The changing nature of the real exchange rate: The role of central bank preferences

We investigate the sources of real exchange rate fluctuations. We do so, first, in the context of a DSGE model that explicitly considers the central bank's preferences. Then we estimate SVAR models, where shocks are identified by sign restrictions derived from the DSGE model. We perform this exercise for twelve countries, nine of which have adopted inflation targeting during the period analyzed. In sharp contrast to the previous evidence in the literature, we find that exchange rate (country risk premium) shocks have become the main drivers of real exchange rate dynamics, while real shocks play a less important role. Evidence from the DSGE model reveals that, as the central bank becomes more averse to inflation movements, and cares less about nominal exchange rate fluctuations, the impact of nominal shocks on the real exchange rate tends to increase, while the impact of real shocks decreases. Our results suggest that the adoption of inflation targeting, along with a floating exchange rate, contributes to a shift in the relative importance of demand and country risk premium shocks in determining the RER.     

Inflation before and after central bank independence: The case of Colombia

In this paper we model the Colombian inflation rate in terms of excess demand effects from asset, goods and factor markets. In contrast to previous results for a group of industrial economies, we find that domestic factors are a far more powerful influence on inflation than are external factors. The paper pays particular attention to the potential effects of the Constitutional Reform of 1991, which created a Central Bank independent from other parts of government. We find that the creation of an independent Central Bank did change some of the parameters of the model, as the disequilibria in goods and monetary markets were found to have a smaller effect on inflation after Central Bank independence was granted.     

Preventing bank panics: The role of the regulator's preferences

How do the preferences of a banking authority affect its decision making in periods of distress and thus financial stability? We study this question in a version of Diamond and Dybvig (1983) with a monopolistic bank and a time-consistent policy response by a banking authority. We show that limited commitment on the part of the banking authority may induce fragility but the banking authority's incentives are also an important determining factor in the degree of financial stability. In particular, under a simple suspension scheme, delegating a banking authority who places sufficient weight on a banker's welfare acts as a commitment device and prevents runs, in analogy with how a Rogoff (1985) “conservative” central banker helps reduce inflation bias. In contrast, once interventions take the form of payment rescheduling, the scope for the bank's susceptibility to a panic increases should the banking authority put more weight on monopoly rents. Identifying such an aspect of vulnerability suggests that appointing a banking authority whose objective function deviates from that of depositors may have unintended consequences.     

The central bank as shaper and observer of events: The case of the yield spread

The yield spread has commonly been employed as a successful predictor of economic growth and recessions, although its marginal predictive power has decreased since the 1990s. Notably, the yield spread's declining power to predict US economic activity coincided with its growing power to predict US interest rate changes. In my view, these phenomena are inevitably linked and share one cause. The central bank intended to enhance both its transparency and credibility through greater information disclosure; this disclosure improved interest rate predictability but might also have crowded out useful private information formerly in the yield spread that helped predict economic activity.     

Managing financial market expectations: The role of central bank transparency and central bank communication

In this paper, we study the influence of central bank transparency and informal central bank communication on the formation of money market expectations. The sample covers nine major central banks from January 1999 to July 2007. We find, first, that transparency reduces the bias in money market expectations and dampens their variation. Second, informal communications help manage financial market expectations by reducing the variation of expectations. Third, various subcategories of the Eijffinger and Geraats (2006) transparency index lead to a smaller bias in expectations (in particular, evaluation of policy outcome and explanation of interest rate decisions) and to a reduction in the variation of expectations (in particular, explicit prioritization of objectives and provision of information on unanticipated macroeconomic disturbances).     

An analysis of regime shifts in the Turkish economy

We use a time-varying dynamic factor model with regime switching to construct and estimate the leading indicators of the currency crises in Turkey. After that, we analyze the business cycles of the Turkish economy, by using a three-state univariate Markov-switching model. Both models capture the observed dynamics of the Turkish economy over the period 1987–2002.     

Prediction of bank financial strength ratings: The case of Turkey

Bank financial strength ratings have gained widespread popularity especially after the recent financial turmoil. Rating agencies were criticized because of their ratings and failure to predict the bankruptcy of the banks. Based on this observation, we investigate whether the forecast of the rating of bank's financial strength using publicly available data is consistent with those of the credit rating agency. We use the data of Turkish banks for this investigation. We take a country-specific approach because previous studies found that proxies used for environmental factors (political, economic, and financial risk of the country) did not have any explanatory power and it is hard to find international data for other important factors such as franchise value, concentration, and efficiency. We use two popular multivariate statistical techniques (multiple discriminant analysis and ordered logistic regression) to estimate a suitable model and we compare their performances with those of two mostly used data mining techniques (Support Vector Machine and Artificial Neural Network). Our results suggest that our predictions are consistent with those of Moody's financial strength rating in general.. The important factors in rating are found to be profitability (measured by return on equity), efficient use of resources, and funding the businesses and the households instead of the government that shows efficient placement of the funds.     

