|
on Monetary Economics |
| By: | Andrew Atkeson; Patrick J. Kehoe |
| Keywords: | Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:662&r=mon |
| By: | Aleksander Berentsen; Cyril Monnet |
| Abstract: | Channel systems for conducting monetary policy are becoming increasingly popular. Despite its popularity, the consequences of implementing policy with a channel system are not well understood. The authors develop a general equilibrium framework of a channel system and study the optimal policy. A novel aspect of the channel system is that a central bank can "tighten" or "loosen" its policy without changing its policy rate. This policy instrument has so far been overlooked by a large body of the literature on the optimal design of interest-rate rules. |
| Keywords: | Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-7&r=mon |
| By: | Carlo Rosa |
| Abstract: | This paper examines and compares the communication strategies of the Federal Reserve and the European Central Bank, and their effectiveness. First we do a comparative study exercise. We find that on monetary policy committee meeting days both the ECB and the Fed can move market rates using either monetary policy or news shocks. However, the response of the long-end of the American term structure to the surprise component of Fed's statements is significantly larger than the reaction of European long-term yields to ECB's announcements. This result is intimately related to the higher transparency of U.S. Fed statements compared to ECB announcements rather than to the different institutional mandate of the two central banks. Second, we investigate the cross-effects i.e. the Fed's ability to move European interest rates and the corresponding ECB's capacity to move American rates. We find that the Fed has been more able to move the European interst rates of all maturities than the ECB to move American rates. This finding is tied to the predominance of dollar fixed income assets rather than to an attempt of the ECB to mimic the Fed. |
| Keywords: | European Central Bank, U.S. Federal Reserve, central bank communication, monetary policy and news shocks, term structure of interest rates |
| JEL: | E52 E58 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0855&r=mon |
| By: | Dean Croushore |
| Abstract: | This paper examines the characteristics of the revisions to the inflation rate as measured by the personal consumption expenditures price index both including and excluding food and energy prices. These data series play a major role in the Federal Reserve’s analysis of inflation. ; The author examines the magnitude and patterns of revisions to both PCE inflation rates. The first question he poses is: What do data revisions look like? The author runs a variety of tests to see if the data revisions have desirable or exploitable properties. The second question he poses is related to the first: Can we forecast data revisions in real time? The answer is that it is possible to forecast revisions from the initial release to August of the following year. Generally, the initial release of inflation is too low and is likely to be revised up. Policymakers should account for this predictability in setting monetary policy. |
| Keywords: | Inflation (Finance) ; Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-8&r=mon |
| By: | John V. Duca; Tao Wu |
| Abstract: | Laubach and Williams (2003) employ a Kalman filter approach to jointly estimate the neutral real federal funds rate and trend output growth using an IS relationship and an output gap based inflation equation. They find a positive link between these two variables, but also much error surrounding neutral real rate estimates. We modify their approach by including variables for regulations on deposit interest rates and on wages and prices. These variables are statistically significant and notably affect estimates of two policy relevant coefficients: the sensitivity of output to the real interest rate and that of inflation to the output gap. |
| Keywords: | Monetary policy ; Federal funds rate |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0807&r=mon |
| By: | Peter Stella; Åke Lonnberg |
| Abstract: | Conventional economic policy models focus only on selected elements of the central bank balance sheet, in particular monetary liabilities and sometimes foreign reserves. The canonical model of an "independent" central bank assumes that it chooses money (or an interest rate) unconstrained by a need to generate seignorage for itself or the government. Whereas a long line of literature has emphasized the dangers of fiscal dominance influencing the conduct of monetary policy, this paper considers the relatively novel idea that an independent central bank could be constrained in achieving its policy objectives by its own balance sheet situation. If one accepts this potential constraint as a valid concern, the financial strength of the central bank as a stand-alone entity becomes highly relevant for ascertaining monetary policy credibility. We consider several strands of evidence that clearly indicate fiscal backing for central banks cannot be assumed, and hence financial independence is relevant to operational independence. First, we examine 135 central bank laws to illustrate the variety of legal approaches adopted with respect to central bank financial independence. Second, we examine the same data set with regard to central bank recapitalization provisions to show that even in cases where the treasury is nominally responsible for keeping the central bank financially strong, it may do so in purely a cosmetic fashion. Third, we show that, in actual practice, treasuries have frequently not provided central banks with genuine financial support on a timely basis, leaving them excessively reliant on seignorage to finance their operations or forcing them to abandon policy objectives. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2008-13&r=mon |
