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on Central Banking |
| By: | Philippe Bacchetta (University of Lausanne, Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Cedric Tille (Graduate Institute, Geneva, Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Eric van Wincoop (University of Virginia, National Bureau of Economic Research and Hong Kong Institute for Monetary Research) |
| 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: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:282010&r=cba |
| By: | Bacchetta, Philippe (University of Lausanne, CEPR); Tille, Cédric (Graduate Institute, Geneva, CEPR); Wincoop, Eric van (University of Virginia, NBER) |
| Abstract: | Recent crises have seen large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics, based on selfful filling shifts in beliefs about risk, that are driven by a negative link between the current asset price and risk about the future asset price. This link implies that risk about the future asset price depends on uncertainty about future risk. This dynamic mapping of risk into itself gives rise to the possibility of multiple equilibria and can generate risk panics. In a panic, risk beliefs are coordinated around a macro fundamental that becomes a sudden focal point of the market. The magnitude of the panic is larger the weaker this macro fundamental. The sharp increase in risk leads to a large drop in the asset price, decreased leverage and reduced market liquidity. While the model is not aimed at modeling the specifics of any particular financial crisis, we show that its implications are broadly consistent with what happened during the 2007-2008 crisis. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2011-003&r=cba |
| By: | Robert Inklaar; J. Christina Wang |
| Abstract: | The measurement of bank output, a difficult and contentious issue, has become even more important in the aftermath of the devastating financial crisis of recent years. In this paper, we argue that models of banks as processors of information and transactions imply a quantity measure of bank service output based on transaction counts instead of balances of loans and deposits. Compiling new and comparable output measures for the United States and a range of European countries, we show that our counts-based output series exhibit significantly different growth patterns from those of our balances-based output series over the years 1997 to 2009. Since the U.S. official statistics rely on counts while European statistics rely on balances, this implies a potentially considerable bias in the estimate of bank output growth in Europe vis-à-vis that in the United States. |
| Keywords: | Banks and banking - Customer services |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:11-1&r=cba |
| By: | Brissimis, Sophocles; Migiakis, Petros |
| Abstract: | The rational expectations hypothesis for survey and model-based inflation forecasts − from the Survey of Professional Forecasters and the Greenbook respectively − is examined by properly taking into account the persistence characteristics of the data. The finding of near-unit-root effects in the inflation and inflation expectations series motivates the use of a local-to-unity specification of the inflation process that enables us to test whether the data are generated by locally non-stationary or stationary processes. Thus, we test, rather than assume, stationarity of near-unit-root processes. In addition, we set out an empirical framework for assessing relationships between locally non-stationary series. In this context, we test the rational expectations hypothesis by allowing the co-existence of a long-run relationship obtained under the rational expectations restrictions with short-run "learning" effects. Our empirical results indicate that the rational expectations hypothesis holds in the long run, while forecasters adjust their expectations slowly in the short run. This finding lends support to the hypothesis that the persistence of inflation comes from the dynamics of expectations. |
| Keywords: | Inflation; rational expectations; high persistence |
| JEL: | C32 D84 C50 E31 E52 E37 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29052&r=cba |
| By: | Lars Jonung; Staffan Linden |
| Abstract: | We use survey based inflationary expectations to explore the forecasting horizons implicitly used by the respondents to questions about the expected rate of inflation during the coming 12 months. We examine the forecast errors, the mean error and the RMSEs, to study if the forecast horizon is truly 12 months as implied by the questionnaires. Our working hypothesis is that the forecast error has a U-shaped pattern, reaching its lowest value on the 12-month horizon. Our exploratory study reveals large differences across countries. For most countries, we get the expected U-shaped outcome for the forecast errors. The horizon implicitly used by respondents when answering the questions is not related to the explicit time horizon of the questionnaire. On average respondents use the same horizon when answering both questions. |
| JEL: | C33 E31 E32 E37 E58 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0435&r=cba |
| By: | Jennifer L. Castle; Nicholas W.P. Fawcett; David F. Hendry |
| Abstract: | Success in accurately forecasting breaks requires that they are predictable from relevant information available at the forecast origin using an appropriate model form, which can be selected and estimated before the break. To clarify the roles of these six necessary conditions, we distinguish between the information set for ‘normal forces’ and the ones for ‘break drivers’, then outline sources of potential information. Relevant non-linear, dynamic models facing multiple breaks can have more candidate variables than observations, so we discuss automatic model selection. As a failure to accurately forecast breaks remains likely, we augment our strategy by modelling breaks during their progress, and consider robust forecasting devices. |
