|
on Central Banking |
| By: | Lars E.O. Svensson |
| Abstract: | In the summer of 2010, the Federal Reserve’s and the Swedish Riksbank’s inflation forecasts were below the former’s mandate-consistent rate and the latter’s target, respectively, and their unemployment forecasts were above sustainable rates. Given the mandates of the Federal Reserve and the Riksbank, conditions in both countries clearly called for policy easing. The Federal Reserve maintained a minimum policy rate, soon started to communicate possible future easing, and in the fall launched QE2. In contrast, the Riksbank started a period of rapid tightening. I examine the arguments that were raised in opposition to the Federal Reserve's easing, and those for the Riksbank's tightening. Although the Swedish economy subsequently performed better than expected, probably an important reason was that the market implemented much easier financial conditions than were consistent with the Riksbank’s policy rate path. Without the policy tightening, performance would have been even better. The U.S. economy meanwhile performed worse than expected because of factors other than monetary policy. Without the policy easing, performance would have been even worse. Thus, the Federal Reserve appears to have followed its mandate in the summer of 2010, and subsequent adverse economic shocks contributed to weak performance of the U.S. economy. In contrast, the Riksbank appears to have deviated from its mandate, but favorable circumstances contributed to an economic outcome with better performance than might have been expected based on policy choices. |
| JEL: | E42 E43 E47 E52 E58 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17823&r=cba |
| By: | Michael B. Devereux; Ozge Senay; Alan Sutherland |
| Abstract: | Over the one and a half decades prior to the global financial crisis, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This is a highly robust prediction of open economy macro models with endogenous portfolio choice. It holds across many different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions. |
| JEL: | F3 F33 F4 F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17796&r=cba |
| By: | Viral V. Acharya; Nada Mora |
| Abstract: | Can banks maintain their advantage as liquidity providers when they are heavily exposed to a financial crisis? The standard argument - that banks can - hinges on deposit inflows that are seeking a safe haven and provide banks with a natural hedge to fund drawn credit lines and other commitments. We shed new light on this issue by studying the behavior of bank deposit rates and inflows during the 2007-09 crisis. Our results indicate that the role of the banking system as a stabilizing liquidity insurer is not one of the passive recipient, but of an active seeker, of deposits. We find that banks facing a funding squeeze sought to attract deposits by offering higher rates. Banks offering higher rates were also those most exposed to liquidity demand shocks (as measured by their unused commitments, wholesale funding dependence, and limited liquid assets), as well as with fundamentally weak balance-sheets (as measured by their non-performing loans or by subsequent failure). Such rate increases have a competitive effect in that they lead other banks to offer higher rates as well. Overall, the results present a nuanced view of deposit rates and flows to banks in a crisis, one that reflects banks not just as safety havens but also as stressed entities scrambling for deposits. |
| JEL: | E4 G01 G11 G21 G28 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17838&r=cba |
| By: | Jordi Galí (CREI, Universitat Pompeu Fabra and Barcelona GSE); Frank Smets (European Central Bank, CEPR and University of Groningen); Rafael Wouters (National Bank of Belgium) |
| Abstract: | We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations. |
| Keywords: | nominal rigidities, unemployment fluctuations, Phillips curve, wage markups shocks, output gap. |
| JEL: | D58 E24 E31 E32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:106&r=cba |
| By: | Philipp Engler (Freie Universität Berlin) |
| Abstract: | After an expansionary monetary policy shock employment increases and unemployment falls. In standard New Keynesian models the fall in aggregate unemployment does not affect employed workers at all. However, Luchinger, Meier and Stutzer (2010) found that the risk of unemployment negatively affects utility of employed workers: An increases in aggregate unemployment decreases workers' subjective well-being, which can be explained by an increased risk of becoming unemployed. I take account of this effect in an otherwise standard New Keynesian open economy model with unemployment as in Gali (2010) and find two important results with respect to expansionary monetary policy shocks: First, the usual wealth effect in New Keynesian models of a declining labor force, which is at odds with the data as high-lighted by Christiano, Trabandt and Walentin (2010), is shut down. Second, the welfare effects of such shocks improve considerably, modifying the standard results of the open economy literature that set off with Obstfeld and Rogoff's (1995) redux model. |
