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on Central Banking |
| By: | Athanasios Orphanides (Central Bank of Cyprus); John C. Williams (Federal Reserve Bank of San Francisco) |
| 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, Robust Control, Model Uncertainty. |
| JEL: | E52 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2008-3&r=cba |
| By: | Nao Sudo (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudo @boj.or.jp)); Yuki Teranishi (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi @boj.or.jp)) |
| Abstract: | After empirically showing imperfect financial integration among the euro countries, i.e., bank loan market heterogeneities in stickinesses of loan interest rates and markups from policy interest rate to loan rates, we build a New Keynesian model where such elements of imperfect financial integration coexist within a single currency area. Our welfare analysis reveals characteristics of optimal monetary policy. A central bank should take these heterogeneities into consideration. The optimal monetary policy is tied to difference in the degree of loan rate stickiness, the size of the steady-state loan rate markup, and the share of the loan market. By calibrating our model to the euro, we present the raking of the euro countries in terms of monetary policy priority. Because of the heterogeneity in the loan markets among the euro area countries, this ordering is not equivalent to the size of the financial market. |
| Keywords: | optimal monetary policy, financial integration, heterogeneous financial market, staggered loan contracts |
| JEL: | E44 E52 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-25&r=cba |
| By: | Devereux, Michael B.; Sutherland, Alan |
| Abstract: | Recent data show substantial increases in the size of gross external asset and liability positions. The implications of these developments for optimal conduct of monetary policy are analyzed in a standard open economy model which is augmented to allow for endogenous portfolio choice. The model shows that monetary policy takes on new importance due to its impact on nominal asset returns. Nevertheless, the case for price stability as an optimal monetary rule remains. In fact, it is reinforced. Even without nominal price rigidities, price stability is optimal because it enhances the risk sharing properties of nominal bonds. |
| Keywords: | Portfolio Choice, International Risk Sharing, Exchange Rate |
| JEL: | E52 E58 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7445&r=cba |
| By: | Carmen M. Reinhart; Kenneth S. Rogoff |
| Abstract: | The historical frequency of banking crises is quite similar in high- and middle-to-low-income countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. We establish these regularities using a unique dataset spanning from Denmark's financial panic during the Napoleonic War to the ongoing global financial crisis sparked by subprime mortgage defaults in the United States. Banking crises dramatically weaken fiscal positions in both groups, with government revenues invariably contracting, and fiscal expenditures often expanding sharply. Three years after a financial crisis central government debt increases, on average, by about 86 percent. Thus the fiscal burden of banking crisis extends far beyond the commonly cited cost of the bailouts. Our new dataset includes housing price data for emerging markets; these allow us to show that the real estate price cycles around banking crises are similar in duration and amplitude to those in advanced economies, with the busts averaging four to six years. Corroborating earlier work, we find that systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms, in rich and poor countries alike. |
| JEL: | E6 F3 N0 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14587&r=cba |
| By: | Spencer Dale (Board of Governors of the Federal Reserve System); Athanasios Orphanides (Central Bank of Cyprus); Par Osterholm (Department of Economics, Uppsala University) |
| Abstract: | Much of the information communicated by central banks is noisy or imperfect. This paper considers the potential benefits and limitations of central bank communications in a model of imperfect knowledge and learning. It is shown that the value of communicating imperfect information is ambiguous. If the public is able to assess accurately the quality of the imperfect information communicated by a central bank, such communication can inform and improve the public's decisions and expectations. But if not, communicating imperfect communication has the potential to mislead and distract. The risk that imperfect communication may detract from the public's understanding should be considered in the context of a central bank's communications strategy. The risk of distraction means the central bank may prefer to focus its communication policies on the information it knows most about. Indeed, conveying more certain information may improve the public's understanding to the extent that it "crowds out" a role for communicating imperfect information. |
| Keywords: | Transparency, Forecasts, Learning |
| JEL: | E52 E58 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2008-1&r=cba |
| By: | Kirstin Hubrich; Kenneth D. West |
| Abstract: | We propose two new procedures for comparing the mean squared prediction error (MSPE) of a benchmark model to the MSPEs of a small set of alternative models that nest the benchmark. Our procedures compare the benchmark to all the alternative models simultaneously rather than sequentially, and do not require reestimation of models as part of a bootstrap procedure. Both procedures adjust MSPE differences in accordance with Clark and West (2007); one procedure then examines the maximum t-statistic, the other computes a chi-squared statistic. Our simulations examine the proposed procedures and two existing procedures that do not adjust the MSPE differences: a chi-squared statistic, and White’s (2000) reality check. In these simulations, the two statistics that adjust MSPE differences have most accurate size, and the procedure that looks at the maximum t-statistic has best power. We illustrate our procedures by comparing forecasts of different models for U.S. inflation. |
| JEL: | C32 C53 E37 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14601&r=cba |
| By: | Christian Kascha (Norges Bank (Central Bank of Norway)); Francesco Ravazzolo (Norges Bank (Central Bank of Norway)) |
| Abstract: | In this paper, we empirically evaluate competing approaches for combining inflation density forecasts in terms of Kullback-Leibler divergence. In particular, we apply a similar suite of models to four different data sets and aim at identifying combination methods that perform well throughout different series and variations of the model suite. We pool individual densities using linear and logarithmic combination methods. The suite consists of linear forecasting models with moving estimation windows to account for structural change. We find that combining densities is a much better strategy than selecting a particular model ex-ante. While combinations do not always perform better than the best individual model, combinations always yield accurate forecasts and, as we show analytically, provide insurance against selecting inappropriate models. Combining with equal weights often outperforms other weighting schemes. Also, logarithmic combinations can be advantageous, in particular if symmetric densities are preferred. |
| Keywords: | Forecast Combination, Logarithmic Combinations, Density Forecasts, Inflation Forecasting |
| JEL: | C53 E37 |
| Date: | 2008–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_22&r=cba |
| By: | Richard M. Levich; Valerio Poti |
| Abstract: | This paper studies predictability of currency returns over the period 1971-2006. To assess the economic significance of currency predictability, we construct an upper bound on the explanatory power of predictive regressions. The upper bound is motivated by "no good-deal" restrictions that rule out unduly attractive investment opportunities. We find evidence that predictability often exceeds this bound. Excess-predictability is highest in the 1970s and tends to decrease over time, but it is still present in the final part of the sample period. Moreover, periods of high and low predictability tend to alternate. These stylized facts pose a challenge to Fama's (1970) Efficient Market Hypothesis but are consistent with Lo's (2004) Adaptive Market Hypothesis, coupled with slow convergence towards efficient markets. Strategies that attempt to exploit daily excess-predictability are very sensitive to transaction costs but those that exploit monthly predictability remain attractive even after realistic levels of transaction costs are taken into account and are not spanned by either the Fama and French (1993) equity-based factors or the AFX Currency Management Index. |
| JEL: | F31 G15 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14597&r=cba |
| By: | Charles Nolan; Christoph Thoenissen |
| Abstract: | Employing the financial accelerator (FA) model of Bernanke, Gertler and Gilchrist (1999) enhanced to include a shock to the FA mechanism, we construct and study shocks to the efficiency of the financial sector in post-war US business cycles. We find that financial shocks are very tightly linked with the onset of recessions, more so than TFP or monetary shocks. The financial shock invariably remains contractionary for sometime after recessions have ended. The shock accounts for a large part of the variance of GDP and is strongly negatively correlated with the external finance premium. Second-moments comparisons across variants of the model with and without a (stochastic) FA mechanism suggests the stochastic FA model helps us understand the data. |
| Keywords: | Financial accelerator; financial shocks; macroeconomic volatility |
| JEL: | E30 E44 E52 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0810&r=cba |
| By: | Tommaso Monacelli; Roberto Perotti |
| Abstract: | We document that variations in government purchases generate a rise in consumption, the real and the product wage, and a fall in the markup. This evidence is robust across alternative empirical methodologies used to identify innovations in government spending (structural VAR vs. narrative approach). Simultaneously accounting for these facts is a formidable challenge for a neoclassical model, which relies on the wealth effect on labor supply as the main channel of transmission of unproductive government spending shocks. The goal of this paper is to explore further the role of the wealth effects in the transmission of government spending shocks. To this end, we build an otherwise standard business cycle model with price rigidity, in which preferences can be consistent with an arbitrarily small wealth effect on labor supply, and highlight that such effect is linked to the degree of complementarity between consumption and hours. We show that the model is able to match our empirical evidence on the effects of government spending shocks remarkably well. This happens when the preferences are such that the positive wealth effect on labor supply is small and therefore the negative wealth effect on consumption is, somewhat counterintuitively, large. |
| JEL: | D91 E21 E62 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14584&r=cba |
| By: | Fernando Broner; Jaume Ventura |
| Abstract: | During the last few decades, emerging markets have lifted most restrictions on international asset trade. The conventional view was that (i) capital would flow into these countries raising investment and growth; (ii) these countries would use international capital markets to smooth productivity, terms-of-trade, and other shocks and achieve less volatile consumption; and (iii) financial integration would encourage the development of domestic financial markets, leading to a more efficient domestic allocation of capital and better sharing of individual risks. But in those emerging markets that liberalized their financial markets, average net capital flows have been small and even negative, volatile and procyclical. As a result, (i) investment and growth have not only not increased but even declined in some cases; (ii) consumption has become more volatile; and (iii) domestic financial markets have become unstable and prone to crises. In this paper, we present a simple model of financial liberalization that can account for these observations. The key friction in the model is sovereign risk. What makes this model different from previous models of sovereign risk is the existence of gains from domestic asset trade and that governments cannot discriminate between domestic and foreign creditors when enforcing debt payments. This makes the theory more realistic both in terms of assumptions and results. |
| Keywords: | Financial liberalization, sovereign risk, enforcement, capital flows |
| JEL: | F34 F36 G15 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1128&r=cba |
| By: | Joyce, Michael (Bank of England); Relleen, Jonathan (Bank of England); Sorensen, Steffen (Barrie+Hibbert Ltd) |
