|
on Central Banking |
| By: | Kaushik Mitra; George W. Evans; Seppo Honkapohja |
| Abstract: | What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Both permanent and temporary policy changes are analyzed. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections. |
| Keywords: | Taxation, Government Spending, Expectations, Permanent and temporary policy changes. |
| JEL: | E62 D84 E21 E43 |
| Date: | 2011–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1111&r=cba |
| By: | Klaus Adam; Albert Marcet |
| Abstract: | We present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning. Agents are 'internally rational', i.e., maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future, but agents may not be 'externally rational', i.e., may not know the true stochastic process for payoff relevant variables beyond their control. This includes future market outcomes and fundamentals. We apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors' expectations of the price and dividend in the next period, rather than by expectations of the discounted sum of dividends. As a result, learning about price behavior affects market outcomes, while learning about the discounted sum of dividends is irrelevant for equilibrium prices. Stock prices equal the discounted sum of dividends only after making very strong assumptions about agents' market knowledge. |
| Keywords: | learning, internal rationality, consumption based asset pricing |
| JEL: | G12 G14 D83 D84 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1068&r=cba |
| By: | Klaus Adam; Pei Kuang; Albert Marcet |
| Abstract: | A simple open economy asset pricing model can account for the house price and current account dynamics in the G7 over the years 2001-2008. The model features rational households, but assumes that households entertain subjective beliefs about price behavior and update these using Bayes' rule. The resulting beliefs dynamics considerably propagate economic shocks and crucially contribute to replicating the empirical evidence. Belief dynamics can temporarily delink house prices from fundamentals, so that low interest rates can fuel a house price boom. House price booms, however, are not necessarily synchronized across countries and the model correctly predicts the heterogeneous response of house prices across the G7, following the fall in real interest rates at the beginning of the millennium. The response to interest rates depends sensitively on agents' beliefs at the time of the interest rate reduction, which are a function of the prior history of disturbances hitting the economy. According to the model, the US house price boom could have been largely avoided, if real interest rates had decreased by less after the year 2000. |
| Keywords: | interest rates, house prices, short-term capital movements |
| JEL: | F41 F32 E43 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1064&r=cba |
| By: | Darrell Duffie |
| Abstract: | Here, I present and discuss a “10-by-10-by-10” network-based approach to monitoring systemic financial risk. Under this approach, a regulator would analyze the exposures of a core group of systemically important financial firms to a list of stressful scenarios, say 10 in number. For each scenario, about 10 such designated firms would report their gains or losses. Each reporting firm would also provide the identities of the 10, say, counterparties with whom the gain or loss for that scenario is the greatest in magnitude relative to all counterparties. The gains or losses with each of those 10 counterparties would also be reported, scenario by scenario. Gains and losses would be measured in terms of market value and also in terms of cash flow, allowing regulators to assess risk magnitudes in terms of stresses to both economic values and also liquidity. Exposures would be measured before and after collateralization. One of the scenarios would be the failure of a counterparty. The “top ten” counterparties for this scenario would therefore be those whose defaults cause the greatest losses to the reporting firm. In eventual practice, the number of reporting firms, the number of stress scenarios, and the number of major counterparties could all exceed 10, but it is reasonable to start with a small reporting system until the approach is better understood and agreed upon internationally. |
| JEL: | G28 G32 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17281&r=cba |
| By: | Hart, Oliver; Zingales, Luigi |
| Abstract: | We study an economy where the lack of a simultaneous double coincidence of wants creates the need for a relatively safe asset (money). We show that, even in the absence of asymmetric information or an agency problem, the private provision of liquidity is inefficient. The reason is that liquidity affects prices and the welfare of others, and creators do not internalize this. This distortion is present even if we introduce lending and government money. To eliminate the inefficiency the government must restrict the creation of liquidity by the private sector. |
| Keywords: | banking; liquidity; money |
| JEL: | E41 E51 G21 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8525&r=cba |
| By: | Michael Dotsey; Andreas Hornstein |