| Keywords: | Economic forecasting, structural breaks, information sets, non-linearity |
| JEL: | C1 C53 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:535&r=cba |
| By: | V. LEWIS; C. POILLY |
| Abstract: | This paper estimates a business cycle model with endogenous rm entry by matching impulse responses to a monetary policy shock in US data. Our VAR includes net business formation, pro ts and markups. We evaluate two channels through which entry may inuence the monetary transmission process. Through the competition effect, the arrival of new entrants makes the demand for existing goods more elastic, and thus lowers desired markups and prices. Through the variety effect, increased rm and product entry raises consumption utility and thereby lowers the cost of living. This implies higher markups and, through the New Keynesian Phillips Curve, lower ination. While the proposed model does a good job at matching the observed dynamics, it generates insufficient volatility of markups and pro ts. Estimates of standard parameters are largely unaffected by the introduction of rm entry. Our results lend support to the variety e¤ect; however, we nd no evidence for the competition effect. |
| Keywords: | entry, ination, monetary transmission, monetary policy, extensive margin |
| JEL: | E32 E52 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:11/705&r=cba |
| By: | Richard G. Anderson; Jane M. Binner; Vincent A. Schmidt |
| Abstract: | This paper examines the inflation "pass-through" problem in American monetary policy, defined as the relationship between changes in the growth rates of individual goods and the subsequent economy-wide rate of growth of consumer prices. Granger causality tests robust to structural breaks are used to establish initial relationships. Then, feedforward artificial neural network (ANN) is used to approximate the functional relationship between selected component subindexes and the headline CPI. Moving beyond the ANN “black box,” we illustrate how decision rules can be extracted from the network. Our custom decompositional extraction algorithm generates rules in humanreadable and machine-executable form (Matlab code). Our procedure provides an additional route, beyond direct Bayesian estimation, for empirical econometric relationships to be embedded in DSGE models. A topic for further research is embedding decision rules within such models. |
| Keywords: | Inflation (Finance) ; Consumer price indexes |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-007&r=cba |
| By: | Mary Daly; Bart Hobijn; Rob Valletta |
| Abstract: | The U.S. economy is recovering from the financial crisis and ensuing deep recession, but the unemployment rate has remained stubbornly high. Some have argued that the persistent elevation of unemployment relative to historical norms reflects the fact that the shocks that hit the economy were especially disruptive to labor markets and likely to have long lasting effects. If such structural factors are at work they would result in a higher underlying natural or nonaccelerating inflation rate of unemployment, implying that conventional monetary and fiscal policy should not be used in an attempt to return unemployment to its pre-recession levels. We investigate the hypothesis that the natural rate of unemployment has increased since the recession began, and if so, whether the underlying causes are transitory or persistent. We begin by reviewing a standard search and matching model of unemployment, which shows that two curves—the Beveridge curve (BC) and the Job Creation curve (JCC)—determine equilibrium unemployment. Using this framework, our joint theoretical and empirical exercise suggests that the natural rate of unemployment has in fact risen over the past several years, by an amount ranging from 0.6 to 1.9 percentage points. This increase implies a current natural rate in the range of 5.6 to 6.9 percent, with our preferred estimate at 6.25 percent. After examining evidence regarding the effects of labor market mismatch, extended unemployment benefits, and productivity growth, we conclude that only a small fraction of the recent increase in the natural rate is likely to persist beyond a five-year forecast horizon. |
| Keywords: | Unemployment ; Labor market |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2011-05&r=cba |
| By: | Bafile, Romina; Piergallini, Alessandro |
| Abstract: | Standard New Keynesian models for monetary policy analysis are "cashless". When the nominal interest rate is the central bank's operating instrument, the LM equation is endogenous and, it is argued, can be ignored. The modern theoretical and quantitative debate on the importance of money for the conduct of monetary policy, however, overlooks firms' money demand. Working in an otherwise baseline New Keynesian setup, this paper shows that the monetary policy transmission mechanism is critically affected by the firms' money demand choice. Specifically, we prove that equilibrium determinacy may require either an active interest-rate policy (i.e., overreacting to inflation) or a passive interest-rate policy (i.e., underreacting to inflation), depending on the elasticity of production with respect to real money balances. We then calibrate the model to U.S. quarterly data and develop a sensitivity analysis in order to investigate the quantitative implications of our theoretical results. We find that macroeconomic stability is more likely to be guaranteed under an active, although not overly aggressive, monetary-policy stance. |
| Keywords: | Firms’ Money Demand; Interest-Rate Policy. |
| JEL: | E52 E41 |
| Date: | 2011–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29028&r=cba |
| By: | Carlo Altavilla (University of Naples Parthenope and CSEF); Matteo Ciccarelli (European Central Bank) |