| Abstract: | This paper reviews the main instruments and associated yield curves that can be used to measure financial market participants' expectations of future UK monetary policy rates. We attempt to evaluate these instruments and curves in terms of their ability to forecast policy rates over the period from October 1992, when the United Kingdom first adopted an explicit inflation target, to March 2007. We also investigate several model-based methods of estimating forward term premia, in order to calculate risk-adjusted forward interest rates. On the basis of both in and out-of-sample test results, we conclude that, given the uncertainties involved, it is unwise to rely on any one technique to measure policy rate expectations and that the best approach is to take an inclusive approach, using a variety of methods and information. |
| Keywords: | Interest rates; forecasting; term premia |
| JEL: | E43 E44 E52 |
| Date: | 2008–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0356&r=cba |
| By: | Peacock, Chris (Bank of England); Baumann, Ursel (European Central Bank) |
| Abstract: | In this paper we model the role of open-economy effects within a New Keynesian Phillips Curve (NKPC) via the inclusion of intermediate imports in firms' production technology. Using this framework we provide evidence on two questions: first, does the inclusion of import prices help explain post-war inflation dynamics in the United Kingdom , United States and Japan; and second, has the influence of import prices in firms' costs become greater over the more recent period since the mid-1980s. Overall, our results suggest that import prices do help explain movements in inflation; in particular, NKPC models that allow for import prices to enter into firms' costs outperform closed-economy models in sample. However, our results suggest that the influence of import prices has generally remained constant across our sample period, with perhaps only the United Kingdom providing some evidence that import prices have become more important in firms' marginal costs. |
| Keywords: | Globalisation; inflation dynamics; import prices; New Keynesian Phillips Curves |
| Date: | 2008–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0359&r=cba |
| By: | Cetorelli, Nicola; Goldberg, Linda S. |
| Abstract: | The globalization of banking in the United States is influencing the monetary transmission mechanism both domestically and in foreign markets. Using quarterly information from all U.S. banks filing call reports between 1980 and 2005, we find evidence for the lending channel for monetary policy in large banks, but only those banks that are domestically-oriented and without international operations. We show that the large globally-oriented banks rely on internal capital markets with their foreign affiliates to help smooth domestic liquidity shocks. We also show that the existence of such internal capital markets contributes to an international propagation of domestic liquidity shocks to lending by affiliated banks abroad. While these results imply a substantially more active lending channel than documented in the seminal work of Kashyap and Stein (2000), the lending channel within the United States is declining in strength as banking becomes more globalized. |
| Keywords: | Lending channel, Bank, global, liquidity, transmission, internal capital markets |
| JEL: | E44 F36 G32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7446&r=cba |
| By: | Robert W. Staiger; Alan O. Sykes |
| Abstract: | Central bank intervention in foreign exchange markets may, under some conditions, stimulate exports and retard imports. In the past few years, this issue has moved to center stage because of the foreign exchange policies of China. China has regularly intervened to prevent the RMB from appreciating relative to other currencies, and over the same period has developed large global and bilateral trade surpluses. Numerous public officials and commentators argue that China has engaged in impermissible "currency manipulation," and various proposals for stiff action against China have been advanced. This paper clarifies the theoretical relationship between exchange rate policy and international trade, and addresses the question of what content can be given to the concept of "currency manipulation" as a measure that may impair the commitments made in trade agreements. Our conclusions are at odds with much of what is currently being said by proponents of counter-measures against China. For example, it is often asserted that China's currency policies have real effects that are equivalent to an export subsidy. In fact, however, if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner's symmetry theorem. With sticky prices, the real effects of exchange rate intervention and the translation of that intervention into trade-policy equivalents depend critically on how traded goods and services are priced. The real effects of China's policies are potentially quite complex, are not readily translated into trade-policy equivalents, and are dependent on the time frame over which they are evaluated (because prices are less "sticky" over a longer time frame). |
| JEL: | F02 F13 F31 K33 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14600&r=cba |
| By: | Gian Maria Milesi-Ferretti |
| Abstract: | The real effective exchange rate of the dollar is close to its minimum level for the past 4decades (as of September 2008). At the same time, however, the U.S. trade and currentaccount deficits remain large and, absent a significant correction in coming years, wouldcontribute to a further accumulation of U.S. external liabilities. The paper discusses thetension between these two aspects of the dollar assessment, and what factors can helpreconcile them. It focuses in particular on the terms of trade, adjustment lags, andmeasurement issues related to both the real effective exchange rate and the current accountbalance. |
| Keywords: | Current account deficits , United States , Real effective exchange rates , Terms of trade , Current account balances , Adjustment process , |
| Date: | 2008–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/260&r=cba |
| By: | Frieden Jeffry A. |
| Abstract: | Is there a valid argument for international cooperation, and some form of international governance structure, in the international monetary realm? On the purely economic front, the argument is not strong. Yet a broader political economy approach concludes that national currency policy can in fact impose non-pecuniary externalities on partner nations. This is especially the case with major policy-driven misalignments, which cannot easily be countered by other governments. For example, one country’s substantially depreciated currency can provoke powerful protectionist pressures in its trading partners, so that exchange rate policy spills over into trade policy in potentially damaging ways. Inasmuch as one government’s policies create these sorts of costs for other countries, and for the world economy as a whole, there is a case for global governance. This might include some institutionalized mechanism to monitor and publicize substantial currency misalignments. While there appears to be little global political attention to such a mechanism now, there have been initiatives along these lines at the regional level, and there are some early stirrings of interest more generally. |
| Keywords: | Exchange rates, macroeconomic policy coordination |
| JEL: | F42 H87 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7408&r=cba |
| By: | Andersson, Fredrik N. G. (Department of Economics, Lund University) |
| Abstract: | This paper studies the issue of whether money contains useful information about future inflation in a panel of nine developed countries. A low frequency estimate of excess money growth is compared to an estimate of the inflation trend following the discussion in Woodford (2007). The empirical analysis shows that money contains more information about future CPI-inflation than an estimate of the inflation trend, and that the output gap has some influence over the medium run movements of inflation, but the effect varies over time. The result is the same for small countries as it is for large countries. Money thus contains information about future headline inflation that the inflation trend does not. |
| Keywords: | Inflation; Money; Inflation Indicators; Wavelet Analysis |
| JEL: | C19 E31 E32 E41 |
| Date: | 2008–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2008_017&r=cba |
| By: | Elke Hahn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frauke Skudelny (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper derives forecasts for euro area real GDP growth based on a bottom up approach from the production side. That is, GDP is forecast via the forecasts of value added across the different branches of activity, which is quite new in the literature. Linear regression models in the form of bridge equations are applied. In these models earlier available monthly indicators are used to bridge the gap of missing GDP data. The process of selecting the best performing equations is accomplished as a pseudo real time forecasting exercise, i.e. due account is taken of the pattern of available monthly variables over the forecast cycle. Moreover, by applying a very systematic procedure the best performing equations are selected from a pool of thousands of test bridge equations. Our modelling approach, finally, includes a further novelty which should be of particular interest to practitioners. In practice, forecasts for a particular quarter of GDP generally spread over a prolonged period of several months. We explore whether over this forecast cycle, where GDP is repeatedly forecast, the same set of equations or different ones should be used. Changing the set of bridge equations over the forecast cycle could be superior to keeping the same set of equations, as the relative merit of the included monthly indictors may shift over time owing to differences in their data characteristics. Overall, the models derived in this forecast exercise clearly outperform the benchmark models. The variables selected in the best equations for different situations over the forecast cycle vary substantially and the achieved results confirm the conjecture that allowing the variables in the bridge equations to differ over the forecast cycle can lead to substantial improvements in the forecast accuracy. JEL Classification: C22, C52, C53, E27. |
| Keywords: | Forecasting, bridge equations, euro area, GDP, bottom up approach. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080975&r=cba |
| By: | Teppei Nagano (Bank of Japan, 2-1-1 Nihonbashi-Hongokucho Chuo-ku, Tokyo 103-8660, Japan.); Naohiko Baba (Corresponding author: Bank for International Settlements, Centralbahnplatz 2, Basel CH-4002, Switzerland.) |
| Abstract: | This paper attempts to extract market expectations about the Japanese economy and the BOJ’s policy stance from the yen yield curves augmented by money market interest rates, during the period from the end of the quantitative easing policy in March 2006. We use (i) the swap yield curves augmented by OIS interest rates (OIS/Swap), and (ii) the JGB yield curve augmented by FB/TB interest rates. First, using the Nelson-Siegel [1987] model, we estimate three latent dynamic factors, which can be interpreted as reflecting market expectations. Second, we investigate the relative importance of price discovery for each factor between OIS/Swap and FBTB/JGB, and find that the former has a more dominant role of price discovery for all factors. Third, we estimate the efficient price for each factor common to both yield curves using a time-series structural model, which enables us to decompose each factor into the efficient price and idiosyncratic factor. JEL Classification: E43, E52, G12. |
| Keywords: | Yield curve, overnight index swap, price discovery, structural time-series model, swap spread. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080980&r=cba |
| By: | Naohiko Baba; Sahminan Frank Packer |
| Abstract: | This paper investigates the spillover effects of money market turbulence in 2007-08 on the short-term covered interest parity (CIP) condition between the US dollar and the euro through the foreign exchange (FX) swap market. Sharp and persistent deviations from the CIP condition observed during the turmoil are found to be significantly associated with differences in the counterparty risk between European and US financial institutions. Furthermore, evidence is found that dollar term funding auctions by the ECB, supported by dollar swap lines with the Federal Reserve, have stabilized the FX swap market by lowering the volatility of deviations from CIP. |
| Keywords: | FX swap, covered interest parity, financial market turmoil, counterparty risk, dollar swap lines, dollar term auction facility |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:267&r=cba |
| By: | Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Dagfinn Rime (Norges Bank (Central Bank of Norway)); Lucio Sarno (Cass Business School and CEPR) |
