Selected Reference and Reading Materials compiled by Dan Villanueva


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Record ID

76     [ Page 61 of 68, No. 1 ]

Date

2010-09

Author

Stéphane Dées, M. Hashem Pesaran, L. Vanessa Smith, Ron P. Smith

Affiliation

European Central Bank, Cambridge University, Birkbeck College

Title

Supply, demand and monetary policy shocks in a multi-country New Keynesian Model

Summary /
Abstract

This paper estimates and solves a multi-country version of the standard DSGE New Keynesian (NK) model. The country-specific models include a Phillips curve determining inflation, an IS curve determining output, a Taylor Rule determining interest rates, and a real effective exchange rate equation. The IS equation includes a real exchange rate variable and a countryspecific foreign output variable to capture direct inter-country linkages. In accord with the theory all variables are measured as deviations from their steady states, which are estimated as long-horizon forecasts from a reduced-form cointegrating global vector autoregression. The resulting rational expectations model is then estimated for 33 countries on data for 1980Q1-2006Q4, by inequality constrained IV, using lagged and contemporaneous foreign variables as instruments, subject to the restrictions implied by the NK theory. The multi-country DSGE NK model is then solved to provide estimates of identified supply, demand and monetary policy shocks. Following the literature, we assume that the within country supply, demand and monetary policy shocks are orthogonal, though shocks of the same type (e.g. supply shocks in different countries) can be correlated. We discuss estimation of impulse response functions and variance decompositions in such large systems, and present estimates allowing for both direct channels of international transmission through regression coefficients and indirect channels through error spillover effects. Bootstrapped error bands are also provided for the cross country responses of a shock to the US monetary policy.

Keywords

Global VAR (GVAR), New Keynesian DSGE models, supply shocks, demand shocks, monetary policy shocks.

URL

http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1239.pdf

Remarks

This adds to the toolkit that includes the Global Projection Model (GPM) and the Global Integrated Monetary and Fiscal Model (GIMF) developed at the IMF, which are estimated using Bayesian techniques, whereas the paper by Dees et al uses constrained instrumental variables. Both are versions of DSGE NK models. The IMF global models can be found in http://www.douglaslaxton.org/index.html.



Record ID

75     [ Page 61 of 68, No. 2 ]

Date

2010-09

Author

Lars E O Svensson

Affiliation

Deputy Governor, Sveriges Riksbank

Title

Monetary policy after the financial crisis -- Speech by Mr Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at the Second International Journal of Central Banking IJCB Fall Conference, Tokyo, 17 September 2010

Summary /
Abstract

"My main conclusion from the crisis with regard to monetary policy so far is that flexible inflation targeting – applied in the right way and using all the information about financialconditions that is relevant for the forecast of inflation and resource utilisation at any horizon – remains the best-practice monetary policy before, during, and after the financial crisis. But a better theoretical, empirical and operational understanding of the role of financial conditions and financial intermediation in the transmission mechanism is urgently required and needs much work, work that is already underway in academia and in central banks. Furthermore, monetary policy cannot guarantee financial stability. A separate financial-stability policy, with the objective of financial stability and with suitable instruments other than the policy rate, is required."

Keywords

Monetary policy, financial oversight, financial conditions, financial crisis

URL

http://www.bis.org/review/r100920c.pdf

Remarks

Lars Svensson does not subscribe to the argument advanced by some economists that financial stability should be a third, separate target in the policy reaction function in a flexible inflation targeting framework. Instead, he argues that the goal of financial stability should be handled by another policy instrument, i.e., effective financial oversight and regulation. He calls for more research on the impact of financial conditions on inflation and the output gap. (See the related paper by Adrian and Shin,
http://dv.data.ph/articles/display.php?id=71, in which they conclude that the interaction of leverage constraints of financial intermediaries, short-term interest rates, and financial assets is important and should be taken into account in the conduct of monetary policy.)