| Abstract: | The literature on optimal monetary policy in New Keynesian models under both commitment and discretion usually solves for the optimal allocations that are consistent with a rational expectations market equilibrium, but it does not study whether the policy can be implemented given the available policy instruments. Recently, King and Wolman (2004) have provided an example for which a time-consistent policy cannot be implemented through the control of nominal money balances. In particular, they find that equilibria are not unique under a money stock regime and they attribute the non-uniqueness to strategic complementarities in the price-setting process. The authors clarify how the choice of monetary policy instrument contributes to the emergence of strategic complementarities in the King and Wolman (2004) example. In particular, they show that for an alternative monetary policy instrument, namely, the nominal interest rate, there exists a unique Markov-perfect equilibrium. The authors also discuss how a time-consistent planner can implement the optimal allocation by simply announcing his policy rule in a decentralized setting. |
| Keywords: | Monetary policy ; Interest rates ; Money supply |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-29&r=cba |
| By: | Vivian Z. Yue; Enrique G. Mendoza |
| Abstract: | Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-noc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around deraults, countercyclical spreads, high debt ratios, and key business cycle moments. |
| Keywords: | Sovereign debt , Business cycles , Economic models , External debt , Emerging markets , Credit risk , |
| Date: | 2011–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/166&r=cba |
| By: | André C. Silva |
| Abstract: | I construct a model in which money and bond holdings are consistent with individual decisions and aggregate variables such as production and interest rates. The agents are infinitely-lived, have constant-elasticity preferences, and receive a fraction of their income in money. Each agent solves a Baumol-Tobin money management problem. Markets are segmented because financial frictions make agents trade bonds for money at different times. Trading frequency, consumption, government decisions and prices are mutually consistent. An increase in inflation, for example, implies higher trading frequency, more bonds sold to account for seigniorage, and lower real balances. JEL codes:E3, E4, E5 |
| Keywords: | money demand, cash management, inventory problem, market segmentation |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:wp557&r=cba |
| By: | Blot, Christophe (Centre de recherche en économie de Sciences Po); Rifflart, Christine (Centre de recherche en économie de Sciences Po) |
| Abstract: | Cet article analyse les politiques conduites par les différentes banques centrales pour sortir de la crise. La Réserve fédérale des États-Unis et la Banque du Japon ont lancé de nouveaux programmes de mesures non conventionnelles. La Banque d’Angleterre a maintenu le statu quo. Quant à la Banque centrale européenne (BCE), elle est intervenue pour enrayer le mouvement de spéculation sur les dettes souveraines en achetant des titres publics mais, en même temps, elle a réduit le nombre de ces opérations de refinancement à long terme. Ces divergences se sont accentuées en début d’année 2011 après qu’une nouvelle flambée du prix du pétrole ait provoqué une accélération de l’inflation. Pourtant, si l’inflation est bien repartie à la hausse, il est erroné de considérer qu’il y a des tensions inflationnistes. L’inflation sous-jacente est en effet toujours au point mort et le niveau de chômage ne fait pas craindre d’effets de second tour. La BCE, en décidant une hausse des taux d’intérêt par crainte des tensions inflationnistes, pourrait donner le signal d’un mouvement plus général de hausse des taux. Cette décision pourrait fragiliser la reprise et aboutirait à un policy-mix franchement restrictif. Aux États-Unis, la hausse des taux serait plus tardive et motivée par un objectif de normalisation de la politique monétaire plutôt que par le souci de lutter contre un regain éphémère de l’inflation. Quant au Japon, le tsunami puis l’accident nucléaire écartent la perspective d’une orientation moins expansionniste de la politique monétaire. Ces divergences se répercuteraient sur le marché des changes. Si le terme de « guerre des monnaies » semble exagéré, il n’en demeure pas moins que l’intransigeance de la BCE infligera une double peine aux États membres de la zone euro qui subiront une nouvelle phase d’appréciation de l’euro. Enfin, dans de nombreux pays émergents, la reprise plus franche de la croissance et de l’inflation ont conduit plusieurs banques centrales à resserrer dès l’année 2010 leur politique monétaire provoquant des mouvements de capitaux et donc une appréciation de certaines monnaies (Singapour, Brésil, Mexique, Corée du Sud, Chine...). |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ner:sciepo:info:hdl:2441/5l6uh8ogmqildh09h61p700s4&r=cba |
| By: | Xavier Debrun |
| Abstract: | Despite growing interest among policymakers, there is no theory of independent fiscal institutions. The emerging literature on "fiscal councils" typically makes informal parallels with the theory of central bank independence, but a very simple formal example shows that such a shortcut is flawed. The paper then illustrates key features of a model of independent fiscal agencies, and in particular the need (1) to incorporate the intrinsically political nature of fiscal policy - which precludes credible delegation of instruments to unelected decisionmakers - and (2) to focus on characterizing "commitment technologies" likely to credibly increase fiscal discipline. |
| Keywords: | Fiscal policy , Central bank autonomy , Political economy , Budget deficits , Budgetary policy , Inflation , |
| Date: | 2011–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/173&r=cba |