| Abstract: | This paper investigates the validity of the law of one price (LOP) in international financial markets by examining the frequency, size and duration of inter-market price di erentials for borrowing and lending services (`one-way arbitrage'). Using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, we nd that the LOP holds on average, but numerous economically signi cant violations of the LOP arise. The duration of these violations is high enough to make it worth- while searching for one-way arbitrage opportunities in order to minimize borrowing costs and/or maximize earnings on given funds. We also document that such opportunities decline with the pace of the market and increase with market volatility. |
| Keywords: | Law of one price, One-way arbitrage, Foreign exchange microstructure |
| JEL: | F31 F41 G14 G15 |
| Date: | 2008–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_19&r=cba |
| By: | Kosuke Aoki; Takeshi Kimura |
| Abstract: | Using a model of island economy where financial markets aggregate dispersed information ofthe public, we analyze how two-way communication between the central bank and the publicaffects inflation dynamics. When inflation target is observable and credible to the public,markets provide the bank with information about the aggregate state of the economy, andhence the bank can stabilize inflation. However, when inflation target is unobservable or lesscredible, the public updates their perceived inflation target and the information revealed frommarkets to the bank becomes less perfect. The degree of uncertainty facing the bank cruciallydepends on how two-way communication works. |
| Keywords: | Monetary policy, central bank communication, inflation target |
| JEL: | E31 E52 E58 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0899&r=cba |
| By: | Amund Holmsen (Norges Bank (Central Bank of Norway)); Jan F. Qvigstad (Norges Bank (Central Bank of Norway)); Øistein Røisland (Norges Bank (Central Bank of Norway)); Kristin Solberg-Johansen (Norges Bank (Central Bank of Norway)) |
| Abstract: | Monetary policy works mainly through private agents' expectations. How precisely future policy intentions are communicated has, according to theory, implications for the outcome of monetary policy. Norges Bank has gone further than most other central banks in communicating its policy intentions. The Bank publishes its own interest rate forecast, along with forecasts of inflation, the output gap, and other key variables. Moreover, Norges Bank aims to be precise about how the policy intentions are formed. The Bank currently uses optimal policy in a timeless perspective as the normative benchmark when assessing the policy intentions. Given the reaction pattern based on the timeless perspective, the Bank identifies and explains the factors that bring about a change in the interest rate forecast from one Monetary Policy Report to the next. The main arguments for publishing the interest rate forecast are discussed and validated against three years of experience with such forecasts. In this paper, we find evidence of reduced volatility in market interest rates on the days with interest rate decisions, which suggests that communicating policy intentions more precisely improves the market participants' understanding of the central bank's reaction pattern. |
| Keywords: | Transparency, optimal monetary policy, interest rate forecasts |
| JEL: | E52 E58 |
| Date: | 2008–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_20&r=cba |
| By: | Knut Are Aastveit (Norges Bank (Central Bank of Norway)and The University of Oslo); Tørres G. Trovik (Norges Bank (Central Bank of Norway)and The World Bank) |
| Abstract: | An approximate dynamic factor model can substantially improve the reliability of real time output gap estimates. The model extracts a common component from macroeconomic indicators, which reduces errors in the gap due to data revisions. The model's ability to handle the unbalanced arrival of data, also yields favorable nowcasting properties and thus starting conditions for the filtering of data into trend and deviations from trend. Combined with the method of augmenting data with forecasts prior to filtering, this greatly reduces the end-of-sample imprecision in the gap estimate. The increased precision has economic significance for real time policy decisions. |
| Keywords: | Output gap, Real time analysis, Monetary policy, Forecasting, Factor model |
| JEL: | C33 C53 E52 E58 |
| Date: | 2008–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_23&r=cba |
| By: | Roland Döhrn; Christoph M. Schmidt; Tobias Zimmermann |
| Abstract: | In this paper we argue that future inflation in an economy depends on the way people perceive current inflation, their inflation sentiment.We construct some simple measures of inflation sentiment which capture whether price acceleration is shared by many components of the CPI basket. In a comparative analysis of the forecasting power of the different inflation indicators for the US and Germany, we demonstrate that our inflation sentiment indicators improve forecast accuracy in comparison to a standard Phillips curve approach. Because the forecast performance is particularly good for longer horizons, we also compare our indicators to traditional measures of core inflation.Here, the sentiment indicators outperform the weighted median and show a similar forecasting power as a trimmed mean. Thus, they offer a convincing alternative to traditional core inflation measures. |
| Keywords: | Inflation forecasting, monetary policy |
| JEL: | E30 E31 E37 C53 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0080&r=cba |
| By: | Giuseppe Ferrero (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Andrea Nobili (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.) |
| Abstract: | The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns - the difference between futures rates and the realized rates - are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are negatively correlated with the business cycle only in the United States. JEL Classification: E43, E44, E52. |
| Keywords: | Monetary policy expectations, excess returns, futures contracts, business cycle. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080979&r=cba |
| By: | Le, Vo Phuong Mai (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael |
| Abstract: | We evaluate the Smets-Wouters model of the US using indirect inference with a VAR representation of the main US data series. We find that the original New Keynesian SW model is on the margin of acceptance when SW's own estimates of the variances and time-series behaviour of the structural errors are used. However when the structural errors implied jointly by the data and the structural model are used the model is rejected. We also construct an alternative (New Classical) version of the model with flexible wages and prices and a one-period information lag. This too is rejected. But when small proportions of both the labour and product markets are assumed to be imperfectly competitive within otherwise flexible markets the resulting `weighted' model is accepted. |
| Keywords: | Bootstrap; US model; DGSE; VAR; New Keynesian; New Classical; indirect inference; Wald statistic |
| JEL: | C12 C32 C52 E1 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2008/32&r=cba |
| By: | Niki X. Papadopoulou (Central Bank of Cyprus) |
| Abstract: | This paper investigates the micro mechanisms by which monetary policy affects and is transmitted through the U.S economy, by developing a unified, dynamic, stochastic, general equilibrium model that nests two classes of models. The first sticky prices and the second limited participation. Limited participation is incorporated by assuming that households’ are faced with quadratic portfolio adjustment costs. Monetary policy is characterized by a generalized Taylor rule with interest rate smoothing. The model is calibrated and investigates whether the unified model performs better in replicating empirical stylized facts, than the models that have only sticky price or limited participation. The unified model replicates the second moments of the data better than the other two types of models. It also improves on the ability of the sticky price model to deliver the hump-shaped response of output and inflation. Moreover, it also delivers on the ability of the limited participation model to replicate the fall in profits and wages, after a contractionary monetary policy. |
| JEL: | E31 E32 E44 E52 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2008-4&r=cba |
| By: | Mario Jovanovic; Tobias Zimmermann |
| Abstract: | In this paper we examine the link between stock market uncertainty and monetary policy in the US. There are strong arguments why central banks should account for stock market uncertainty in their strategy. Amongst others, they can maintain the functioning of financial markets and moderate possible economic downswings. To describe the behavior of the Federal Reserve Bank, augmented forward-looking Taylor rules are estimated by GMM. The standard specification is expanded by a measure for stock market uncertainty, which is estimated by an exponential GARCH-model.We show that, given a certain level of inflation and output, US central bank rates are significantly lower when stock market uncertainty is high and vice versa. These results are achieved by using the federal funds rate from 1980:10 to 2007:7. |
| Keywords: | Monetary policy rules, financial markets, stock market uncertainty, EGARCH |
| JEL: | E58 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0077&r=cba |
| By: | David R. Stockman and Brian E. Raines (Department of Economics,University of Delaware; Department of Mathematics,Baylor University) |
| Abstract: | Some macroeconomic models exhibit a type of global indeterminacy known as Euler equation branching (e.g., the one-sector growth model with a production externality). The dynamics in such models are governed by a differential inclusion. In this paper, we show that in models with Euler equation branching there are multiple equilibria and that the dynamics are chaotic. In particular, we provide sufficient conditions for a dynamical system on the plane with Euler equation branching to be chaotic and show analytically that in a neighborhood of a steady state, these sufficient conditions will typically be satisfied. We also extend the results of Christiano and Harrison (JME, 1999) for the one-sector growth model with a production externality. In a more general setting, we provide necessary and sufficient conditions for Euler equation branching in this model. We show that chaotic and cyclic equilibria are possible and that this behavior is not dependent on the steady state being "locally" determinate or indeterminate. |
| Keywords: | global indeterminacy, Euler equation branching, multiple equilibria, cycles,chaos, increasing returns to scale, externality, regime switching |
| JEL: | E13 E32 E62 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:08-26.&r=cba |
| By: | Athanasios Orphanides (Central Bank of Cyprus); John C. Williams (Federal Reserve Bank of San Francisco) |
| Abstract: | This paper examines the robustness characteristics of optimal control policies derived under the assumption of rational expectations to alternative models of expectations formation and uncertainty about the natural rates of interest and unemployment. 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 also allow for central bank uncertainty regarding the natural rates of interest and unemployment. We find that the optimal control policy derived under the assumption of perfect knowledge about the structure of the economy can perform poorly when knowledge is imperfect. These problems are exacerbated by natural rate uncertainty, even when the central bank's estimates of natural rates are efficient. We show that the optimal control approach can be made more robust to the presence of imperfect knowledge by deemphasizing the stabilization of real economic activity and interest rates relative to inflation in the central bank loss function. That is, robustness to the presence of imperfect knowledge about the economy 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 the alternative models of learning that we study and natural rate uncertainty and outperform the optimal control policy and generally perform as well as the robust optimal control policy that places less weight on stabilizing economic activity and interest rates. |
| Keywords: | Rational Expectations, Robust Control, Model Uncertainty, Natural Rate of Unemployment, Natural Rate of Interest. |
| JEL: | E52 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2008-5&r=cba |
| By: | Spehar, Ann O'Ryan |
