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on Monetary Economics |
| By: | Kevin Clinton (Queen's University) |
| Abstract: | Core inflation is a useful concept for the theory and practice of monetary policy. The Bank of Canada maintains, in addition, that core inflation should be, and has in fact been, a useful predictor of headline inflation. Under the bank’s policy of inflation targeting, however, this is incorrect: over horizons of a year or more the best forecast should be the 2 percent target; and core inflation should have no predictive content. Post- 1995 evidence confirms this argument. |
| Keywords: | TBA |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1077&r=mon |
| By: | Jan Strasky |
| Abstract: | This paper analyses the performance of the inflation forecast-based (IFB) monetary policy rules in the quarterly projection model of the Czech National Bank. The paper begins by reviewing the model and its parametrization, including the variance-covariance matrix of disturbances employed in simulations. The main part of the paper presents the results of an extensive grid search over various targeting horizons and coefficient values for a simple IFB rule with optimized coefficients, and suggests three possibilities for improvement: a shorter targeting horizon, a higher relative weight placed on inflation gap stabilization, and a lower coefficient on partial interest rate adjustment. These results are supported by an analysis of the impact of individual shocks on the optimal coefficients of the IFB rule. The last section of the paper argues for inclusion of the real exchange rate stabilization objective in the policy maker’s loss function and repeats the grid search for an optimal rule allowing for the real exchange rate feedback term. The previous results are not dramatically altered and we conclude that the stabilization properties of the extended rules are comparable with the those of the original optimized IFB rules. |
| Keywords: | Exchange rates, inflation targeting, monetary policy rules, open economy. |
| JEL: | E52 E58 F41 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2005/05&r=mon |
| By: | Lucjan T. Orlowski; Kirsten Lommatzsch; |
| Abstract: | We demonstrate that bond yield compression is under way in the countries converging to the euro and that German yields are significant drivers of local currency yields. Based on the evidence from Poland, Hungary and the Czech Republic, we conclude that these new Member States of the European Union are ready to adopt the euro without risking a disruptive shock to their financial stability. This message transpires from investigating the daily volatility dynamics of local bond yields as a function of German yields, conditional on changes in local term spreads, exchange rates and adjustments to central bank reference rates. Similar results of high sensitivity of local currency bond yields to changes in German yields are obtained from testing monthly series of macroeconomic fundamentals. These findings provide evidence of the potential usefulness of term spreads as indicators of monetary convergence. |
| Keywords: | term spread, term premium, yield compression, monetary convergence, new Member States, EMU, conditional volatility, asymmetric GARCH models |
| JEL: | E43 E44 F36 |
| Date: | 2005–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-799&r=mon |
| By: | Katerina Arnostova; Jaromir Hurnik |
| Abstract: | Due to significant lags between a monetary policy action and the subsequent responses in the economy, understanding the transmission mechanism is of primary importance for conducting monetary policy. This paper analyses the monetary policy transmission mechanism using VAR models - the most widely used empirical methodology for analyzing the transmission mechanism in the Czech economy. Using the VAR methodology, the paper tries to evaluate the effects of an exogenous shock to monetary policy. The results show that an unexpected monetary policy tightening leads to a fall in output, whereas prices remain persistent for a certain time. The exchange rate reaction then heavily depends on the data sample used. Although it is clear that due to the rather short time span of the data, the results should be taken with caution, they at least show that the basic framework of how monetary policy affects the economy does not differ significantly either from what would be predicted by the theory or from the results obtained for more developed economies. |
| Keywords: | Impulse response, monetary policy, transmission mechanism, vector autoregressions. |
| JEL: | E37 E52 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/04&r=mon |
| By: | Balazs Egert; Lubos Komarek |
| Abstract: | This paper studies the impact of daily official foreign exchange interventions on the Czech koruna's exchange rate vis-a-vis the euro (the German mark prior to 1999) from 1997 to 2002. Both the event study methodology, extended with official interest rate moves, and a variety of GARCH models reveal that central bank interventions, especially koruna purchases, seem to have been relatively ineffective from 1997 to mid-1998 compared to the size of the interventions. From mid-1998 to 2002, however, koruna sales turn out to be effective in smoothing the path of the exchange rate up to 60 days. Nevertheless, the event study approach indicates that the success of FX interventions may be intimately related to the coordination of intervention and interest rate policies. |
| Keywords: | Central bank intervention, Czech Republic, event study, foreign exchange intervention, GARCH, interest rate policy, transition economies. |
| JEL: | F31 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/07&r=mon |
| By: | Roman Horvath |
| Abstract: | This paper estimates the medium-term determinants of the bilateral exchange rate variability and exchange rate pressures for 20 developed countries in the 1990s. The results suggest that the optimum currency area criteria explain the dynamics of bilateral exchange rate variability and pressures to a large extent. Next, we predict exchange rate volatility and pressures for the Central and Eastern European Countries (CEECs). We find that the CEECs encounter exchange rate pressures at approximately the same level as the euro area countries did before they adopted the euro. |