| By: | Daniel Kanda |
| Abstract: | For a number of countries - Italy, Netherlands, the United Kingdom, Germany, Ireland, and France - this paper develops an inter-temporal model that elicits the implied country-preferences over balancing the conflicting objectives of fiscal consolidation and reduction of economic slack. The model suggests that some front-loading of adjustment is desirable, although the extent would vary by country preferences. It also finds that proposed consolidations may prove to be stronger than acceptable, especially if somewhat larger than anticipated fiscal multipliers lead to a sizeable economic deceleration. |
| Keywords: | Cross country analysis , Developed countries , Economic models , Europe , Fiscal consolidation , Fiscal policy , Fiscal sustainability , |
| Date: | 2011–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/164&r=cba |
| By: | Michael B. Devereux; Viktoria Hnatkovska |
| Abstract: | This paper documents some previously neglected features of sectoral shares at business cycle frequencies in OECD economies. In particular, we find that the nontraded sector share of output is as volatile as aggregate GDP, and that for most countries, the nontraded sector is distinctly countercyclical. While the standard international real business cycle model has difficulty in accounting for these properties of the data, an extended model which allows for sectoral adjustment along both the intensive and extensive margins does a much better job in replicating the volatilities and co-movements in the data. In addition, the model provides a closer match between theory and data with respect to the correlation between relative consumption growth and real exchange rate changes, a key measure of international risk-sharing. |
| JEL: | F3 F4 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17289&r=cba |
| By: | Michael B. Devereux; Viktoria Hnatkovska |
| Abstract: | A basic prediction of effcient risk-sharing is that relative consumption growth rates across countries or regions should be positively related to real exchange rate growth rates across the same areas. We investigate this hypothesis, employing a newly constructed multi-country and multi-regional data set. Within countries, we find signifcant evidence for risk sharing: episodes of high relative regional consumption growth are associated with regional real exchange rate depreciation. Across countries however, the association is reversed: relative consumption and real exchange rates are negatively correlated. We identify this failure of risk sharing as a border effect. We find that the border effect is substantially (but not fully) accounted for by nominal exchange rate variability. We then ask whether standard open economy macro models can explain these features of the data. We argue that they cannot. To explain the role of the nominal exchange rate in deviations from cross country consumption risk sharing, it is necessary to combine multiple sources of shocks, ex-ante price setting, and incomplete financial markets. |
| JEL: | F3 F4 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17288&r=cba |
| By: | Raberto, Marco; Teglio, Andrea; Cincotti, Silvano |
| Abstract: | The recent financial crises pointed out the central role of public and private debt in modern economies. However, even if debt is a recurring topic in discussions about the current economic situation, economic modelling does not take into account debt as one of the crucial determinants of economic dynamics. Our contribution, in this paper, is to investigate the issues of borrowing and debt load by means of computational experiments, performed in the environment of the agent-based Eurace simulator. We aim to shed some light on the relation between debt and the main economic indicators. Our results clearly confirm that the amount of credit money in the economy is a very important variable, that can affect economic performance in a twofold way: fostering growth or pushing the economy into recession or crisis. The outcomes of our experiments show a rich scenario of interactions between real and financial variables in the economy, and therefore represents a truly innovative tool for the study of economics. -- |
| Keywords: | Agent-based computational economics,debt,leverage,credit money,economic crisis |
| JEL: | E2 E3 E44 E51 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201131&r=cba |
| By: | Pedro Gomis-Porqueras; Daniel R. Sanches |
| Abstract: | The authors investigate the extent to which monetary policy can enhance the functioning of the private credit system. Specifically, they characterize the optimal return on money in the presence of credit arrangements. There is a dual role for credit: It allows buyers to trade without fiat money and also permits them to borrow against future income. However, not all traders have access to credit. As a result, there is a social role for fiat money because it allows agents to self-insure against the risk of not being able to use credit in some transactions. The authors consider a (nonlinear) monetary mechanism that is designed to enhance the credit system. An active monetary policy is sufficient for relaxing credit constraints. Finally, they characterize the optimal monetary policy and show that it necessarily entails a positive inflation rate, which is required to induce cooperation in the credit system. |
| Keywords: | Monetary policy ; Money ; Credit |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-28&r=cba |
| By: | Daniel Leigh; Andrea Pescatori; Jaime Guajardo |