| Abstract: | This paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule-based monetary policy on unemployment dynamics in the euro area and the US. We employ a Bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy. We find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions. Moreover, monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism. Finally, we show that a policy maker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism, but also about the differences between the euro area and the US, which are on average essentially small. |
| Keywords: | Monetary policy, Taylor rule, Real-time data, Great Moderation, Forecasting. |
| JEL: | E52 E58 C32 C53 C82 |
| Date: | 2011–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:274&r=cba |
| By: | Gaël Giraud (Centre d'Economie de la Sorbonne - Paris School of Economics et ESCP-Europe); Nguenamadji Orntangar (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | This paper provides a new framework for monetary macro-policy, where the Central Bank potentially intervenes both on short-term and long-term loans markets, and can do this alternatively by manipulating interest rates or money supply. Following Bonnisseau and Orntangar (2010) and Giraud and Tsomokos (2010), we develop a discrete-time out-of-equilibrium dynamics with real trades, performed by myopic heterogeneous households in a cash-in-advance economy with several goods. Positive value and non-neutrality of fiat money are shown to be compatible with a local quantity theory of money. Every monetary policy induces a globally unique trade path, both for real and nominal variables.Thus, monetary policy and myopia suffice to pin down the absolute level of prices. However, a minimal money growth rate is exhibited, which depends upon the level of households' long-term debt and current gains-to-trade. Below this growth rate, the economy falls into a local liquidity trap ; above it, the economy eventually converges towards a Pareto-optimal rest-point while inflation raises in an unbounded fashion. As a consequence, a literal application of Taylor's rule leads the economy to a local liquidity trap. These findings provide insight into recent non-conventional monetary policies led by Central Banks. |
| Keywords: | Central Bank, gains to trade, Taylor rule, myopia, liquidity trap, finite speed of trade. |
| JEL: | D50 E40 E50 E58 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:11011&r=cba |
| By: | Avouyi-Dovi, S.; Sahuc, J-G. |
| Abstract: | This paper quantifies the effects on welfare of misspecified monetary policy objectives in a stylized DSGE model. We show that using inappropriate objectives generates relatively large welfare costs. When expressed in terms of ‘consumption equivalent’ units, these costs correspond to permanent decreases in steady-state consumption of up to two percent. The latter are generated by both the inappropriate choice of weights and the omission of variables. In particular, it is costly to assume an interest-rate smoothing incentive for central bankers when it is not socially optimal to do so. Finally, a parameter uncertainty decomposition indicates that uncertainty about the properties of markup shocks gives rise to the largest welfare costs. |
| Keywords: | Welfare ; Monetary policy objectives ; DSGE model ; Bayesian econometrics. |
| JEL: | C11 C32 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:320&r=cba |
| By: | Saroj Bhattarai; Raphael Schoenle |
| Abstract: | In this paper, we establish three new facts about price-setting by multiproduct firms and contribute a model that can explain our findings. Our findings have important implications for real effects of nominal shocks and provide guidance for how to model pricing decisions of firms. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchronization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multiproduct firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend inflation, the model matches the empirical findings. |
| Keywords: | Price levels ; Productivity |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:73&r=cba |
| By: | Eliana González |
| Abstract: | Three methodologies of estimation of models with many predictors are implemented to forecast Colombian inflation. Two factor models, based on principal components, and partial least squares, as well as a Bayesian regression, known as Ridge regression are estimated. The methodologies are compared in terms of out-sample RMSE relative to two benchmark forecasts, a random walk and an autoregressive model. It was found, that the models that contain many predictors outperformed the benchmarks for most horizons up to 12 months ahead, however the reduction in RMSE is only statistically significant for the short run. Partial least squares outperformed the other approaches based on large datasets. |
| Date: | 2011–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:007996&r=cba |
| By: | Luca Papi (Universit… Politecnica delle Marche, Department of Economics, MoFiR) |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:49&r=cba |
| By: | Pietro Biroli; Gilles Mourre; Alessandro Turrini |
| Abstract: | This paper assesses the adjustment mechanism in the euro area. Results show that the real exchange rate (REER) adjusts in such a way to redress cyclical divergences and that after monetary unification REER dynamics have become less reactive to country-specific shocks but also less persistent. It is found that regulations, notably affecting price and wage nominal flexibility and employment protection, play a role in the adjustment mechanism. Indicators of product and labour regulations appear to matter forboth the reaction of price competitiveness to cyclical divergences (differences between national and euro-area output gaps) and for the inertia of competitiveness indicators. Moreover, regulations appear to matter also for the extent to which common shocks may end up producing country-specific effects on the price competitiveness, as revealed by their interaction with proxies of unobservable common shocks along the lines of the methodology developed in Blanchard and Wolfers (2000). In light of the tendency towards less stringent regulations in past decades, the results seem consistent with the observed reduction in the persistence of inflation differentials, and has have implications for the design of adjustment-friendly product and labour market reforms. |