| By: | Grégory Levieuge (Laboratoire d'Economie d'Orléans (LEO), UMR CNRS 6221); Alexis Penot (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France,) |
| Abstract: | Compared with the U.S., the amplitude of the European monetary policy rate cycle is strikingly narrow. Is it an evidence of a less reactive ECB? This observation can certainly reflect the preferences and then the strategy of the ECB. But its greater inertia must also be assessed in the light of the singularity of the European structure and of the shocks hitting it. From this perspective, several contributions assert that the nature, size and persistence of shocks mainly explain the different interest rate setting. Therefore, they rely on the idea that both areas share the same monetary policy rule and, more surprising, the same structure. This paper aims at examining this conclusions with an alternative modelling. The results confirm that the euro area and U.S. monetary policy rules are not fundamentally different. But we reject the differences of nature and amplitude of shocks. What is often interpreted as such is in fact the consequence of how distinctly both economies absorb shocks. So differences in the amplitude of the interest rate cycles in both areas are basically explained by structural dissimilarities. |
| Keywords: | interest rate, macroeconomic shocks, monetary policy rules, policy activism, structural divergence |
| JEL: | C51 E52 E58 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0804&r=mon |
| By: | Athanasios Orphanides; John C. Williams |
| Abstract: | This paper examines the robustness characteristics of optimal control policies derived under the assumption of rational expectations to alternative models of expectations. We assume that agents have imperfect knowledge about the precise structure of the economy and form expectations using a forecasting model that they continuously update based on incoming data. We find that the optimal control policy derived under the assumption of rational expectations can perform poorly when expectations deviate modestly from rational expectations. We then show that the optimal control policy can be made more robust by deemphasizing the stabilization of real economic activity and interest rates relative to inflation in the central bank loss function. That is, robustness to learning provides an incentive to employ a "conservative" central banker. We then examine two types of simple monetary policy rules from the literature that have been found to be robust to model misspecification in other contexts. We find that these policies are robust to empirically plausible parameterizations of the learning models and perform about as well or better than optimal control policies. |
| Keywords: | Rational expectations (Economic theory) ; Econometric models |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-05&r=mon |
| By: | Alexandre Sokic |
| Abstract: | This paper uses an analytical approach and the precise definition of money essentiality given by Scheinkman (1980) with the aim to establish a formal theoretical link between the possibility of hyperinflationary paths and the concept of money essentiality. In this respect the paper contributes to the understanding of the well known failure of Cagan based inflationary finance models to produce explosive hyperinflation. We consider two standard optimizing monetary models representing alternative ways of modelling the transaction role of money. The paper considers a money-in-the-utility-function model and a cash-in-advance model where representative agent’s preferences are represented by general utility functions. We show that modelling monetary hyperinflation with perfect foresight is closely linked to the concept of money essentiality as defined by Scheinkman (1980). The possibility of explosive monetary hyperinflation in a perfect foresight inflationary finance model always relies on a sufficient level of money essentiality. The main contribution of this paper is to show that, whether in a cash-in-advance or in a money-in-the-utility-function framework, this sufficient level of money essentiality does not depend on the specific way, cash-in-advance or moneyin- the-utility-function, of modelling the role of money as a medium of exchange. |
| Keywords: | monetary hyperinflation, inflation tax, money essentiality. |
| JEL: | E31 E41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2008-12&r=mon |
| By: | Mehrotra, Aaron (BOFIT); Kozluk , Tomasz (BOFIT) |