The powers that are: central bank independence in the Greenspan era

This paper investigates political pressure from incumbent Presidents and Congress on US monetary policy during the period that Greenspan was the chairman of the Federal Reserve. We propose an expectations-augmented Taylor rule in which we replace realized values with expectations, and use the unemployment gap instead of the output gap. We apply a state-space framework that allows the use of mixed frequency data. Our findings suggest that the Federal Reserve under Greenspan did not create election driven cycles, but also did not strictly follow the Taylor rule. The deviations from the Taylor rule are not driven by partisan politics, but are rooted in the expected economic conditions.     

The evolution of consumer preferences in Poland

This note investigates a change of consumer preferences in Poland in the period of 1996–2016. I use the Euler equation–generalized method of moments (GMM) to estimate the structural parameters of the aggregate consumption function to show that consumers in Poland significantly change their attitude to risk during the global financial crisis, when the estimate of the risk-aversion parameter becomes very high, while otherwise close to zero suggesting near risk neutrality. Also, the subjective trade-off between consumption today and tomorrow undergoes an evolution towards lower ‘impatience’. Over-identifying restrictions are tested and the null hypothesis of validity of instruments is not rejected. The stability over time of the estimated parameters is tested and rejected. The evolution of preferences is shown through recursive estimates of the deep parameters, too.     

New directions in predicting bank failures: The case of small banks

This paper uses five financial accounting ratios with three alternative loan-portfolio diversification measures to classify failures among small commercial banks that occurred during 1984. Classifications for one, two and three years before failure are performed using linear probability, logit, probit, and discriminant analysis models. Validation is done through the U-Method. The results indicate that the logit and probit functional forms may offer an advantage over the more frequently used discriminant analysis. U-Method classification accuracy is approximately 86 percent for the logit and probit models.     

Macroeconomic and financial effects of oil price shocks: Evidence for the euro area

The paper investigates the macroeconomic and financial effects of oil price shocks for the euro area, with a special focus on post-2009 oil price dynamics and the recent slump. The analysis is carried out episode by episode, by means of a large-scale time-varying parameter model. We find that recessionary effects are triggered by oil price hikes and, in some cases, also by oil price slumps. In this respect, the post-2009 run-up likely contributed to sluggish growth, while uncertainty and real interest rate effects are the potential channels through which the 2014 slump has depressed aggregate demand and worsened financial conditions. Also in light of the zero interest rate policy carried out by the ECB, in so far as the Quantitative Easing policy failed to generate inflationary expectations, a more expansionary fiscal policy might be required to counteract the deflationary and recessionary threat within the expected environment of soft oil prices.     

Auctions with a buy price: The case of reference-dependent preferences

In an auction with a buy price, the seller provides bidders with an option to end the auction early by accepting a transaction at a posted price. This paper develops a model of an auction with a buy price in which bidders use the auction's reserve price and buy price to formulate a reference price. The model both explains why a revenue-maximizing seller would want to augment her auction with a buy price and demonstrates that the seller sets a higher reserve price when she can affect the bidders' reference price through the auction's reserve price and buy price than when she can affect the bidders' reference price through the auction's reserve price only. The comparative statics properties of bidding behavior are in sharp contrast to equilibrium behavior in other models where the existence and size of the auction's buy price have no effect on bidding behavior.     

The inflation bias when the central bank targets the natural rate of unemployment

This paper studies the proposition that an inflation bias can arise in a setup where a central banker with asymmetric preferences targets the natural unemployment rate. Preferences are asymmetric in the sense that positive unemployment deviations from the natural rate are weighted more (or less) severely than negative deviations in the central banker's loss function. The bias is proportional to the conditional variance of unemployment. The time-series predictions of the model are evaluated using data from G7 countries. Econometric estimates support the prediction that the conditional variance of unemployment and the rate of inflation are positively related.     