| JEL: | E30 F41 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0428&r=cba |
| By: | Yu-chin Chen (University of Washington and Hong Kong Institute for Monetary Research); Kwok Ping Tsang (Virginia Tech and Hong Kong Institute for Monetary Research) |
| Abstract: | The nominal exchange rate is both a macroeconomic variable equilibrating international markets and a financial asset that embodies expectations and prices risks associated with cross border currency holdings. Recognizing this, we adopt a joint macro-finance strategy to model the exchange rate. We incorporate into a monetary exchange rate model macroeconomic stabilization through Taylor-rule monetary policy on one hand, and on the other, market expectations and perceived risks embodied in the cross-country yield curves. Using monthly data between 1985 and 2005 for Canada, Japan, the UK and the US, we employ a state-space system to model the relative yield curves between country-pairs using the Nelson and Siegel (1987) latent factors, and combine them with monetary policy targets (output gap and inflation) into a vector autoregression (VAR) for bilateral exchange rate changes. We find strong evidence that both the financial and macro variables are important for explaining exchange rate dynamics and excess currency returns, especially for the yen and the pound rates relative to the dollar. Moreover, by decomposing the yield curves into expected future yields and bond market term premiums, we show that both expectations about future macroeconomic conditions and perceived risks are priced into the currencies. These findings provide support for the view that the nominal exchange rate is determined by both macroeconomic and financial forces. |
| Keywords: | Exchange Rate, Term Structure, Latent Factors, Term Premiums |
| JEL: | E43 F31 G12 G15 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:012011&r=cba |
| By: | Mario Forni; Luca Gambetti; Luca Sala |
| Abstract: | This paper uses a structural, large dimensional factor model to evaluate the role of 'news' shocks (shocks with a delayed effect on productivity) in generating the business cycle. We find that (i) existing small-scale VECM models are affected by 'non-fundamentalness' and therefore fail to recover the correct shock and impulse response functions; (ii) news shocks have a limited role in explaining the business cycle; (iii) their effects are in line with what predicted by standard neoclassical theory; (iv) the bulk of business cycle fluctuations are explained by shocks unrelated to technology. |
| Keywords: | structural factor model, news shocks, invertibility, fundamentalness. |
| JEL: | C32 E32 E62 |
| Date: | 2011–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:862.11&r=cba |
| By: | Nan-Kuang Chen (National Taiwan University and Hong Kong Institute for Monetary Research); Han-Liang Cheng (Chung-Hua Institution for Economic Research) |
| Abstract: | This paper is a theoretical study of the effects of monetary policy reacting to fluctuations in asset price, accounting for the expectation formation effect of policy regime shift in a DSGE model calibrated to the U.S. economy. We find that the effect of expectation formation can substantially influence the movement of asset price. In contrast to the linear policy rule, under the regime switching policy rule reacting to asset price can generate substantial stabilization effect: the "expected" inflation-output volatility frontier shifts downward, thereby lowering both the volatilities of inflation and output for all possible policy choices. The trade-off between the expected volatility of inflation and that of output, as demonstrated by the "Taylor curve," greatly diminishes, implying that the Taylor rule which considers expectation formation effect and asset price movement expands the set of monetary policy choices available for monetary authority. |
| Keywords: | Asset Price, Monetary Policy, Regime Switching, DSGE |
| JEL: | E3 E52 G1 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:032011&r=cba |
| By: | Faccini, Renato (Bank of England); Millard, Stephen (Bank of England); Zanetti, Francesco (Bank of England) |
| Abstract: | We estimate a New Keynesian model with matching frictions and nominal wage rigidities on UK data. We are able to identify important structural parameters, recover the unobservable shocks that have affected the UK economy since 1971 and study the transmission mechanism. With matching frictions, wage rigidities have limited effect on inflation dynamics, despite improving the empirical performance of the model. The reason is that with matching frictions, marginal costs depend on unit labour costs and on an additional component related to search costs. Wage rigidities affect both components in opposite ways leaving marginal costs and inflation virtually unaffected. |
| Keywords: | DSGE models; Bayesian estimation; labour market search; unemployment |
| JEL: | E24 E32 E52 J64 |
| Date: | 2011–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0408&r=cba |
| By: | Meixing Dai |
| Abstract: | Cet article fournit un point de vue opposé au consensus d’« une macroéconomie sans LM ». Elle montre que, lorsque la politique monétaire est spécifiée en termes de règle du taux d’intérêt et la banque centrale ne contrôle pas directement les taux d’intérêt affectant la demande globale, la condition d’équilibre sur le marché monétaire a un autre rôle à jouer que de déterminer de manière endogène la masse monétaire. En effet, dans le cadre du modèle de l’offre et de la demande globales, une intégration des conditions équilibres sur les marchés monétaire et des réserves bancaires permet de montrer que l’inflation anticipée peut être stable ou instable selon le degré de développement financier de l’économie. Ce cadre permet également d’examiner la dynamique de l’économie quand le taux d’intérêt nominal tombe à zéro et une politique d’assouplissement quantitatif est mise en place. |