| Abstract: | We study the effects of Chinese monetary policy shocks on China’s major trading partners in East Asia by estimating structural vector autoregressive (SVAR) models for six economies in the region. We find that a monetary expansion in Mainland China leads to an increase in real GDP (temporary) and the price level (permanent) in a number of economies in our sample, most notably in Hong Kong and the Philippines. The impact could result from intertemporal substitution present in a general equilibrium framework which allows for positive domestic impacts of foreign monetary expansions. Our results emphasize the growing importance of China for its neighboring economies and the significance of Chinese shocks for the design of monetary policy in Asian economies. |
| Keywords: | monetary policy shocks; Asian production chain; SVAR; East Asia; China |
| JEL: | E52 F42 |
| Date: | 2008–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_005&r=mon |
| By: | Alexandre Sokic |
| Abstract: | This paper aims at providing some new theoretical support for money demand functions in monetary hyperinflation analysis given the well known failure of Cagan based inflationary finance models to produce explosive hyperinflation. An analytical approach is used to characterize the agents’ preferences which are compatible with monetary hyperinflation. In the context of a MIUF model, we show that the possibility of explosive hyperinflation paths depends on a sufficient level of money essentiality in the sense of Scheinkman (1980) which is conveyed by the agents’ preferences. This result emerges without any ad-hoc assumption implying the inclusion of some friction in the adjustment of some nominal variable. It suggests that monetary hyperinflation analysis under perfect foresight requires abandoning the Cagan money demand and adopting a demand for money respecting money essentiality. Theoretical support is brought to inelastic functional forms of money demand and specifically to the double-log schedule. |
| Keywords: | money demand, monetary hyperinflation, inflation tax, money essentiality. |
| JEL: | E31 E41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2008-13&r=mon |
| By: | Tao Wu |
| Abstract: | This paper examines the effectiveness of the new liquidity facilities that the Federal Reserve established in response to the recent financial crisis. I develop a noarbitrage based affine term structure model with default risk and conduct a thorough factor analysis of the counterparty default risk among major financial institutions and the underlying mortgage default risk. The new facilities' effectiveness is examined, by first separately examining their effects in relieving financial institutions' liquidity concerns and reducing the counterparty risk premiums, and then quantifying their overall effects in reducing financial strains in the inter-bank money market. ; Empirical results indicate that the Term Auction Facility (TAF) has a strong effect in reducing financial strains in the inter-bank money market, primarily through relieving financial institutions' liquidity concerns. Heightened uncertainty regarding the macroeconomy, financial markets, and mortgage default risk have significantly raised counterparty risk premiums among financial institutions, but have had little effect on their liquidity premiums. The Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), however, are found to have had less discernible effects so far in relieving financial strains in the Libor market. This is consistent with market observations of a weaker interest from primary dealers in participating in the TSLF auctions than banks have shown in tapping the TAF. |
| Keywords: | Liquidity (Economics) ; Monetary policy - United States ; Money market ; Financial markets ; Interbank market |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0808&r=mon |
| By: | James T. E. Chapman |
| Abstract: | Given the increasing interdependence of both financial systems and attendant payment and settlement systems a vital question is what form should optimal policy take when there are two connected payment systems with separate regulators. In this paper I show that two central banks operating in a non-cooperative way will not have an incentive to achieve the optimal allocation of goods. I further show that this non-cooperative outcome will be supported by a zero intraday interest rate and constant fixed exchange rate. This is in contrast to recent research; which has shown that domestically a zero intraday interest rate will achieve a social optimum and that the central bank has an incentive to achieve it. |
| Keywords: | Payment, clearing, and settlement systems; Exchange rate regimes |
| JEL: | E58 E42 F31 F33 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-17&r=mon |
| By: | Stephen Hansen; Michael F. McMahon |
| Abstract: | The use of independent committees for the setting of interest rates, such as the MonetaryPolicy Committee (MPC) at the Bank of England, is quickly becoming the norm in developedeconomies. In this paper we examine the issue of appointing external members (memberswho are outside the staff of the central bank) to these committees. We construct a model ofMPC voting behaviour, and show that members who begin voting for similar interest ratesshould not systematically diverge from each other at any future point. However, econometricresults in fact show that external members initially vote in line with internal members, butafter a year, begin voting for substantially lower interest rates. The robustness of this effect toincluding member fixed effects provides strong evidence that externals behave differentlyfrom internals because of institutional differences between the groups, and not someunobserved heterogeneity. We then examine whether career concerns can explain thesefindings, and conclude that they cannot. |
