Estimation of the equilibrium exchange rate: The CHEER approach

The paper presents the results of an investigation where the concept of a steady-state level of the exchange rate is equated with the capital market equilibrium based on the CHEER approach. The empirical analysis concentrates on Poland, because in this case the assessment of the equilibrium exchange rate is of vital importance. The prospect of the Polish currency joining the ERM2 provokes controversies and requires research into the economic consequences of accession to the EMU. The international transmission mechanisms affecting the Polish economy are identified within the VEqCM framework. The calculations indicate that in the last years of the analyzed sample (i.e. up to December 2006) the zloty/euro exchange rate was slightly overvalued, and the steady-state level was found to have been adjusting to the value of 4.1 zlotys.     

Cagan’s paradox and money demand in hyperinflation: Revisited at daily frequency

Using daily data the Cagan money demand is estimated and accepted for the most severe portion of Serbia’s 1992–1993 hyperinflation, i.e. its last 6 months. An implication is that the public adjusted daily throughout this extreme period. Moreover, the obtained semi-elasticity estimates are by far lower than those previously found using monthly data sets. Consequently, the daily estimates reject the longstanding Cagan’s paradox, based on monthly studies, by showing that the economy has been on the correct, increasing side of the Laffer curve almost through the end of hyperinflation. This strongly supports the view that hyperinflation is triggered and driven all way through its end by the government’s hunt for non-decreasing seigniorage. Daily adjustments of public in hyperinflation can account for the difference between the results obtained at daily and monthly frequencies, calling into question the latter. Some evidence is offered that the findings of this paper may hold for other hyperinflations.     

Bank competition efficiency in Europe: A frontier approach

There are numerous ways to indicate the degree of banking competition across countries. Antitrust authorities rely on the structure-conduct-performance paradigm while academics prefer price mark-ups (Lerner index) or correlations of input costs with output prices (H-statistic). These measures are not always strongly correlated within or across countries. Frontier efficiency analysis is used to devise an alternative indicator of competition and rank European countries by their dispersion from a “competition frontier”. The frontier is determined by how well payment and other costs explain variations in loan-deposit rate spread and non-interest activity revenues. Overall, differences in competition appear to be small.     

The role of household and business credit in banking crises

Private credit expansions are an important predictor of subsequent banking crises. We revisit that result with a new dataset from developed and developing countries that decomposes private credit into household credit and enterprise credit. We argue that household credit growth raises debt levels without much effect on long-term income. Rapid household credit expansions generate vulnerabilities that can precipitate a banking crisis. Enterprise credit expansions can have the same effects but it is tempered by the associated increase in income. Our estimates show that household credit expansions have been a statistically and economically significant predictor of banking crises. Enterprise credit expansions are also associated with banking crises but their effect is weaker and less robust.     

The Risk Microstructure of Corporate Bonds: A Case Study from the German Corporate Bond Market

This article presents joint econometric analysis of interest rate risk, issuer‐specific risk (credit risk) and bond‐specific risk (liquidity risk) in a reduced‐form framework. We estimate issuer‐specific and bond‐specific risk from corporate bond data in the German market. We find that bond‐specific risk plays a crucial role in the pricing of corporate bonds. We observe substantial differences between different bonds with respect to the relative influence of issuer‐specific vs. bond‐specific spread on the level and the volatility of the total spread. Issuer‐specific risk exhibits strong autocorrelation and a strong impact of weekday effects, the level of the risk‐free term structure and the debt to value ratio. Moreover, we can observe some impact of the stock market volatility, the respective stock's return and the distance to default. For the bond‐specific risk we find strong autocorrelation, some impact of the stock market index, the stock market volatility, weekday effects and monthly effects as well as a very weak impact of the risk‐free term structure and the specific stock's return. Altogether, the determinants of the spread components vary strongly between different bonds/issuers.     

Unemployment,Government Spending and the Laffer Effect*

The paper studies the effects of income tax rate changes in a general equilibrium model with frictional unemployment. Laffer curve effects, by which a tax rate reduction may increase the level of government spending or its share in output, are shown to be possible under certain conditions. These are the presence of unemployment benefit payments, government budget balance through fiscal spending adjustment and limited quantitative importance of labour reallocation costs. Endogenous government spending acts as a fiscal accelerator if the fiscal burden of unemployment benefit payments is large, but reduces the employment effects of tax rate cuts if it is low.     

Reconsidering the Relationship between Inflation and Relative Price Variability

It has long been popularly believed that the relationship between inflation and relative price variability (RPV) is positive and stable. Using disaggregated CPI data for the United States and Japan, however, this study finds that the relationship is neither linear nor stable over time. The overall relationship is approximately U‐shaped around a nonzero threshold inflation rate. RPV therefore changes not with the inflation rate per se, but with the deviation of inflation from the threshold inflation rate. More importantly, the relationship is by no means stable over time but instead varies significantly in a way that coincides with regime changes of inflation or monetary policy. The relationship was positive during the period of high inflation of the 1970s and the early 1980s, as has been documented by a number of previous studies, whereas it takes a U‐shape profile during the Great Moderation. The results are robust to the use of core inflation, which excludes the traditionally volatile prices of food and energy. This paper then presents a modified version of the Calvo‐type sticky price model to describe the observed empirical regularities. Simulation experiments show that the modified Calvo model fits the data well, and that the underlying relationship hinges upon the degree of price rigidity, which is systematically related to inflation regime. For countries and periods with low inflation rates, the relationship takes a U‐shape as price adjustment is more sticky. In a high‐inflation environment, when price setting becomes more flexible, the U‐shaped profile vanishes.     

The Taylor Rule and “Opportunistic” Monetary Policy

We investigate the possibility that the Taylor rule should be formulated as a threshold process such that the Federal Reserve acts more aggressively in some circumstances than in others. It seems reasonable that the Federal Reserve would act more aggressively when inflation is high than when it is low. Similarly, it might be expected that the Federal Reserve responds more to a negative than a positive output gap. Although these specifications receive some empirical support, we find that a modified threshold model that is consistent with “opportunistic” monetary policy makes significant progress toward explaining Federal Reserve behavior.     

A New Data Set on Monetary Policy: The Economic Forecasts of Individual Members of the FOMC

This paper describes a new data set of the forecasts of output growth, inflation, and unemployment prepared by individual members of the Federal Open Market Committee. The paper discusses the scope of the data set, possibilities for extending it, and some potential uses. It offers a preliminary examination of some of the cross‐sectional features of the data.