| Keywords: | Open economy macroeconomics, monetary policy, unemployment |
| JEL: | E24 E52 F32 F41 |
| Date: | 2011–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2011_8&r=cba |
| By: | Laurence M. Ball |
| Abstract: | From 2000 to 2003, when Ben Bernanke was a professor and then a Fed Governor, he wrote extensively about monetary policy at the zero bound on interest rates. He advocated aggressive stimulus policies, such as a money-financed tax cut and an inflation target of 3-4%. Yet, since U.S. interest rates hit zero in 2008, the Fed under Chairman Bernanke has taken more cautious actions. This paper asks when and why Bernanke changed his mind about zero-bound policy. The answer, at one level, is that he was influenced by analysis from the Fed staff that was presented at the FOMC meeting of June 2003. This answer raises another question: why did the staff's views influence Bernanke so strongly? I seek answers to this question in the social psychology literature on group decision-making. |
| JEL: | E52 E58 E65 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17836&r=cba |
| By: | Evren Caglar (University of Kent); Jagjit S. Chadha (University of Kent); Katsuyuki Shibayama (University of Kent) |
| Abstract: | Koop, Pesaran and Smith (2011) suggest a simple diagnostic indicator for the Bayesian estimation of the parameters of a DSGE model. They show that, if a parameter is well identified, the precision of the posterior should improve as the (artificial) data size T increases, and the indicator checks the speed at which precision improves. It does not require any additional programming; a researcher just needs to generate artificial data and estimate the model with different T. Applying this to Smets and Wouters'(2007) medium size US model, we find that while exogenous shock processes are well identified, most of the parameters in the structural equations are not. |
| Keywords: | Bayesian Estimation, Dynamic stochastic general equilibrium models, Identification. |
| JEL: | C51 C52 E32 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1205&r=cba |
| By: | Joshua Aizenman; Hiro Ito |
| Abstract: | We examine the open macroeconomic policy choices of developing economies from the perspective of the economic “trilemma” hypothesis. We construct an index of divergence of the three trilemma policy choices, and evaluate its patterns in recent decades. We find that the three dimensions of the trilemma configurations are converging towards a “middle ground” among emerging market economies -- managed exchange rate flexibility underpinned by sizable holdings of international reserves, intermediate levels of monetary independence, and controlled financial integration. Emerging market economies with more converged policy choices tend to experience smaller output volatility in the last two decades. Emerging markets with relatively low international reserves/GDP could experience higher levels of output volatility when they choose a policy combination with a greater degree of policy divergence. Yet this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding. |
| JEL: | F15 F2 F32 F36 F4 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17806&r=cba |
| By: | Daniel F. Waggoner; Tao Zha |
| Abstract: | We estimate a Markov-switching mixture of two familiar macroeconomic models: a richly parameterized DSGE model and a corresponding BVAR model. We show that the Markov-switching mixture model dominates both individual models and improves the fit considerably. Our estimation indicates that the DSGE model plays an important role only in the late 1970s and the early 1980s. We show how to use the mixture model as a data filter for estimation of the DSGE model when the BVAR model is not identified. Moreover, we show how to compute the impulse responses to the same type of shock shared by the DSGE and BVAR models when the shock is identified in the BVAR model. Our exercises demonstrate the importance of integrating model uncertainty and parameter uncertainty to address potential model misspecification in macroeconomics. |
| JEL: | C52 E2 E4 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17791&r=cba |
| By: | Okano, Eiji; Eguchi, Masataka; Gunji, Hiroshi; Miyazaki, Tomomi |
| Abstract: | We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate. |
| Keywords: | local currency pricing, optimal monetary policy, CPI inflation, fixed exchange rate, Bayesian estimation |
| JEL: | E52 E62 F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hituec:558&r=cba |
| By: | Yasuo Hirose; Takushi Kurozumi |
| Abstract: | Recent studies attempt to quantify the empirical importance of news shocks (ie., anticipated future schocks) in business cycle fluctuations. This paper identifies news schocks in a dynamic stochastic general equilibrium model estimated with not only actual data but also forecast data. The estimation results show new empirical evidence that antecipated future technology shocks are the most important driving force of U.S. business cycles. The use of the forecast data makes the anticipated shocks play a much more important role in fitting model-implied expectations to this data, since such shocks have persistent effects on the expectaions and thereby help to replicate the observed persistence of the forecasts. |