| Abstract: | There is a new approach to modeling business cycles that is gaining acceptance. It appears that there is good evidence that this approach may have a great deal to offer in understanding the causes and processes of major economic business cycles associated with financial crisis. This paper does not intend to define a mathematical model but instead describes the ideas and theories behind this new approach. In addition, this paper addresses a few of the unique challenges officials within the United States face with the current global crisis. The new approach has at its core the belief that the structure of our current economy, as well as many European economies, has changed significantly. Starting around 1983-1985 a structural break occurred that resulted in a period where changes in GDP, consumption and inflation ceased to experience high volatility. This period has been dubbed “The Great Moderation” and it is significant. The standard deviation during the years 1985-2004 was but one-half the standard deviation of the quarterly growth rate of real gross domestic product between the years 1960-1984. A variety of hypothesis for this period has been put forth of which will not be discussed in this paper. More importantly here, is that these new economies are subject to business cycles that are endogenous in nature and are highly correlated with financial crisis. It is believed that these new economies have specific characteristics that generate these financial business cycles. These cycles are not triggered by exogenous supply or demand shocks that throw an economy off of a steady state but instead are an endogenous force within the gears of the system itself that creates imbalances that can build up without any noticeable increase in inflation - the traditional parameter typically used to monitor imbalances. The main characteristic of this new era of Great Moderation is rapidly rising growth coupled with low and stable prices which is highly correlated with an increase in the probability of episodes of financial instability (Borio 2003). In fact, within these new economies inflation shows up first as excess demand within credit aggregates and asset prices rather than in the traditional goods and services markets. This means that a financial crisis could occur without inflation ever having occurred within the broader economy. If asset bubbles are left unattended the resulting implosion of the bubbles can create virulent deflationary episodes. And it is the unwinding of the financial imbalances caused by the bubbles that are the source of financial instability. Note that according to this model, it is not a sudden decline in inflation brought on by a contraction in the money supply that triggers a crisis as is often argued (for example Friedman and Schwartz 1963). So, minimizing the deflationary impact will not stop the necessary unwinding and required rebalancing. There are many parameters that have been used in developing predictive models that anticipate a financial crisis. A few leading indicators that may warn of a growing financial crisis are: 1. Widening Credit gaps and rapidly rising assets values (equities, real estate- inelastic assets) 2. Over confidence / ‘exuberance’ coupled with faith in central bankers anti-inflationary commitments 3. Misalignments in intertemporal consumption, savings and investment decisions 4. Output gaps 5. Currency exchange rates / imbalance in global savings Again, this paper does not intend to define a model but instead simply lays out the ideas and theories behind this new modeling approach. This paper will first compare the traditional to the new modeling approach by first describing the economic environment that creates the business cycle. Secondly it will compare the two paradigms and explain how each generates different questions and answers in monitoring and explaining economic stability. Finally, I touch on a few of the unique challenges facing our current crisis within the United States. |
| Keywords: | Great Moderation; Business Cycles; Austrian Economics |
| JEL: | E32 |
| Date: | 2008–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12274&r=cba |
| By: | Ida Wolden Bache (Norges Bank (Central Bank of Norway)); Kai Leitemo (Norwegian School of Management BI) |
| Abstract: | We argue that the correct identification of monetary policy shocks in a vector autoregression requires that the identification scheme distinguishes between permanent and transitorymonetary policy shocks. The permanent shocks reflect changes in the inflation target while the transitory shocks represent temporary deviations from the interest rate reaction function. Whereas both shocks may raise the nominal interest rate on impact, the inflation and output responses of the two shocks are different. We show, using a simple simulation experiment, that a failure to distinguish between the two types of shocks can result in a ”price puzzle”. |
| Keywords: | Monetary policy shocks, VAR modeling, identification, price puzzle |
| JEL: | E47 E52 E61 |
| Date: | 2008–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_18&r=cba |
| By: | Tovar, Camilo Ernesto |
| Abstract: | Over the past 15 years there has been remarkable progress in the specification and estimation of dynamic stochastic general equilibrium (DSGE) models. Central banks in developed and emerging market economies have become increasingly interested in their usefulness for policy analysis and forecasting. This paper reviews some issues and challenges surrounding the use of these models at central banks. It recognises that they offer coherent frameworks for structuring policy discussions. Nonetheless, they are not ready to accomplish all that is being asked of them. First, they still need to incorporate relevant transmission mechanisms or sectors of the economy; Second, issues remain on how to empirically validate them; and finally, challenges remain on how to effectively communicate their features and implications to policy makers and to the public. Overall, at their current stage DSGE models have important limitations. How much of a problem this is will depend on their specific use at central banks. |
| Keywords: | DSGE models, Central Banks, Communication, Estimation, Modelling |
| JEL: | B4 C5 E0 E32 E37 E50 E52 E58 F37 F41 F47 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7406&r=cba |
| By: | Nuno Cassola (Financial Research Divison, DG Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Claudio Morana (Università del Piemonte Orientale, Facoltà di Economia, Dipartimento di Scienze Economiche e Metodi Quantitativi, Via Perrone 18, 28100, Novara, Italy; International Center for Economic Research (ICER, Torino) and Center for Research on Pensions and Welfare Policies (CeRP, Torino).) |
| Abstract: | In the framework of a new money market econometric model, we assess the degree of precision achieved by the European Central Bank ECB) in meeting its operational target for the short-term interest rate and the impact of the U.S. sub-prime credit crisis on the euro money market during the second half of 2007. This is done in two steps. Firstly, the long-term behaviour of interest rates with one-week maturity is investigated by testing for co-breaking and for homogeneity of spreads against the minimum bid rate (MBR, the key policy rate). These tests capture the idea that successful steering of very short-term interest rates is inconsistent with the existence of more than one common trend driving the one-week interest rates and/or with nonstationarity of the spreads among interest rates of the same maturity (or measured against the MBR). Secondly, the impact of several shocks to the spreads (e.g. interest rate expectations, volumes of open market operations, interest rate volatility, policy interventions, and credit risk) is assessed by jointly modelling their behaviour. We show that, after August 2007, euro area commercial banks started paying a premium to participate in the ECB liquidity auctions. This puzzling phenomenon can be understood by the interplay between, on the one hand, adverse selection in the interbank market and, on the other hand, the broad range of collateral accepted by the ECB. We also show that after August 2007, the ECB steered the “risk-free” rate close to the policy rate, but has not fully off-set the impact of the credit events on other money market rates. JEL Classification: C32, E43, E50, E58, G15. |
| Keywords: | Money market interest rates, euro area, sub-prime credit crisis, credit risk, liquidity risk, long memory, structural change, fractional co-integration, co-breaking, fractionally integrated factor vector autoregressive model. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080982&r=cba |
| By: | Bernardo Guimaraes; Kevin D. Sheedy |
| Abstract: | A striking fact about prices is the prevalence of ``sales': large temporary price cuts followedby a return exactly to the former price. This paper builds a macroeconomic model with arationale for sales based on firms facing consumers with different price sensitivities. Even iffirms can vary sales without cost, monetary policy has large real effects owing to sales beingstrategic substitutes: a firm's incentive to have a sale is decreasing in the number of otherfirms having sales. Thus the flexibility of prices at the micro level due to sales does nottranslate into flexibility at the macro level. |
| Keywords: | sales, monetary policy, nominal rigidities |
| JEL: | E3 E5 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0887&r=cba |
| By: | Olivier Coibion; Yuriy Gorodnichenko |
| Abstract: | This paper uses three different surveys of economic forecasts to assess both the support for and the properties of informational rigidities faced by agents. Specifically, we track the impulse responses of mean forecast errors and disagreement among agents after exogenous structural shocks. Our key contribution is to document that in response to structural shocks, mean forecasts fail to completely adjust on impact, leading to statistically and economically significant deviations from the null of full information: the half life of forecast errors is roughly between 6 months and a year. Importantly, the dynamic process followed by forecast errors following structural shocks is consistent with the predictions of models of informational rigidities. We interpret this finding as providing support for the recent expansion of research into models of informational rigidities. In addition, we document several stylized facts about the conditional responses of forecast errors and disagreement among agents that can be used to differentiate between some of the models of informational rigidities recently proposed. |
| JEL: | D84 E3 E4 E5 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14586&r=cba |
| By: | Akito Matsumoto; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci |
| Abstract: | We study exchange rate and equity price dynamics, in general equilibrium, in the presence of news shocks about future productivity and monetary policy. We identify a condition under which these asset prices become more volatile without affecting the volatility of the underlying processes-a positive correlation between news and current shocks. This condition also explains why persistent underlying processes generate volatile asset prices. In addition, we show that the correlation between exchange rate and equity returns depends critically on the currency denomination of the equity return and the monetary policy reaction to productivity shocks. The model we set up does well at matching second moments of exchange rate and equity returns for major floating currencies. |
| Keywords: | External shocks , Exchange rates , Stock prices , Productivity , Monetary policy , Asset prices , Floating exchange rates , Economic models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/284&r=cba |
| By: | Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Jared Laxton; Douglas Laxton; Michel Juillard |
| Abstract: | This is the third of a series of papers that are being written as part of a larger project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the US, Euro Area, and Japanese economies that incorporates oil prices and allows us to trace out the effects of shocks to oil prices. The model is estimated with Bayesian techniques. We show how the model can be used to construct efficient baseline forecasts that incorporate judgment imposed on the near-term outlook. |
| Keywords: | Economic forecasting , United States , Euro Area , Japan , Oil prices , Monetary policy , External shocks , Forecasting models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/280&r=cba |
| By: | Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Jared Laxton; Douglas Laxton; Michel Juillard |
| Abstract: | This is the second of a series of papers that are being written as part of a larger project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the US, Euro Area, and Japanese economies. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties. We show how the model can be used to construct efficient baseline forecasts that incorporate judgment imposed on the near-term outlook. |
| Keywords: | Economic forecasting , United States , Euro Area , Japan , Monetary policy , Forecasting models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/279&r=cba |
| By: | Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Douglas Laxton; Michel Juillard |
| Abstract: | This is the first of a series of papers that are being written as part of a project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the U.S. economy. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties. After developing a benchmark model without financial-real linkages, we introduce such linkages into the model and compare the results with and without linkages. |
