|
on Central Banking |
| By: | Luigi Paciello (EIEF); Mirko Wiederholt (Northwestern University) |
| Abstract: | This paper studies optimal monetary policy when decision-makers in firms choose how much attention they devote to aggregate conditions. When the amount of attention that decision-makers in firms devote to aggregate conditions is exogenous, complete price stabilization is optimal only in response to shocks that cause efficient fluctuations under perfect information. When decision-makers in firms choose how much attention they devote to aggregate conditions, complete price stabilization is optimal also in response to shocks that cause inefficient fluctuations under perfect information. Hence, recognizing that decision-makers in firms can choose how much attention they devote to aggregate conditions has major implications for optimal policy. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1104&r=cba |
| By: | Jack Favilukis; David Kohn; Sydney C. Ludvigson; Stijn Van Nieuwerburgh |
| Abstract: | The last fifteen years have been marked by a dramatic boom-bust cycle in real estate prices, accompanied by economically large fluctuations in international capital flows. We argue that changes in international capital flows played, at most, a small role in driving house price movements in this episode and that, instead, the key causal factor was a financial market liberalization and its subsequent reversal. Using observations on credit standards, capital flows, and interest rates, we find that a bank survey measure of credit supply, by itself, explains 53 percent of the quarterly variation in house price growth in the U.S. over the period 1992-2010, while it explains 66 percent over the period since 2000. By contrast, once we control for credit supply, various measures of capital flows, real interest rates, and aggregate activity—collectively—add less than 5% to the fraction of variation explained for these same movements in home values. Credit supply retains its strong marginal explanatory power for house price movements over the period 2002-2010 in a panel of international data, while capital flows have no explanatory power. |
| JEL: | F20 F32 G12 G21 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17751&r=cba |
| By: | Lambertini, Luisa (EPFL, College of Management); Mendicino , Caterina (Banco de Portugal, Departamento Estudos Economicos); Punzi , Maria Teresa (University of Nottingham) |
| Abstract: | Survey data suggests that news of changes in business conditions are significantly related to house prices and consumers' beliefs of favorable buying conditions in the housing market. This paper explores the transmission of "news shocks" as a source of boom-bust cycles in the housing market. News on shocks originated in different sectors of the economy can generate booms in the housing market in accordance with the average behavior in the data; expectations on monetary policy and in inflationary shocks that are not fulfilled can also lead to the observed subsequent macroeconomic recession. Investigating the role of the credit market for house market fluctuations we find that favorable credit conditions that are expected to be reversed in the near future generate boom-bust cycle dynamics in line with the most recent episode. Further, credit conditions also affect boom-bust cycles generated by news shocks originated in other sectors of the economy. In particular, lower loan-to-value ratios reduce the severity of expectations-driven cycles and the volatility of household debt, aggregate consumption and GDP. |
| Keywords: | boom-bust cycles; credit frictions; housing market |
| JEL: | E32 E44 E52 |
| Date: | 2012–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_002&r=cba |
| By: | Michele Ca' Zorzi; Alexander Chudik; Alistair Dieppe |
| Abstract: | The global financial crisis has led to a revival of the empirical literature on current account imbalances. This paper contributes to that literature by investigating the importance of evaluating model and parameter uncertainty prior to reaching any firm conclusion. We explore three alternative econometric strategies: examining all models, selecting a few, and combining them all. Out of thousands (or indeed millions) of models a story emerges. The chance that current accounts were aligned with fundamentals prior to the financial crisis appears to be minimal. |
| Keywords: | Macroeconomics - Econometric models |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:100&r=cba |
| By: | Carlos A. Vegh; Guillermo Vuletin |
| Abstract: | It is well known by now that government spending has typically been procyclical in emerging economies but acyclical or countercyclical in industrial countries. Little, if any, is known, however, about the cyclical behavior of tax rates (as opposed to tax revenues, which are endogenous to the business cycle and hence cannot shed light on the cyclicality of tax policy). We build a novel dataset on tax rates for 62 countries for the period 1960-2009 that comprises corporate income, personal income, and value-added tax rates. We find that, by and large, tax policy is acyclical in industrial countries but procyclical in developing countries. We show that the evidence is consistent with a model of optimal fiscal policy under uncertainty. |
| JEL: | E32 E62 H20 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17753&r=cba |
| By: | Jean Pisani-Ferry |
