Research Items (36)
This paper examines the implications for equilibrium determinacy of forward-looking monetary policy rules in a Neo-Wicksellian model that incorporates real balance effects. We show that in closed economies the presence of small, empirically plausible real balance effects significantly restricts the ability of the Taylor principle to prevent indeterminacy of the rational expectations equilibrium. This problem is further exac- erbated in open economies, particulary if the monetary policy rule reacts to consumer- price, rather than domestic-price, inflation. These findings still hold even when output and the real exchange rate are introduced into the policy rule, thereby suggesting that the widespread neglect of real balance effects in the literature is ill-advised.
- Dec 2012
This paper aims to explain the rise and fall of communism by exploring the interplay between economic incentives and social preferences transmitted by ideology. We introduce inequality-averse and inefficiency-averse agents and analyze their conflict through the interaction between leaders with economic power and followers with ideological determination. The socioeconomic dynamics of our model generate a pendulum-like switch from markets to a centrally-planned economy abolishing private ownership, and back to restoring market incentives. The grand experiment of communism is thus characterized to have led to the discovery of a trade-off between equality and efficiency at the scale of alternative economic systems. While our focus is on the long-run transitions from capitalism to communism and back observed in the course of the 20-th century, the model also derives conditions under which the two systems converge and become stable.
This paper applies GMM estimation to assess empirically the small open-economy New Keynesian Phillips Curve derived in Galí and Monacelli (2005). We obtain a testable specification where fluctuations in the terms of trade enter explicitly, thus allowing a comparison of the relevance of domestic versus external determinants of CPI inflation dynamics. For most countries in our sample the expected relative change in the terms of trade emerges as a more relevant inflation driver than the contemporaneous domestic output gap. Overall, our results indicate some, albeit moderate, support for the tested relationship based on data from ten OECD countries typically classified as open economies.
We propose a simple, yet sufficiently encompassing classification scheme of monetary economics. It comprises three fundamental fields and six recent areas that expand within and across these fields. The elements of our scheme are not found together and in their mutual relationships in earlier studies of the relevant literature, neither is this an attempt to produce a relatively complete systematization. Our intention in taking stock is not finality or exhaustiveness. We rather suggest a viewpoint and a possible ordering of the accumulating knowledge. Our hope is to stimulate an improved understanding of the evolving nature and internal consistency of monetary economics at large.
- Oct 2009
This paper compares exchange rate pass-through to aggregate prices in the US, Germany and Japan across a number of dimensions. Building on the empirical approaches in the recent literature, our contribution is to perform a thorough sensitivity analysis of pass-through estimates. We find that the econometric method, data frequency and variable proxy employed matter for the precision of details, yet they often agree on some general trends. Thus, pass-through to import prices has declined in the 1990s relative to the 1980s, pass-through to export prices remains country-specific and pass-through to consumer prices is nowadays negligible in all three economies we considered. Copyright © 2008 John Wiley & Sons, Ltd.
This paper addresses empirically the still debated issue of the legitimacy of the European Central Bank (ECB) with regard to European polities, presenting evidence on public opinion support for the ECB as elicited from responses in the recent waves of the Eurobarometer survey. We employ a rich set of potential determinants, combining macroeconomic and socio-demographic data in logistic regressions, to explain trust in the ECB. We find that people with higher level of income and education and centre to right-wing political orientation tend to support the ECB, as well as people with optimistic expectations on the economic situation. Moreover, our results indicate that socio-demographic determinants of trust in the ECB dominate macroeconomic ones, in particular inflation performance, by a considerable margin of magnitude and in a quite robust way. The policy relevance of such results is important for ECB’s communication strategy with the EU public, especially in the years ahead of likely reforms of the European Monetary Union (EMU).