| Keywords: | Règle du taux d’intérêt, marché des réserves bancaires, rôle de la monnaie, dynamique de l’inflation anticipée, politiques monétaires non conventionnelles, assouplissement quantitatif, et borne inférieure zéro du taux d’intérêt nominal. |
| JEL: | E44 E51 E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2011-05&r=cba |
| By: | Strulik, Holger; Trimborn, Timo |
| Abstract: | The output multiplier turns negative before a deficit spending program expires. We show the generality of this unpleasant finding for the standard real business cycle model. We then calibrate an extended model for the US and demonstrate how fiscal stimulus slows down economic recovery from recession in the medium-run. We discuss the slowdown from recovery w.r.t.\ alternative assumptions about the size and persistence of the initial shock (severity of the recession), the assumed power of the impact multiplier, and the scale and duration of the stimulus program. We also show that results are quantitatively very similar independent from whether a recession was caused by an efficiency wedge (input-financing frictions) or a labor wedge (labor market frictions). Capital stock and output are always below their laissez-faire level of recovery when fiscal stimulus expires. |
| Keywords: | fiscal stimulus, government spending, output multiplier, economic recovery |
| JEL: | E60 H30 H50 O40 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-466&r=cba |
| By: | Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Douglas D. Evanoff |
| Abstract: | We study the effects of securitization on renegotiation of distressed residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observe lender renegotiation actions and cover more than 60% of the U.S. mortgage market. Exploiting within-servicer variation in these data, we find that bank-held loans are 26% to 36% more likely to be renegotiated than comparable securitized mortgages (4.2 to 5.7% in absolute terms). Also, modifications of bank-held loans are more efficient: conditional on a modification, bank-held loans have lower post-modification default rates by 9% (3.5% in absolute terms). Our findings support the view that frictions introduced by securitization create a significant challenge to effective renegotiation of residential loans. |
| Keywords: | Mortgage loans ; Asset-backed financing ; Securities ; Mortgages |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2011-02&r=cba |
| By: | Giancarlo Corsetti; Keith Kuester; Gernot J. Muller |
| Abstract: | According to conventional wisdom, fiscal policy is more effective under a fixed than under a flexible exchange rate regime. In this paper the authors reconsider the transmission of shocks to government spending across these regimes within a standard New Keynesian model of a small open economy. Because of the stronger emphasis on intertemporal optimization, the New Keynesian framework requires a precise specification of fiscal and monetary policies, and their interaction, at both short and long horizons. The authors derive an analytical characterization of the transmission mechanism of expansionary spending policies under a peg, showing that the long-term real interest rate always rises in response to an increase in government spending if inflation rises initially. This response drives down private demand even though short-term real rates fall. As this need not be the case under floating exchange rates, the conventional wisdom needs to be qualified. Under plausible medium-term fiscal policies, government spending is not necessarily less expansionary under floating exchange rates. |
| Keywords: | Fiscal policy ; Monetary policy |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-9&r=cba |
| By: | Costas Karfakis |
| Abstract: | The purpose of this study is to examine whether the portfolio balance effect, operating through the outstanding debts of US and euro area, and the signaling effect of sterilized intervention, operating through the relative composition of official reserves of developing and emerging countries, explain the developments of the euro/dollar exchange rate. The empirical analysis reveals that both effects are statistically significant and have the correct signs. The Clark-West testing procedure indicates that the model which relates the exchange rate to official reserves and the interest rate differential outperforms the random walk model in the forecasting accuracy. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0431&r=cba |
| By: | Schenkelberg, Heike |
| Abstract: | This paper oers new insights on the price setting behaviour of German retail rms using a novel dataset that consists of a large panel of monthly business surveys from 1991-2006. The rm-level data allows matching changes in rms' prices to several other rm-characteristics. Moreover, information on price expectations allow analyzing the determinants of price updating. Using univariate and bivariate ordered probit specications, empirical menu cost models are estimated relating the probability of price adjustment and price updating, respectively, to both time- and state- dependent variables. First, results suggest an important role for state-dependence; changes in the macroeconomic and institutional environment as well as rm-specic factors are signicantly related to the timing of price adjustment. These ndings imply that price setting models should endogenize the timing of price adjustment in order to generate realistic predictions concerning the transmission of monetary policy. Second, an analysis of price expectations yields similar results providing evidence in favour of state-dependent sticky plan models. Third, intermediate input cost changes are among the most important determinants of price adjustment suggesting that pricing models should explicitly incorporate price setting at dierent production stages. However, the results show that adjustment to input cost changes takes time indicating "additional stickiness" at the last stage of processing. |
