UNEMPLOYMENT PERSISTENCE AND THE NAIRU: A BAYESIAN APPROACH

This paper estimates the United States and euro area NAIRU in a Bayesian framework. We set out a simple structural model explaining unemployment by demand and supply factors, which are treated as unobserved variables that have observable effects on measured unemployment, output and inflation. The model allows for unemployment persistence and a time-varying core inflation rate. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is lower in the United States but demand shocks seem to be more important in explaining variation in unemployment.     

UNDERSTANDING THE INTERACTION BETWEEN INTERNATIONAL AND EURO AREA OUTPUT VOLATILITY

This paper addresses two main questions. First, it seeks to establish whether the stylized facts of the ‘great moderation’ that have been documented for the UK and US economies can be found for the Euro area. Second, it explores possible explanations for any changes that have occurred in the volatility of Euro area output fluctuations. In examining why business cycles have moderated, much of the existing literature has tended to concentrate on a few key factors. These include shifts in the structure of the economy, improved monetary policy and a ‘good luck’ factor. This paper, however, follows a relatively new branch of the great moderation literature by focusing on whether international business cycle linkages have changed in a way that may have perpetuated the dampening in Euro area output fluctuations. The results show Euro area output fluctuations to have significantly reduced in variability over the last quarter of a century. The results go on to highlight that, although Euro area cycles differ little from rest of the world cycles, the moderation in Euro area output fluctuations is only marginally due to changes in international business cycle linkages and smaller international and domestic shock variances.     

HYSTERESIS AND THE REGIONAL NAIRUs IN ITALY

This paper investigates the determinants of regional unemployment disparities in Italy. Relying on panel unit root tests and data over the 1977–2003 years, we reject the hysteresis hypothesis and then proceed to estimate the non‐accelerating inflation rate of unemployment (NAIRU) for each of the 20 Italian regions. Our estimates of the regional NAIRUs turn out to be fairly precise and allow us to draw two interesting conclusions. First, the hypothesis of constant regional NAIRUs between 1977 and 2003 is supported by the data. Second, we find that there is a significant degree of heterogeneity among the regional NAIRUs.     

CAPITAL ADEQUACY REQUIREMENTS AND THE FINANCIAL ACCELERATOR CAUSED BY BANK CAPITAL

This paper develops a computable dynamic general equilibrium model with heterogeneous banks, a portion of which may be constrained by capital adequacy requirements and the remainder of which may not, in order to examine what effects the capital requirements and bank capital induce in the macroeconomy. Applying the parameterized expectations algorithm, the model economy shows that binding bank capital constraints induce the financial accelerator, the hump‐shaped dynamic behaviour of output, and ineffectuality of monetary policy, and that all the results are derived from the individual banks’ cross‐sectional asymmetric responses that are consistent with the empirical evidence.     

AN ANALYSIS OF MONETARY POLICY SHOCKS IN JAPAN: A FACTOR AUGMENTED VECTOR AUTOREGRESSIVE APPROACH*

This paper analyses monetary policy shocks in Japan using a factor augmented vector autoregressive approach. There are three main findings. First, the time lags with which the monetary policy shocks are transmitted vary between the various macroeconomic time series. These include several series that have not been included thus far in standard vector autoregressive analysis, including housing starts and employment indices. Second, a coherent picture of monetary policy effects on the economy is obtained. Third, it is found that monetary policy shocks have a stronger impact on real variables, such as employment and housing starts, than industrial production.     

IDEAL AND REAL JAPANESE MONETARY POLICY: A COMPARATIVE ANALYSIS OF ACTUAL AND OPTIMAL POLICY MEASURES*

This paper discusses the successes and failures of Japanese monetary policy by evaluating policies from January 1980 to May 2003 in the light of optimal policy rules. First, we quantitatively conceptualize the Bank of Japan (BOJ)'s policy decisions by employing Bernanke and Mihov's (1998 ) econometric methodology for developing monetary policy measures and term the resulting policy measure the ‘actual policy measure’. Next, assuming that the BOJ is committed to optimal policy rules, we simulate optimal policy paths, which we term ‘optimal policy measures’. We evaluate Japanese monetary policy historically by comparing actual and optimal policy measures.     

BANK OUTPUT MEASUREMENT IN THE EURO AREA: A MODIFIED APPROACH

Banks do not charge explicit fees for many of the services they provide, bundling the service payment with the offered interest rates. This output therefore has to be imputed using estimates of the opportunity cost of funds. We argue that rather than using the single short‐term, low‐risk interest rate as in current official statistics, reference rates should match the risk characteristics of loans and deposits. This would lower euro area imputed bank output by, on average, 28–54 percent compared with the current methodology, implying that euro area GDP (at current prices) is overstated by 0.11–0.18 percent. This adjustment also leads to more plausible shares in value added of income from fixed capital in the banking industry.     