| Abstract: | This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMFdocuments, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects. |
| Keywords: | Cross country analysis , Fiscal consolidation , Fiscal policy , Government expenditures , International trade , OECD , Sovereign debt , |
| Date: | 2011–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/158&r=cba |
| By: | Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.; Kuester, Keith; Rubio-Ramírez, Juan Francisco |
| Abstract: | We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fiscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, we first estimate tax and spending processes for the U.S. that allow for time-varying volatility. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate. |
| Keywords: | DSGE models; fiscal policy; monetary policy; uncertainty |
| JEL: | C11 E10 E30 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8528&r=cba |
| By: | Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerron-Quintana (Federal Reserve Bank of Philadelphia); Keith Kuester (Federal Reserve Bank of Philadelphia); Juan Rubio-Ramirez (Department of Economics, Duke University) |
| Abstract: | We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fisscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, we first estimate tax and spending processes for the U.S. that allow for time-varying volatility. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate. |
| Keywords: | DSGE models, Uncertainty, Fiscal Policy, Monetary Policy |
| JEL: | E10 E30 C11 |
| Date: | 2011–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-022&r=cba |
| By: | Jesus Fernandez-Villaverde; Pablo Guerron-Quintana; Keith Kuester; Juan Rubio-Ramirez |
| Abstract: | The authors study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fiscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, the authors first estimate tax and spending processes for the U.S. that allow for time-varying volatility. They then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. The authors find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate. |
| Keywords: | Monetary policy ; Fiscal policy ; Uncertainty |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-32&r=cba |
| By: | Paul Beaudry; Franck Portier |
| Abstract: | Business cycles reflect changes over time in the amount of trade between individuals. In this paper we show that incorporating explicitly intra-temporal gains from trade between individuals into a macroeconomic model can provide new insight into the potential mechanisms driving economic fluctuations as well as modify key policy implications. We first show how a "gains from trade" approach can easily explain why changes in perceptions about the future (including "news" about the future) can cause booms and bust. We then turn to fiscal policy, and discuss under what conditions fiscal multipliers can be observed. While much of our analysis is conducted in a flexible price environment, we also present implications of our model for a sticky price environments, as it allows to understand stable-inflation boom-bust cycles. The source of the explicit gains from trade in our setup derives from simply assuming that in the short run workers are not perfect mobile across all sectors of the economy. We provide evidence from the PSID in support of this modeling assumption. |
| JEL: | E32 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17291&r=cba |
| By: | Xiaoji Lin; Lu Zhang |
| Abstract: | We question a deep-ingrained doctrine in asset pricing: If an empirical characteristic-return relation is consistent with investor "rationality," the relation must be "explained" by a risk factor model. The investment approach changes the big picture of asset pricing. Factors formed on characteristics are not necessarily risk factors: Characteristics-based factor models are linear approximations of firm-level investment returns. The evidence that characteristics dominate covariances in horse races does not necessarily mean mispricing: Measurement errors in covariances are more likely to blame. Most important, the investment approach completes the consumption approach in general equilibrium, especially for cross-sectional asset pricing. |
| JEL: | D51 D53 D58 E22 E44 G12 G14 G31 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17285&r=cba |
| By: | Gregorio Impavido; Ahmed I Al-Darwish; Michael Hafeman; Malcolm Kemp; Padraic O'Malley |
| Abstract: | In today’s financial system, complex financial institutions are connected through an opaque network of financial exposures. These connections contribute to financial deepening and greater savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency II should improve the stability of these connections, but could have unintended consequences for cost of capital, funding patterns, interconnectedness, and risk migration. |
| Date: | 2011–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/187&r=cba |
| By: | Guangling (Dave) Liu; Nkhahle E. Seeiso |
| Abstract: | This paper studies the impacts of bank capital regulation on business cycle fluctuations. To do so, we adopt the Bernanke et al. (1999) "financial accelerator" model (BGG), to which we augment a banking sector to study the procyclical nature of Basel II claimed in the literature. We first study the impacts of a negative shock to entrepreneur's net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impacts of a negative shock to the entrepreneurs' net worth when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further ampliflies the financial accelerator effect through the external finance premium channel, which in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable. |