| JEL: | E30 E32 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-01&r=cba |
| By: | Beaudry, Paul; Portier, Franck |
| 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 and risk shocks) 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. -- |
| Keywords: | business cycle,investment,heterogeneous agents |
| JEL: | E32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:12002&r=cba |
| By: | Guido Ascari (University of Pavia); Giorgio Fagiolo (Sant'Anna School of Advanced Studies); Andrea Roventini (OFCE-Sciences-po,Sant'Anna School of Advanced Studies) |
| Abstract: | Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, 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 sta- tistical 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 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1201&r=cba |
| By: | Ferré Carracedo, Montserrat; Manzano, Carolina |
| Abstract: | In this paper we propose a new measure of the degree of conservativeness of an inde- pendent central bank and we derive the optimal value from the social welfare perspective. We show that the mere appointment of an independent central bank is not enough to achieve lower inflation, which may explain the mixed results found between central bank independence and inflation in the empirical literature. Further, the optimal central bank should not be too conservative. For instance, we will show that in some circumstances it will be optimal that the central bank is less conservative than society in the Rogoff sense. JEL classification: E58, E63. Keywords: Central bank; Conservativeness; Independence. |
| Keywords: | Bancs centrals, 35 - Administració pública. Govern. Assumptes militars, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:urv:wpaper:2072/179623&r=cba |
| By: | Dong Jin Lee (University of Connecticut); Jai Hyung Yoon (Andong National University) |
| Abstract: | This paper empirically explores the New Keynesian Phillips Curve (NKPC)in multiple quantiles and examines the risk structure of the inflation process focusing on the asymmetric monetary policy. The estimation results support the canonical NKPC in upper quantiles while the hybrid version fits better with mid-quantiles. We find evidence of an asymmetric risk such that a decrease in the expected inflation reduces the risk in the sense of dispersive order and vice versa. This result implies that tightening rather than easing money is more effective in reducing risks. Structural break tests detect a break in all quantiles around 1983. Post-break data still support the asymmetric pattern. JEL Classification: C32, E31, E52 Key words: New Keynesian Phillips Curve, multiple quantile estimation, asymmetric monetary policy, structural break |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2012-03&r=cba |
| By: | Ahrens, Steffen; Snower, Dennis J. |
| Abstract: | We incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive inflation. Workers with relatively low incomes experience envy, whereas those with relatively high incomes experience guilt. The former seek to raise their income, and the latter seek to reduce it. The greater the inflation rate, the greater the degree of wage dispersion under Calvo wage contracts, and thus the greater the degree of envy and guilt experienced by the workers. Since the envy effect is stronger than the guilt effect, according to the available empirical evidence, a rise in the inflation rate leads workers to supply more labor over the contract period, generating a significant positive long-run relation between inflation and output (and employment), for low inflation rates. This Phillips curve relation, together with an inefficient zero-inflation steady state, provides a rationale for a positive long-run inflation rate. Given standard calibrations, optimal monetary policy is associated with a long-run inflation rate around 2 percent. -- |
| Keywords: | inflation,long-run Phillips curve,fairness,inequity aversion |
| JEL: | D03 E20 E31 E50 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201201&r=cba |
| By: | Ahrens, Steffen (Kiel Institute for the World Economy); Snower, Dennis J. (Kiel Institute for the World Economy) |
| Abstract: | We incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive inflation. Workers with relatively low incomes experience envy, whereas those with relatively high incomes experience guilt. The former seek to raise their income, and latter seek to reduce it. The greater the inflation rate, the greater the degree of wage dispersion under Calvo wage contracts, and thus the greater the degree of envy and guilt experienced by the workers. Since the envy effect is stronger than the guilt effect, according to the available empirical evidence, a rise in the inflation rate leads workers to supply more labor over the contract period, generating a significant positive long-run relation between inflation and output (and employment), for low inflation rates. This Phillips curve relation, together with an inefficient zero-inflation steady state, provides a rationale for a positive long-run inflation rate. Given standard calibrations, optimal monetary policy is associated with a long-run inflation rate around 2 percent. |