- Nov 2011
This paper aims to explain the rise and fall of communism by exploring the interplay between economic incentives and social preferences transmitted by ideology. We introduce inequality-averse and inefficiency-averse agents and analyze their conflict through the interaction between leaders with economic power and followers with ideological determination. The socioeconomic dynamics of our model generate a pendulum-like switch from markets to a centrally-planned economy abolishing private ownership, and back to restoring market incentives. The grand experiment of communism is thus characterized to have led to the discovery of a trade-o¤ between equality and efficiency at the scale of alternative economic systems. While our focus is on the long-run transitions from capitalism to communism and back observed in the course of the 20-th century, the model also derives conditions under which each of the systems can remain stable.
The present paper builds on certain implications of the theoretical new-open economy macroeconomics (NOEM) literature as well as on recent empirical studies of aggregate exchange rate pass-through to compare and interpret its likely range during the last two decades of the 20th century in the three largest national economies of the world. A principal contribution is that, unlike earlier research, we focus on monthly data to comply with the relevant span of real-world price level stickiness but at the same time discuss how our quantification differs from analogous quarterly estimates. Another import is that we take robustness seriously and obtain our results employing a battery of alternative specifications of OLS, unrestricted and — notably — generalized VARs based on various combinations of proxies. The key conclusion from our analysis is that pass-through on import prices has considerably declined in the 1990s relative to the 1980s, pass-through on export prices has somewhat increased and pass-through on consumer prices seems to be nowadays practically negligible in all three countries we consider. Thus Grassman's law, corroborated for the 1960s and the early 1970s, that producer's currency pricing dominates in international trade implying a strong pass-through may have recently been losing grounds, most likely due to increasing pricing-to-market behavior of monopolistic firms competing strategically in the globalizing economy. JEL Classification: F10, F33, F41.
- Jan 2011
In this paper we evaluate the relative influence of external versus domestic inflation drivers in the 12 new European Union (EU) member countries. Our empirical analysis is based on the New Keynesian Phillips Curve (NKPC) derived in Gal and Monacelli (2005) for small open economies (SOE). Employing the generalized method of moments (GMM), we find that the SOE NKPC is well supported in the new EU member states. We also find that the inflation process is dominated by domestic variables in the larger countries of our sample, whereas external variables are mostly relevant in the smaller countries.
We study the evolution of inflation aversion preferences across generations. In the theoretical part of the paper, we analyze the dynamics of such preferences in an overlapping-generations model with heterogenous mature agents characterized by different degrees of inflation aversion. We show how the stability of a society’s degree of inflation aversion depends on the strength and speed of changes in the structure of the population. The empirical part then proposes two applications in support of the theoretical results. We first link demographic structures to inflation aversion, and then proceed by looking at the relations between income (in)equality and measures of inflation aversion.
The democratic accountability of policymaking institutions which are autonomous within delegated mandates has not received as much attention as their independence. We analyze in a theoretical model the effects of accountability inthe form of possible overriding of economic policy decisions by the government under different degrees of independence of expert committees conducting monetary and fiscal policy. The equilibrium outcomes of such alternative institution-design frameworks are compared according to key macroeconomic performance criteria. Our results stress the trade-off between anchoring inflation expectations on target and output stabilization that is not solved with accountability.
This paper re-considers the importance of trade openness for equilibrium determinacy when monetary policy is characterized by interest-rate rules. We develop a two-country, sticky-price model where money enters the utility function in a non-separable manner. Forward- and current-looking policy rules that react to domestic or consumer price inflation are analyzed. It is shown that the introduction of real balance effects substantially limits the validity of the Taylor principle and challenges recent conclusions concerning the relative desirability of the inflation indicator targeted.
This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under ‘normal’ circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in ‘exceptional’ circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of ‘rules versus discretion’ has, thus, reappeared as the synthesis of ‘rules cum discretion’, in essence as inflation-forecast targeting.