| Keywords: | Monetary Policy Committee (MPC), Bank of England, Committee Voting,Signalling |
| JEL: | E58 D71 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0862&r=mon |
| By: | Daron Acemoglu; Simon Johnson; Pablo Querubin; James A. Robinson |
| Abstract: | We argue that the question of whether and when policy reform works should be investigated together with the political economy factors responsible for distortionary policies in the first place. These not only determine the initial distortions, but also often shape policy in the post-reform environment. Distortionary policies are more likely to be adopted when politicians are unconstrained and unaccountable to citizens. This reasoning implies that policy reform should have modest effects in societies where the political system already places constraints on politicians. It also implies, however, that in societies with weak political constraints, which are often those adopting the most distortionary policies, policy reforms may be ineffective because the underlying political economy problems are not typically altered by these reforms. Policy reform should therefore have its largest effect in societies with intermediate levels of constraints. In addition, when policy reform is (partly) effective, it may lead to a deterioration in other (unreformed) components of policy in order to satisfy the underlying demands on politicians – a phenomenon we call the seesaw effect. We provide reduced-form evidence consistent with these ideas by looking at the effect of central bank independence on inflation. The evidence is consistent with the notion that central bank reforms have reduced inflation in societies with intermediate constraints and have had no or little effects in countries with the high and low levels of constraints. We also present some evidence suggesting that, consistent with the seesaw effect, in countries where central bank reforms reduce inflation, government expenditure tends to increase. |
| JEL: | E31 P16 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14033&r=mon |
| By: | Jean-Pierre Allégret (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France); Alain Sand-Zantman (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| Abstract: | This paper analyses the monetary consequences of the Latin-American trade integration process. We consider a sample of five countries –Argentina, Brazil, Chile, Mexico and Uruguay- spanning the period 1991-2007. The main question raised pertains to the feasibility of a monetary union between L.A. economies. To this end, we study whether this set of countries is characterized by business cycle synchronization with the occurrence of common shocks, a strong similarity in the adjustment process and the convergence of policy responses. We focus especially our attention on two points. First, we try to determine to what extent international disturbances influence the domestic business cycles through trade and/or financial channels. Second, we analyze the impact of the adoption of different exchange rate regimes on the countries’ responses to shocks. All these features are the main issues in the literature relative to regional integration and OCA process. |
| Keywords: | bayesian VAR, business cycles, Latin American countries, optimum currency area |
| JEL: | C32 E32 F42 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0809&r=mon |
| By: | Theodore M. Crone; N. Neil K. Khettry; Loretta J. Mester; Jason A. Novak |
| Abstract: | Two rationales offered for policymakers' focus on core measures of inflation as a guide to underlying inflation are that core inflation omits food and energy prices, which are thought to be more volatile than other components, and that core inflation is thought to be a better predictor of total inflation over time horizons of import to policymakers. The authors' investigation finds little support for either rationale. They find that food and energy prices are not the most volatile components of inflation and that depending on which inflation measure is used, core inflation is not necessarily the best predictor of total inflation. However, they do find that combining CPI and PCE inflation measures can lead to statistically significant more accurate forecasts of each inflation measure, suggesting that each measure includes independent information that can be exploited to yield better forecasts. |
| Keywords: | Inflation (Finance) |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-9&r=mon |
| By: | John H. Munro |