| Keywords: | Price setting behaviour; time dependent pricing; state dependent pricing; sticky prices |
| JEL: | E31 E32 E50 |
| Date: | 2011–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12158&r=cba |
| By: | Philipp Matros (Universität Regensburg); Enzo Weber (Osteuropa-Institut, Regensburg (Institut for East European Studies)) |
| Abstract: | The present work deals with a frequently detected failure of the uncovered interest rate parity (UIP) - the absence of bivariate cointegration between domestic and foreign interest rates. We explain non-stationarity of the interest differential via central bank reactions to exchange rate variations. Thereby, the exchange rate in levels introduces an additional stochastic trend into the system. Trivariate cointegration between the interest rates and the exchange rate accounts for the missing stationarity property of the interest differential. We apply the concept to the case of Turkey and Europe,where we can validate the theoretical considerations by multivariate time series techniques. |
| Keywords: | Uncovered Interest Rate Parity, Monetary Policy Rules, Cointegration, Vector-Error Correction Model |
| JEL: | E44 F31 C32 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:293&r=cba |
| By: | Sa, Filipa (fgs22@cam.ac.uk); Towbin, Pascal (Banque de France); wieladek, tomasz (Bank of England) |
| Abstract: | A number of OECD countries experienced an environment of low interest rates and a rapid increase in housing market activity during the last decade. Previous work suggests three potential explanations for these events: expansionary monetary policy, capital inflows due to a global savings glut and excessive financial innovation combined with inappropriately lax financial regulation. In this study we examine the effects of these three factors on the housing market. We estimate a panel VAR for a sample of OECD countries and identify monetary policy and capital inflows shocks using sign restrictions. To explore how these effects change with the structure of the mortgage market and the degree of securitisation, we augment the VAR to let the coefficients vary with mortgage market characteristics. Our results suggest that both types of shocks have a significant and positive effect on real house prices, real credit to the private sector and real residential investment. The responses of housing variables to both types of shocks are stronger in countries with more developed mortgage markets, roughly doubling the responses to a monetary policy shock. The amplification effect of mortgage-backed securitisation is particularly strong for capital inflows shocks, increasing the response of real house prices, residential investment and real credit by a factor of two, three and five, respectively. |
| Keywords: | House prices; capital flows; financial innovation; monetary policy |
| JEL: | C33 E51 F32 G21 |
| Date: | 2011–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0411&r=cba |
| By: | Avadanei, Andreea |
| Abstract: | The aim of this paper is to illustrate the general implications of single monetary policy in sustaining European financial integration. Our study is structured on two main sections; the first one presents the importance of money market integration for the common policy and the seconds analyses the transmission mechanism functioning under financial distress. An efficient and integrated money market is essential for a sound monetary policy, given that it provides an even distribution of central bank liquidity and a homogeneous level of short-term interest rates in the entire space of the common currency. If monetary policy transmission mechanism has been irreversibly affected by the international crisis, it is still premature to determine. |
| Keywords: | single policy; transmission mechanism; financial distress; pass-through process |
| JEL: | F50 E42 |
| Date: | 2011–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29147&r=cba |
| By: | Mario Forni; Luca Gambetti |
| Abstract: | We derive necessary and sufficient conditions under which a set of variables is informationally sufficient, i.e. it contains enough information to estimate the structural shocks with a VAR model. Based on such conditions, we suggest a procedure to test for informational sufficiency. Moreover, we show how to amend the VAR if informational sufficiency is rejected. We apply our procedure to a VAR including TFP, unemployment and per-capita hours worked. We find that the three variables are not informationally sufficient. When adding missing information, the effects of technology shocks change dramatically. |
| Keywords: | Structural VAR, non-fundamentalness, information, FAVAR models, technology shocks. |
| JEL: | C32 E32 E62 |
| Date: | 2011–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:863.11&r=cba |
| By: | Totzek, Alexander |
| Abstract: | In the last two decades a body of literature highlights the role of financial frictions for explaining the development of key macroeconomic variables. Moreover, the financial crisis 2007-2009 again sheds light on the importance of this topic. In this paper, we contribute to the literature by simultaneously explaining two empirical observations. First, mark-ups on the loan market react counter-cyclical. Second, the number of banks operating in the economy significantly co-moves with GDP. Therefore, we develop a DSGE model which incorporates an oligopolistic banking sector with endogenous bank entry. The resulting model generates significant accelerating effects which are even larger than those obtained in the famous financial accelerator model of Bernanke et al. [Bernanke, B., Gertler, M., Gilchrist, S., 1999. The financial accelerator in a quantitative business cycle framework. In: Handbook of Macroeconomics. North-Holland, Amsterdam] and performs remarkable well when comparing the generated second moments of real and financial variables with those observed in the data. -- |
| Keywords: | Oligopolistic competition,Bank entry,Financial accelerator |
