Search

The paper argues that the achievement of sustainability of public debt requiring the fulfillment of solvency and liquidity conditions in countries for which real interest rates are above the real growth rates is challenging and difficult. Since solvency is a rather complex concept and its governance is difficult and delicate, the paper maintains that such countries could try to achieve the sustainability of public debt by delegating the tasks of securing the observance of solvency and liquidity conditions to fiscal councils (FC) that need to be formed as autonomous public institutions with sufficient financial and technical resources. In Turkey FC needs to be assigned the further task of improving policymakers' incentives to opt for sound government procurement and taxation policies that would lead to the achievement of efficient allocation of resources and elimination of corruption and nepotism in the economy. [ABSTRACT FROM AUTHOR]

This paper explores the validity of the twin deficit hypothesis in selected 25 OECD countries with annual data for 2005–2016 by considering different real interest rate regimes. A non-dynamic panel threshold model, introduced by Hansen (1999) , is employed. The novelty of the empirical findings from the present study is that there exists a non-linear relationship between the budget deficit and the trade balance, which is driven by a critical threshold level in the real interest rates. The findings suggest that twin deficit hypothesis holds only under the low real interest rate regime, that is, rises in budget deficits lead to deteriorations in the trade balance when the real interest rate is below the threshold level. When the high real interest rate (i.e. above-the-threshold) regime is concerned, increasing budget deficits give rise to improvements in the trade balance, a finding consistent with the twin divergence hypothesis. Thus, the effect on the trade balance of an expansionary fiscal policy that worsens the budget balance reverses substantially depending on the threshold level of the real interest rates. The major policy implication of this paper is that the policy makers in the selected OECD countries should pay a greater attention to fiscal discipline in order to prevent the trade balance from worsening, because the majority of the countries fall into the low real interest rate regime over the recent years of the sample period (i.e. between 2010 and 2016). [ABSTRACT FROM AUTHOR]

This paper investigates the real effects of macroprudential policy (MaPP) using individual data from 122 countries. The empirical analysis shows that MaPP increases savings and decreases borrowing. These effects are then disaggregated by policy tool, interest rate and country income level. The effects of MaPP on individual behavior depend to a large extent on the policy tool and the country income level and to a lesser extent on the interest rate. These results stand up to a variety of endogeneity tests that include propensity score matching and an instrumental variable approach. [ABSTRACT FROM AUTHOR]

The outbreak of Covid-19 has played the role of a 'game changer' in the way countries of the Eurozone have faced the economic consequences of the pandemic crisis. This paper investigates what has happened to the interest rates of the sovereign bond in selected countries of the Eurozone during 2020. While the pandemic crisis can be interpreted as a symmetric shock, we found some important asymmetric consequences both in the sovereign bond market and the credit default swap market. Even though the European Central Bank (ECB) has played a fundamental role in easening tensions, especially with the announce of the Pandemic Emergency Purchase Programme (PEPP), countries with a higher pre-Covid level of the debt-to-GDP ratio have been found to undergo a significant jump in interest rates and a greater perceived risks of default. Important policies implications emerge in relation to the future role of the ECB. [ABSTRACT FROM AUTHOR]

We use the Christensen, Diebold, and Rudebusch (2011) representation of the yield curve to test the functioning of the interest rate transmission mechanism along the yield curve based on government paper in advanced, emerging market, and low-income countries. We find a robust link from the policy and short-term interbank rates to the longer-term bond yields in all countries. Two policy implications emerge. First, the presence of well-developed secondary markets does not seem to affect transmission of short term rates along the yield curve. Second, the strength of the transmission mechanism seems to be affected by the choice of the monetary regime and the level of development: advanced countries with a credible inflation targeting regime seem to have better-behaved yield curves than the countries with other monetary regimes. [ABSTRACT FROM AUTHOR]

In this paper, we apply a novel econometric approach joint with an exhaustive revision of the main events in the history of US monetary policy in order to check the effectiveness of monetary policy focused on interest rates. Unlike the traditional cointegration approach, this new methodology allows us to break with the rigidity of traditional approaches in favour of letting the series be cointegrated, and the spread is able to follow a long-memory process; i.e., it does not necessarily need to be I (0) and also rejects the assumption that interest rates could follow the dichotomy I (0)/ I (1). To the best of our knowledge, this is one of the first applications of the Fractionally Cointegrated Vector Autoregressive (FCVAR) model (Johansen and Nielsen (2012) and Nielsen and Popiel (2016)). Aiming to achieve this goal, we use two databases, i.e., the Jordà-Schularick-Taylor Macrohistory Database and Shiller's database. Our results cannot reject the Expectations Hypothesis of Term Structure in this time period, and more importantly, we also find that the long-term rate drives the long-run relationship, contributing to the total proportion to the common trend; the persistence of the spread shows us effective control power over interest rates by the Fed. [ABSTRACT FROM AUTHOR]