| Abstract: | This is a substantially revised version of an earlier Working Paper (posted in 2002, with a different title), based on much new data and other information. It re-examines Earl Hamilton’s famous 1929 thesis on ‘Profit Inflation’ and the ‘birth of modern industrial capitalism’: namely, that the inflationary forces of the Price Revolution era produced a widening gap between prices and wages, thus providing industrial entrepreneurs with windfall profits, which they reinvested in larger-scale, more capital intensive forms of industry. Hamilton’s analyses of price and wage data for 16th- and 17th-century Spain, France, and England led him to conclude that: Spain had enjoyed virtually no ‘profit inflation’, since wages had generally kept pace with prices; and that early-modern England had experienced the greatest degree of such ‘profit inflation’. Such a contrast in their national economic experiences helps to explain, in Hamilton’s view, why Spain subsequently ‘declined’, while England became the homeland of the modern Industrial Revolution. A major reason for the significance and fame of the Hamilton thesis was its enthusiastic endorsement by John Maynard Keynes, in his Treatise of Money, published the following year, in 1930. Subsequently, the Hamilton ‘profit inflation’ thesis was subjected to severe attacks: by John Nef (1936-37) and David Felix (1956). But they had to rely on the same dubious and indeed often untrustworthy price and wage data for England and France (and of course on Hamilton’s data for Spain, which was of much higher quality). Both rightly noted that the proper comparison had to be made between industrial wages and industrial prices, not the price level in general. Since industrial prices generally rose less than did the overall price level (heavily weighted with foodstuffs), they found much less evidence for ‘profit inflation’ than had Hamilton. Nef developed a counter thesis to argue that sharply rising raw material costs, especially for wood and charcoal, forced industrialists to devise new furnace technologies to burn coal instead of wood or charcoal: changes that not inly reduced such costs but resulted in much larger-scale, more capital-intensive forms of industry. In this revised paper, I offer new data to demonstrate that neither the ‘energy’ nor the new furnace technologies took place until after the 1640s. This study is based on newer sets of price and wage indices that appeared after their publications: those by Phelps Brown and Hopkins for England (which I have modified, after using their data sheets in the LSE Archives), and for this version, additional price date for England. For the southern Netherlands, I have utilized Herman Van der Wee Consumer Price Index. My analyses of both industrial prices and industrial wages suggest that, for England, there is more evidence for potential ‘profit inflation’, in some industries, than Nef or Felix had been willing to concede. But the major discovery was that the Antwerp region continuously experienced, over the 16th and 17th centuries, the contrary phenomenon: what Keynes had called ‘Profit Deflation’ (for him, a truly negative force), in that industrial wages rose faster than industrial prices. And yet indisputably the southern Netherlands had a much more industrialized and more rapidly growing economy than did England, at least until the Revolt of the Netherlands (1568-1609). The concept of ‘profit inflation’ is not, therefore, a useful analytical tool, if based only on labour costs. This study concludes with a brief examination of the effects on inflation on two other factor costs: land, in terms of real rents, and capital, in terms of real interest rates, which did fall with inflation. In all likelihood both such costs did lag behind industrial prices in early-modern England and the Low Countries (and contrary to Eric Kerridge’s 1953 assertions on English rents), though real interest rates lagged more than did real rents. While disputing the Nef thesis, I do analyse the forms and nature of other new, larger-scale industries in this era (mining, metallurgy shipbuilding). I also provide a new appendix on the role of coinage debasements, as an another important monetary factor in determining regional differences in inflation rates; and this contradicts the almost universal assumption that debasements were irrelevant. |
| Keywords: | gold and silver, money, coinage, Price Revolution, Profit Inflation, prices, nominal and real wages, masons |
| JEL: | B2 E2 E3 J3 N N3 O O5 |
| Date: | 2008–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-320&r=mon |
| By: | Abhijit Sen Gupta (Indian Council for Research on International Economic Rela); Amitendu Palit (Indian Council for Research on International Economic Rela) |
| Abstract: | In this paper we evaluate the feasibility of a common Asian Currency Unit (ACU) involving countries of East and South Asia. We analyze the various properties of an ACU and calculate it's value using weighted averages of the values of Asian currencies. Looking at the movement of individual Asian currencies vis-'a-vis the ACU, we find that there have been severe misalignments among the Asian currencies during the past seven years. We discuss the possibility of the Rupee figuring in the ACU and identify the major economic, political and historical impediments in the way of faster acceptance of ACU in the region. We point out the various strategies that could be employed to facilitate faster adoption of ACU. These include creating certain institutional safeguards as well as strengthening the existing ones. Finally, we highlight some ways to promote the use and acceptability of the ACU and also emphasize the importance of conceiving a larger framework of participating countries, including India. |
| Keywords: | Asian Currency Unit, Regional integration, Monetary cooperation |