| JEL: | E44 E32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201102&r=cba |
| By: | Alexander Alexeev; Mikhail Sokolov |
| Abstract: | Axiomatic derivations of the rate of return and its generalizations to nonexponential discounting and in the presence of inflation are given by elementary methods. |
| Keywords: | rate of return, yield, investment project, axiomatic approach |
| JEL: | G11 |
| Date: | 2011–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:eus:wpaper:ec0211&r=cba |
| By: | Siregar, Reza |
| Abstract: | The aim of this paper is to review and examine a collection of ‘most commonly applied’ theoretical and empirical models of equilibrium exchange rate. The presentation on each model starts with an introduction of core theoretical frameworks. It will then be followed by discussions on relevant empirical steps to estimate the equilibrium rate. The rest of the paper will focus on assessing the strengths and weaknesses of the model and how each relates to the other. |
| Keywords: | Equilibrium; Exchange Rate Models; PPP; Monetary Model; BEER; DEER; FEER; PEER and NATREX |
| JEL: | F32 F31 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28987&r=cba |
| By: | Diaa Noureldin; Neil Shephard; Kevin Sheppard |
| Abstract: | This paper introduces a new class of multivariate volatility models that utilizes high-frequency data. We discuss the models’ dynamics and highlight their differences from multivariate GARCH models. We also discuss their covariance targeting specification and provide closed-form formulas for multi-step forecasts. Estimation and inference strategies are outlined. Empirical results suggest that the HEAVY model outperforms the multivariate GARCH model out-of-sample, with the gains being particularly significant at short forecast horizons. Forecast gains are obtained for both forecast variances and correlations. |
| Keywords: | HEAVY model, GARCH, multivariate volatility, realized covariance, covariance targeting, multi-step forecasting, Wishart distribution |
| JEL: | C32 C52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:533&r=cba |
| By: | Daiju Narita |
| Abstract: | It is often emphasized that the primary economic solution to climate change is the introduction of a carbon pricing system (tax or tradable permits) anchored to the social cost of carbon. This standard argument, however, misses the fact that if emission reduction is sought through the use of technologies with network externalities, the level of emission reduction can become expectation-driven rather than uniquely determined by the level of carbon price. Using a simple model, the paper discusses the possibility that the effectiveness of carbon policy is influenced by firms’ belief on carbon policy and technology penetration in the future – in extreme cases, expectations prevail over policy. This feature highlights the danger of overemphasis on finding the “right” carbon price in policy making and the role of climate policy as expectation management |
| Keywords: | climate policy, technology choice, expectations, multiple equilibria |
| JEL: | Q54 O33 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1681&r=cba |
| By: | Martin Larch; Paul van den Noord; Lars Jonung |
| Abstract: | While current instruments of EU economic policy coordination helped stave off a full-scale depression, the post-2007 global financial and economic crisis has revealed a number of weaknesses in the Stability and Growth Pact, the EU framework for fiscal surveillance and fiscal policy coordination. This paper provides a diagnosis of how the SGP faired ahead and during the present crisis and offers a first comprehensive review of the ongoing academic and policy debate, including an account of the reform proposals adopted by the Commission on 29 September 2010. In our view, the current system of EU rules is unbalanced. It consists of (i) very specific provisions on how to conduct fiscal policy making in normal times with no effective enforcement mechanisms, and of (ii) no or extremely tight provisions for really bad economic times, like the Great Recession. A two-pronged approach as outlined in this report is needed to revive the Pact: tighter enforcement, coupled with broader macroeconomic surveillance, in good times and an open window for exceptionally bad times, including a crisis resolution mechanism at the EU level. |
| JEL: | E62 E63 H6 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0429&r=cba |
| By: | Berner, Eike |
| Abstract: | This paper examines exchange rate pass-through into German import unit values over the last 20 years. I find incomplete pass-through to be the predominant characteristic for German imports with an average rate of 42% over three months. This result holds when considering monthly 8-digit data, the most disaggregated German import data available. Furthermore, I distinguish 16 German trading partners and estimate substantial cross-country differences in the pass-through to import unit values. Imports coming from European countries generally exhibit statistically zero pass-through. By contrast, non-European trading partners are characterized by statistically significant incomplete pass-through rates. I also study whether there are differences in the pass-through rates for appreciations and depreciations, as well as for small and large exchange rate shocks. Moreover, I test for a negative correlation between the goods' quality and its pass-through rate. -- |
| Keywords: | exchange rate,pass-through,import prices,Germany |
| JEL: | F42 F31 F14 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201101&r=cba |
| By: | Coen Teulings; Frits Bos |
| Abstract: | Independent national fiscal institutions can play a major role in fiscal policy and in maintaining and restoring sustainability of a country's public finance. |
| JEL: | A11 D70 E60 E62 H6 P10 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:docmnt:218&r=cba |
| By: | Philip Lane (Institute for International Integration Studies, Trinity College Dublin) |