There have been relatively few analyses of the policy context and consequences of a Zero Lower Bound (ZLB) for nominal interest rates. This paper sets out monetary policy alternatives, including negative interest rates, a revision of the inflation target, and rendering unconventional policy instruments such as QE conventional (permanent). Following extensive discussion of policy options, we set out a model that explores the impacts of the real policy rate on economic growth, employment and inflation, with particular attention to the British economy. We use a Time-Varying Structural Vector Auto-regressive (TVSVAR) Model where the sources of time variation are both the coefficients and variance–covariance matrix of the innovations. It was found that real rates have significant implications for real growth, the labour market and price stability even when monetary policy was constrained at the ZLB in nominal terms. The study additionally applies a discrete break in the data to focus on the Post-Global Financial Crisis and ZLB period. This indicates that the effectiveness of real rates did not diminish and this has important implications in terms of a policy approach which seeks to exploit real negative rates. [ABSTRACT FROM AUTHOR]

Gibson paradox is one of the most discussed economic phenomena in the literature. As observed by Keynes (1930) , the most established empirical fact in economics remains unsolved. This paper investigates the Gibson law in the Netherlands over 1800–2012 focusing on the nature of the paradox. Establishing the presence of the paradox outside Gibson (1923) original research in the United Kingdom brings new light to understanding the paradox true nature. A non-linear analysis (logit) is used to identify the factors behind the paradox in the Netherlands. The results provide support that Gibson paradox is the most established empirical fact (non-linear and multivariate) in economics that has pronounced economic policy implications. Policy makers and central banks significantly affect short-term interest rates influencing long-term rates under the expected rise in interest rates for circulation credits. High purchasing power means better micro and macro liquidity and less demand for circulations credits directing Gibson regime-switching behaviour. [ABSTRACT FROM AUTHOR]

Abstract This paper provides empirical evidence of the role of the euro in the genesis of the recent Irish financial-economic crisis. By using a Taylor rule we measure the appropriateness of the ECB's one-size-fits-all policy rate for the Irish economy. A counterfactual analysis suggests that the Irish interest rate should have been on average 6.5% higher. Using a BVAR and multivariate housing model, we provide econometric evidence that under an alternative sovereign monetary policy, the average house price would have been 25–30% lower just before the housing bust. In addition, it shows that a monetary policy tailored to the needs of the member state prevents housing prices from dramatically increasing. [ABSTRACT FROM AUTHOR]

Abstract: Wide interest margins as witnessed in Kenya are a sign of a repressed and inefficient financial sector. This paper carries out a cross-country analysis of the determinants of financial market efficiency using panel cointegration with a view to recommending policy options for improving the efficiency of the financial sector intermediation process in Kenya. The study finds that the major contributors to the differences in financial sector inefficiency in Kenya compared to the other countries in the study are high bank operating costs, default risk and financial market structure. The study recommends, among other measures, that the government through the Central Bank need to collaborate with the commercial banks and establish a working credit reference bureau to enable easy identification of credit worthy customers in order to reduce default risk; there is also need by the central bank to license more new banks to increase competition and reduce bank concentration. The study also recommends increased use of technology including phone-banking and e-banking to reduce operation costs of the banks. The paper concludes that contrary to the findings from other cross-country analysis, the factors that lead to financial market in/efficiency varies from one country to the other. [Copyright &y& Elsevier]

This paper examines the determinants of interest rates in India in the post-reform period in the context of a model that takes into account both domestic and external factors. The short- and long-run behavior of interest rates (commercial paper rate, 3-month Treasury bill rate, 12-month Treasury bill rate) is studied. The empirical results are robust across interest rates and indicate the existence of a cointegrating relationship between real interest rates, real government expenditure, real money supply, foreign interest rates and the forward premium. The estimations also show that movements in interest rates are Granger caused by both domestic and external factors. [Copyright &y& Elsevier]