We ask whether a shift to instrument independence affects central bank behavior when monetary policy is already operating under the constrained discretion of an inflation targeting goal. Taking advantage of the unique UK experience to identify such an exogenous break, we estimate Taylor rules via alternative methods, specifications and proxies. We find that the institutional move to greater autonomy of the Bank of England, having augmented its responsibility, accountability and transparency in achieving the delegated inflation target, has also increased its sensitivity to, and the freedom to counter, inflationary pressures arising — with anchored inflation — via the output gap. as well as the audiences at an invited session on monetary policy at the 35th annual meetings of the Eastern Economic Association in Philadelphia (February 2006), the 38th annual conference of the Money, Macro and Finance research group in York (September 2006), and seminars at Essex (February 2006) and Reading (April 2006). The usual disclaimer applies.
We investigate whether increased independence affects central bank behavior when monetary policy is already in an inflation targeting regime. Taking advantage of the recent UK experience to identify such an exogenous change, we estimate Taylor rules via alternative methods, specifications and proxies. Our contribution is to detect two novel results: the Bank of England has responded to the output gap, not growth; and in a stronger way after receiving operational independence. Both findings are consistent with the Bank's mandate and New Keynesian monetary theory. Economic expansion and anchored inflation have thus complemented greater autonomy in influencing the Bank's policy feedback
- Feb 2006
This paper evaluates empirically the feedback and stance of monetary policy in the United Kingdom under inflation targeting, implemented since October 1992. Its principal contribution is in comparing two subsamples, before the Bank of England was granted operational independence in May 1997 and after that. We find that the operational independence subperiod has differed from the preindependence one in terms of a weaker response to inflation but stronger sensitivity to the output gap and a less restrictive stance of monetary policy. Such behavior appears justified given the Bank's mandate and the evolution of the business cycle.
Scientists and epistemologists generally agree that a scientific law must be (a) relatively simple and (b) not contradicted by the available evidence. In this paper we propose and test one such law pertaining to international economics, the triple-parity law. It integrates three well-known equilibrium conditions, which are shown to prevail in the long run, on average and ex post: (i) uncovered nominal interest rate parity (UIP); (ii) relative purchasing power parity (PPP); (iii) real interest rate parity (RIP). Using a cross-section of annual mean values or trend growth rates for 18 OECD countries in the post-Bretton-Woods/pre-EMU floating rate period (1976-1998) and employing a variety of single-equation and system estimation methods, we present robust evidence that the triple-parity law ultimately holds for large and diversified economies. For a few, mostly small and specialized countries, its working is however affected by some significant financial or real comparative (dis)advantages, for which estimates are provided. The law says nothing about short-term dynamics, but it can provide useful benchmarks in this context too, insofar as measures of the speed of convergence to long-run equilibrium are estimated. The triple-parity law, finally, illustrates another, rather fundamental point: if we look beyond short-term fluctuations and vagaries, economic laws do exist in the long run, just as economists used to think in the days of Marshall, Fisher, Walras and Pareto.
This paper is an empirical investigation into the question of whether increased independence affects central bank behavior, in particular when monetary policy is already in an inflation targeting regime. We take advantage of the unique experience in that sense of the United Kingdom, where the Bank of England was granted operational independence from Her Majesty's Treasury only in May 1997, while inflation targeting had been implemented since October 1992. Our strategy is to estimate Taylor rules employing alternative specifications, econometric methods and variable proxies in search for robust results that survive most of those modifications. The key lesson we extract from UK quarterly data is that the Bank of England has responded to the output gap, and not at all to output growth, the more so after receiving operational independence, when the gap has been positive or close to zero and inflation credibly stabilized at target. We find no unambiguous evidence for any definite change in the Bank's reaction to inflation or in the degree of its interest rate smoothing. Our main import is to argue that both the asymmetry of the monetary policy reaction function across the cycle and the response to the output gap, not growth, are fully consistent with New Keynesian theory, especially under inflation targeting. Anchored inflation and economic expansion during the post-independence period thus complement greater autonomy in influencing the behavior of the Bank of England, yet clear separation of the individual contribution of each of these effects appears challenging given our short sample.