| Abstract: | The search for solutions to the euro crisis is based on a partial diagnosis that overemphasises the lack of enforcement of existing fiscal rules. Europeâ??s leaders should rather address the euro areaâ??s inherent weaknesses revealed by the crisis.At the core of euro-area vulnerability is an impossible trinity of strict no-monetary financing, bank-sovereign interdependence and no co-responsibility for public debt. This Policy Contribution assesses the corresponding three options for reform: a broader European Central Bank (ECB) mandate, the building of a banking federation, and fiscal union with common bonds. None will be easy.The least feasible option is a change to the ECBâ??s mandate; changing market perceptions would require the ECB to credibly commit overwhelming forces, and the ECB is simply not in a position to make such a commitment.The building of a banking federation, meanwhile, involves reforms that are bound to be difficult. Incremental progress is likely, but a breakthrough less so.This leaves fiscal union. It faces major obstacles, but a decision to move in this direction would signal to the markets and ECB a commitment to stronger Economic and Monetary Union. One possibility would be to introduce a limited, experimental scheme through which trust could be rebuilt. This Policy Contribution draws on presentations made at the XXIV Moneda y Crédito Symposium, Madrid, 3 November 2011, at the Asia-Europe Economic Forum conference in Seoul, 9 December, and at De Nederlandsche Bank in Amsterdam on 17 December. I am very grateful to Silvia Merler for excellent research assistance. I thank participants in these seminars and Bruegel colleagues for comments and criticisms. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:674&r=cba |
| By: | Grossi, Michele; Tamborini, Roberto |
| Abstract: | In this paper, the authors present a New Keynesian quantitative model with endogenous investment and a stock-market sector to shed further light on two unsettled issues: whether central banks should include some financial indicator in their policy rules, and what indicator may be expected to generate better stabilization performance. For comparative purposes, the authors replicate the policy framework and assessment strategy of the well-known no-inclusion model of Bernanke-Gertler (1999, 2000) and assess performance of five policy rules. Two of these are traditional Taylor rules (i.e., do not incorporate financial indicators) that differ in the relative weight they put on output and inflation gaps. The other three are financial Taylor rules. These involve the addition of one financial indicator in each case. Specifically, the deviation from trend of stock prices, of Tobin's q (the rate of change in stock prices relative to capital stock) and of investment. The authors obtain results that are at variance with Bernanke-Gertler, first, because the best performing rule of the traditional rules is output aggressive instead of inflation aggressive and, second, because the financial rule with Tobin's q outperforms the traditional inflation-aggressive one under all dimensions and cases. However, the authors cannot draw a univocal conclusion as regards the comparison between the financial rule with Tobin's q and the traditional but output aggressive rule. -- |
| Keywords: | New Keynesian models,monetary policy,stock markets and bubbles |
| JEL: | E5 E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201154&r=cba |
| By: | Frantisek Brazdik; Michal Hlavacek; Ales Marsal |
| Abstract: | This survey gives insight into the ongoing research in financial frictions modeling. The recent financial turmoil has fueled interest in operationalizing financial frictions concepts and introducing them into tools for policy makers. The rapid growth of the literature on these issues is the motivation for our review of the presented approaches. The empirical facts that motivate the inclusion of financial frictions are surveyed. This survey provides a description of the basic approaches for introducing financial frictions into dynamic stochastic general equilibrium models. The significance and empirical identification of the financial accelerator effect is then discussed. The role of financial frictions models in CNB monetary and macroprudential policy is also described. It is concluded that given the heterogeneity of the approaches to financial frictions it is beneficial for the conduct of monetary policy to focus on the development of satellite approaches. The role of financial frictions in DSGE models for macroprudential policy is also discussed, as these models can be used to generate stress-testing scenarios. It can be concluded that DSGE models with financial frictions could complement current stress-testing practice, but are not able to replace stress tests. |
| Keywords: | DSGE models, financial accelerator, financial frictions. |
| JEL: | E21 E22 E27 E59 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2011/03&r=cba |
| By: | Todd E. Clark; Taeyoung Doh |