Abstract This paper examines the relative effectiveness of the use of direct and indirect monetary policy instruments in Barbados, Jamaica and Trinidad and Tobago, by estimating a restricted Vector Autoregressive model with Exogenous Variables (VARX). The model captures the dynamic interaction of the key sectors in the economy and it accounts for the fact that the banking system in those countries is characterized by high levels of excess reserves. Also, the study assumes that the central bank conducts monetary policy using a Taylor-type rule, and it evaluates the effects of a reserve requirement policy. The results show that although a positive shock to the policy interest rate has a direct effect on commercial banks' interest rates, there is a weak transmission to the real variables. Furthermore, an increase in the required reserve ratio is successful in reducing private sector credit and excess reserves, while at the same time alleviating pressures on the exchange rate. The findings therefore indicate that central banks in small open economies should consider using reserve requirements as a complement to interest rate policy, to achieve their macroeconomic objectives. [ABSTRACT FROM AUTHOR]

This paper empirically investigates the determinants of the two key benchmark interest rates in China using an array of constrained ordered probit models for quarterly frequency data from 1987 to 2013. Specifically, we estimate the behavioral equation of the People's Bank of China that models its decision-making process for revisions of the benchmark deposit rate and the lending rate. Our findings imply that the PBC's policy decisions are better understood as responses to changes in inflation and money growth, while output gaps and the exchange rate play negligible roles. We also implement in-sample fit analyses and out-of-sample forecast exercises. Our empirical findings show robust and reasonably good performances of our models in understanding dynamics of these benchmark interest rates. [ABSTRACT FROM AUTHOR]

The constant natural interest rate assumption implicit in Taylor type feedback rules to assess the stance of monetary policy could be misleading at times, particularly because of the time-varying nature of the natural interest rate. In the post crisis period, reflecting a complex web of supply side, demand side, regulatory and global factors, natural rates of both advanced and emerging economies have been estimated in the literature to have altered considerably. Using a theoretical framework that combines the essence of Ramsay’s growth model and the New-Keynesian macro-dynamics, and applying the Kalman filter estimation technique, this paper finds that India’s estimated natural real interest rate in Q4 of 2014–2015 lied in a range of 0.6%–3.1%, even though core estimates point to a narrower range of 1.6%–1.8%. These estimates indicate that the real interest rate gap was negative in India for a major part of the last about ten years when CPI inflation was persistently high, implying that monetary policy stance of the Reserve Bank was largely accommodative rather than anti-inflationary. [ABSTRACT FROM AUTHOR]

Merging recent empirical findings into an overinvestment framework this paper describes a recursive process of monetary policy interactions between industrialised and emerging market economies that provides an explanation of what may have led to the current global low interest rate environment. Based on the overinvestment framework we show that in the prevailing asymmetric world monetary system, monetary policies of industrialised countries can fuel credit booms in emerging markets. We argue that the absorption of inflationary pressure by emerging markets during boom periods and the fear of feedback effects of crises in emerging markets encourage delayed monetary tightening in industrialised countries. [ABSTRACT FROM AUTHOR]

In many countries monetary policy decisions are based on the output gap. In particular, monetary easing is usually justified by citing slack in the economy. However, the use of subjective information can result in an inaccurate estimate of the output gap, and its partial interpretation can lead to a wrong monetary decision. This paper establishes that monetary decisions can be inconsistent when they are based on an output gap estimated with the HP filter with tail correction and when policymakers assume that a negative gap does always indicate weakness in demand. We suggest that monetary policymakers should use several methods and approaches, with the purpose of taking decisions with the most complete and accurate information available. [ABSTRACT FROM AUTHOR]

This paper investigates the relationship between oil prices and exchange rates in three African countries using a Vector AutoRegressive (VAR) model. We use daily data on nominal exchange rates, oil prices and short term interbank interest rates from 01/12/2003 to 02/07/2014. The results suggest that the exchange rate of the three selected countries behavior is different in the event of an oil price shock, not only before and after the oil peak of July of 2008, but also between each other. Therefore, no general rule can be made for net oil importing sub-Saharan countries, such as Botswana, Kenya and Tanzania. We conclude that after an oil price peak, the Botswanan pula clearly appreciates against the US dollar, the Kenyan and Tanzanian shilling. [ABSTRACT FROM AUTHOR]

We examine the public debt management problem with respect to the maturity mix of new issues in a mean-variance framework. After identifying the main determinants of the long-run target (strategy), we focus on which interest rate conditions allow for a temporary deviation (tactics). The study is partly motivated by the apparent window of opportunity to issue more heavily at longer maturities given the recent historically low yields. We show that the room for long tactical positions on the long-term bond is actually narrower than predicted by rules of thumb based on Sharpe-like ratios. Once the model is augmented to embed real world features such as no price-taking and transaction costs, the scope for tactical position shrinks further. We discuss the model results and its implications in terms of the principal–agent dilemma (government vs. debt manager); the paper also explores the financial stability implications arising from public debt issuance choices. All in all, our findings provide a rationale for the degree of caution often shown by many public debt managers in fulfilling their mandate. [ABSTRACT FROM AUTHOR]