Record ID

74     [ Page 61 of 68, No. 3 ]

Date

2010-04

Author

Kai Christoffel, Günter Coenen, Anders Warne

Affiliation

European Central Bank

Title

Forecasting with DSGE Models

Summary /
Abstract

In this paper we review the methodology of forecasting with log-linearised DSGE models using Bayesian methods. We focus on the estimation of their predictive distributions, with special attention being paid to the mean and the covariance matrix of h-step ahead forecasts. In the empirical analysis, we examine the forecasting performance of the New Area-Wide Model (NAWM) that has been designed for use in the macroeconomic projections at the European Central Bank. The forecast sample covers the period following the introduction of the euro and the out-of-sample performance of the NAWM is compared to nonstructural benchmarks, such as Bayesian vector autoregressions (BVARs). Overall, the empirical evidence indicates that the NAWM compares quite well with the reduced-form models and the results are therefore in line with previous studies. Yet there is scope for improving the NAWM’s forecasting performance. For example, the model is not able to explain the moderation in wage growth over the forecast evaluation period and, therefore, it tends to overestimate nominal wages. As a consequence, both the multivariate point and density forecasts using the log determinant and the log predictive score, respectively, suggest that a large BVAR can outperform the NAWM.

Keywords

Bayesian Inference, DSGE Models, Euro Area, Forecasting, Open-Economy Macroeconomics, Vector Autoregression

URL

http://www.ecb.int/pub/pdf/scpwps/ecbwp1185.pdf

Remarks

The authors compare favorably the forecasting performance of the ECB NAWM DSGE model with that of a BVAR. However, the DSGE model overpredicts nominal wage growth, suggesting a large BVAR can be better. Another alternative to a large BVAR is to incorporate in the DSGE model the structure of the labor market in the euro area as suggested by Levin et al in "Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models (2005)" (Record ID 63 in my list of circulated papers).



Record ID

73     [ Page 61 of 68, No. 4 ]

Date

2007-08

Author

Jaromir Benes, Marta Castello Branco, David Vavra

Affiliation

Reserve Bank of New Zealand, IMF

Title

A Simple DGE Model for Inflation Targeting

Summary /
Abstract

The paper presents a DGE model designed as a core projection tool to support monetary policy in inflation-targeting (IT) emerging market economies. The paper uses a particularly simple and flexible general equilibrium model structure that can be amended to account for various phenomena that often complicate policy analysis in emerging markets, such as persistent trends in relative prices. The model's calibration is intuitive and can draw on the vast experience many countries have with calibrating small 'gap' models of monetary policy transmission. Moreover, the definition of the model's steady state in terms of nominal expenditure ratios, rather than levels of real variables, allows for the easy use of the model in a regular forecast production cycle in an IT central bank. The paper tests the model's properties on recent Turkish data, demonstrating that the main stylized features relevant for monetary policy making are well captured by the model.

Keywords

Inflation targeting, Economic models, Monetary transmission mechanism

URL

http://www.imf.org/external/pubs/ft/wp/2007/wp07197.pdf

Remarks

This is an applied DSGE model for Turkey, a country that became a full-fledged IT in 2006. A very practical, monetary policy-oriented paper.



Record ID

72     [ Page 61 of 68, No. 5 ]

Date

2010-03

Author

Carl E. Walsh

Affiliation

University of California, Santa Cruz

Title

Commentary: Using Models for Monetary Policy Analysis

Summary /
Abstract

Modern policy analysis makes extensive use of dynamic stochastic general equilibrium (DSGE) models. These models differ significantly from earlier generations of large-scale econometric models. I review what I see as major progress in the ability of economists to conduct model-based policy analysis. This progress has come through the evolution in the types of models being used and in a refinement of the types of questions asked of these models.