| Abstract: | This paper has three goals. First, it seeks to explain the origins of the Irish crisis. Second, it provides an interim assessment of the Irish government?s management of the crisis. Third, it evaluates the lessons from Ireland for the macroeconomics of monetary unions. |
| Keywords: | Irish crisis |
| JEL: | E5 F4 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp356&r=cba |
| By: | Bårdsen, Gunnar (Department of Economics); den Reijer, Ard (Monetary Policy Department, Central Bank of Sweden); Jonasson, Patrik (Monetary Policy Department, Central Bank of Sweden); Nymoen, Ragnar (Department of Economics) |
| Abstract: | MOSES is an aggregate econometric model for Sweden, estimated on quarterly data, and intended for short-term forecasting and policy simulations. After a presentation of qualitative model properties, the econometric methodology is summarized. The model properties, within sample simulations, and examples of dynamic simulation (model forecasts) for the period 2009q2-2012q4 are presented. We address practical issues relating to operational use and maintenance of a macro model of this type. The detailed econometric equations are reported in an appendix. |
| Keywords: | macroeconomic model; policy analysis; general-to-specific modelling |
| JEL: | E12 E66 |
| Date: | 2011–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0249&r=cba |
| By: | Katarína Danišková (Comenius University Bratislava); Jarko Fidrmuc (Osteuropa-Institut, Regensburg (Institut for East European Studies)) |
| Abstract: | The New Keynesian Phillips Curve has become an important part of modern monetary policy models. It describes the relationship between inflation and real marginal cost, which is derived from micro-founded models with rational expectations, sticky prices, and forward and backward looking behaviour. This answers the previous critique of the Phillips Curve. We estimate several specifications of the New Keynesian Phillips Curve for the Czech Republic between 1996 and 2009. We show that the GMM suffers under the problem of weak instruments leading to biased estimates. In turn, the FIML is robust and yields significant estimates of structural parameters implying a strong forward looking behaviour. |
| Keywords: | inflation, New Keynesian Phillips Curve, marginal costs, output gap, real unit labour costs |
| JEL: | E31 E52 C32 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:292&r=cba |
| By: | Abdul Majid, Muhamed Zulkhibri |
| Abstract: | This paper examines the interest rate pass-through from money market rates to various retail lending and deposit rates for financial institutions in Malaysia. The evidence shows that vast majority of retail lending rates pass-through is less than complete, while the speed of adjustment varies across administered interest rates. Adjustment in lending rates tended to be more sluggish than that of deposit rates. The finance companies, moreover, are quicker in adjusting their deposit rates than the commercial banks, but are slower in adjusting their loan rates. The empirical analysis also shows that interest rate adjustment is asymmetric and faster in the period of monetary easing rather than in the period of monetary tightening. The evidence suggests the importance of financial institutions in the transmission of monetary policy reflecting the adjustment processes are not uniform across different types of institutions and instruments. |
| Keywords: | Interest rate pass-through; Price rigidity; Monetary Policy; Malaysia |
| JEL: | E43 E52 E44 |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29040&r=cba |
| By: | Abdul Majid, Muhamed Zulkhibri |
| Abstract: | This paper investigates the role of the term spread to predict domestic output and inflation in less developed financial market with the focus on Malaysia bond market. By controlling for past values of the dependent variable, this paper finds that the term spread of various bond maturities contain relevant information about future output and inflation at short horizons. Besides that, we employ a probit model to assess the ability for the yield curve to predict future economic slowdown. The results suggest that the term spread has contributed significantly in the probability of predicting future economic slowdown. Despite the under-developed bond market, the findings point to the potential for bond yields to play a greater role in monetary analysis beyond conventional indicators. From the policy point of views, the results from our analysis suggest that there is a significant potential for incorporating more technical and model based approaches using the yield curve beyond the usual indicator analysis. |
| Keywords: | Term spread; Forecasting; Monetary Policy; Malaysia |
| JEL: | E43 E52 |
| Date: | 2011–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29039&r=cba |
| By: | Abdul Majid, Muhamed Zulkhibri |
| Abstract: | The paper explores the measurement of monetary condition in Malaysia to augment the existing monetary policy framework. As an open economy, Monetary Condition Index (MCI) and Financial Condition Index (FCI) are applicable to understand the monetary condition especially in the era of financial deregulation and liberalisation. The results obtained suggest that the index is most useful when the exchange market exhibits stable conditions, and would be a constructive tool in the simultaneous management of the foreign currency and domestic money markets. However, the frequent experience of instability caused by supply and demand shocks with persistent and large inertia in the economy complicates the practical use of MCI and FCI in Malaysia. While this approach obviously does not provide answers to every question and as a leading indicator for inflation, it nonetheless makes it possible to measure the monetary condition in the Malaysian economy. |
| Keywords: | Monetary condition index; Monetary Policy; Malaysia |
| JEL: | E52 E44 |
| Date: | 2010–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29041&r=cba |