Using a simple macroeconomic model, this paper examines the interaction between corruption and central bank independence in the construction of an optimal monetary policy rule where the instrument of policy is the real interest rate. As such, we are especially interested in how the policy instrument reacts to key macroeconomic variables in the face of possible corruption (modelled here as tax leakage) and possible dependence by the central bank on the fiscal policy process. We analyse this issue by deriving optimal rules for a strict inflation targeting and a real exchange rate target regime. We find that, firstly, the existence of corruption imposes an inflationary bias on the optimal rule – even when the central bank is independent. We find, furthermore, that a central bank that exhibits some dependence exacerbates this effect. [ABSTRACT FROM AUTHOR]

Abstract: In this paper we use a Markov-switching vector autoregressive model to analyse the interest rate pass-through between interbank and retail bank rates in the Euro area. Empirical results, based on monthly data for the period 2003–2011, show that during periods of financial distress bank lending rates to both households and non-financial corporations show a reduction of their degree of pass-through from the money market rate. Significant sectoral heterogeneities characterise the transmission mechanism of monetary policy impulses, with rates on loans to non-financial firms being more affected by changes in the interbank rate than loans to households, both in times of high volatility and in normal market conditions. [Copyright &y& Elsevier]

Abstract: Monetary policy in Nigeria aims is to achieve price and monetary stability. During the 1980s and 1990s, monetary targeting was the dominant monetary policy framework in Nigeria. However, in 2006 the Central Bank of Nigeria (CBN) adopted the new monetary policy framework through which short-term interest rates are adjusted to achieve stability in the value of the domestic currency. This paper has presented an empirical investigation into the demand for Nigerian real narrow money (M1) over the period 1960–2008 in an attempt to identify whether the CBN were right to adopt the new monetary policy framework. In doing so, we estimate alternative (canonical and extended) specifications of M1 demand using structural change methods. Our results suggest that the canonical specification is well-determined. Although the money demand relationship went through a regime shift in 1986, it is largely stable. These findings favour the use of supply of money as an instrument of monetary policy, thus lending limited support for the new monetary policy framework. [Copyright &y& Elsevier]

Abstract: This paper evaluates the hypothesis of long-run super-neutrality of money (LRSN) within the context of the South African economy. The long-run impact of inflation on the interest rate and subsequently, output is estimated by employing a trivariate structural vector autoregression model, using quarterly data for the period of 1960:1 to 2010:1. The estimation results suggest that the hypothesis of LRSN cannot be rejected, thereby suggesting that monetary policy in South Africa cannot be used to solve the large and persistent unemployment problem in South Africa, which is understandable, since unemployment is inherently structural and is due to skills-shortage. This is further supported by our one of our other results which shows that significant long-run impact on output is obtained from technological improvements. [Copyright &y& Elsevier]

Abstract: This paper studies the monetary policy of the Federal Reserve (Fed) and the European Central Bank (ECB) with respect to stock or/and foreign exchange markets from 1979 to 2009. I find that during the Greenspan era stock markets played a role in US monetary policy. The Fed lowered interest rates when stock prices fell, but did not raise interest rates in response to rising stock prices. This asymmetry put a downward pressure on interest rates. For the ECB, the exchange rate to the dollar played a role in monetary policy decisions. While I do not find evidence of asymmetric monetary policy with respect to the stock market, the ECB may be argued to have indirectly followed the asymmetric US monetary policy via the exchange rate channel until 2006, the period until which the dollar depreciated heavily against the euro. With asset markets putting a downward pressure on interest rates, it is likely that the Fed and ECB contributed to recent boom-and-bust cycles by providing low-cost liquidity to flourishing markets. Relevance and implications of the findings are discussed. [Copyright &y& Elsevier]

