnitude of external imbalances prior to a reversal seem to be more powerful predictors of the probability of reversals than of their magnitude.<P>Les déséquilibres mondiaux sont-ils viables ? : Mieux comprendre les causes des retournements de balance courante<BR>Les amples variations des soldes des paiements courants des pays peuvent avoir des effets perturbateurs, puisqu'elles tiennent souvent à de brusques interruptions des entrées de capitaux extérieurs et débouchent fréquemment sur des crises de change et bancaires. En conséquence, de nombreux travaux empiriques ont été réalisés sur la viabilité des soldes des paiements courants et les déterminants de leurs amples fluctuations. Nous apportons un nouvel éclairage sur cette question en procédant à un test de racine unitaire sur les ratios solde des paiements courants/PIB d'un vaste ensemble d'économies parvenues à maturité et émergentes, à partir d'une méthodologie tenant compte des ruptures structurelles dans les niveaux et les tendances des séries statistiques considérées. Nous établissons ensuite une chronologie des retournements de balance courante concordant avec la viabilité des positions extérieures, et nous l'utilisons pour estimer les facteurs qui expliquent la probabilité et l'ampleur de ces retournements à l'aide d'un modèle de sélection probit ordonné au premier stade. Nous parvenons à la conclusion que la plupart des facteurs qui expliquent la probabilité des retournements, telles que les tendances dans les flux de capitaux, dans le solde budgétaire et dans les positions extérieures, influent également sur leur ampleur. On relève toutefois quelques exceptions. Ainsi, l'orientation de la politique monétaire et l'ampleur des déséquilibres externes avant un retournement semblent être de meilleures variables explicatives de la probabilité des retournements que de leur ampleur. |
| Keywords: | capital flows, current account sustainability, current account reversals, flux de capitaux, retournements de balance courante, viabilité de la balance courante |
| JEL: | C32 C35 F32 |
| Date: | 2010–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:813-en&r=cba |
| By: | Vasia Panousi; George-Marios Angeletos |
| Abstract: | How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? This paper investigates this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk---a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. Our contribution is then to show that this friction provides a simple explanation for the emergence of global imbalances, a simple resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a distinct set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-54&r=cba |
| By: | Pierre L. Siklos (Professor, Wilfrid Laurier University (E-mail: psiklos@wlu.ca)) |
| Abstract: | This paper documents empirically and analyzes theoretically the responses of disaggregated prices to aggregate technology and monetary policy shocks. Based on the price data of US personal consumption expenditure, we find that disaggregated price responses have features across shocks and across sectors that are difficult to explain using standard multi-sector sticky price models. In terms of shocks, a substantial fraction of disaggregated prices initially rise in response to a contractionary monetary policy shock, while most prices fall immediately in response to an aggregate technological improvement. In terms of sectors, the disaggregated price responses are correlated weakly with the frequency of price changes. To reconcile these observations, we extend the standard model. We find that the cost channel of monetary policy and cross-sectional heterogeneity in real rigidity are possible avenues in accounting for these facts. |
| Keywords: | Disaggregated Prices, Technology Shocks, Monetary Policy Shocks, Sticky Price Models |
| JEL: | E31 F52 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-26&r=cba |
| By: | Buch, Claudia M.; Eickmeier, Sandra; Prieto, Esteban |
| Abstract: | The interplay between banks and the macroeconomy is of key importance for financial and economic stability. We analyze this link using a factor-augmented vector autoregressive model (FAVAR) which extends a standard VAR for the U.S. macroeconomy. The model includes GDP growth, inflation, the Federal Funds rate, house price inflation, and a set of factors summarizing conditions in the banking sector. We use data of more than 1,500 commercial banks from the U.S. call reports to address the following questions. How are macroeconomic shocks transmitted to bank risk and other banking variables? What are the sources of bank heterogeneity, and what explains differences in individual banks' responses to macroeconomic shocks? Our paper has two main findings: (i) Average bank risk declines, and average bank lending increases following expansionary shocks. (ii) The heterogeneity of banks is characterized by idiosyncratic shocks and the asymmetric transmission of common shocks. Risk of about 1/3 of all banks rises in response to a monetary loosening. The lending response of small, illiquid, and domestic banks is relatively large, and risk of banks with a low degree of capitalization and a high exposure to real estate loans decreases relatively strongly after expansionary monetary policy shocks. Also, lending of larger banks increases less while risk of riskier and domestic banks reacts more in response to house price shocks. -- |