Measuring Monetary Policy in Germany: A Structural Vector Error Correction Approach

Abstract. A structural vector error correction (SVEC) model is used to investigate several monetary policy issues. While being data-oriented the SVEC framework allows structural modeling of the short-run and long-run properties of the data. The statistical model is estimated with monthly German data for 1975–98 where a structural break is detected in 1984. After splitting the sample, three stable long-run relations are found in each subsample which can be interpreted in terms of a money-demand equation, a policy rule and a relation for real output, respectively. Since the cointegration restrictions imply a particular shape of the long-run covariance matrix this information can be used to distinguish between permanent and transitory innovations in the estimated system. Additional restrictions are introduced to identify a monetary policy shock.     

A time-varying “natural” rate of interest for the euro area

We estimate a time-varying “natural” rate of interest (TVNRI) for a synthetic euro area over the period 1979Q1-2004Q4 using a small macroeconomic model, broadly following a methodology developed by Laubach and Williams [2003. Measuring the natural rate of interest. The Review of Economics and Statistics 85(4), 1063-1070] for the United States. The Kalman filter simultaneously estimates the output gap and the natural rate of interest. Our identifying assumptions include a close relationship between the TVNRI and the low-frequency fluctuations of potential output growth. The difference between the real rate of interest and its estimated natural level offers valuable insights into the monetary policy stance over the last two decades and a half.     

An analysis of the informational content of New Zealand data releases: The importance of business opinion surveys

We examine the informational content of New Zealand data releases using a parametric dynamic factor model estimated with unbalanced real-time panels of quarterly data. The data are categorised into 21 different release blocks, allowing us to make 21 different factor model forecasts each quarter. We compare three of these factor model forecasts for real GDP growth, CPI inflation, non-tradable CPI inflation, and tradable CPI inflation with three different real-time forecasts made by the Reserve Bank of New Zealand each quarter. We find that, at some horizons, the factor model produces forecasts of similar accuracy to the Reserve Bank's forecasts. Analysing the marginal value of each of the data releases reveals the importance of the business opinion survey data—the Quarterly Survey of Business Opinion and the National Bank's Business Outlook survey—in determining how factor model predictions, and the uncertainty around those predictions, evolve through each quarter.     

MONEY DEMAND STABILITY AND INFLATION PREDICTION IN THE FOUR LARGEST EMU COUNTRIES

In this paper, we analyze the money demand functions of the four largest EMU countries and of the four-country (EMU-4) aggregate. We identify reasonable and stable money demand relationships for Germany, France and Spain as well as the EMU-4 aggregate. For the case of Italy, results are less clear. From the estimated money demand functions, we derive both EMU-4 and country-specific measures of money overhang. We find that the EMU-4 overhang measure strongly correlates with the country-specific measures, particularly since the start of EMU, and is useful to predict country-specific inflation. However, it generally does not encompass country-specific money overhang measures as predictors of inflation. Hence, aggregate money overhang is an important, but by far not an exhaustive, indicator for the disaggregate level.     

Shocking the eurozone

In this paper, the monetary transmission mechanism within the European Monetary Union is investigated. The impulse response functions and forecast error variance decompositions of a structural vector error correction model (SVECM) are compared with those of a New Keynesian theoretical model. The identifying restrictions of the SVECM are directly derived from the theoretical model. Two permanent shocks are identified, one having only nominal, and one having only real effects. The three transitory shocks comprise a short-term interest-rate shock, an aggregate demand shock and a money demand shock. The main conclusions are that permanently reducing the inflation objective depresses output in the first year, but has no real effects in the long run. Regarding output variability, the results indicate that aggregate demand shocks are most important during the first year, after which aggregate supply shocks dominate.     

How well does a small structural model with sticky prices and wages fit postwar U.S. data?

In this paper, we ask whether a small structural model with sticky prices and wages, embedding various modelling devices designed to increase the degree of strategic complementarity between price-setters, can fit postwar U.S. data. To answer this question, we resort to a two-step empirical evaluation of our model. In a first step, we estimate the model by minimizing the distance between theoretical autocovariances of key macroeconomic variables and their VAR-based empirical counterparts. In a second step, we resort to Watson's [Watson, M.W., 1993. Measures of fit for calibrated models. Journal of Political Economy 101, 1011–1041.] procedure [Measures of fit for calibrated models. Journal of Political Economy 101 (6), 1011.1041] to quantify the model's goodness-of-fit. Our main result is that the combination of sticky prices and sticky wages is central in order to obtain a good empirical fit. Our analysis also reveals that a model with only sticky wages does not perform well according to Watson's criterion [Watson, M.W., 1993. Measures of fit for calibrated models. Journal of Political Economy 101, 1011–1041.].     

The vanishing role of money in the macro-economy: An empirical investigation for India

The recent de-emphasizing of the role of “money” in both theoretical macroeconomics as well as in the practical conduct of monetary policy sits uneasily with the idea that inflation is a monetary phenomenon. Empirical evidence has, however, been accumulating pointing to an important leading indicator role for money and credit aggregates with respect to long term inflationary trends. Such a role could arise from monetary aggregates furnishing a nominal anchor for inflationary expectations, from their influence on the term structure of interest rates and from their affecting transaction costs in markets. Our paper attempts to assess the informational content role of money in the Indian economy by a separation of these effects across time scales and frequency bands, using the techniques of wavelet analysis and band spectral analysis respectively. Our results indicate variability of causal relations across frequency ranges and time scales, as also occasional causal reversals.     