| JEL: | F36 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ind:icrier:208&r=mon |
| By: | Bukhari, S. Adnan H. A. S. Bukhari; Hanif, Muhammad Nadeem |
| Abstract: | An artificial neural network (ANN) is an information-processing paradigm that is inspired by the way biological nervous systems, such as the brain, process information. In previous two decades, ANN applications in economics and finance; for such tasks as pattern reorganization, and time series forecasting, have dramatically increased. Many central banks use forecasting models based on ANN methodology for predicting various macroeconomic indicators, like inflation, GDP Growth and currency in circulation etc. In this paper, we have attempted to forecast monthly YoY inflation for Pakistan by using ANN for FY08 on the basis of monthly data of July 1993 to June 2007. We also compare the forecast performance of the ANN model with that of univariate AR(1) model and observed that RMSE of ANN based forecasts is much less than the RMSE of forecasts based on AR(1) model. At least by this criterion forecast based on ANN are more precise. |
| Keywords: | artificial neural network; forecasting; inflation |
| JEL: | C51 C53 E31 C52 E37 |
| Date: | 2007–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8898&r=mon |
| By: | Philip R. Lane |
| Abstract: | The first decade of EMU has taught us much about the power of a single currency to integrate financial markets. In this review, I first discuss the quantitative impact of the euro on cross- border financial holdings before turning to the macroeconomic implications of enhanced financial integration. |
| Date: | 2008–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp248&r=mon |
| By: | Virginie Coudert; Cecile Couharde |
| Abstract: | Pegged exchange rates are often pointed out as more prone to risk of overvaluation, because their real exchange rates have a tendency to appreciate. We check this assumption empirically over a large sample of emerging and developing countries, by using two databases for de facto classifications by Levy-Yeyati and Sturzenegger (2003) and by Reinhart and Rogoff (2004). We assess currency misalignments by estimating real equilibrium exchange rates taking into account a Balassa effect and the impact of net foreign assets. Pegged currencies are shown to be more overvalued than floating ones. |
| Keywords: | Exchange rate regimes; emerging and developing countries; misalignments |
| JEL: | F31 F33 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2008-07&r=mon |
| By: | Agnes Benassy-Quere; Sophie Bereau; Valérie Mignon |
| Abstract: | In this paper, we investigate different views of equilibrium exchange rates within a single, stock-flow adjustment framework. We then compare FEER and BEER estimations of equilibrium exchange rates based on the same, econometric model of the net foreign asset position, with special focus on the euro-dollar rate. These estimations suggest that, although more robust to alternative assumptions, the BEER approach may rely on excessive confidence on past behaviors in terms of portfolio allocation. Symmetrically, FEERs may underestimate the plasticity of international capital markets because they focus on the adjustment of the trade balance. |
| Keywords: | Equilibrium exchange rates; euro-dollar; FEER; BEER; global imbalances |
| JEL: | F31 C23 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2008-02&r=mon |
| By: | Viv Hall; John McDermott |
| Abstract: | An important requirement, prior to countries’ adopting a common currency or maintaining an independent monetary policy, is establishing the extent to which they share a common economic cycle and how susceptible they are to region-specific shocks. For example, Kouparitsas (2001) has examined whether 8 US BEA regions are largely subject to common sources of disturbance, and assesses whether their regional cycles are consistent with a common currency area for the US. Norman and Walker (2007) conclude for 6 Australian States that the major source of the State fluctuations is shocks which are common to all States. But their variance analysis also shows that each overall State cycle is driven partly by fluctuations specific to that State, in particular for Western Australia. Findings such as these also have important implications for the relative strengths of influence of fiscal and regional policies, and of external shocks. Using similar unobserved components methodology (e.g. Watson and Engle (1983), Kouparitsas (2001, 2002), Norman and Walker (2007), and Hall and McDermott (2008)), we establish an Australasian common cycle, and assess the extent to which the region-specific cycles of 6 Australian States and NZ are additionally important. Our results suggest that: (1) structural breaks play an important role; (2) New Zealand’s region-specific growth cycle has exhibited distinctively different features, relative to the common cycle; and (3) for every Australasian region, the regionspecific cycle variance dominates that of the common cycle. Our findings on the distinctiveness of New Zealand’s output and employment cycles are consistent with New Zealand retaining the flexibility of a separate currency and monetary policy. |
| JEL: | C32 E32 E52 F36 R11 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-11&r=mon |