| Keywords: | Business cycle fluctuations, Financial accelerator, Bank capital requirement, Monetary policy |
| JEL: | E32 E44 G28 E50 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:221&r=cba |
| By: | Heng-fu Zou (Central University of Finance and Economics; Shenzhen University; Wuhan University; Peking University); Liutang Gong (Guanghua School of Management, Peking University); Xinsheng Zeng (Wuhan University) |
| Abstract: | With inflation aversion, an increase in the monetary growth rate decreases the steady-state value of capital stock, consumption, and real balance holding. |
| Keywords: | Inflation aversion, Capital accumulation, Money |
| JEL: | D91 E63 O23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:481&r=cba |
| By: | Gaowang Wang (School of Economics and Management, Wuhan University); Heng-fu Zou (CEMA, Central University of Finance and Economics; China School of Advanced Study (SAS), Shenzhen University; IAS, Wuhan University; GSM, Peking University) |
| Abstract: | The optimal inflation tax is reexamined in the framework of dynamic second best economy populated by individuals with inflation aversion. A simple formula for the optimal inflation rate is derived. Different from the literature, it is shown that if the marginal excess burden of other distorting taxes approaches zero, Friedman's rule for optimum quantity of money is not optimal, and the optimal inflation tax is negative; if the marginal excess burden of other taxes is nonzero, the optimal inflation rate is indeterminate and relies on the tradeoffs between the impatience effect of inflation and the effects of other economic forces in the monetary economy. |
| Keywords: | Inflation aversion, Optimal inflation tax, Second best taxation, The friedman rule |
| JEL: | E31 E41 E52 H21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:480&r=cba |
| By: | Trung Bui; Tamim Bayoumi |
| Abstract: | Event studies are used to analyze the impact of U.S. financial, fiscal, and monetary policies from US to foreign asset prices across a range of G20 countries and Switzerland. The initial announcement that the Administration supported tighter regulation of banks led to a generalized fall in advanced economy bank shares compared to local equity markets. For later Dodd-Frank announcements, however, falls in U.S. bank equity prices were accompanied by increases in U.K. and Swiss valuations, implying a potential for regulatory arbitrage. Turning to macro policies, the 2008/9 fiscal and monetary stimulus packages generally supported foreign activity, while the impact of similar stimulus in 2010 is less clear. |
| Date: | 2011–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/183&r=cba |
| By: | Gustavo Adler; Camilo E Tovar Mora |
| Abstract: | This paper examines foreign exchange intervention practices and their effectiveness using a new qualitative and quantitative database for a panel of 15 economies covering 2004 - 10, with special focus on Latin America. Qualitatively, it examines institutional aspects such as declared motives, instruments employed, the use of rules versus discretion, and the degree of transparency. Quantitatively, it assesses the effectiveness of sterilized interventions in influencing the exchange rate using a two-stage IV-panel data approach to overcome endogeneity bias. Results suggest that interventions slow the pace of appreciation, but the effects decrease rapidly with the degree of capital account openness. At the same time, interventions are more effective in the context of already ‘overvalued’ exchange rates. |
| Keywords: | Central banks , Exchange markets , Exchange rates , Foreign exchange , Intervention , Latin America , Reserves , |
| Date: | 2011–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/165&r=cba |
| By: | Larry Cordell; Yilin Huang; Meredith Williams |
| Abstract: | This paper conducts an in-depth analysis of structured finance asset-backed securities collateralized debt obligations (SF ABS CDOs), the subset of CDOs that traded on the ABS CDO desks at the major investment banks and were a major contributor to the global financial panic of August 2007. Despite their importance, we have yet to determine the exact size and composition of the SF ABS CDO market or get a good sense of the write-downs these CDOs will generate. In this paper the authors identify these SF ABS CDOs with data from Intex©, the source data and valuation software for the universe of publicly traded ABS/MBS securities and SF ABS CDOs. They estimate that 727 publicly traded SF ABS CDOs were issued between 1999 and 2007, totaling $641 billion. Once identified, they describe how and why multisector structured finance CDOs became subprime CDOs, and show why they were so susceptible to catastrophic losses. The authors then track the flows of subprime bonds into CDOs to document the enormous cross-referencing of subprime securities into CDOs. They calculate that $201 billion of the underlying collateral of these CDOs was referenced by synthetic credit default swaps (CDSs) and show how some 5,500 BBB-rated subprime bonds were placed or referenced into these CDOs some 37,000 times, transforming $64 billion of BBB subprime bonds into $140 billion of CDO assets. For the valuation exercise, the authors estimate that total write-downs on SF ABS CDOs will be $420 billion, 65 percent of original issuance balance, with over 70 percent of these losses having already been incurred. They then extend the work of Barnett-Hart (2009) to analyze the determinants of expected losses on the deals and AAA bonds and examine the performance of the dealers, collateral managers, and rating agencies. Finally, the authors discuss the implications of their findings for the “subprime CDO crisis” and discuss the many areas for future work. |