产业技术视角下锡产业演进阶段识别分析——基于时变参数生产函数模型

技术进步在产业演进过程中发挥了重要作用,是产业演进的根本动力。通过建立时变参数生产函数模型,设定状态方程和量测方程,利用卡尔曼滤波法求解出每年各技术指标的具体数值,再根据产业技术视角下产业演进的判定标准,对中国锡产业所处的演进阶段及分界点做出近似测度。研究结果表明:技术指标变化可用来识别锡产业演进阶段;中国锡产业目前表现出衰退期特征;锡产业演进规律受到产业性质的制约。根据锡产业表现出的阶段性特征和其内在的演进规律,有利于政府部门制定战略性资源型产业发展规划,为产业选择提供依据。     

The effects of economic policy uncertainty on China’s economy: evidence from time-varying parameter FAVAR

ABSTRACT

This article explores the effects of China’s economic policy uncertainty (EPU) on its fiscal policy, monetary policy and a wide range of macro-economic variables using a time-varying parameter FAVAR model. Based on monthly data from 07/2003 to 08/2017, the time-varying structure of the model allows us to capture the time-varying characteristics of the macro-economic variables and which channel is relevant. Empirical results reveal that the reaction of monetary and fiscal policies to EPU is highly asymmetric across macro-economic circumstances. Loose monetary and fiscal policies are adopted in response to EPU shocks during the financial crisis, while policies are moderately tightened after the crisis. The China Interbank Offered Rate (Chibor) responds more sensitively and severely than M2 to EPU shocks. Additionally, EPU shocks have a significant and negative impact on economic growth, consumption, exchange rates, bonds and the stock market, but showing a positive impact on credit, real estate and fixed asset investment (which might be due to China’s special economic market environment and the high investment return). The results indicate that EPU shocks significantly affect macroeconomic fundamentals through precautionary savings and financial market channels but lose their effectiveness through a ‘real options’ effect.     

Forecasting the Direction of Policy Rate Changes: The Importance of ECB Words

This paper evaluates the predictive power of different information sets for the European Central Bank (ECB) interest-rate-setting behaviour. We employ an ordered probit model, i.e. a limited dependent variable framework, to take into account the discreteness displayed by policy rate changes. The results show that the forecasting ability of standard Taylor-type variables, such as inflation and output gap, is fairly low both in-sample and out-of-sample, and is comparable to the performance of the random walk model. Instead by using broader information sets that include measures of core inflation, exchange rates, monetary aggregates and financial conditions, the accuracy of the forecasts about ECB future actions substantially improves. Moreover, ECB rhetoric considerably contributes to a better understanding of its policy reaction function. Finally, we find that that the ECB has been fairly successful in educating the public to anticipate the overall future direction of its monetary policy, but has been less successful in signalling the exact timing of rate changes.     

Exploiting old customers and attracting new ones: The case of bank deposit pricing

Recent theoretical contributions suggest that deposit interest rates should be higher in geographic areas characterized by greater in-migration and lower for depositors at banks with greater shares of existing (or so-called “locked-in”) depositors. These hypotheses are tested using a rich data set obtained for the Spanish banking industry. Results confirm that, all else equal, banks offer higher deposit rates in territories characterized by greater in-migration, and also that they tend to offer lower rates, the larger the number of their locked-in depositors. These findings confirm the existence of the trade-off between exploiting old customers and attracting new ones.     

Customer preferences versus managerial decision-making in open innovation communities: the case of Starbucks

Customers can participate in open innovation communities posting innovation ideas, which in turn can receive comments and votes from the rest of the community, highlighting user preferences. However, the final decision about implementing innovations corresponds to the company. This paper is focused on the customers' activity in open innovation communities. The aim is to identify the main topics of customers' interests in order to compare these topics with managerial decision-making. The results obtained reveal first that both votes and comments can be used to predict user preferences; and second, that customers tend to promote those innovations by reporting more comfort and benefits. In contrast, managerial decisions are more focused on the distinctive features associated with the brand image.     

Formal targets, central bank independence and inflation dynamics in the UK: A Markov-Switching approach

We examine inflation and uncertainty in the UK with a version of the Markov Switching model, which allows for changes in the variance as well as in the mean and persistence of a series. We find that the UK’s attempts at exchange rate pegs in the form of shadowing the deutschmark and entering the ERM were ineffective, and in the latter case counterproductive in lowering inflation uncertainty. The 1981 budget, however, greatly lowered uncertainty, and the adoption of a formal inflation target also had a palpable, negative impact on inflation uncertainty. As a suggestive exercise, we examine inflation uncertainty in the US, and find that, over 2005–2008, in the absence of an inflation target, uncertainty rose in the US, while uncertainty remained low in the UK over this period of rising commodity prices and financial turmoil.     

Measuring bank competition under binding interest rate regulation: the case of China

Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition have concluded that bank competition in China declined during the past decade, despite progressive reforms implemented since the 1980s. We show that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar–Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the profit elasticity (PE) approach does not suffer from these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996–2008, we show that competition actually increased in the past decade when the PE indicator is used.