| Keywords: | inflation, long-run Phillips curve, fairness, inequity aversion |
| JEL: | D03 E20 E31 E50 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6302&r=cba |
| By: | Graf Lambsdorff, Johann; Schubert, Manuel; Giamattei, Marcus |
| Abstract: | We carry out an experiment on a macroeconomic price setting game where prices are complements. Despite relevant information being common knowledge and price flexibility we observe significant deviation from equilibrium prices and history dependence. In a first treatment we observe that equilibrium values were obtained in the long run but at the cost of a very slow adjustment and thus history dependence. By reporting a business indicator in a simpler form, subjects were given the chance to coordinate their prices by help of a heuristic in a second treatment. This option was widely taken, bringing about excess volatility and a deviation from equilibrium even in the long run. In a third treatment with staggered pricing we observe, contrary to theoretical predictions, the one-round ahead (publicly known) shock is significant, but future inflation is not. Our findings cast light on price dynamics when subjects have limited computational capacities. -- |
| Keywords: | Inflation Persistence,Staggered Prices,Sticky Reasoning,New Keynesian Phillips Curve |
| JEL: | E31 C92 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:upadvr:v6311&r=cba |
| By: | Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini |
| Abstract: | This work studies the interactions between income distribution and monetary and fiscal policies in terms of ensuing dynamics of macro variables (GDP growth, unemployment, etc.) on the grounds of an agent-based Keynesian model. The direct ancestor of this work is the "Keynes meeting Schumpeter" formalism presented in Dosi et al. (2010). To that model, we add a banking sector and a monetary authority setting interest rates and credit lending conditions. The model combines Keynesian mechanisms of demand generation, a "Schumpeterian" innovation-fueled process of growth and Minskian credit dynamics. The robustness of the model is checked against its capability to jointly account for a large set of empirical regularities both at the micro level and at the macro one. The model is able to catch salient features underlying the current as well as previous recessions, the impact of financial factors and the role in them of income distribution. We find that different income distribution regimes heavily affect macroeconomic performance: more unequal economies are exposed to more severe business cycles fluctuations, higher unemployment rates, and higher probability of crises. On the policy side, fiscal policies do not only dampen business cycles, reduce unemployment and the likelihood of experiencing a huge crisis. In some circumstances they also affect positively long-term growth. Further, the more income distribution is skewed toward profits, the greater the effects of fiscal policies. About monetary policy, we find a strong non-linearity in the way interest rates affect macroeconomic dynamics: in one "regime" with low rates, changes in interest rates are ineffective up to a threshold beyond which increasing the interest rate implies smaller output growth rates and larger output volatility, unemployment and likelihood of crises. |
| Keywords: | agent-based Keynesian models, multiple equilibria, fiscal and monetary policies, income distribution, transmission mechanisms, credit constraints |
| JEL: | E32 E44 E51 E52 E62 |
| Date: | 2012–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2012/03&r=cba |
| By: | Silvia Merler; Jean Pisani-Ferry |
| Abstract: | The crisis has underlined the strong interdependence between the euro-area banking and sovereign crises. To understand the role domestic banks have played in holding sovereign debt, a breakdown of government debt by holding sectors is required. The data shows that at the start of the crisis, most continental euro-area countries were characterised by the large size of their banksâ?? portfolios of domestic government bonds, which were markedly larger than in the UK or the US. Consequently, concern about sovereign solvency was bound to have major consequences for banks. The structural vulnerability of euro-area countries has increased, reinforcing the sovereign/ banking crisis vicious cycle. All countries for which concerns about state solvency arose in recent years have seen a reversal in the previously steady increase of the share of government debt held by non residents. Germany, by contrast, has seen an increase in the share held by non residents. In the short term, these observations raise a question about the effectiveness of ECB provision of liquidity to banks as a means to alleviate the sovereign crisis. At a point when government bonds are considered risky assets, euro-area banks are faced with both balance sheet and reputational risks compared to their non-euro area counterparts, and may prove reluctant to increase this exposure further. In the longer term, the question is if and how euro-area regulators should set incentives to reduce banksâ?? heavy exposure to sovereigns. This issue should be given more attention in European policy discussions on how to strengthen the euro area. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:695&r=cba |