| Keywords: | FAVAR,bank risk,macro-finance linkages,monetary policy,microeconomic adjustment |
| JEL: | E44 G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201020&r=cba |
| By: | Hubert De La Bruslerie (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX); Jessica Fouilloux (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen) |
| Abstract: | This paper proposes a consumption-based model that accounts for term premiums of the nominal term structure of interest rates. The driving force behind the model is the looking at the ex ante term premium. Nominal term premiums depend on the volatility processes of real consumption and inflation. When calibrated to US data on interest rates, consumption and inflation, the model accounts for the C-CAPM expectations puzzle. Risk aversion coefficients around 6 are evidenced. The hypothesis of non-constant subjective discount rates is envisaged but successfully validated. |
| Keywords: | C-CAPM, term structure of interest rates, term premium, risk aversion, subjective discount factor |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00536924_v1&r=cba |
| By: | Jan-Christoph Rülke (WHU - Otto Beisheim School of Management,WHU - Otto Beisheim School of Management); Peter Tillmann (Justus-Liebig-University Giessen) |
| Abstract: | Twice a year FOMC members submit forecasts for growth, unemplyoment and in ation to be published in the Humphrey-Hawkins Report to Congress. In this paper we use individual FOMC forecasts to assess whether these forecasts exhibit herding behavior, a pattern often found in private sector forecasts. While growth and unemployment forecast do not show herding behavior, the in ation forecasts show strong evidence of anti-herding, i.e. FOMC members intentionally scatter their forecasts around the consensus. Interestingly, anti-herding is more important for nonvoting members than for voters. |
| Keywords: | Central Federal Open Market Committee, monetary policy, forecasting, herding |
| JEL: | E43 E52 E27 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201031&r=cba |
| By: | Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | Since the mid-1990s, we observe an increase of world current account imbalances. These imbalances have only been partially reduced since the burst of the crisis in 2007. They reflect, to some extent, exchange rate misalignments, an issue which has been frequently studied in the literature. However, these imbalances, which have reinforced in the 2000s, are also important inside the Euro area. This analysis cannot be reduced to simple estimates of euro misalignment at the world level because of the specific constraints that exist for each member of the Euro area. This article aims to examine to what extent the intra-European imbalances reflect exchange rate misalignments for each “national euro”. |
| Keywords: | Equilibrium Exchange Rate; Current Account Balance; Macroeconomic Balance |
| Date: | 2010–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00435836_v5&r=cba |
| By: | Antonia Lòpez-Villavicencio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | We analyze, in a unified theoretical framework, the two main models for equilibrium exchange rate, namely, the BEER and the FEER approaches. In order to understand the interactions between them, we study in detail the temporal links between these two measures. Our results show that, in average, the BEER and the FEER are closely related. Yet, important differences can be observed for some countries and/or some periods of time. Therefore, we analyze some of the factors that may explain this disconnection, identifying several aspects which are able to alter the relation between the current account and the real effective exchange rate, and so, between the FEER and the BEER. Our analysis puts forward the structural changes in matter of competitiveness, the dynamics of foreign asset positions and valuation effects as explanations for the divergence. |
| Keywords: | Equilibrium Exchange Rate, BEER, FEER, Cointegration, Global Imbalances |
| Date: | 2010–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00535907_v1&r=cba |
