Canadian Interest Rate Setting: The Information Content of Canadian and U.S. Central Bank Communication

We explain Canadian target rate decisions using macroeconomic variables as well as Bank of Canada and Federal Reserve communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to explain and predict 60 target rate decisions between 1998 and 2006. We find that communications, especially speeches and testimony by Canadian Governing Council members, provide a significant and robust explanation of Canadian target rate decisions. However, prior to the introduction of fixed announcement dates, Canadian communications contained more information on upcoming policy moves. Finally, communications by the U.S. Federal Reserve Bank—which are much more frequent—outperform our Canadian communication indicators in explaining Canadian interest rate decisions.     

Public budgetary rules and GDP growth: An empirical study on OECD and twelve european countries

We study the long-term effects of budgetary rules on GDP growth rate and analyse the determinants of the short-term GDP growth dynamics. For both a sample of 19 OECD and a subsample of 12 European countries, we show that, in the long run, improvements in the cyclically adjusted budget balance, as well as increases in the tax burden, have negative effects on GDP growth. The highest effect of fiscal policy on GDP growth would be obtained if the structural deficits were used to increase the market size by reducing the tax burden. In line with Barro (1990), a deficit-financed reduction of tax burden has a stronger effect for European than for OECD countries, because in Europe the government size with respect to market size is too large. Therefore, if GDP growth is a dominant policy objective, in Europe specific actions should redress the 2012 Treaty toward a reduction of the tax burden.     

Inflation Forecast Targeting: An Alternative Approach to Estimating the Inflation‐Output Variability Tradeoff

We suggest a new way of computing the inflation‐output variability tradeoff under inflation forecast targeting. Our approach is based on dynamic, stochastic simulations of the average inflation rate over a two‐year horizon using the moving average representation of a vector autoregressive (VAR) model. Using real‐time data over two samples, we estimate the inflation‐output variability tradeoff for the United States and show that it has shifted favorably over time. We analyze the policy interventions required to achieve target inflation in each sample and compare these interventions over time.     

Deflationary shocks and monetary rules: An open-economy scenario analysis

The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions on whether the zero interest floor (ZIF) is binding. It uses a two-country general-equilibrium simulation model calibrated to the Japanese economy vis-à-vis the rest of the world. Negative demand shocks have more prolonged and startling effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. More open economies hit the ZIF for a shorter period of time, and with less harmful effects. Deflationary supply shocks have different implications according to whether they are concentrated in the tradables rather than the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding. J. Japanese Int. Economies 20 (4) (2006) 665–698.     

Monetary Policy Impulses and Retail Interest Rate Pass‐Through in Asian Banking Markets

This paper considers the integration of financial markets and mutual influences of monetary policies in the USA and Asia based on monthly data from 1994 to 2007. We used panel‐type and time‐series and quantile panel‐type error correction models to test the influences of expected and unexpected monetary policy impulses on the interest rate pass‐through mechanism in the financial markets of 9 Asian countries and the USA. The empirics show that if interest rate integration exists in the financial markets, the following effects are observed: (i) positive impulses of unexpected monetary policy will lead to an increase in the long‐run multiplier of the retail interest rate; (ii) the adjustment of retail interest rates with short‐run disequilibrium will lead to an increase in the long‐run markup; and (iii) the empirical results of quantile regression prove that when the interest variation is greater than the 0.5th quantile and unexpected monetary policy impulses are greater than the expected monetary policy impulses, the short‐run interest rate pass‐through mechanism becomes more unstable.     

Responding to the global financial crisis: Vietnamese exchange rate policy, 2008–2009

The paper presents an analysis of exchange rate policy in Vietnam during 2008–2009. In early 2008, the country faced a sudden reversal of capital flows as signs of developing domestic vulnerabilities became evident. The downward pressure on the dong then intensified with the onset of the global financial crisis in the fall. In these environments, the Vietnamese authorities responded with various exchange rate policy measures. The paper documents a shift in Vietnam's de facto exchange rate regime, from a basket peg to a simple US dollar peg, when the domestic vulnerabilities became compounded by the evolving global crisis. The authorities utilized additional measures to relieve pressure on the parallel exchange rate. An event study methodology finds little evidence of systematic effectiveness for these policy actions; any effectiveness was short-lived. A close examination of individual actions suggests that the impact of foreign exchange market intervention appeared more consistent than any other type of measure and most effective when combined with other measures.     

Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC

The aim of this paper is to find some empirical evidence on Purchasing Power Parity (PPP) and Uncovered Interest Parity (UIP) in the Spanish case vis à vis the European Community for the period 1980–89. The main contribution of the paper is the aggregation of the variables corresponding to the countries that participate in the exchange rate mechanism of the European Monetary System. The results support the importance of the interest differential as an explanatory variable for the short-term adjustment to the PPP. The results follow from powerful estimation techniques, applied in the framework of a multivariate error-correction model using the maximum-likelihood procedure as developed by Johansen and Juselius (1992).     

The Categorization of Small Open Economies and the Response to Foreign Interest Rate Shocks: Based on Financial Integration and Net External Credit

To analyze precisely effects of foreign interest rate hike shocks, this paper categorizes small open economies into four kinds of types based on the net external credit (or debt) level and the financial integration level. The empirical result shows that responses of macroeconomic variables tend to differ substantially depending on the type of a small open economy. These findings imply that we need to consider the net external credit (or debt) level and the financial integration level of a small open economy when we predict the effect of a foreign interest rate hike shock.     

Exchange Rates and Economic Recovery in the 1930s: An Extension to Asia

Scholars have found a positive relationship between the magnitude of currency depreciation and the extent of recovery from the Great Depression for Europe and Latin America. The relationship between currency depreciation and economic activity during the Great Depression for Asian economies has not yet been explored. This paper examines this topic using data from 13 Asian economies: China, India, Indonesia, Iran, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, Turkey, and Vietnam. We find that Asian economies responded in a similar way to currency depreciation during the Great Depression as did European and Latin American countries.