This paper compares the empirical range of aggregate exchange rate pass-through in the US, Germany and Japan during the 1980s and the 1990s. Our main contribution is to focus on monthly data, to better account for real-world price level stickiness and exchange rate volatility. Another import is that we take robustness seriously and obtain our results employing a battery of alternative spec-ifications, including notably generalized impulse response functions. We find that, first, pass-through on import prices has considerably declined in the 1990s relative to the 1980s, pass-through on export prices has not changed much and pass-through on consumer prices seems to be nowadays practically negligible in all three coun-tries we considered. Second, the econometric method, variable proxy and data frequency used matter for the precise magnitudes and time patterns, yet they of-ten accord on the general trends; our emphasis on monthly series has, however, uncovered a common profile of short-run pass-through dynamics which remains hidden in quarterly observations. Third, the US is quite a particular economy, with import and, hence, consumer price levels that are amazingly insensitive to US dollar fluctuations. JEL Classification: F10, F33, F41. Keywords: exchange rate pass-through, export/import price indexes vs unit values of exports/imports, sensitivity analysis, generalized impulse responses, in-ternational comparisons.
This paper compares the empirical range of aggregate exchange rate pass- through in the US, Germany and Japan during the 1980s and the1990s. Our main contribution is to focus on monthly data, to better account for real-world price level stickiness and exchange rate volatility. Another import is that we take robustness seriously and obtain our results employing a battery of alternative specifications, including notably generalized VARs. We find that, first, pass-through on import prices has considerably declined in the 1990s relative to the 1980s, pass-through on export prices has not changed much and pass-through on consumer prices seems to be nowadays practically negligible in all three countries we considered. Second, the econometric method, variable proxy and data frequency used matter for the precise magnitudes and time patterns, yet they often accord on the general trends; our emphasis on monthly series has, however, uncovered a common profile of short-run pass-through dynamics which remains hidden in quarterly observations. Third, the US is quite a particular economy, with import and, hence, consumer price levels that are amazingly insensitive to US dollar fluctuations.
This paper extends stochastic research in new open-economy macro- economics (NOEM) to study the effects of the exchange-rate regime on international trade in a more realistic, yet rigorous, analytical set-up. We essentially incorporate "iceberg" costs, inducing home bias, into a unified framework which nests trade between countries that produce similar vs. different composite goods. Our main result is that given (some degree of) producer's currency pricing with symmetry in structure and money shock distributions as the only source of uncertainty, a fixed exchange rate slightly reduces expected trade, measured as a share in GDP, relative to a float under elastic import demand, i.e. when countries' output mixes are similar; inelastic import demand, possible under the same taste for diversity but far less substitutable national outputs arising in our model from differences in endowments although not in technological labor input requirements, reverses this conclusion. What a peg can achieve in any of these cases is trade stabilization (across states of nature). It would be greater for (symmetric) nations which (i) have a larger proportion of producer's currency pricing in their trade, (ii) are exposed to higher mone- tary uncertainty, (iii) produce less substitutable output mixes and (iv) are located closer to one another or apply weaker bilateral trade restrictions.
Capital controls have long been an instrument of economic policy, even in the industrialised countries before the 1980s. But – by analogy with free trade in goods – mainstream economic theory has since then generally shifted to a defence of unrestricted capital movements as beneficial over the long run. The usual textbook arguments in favour of capital mobility, e.g. Caves, Frankel and Jones (2002), are embodied in three effects, which I would denote as: • efficiency effect: investment can be financed more cheaply by borrowing from abroad than out of domestic saving alone; • diversification effect: both domestic and foreign economic agents are able to better diversify away insurable risks, thus smoothing consumption; • competition effect: international capital markets discipline domestic financial institutions and governments. The financial crises of the 1990s have however confirmed that, in the real world, global financial markets do not operate as perfectly as assumed in theory. Therefore, sequencing of the opening of the capital account has more recently been recommended to developing and transition economies with only emerging markets, hence with weaker institutions and fundamentals. This sequencing usually favours: • FDI over portfolio flows; • long-run over short-run flows; • inflows over outflows. In essence, the motivation is that such countries should not introduce capital account convertibility – by opening the "financial account" 2 in the balance of payments – before domestic reforms have strengthened their financial sectors.
