How should monetary policy respond to changes in the relative price of oil? Considering supply and demand shocks

This paper examines optimal monetary policy in a New Keynesian model where supply and demand shocks affect the price of oil. Optimal policy fully stabilizes core inflation when wages are flexible. The nominal rate rises (falls) in response to the demand (supply) shock. With sticky wages core inflation falls (rises) in response to the demand (supply) shock. Impulse response functions from a VAR estimated with post-1986 U.S. data show minimal movement in core inflation in response to both shocks. The federal funds rate rises (falls) in response to the demand (supply) shock, consistent with the predictions from the theoretical model for policy that stabilizes core inflation.     

线性和非线性视角下的费雪效应实证检验

基于2000年1月~2009年12月我国名义利率和通货膨胀率均为非平稳时间序列的事实,采用Johansen协整检验和门限协整(threshold cointegration)两种方法对我国是否存在费雪效应进行检验;实证发现,两种方法均支持我国存在弱费雪效应,但得出来的弱费雪效应程度却存在差别,前者认为我国通货膨胀率的变化只有6%反应到名义利率上面,而后者认为这个比例达到42.4%。     

Post-euro EU and US interest rates and foreign exchange rates: Are they in harmony or in disarray?

This paper focuses on: (1) how a select set of financial and economic factors could set the path for interest rates and foreign exchange rates, and (2) whether the resultant realized interest and exchange rates would be in harmony or in disarray. Using post-euro data for the EU and the US, an array of monetary rules is examined. In particular, the paper investigates whether the original and the extended Taylor rules provide an explanation of the dynamics of the EU monetary system since the inception of the euro. Our findings indicate that the EU and the US monetary responses are not the same and that exchange rates play a significant role.     

Central banks’ interest rate projections and forecast coordination

We apply a simple test to study the effect of the publication of central banks’ interest-rate projections on the coordination of private-sector interest-rate forecasts. Our results indicate that the publication of interest-rate projections does not lead private-sector forecasters to coordinate their forecasts. In fact, private-sector forecasters rather seem to anti-coordinate, that is, they scatter their forecasts around a consensus forecast or around a central bank's interest-rate projections.     

Interest rate and bank stock returns asymmetry: Evidence from U.S. banks

We use the multivariate extension of Exponential Generalized Autoregressive Conditionally Heteroscedastic (EGARCH) of Nelson, Econometrica, 59: 347–370, 1991 to test for spillover effects and examine the extent of asymmetries between short- and long-term interest rates and portfolios of money center, large, and medium-size banks in the U.S. Our results indicate the existence of price and volatility spillovers from short- and long-term interest rates to the three bank portfolios. We also provide evidence of response asymmetries for the portfolios of money center and large banks, suggesting that money center and large banks are more sensitive to negative than positive short- and long-term interest rate changes.

Degrees of tax indexation and nominal interest rates: Effects of inflation on incentives to save and invest

This paper examines the effects of inflation expectations on nominal interest rates, and incentives to save and invest under partial and complete tax indexation schemes. One would expect that a partially indexed structure would be better than a non-indexed system. However, this is not the case—it reduces the adverse effects of inflation on the incentives to save, but accentuates them on the incentives to invest. Moreover, a change from a non-indexed tax structure to a fully-indexed structure will, ceteris paribus, lead to lower equilibrium interest rates, whereas a switch to a partially indexed system will imply higher rates.

The deterministic shift extension and the affine dynamic Nelson–Siegel model

The affine dynamic Nelson–Siegel model links the affine class of models with the Nelson–Siegel interpolation scheme of the yield curve. Its parameters are interpreted as the latent factors of the spot rate process driven by an affine diffusion. Using an appropriate specification of this diffusion, the yields become in form of the Nelson–Siegel model but an adjustment term is introduced. In this paper, the model is extended using a deterministic shift extension so as to perfectly fit the term structure and reduce the correction term. This enhancement allows to simulate the yield curve and the spot rate process consistently with the market data used for the calibration of the model. A numerical example discusses the calibration results of the original model and the proposed extension.     

Strategic behavior in financial markets

We describe a financial market as a noncooperative game in strategic form. Agents may borrow or deposit money at a central bank and use the cash available to them in order to purchase a commodity for immediate consumption. They derive positive utility from consumption and from having cash reserves at the end of the day, whereas being bankrupt entails negative utility. The bank fixes interest rates. The existence of Nash equilibria (both mixed and pure) of the ensuing game is proved under various assumptions. In particular, no agent is bankrupt at equilibrium. Asymptotic behavior of replica markets is discussed, and it is shown that given appropriate assumptions, the difference between a strategic player and a price taker is negligible in a large economy.     

What do interest rates reveal about the functioning of real business cycle models?

This paper begins by documenting the extent to which the predictions of standard Real Business Cycle (RBC) models are incompatible with observed movements in real interest rates. The main finding of the paper is that extending the baseline model to include habit persistence in consumption and adjustment costs to capital significantly improves the model's empirical performance. In our evaluation of the model's performance, we take special care of estimating and testing predictions of the model using both moments drawn directly from the data and moments calculated after identifying shocks to the stochastic trend.     

Bond risk, bond return volatility, and the term structure of interest rates

This paper explores the time variation in the bond risk, as measured by the covariation of bond returns with stock returns and consumption growth, and in the volatility of bond returns. A robust stylized fact in empirical finance is that the spread between the yields on long- and short-term bonds forecasts future excess returns on bonds at varying horizons positively; in addition, the short-term nominal interest rate forecasts both the stock return volatility and the exchange rate volatility positively. This paper presents evidence that movements in both the short-term nominal interest rate and the yield spread are positively related to changes in the subsequent realized bond risk and bond return volatility. The yield spread appears to proxy for business conditions, while the short rate appears to proxy for inflation and economic uncertainty. A decomposition of bond betas into a real cash flow risk component and a discount rate risk component shows that yield spreads have offsetting effects in each component. A widening yield spread is correlated with a reduced cash-flow (or inflationary) risk for bonds, but it is also correlated with a larger discount rate risk for bonds. The short rate only forecasts the discount rate component of the bond beta.     

Evaluating factor forecasts for the UK: The role of asset prices

This paper applies a large data set, consisting of 167 monthly time series for the UK, both economic and financial, to simulate out-of-sample predictions of industrial production, inflation, 3-month Treasury Bills, and other variables. Fifteen dynamic factor models that allow forecasting based on large panels of time series are considered. The performances of these factor models are then compared to the following competing models: a simple univariate autoregressive, a vector autoregressive, a leading indicator, and a Phillips curve models. The results show that the best dynamic factor models outperform the competing models in forecasting at 6-, 12-, and 24-month horizons. Thus, the financial markets may have predictive power for the economic activity. This can be a useful tool for central banks and financial institutions, which may use the factor models to construct leading indicators of the economic conditions. In addition, researchers can see a strategic application of factor models.