| Keywords: | Debt ; Securities ; Asset-backed financing ; Banks and banking |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-30&r=cba |
| By: | Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234) |
| Abstract: | The paper investigates if the most popular alternative to the purchasing parity power approach (PPP) to estimate equilibrium exchange rates, the fundamental equilibrium exchange rate (FEER) influences exchange rate dynamics in the long run. For a large panel of industrialized and emerging countries and on the period 1982-2007, we detect the presence of unit roots in the series of real effective exchange rates and in the series of FEERs. We find and estimate a cointegration relationship between real effective exchange rates and FEERs. The results show that the FEER has a positive and significant influence on exchange rate dynamics in the long run. |
| Keywords: | Fundamental equilibrium exchange rates; Panel unit root tests; Global imbalances; Fully modified ordinary least square; Dynamic ordinary least square; Pooled Mean Group |
| Date: | 2011–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00593674&r=cba |
| By: | L. Randall Wray |
| Abstract: | In this paper, I first quickly recount the causes and consequences of the global financial crisis (GFC). Of course, the triggering event was the unfolding of the subprime crisis; however, I argue that the financial system was already so fragile that just about anything could have caused the collapse. I then move on to an assessment of the lessons we should have learned. Briefly, these include: (a) the GFC was not a liquidity crisis, (b) underwriting matters, (c) unregulated and unsupervised financial institutions naturally evolve into control frauds, and (d) the worst part is the cover-up of the crimes. I argue that we cannot resolve the crisis until we begin going after the fraud. Finally, I outline an agenda for reform, along the lines suggested by the work of Hyman P. Minsky. |
| Keywords: | Global Financial Crisis; Subprime Crisis; Hyman P. Minsky; Galbraith and the Great Crash; Control Fraud; Underwriting; Deregulation; Financial Reform |
| JEL: | E3 E11 E12 E32 E44 G21 G38 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_681&r=cba |
| By: | Hong, Hao (Cardiff Business School) |
| Abstract: | This paper examines the effectiveness of monetary aggregates through various nominal interest rates by integrating the financial sector into the Cash-in-Advance (CIA) economy. The model assumes that there are two types of representative agents in the financial sector, which are: productive banks and financial intermediates. The productive banks supply a financial service, which is an exchange technology service to households and financial intermediates receive savings fund from savers and offer loans to borrowers. The monetary expansions are increased banking costs through the rate of inflation. It leads households to use more exchange credit relative to cash at the goods market. Since the number of savings funds is equal to the number of exchange credits used at the goods market, money injections are lower the nominal interest rate on saving as the saving fund increases with exchange credit. By assuming that firms are the only borrowers at the capital market from Fuerst (1992), a lower nominal interest rate on the saving fund reduces the marginal cost of labour and increases labour demand. Meanwhile, the increasing marginal cost of money through the expected inflation effect has a negative effect on labour supply. With labour demand dominating labour supply effects, both output and employment increase with monetary expansion. The paper is able to generate a decreasing nominal interest rate with an increasing money supply with an absence of limited participation monetary shocks from Lucas (1990); and by allowing firms to borrow wage bills payment from financial intermediates, it examines the positive response of aggregate output subject to monetary expansion under flexible price framework. |
| Keywords: | monetary transmission; business cycles; banking sector; interest rates |
| JEL: | E10 E44 E51 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/18&r=cba |
| By: | Nikoloz Gigineishvili |
| Abstract: | Numerous empirical studies have found that the strength of the interest rate pass-through varies markedly across countries and markets. The causes of such heterogeneity have attracted considerably less attention so far. Unlike other studies that mainly focus on small groups of mostly developed and emerging markets in the same region, this paper expands the cross-sectional coverage to 70 countries from all regions, including low income, emerging and developed countries. It uses a wide range of macroeconomic and financial market structure variables to uncover structural determinants of pass-through. The paper finds that per capita GDP and inflation have positive effects on pass-through, while market volatility has a negative effect. Among financial market variables exchange rate flexibility, credit quality, overhead costs, and banking competition were found to strengthen pass-through, whereas excess banking liquidity to impede it. |
| Date: | 2011–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/176&r=cba |