| Keywords: | Euro Adoption, Exchange Rates, GMM, Optimum Currency Area. |
| JEL: | F15 F31 E58 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/08&r=mon |
| By: | Michael Brandmeier |
| Abstract: | The real economic effects of the considerably high appreciation in Central European Economies (CEE) are controversially disputed in the eve of the European Monetary Union (EMU) entry of several CEE economies. The Balassa-Samuelson-effect was made responsible for the expectation of higher inflation rates in CEE than in the EMU in the next years. Higher inflation rates will deteriorate the price competitiveness of the export sectors in the CEE countries because of real appreciation. This paper focuses on the effects of labour productivity differences in several industrial and service sectors on the consumer prices. Labour productivity changes are affected by the technology impact on labour demand and by the relative wage increases following from tensions of regional labour markets because of rising prices and skilled labour shortage. Real appreciation is determined by labour productivity differences and by capital good imports. We conclude that the negative coherence between real appreciation and the endangered price competitiveness of the export sectors in CEE has to be taken into account, unless the negative experience of loss of competitiveness because of sudden real appreciation in Eastern Germany will take place on a large scale in the eastern part of the enlarged euro area. |
| Keywords: | European Monetary Union, inflation differences, Balassa-Samuelson-effect, Central and Eastern Europe |
| JEL: | E31 F33 F41 |
| Date: | 2006–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:55&r=mon |
| By: | Javier Gómez Pineda |
| Abstract: | Capital flows often confront central banks with a dilemma: to contain the exchange rate or to allow it to float. To tackle this problem, an equilibrium model of capital flows is proposed. The model captures sudden stops with shocks to the country risk premium. This enables the model to deal with capital outflows as well as capital inflows. From the equilibrium conditions of the model, I derive an expression for the accounting of net foreign assets, which helps study the evolution of foreign debt under di¤erent policy experiments. The policy experiments point to three main conclusions. First, interest rate defenses of the exchange rate can deliver recessions during capital outflows even in financially resilient economies. Second, during unanticipated reversals in capital inflows, the behavior of foreign debt is not necessarily improved by containing the exchange rate. Third, an economy can gain resilience not by simply shifting the currency denomination of debt, but by both, shifting the denomination and floating the currency. |
| Keywords: | Sudden stops; Credit booms; Country risk; Fear of floating; Debt sustainability |
| JEL: | F41 F32 G15 H62 H63 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:395&r=mon |
| By: | Rasmus Fatum (School of Business, University of Alberta); Michael M. Hutchison (Department of Economics, University of California Santa Cruz) |
| Abstract: | Studies of central bank intervention are complicated by the fact that we typically observe intervention only during periods of turbulent exchange markets. Furthermore, entering the market during these particular periods is a conscious “self-selection” choice made by the intervening central bank. We estimate the “counterfactual” exchange rate movements that allow us to determine what would have occurred in the absence of intervention and we introduce the method of propensity score matching to the intervention literature in order to estimate the “average treatment effect” (ATE) of intervention. Specifically, we estimate the ATE for daily Bank of Japan intervention over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period, ineffective during 2003 and counterproductive during the first quarter of 2004. |
| Keywords: | foreign exchange intervention; Bank of Japan; self-selection, matching methods |
| JEL: | E58 F31 G15 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:06-04&r=mon |
| By: | Roman Sustek |
| Abstract: | Micro-level empirical evidence suggests that plant managers adjust production by utilizing capital along nonconvex margins. Existing models of the monetary transmission mechanism (MTM), however, assume that production units adjust output smoothly. The objective of this paper is to determine whether such plant-level nonconvexities affect the MTM in a quantitatively significant way. To this end we replace the smooth production function in a prototypical model of the MTM with heterogeneous plants that adjust output along three nonconvex margins: intermittent production, shiftwork, and weekend work. We calibrate the model such that steady-state utilization of these margins is in line with U.S. data. We find that the nonconvexities dampen the responses of aggregate economic activity and prices to monetary policy shocks by about 50 percent relative to the standard model, thereby significantly reducing the effectiveness of the MTM. Due to heterogeneity and discrete choices at the plant level, monetary policy affects the output decisions of only “marginal†plants – those close to being indifferent between alternative production plans. In equilibrium the measure of such plants is rather small. In addition, contrary to popular belief, the quantitative effects of monetary policy shocks on aggregate output do not significantly change with the degree of capacity utilization over the business cycle. The effects on inflation, however, do change substantially over the business cycle when monetary policy shocks are persistent. |
| Keywords: | Asymmetries, heterogenous plants, monetary transmission mechanism, nonconvexities, nonlinear approximation. |
| JEL: | E22 E23 E32 E52 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/09&r=mon |
| By: | Sophocles Mavroeidis |