| By: | Nabil Aflouk (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | Since the mid-1990s, the world imbalances have increased significantly with a large US current deficit facing Asian surpluses, mainly Chinese. Since 2007, a partial reduction of these imbalances has been obtained, largely thanks to production's decreases, without large exchange rate adjustments. The Asian surpluses have remained important. The objective of this paper is to examine the exchange rate misalignments (ERM) of the main emerging countries in Asia and Latin America since the 1980s, so as to shed light on the 2000s by a long term analysis and compare with the industrialized countries' case. Our results confirm that ERM have been reduced since the mid-2000s at the world level, but the dollar remained overvalued against the East Asian countries, except the yen. Chinese, Indian and Brazilian exchange rate policies have been much contrasted since the 1980s. The Indian rupee has been more often overvalued while a more balance situation prevailed in Brazil only since the 2000s. The Latin American countries have faced wider and more dispersed ERM and current imbalances than East Asian countries. But Argentina, Chile and Uruguay benefits now of undervalued currencies while Mexico is closer to equilibrium. |
| Keywords: | Equilibrium Exchange Rate, Current Account Balance, Macroeconomic Balance, Emerging Countries |
| Date: | 2010–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00484808_v5&r=cba |
| By: | Kenneth I. Carlaw (University of British Columbia); Richard Lipsey (Simon Fraser University) |
| Abstract: | The modern Schumpeterian vision in which history matters is of a non-stationary, evolving economy driven by bursts of technological change initiated by agents facing uncertainty and producing long term, path dependent growth and shorter term non-random investment cycles. The New Classical vision in which history does not matter is of a stationary, ergodic process driven by rational agents facing risk and producing stable trend growth and shorter term cycles caused by random disturbances. We use Carlaw and Lipsey’s forthcoming simulation model of non-stationary, sustained growth driven by endogenous path dependent technological change under uncertainty, to generate artificial national accounts data. We first use an HP-filter to match these data to the RBC stylized growth facts. We then show that the raw simulation data pass standard tests for trend and difference stationarity, appearing to exhibit unit roots and cointegrating processes of order one. Thus, contrary to current belief, these tests do not establish that the real data are generated by a stationary process. Real data from six OECD countries are then used first to show that the hypothesis of a non-varying NAIRU is rejected for all six countries and then to estimate time varying NAIRU’s for each. The estimates are highly sensitive to the time period over which they are made. They also fail to show any relation between the difference between actual unemployment and the estimated NAIRU for each year and the acceleration in the inflation rate. Thus there is no tendency for the inflation rate to behave as required by the New Classical theory. |
| Keywords: | non-ergodic equilibria, stionarity, real business cycles, growth theory, NAIRU, general equilibrium macroeconomics |
| JEL: | E2 E3 E4 N1 O3 O4 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp10-02&r=cba |
| By: | Alfred Guender (University of Canterbury); Allan G.J. Wu |
| Abstract: | The operating procedure of a central bank influences in no small measure whether the behavior of interest rates is consistent with the expectations hypothesis. In New Zealand, the predictive content of the term spread improves markedly in the wake of the switch from a quantity-based to a price-based operating procedure in March 1999. The Official Cash Rate system has made it easier for market participants to understand the day-to-day conduct of monetary policy. As a result, market interest rates have become more predictable, thereby contributing to the success of the expectations hypothesis in explaining the behavior of yields on very short-dated financial instruments. |
| JEL: | E43 E52 |
| Date: | 2010–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:10/72&r=cba |
| By: | Paul Alagidede; Simeon Coleman; Juan Carlos Cuestas (Department of Economics, The University of Sheffield) |
| Abstract: | Plans are far advanced to form a second monetary union, the West African Monetary Zone (WAMZ), in Africa. While much attention is being placed on convergence criteria and preparedness of the five aspiring member states, less attention is being placed on the extent to which the dynamics of inflation in individual countries are (dis)similar. This paper aims to stimulate debate on the long term sustainability of the union by examining the dynamics of inflation within these countries. Using Fractional Integration (FI) methods, we establish that some significant differences exist among the countries. Shocks to inflation in Sierra Leone are non mean reverting; results for The Gambia, Ghana and Guinea-Bissau suggest some inflation persistence, despite being mean reverting. Some policy implications are discussed and some warnings are raised. |
| Keywords: | Inflationary shocks, fractional integration, stationarity, West Africa, Monetary unions |
| JEL: | C14 E31 E58 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2010020&r=cba |