| By: | David Kiefer |
| Abstract: | Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy, the IS-PC-MR model. Their third equation is the monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. Central banks achieve their preferred outcome by setting interest rates along an IS curve. We simplify their model to 2 equations (PC and MR), developing a state space econometric specification of this solution, and adding a random walk model of unobserved potential growth. Applying this model to a panel of North Atlantic countries, we find it historically consistent with an inflation target of about 4%. Significant interdependence is found in the between-country covariance of inflation and growth shocks, but not of potential output. Beginning with the approximation that expected inflation is the most recent observation, we extend the model to introduce alternative assumptions about expectations with mixed results, support for the sticky-price model, but doubts about activist policy. |
| Keywords: | new Keynesian policy, inflation targets, expectations JEL Codes: E61, E63 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2011_15&r=cba |
| By: | Ayako Saiki |
| Abstract: | The purpose of this study is to examine how monetary integration affects the exchange rate pass-through, by testing whether monetary policy convergence in the euro area led to a convergence in terms of exchange rate pass-through. We conduct a comparative study between the “experiment group” (the euro area) and the “control group” (non-euro industrial countries). We find evidence for stronger convergence of exchange rate pass-through for the euro area economies as a group, especially around the 1980s. The group of non-euro industrial countries also had conditional convergence (convergence with permanent cross-sectional heterogeneity) in exchange rate pass-through, but its cross-sectional dispersion remains substantially larger compared to the euro area. This indicates that monetary integration affects the exchange rate pass-through. This has an important policy implication for the euro area, especially for the new member countries, as their exchange rate pass-through would not remain constant or purely exogenous; it should also converge to the euro area average as they work to achieve the Maastricht Criteria. |
| Keywords: | Monetary Policy; Central Banks and Their Policies; International Monetary Arrangements and Institutions |
| JEL: | E52 E58 F33 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:308&r=cba |
| By: | Enrique Alberola (Banco de España); Carlos Trucharte (Banco de España); Juan Luis Vega (Banco de España) |
| Abstract: | The view that central banks must play a greater role in preserving financial stability has gained considerable ground in the aftermath of the crisis and macroprudential policy has become a central pillar to deal with financial stability. The policy frame of macroprudential policy, its toolbox and interactions with other policies is not completely established yet, though. In this context, Spain’s ten-year experience with its dynamic provision is a key reference. The analysis shows that, during the current financial crisis, dynamic provisions have proved useful to mitigate —to a limited extent— the build-up of risks and, above all, to provide substantial loss absorbency capacity to the financial institutions, suggesting that it could be an important tool for other banking systems. However, it is not the macro-prudential panacea: it needs to be complemented and be consistent with the rest of policies, either within the macro-prudential or in the broader context of macroeconomic management, including monetary policy. While there is a higher awareness of the contribution of monetary policy to financial stability, its role is in practice limited. The case of the euro area is particularly telling in this respect: macro-financial imbalances developed in sectors where financial integration was low and the effects hence were confined to the domestic economies. The asymmetry between a supranational monetary policy plus macroprudential surveillance and domestic implementation of macroprudential policies raises a set of issues which are worth exploring. |
| Keywords: | Macroprudential policy, Dynamic provision, Central banks |
| JEL: | E52 E58 G28 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1105&r=cba |
| By: | Barbara Rossi; Atsushi Inoue |
| Abstract: | This paper proposes new methodologies for evaluating out-of-sample forecasting performance that are robust to the choice of the estimation window size. The methodologies involve evaluating the predictive ability of forecasting models over a wide range of window sizes. The authors show that the tests proposed in the literature may lack the power to detect predictive ability and might be subject to data snooping across different window sizes if used repeatedly. An empirical application shows the usefulness of the methodologies for evaluating exchange rate models' forecasting ability. |
| Keywords: | Forecasting |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-31&r=cba |
| By: | Mercedes Garcia-Escribano; Man-Keung Tang; Carlos I. Medeiros; W. Christopher Walker; Carlos Fernandez Valdovinos; Camilo E Tovar Mora; Mercedes Vera-Martin; Jorge A. Chan Lau; G. Terrier; Rodrigo O. Valdés |