| Keywords: | Economic forecasting , United States , Monetary policy , Forecasting models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/278&r=cba |
| By: | Kaminska, Iryna (Bank of England) |
| Abstract: | This paper combines a structural vector autoregression (SVAR) with a no-arbitrage approach to build a multifactor affine term structure model (ATSM). The resulting no-arbitrage structural vector autoregressive (NA-SVAR) model implies that expected excess returns are driven by the structural macroeconomic shocks. This is in contrast to a standard ATSM, in which agents are concerned with non-structural risks. As a simple application of a NA-SVAR model, we study the effects of supply, demand and monetary policy shocks on the UK yield curve. We show that all shocks affect the slope of the yield curve, with demand and supply shocks accounting for a large part of the time variation in bond yields. The short end of the yield curve is driven mainly by the expectations component, while the term premium matters for the dynamics of the long end of the yield curve. |
| Keywords: | Structural vector autoregression; interest rate risk; essentially affine term structure model |
| JEL: | C32 E43 E44 |
| Date: | 2008–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0357&r=cba |
| By: | Elif C. Arbatli |
| Abstract: | The intertemporal approach to the current account suggests modeling movements in the current account in a forward-looking, dynamic framework. In this framework, the current account reflects consumption smoothing of agents that lend and borrow from the rest of the world in the face of transitory shocks to income. As in permanent income models of consumption, the marginal propensity to consume out of transitory shocks is predicted to be significantly smaller which implies that a permanent income shock has a smaller effect on the current account than a transitory income shock. I use the term structure of petroleum futures to identify permanent and transitory innovations to petroleum prices. Then, I formulate a test of the intertemporal approach to the current account based on how a group of nineteen small petroleum exporters respond to each type of income shock. This market-based identification of income shocks and their perceived persistence offers a transparent framework for investigating the empirical evidence for the intertemporal approach. As the theory predicts, petroleum exporters have a significantly higher marginal propensity to consume out of permanent oil price shocks than out of transitory oil price shocks. |
| Keywords: | Balance of payments and components |
| JEL: | C22 F21 F32 G13 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-48&r=cba |
| By: | Messina, Julián (University of Girona); Strozzi, Chiara (University of Modena and Reggio Emilia); Turunen, Jarkko (European Central Bank) |
| Abstract: | We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labour market. |
| Keywords: | dynamic correlation, business cycle, real wages, labour market institutions |
| JEL: | E32 J30 C10 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3884&r=cba |
| By: | Joyce, Michael (Bank of England); Kaminska, Iryna (Bank of England); Lildholdt, Peter |
| Abstract: | Long-horizon interest rates in the major international bond markets fell sharply during 2004 and 2005, at the same time as US policy rates were rising; a phenomenon famously described as a 'conundrum' by Alan Greenspan the Federal Reserve Chairman. But it was arguably the decline in international long real rates over this period which was more unusual and, by the end of 2007, long real rates in the United Kingdom remained at recent historical lows. In this paper, we try to shed light on the recent behaviour of long real rates, by estimating several empirical models of the term structure of real interest rates, derived from UK index-linked bonds. We adopt a standard 'finance' approach to modelling the real term structure, using an essentially affine framework. While being empirically tractable, these models impose the important theoretical restriction of no arbitrage, which enables us to decompose forward real rates into expectations of future short (ie risk-free) real rates and forward real term premia. One general finding that emerges across all the models estimated is that time-varying term premia appear to be extremely important in explaining movements in long real forward rates. Although there is some evidence that long-horizon expected short real rates declined over the conundrum period, our results suggest lower term premia played the dominant role in accounting for the fall in long real rates. This evidence could be consistent with the so-called 'search for yield' and excess liquidity explanations for the conundrum, but it might also partly reflect strong demand for index-linked bonds by institutional investors and foreign central banks. |
| Keywords: | Yield curve; term premia; conundrum |
| JEL: | C32 E43 E44 G12 |
| Date: | 2008–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0358&r=cba |
| By: | Mario Cerrato; Hyunsok Kim; Ronald MacDonald |
| Abstract: | The breakdown of the Bretton Woods system and the adoption of generalised floating exchange rates ushered in a new era of exchange rate volatility and uncertainty. This increased volatility lead economists to search or economic models able to describe observed exchange rate behavior. In the present paper we propose more general STAR transition functions which encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another, and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to two different exchange rate data-sets, one for developing countries, and official nominal exchange rates, and the second for emerging market economies using black market exchange rates. |
| Keywords: | unit root tests, threshold autoregressive models, purchasing power parity. |
| JEL: | C22 F31 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2008_33&r=cba |
| By: | Massimo Guidolin (Federal Reserve Bank of St. Louis, 411 Locust St, St Louis, MO, 63166-0442, USA.); Daniel L. Thornton (Federal Reserve Bank of St. Louis, 411 Locust St, St Louis, MO, 63166-0442, USA.) |
| Abstract: | Despite its important role in monetary policy and finance, the expectations hypothesis (EH) of the term structure of interest rates has received virtually no empirical support. The empirical failure of the EH was attributed to a variety of econometric biases associated with the single-equation models used to test it; however, none account for it. This paper analyzes the EH by focusing on its fundamental tenet - the predictability of the short-term rate. This is done by comparing h-month ahead forecasts for the 1- and 3-month Treasury yields implied by the EH with the forecasts from random-walk, Diebold and Lei (2006), and Duffee (2002) models. The evidence suggests that the failure of the EH is likely a consequence of market participants’ inability to predict the short-term rate. JEL Classification: E40, E52. |
| Keywords: | Expectations theory, random walk, time-varying risk premium |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080977&r=cba |
| By: | Tamborini, Roberto |
| Abstract: | Current macro-models based on the demand-side effects of monetary policy and sticky prices account for the observed correlations between policy interest rates, output and inflation, but they fail with regard to other empirical regularities, such as the negative effects of policy shocks on real wages and profits. Moreover, the lack in these models of an explicit role of the credit market in the transmission mechanism is now regarded as a major limitation. Drawing on the modern literature on the monetary transmission mechanisms with capital market imperfections, this paper presents a model of the “credit-cost channel” of monetary policy. The thrust of the model is that firms’ reliance on bank loans (“credit channel”) may make aggregate supply sensitive to bank interest rates (“cost channel”), which are in turn driven by the official rate controlled by the central bank. The model is assessed theoretically by examining whether, and under what conditions, changes in the policy interest rate produce the whole pattern of the observed relationships, with no recourse to non-competitive hypotheses and frictions. This result is obtained for parameter values in the range of available consensus estimates, with a caveat concerning labour-supply elasticity to the real wage rate. |
| Keywords: | Macroeconomics and monetary economics, monetary transmission mechanisms, credit channel, cost channel |
| JEL: | C32 E51 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7409&r=cba |
| By: | Maria Grydaki (Department of Economics, University of Macedonia); Stilianos Fountas (Department of Economics, University of Macedonia) |
| Abstract: | This paper makes an attempt to determine the factors influencing exchange rate and exchange rate uncertainty, as well as, output and output variability. In the context of a small open economy under flexible exchange rates regime it is found that the level both of exchange rate and output is affected by monetary and inflationary shocks, as well as shocks in government spending, output and trade balance. Further, the uncertainty of exchange rate and output is associated positively with the uncertainty of all shocks while the contemporaneous occurrence of selected shocks imposes either a positive or negative impact on exchange rate and output volatility. Finally, it is shown that the effect of the determinants either of exchange rate volatility or output volatility is very sensitive to the parameter values. |
| Keywords: | Vexchange rate volatility, output volatility, open-economy models. |
| JEL: | E32 F31 F41 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2008_16&r=cba |
| By: | Ricardo M. Sousa (Universidade do Minho - NIPE); António Afonso (European Central Bank, Directorate General Economics) |
| Abstract: | We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression approach. We build on a recursive identification scheme, but we: (i) include the feedback from government debt (ii); look at the impact on the composition of output; (iii) assess the effects on asset markets (via housing and stock prices); (iv) add the exchange rate; (v) assess potential interactions between fiscal and monetary policy; (vi) use quarterly data, particularly, fiscal data; and (vii) analyze empirical evidence from the U.S., the U.K., Germany, and Italy. The results show that government spending shocks, in general, have a small effect on GDP; lead to important “crowding-out” effects; have a varied impact on housing prices and generate a quick fall in stock prices; and lead to a depreciation of the real effective exchange rate. Government revenue shocks generate a small and positive effect on both housing prices and stock prices that later mean reverts; and lead to an appreciation of the real effective exchange rate. The empirical evidence also shows that it is important to explicitly consider the government debt dynamics in the model. |
| Keywords: | fiscal policy, Bayesian Structural VAR, debt dynamics. |
| JEL: | C11 C32 E62 H62 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:22/2008&r=cba |
| By: | António Afonso; Ricardo M. Sousa |
| Abstract: | We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression approach. We build on a recursive identification scheme, but we: (i) include the feedback from government debt (ii); look at the impact on the composition of output; (iii) assess the effects on asset markets (via housing and stock prices); (iv) add the exchange rate; (v) assess potential interactions between fiscal and monetary policy; (vi) use quarterly data, particularly, fiscal data; and (vii) analyze empirical evidence from the U.S., the U.K., Germany, and Italy. The results show that government spending shocks, in general, have a small effect on GDP; lead to important “crowding-out” effects; have a varied impact on housing prices and generate a quick fall in stock prices; and lead to a depreciation of the real effective exchange rate. Government revenue shocks generate a small and positive effect on both housing prices and stock prices that later mean reverts; and lead to an appreciation of the real effective exchange rate. The empirical evidence also shows that it is important to explicitly consider the government debt dynamics in the model. |
| Keywords: | fiscal policy; Bayesian Structural VAR; debt dynamics. |
| JEL: | C11 C32 E62 H62 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp562008&r=cba |
| By: | Hilde C. Bjørnland (Norwegian School og Management and Norges Bank (Central Bank of Norway)); Dag Henning Jacobsen (Norges Bank (Central Bank of Norway)and The World Bank) |