Keywords

JEL Codes: E17, E52

URL

http://www.ijcb.org/journal/ijcb10q1a13.pdf

Remarks

This is an excellent short commentary by an authority on theoretical and quantitative monetary policy on the evolution of macroeconometrics from the L. Klein days to the present DSGE era, highlighting the similarities and major differences and identifying the areas for improving DSGE modeling.



Record ID

71     [ Page 61 of 68, No. 6 ]

Date

2009-12

Author

Tobias Adrian and Hyun Song Shin

Affiliation

Federal Reserve Bank of New York Princeton University

Title

Prices and Quantities in the Monetary Policy Transmission Mechanism

Summary /
Abstract

Central banks have a variety of tools for implementing monetary policy, but the tool that has received the most attention in the literature has been the overnight interest rate. The financial crisis that erupted in the summer of 2007 has refocused attention on other channels of monetary policy, notably the transmission of policy through the supply of credit and overall conditions in the capital markets. In 2008, the Federal Reserve put into place various lender-of-last-resort programs under section 13(3) of the Federal Reserve Act in order to cushion the strains on financial intermediaries’ balance sheets and thereby target the unusually wide spreads in a variety of credit markets. While classic monetary policy targets a price (for example, the federal funds rate), the liquidity facilities affect balance-sheet quantities. The financial crisis forcefully demonstrated that the collapse of the financial sector’s balance-sheet capacity can have powerful adverse effects on the real economy. We reexamine the distinctions between prices and quantities in monetary policy transmission.

Keywords

JEL Codes: E44, E52, E58, G18, G28

URL

http://www.ijcb.org/journal/ijcb09q4a7.pdf

Remarks

In response to the global financial crisis, central banks have added another policy, "quantitative easing," to the interest rate. A way to incorporate this into central bank policy models, according to the authors, is to express the policy interest rate and the quantitative policy (summarized by the central bank bank balance sheet) as functions of GDP, inflation, and leverage. Repos and commercial paper, which finance the "shadow' banking system, are included in the quantitative policy. The authors conclude that the interaction of leverage constraints of financial intermediaries, short-term interest rates, and financial asset quantities is important and should be taken into account in the conduct of monetary policy.



Record ID

70     [ Page 61 of 68, No. 7 ]

Date

2009-09

Author

Antonella Foglia

Affiliation

Banking and Financial Supervision, Bank of Italy

Title

Stress Testing Credit Risk: A Survey of Authorities' Aproaches

Summary /
Abstract

This paper reviews the quantitative methods developed at selected authorities for stress testing credit risk, focusing in particular on the methods used to link macroeconomic drivers of stress with bank-specific measures of credit risk (macro stress test). Authorities with a mandate for financial stability are particularly interested in quantifying the macro-to-micro linkages and have developed specific modeling expertise in this field. Stress testing credit risk is also an essential element of the Basel II framework, and some stress-testing requirements of Basel II are formulated by making explicit reference to the economic cycle. The paper highlights recent developments in macro stress testing and details a number of methodological challenges that may be useful for supervisors in their review process of banks’ models as required by Basel II. It also contributes to the ongoing macroprudential research efforts to integrate macroeconomic oversight and prudential supervision, for early detection of key vulnerabilities and assessment of macro-financial linkages.



Keywords

JEL Codes: E32, E37, G21

URL

http://www.ijcb.org/journal/ijcb09q3a1.pdf



Record ID

69     [ Page 61 of 68, No. 8 ]

Date

2009-06

Author

Michael Ehrmann and Marcel Fratzscher

Affiliation

European Central Bank

Title

Explaining Monetary Policy in Press Conferences

Summary /
Abstract

The question of how best to communicate monetary policy decisions remains a highly topical issue among central banks. Focusing on the experience of the European Central Bank, this paper studies how explanations of monetary policy decisions at press conferences are perceived by financial markets. The empirical findings show that ECB press conferences provide substantial additional information to financial markets beyond that contained in the monetary policy decisions, and that the information content is closely linked to the characteristics of the decisions. Press conferences have on average had larger effects on financial markets than the corresponding policy decisions, with lower effects on volatility. Moreover, the Q&A part of the press conference fulfills a clarification role, in particular during periods of large macroeconomic uncertainty.