| Abstract: | This paper reviews policy tools that have been used and/or are available for policy makers in the region to lean against the wind and review relevant country experiences using them. The instruments examined include: (i) capital requirements, dynamic provisioning, and leverage ratios; (ii) liquidity requirements; (iii) debt-to-income ratios; (iv) loan-to-value ratios; (v) reserve requirements on bank liabilities (deposits and nondeposits); (vi) instruments to manage and limit systemic foreign exchange risk; and, finally, (vii) reserve requirements or taxes on capital inflows. Although the instruments analyzed are mainly microprudential in nature, appropriately calibrated over the financial cycle they may serve for macroprudential purposes. |
| Keywords: | Banking sector , Capital controls , Capital flows , Credit risk , Cross country analysis , Fiscal policy , Foreign exchange , Latin America , Liquidity , Monetary policy , Risk management , |
| Date: | 2011–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/159&r=cba |
| By: | Juan Carlos Cuestas (Department of Economics, The University of Sheffield); Carlyn Dobson (Division of Economics, Nottingham trent University) |
| Abstract: | In this paper we aim to shed some light on the potential for creating a monetary union in the Caribbean. We analyse the inflation rates for twelve countries using various time series methods. The results show that the inflation rates are mean reverting processes and that there is evidence of a convergence club in inflation rates within the area, which contradicts previous studies. Our contribution implies good news for the creation of a common central bank in the Caribbean. |
| Keywords: | Caribbean, inflation persistence, monetary union and unit roots |
| JEL: | C32 F15 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2011017&r=cba |
| By: | AfDB |
| Date: | 2011–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:adb:adbwps:324&r=cba |
| By: | T. Mangwengwende; Z. Chinzara; H. Nel |
| Abstract: | This study investigates the link between bank concentration and interest rate pass-through (IRPT) in four sub-Saharan countries. It also analyses whether there is asymmetry in IRPT and whether such asymmetry is related to changes in bank concentration. By applying a number of econometric methods including Asymmetric Error Correction Models, Mean Adjustment Lag (MAL) models and Autoregressive Distributed Lag models on monthly data for the period 1994-2007, the study found some evidence of a relationship between bank concentration and IRPT in all four countries. However, the results reveal that bank concentration has a stronger influence on the magnitude of its adjustment rather than its speed. Of particular note in this investigation is the fact that the findings support both the Structure-Conduct-Performance hypothesis and the competing Efficient-Structure hypothesis in the banking industries of the four countries. While there is some evidence supporting the view that bank lending and deposit rates adjust asymmetrically to changes in policy rates, there is very limited evidence that these asymmetries are a result of bank concentration. The key implication of the result for African countries is that increased bank concentration through bank consolidation programmes designed to strengthen banking industries should not be viewed with cynicism in so far as monetary policy transmission is concerned because concentration does not necessarily undermine the effectiveness of monetary policy. |
| Keywords: | Bank Concentration Monetary Policy Interest Rate Pass-Through Asymmetric Adjustment Sub-Saharan Africa |
| JEL: | E52 E58 G28 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:233&r=cba |
| By: | Kenji Moriyama |
| Abstract: | This paper investigates the degree of inflation inertia in Egypt and its determinants using the cross country data consisting of over 100 countries. Medium-unbiased estimator of inflation inertia in Egypt is high compared to other countries, as indicated by its location around the upper quartile among the sample. The cross country analysis indicates that counter-cyclical macroeconomic policy and fiscal consolidation are a key to reduce inflation inertia and the costs of disinflation. |
| Keywords: | Business cycles , Cross country analysis , Egypt , Fiscal consolidation , Inflation , Monetary policy , |
| Date: | 2011–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/160&r=cba |
| By: | Diego Gianelli (Banco Central del Uruguay) |
| Abstract: | Banking interest rates are closely related to monetary policy transmission than overnight interest rates. Since overnight interest rates are used as policy instrument since September 2007 by Uruguayan Central Bank, it is important to quantify the extent to which overnight interest rates are transmitted to banking interest rates. This paper quantifies the interest rate pass-through, both in the long and the short run, considering the structural changes observed in the underlying economic structure, and controlling for the fundamentals of financial intermediation margins. I find a significant pass-through from overnight interest rates to banking interest rates denominated in domestic currency but no significant passthrough to those denominated in foreign currency. I also find a notorious reduction in the level and the speed of the pass-through since the adoption of quantitative monetary target, and a positive correlation between financial margins and aggregate macroeconomic risk perception. The apparent reduction in the interest rate pass-through since 2004 represent a challenge for conducting monetary policy under a flexible inflation targeting regime. |
| Keywords: | Monetary Policy, interest rate pass through |
| JEL: | E44 G12 C01 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ude:wpaper:0411&r=cba |