| By: | Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.) |
| Abstract: | Since the intensification of the crisis in September 2008, all euro area long-term government bond yields relative to the German Bund have been characterised by highly persistent processes with upward trends for countries with weaker fiscal fundamentals. Looking at the daily period 1 September 2008 - 4 August 2011, we find that three factors can explain the recorded developments in sovereign spreads: (i) an aggregate regional risk factor, (ii) the country-specific credit risk and (iii) the spillover effect from Greece. Specifically, higher risk aversion has increased the demand for the Bund and this is behind the pricing of all euro area spreads, including those for Austria, Finland and the Netherlands. Country-specific credit ratings have played a key role in the developments of the spreads for Greece, Ireland, Portugal and Spain. Finally, the rating downgrade in Greece has contributed to developments in spreads of countries with weaker fiscal fundamentals: Ireland, Portugal, Italy, Spain, Belgium and France. JEL Classification: G15, F36. |
| Keywords: | Sovereign spreads, credit ratings, spillovers. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111419&r=cba |
| By: | Andrzej Torój (Ministry of Finance, Poland) |
| Abstract: | We develop a framework for assessing the welfare implications of the new EU's Excessive Imbalance Procedure (EIP) to be implemented in 2012, with a special focus on the current account (CA) constraint. For this purpose, we apply a New Keynesian 2-region, 2-sector DSGE model, using the second order Taylor approximation of the households' utility around the steady state as a standard measure of welfare. The compliance with the CA criterion is ensured by modifying the policymakers' loss function in line with Woodford's (2003) treatment of the zero lower bound of nominal interest rates. The introduction of EIP threshold on CA balance results in a welfare loss equivalent to steady-state decrease in consumption of 0.105% after the euro adoption or 0.033% before that. If we consider the 4% threshold on current plus capital account (rather than current account alone), this cost decreases to 0.019 under the euro and approximately a half of that without the euro. EIP can be seen as a factor augmenting the cost of euro adoption. |
| Keywords: | Excessive Imbalance Procedure, EMU, DSGE, welfare, constrained optimum policy |
| JEL: | C54 D60 E42 F32 |
| Date: | 2012–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:fpo:wpaper:10&r=cba |
| By: | Pfajfar, D.; Santoro, E. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of pass-through of the policy rate to bank-lending rates. Strong cost-side effects heavily constrain the policy rate response to inflation from above, so that inflation tar- geting policies may not be capable of ensuring REE uniqueness. In such cases, it is advisable to combine inflation responses with an appropriate reaction to the output gap and/or firm profitability. The negative reaction of real activity and asset prices to inflationary shocks adds a negative force to inflation responses that counteracts the borrowing cost effect and avoids expectations of higher inflation to become self-fulfilling. |
| Keywords: | Monetary Policy;Cost Channel;Asset Prices;Determinacy;E-stability. |
| JEL: | E31 E32 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012010&r=cba |
| By: | Marcello Pericoli (Bank of Italy) |
| Abstract: | Estimates of the real term structure for the euro area implied by French index-linked bonds are obtained by means of a smoothing spline methodology. The real term structure allows computation of the constant-maturity inflation compensation, which is compared with the surveyed inflation expectations in order to obtain a rough measure of the inflation risk premium. The comparison between the inflation compensation and the inflation swap shows that the two variables are closely interlinked but differently affected by illiquidity during periods of stress. The methodology used in this paper is quite effective at capturing the general shape of the real term structure while smoothing through idiosyncratic variations in the yields of index-linked bonds. Real interest rates tend to be quite stable at longer horizons and the average 10-year real rate from 2002 to 2009 is close to 2 per cent. Furthermore, evidence is found that inflation compensation was held down in the period 2008-09 by an increase in the liquidity premium of index-linked bonds. |
| Keywords: | index-linked bond, real term structure, inflation compensation, inflation risk premium, smoothing spline |
| JEL: | C02 G10 G12 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_841_12&r=cba |
| By: | Christian Glocker (WIFO); Pascal Towbin |
