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on International Finance |
| By: | Günter Coenen (Directorate General Research, European Central Bank); Volker Wieland (Professur für Geldtheorie und -politik, Johann-Wolfgang-Goethe Universität) |
| Abstract: | In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable. |
| Keywords: | monetary policy rules, zero-interest-rate bound, liquidity trap, rational expectations, nominal rigidities, exchange rates |
| JEL: | E31 E52 E58 E61 |
| Date: | 2004–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200414&r=ifn |
| By: | Markus Haas (University of Munich); Stefan Mittnik (University of Munich); Bruce Mizrach (Rutgers University) |
| Abstract: | Financial markets embed expectations of central bank policy into asset prices. This paper compares two approaches that extract a probability density of market beliefs. The first is a simulatedmoments estimator for option volatilities described in Mizrach (2002); the second is a new approach developed by Haas, Mittnik and Paolella (2004a) for fat-tailed conditionally heteroskedastic time series. In an application to the 1992-93 European Exchange Rate Mechanism crises, that both the options and the underlying exchange rates provide useful information for policy makers. |
| Keywords: | Options; Implied Probability Densities; GARCH; Fat-tails; Exchange Rate Mechanism |
| JEL: | G12 G14 F31 |
| Date: | 2005–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200509&r=ifn |
| By: | Torben G. Andersen (Department of Finance, Northwestern University and NBER); Tim Bollerslev (Departments of Economics and Finance, Duke University and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania and NBER); Clara Vega (Department of Economics, University of Rochester) |
| Abstract: | We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing “cash flow” and “discount rate” effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects. |
| Keywords: | Asset Pricing; Macroeconomic News Announcements; Financial Market Linkages; Market Microstructure; High-Frequency Data; Survey Data; Asset Return Volatility; Forecasting. |
| JEL: | F3 F4 G1 C5 |
| Date: | 2004–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200419&r=ifn |
| By: | Michael W. Brandt (Department of Finance, University of Pennsylvania, and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania, and NBER) |
| Abstract: | We extend the important idea of range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator that is motivated by financial economic considerations (the absence of arbitrage), in addition to statistical considerations. We show that, unlike other univariate and multivariate volatility estimators, the range-based estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading. Finally, we provide an empirical example illustrating the value of the high-frequency sample path information contained in the range-based estimates in a multivariate GARCH framework. |
| Keywords: | Range-based estimation, volatility, covariance, correlation, absence of arbitrage, exchange rates, stock returns, bond returns, bid-ask bounce, asynchronous trading |
| Date: | 2004–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200407&r=ifn |
| By: | Filippo Altissimo; Pierpaolo Benigno; Diego Rodriguez Palenzuela |
| Abstract: | This paper analyzes the long-run determinants of inflation differentials in a monetary union. First, we aim at establishing some stylized facts relating the regional dispersion in headline inflation rates in the euro area as well as in the main components of the consumer price index. We find that a relatively large proportion of it occurs in the Service category of the EU's harmonized consumer price index (HICP). We then lay out a model of a monetary union with fully flexible prices, the long-run properties of which are analyzed. Our model departs in several respect from the Balassa-Samuelson hypotheses. Our results are in contrast with the result that movements in the real exchange rate are mainly driven by regionally asymmetric productivity shocks in the traded sectors. Our results point instead to relative variations in productivity in the non-traded sector as the primary cause of price and inflation differentials, with shocks to productivity in the traded sector being largely absorbed by movements in the terms of trade in the regional economies. These shocks are also found to largely drive the variability of real wages at the country level. |
| JEL: | E31 F41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11473&r=ifn |