| Abstract: | With the concept of trend inflation now widely understood as to be important as a measure of the public's perception of the inflation goal of the central bank and important to the accuracy of longer-term inflation forecasts, this paper uses Bayesian methods to assess alternative models of trend inflation. Reflecting models common in reduced-form inflation modeling and forecasting, we specify a range of models of inflation, including: AR with constant trend; AR with trend equal to last period's inflation rate; local level model; AR with random walk trend; AR with trend equal to the long-run expectation from the Survey of Professional Forecasters; and AR with time-varying parameters. We consider versions of the models with constant shock variances and with stochastic volatility. We first use Bayesian metrics to compare the fits of the alternative models. We then use Bayesian methods of model averaging to account for uncertainty surrounding the model of trend inflation, to obtain an alternative estimate of trend inflation in the U.S. and to generate medium-term, model-average forecasts of inflation. Our analysis yields two broad results. First, in model fit and density forecast accuracy, models with stochastic volatility consistently dominate those with constant volatility. Second, for the specification of trend inflation, it is difficult to say that one model of trend inflation is the best. Among alternative models of the trend in core PCE inflation, the local level specification of Stock and Watson (2007) and the survey-based trend specification are about equally good. Among competing models of trend GDP inflation, several trend specifications seem to be about equally good. |
| Keywords: | Bayesian statistical decision theory ; Inflation (Finance) - Mathematical models ; Forecasting |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1134&r=cba |
| By: | Laurent Pauwels (The University of Sydney Business School); Andrey Vasnev (The University of Sydney Business School) |
| Abstract: | This paper provides a methodology for combining forecasts based on several discrete choice models. This is achieved primarily by combining one-step-ahead probability forecast associated with each model. The paper applies well-established scoring rules for qualitative response models in the context of forecast combination. Log-scores and quadratic-scores are both used to evaluate the forecasting accuracy of each model and to combine the probability forecasts. In addition to producing point forecasts, the effect of sampling variation is also assessed. This methodology is applied to forecast the US Federal Open Market Committee (FOMC) decisions in changing the federal funds target rate. Several of the economic fundamentals influencing the FOMC decisions are nonstationary over time and are modelled in a similar fashion to Hu and Phillips (2004a, JoE). The empirical results show that combining forecasted probabilities using scores mostly outperforms both equal weight combination and forecasts based on multivariate models. |
| Keywords: | Forecast combination, Probability forecast, Discrete choice models, Monetary policy decisions |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:syb:wpbsba:11/2011&r=cba |
| By: | Lilia Karnizova (Department of Economics, University of Ottawa, Ottawa, ON) |
| Abstract: | Overly optimistic expectations concerning productivity and consequent downward revisions are commonly viewed as a key determinant of U.S. investment during the boom-bust cycle of 1995–2003. This view is formalized and evaluated in a general equilibrium model with news shocks about future productivity and preferences for financial wealth. The model generates a boom-bust cycle in response to good news that is not realized. A method is devised to estimate “the productivity prospects”: a series that captures the effects of news shocks on economic decisions. The estimated series rises during the boom, falls during the recession and helps forecast future productivity shocks at several horizons. The model's predictions for sample paths of hours worked, output, investment, consumption, wages and stock prices are largely in conformity with U.S. data. The model therefore offers a possible solution to several puzzles identified in the literature regarding the 1990's boom and the 2001 recession. |
| Keywords: | boom-bust cycles; news shocks; investment; expectations; preferences for wealth |
| JEL: | E21 E22 E27 E32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ott:wpaper:1201e&r=cba |
| By: | Urszula Szcserbowicz (Observatoire Français des Conjonctures Économiques); (Observatoire Français des Conjonctures Économiques) |
| Keywords: | unconventional monetary policy,inflation expectations,long-term interest rates, Libor-OIS spread, announcements effects |
| JEL: | E43 E44 E52 E58 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1115&r=cba |
| By: | Paul Hubert (Observatoire Français des Conjonctures Économiques); (Observatoire Français des Conjonctures Économiques) |
| Abstract: | Policymakers at the Federal Open Market Committee (FOMC) publish macroeconomic forecasts since 1979. Some studies find that these forecasts do not contain useful information to predict these macroeconomic variables compared to other forecasts. In this paper, we examine the value of publishing these FOMC forecasts in two steps. We assess whether they influence private forecasts and whether they may be considered as a policy instrument. We provide original evidence that FOMC forecasts are able to influence private expectations. We also find that FOMC forecasts give information about future Fed rate movements, affect policy variables in a different way from the Fed rate, and respond differently to macro shocks. |
| Keywords: | Monetary Policy, Forecasts, FOMC, Influence, Policy signals, Structural VAR. |