| Abstract: | When dealing with credit booms driven by capital inflows, monetary authorities in emerging markets are often reluctant to raise interest rates, as they fear that an increase attracts even more capital and appreciates the currency. A number of countries therefore use reserve requirements as an additional policy instrument. The present study provides evidence on their macroeconomic effects. We estimate a vector autoregressive (VAR) model for the Brazilian economy and identify interest rate and reserve requirement shocks. For both instruments a discretionary tightening leads to a decline in domestic credit. We find, however, very different effects for other macroeconomic aggregates. In contrast to interest rate policy, a positive reserve requirement shock leads to an exchange rate depreciation and an improvement in the current account, but also to an increase in prices. The results suggest that reserve requirement policy can complement interest rate policy in pursuing a financial stability objective, but cannot be its substitute with regards to a price stability objective. |
| Keywords: | Reserve Requirements, Capital Flows, Monetary Policy, Business Cycle |
| Date: | 2012–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2012:i:420&r=cba |
| By: | Francesco Giavazzi; Michael McMahon |
| Abstract: | This paper provides new evidence on the effects of fiscal policy by studying, using household-level data, how households respond to shifts in government spending. Our identification strategy allows us to control for time-specific aggregate effects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth effects associated with a shift in spending. We find significant heterogeneity in households' response to a spending shock; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall. |
| JEL: | D12 E21 E24 E62 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17837&r=cba |
| By: | Magdalena Szyszko (Wyższa Szkoła Bankowa w Poznaniu, Katedra Bankowości i Rynku Finansowego) |
| Abstract: | This paper focuses on the associations between the inflation forecasts of the central bank and inflation expectations of the households. The first part is of a descriptive nature. It gives the theoretical background of modern monetary policy focusing on the role of expectations. It also presents the idea of inflation forecast targeting. Then the framework of the inflation forecast targeting in four countries: the Czech Republic, Hungary, Poland and Romania is presented. The empirical part of the study is an attempt to find associations between the inflation forecasts results and inflation expectations of consumers derived on the basis of surveys. The theory gives sound background for the existence of such relationships.The interdependences are tested in several ways. The last part of the paper focuses on the results and conclusions. |
| Keywords: | inflation forecasts, inflation forecasts targeting, inflation expectations |
| JEL: | E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:105&r=cba |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.); Lucio Sarno (Finance Faculty, Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UK and CEPR.); Gabriele Zinna (Bank of England, Threadneedle Street, London EC2R 8AH, UK.) |
| Abstract: | This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011), as an attempt to evaluate its potential for explaining the poor empirical performance of traditional exchange rate models. This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and a decade of proprietary data on order flow, we find empirical evidence that strongly supports the empirical implications of the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates. The findings have implications for exchange rate modelling, suggesting that a more accurate understanding of exchange rates requires taking into account the role of scapegoat factors and their time-varying nature. JEL Classification: F31, G10. |
| Keywords: | Scapegoat, exchange rates, economic fundamentals, survey data, order flow. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111418&r=cba |
| By: | Alexander Chudik (Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, Texas 75201, USA and CIMF.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.) |
| Abstract: | The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental di¤erences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a flight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. JEL Classification: E44, F3, C5. |
| Keywords: | Global financial crisis, sovereign debt crisis, liquidity, risk, capital flows, transmission, high dimensional VARs, advanced economies, emerging market economies. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111416&r=cba |
| By: | Robert Kollmann; Werner Roeger; Jan in'tVeld |
| Abstract: | A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment. |
| Keywords: | State support for banks; financial crises; fiscal stimulus; real activity |
| JEL: | E62 E63 G21 G28 H25 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/108554&r=cba |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.) |
| Abstract: | The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. JEL Classification: F30, F31. |
| Keywords: | Capital controls, capital flows, exchange rates, financial stability, economic policy, G20. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111415&r=cba |
| By: | Leonardo Gambacorta (Bank for International Settlements); Paolo Emilio Mistrulli (Bank of Italy) |