HOUSE PRICES IN THE MEASUREMENT OF INFLATION IN THE EURO AREA

An important element of the current monetary policy debate in Europe is the question of if and how house prices should be included in the harmonized index of consumer prices (HICP). This paper uses a signal extraction approach to inflation measurement to illustrate the impact of including house prices when the aggregate inflation measure is constructed by assigning weights to individual price series based on their signal-to-noise ratio. The inclusion of house prices in the HICP in this manner does not materially impact the appropriate stance of monetary policy. ( JEL E31, E52, E58)     

TESTING THE ONE‐WAY EFFECT IN THE PRESENCE OF TREND BREAKS*

This paper provides an approach to testing the measures of the one‐way effect for cointegrated vector time‐series in the presence of trend breaks. We propose Wald testing the measures and their computational algorithm, an extension of previous work by Hosoya and Yao and Hosoya, to the case where trend breaks are explicitly taken into account in the cointegration relationship. On the basis of the proposed inferential method and the derived evidence, we present a causal structure characterization of money supply and income as well as interest rates for the last 44 years of the Japanese economy, and contrast it with the results of Yao and Hosoya.     

A REVISIT TO THE STATIONARITY OF OECD INFLATION: EVIDENCE FROM PANEL UNIT‐ROOT TESTS AND THE COVARIATE POINT OPTIMAL TEST*

This paper re‐examines the stationarity of inflation rates in 19 Organisation for Economic Cooperation and Development countries with the use of cross‐sectional information. We employ the panel unit‐root tests that allow for cross‐sectional dependency and the covariate point optimal test. These tests have high power in common due to the exploitation of cross‐sectional information, and they can assist mutually to draw a concrete conclusion on inflation dynamics for all series in the panel. Our empirical results show that allowing for cross‐sectional dependency rejects the null hypothesis that all series in the panel have a unit root, implying that there is at least one stationary series in the panel. With the help of the results of the covariate test, we can distinguish the panel into a group of stationary and a group of non‐stationary series. For robustness, the two groups of series are re‐confirmed by the panel tests. Our results reveal evidence of mean reversion in inflation for 15 of 19 countries, which is significantly stronger as compared to that obtained by the state‐of‐the‐art univariate unit‐root tests.     

THE TRANSMISSION OF THE MONETARY POLICY IN THE EURO AREA: THE ROLE OF THE BANKS’ BUSINESS MODEL

This paper sheds some new light on the incidence of the banks’ business model as a component of the bank lending channel in the euro area. Differently from existing literature, the analysis is led on the basis of the two main macroeconomic regions that today characterize the euro area: its north‐east (German‐centric) and south‐west halves. The observation period is 2008–2013, mainly featured by the financial and economic crisis. The empirical findings evidence that in the north‐east half of the euro area the cooperative banks leveraged the effects of the reduction in the interest rates in terms of new lending. In this respect, they differentiated from commercial and savings banks, which showed a more neutral impact on the transmission of the monetary policy decisions. These results highlight the distinctive role of the cooperative banks in terms of credit provision in Germany and in the whole north‐east half of the euro area. Nevertheless, this cooperative banking effect did not emerge for the south‐west half of the continent, particularly hit by the crisis. This may suggest that the bank's business model tend to be neutral to the transmission of the monetary policy in economies characterized by prolonged recessions.     

The Effects of Monetary Policy Shocks in the USA: A Forecast‐Augmented VAR Approach

This paper formulates a forward‐looking monetary policy function for the USA in a structural vector autoregression (VAR) model, by using forecasts of key macroeconomic variables, in addition to the ex post realised variables used in a standard VAR. Since this forecast‐augmented VAR (FOAVAR) uses both forecasted and realised variables, and the standard VAR uses only realised variables, the standard VAR is nested in the FOAVAR. I find that the Fed responds to forecasted macroeconomic variables more significantly than realised variables. I also find that the monetary policy shock in the FOAVAR generates impulse responses of variables that are consistent with the predictions of economic theories, while the policy shock in the standard VAR causes a price puzzle: an increase in the price level due to a contractionary policy shock. These results suggest that a monetary policy function identified in a standard VAR, by using only realised macroeconomic variables, may incorrectly represent the Fed's policy function.     

The effect of monetary policy on real house price growth in South Africa: A factor-augmented vector autoregression (FAVAR) approach

This paper assesses the impact of monetary policy on real house price growth in South Africa using a factor-augmented vector autoregression (FAVAR), estimated using a large data set comprising of 246 quarterly series over the period 1980:01 to 2006:04. The results based on the impulse response functions indicate that, in general, house price inflation responds negatively to monetary policy shock, but the responses are heterogeneous across the middle-, luxury- and affordable-segments of the housing market. The luxury-, large-middle- and medium-middle-segments are found to respond much more than the small-middle- and the affordable-segments of the housing market. More importantly, we find no evidence of the home price puzzle, observed previously by other studies that analyzed house prices using small-scale models. We put this down to the benefit gained from using a large information set.