| Abstract: | We analyze the role of house prices in the monetary policy transmission mechanism in the U.S. using structural VARs. The VAR is identified using a combination of short-run and long-run (neutrality) restrictions, allowing for a contemporaneous interaction between monetary policy and various asset prices. By allowing the interest rate and asset prices to react simultaneously to news, we find the role of house prices in the monetary transmission mechanism to increase considerably. In particular, following a monetary policy shock that raises the interest rate by one percentage point, house prices fall immediately by 1 percent, for then to decline by a total of 4-5 percent after three years. Furthermore, the fall in house prices enhances the negative response in output and consumer price inflation that has traditionally been found in the conventional literature. |
| Keywords: | VAR, monetary policy, house prices, identification. |
| JEL: | C32 E52 F31 F41 |
| Date: | 2008–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_24&r=cba |
| By: | M. Ayhan Kose; Stijn Claessens; Marco Terrones |
| Abstract: | We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the period 1960–2007. In particular, we analyze the implications of 122 recessions, 112 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts) and their various overlaps in these countries over the sample period. Our results indicate that interactions between macroeconomic and financial variables can play major roles in determining the severity and duration of recessions. Specifically, we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions. JEL Classification Numbers: E32; E44; E51; F42 |
| Keywords: | Economic recession , Business cycles , Financial crisis , Credit , Housing prices , Stock prices , Oil prices , Databases , Economic models , |
| Date: | 2008–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/274&r=cba |
| By: | Sophie Bereau; Antonia Lopez Villavicencio; Valerie Mignon |
| Abstract: | We study the nonlinear dynamics of the real exchange rate towards its behavioral equilibrium value (BEER) using a Panel Smooth Transition Regression model framework.We show that the real exchange rate convergence process in the long run is characterized by nonlinearities for emerging economies, whereas industrialized countries exhibit a linear pattern. Moreover, there exists an asymmetric behavior of the real exchange rate when facing an over- or an undervaluation of the domestic currency. Finally, our results suggest that the real exchange rate is unable to unwind alone global imbalances. |
| Keywords: | Equilibrium exchange rate; BEER model; panel smooth transition regression; panel vector error correction model |
| JEL: | F31 C23 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2008-23&r=cba |
| By: | Jiri Podpiera |
| Abstract: | The use of estimated policy rules has been on the rise over the past few decades as central banks have increasingly relied on them as policy benchmarks. While simple, conventionally estimated rules have proven insightful, their value is generally seen to depend, among other things, on the ability of the benchmark to accurately reflect the policy environment and on the relevance of the econometric assumptions behind the estimation method. This paper addresses a potential source of econometric bias that might naturally arise and adversely affect the accuracy of conventionally estimated policy rules as benchmarks. In particular, the discrete nature of the policy rate setting process at central banks leaves open the possibility that observed policy rate changes may include significant rounding errors. If so, parameter estimates using conventional econometric methods could be seriously biased; technically, this is an example of a censoring bias. To address this concern, the paper offers a new method for estimating monetary policy rules and demonstrates the ability of the resulting bias-adjusted policy rules to outperform conventionally estimated ones in characterizing the policy environments in the cases of the Czech Republic and the United States. |
| Keywords: | Bias in parameters, Monetary policy, Policy rule. |
| JEL: | E4 E5 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2008/2&r=cba |
| By: | Jonathan Chiu; Cesaire Meh |
| Abstract: | This paper develops a search-theoretic model to study the interaction between banking and monetary policy and how this interaction affects the allocation and welfare. Regarding how banking affects the welfare costs of inflation: First, we find that, with banking, inflation generates smaller welfare costs. Second, we show that, lowering inflation improves welfare not just by reducing consumption/production distortions, but also by avoiding intermediation costs. Therefore, understanding the nature of intermediation cost is critical for accurately assessing the welfare gain of lowering the inflation target. Regarding how monetary policy affects the welfare effects of banking: First, banking always improves efficiency of production, but the banking technology has to be efficient to improve welfare (especially in low inflation economy). Second, welfare effects of banking depend on monetary policy. For low inflation, banking is not active. For high inflation, banking is active and improves welfare. For moderate inflation, banking is active but reduces welfare. Owing to general equilibrium feedback, banking is supported in equilibrium even though welfare is higher without banking. |
| Keywords: | Monetary policy framework |
| JEL: | E40 E50 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-49&r=cba |
| By: | Daniel L. Thornton (Federal Reserve Bank of St. Louis, 411 Locust St, St Louis, MO, 63166-0442, USA.) |
| Abstract: | The phrase “liquidity effect” was introduced by Milton Friedman (1969) to describe the first of three effects on interest rates caused by an exogenous change in the money supply. The lack of empirical support for the liquidity effect using monthly and quarterly data using various monetary and reserve aggregates led Hamilton (1997) to suggest that more convincing evidence of the liquidity effect could be obtained using daily data – the daily liquidity effect. This paper investigates the implications of the daily liquidity effect for Friedman’s liquidity effect using a comprehensive model of the Fed’s daily operating procedure. The evidence indicates that it is no easier to find convincing evidence of a Friedman’s liquidity effect using daily data than it has been using lower frequency data. JEL Classification: E40, E52. |
| Keywords: | liquidity effect, federal funds rate, monetary policy, operating procedure, FOMC. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080984&r=cba |
| By: | Andrea Fracasso; Stefano Schiavo |
| Abstract: | Global imbalances are not new as much as the effort to address them. In the mid 1980s the phenomenon led the most industrialised countries to orchestrate a devaluation of the US dollar so as to reduce the US trade deficit. Some economists have called for a similar "New Plaza" agreement to tackle the present situation. The feasibility of such a plan has not been thoroughly assessed so far. In this paper we apply complex network analysis to characterise the properties of the web of international bilateral trade imbalances. We study its evolution over time and the position of key players within it. We find that the complexity of the network has increased in several dimensions, and this casts doubts on the usefulness of a coordinated solution among industrialised countries only. In addition, we propose new effective exchange rate measures based on bilateral trade imbalances, and study their dynamics in the 1980s and in the 2000s. By distinguishing exchange rate movements against debtor and creditor countries we show that, so far, they have not been consistent with the simultaneous reduction in all trade bilateral imbalances. A paradox therefore emerges: the growing difficulty to orchestrate a plan involving a large number of partners is matched by the inability of so far uncoordinated exchange rate adjustments to close global imbalances. |
| Keywords: | Plaza agreement, exchange rates, global imbalances, network analysis |
| JEL: | F31 F33 F42 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0824&r=cba |
| By: | Tuomas Välimäki (Suomen Pankki, P.O. Box 160, FIN-00101 Helsinki, Finland.) |
| Abstract: | The tender spread, i.e. the difference between the effective price for money in the ECB’s main refinancing operations and the prevailing policy rate, is one of the main determinants behind the evolution of the EONIA with respect to the ECB’s operational target. This study assesses the reasons for which the average tender spread did not reduce after the banks’ demand for liquidity was isolated from their interest rate expectations in March 2004. The paper offers two potential explanations for the unexpected behavior. First, following the increased precision in the ECB’s liquidity provision after the end-of- period fine tuning operations were added to the regularly applied tools, even a small bias in the liquidity supply could have resulted in a strictly positive tender spread. Second, banks’ uncertainty over their individual allotments in the tender operations may have led to a strictly positive tender spread. Furthermore, the significant growth in the refinancing volumes may have intensified the allotment uncertainty. JEL Classification: D44, E58. |
| Keywords: | Main refinancing operations, liquidity, EONIA, tenders. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080981&r=cba |
| By: | Julien Idier (Corresponding author: Banque de France, 39, rue Crois-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Stefano Nardelli (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper the probability of informed trading (PIN) model developed by Easley and O’Hara (1992) is applied to analyze the role and impact of heterogeneities in euro overnight unsecured market. The empirical assessment of the functioning of this market is based on the PIN which measures the ability of traders to interpret signals on the expected evolution of the overnight rate. Results show that between 2000 and 2004 a heterogeneous learning process of market mechanisms within participants could be observed, whereas such asymmetries have been sharply decreasing since 2005. This is reviewed against some significant events that occurred in the euro money market, such as the reform of the Eurosystem’s operational framework in March 2004 and the recent financial market turmoil, which has represented a break in the steady decline of asymmetries as evidence suggest. JEL Classification: G14, E52. |
| Keywords: | Microstructure, PIN model, Money Markets. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080987&r=cba |
| By: | Herwartz, Helmut; Weber, Henning |
| Abstract: | Microfoundations of the euro’s effect on euro area trade hinge on the timing, the speed and the size of adjustment in trade costs. We estimate timing, speed and size of adjustment in trade costs for sectoral trade data. Our approach allows for sector specific impacts of trade costs on sectoral trade while controlling for unobserved but time-variant variables at the sector level. We find that, due to falling trade costs, trade within the euro area increases between the years 2000 and 2003 by 10 to 20 percent compared with trade between European countries that are not members of the euro area. Adjustment of individual sectors is extremely fast whereas aggregate adjustment spreads out because different sectors adjust at distinct times. |
| JEL: | C31 C33 F13 F15 F33 F42 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:7412&r=cba |
| By: | Francisco J. Buera; Alexander Monge-Naranjo; Giorgio E. Primiceri |
| Abstract: | We study the evolution of market-oriented policies over time and across countries. We consider a model in which own and neighbors' past experiences influence policy choices, through their effect on policymakers' beliefs. We estimate the model using a large panel of countries. We find that there is a strong geographical component to learning, which is crucial to explain the slow adoption of liberal policies during the postwar period. Our model also predicts that there would be a substantial reversal to state intervention if nowadays the world was hit by a shock of the size of the Great Depression. |
| JEL: | O4 O43 O50 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14595&r=cba |
| By: | Andersson, Fredrik N. G. (Department of Economics, Lund University) |
| Abstract: | This paper introduces a new estimate of core inflation. Core inflation is a real time estimate of monetary inflation. Most existing core inflation estimate do not account for persistent relative price changes and are therefore likely to be poor estimates of the underlying monetary inflation rate. The proposed core inflation estimate estimates core inflation by first estimating the inflation signal in all price series from the price index with a wavelet based signal estimation algorithm. In the second step the weighted inflation average is calculated by using the expenditure weights from the price index as weights. Relative price changes are thus accounted for under the assumption that the household must apply to its long run budget restriction. The proposed estimate of core inflation is estimated using data from the United States and the United Kingdom. It is evaluated by comparing it to existing estimates of core inflation. The empirical analysis show that the proposed estimate has a smaller forecasting error of future inflation than the other estimates and that it rapidly responds to increases in monetary inflation. |