Keywords

JEL Codes: E52, E58, G14

URL

http://www.ijcb.org/journal/ijcb09q2a2.pdf



Record ID

68     [ Page 61 of 68, No. 9 ]

Date

2010-09

Author

SPR, MCM, FAD, RES

Affiliation

IMF

Title

IMF-FSB EWE--Design and Methodological Toolkit

Summary /
Abstract

The severe global impact of the financial crisis in the United States during 2007–08 took almost everyone by surprise. Despite occasional concerns aired during the pre-crisis period, the U.S. financial system was widely perceived to be fundamentally sound and well-regulated. However, starting with the collapse of the U.S. subprime mortgage market in late 2007, and particularly in the aftermath of Lehman’s demise in late 2008, the crisis spread globally. Liquidity dried up, cross-border capital flows reversed abruptly, and world trade dropped sharply. In a truly systemic manner, the effects of a shock in one corner of the U.S. financial sector impaired global economic and financial activity in a lasting way.

Keywords

International financial system | External sector | Corporate sector | Capital markets | Asset prices | Fiscal risk | Financial risk | Fund role | Multilateral surveillance | Risk management

URL

http://www.imf.org/external/np/pp/eng/2010/090110.pdf

Remarks

This very important paper by IMF experts should be of use by the Asean+3, particularly on the implementation of the CMIM and the workings of the AMRO.



Record ID

67     [ Page 61 of 68, No. 10 ]

Date

2004-09

Author

Frank Smets and Raf Wouters

Affiliation

ECB

Title

Forecasting with a Bayesian DSGE Model: An applicationo to the Euro Area

Summary /
Abstract

In monetary policy strategies geared towards maintaining price stability conditional and unconditional forecasts of inflation and output play an important role. This paper illustrates how modern sticky-price dynamic stochastic general equilibrium models, estimated using Bayesian techniques, can become an additional useful tool in the forecasting kit of central banks. First, we show that the forecasting performance of such models compares well with atheoretical vector autoregressions. Moreover, we illustrate how the posterior distribution of the model can be used to calculate the complete distribution of the forecast, as well as various inflation risk measures that have been proposed in the literature. Finally, the structural nature of the model allows computing forecasts conditional on a policy path. It also allows examining the structural sources of the forecast errors and their implications for monetary policy. Using those tools, we analyse macroeconomic developments in the euro area since the start of EMU.

Keywords

Forecasting; DSGE models; monetary policy; euro area

URL

http://www.ecb.int/pub/pdf/scpwps/ecbwp389.pdf

Remarks

This is an excellent paper by original thinkers Smets and Wouters, who first applied Bayesian methods to DSGE modeling. Modern sticky-price DSGE models of the type used in this paper and estimated using Bayesian techniques combine a sound, micro-founded structure necessary for policy analysis with a good probabilistic description of the observed data and forecasting performance. In this paper the authors illustrated how such Bayesian DSGE models can become an additional useful tool in the forecasting kit of central banks. First, they show that the forecasting performance of such models compares well with atheoretical vector autoregressions. Moreover, they illustrate how the posterior distribution of the model can be used to calculate the complete distribution of the forecast, as well as various inflation risk measures that have been proposed in the literature. Finally, the structural nature of their model allows computing forecasts conditional on a policy path. It also allows examining the structural sources of the forecast errors and their implications for monetary policy. Using those tools, they briefly analysed and interpreted macroeconomic developments in the euro area since the start of EMU. Their tools can also be used to forecast and interpret macroeconomic developments in the Philippines since 2002.



Total records: 676 | Select no. of records per page: 10 | 20 | 30 | 50 | 100 | Show all | Search
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