| Abstract: | We re-examine the evidence on the new Phillips curve model of Gali and Gertler (Journal of Monetary Economics 1999) using the conditional score test of Kleibergen (Econometrica 2005), which is robust to weak identification. In contrast to earlier studies, we find that US postwar data are consistent both with the view that inflation dynamics are forward-looking, and with the opposite view that they are predominantly backward-looking. Moreover, the labor share does not appear to be a relevant determinant of inflation. We show that this is an important factor contributing to the weak identification of the Phillips curve. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2006-13&r=mon |
| By: | Marek Hlavacek; Michael Konak; Josef Cada |
| Abstract: | One of the most significant factors influencing the liquidity of the financial market is the amount of currency in circulation. Although the central bank is responsible for the distribution of the currency it cannot assess the demand for the currency, as that demand is influenced by the non-banking sector. Therefore, the amount of currency in circulation has to be forecasted. This paper introduces a feedforward structured neural network model and discusses its applicability to the forecasting of currency in circulation. The forecasting performance of the new neural network model is compared with an ARIMA model. The results indicate that the performance of the neural network model is better and that both models might be applied at least as supportive tools for liquidity forecasting. |
| Keywords: | Neural network, seasonal time series, currency in circulation. |
| JEL: | C45 C53 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/11&r=mon |
| By: | Balázs Égert; ; |
| Abstract: | This paper investigates the importance of the Balassa-Samuelson effect for two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey) and two CIS countries (Russia and Ukraine). The paper first studies the basic assumptions of the Balassa-Samuelson effect using yearly data, and then undertakes an econometric analysis of the assumptions on the basis of monthly data. The results suggest that for most of the countries, there is either amplification or attenuation, implying that any increase in the open sector’s productivity feeds onto changes in the relative price of non-tradables either imperfectly or in an over-proportionate manner. With these results as a background, the size of the Balassa-Samuelson effect is derived. For this purpose, a number of different sectoral classification schemes are used to group sectors into open and closed sectors, which makes a difference for some of the countries. The Balassa-Samuelson effect is found to play only a limited role for inflation and real exchange rate determination, and it seems to be roughly in line with earlier findings for the eight new EU member states of Central and Eastern Europe. |
| Keywords: | Balassa-Samuelson effect, productivity, inflation, real exchange rate, transition, South Eastern Europe, CIS, Turkey |
| JEL: | E31 O11 P17 |
| Date: | 2005–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-796&r=mon |
| By: | Lubos Komarek; Martin Melecky |
| Abstract: | The behavioural equilibrium exchange rate (BEER) model of the Czech koruna is derived in this paper and estimated by three methods suitable for non-stationary time series. The potential determinants of the real equilibrium exchange rate considered are the productivity differential, the interest rate differential, the terms of trade, net foreign direct investment, net foreign assets, government consumption and the degree of openness. We find that the Czech koruna was on average undervalued over the period 1994 to 2004 by about 7 percent with respect to the estimated BEER. The significant determinants of the equilibrium exchange rate of the Czech koruna appear to be the productivity differential, the real interest rate differential, the terms of trade and net foreign direct investment. |
| Keywords: | Czech Republic, equilibrium exchange rate modelling, ERM II, exchange rate misalignments, time-series analysis. |
| JEL: | C52 C53 E58 E61 F31 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/05&r=mon |
| By: | Balázs Égert,; László Halpern; Ronald MacDonald |
| Abstract: | In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size. |
| Keywords: | equilibrium exchange rate, Purchasing Power Parity, trend appreciation, Balassa-Samuelson effect, productivity, inflation differential, tradable prices, regulated prices, Fundamental Equilibrium Exchange Rate, Behavioural Equilibrium Exchange Rate, Permanent Equilibrium Exchange Rate, NATREX, CHEER, transitional economies, euro. |
| JEL: | C15 E31 F31 O11 P17 |
| Date: | 2005–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-793&r=mon |
| By: | Stephen G. Cecchetti |
| Abstract: | At the dawn of the 21st century, property and equity ownership are spread more broadly across the population than they once were. One consequence of this is that asset price booms and crashes now have a direct impact on general welfare. The fact that bubbles distort nearly all economic decisions gives policymakers a stronger interest in asset price stability. In this essay I examine the theoretical and empirical case for the existence of equity and property bubbles, and then summarize the economic distortions that they create. The evidence suggests increasing our attention on property prices. I go on to discuss the possible policy responses, including examining the consequences of changing the way in which housing is included in standard aggregate price measures. |
| Keywords: | . Central bank policy, equity price bubbles, housing price bubbles. |
| JEL: | E5 G0 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/14&r=mon |
| By: | José Gómez González; Fernando Grosz |
| Abstract: | In this paper we find empirical evidence of bank lending channel for Colombia and Argentina. As for Argentina, we do not find evidence that changes in the interbank interest rate affect the growth rate of total loans directly. However, it does indirectly through interactions: the interbank interest rate affects the loan supply through its interactions with capitalization and liquidity. As for Colombia, there is direct bank lending channel, which is reinforced through interactions with capitalization and liquidity. Also, using a panel data of more than 3300 firms, we provide additional support to the existence of a bank lending channel for Colombia. |
| Date: | 2006–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002517&r=mon |