| Abstract: | A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank-specific characteristics affect the functioning of the credit market in an economy-wide crisis, when banks may find it difficult to perform the role of shock absorbers. We investigate how bank-specific characteristics (size, liquidity, capitalization, funding structure) and the bank-firm relationship have influenced interest rate setting since the collapse of Lehman Brothers. Unlike the existing literature, which has focused chiefly on the amount of credit granted during the crisis, we look at its cost. The data on a large sample of loans from Italian banks to non-financial firms suggest that close lending relationships kept firms more insulated from the financial crisis. Further, spreads increased by less for the customers of well-capitalized, liquid banks and those engaged mainly in traditional lending business. |
| Keywords: | bank interest rate setting, lending relationship, bank lending channel, financial crisis. |
| JEL: | G21 E44 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_829_11&r=cba |
| By: | Paul Cavelaars; Joost Passenier |
| Abstract: | This paper gives an overview of the recent literature on bank business models, structured along what we deem to be the three central questions when analysing business models. By doing so, we endeavour to provide the recent shift in prudential supervision towards the analysis of bank business models with a sound economic basis. The bottom-line for supervisors - in our view - is that it is essential to understand where the profit comes from and what risks the bank or the banking sector is exposed to in generating those profits. |
| Keywords: | banking; business model |
| JEL: | G21 G28 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:336&r=cba |
| By: | Christiane Baumeister; Lutz Kilian |
| Abstract: | Recently, there has been increased interest in real-time forecasts of the real price of crude oil. Standard oil price forecasts based on reduced-form regressions or based on oil futures prices do not allow consumers of forecasts to explore how much the forecast would change relative to the baseline forecast under alternative scenarios about future oil demand and oil supply conditions. Such scenario analysis is of central importance for end-users of oil price forecasts interested in evaluating the risks underlying these forecasts. We show how policy-relevant forecast scenarios can be constructed from recently proposed structural vector autoregressive models of the global oil market and how changes in the probability weights attached to these scenarios affect the upside and downside risks embodied in the baseline real-time oil price forecast. Such risk analysis helps forecast users understand what assumptions are driving the forecast. An application to real-time data for December 2010 illustrates the use of these tools in conjunction with reduced-form vector autoregressive forecasts of the real price of oil, the superior realtime forecast accuracy of which has recently been established. |
| Keywords: | Econometric and statistical methods; International topics |
| JEL: | Q43 C53 E32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-1&r=cba |
| By: | Gregory H. Bauer; Antonio Diez de los Rios |
| Abstract: | We construct a multi-country affine term structure model that contains unspanned macroeconomic and foreign exchange risks. The canonical version of the model is derived and is shown to be easy to estimate. We show that it is important to impose restrictions (including global asset pricing, carry trade fundamentals and maximal Sharpe ratios) on the prices of risk to obtain plausible decompositions of forward curves. The forecasts of interest rates and exchange rates from the restricted model match those from international survey data. Unspanned macroeconomic variables are important drivers of international term and foreign exchange risk premia as well as expected exchange rate changes. |
| Keywords: | Asset Pricing; Exchange rates; Interest rates |
| JEL: | E43 F31 G12 G15 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-5&r=cba |
| By: | Marcello Pericoli (Bank of Italy) |
| Abstract: | This paper uses the celebrated no-arbitrage affine Gaussian term structure model applied to index-linked and standard government bonds to derive expected inflation rates and inflation risk premia, in the euro area and in the US. Maximum likelihood estimates show that the model describes the evolution of the nominal and real term structures by using three latent factors which can be interpreted as two real factors and one inflation factor. These provide important information on expected inflation and inflation risk premia. The results highlight some striking differences between the euro area and the US. In the US, forward inflation risk premia become sizable around the start of the late-2000s financial crisis and considerably increase just before the adoption of the first unconventional monetary policy measures in March 2009. By contrast, in the euro area forward inflation risk premia remain unchanged even after the adoption of the unconventional monetary policy measures following the most acute phases of the financial crisis, in October 2008 and in May 2010. However, long-term inflation expectations have been well anchored over the past years. |