| JEL: | E52 E58 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1123&r=cba |
| By: | Mehmet Pasaogullari; Simeon Tsonevy |
| Abstract: | We propose a DSGE model with regime switching in the central bank’s inflation target to explain inflation compensation in the UK. Taking advantage of the well-documented change in UK monetary policy to adopt inflation targeting, we estimate our model using nominal and inflation-linked Treasury bond data from the UK from 1985 to 2007. We find that this model can account for the term structure of inflation compensation in the nominal yield curve by generating regime-dependent conditional expectations of future inflation. |
| Keywords: | Inflation targeting ; Monetary policy - Great Britain |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1133&r=cba |
| By: | Tommaso Proietti (The University of Sydney Business School and Università degli Studi di Roma "Tor Vergata"); Helmut Lütkepohl (European University Institute) |
| Abstract: | The paper investigates whether transforming a time series leads to an improvement in forecasting accuracy. The class of transformations that is considered is the Box-Cox power transformation, which applies to series measured on a ratio scale. We propose a nonparametric approach for estimating the optimal transformation parameter based on the frequency domain estimation of the prediction error variance, and also conduct an extensive recursive forecast experiment on a large set of seasonal monthly macroeconomic time series related to industrial production and retail turnover. In about one fifth of the series considered the Box-Cox transformation produces forecasts significantly better than the untransformed data at one-step-ahead horizon; in most of the cases the logarithmic transformation is the relevant one. As the forecast horizon increases, the evidence in favour of a transformation becomes less strong. Typically, the naïve predictor that just reverses the transformation leads to a lower mean square error than the optimal predictor at short forecast leads. We also discuss whether the preliminary in-sample frequency domain assessment conducted provides a reliable guidance which series should be transformed for improving significantly the predictive performance. |
| Keywords: | Forecasts comparisons. Multi-step forecasting. Rolling forecasts. Nonparametric estimation of prediction error variance. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:syb:wpbsba:08/2011&r=cba |
| By: | Carrera, César (Banco Central de Reserva del Perú) |
| Abstract: | The slope of the sticky information Phillips curve proposed by Mankiw and Reis (2002) is based on the degree of information rigidity on the part of firms. Carroll (2003) uses an epidemiology model of expectations and finds evidence for the U.S. of a one-year lag in the transmission of information from professional forecasters to households. Using financial institutions‟ and firms‟ survey data from Peru and the model proposed by Carroll, I estimate the degree of information rigidity for the Peruvian economy. This paper also considers heterogeneous responses and explores the cross-sectional dimension of these survey forecasts. I find that the degree of information stickiness is such that it takes between one and three quarters for updating information, a result that is robust to different specifications. |
| Keywords: | Inflation expectations, Heterogeneous expectations, Survey expectations, Epidemiology, Sticky Information |
| JEL: | D84 E31 C11 C53 C82 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2012-004&r=cba |
| By: | Zlatuse Komarkova; Adam Gersl; Lubos Komarek |
| Abstract: | We provide a macro stress-testing model for banks’ market and funding liquidity risks with a survival period of one and three months. The model takes into account the impact of both bank-specific and market-wide scenarios and considers both the first- and second-round effects of shocks. The testing model has three phases; (i) the formation of a balance-sheet liquidity shortfall, (ii) the reaction by banks, and (iii) the feedback effects of shocks. During each phase we re-count the liquidity buffer and examine whether banks hold a sufficiently large amount of liquid assets to be able to survive the liquidity tension in their balance sheets. An application to Czech banks illustrates which bank business models are sensitive to liquidity tensions. Overall, we confirm that the Czech banking system is resilient to a scenario mimicking the international liquidity crisis of 2008-2009. |
| Keywords: | Banking, financial stability, liquidity risk, stress testing. |
| JEL: | G12 G19 G21 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2011/11&r=cba |
| By: | Marcos dal Bianco; Maximo Camacho; Gabriel Perez-Quiros |
| Abstract: | We propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fit and, more importantly, encouraging out-of-sample forecasting results at horizons ranging from one-week to one month. Specifically, we obtain statistically significant improvements upon the hard-to-beat random-walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model obtains a great improvement when we use the direction of change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down, with statistically significant improvements. |
| Keywords: | Euro-dollar rate, Exchange rate forecasting, State-space model, Mixed frequencies |