Thèse sc. écon. Lausanne (pas d'échange). Literaturverz.
- Dec 2003
The paper compares exchange rate pass-through on aggregate prices in the US, Germany and Japan across a number of dimensions. Building on the empirical approaches in the recent literature, our contribution is to perform a thorough sensitivity analysis of alternative pass-through estimates. We find that the econometric method, data frequency and variable proxy employed matter for the precision of details, yet they often agree on some general trends. Thus, pass-through on import prices has declined in the 1990s relative to the 1980s, pass-through on export prices remains country-specific and pass-through on consumer prices is nowadays negligible in all three economies we consider.
In a baseline stochastic new open-economy macroeconomics (NOEM) model which parallels alternative invoicing conventions, namely consumer's currency pricing (CCP) vs. producer's currency pricing (PCP), we revisit the question whether the exchange-rate regime matters for trade. We show analytically that under full symmetry, only money shocks and separable but otherwise very general utility, it is irrelevant in affecting expected trade-to-output ratios. A peg-float comparison is nevertheless meaningful under PCP, although not CCP, in terms of volatility of national trade shares: by shutting down the pass-through and expenditure-switching channel, a peg then stabilizes equilibrium trade-to-GDP at its expected level.
The present paper, a rather synthetic and provocative one, proposes answers to two related, recently worrisome and frequently asked questions, as clear from the title. (i) Did the Swiss economy really stagnate in the 1990s? Although we would prefer to term it "weak real growth" instead of outright "stagnation", there has indeed been a problem of the kind in Switzerland in the last eight years or so, yet not as acute as the officially published statistics have suggested. We present broad empirical evidence, exploiting both a national accounting and a PPP-based growth evaluation approach, in support of such a conclusion. The growth deficiency phenomenon has been well accounted for by purely economic explanations such as the convergence proposition, the monetary-fiscal policy mix, the autonomous drop in consumer demand and the structural rigidities in the Swiss economy. In addition, it is also partly explained by statistical real GDP underreporting, as argued by other authors too. On the grounds of the comparison between our two alternative (national vs. PPP) estimates, the mismeasurement of Swiss growth appears to be neither crucially considerable nor fully negligible: of the order of 0.4 percentage points per annum, on average for 1990-1996, as far as per capita real GDP is concerned. The most likely reasons for understating growth relate essentially to the particular structural change Switzerland's economy has been witnessing in the last decade or so. More specifically, because of the conceptual (definition) and technical (national deflator) caveats in measuring real value added and productivity in services -a sector with a traditionally higher share in Switzerland -national statistics has not been able, it appears, to precisely capture, and quantify, the Swiss services industries' recent contribution to real GDP and labour productivity. (ii) Is Switzerland all that rich? Although still relatively high-standing in 1996 on account of its real GDP per head level (at PPPs), we report calculations indicating that this country is much closer to the average for the OECD in terms of real GDP per person employed and per hour worked. A robust finding is that Swiss fabled affluence is nothing but a myth if due account is taken of the amount of work put in by its people. Departing from such a reasoning, we finally derive some lessons for Swiss policy makers that seem important with regard to Switzerland's EU accession process as well as in other international aspects.
This paper starts by reviewing the recent literature on antitrust laws in banking from the perspective of general economic analysis. We focus on the US experience for didactic reasons and as a background against which the Swiss case is discussed further on. After an introductory section, we examine some facts about the process of bank expansion, concentration and mergers in the US during the 1980s and 1990s, and then turn to the driving forces as well as the economic concepts used in assessing possible anticompetitive effects. A third section focuses on the origins and development of the legal framework of banking and competition policy. A brief fourth section summarizes the conclusions and lessons to be derived from the American experience. Finally, in a fifth section, we offer some reflections on the case of Switzerland, which appears to be the mirror image of the US as far as the legal, institutional and empirical aspects of the current situation are concerned. The paper concludes by expressing our confidence that future Swiss competition policy and antitrust legislation in banking will largely benefit from the economic knowledge accumulated on the subject, such as that pertaining to the US case.