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482. Optimal Monetary Policy in an Operational Medium-Sized DSGE Model
- Author:
- Malin Adolfson, Stefan Laseen, Jesper Linde, and Lars E.O. Svensson
- Publication Date:
- 07-2011
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incoporates large international spillover effects.
- Topic:
- Development, Economics, Monetary Policy, and Finance
- Political Geography:
- Global Focus
483. Firm Default and Aggregate Fluctuations
- Author:
- Tor Jacobson, Jesper Linde, and Kasper Roszbach
- Publication Date:
- 08-2011
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990-2009, a period which includes a full-scale banking crisis, we find strong evidence for a substantial and stable impact from aggregate fluctuations on business defaults. A standard logit model with financial ratios augmented with macroeconomic factors can account surprisingly well for the outburst in business defaults during the banking crisis, as well as the subsequent fluctuations in default frequencies. Moreover, the effects of macroeconomic variables differ across industries in an economically intuitive way. Out-of-sample evaluations show that our approach is superior to models that exclude macro information and standard well-fitting time-series models. Our analysis shows that firm-specific factors are useful in ranking firms' relative riskiness, but that macroeconomic factors are necessary to understand fluctuations in the absolute risk level.
- Topic:
- Economics, Finance, Macroeconomics, and Banking
- Political Geography:
- Global Focus
484. Empirical Estimation of Trend and Cyclical Export Elasticities
- Author:
- Jane Haltmaier
- Publication Date:
- 09-2011
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper uses an adaptation of Vahid and Engle's common trend/common cycle analysis to estimate trend and cyclical export elasticities for trading partner income and real exchange rates for 36 countries. For the countries for which both types of income elasticities can be identified, the cyclical elasticity is on average more than twice as large as the trend elasticity. The methodology is applied to forecasting exports during the recent cycle and it appears to improve on simpler models for about half of the countries. For an aggregate of all of the countries for which separate elasticities can be identified, the RMSE is about half as large for the trend/cycle model as for the simple model.
- Topic:
- Economics, International Trade and Finance, Exchange Rate Policy, and Exports
- Political Geography:
- Global Focus
485. Loose Commitment in Medium-Scale Macroeconomic Models: Theory and Applications
- Author:
- Davide Debortoli, Junior Maih, and Ricardo Nunes
- Publication Date:
- 11-2011
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment. As opposed to the existing literature, our method can be employed in medium- and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters (2007) model, where we show that imperfect commitment has relevant implications for interest rate setting, the sources of business cycle fluctuations, and welfare.
- Topic:
- Economics, Monetary Policy, Business, and Macroeconomics
- Political Geography:
- Global Focus
486. Monetary Regime Switches and Unstable Objectives
- Author:
- Davide Debortoli and Ricardo Nunes
- Publication Date:
- 11-2011
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- Monetary policy objectives and targets are not necessarily stable over time. The regime switching literature has typically analyzed and interpreted changes in policymakers' behavior through simple interest rate rules. This paper analyzes policy regime switches explicitly modeling policymakers' behavior and objectives. We show how current monetary policy is affected and should optimally respond to alternative regimes. We also show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers' preferences. In fact, capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results.
- Topic:
- Economics, Monetary Policy, Interest Rates, and Fiscal Policy
- Political Geography:
- Global Focus
487. Are Recoveries from Banking and Financial Crises Really So Different?
- Author:
- Greg Howard, Robert Martin, and Beth Anne Wilson
- Publication Date:
- 11-2011
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years. Focusing specifically on the performance of output after the recession trough, we find little or no difference in the pace of output growth across types of recessions. In particular, banking and financial crisis do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss. However, recovery does change with some characteristics of recession. Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions. Most recessions are associated with a slowing, if not outright decline in house prices, but recessions with large declines in house prices also tend to have slower recoveries. Long recessions and those associated with poor housing-market outcomes can lead to sustained output losses relative to pre-crisis trends. Consistent with microeconomic studies showing permanent income loss to job-losing workers during recessions, we find that the sustained deviation in output from trend is associated with a reduction in labor input, especially linked to declines in employment and labor-force participation following recessions. On net, our results imply that the output/employment gap following a severe, long recessions is considerably smaller than is typically assumed by standard macro models, which in turn may have substantial implications for macroeconomic policy during recoveries.
- Topic:
- Economics, Financial Crisis, Finance, Banking, and Banking Crisis
- Political Geography:
- Global Focus
488. Financial Globalization and Monetary Policy
- Author:
- Steven B. Kamin
- Publication Date:
- 06-2010
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper reviews the available evidence and previous research on potential effects of financial globalization, that is, the international integration of financial markets. In particular, we address the questions: Has financial globalization materially increased the influence of external developments on domestic monetary conditions? And, has it reduced the influence of central banks over financial and economic conditions in their own country? We find that central banks with floating currencies retain the ability to independently determine short-term interest rates and thus influence broader financial conditions and macroeconomic performance in their economies. However, domestic financial conditions appear to have become more vulnerable to a wide range of external shocks, complicating the task of making appropriate monetary policy decisions. Moreover, the financial crisis has highlighted the importance of cross-border channels for the transmission of liquidity and credit shocks. With financial transactions increasingly being undertaken in vehicle currencies such as dollars and euros, the liquidity provision and the lender-of-last resort functions of many central banks are being challenged. Accordingly, international arrangements for liquidity provision may become increasingly important in the future.
- Topic:
- Economics, Globalization, International Cooperation, Monetary Policy, and Interest Rates
- Political Geography:
- Global Focus
489. Globalization: Curse or Cure? Policies to Harness Global Economic Integration to Solve Our Economic Challenge
- Author:
- Jagadeesh Gokhale
- Publication Date:
- 02-2010
- Content Type:
- Working Paper
- Institution:
- The Cato Institute
- Abstract:
- Globalization holds tremendous promise to improve human welfare but can also cause conflicts and crises as witnessed during 2007–09. How will competition for resources, employment, and growth shape economic policies among developed nations as they attempt to maintain productivity growth, social protections, and extensive political and cultural freedoms?
- Topic:
- Development, Economics, Globalization, and International Trade and Finance
- Political Geography:
- Global Focus
490. Dependency and Complacency in the Energy Sector: Implications for Human Security
- Publication Date:
- 10-2010
- Content Type:
- Policy Brief
- Institution:
- Centre for Non-Traditional Security Studies, S. Rajaratnam School of International Studies
- Abstract:
- The need for higher levels of economic growth and development – in both developing and developed countries – has only served to increase the world's appetite for energy. The persistent dependence on traditional sources of energy in the form of fossil fuels such as oil and coal relegates the plan to develop renewable sources of energy to a long-term goal despite the desire for sustainable development and a low-carbon economy. Such dependency on these energy sources has sometimes come with a degree of complacency. Complacency sets in when profit-driven firms fail to take into account the socioeconomic and environmental implications of the development of traditional energy sources; these could indirectly affect production and operational processes as well as the firms' overall image. This complacency is reflected in ineffective management which can and has posed threats to human security.
- Topic:
- Security, Development, Economics, and Energy Policy
- Political Geography:
- Global Focus