| JEL: | F31 F37 C01 C22 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1201&r=cba |
| By: | Guido Ascari; Giorgio Fagiolo; Andrea Roventini |
| Abstract: | Recent empirical findings suggest that macroeconomic variables are seldom normally distributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) densities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this statistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics. |
| Keywords: | Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential-Power Distributions, Laplace Distributions, DSGE Models, RBC Models |
| JEL: | C1 E3 |
| Date: | 2012–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2012/02&r=cba |
| By: | Matthieu Bussiere; Alexander Chudik; Arnaud Mehl |
| Abstract: | This paper uncovers the response pattern to global shocks of euro area countries' real effective exchange rates before and after the start of Economic and Monetary Union (EMU), a largely open ended question when the euro was created. We apply to that end a newly developed methodology based on high dimensional VAR theory. This approach features a dominant unit to a large set of over 60 countries' real effective exchange rates and is based on the comparison of two estimated systems: one before and one after EMU. ; We find strong evidence that the pattern of responses depends crucially on the nature of global shocks. In particular, post-EMU responses to global US dollar shocks have become similar to Germany's response before EMU, i.e. to that of the economy that used to issue Europe's most credible legacy currency. ; By contrast, post-EMU responses of euro area countries to global risk aversion shocks have become similar to those of Italy, Portugal or Spain before EMU, i.e. of economies of the euro area's periphery. Our findings also suggest that the divergence in external competitiveness among euro area countries over the last decade, which is at the core of today's debate on the future of the euro area, is more likely due to country-specific shocks than to global shocks. |
| Keywords: | Economic and Monetary Union ; Vector autoregression |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:102&r=cba |
| By: | Eickmeier, Sandra; Ng, Tim |
| Abstract: | We study how credit supply shocks in the US, the euro area and Japan are transmitted to other economies. We use the recently-developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983-2009. We experiment with inter-country links that distinguish bilateral trade, portfolio investment, foreign direct investment and banking exposures, as well as asset-side vs. liability-side financial channels. Capturing both bilateral trade and inward foreign direct investment or outward banking claim exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses to financial shocks that have the effect of reducing credit supply to the private sector. We find that negative US credit supply shocks have stronger negative effects on domestic and foreign GDP, compared to credit supply shocks from the euro area and Japan. Domestic and foreign credit and equity markets respond clearly to the credit supply shocks. Exchange rate responses are consistent with a flight to quality to the US dollar. The UK, another international financial centre, is also responsive to the shocks. These results are robust to the exclusion of the 2007-09 crisis episode from the sample. -- |
| Keywords: | international business cycles,credit supply shocks,trade and financial integration,Global VAR,sign restrictions |
| JEL: | F41 F44 F36 F15 C3 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201127&r=cba |
| By: | Michael Pedersen |
| Abstract: | The present paper analyzes propagation of shocks to food and energy prices in 46 countries with data from the period 1999-2010. The empirical evidence suggests that in only one of the countries considered, a shock to the price of either energy or food shows no propagation to the prices of the goods and services included in the core inflation measure. In general, the propagation effect of food price shocks is larger than that of energy price shocks. Emerging economies are more affected by propagation than advanced ones. The results advocate that policy makers concerned with price stability should pay special attention to shocks affecting domestic food prices. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:648&r=cba |
| By: | Goodness C. Aye (Department of Agricultural Economics, University of Agriculture, Makurdi, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria) |
| Abstract: | This paper uses Indian quarterly data for the period of 1960:Q2-2011:Q2 to test for nonlinearity in a standard monetary vector autoregression (VAR) model comprising of output, price and money, using an estimation strategy that is consistent with wide range of structural models. We find that positive and negative monetary policy shocks have an immediate short-live and a delayed persistent asymmetric effect on output and price respectively. In addition, we show that compared to a linear VAR, the nonlinear VAR has a bigger impact of a monetary policy shock on output and price. In general, we conclude that there are clear gains from modelling monetary policy using a nonlinear VAR framework. |
| Keywords: | Asymmetric Effects, Monetary Policy, Linear and Nonlinear VAR, India |
| JEL: | C32 E23 E31 E51 E52 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201202&r=cba |