| Keywords: | Core Inflation; Signal Estimation; Wavelets |
| JEL: | E31 E52 |
| Date: | 2008–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2008_019&r=cba |
| By: | Michael Joyce (Monetary Analysis, Bank of England, Threadneedle Street, London, EC2R, U.K.); Jonathan Relleen (Monetary Analysis, Bank of England, Threadneedle Street, London, EC2R, U.K.); Steffen Sorensen (Barrie+Hibbert Ltd, Financial Economic Research, 41 Lothbury, London, EC2R 7HG., U.K.) |
| Abstract: | This paper reviews the main instruments and associated yield curves that can be used to measure financial market participants’ expectations of future UK monetary policy rates. We attempt to evaluate these instruments and curves in terms of their ability to forecast policy rates over the period from October 1992, when the United Kingdom first adopted an explicit inflation target, to March 2007. We also investigate several model-based methods of estimating forward term premia, in order to calculate riskadjusted forward interest rates. On the basis of both in and out-of-sample test results, we conclude that, given the uncertainties involved, it is unwise to rely on any one technique to measure policy rate expectations and that the best approach is to take an inclusive approach, using a variety of methods and information. JEL Classification: E43, E44, E52. |
| Keywords: | Interest rates, forecasting, term premia. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080978&r=cba |
| By: | Adam Cagliarini (Reserve Bank of Australia); Mariano Kulish (Reserve Bank of Australia) |
| Abstract: | Standard solution methods for linear stochastic models with rational expectations presuppose a time-invariant structure as well as an environment in which shocks are unanticipated. Consequently, credible announcements that entail future changes of the structure cannot be handled by standard solution methods. This paper develops the solution for linear stochastic rational expectations models in the face of a finite sequence of anticipated structural changes. These events encompass anticipated changes to the structural parameters and anticipated additive shocks. We apply the solution technique to some examples of practical relevance to monetary policy. |
| Keywords: | structural change; anticipated shocks; rational expectations |
| JEL: | C63 E17 E47 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2008-10&r=cba |
| By: | John Bryant (Vocat International) |
| Abstract: | This paper develops further monetary aspects of a model, first set out as part of a paper by the author, published in 2007, concerning the application of thermodynamic principles to economics. The model is backed up by statistical regression analysis of quarterly data of the UK and USA economies, with significant levels of correlation. The model sets out relationships between price, output volume, velocity of circulation and money supply, and develops an equation to measure entropy gain in an economic system, linked to interest rates, and thence to an equation for the yield of a money instrument. |
| Keywords: | Monetary, thermodynamics, economics, entropy, interest rates, yield, money, UK economy |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:ten52008&r=cba |
| By: | Katrin Assenmacher-Wesche (Schweizerische Nationalbank, Börsenstrasse 15, Postfach 2800, 8022 Zürich, Switzerland.); Stefan Gerlach (Johann Wolfgang Goethe Universität, Mertonstrasse 17, D-60325 Frankfurt am Main.) |
| Abstract: | This paper tests the expectations hypothesis (EH) of the term structure of interest rates in US data, using spectral regression techniques that allow us to consider different frequency bands. We find a positive relation between the term spread and the change in the long-term interest rate in a frequency band of 6 months to 4 years, whereas the relation is negative at higher and lower frequencies. We confirm that the variance of term premia relative to expected changes in long-term interest rates dominates at high and low frequencies, leading the EH to be rejected in those bands but not in the intermediate frequency band. JEL Classification: C22, E43. |
| Keywords: | Expectations theory of the term structure, interest rates, spectral egression, frequency domain. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080976&r=cba |
| By: | Pelin Ilbas (Norges Bank (Central Bank of Norway)) |
| Abstract: | We use Bayesian methods to estimate the preferences of the US Federal Reserve by assuming that monetary policy is performed optimally under commitment since the mid-sixties. For this purpose, we distinguish between three subperiods, i.e. the pre-Volcker, the Volcker-Greenspan and the Greenspan period. The US economy is described by the Smets and Wouters (2007) model. We find that there has been a switch in the monetary policy regime since Volcker, with a focus on output growth instead of the output gap level as a target variable. We further show that both interest rate variability and interest rate smoothing are significant target variables, though less important than the in‡ation and output growth targets. We find that the "Great Moderation" of output growth is largely explained by the decrease in the volatility of the structural shocks. The Inflation Stabilization, however, is mainly due to the change in monetary policy that took place at the start of Volcker's mandate. During the Greenspan period, the optimal Taylor rule appears to be equally robust to parameter uncertainty as the unrestricted optimal commitment rule. |
| Keywords: | optimal monetary policy, central bank preferences, parameter uncertainty |
| JEL: | E42 E52 E58 E61 E65 |
| Date: | 2007–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_21&r=cba |
| By: | Nathaniel John Porter; Francis Vitek |
| Abstract: | We study the impact of a minimum wage on business cycle volatility, depending upon its coverage and adjustment mechanism. As with other small open economies, Hong Kong SAR is vulnerable to external shocks, with its exchange rate regime precluding active monetary policy. Adjustment to past shocks has relied on flexible domestic prices. We find that a minimum wage affecting 20 percent of employees would amplify output volatility by 0.2 percent to 9.2 percent, and employment volatility by ?1.2 percent to 7.8 percent. A fixed wage or indexation to consumption price inflation increases volatility most. Indexation to wage inflation or unit labor cost growth is preferable, largely preserving labor market flexibility. |
| Keywords: | Minimum wage , Hong Kong Special Administrative Region of China , Business cycles , External shocks , Exchange rate regimes , Monetary policy , Inflation , Wage indexation , Labor market policy , Economic models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/285&r=cba |
| By: | Daniel C. L. Hardy; MarÃa Nieto |
| Abstract: | The scramble to expand deposit guarantees in Europe in response to recent financial turmoil confirms that the on-going integration of European financial markets requires closer coordination of prudential policies and financial safety nets. We study the optimal design of prudential supervision and deposit guarantee regulations in a multi-country, integrated banking market such as the European Union, where policy-makers have either similar or asymmetric preferences regarding profitability and stability of the banking sector. The paper concludes with recommendations on policy priorities in this area. |
| Keywords: | Deposit insurance , Europe , European Economic and Monetary Union , Economic integration , Bank supervision , Banking sector , Social safety nets , International cooperation , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/283&r=cba |
| By: | Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Sandra Schmidt (Centre for European Economic Research, L7, 1, D-68161 Mannheim, Germany.) |
| Abstract: | We employ a time series econometric framework to explore the structural determinants of the spread between the European Overnight Rate and the ECB’s Policy Rate (EONIA spread) aiming to explain the widening of the EONIA spread from mid-2004 to mid-2006. In particular, we estimate a model on the EONIA spread since the introduction of the new operational framework in March 2004 until August 2006. We show that the increase in the EONIA spread can for the largest part be explained by the current liquidity deficit. Moreover, tight liquidity conditions as well as an increase in banks’ liquidity uncertainty lead to a significant upward pressure on the spread. The ECB’s liquidity policy only reduces the spread if a loose policy is conducted during the last week of a maintenance period. Interestingly, interest rate expectations have not been found to have an important influence. JEL Classification: E43, E52, C22. |
| Keywords: | Overnight Market Rate (EONIA), Interest Rate Determination, Monetary Policy Implementation, Operational Framework. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080983&r=cba |
| By: | Michiel van Leuvensteijn (CPB Netherlands Bureau for Economic Policy Analysis); Christoffer Kok Sørensen (European Central Bank); Jacob A. Bikker (Nederlandsche Bank); Adrian van Rixtel (Banco de España) |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest ratesin more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. |
| Keywords: | Monetary transmission, banks, retail rates, competition, panel data |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0828&r=cba |
| By: | Claudio Borio; Sahminan Haibin Zhu |
| Abstract: | Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy. |
| Keywords: | risk-taking channel, transmission mechanism, capital regulation, procyclicality |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:268&r=cba |
| By: | Gösta Ljungman |
| Abstract: | This paper looks at the factors that have to be considered when designing an aggregate expenditure ceiling. It is argued that expenditure ceilings are effective in promoting fiscal discipline and sustainability, but that a number of trade-offs have to be made when setting up a fiscal framework that will survive in a politically charged environment. The paper illustrates the discussion with a case study of medium-term aggregate expenditure ceilings in three countries: Finland, the Netherlands and Sweden. |
| Keywords: | Government expenditures , Budgetary policy , Finland , Netherlands , Sweden , Fiscal policy , Political economy , Fiscal sustainability , Inflation , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/282&r=cba |
| By: | António Afonso; Luca Agnello; Davide Furceri |
| Abstract: | We decompose fiscal policy in three components: i) responsiveness, ii) persistence and iii) discretion. Using a sample of 132 countries, our results point out that fiscal policy tends to be more persistent than to respond to output conditions. We also found that while the effect of cross-country covariates is positive (negative) for discretion, it is negative (positive) for persistence thereby suggesting that countries with higher persistence have lower discretion and vice versa. In particular, while government size, country size and income have negative effects on the discretion component of fiscal policy, they tend to increase fiscal policy persistence. |
| Keywords: | Fiscal Policy; Fiscal Volatility. |
| JEL: | E62 H50 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp502008&r=cba |
| By: | António Afonso; Ricardo M. Sousa |
| Abstract: | This paper investigates the link between fiscal policy shocks and movements in asset markets using a Fully Simultaneous System approach in a Bayesian framework. Building on the works of Blanchard and Perotti (2002), Leeper and Zha (2003), and Sims and Zha (1999, 2006), the empirical evidence for the U.S., the U.K., Germany, and Italy shows that it is important to explicitly consider the government debt dynamics when assessing the macroeconomic effects of fiscal policy and its impact on asset markets. In addition, the results from a VAR counter-factual exercise suggest that: (i) fiscal policy shocks play a minor role in the asset markets of the U.S. and Germany; (ii) they substantially increase the variability of housing and stock prices in the U.K..; and (iii) government revenue shocks have apparently contributed to an increase of volatility in Italy. |
| Keywords: | Bayesian Structural VAR; fiscal policy; housing prices; stock prices. |
| JEL: | C32 E62 G10 H62 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp582008&r=cba |
| By: | Vahagn Galstyan and Philip R. Lane |
| Abstract: | Our goal in this paper is to investigate the relation between government spending and the long-run behaviour of the Irish real exchange rate. We postulate that an increase in government consumption should be associated with real appreciation, while the impact of government investment is ambiguous. Empirically, we find that an increase in government consumption indeed appreciates the real exchange rate while an increase in government investment is associated with real depreciation. Accordingly, the level and composition of government spending matters for Irish external competitiveness. |