| Keywords: | real and nominal term structure, inflation risk premium, affine term structure, Kalman filter |
| JEL: | C02 G10 G12 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_842_12&r=cba |
| By: | Niels Johannesen (Department of Economics - University of Copenhagen - University of Copenhagen); Gabriel Zucman (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | During the financial crisis, G20 countries compelled tax havens to sign bilateral treaties providing for exchange of bank information. Is it the end of bank secrecy? Exploiting a unique panel dataset, we study how the treaties affected bank deposits in tax havens. Our results suggest that most tax evaders did not respond to the treaties but that a minority responded by transferring their deposits to havens not covered by a treaty. Overall, the G20 tax haven crackdown caused a modest relocation of deposits between havens but no significant repatriation of funds: the era of bank secrecy is not yet over. |
| Keywords: | Tax havens ; Tax evasion |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00665054&r=cba |
| By: | Lahura, Erick (Banco Central de Reserva del Perú) |
| Abstract: | In order to quantify the effects of monetary policy, this paper employs an alternative empirical measure of monetary policy shocks based on market expectations obtained from media and survey information in Peru. Using monthly data for the period 2003-2011, we use the proposed measure as a variable representing exogenous variation in monetary policy and evaluate its dynamic impact on output and prices. The results show a coherent picture of the effects of monetary policy compared to alternative approaches in terms of both the magnitude and the timing of the effects. |
| Keywords: | Monetary policy shocks, media, survey |
| JEL: | E52 E58 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2012-005&r=cba |
| By: | Joon-Ho Hahm; Frederic S. Mishkin; Hyun Song Shin; Kwanho Shin |
| Abstract: | This paper examines macroprudential policies in open emerging economies. It discusses how the recent financial crisis has provided a rationale for macroprudential policies to help manage the economy and the need for policymakers to monitor the financial cycle and systemic risks. It also discusses one particularly promising measure of the state of the financial cycle, the growth of non-core liabilities of the financial sector, and evaluates macroprudential policy frameworks. The paper uses Korea as an example and conducts an empirical evaluation of non-core liabilities of Korean banks as a measure of the financial cycle. |
| JEL: | E44 E52 E58 G28 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17780&r=cba |
| By: | Ali, Heba |
| Abstract: | Inflation as a phenomenon has witnessed remarkable changes starting from mid-eighties of the last century. Inflation rates have become less persistent, less responsive to supply side shocks. In addition, the relative importance of demand pull inflation as one of the major determinants of inflation has decreased due to efficient monetary policies that have been adopted by central banks all over the world to reduce inflation based on anchoring inflation expectations. Moreover, the slope of Phillips curve has flattened as many factors have appeared to be more influential on inflation rather than output gap, namely inflation expectations. These changes constitute in the new economic literature what so called “Inflation Dynamics”. In this context, this study focuses on analyzing inflation dynamics in Egypt in (1980-2009) in order to identify to what extent “Inflation Dynamics” in Egypt is different from or similar to those witnessed globally. The study applied a Vector Auto Regressive model (VAR) and other econometrics models to analyze “Inflation Dynamics” in Egypt in three sub periods: the 1980s, the 1990s and the first decade of the new millennium. The study concluded that Inflation Dynamics in Egypt is completely different from those observed globally. Inflation rates in Egypt have become more persistent especially starting from 2000; Inflation shocks are now lasting longer and have a long-term impact on the future inflation paths. On the other hand, demand bull inflation still considers one of the most important inflation determinants, as it is solely responsible for explaining 30% of the changes in inflation rates. In addition, the study confirmed that inflation rates in Egypt have become more responsive to supply side shocks starting from 2006. As for the slope of Phillips curve, the study confirmed that similar to the changes observed globally, the slope of Phillips Curve for the Egypt economy has flattened reflecting the increasing importance of other inflation determinants rather than output gap. |
| Keywords: | Inflation; Inflation dynamics; Inflation persistence; The Egyptian economy; Demand-pull inflation; Cost-push inflation; Inflation expectations; markets and prices rigidities; Phillips curve; Government debt; Monetary policies; Vector Auto Regression (VAR) |
| JEL: | E31 |
| Date: | 2011–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36331&r=cba |