| Date: | 2008–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp274&r=cba |
| By: | António Afonso; Luca Agnello; Davide Furceri |
| Abstract: | In this working paper, we decompose fiscal policy in three components: i) responsiveness, ii) persistence and iii) discretion. Using a sample of 132 countries, our results point out that fiscal policy tends to be more persistent than responding to output variations. We also found that while the effect of cross-country covariates is positive (negative) for discretion, it is negative (positive) for persistence, suggesting that countries with higher persistence have lower discretion and vice versa. In particular, while government size, country size and income have negative effects on the discretion component of fiscal policy, they tend to increase fiscal policy persistence. <P>Réaction au cycle, persistance et effet discrétionnaire de la politique budgétaire <BR>Nous décomposons la politique budgétaire en trois composantes : i) réponse, ii) persistance et iii) effet discrétionnaire. Utilisant un échantillon de 132 pays, nos résultats montrent que la politique budgétaire tend à être plus persistante qu’elle ne répond aux variations du PIB. Nous trouvons également qu’alors que l’effet des covariations entre pays affecte positivement (négativement) l’effet discrétionnaire, il a un effet négatif (positif) sur la persistance. Cela suggère que les pays dotés d’une forte persistance ont un effet discrétionnaire plus faible et vice versa. En particulier, alors que la taille du gouvernement, la taille du pays et le revenu ont des effets négatifs sur la composante discrétionnaire de la politique budgétaire, ils tendent à augmenter la persistance de la politique budgétaire. |
| Keywords: | fiscal policy, politique fiscale, fiscal volatility, volatilité fiscale |
| JEL: | E62 H50 |
| Date: | 2008–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:659-en&r=cba |
| By: | Robert Price; Isabelle Joumard; Christophe André; Makoto Minegishi |
| Abstract: | The financial crisis and economic downturn are going to weigh on fiscal positions in OECD countries over the short to medium-term, both through the operation of automatic stabilisers and the enactment of discretionary fiscal stimulus packages. However, the strategic policy options facing OECD countries are mainly determined by the soundness of their underlying fiscal positions which vary substantially. This paper first describes how OECD economies are situated with respect to underlying fiscal balances and net government debt. A number of countries seem to enjoy favourable fiscal positions with underlying fiscal surpluses, low government debt or even positive net financial asset positions. When taking account, as far as possible, of implicit liabilities associated with ageing populations and resource-based revenues, fiscal positions still vary greatly across countries. The paper then examines the criteria involved in deciding whether government financial asset accumulation is in excess of needs and the use to which any excess government saving might be put, whether increasing public spending or reducing taxes. Finally, the determinants of the optimal size of the government balance sheet for any given desired net debt position are discussed. <P>Stratégies pour les pays bénéficiant de situations budgétaires favorables <BR>La crise financière et le ralentissement économique vont peser sur la situation budgétaire des pays de l’OCDE à court et moyen terme, à la fois à travers le jeu des stabilisateurs automatiques et la mise en oeuvre de politiques discrétionnaires de relance budgétaire. Toutefois, les options stratégiques dont disposent les pays de l’OCDE sont principalement déterminées par la solidité de leur situation budgétaire sous-jacente, très variable d’un pays à l’autre. Ce document commence par décrire la situation des économies de l’OCDE en termes de déficit sous-jacents et de dette nette des administrations publiques. Un certain nombre de pays semblent bénéficier d’une situation budgétaire favorable, avec des surplus sousjacents, une faible dette des administrations publiques, ou même une situation créditrice nette. Lorsque l’on prend en compte, dans la mesure du possible, les engagements implicites liés au vieillissement de la population et les revenus associés à l’exploitation de ressources naturelles, les situations budgétaires restent très variables selon les pays. Ce document examine ensuite les critères pertinents pour décider si l’accumulation d’actifs financiers par les administrations publiques est excessive par rapport aux besoins et quelles utilisations pourraient être faites d’une épargne excédentaire des administrations publiques, que ce soit pour accroître les dépenses publiques ou réduire les impôts. Il s’achève par une analyse des déterminants de la taille optimale du bilan des administrations publiques pour un niveau désiré de dette nette donné. |
| Keywords: | fiscal policy, politique budgétaire, fiscal sustainability, solde budgétaire sous-jacent, budget surplus, commodity-related revenues, government debt, government financial assets, public investment, underlying fiscal balance, actifs financiers des administrations publiques, dette des administrations publiques, excédent budgétaire, investissement public, revenus liés à l’exploitation de ressources naturelles, soutenabilité budgétaire |
| JEL: | E62 H2 H5 H6 J11 Q33 |
| Date: | 2008–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:655-en&r=cba |
| By: | Plachta, Robert |
| Abstract: | This paper assesses the interactions of horizontal fiscal equalisation schemes with debt policy by sovereign regional governments. Local public goods are either financed by debt or taxation. A horizontal equalisation scheme eleviates regional public revenue disparities under horizontal and vertical tax competition. We show that fiscal equalisation schemes have no impact on the optimal central government grant whereas they can either soften or harden the regional budget constraint depending on the specific formulae. Revenue equalisation softens the budget constraint whereas tax base equalisation hardens the budget constraint of poor states. |
| Keywords: | Fiscal federalism, public debt, soft budget constraint, fiscal equalisation, tax competition |
| JEL: | E62 H7 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:uoccpe:7451&r=cba |
| By: | Andreas Beyer; Vitor Gaspar; Christina Gerberding; Otmar Issing |
| Abstract: | During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time. |
| JEL: | E31 E32 E41 E52 E58 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14596&r=cba |
| By: | George M. Georgiou (Publications Section, Central Bank of Cyprus) |
| Abstract: | There has been a burgeoning number of studies attempting to measure the size of the ‘black’ economy. These are based on a variety of methodologies and provide a range of estimates, not just across countries but also within the same countries and often by the same author(s). This raises a number of issues: What is meant by the term ‘black’ economy? Is it an appropriate description? What, if any, is the theory underlying the estimates of informal economic activity? This discussion paper examines these and other issues, and concludes that whilst the existence of what we prefer to call the ‘informal’ or ‘grey’ economy in most countries is incontrovertible, there is a lack of consensus on the appropriate methodology for estimating its size. More importantly, the large number of studies so far are simply exercises in measurement without theory, though we are sceptical that even with strong theoretical underpinnings it is possible to provide accurate estimates of a complicated web of informal activities. |
| JEL: | E26 H26 K42 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2007-1&r=cba |
| By: | Joras Ferwerda |
| Abstract: | Anti-money laundering policy has become a major issue in the Western world, especially in the United States after 9-11. Basically all countries in the world are more or less forced to cooperate in the global fight against money laundering. In this paper, the criminalization of money laundering is modelled, assuming rational behaviour of criminals, following the law and economics strand of the literature which is described as the economics of crime. The theoretical model shows that a) the probability to be caught for money laundering, b) the sentence for money laundering, c) the probability to be convicted for the predicate crime and d) the transaction costs of money laundering are negatively related to the amount of crime. Under the assumption that these factors are all positively influenced by a stricter anti-money laundering policy, the hypothesis empirically tested in this paper is that anti-money laundering policy deters potential criminals from illegal behavior and therefore lowers the crime rate. Since the data on anti-money laundering policy, used in the literature so far, is not all-embracing, a new unique indicator is constructed by using all the information from the mutual evaluation reports on money laundering of the FATF, IMF and World Bank. This unique dataset is used in an empirical estimation based on a Mundlak specification to test the effect of antimoney laundering policy on the crime rate. Among the four policy areas measured- the role of laws, the institutional framework, the duties of the private sector in law enforcement, and international cooperation, the latter turned out to be the most important policy area for reducing crime. This should be an extra incentive for countries and international organizations to continue their efforts to promote and develop international cooperation in the fight against money laundering. |
| Keywords: | Anti-Money Laundering Policy and Crime |
| JEL: | K42 F59 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0835&r=cba |
| By: | Magdalena Morgese Borys; Roman Horvath |
| Abstract: | In this paper, we examine the effects of Czech monetary policy on the economy within the VAR, structural VAR, and factor-augmented VAR frameworks. We document a wellfunctioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so.Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the realtime output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards. |
| Keywords: | Monetary policy transmission, real-time data, sectoral prices, VAR. |
| JEL: | E31 E52 E58 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2008/4&r=cba |
| By: | Philip Liu (Reserve Bank of Australia) |
| Abstract: | This paper examines the sources of Australia’s business cycle fluctuations. The cyclical component of GDP is extracted using the Beveridge-Nelson decomposition and a structural VAR model is identified using robust sign restrictions derived from a small open economy model. In contrast to previous VAR studies, international factors are found to contribute to over half of the output forecast errors, whereas demand shocks have relatively modest effects. |
| Keywords: | Australian business cycle; sign restriction VAR; stabilisation policy; international shocks |
| JEL: | E32 E52 E63 F41 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2008-08&r=cba |
| By: | Luiz Carlos Bresser-Pereira and Cleomar Gomes da Silva |
| Abstract: | O Regime de Meta de Inflação se Tornou Dominante na Formulação de Políticas dos Bancos Centrais nos Últimos 15 Anos. a Teoria Subjacente, Particularmente a Regra de Taylor, Pode ser Vista como uma Competente Generalização Desse Comportamento. de um Ponto de Vista Keynesiano, Ele Será Aceitável se Encararmos a Taxa de Juros de Equilíbrio como Apenas uma Convenção Variável e se a Combinarmos ou com uma Taxa de Câmbio ou com uma Meta de Emprego. no Caso do Brasil, Porém, Além Dessa Ressalva Teórica e da Condição do Duplo Mandato, o Regime de Metas de Inflação Enfrenta um Problema de Incoerência. esta é uma Política que se Destinava a ser Utilizada na Administração da Política Monetária, não na Mudança do Regime de Política Monetária . a Política de Metas de Inflação foi Introduzida no Brasil em 1999 como um Substituto para a Âncora Cambial, que Havia Sido Usada Desastrosamente entre 1995 e 1998. Durante Muitos Anos, o País Havia Enfrentado uma Armadilha de Alta Taxa de Juros / Taxa de Câmbio Valorizada E, Portanto, Precisava Mudar seu Regime de Política Monetária Antes de Eventualmente Adotar o Regime de Meta de Inflação. Essa Mudança, que Começou com a Flutuação de Janeiro de 1999, Deveria ter Sido Completada com Reformas Específicas (Fim da Indexação dos Serviços Públicos e dos Próprios Juros Básicos). no Entanto, em Lugar de Desenvolver uma Estratégia para Reduzir a Taxa de Juros, o Governo Continuou a Definir a Inflação como o Principal Problema a ser Enfrentado e Adotou uma Política Formal de Metas de Inflação. a Conseqüência é que Desde 1999 Essa Política se Tornou o Obstáculo que a Economia Brasileira Enfrenta para Escapar da Armadilha da Taxa de Juros |
| Date: | 2008–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:158&r=cba |