Abstract: The international dollar standard is malfunctioning. Near zero U.S. short-term interest rates launch massive hot money outflows by carry traders into emerging markets (EM) in Asia and Latin America. Each EM central bank buys dollars to prevent its currency from appreciating but loses monetary control. Despite EM currency appreciation, average inflation in EMs is now much higher than in the old industrial economies—and world commodity prices are bid up sharply. This inflation on the dollar''s periphery only registers in the U.S. CPI with a long lag. But the more immediate effect of the Fed''s zero interest rate is to upset the process of bank intermediation within the American economy. Bank credit continues to be weak while employment languishes. The (second) avalanche of hot money outflows into emerging markets (EM) began when the Fed reduced the interest rate on Federal Funds to virtually zero in December 2008—and other industrial countries followed suit. But the outbreak of a banking crisis in Europe with counter party risk in the summer of 2011 led to a global tightening of bank credit on which “carry traders” depend for financing hot money flows and long positions in primary commodities. So they had to sell off their foreign exchange (mainly EM) assets and long positions in commodities to get back into dollars or yen. The result is that EM currencies and commodity prices—with the exception of the price of oil—fell and remained weak through December 2011, while the dollar strengthened and the Japanese government intervened several time in the last half of 2011 to prevent the yen from appreciating. This cycle illustrates the main point of the paper: wide interest rate differentials across currencies make the world monetary system much more fragile whatever the exchange rate regime. “Reform” efforts should focus much more on international monetary harmonization that limits interest differentials while accepting the need for exchange rate buffers, such as capital controls, to limit hot money flows. Once the European banking crisis recedes (if ever), the large interest differential—near zero interest rates in the United States and much higher natural interest rates in the high growth EMs—will, in 2012, set off another cycle of hot money flows from the center to the periphery with rising commodity prices. [Copyright &y& Elsevier]

Abstract: This paper examines the pass-through from the market interest rate to the rate charged on bank loans using aggregate data for the U.K. Thereby, we explicitly disentangle credit supply and demand and allow the interest rate charged on loans to depend on the volume of loans. We find that, although banks adjust the lending rate to some extent, they largely accommodate shifts in demand. Overall, our results are consistent with the idea that banks provide insurance against liquidity shocks. [ABSTRACT FROM AUTHOR]

Abstract: This paper investigates the impact of international shocks – interest rate, commodity price and industrial production shocks – on key macroeconomic variables in ten Central and Eastern European (CEE) countries by using near-VAR models and monthly data from the early 1990s to 2009. In contrast to previous work, the empirical analysis takes explicit account of the possibility of (multiple) structural breaks in the underlying time series. We establish strong evidence of structural breaks, particularly along the years 2007 and 2008, suggesting the very relevant impact of the recent global crisis on CEE economies. Moreover, our results suggest that the way how countries react to world commodity price shocks is related to the underlying economic structure and the credibility of the monetary policy. We also find that some countries like Slovakia and Slovenia – already euro area members – react stronger to foreign industrial production shocks than other countries and that the responses to such shocks are strongly correlated for selected CEE countries. Nevertheless, our results also shed light on substantial differences in responses to foreign interest rate shocks that originate from the US or the euro area. [Copyright &y& Elsevier]

Abstract: The recent financial crisis has shown that the economic consequences of financial instability can be devastating. The consensus on the role that asset prices should play in monetary policy appears to be shifting. The pre-crisis consensus that monetary policy should only take asset prices into account, insofar as they affect inflation, is being challenged. In particular, it has recently been suggested that the monetary pillar of European Central Bank (ECB) policy provides an institutional framework to incorporate financial indicators, such as asset prices, in interest rate policy. This paper empirically examines the influence of stock price developments on the monetary policy of the ECB before the crisis. For this purpose, augmented forward-looking Taylor rules are estimated for the ECB using monthly data between 1999 and 2005. Of special interest is the effect of adding stock prices as arguments to the standard Taylor rule of the ECB. The GMM estimations suggest that the stock price developments already had an influence on ECB interest rates before the crisis. We offer an institutional explanation based on the monetary pillar of ECB policy and argue that this pillar has already served as a de facto conduit for stock prices to affect monetary policy before the outbreak of the financial crisis. We discuss the policy implications of our findings. [Copyright &y& Elsevier]

Abstract: In this paper we account for the U.S. Fed''s response to money demand shocks by allowing for less-than-complete accommodation in the estimation of the Fed''s money supply policy rule. We find a significantly lower degree of money accommodation in the 1979–1982 period, which hints at money targeting during that period rather than interest rate targeting. We identify the path of money demand and money supply shocks and comment on their effects on the dynamic behavior of money, interest rates, output and inflation: the monetary policy intermediate target seems not to be the key determinant of macro-dynamics. Our results allow us to offer comments on the implications for monetary policy of both the degree of money demand accommodation – thus, of the intermediate monetary policy target – and the evolution (reduction) of macroeconomic volatility between 1984 and 2007. [Copyright &y& Elsevier]

Savings behaviour is important because of the close relation between savings and growth. Thus this paper presents individual country analysis of the savings behaviour in five main South Asian countries, namely India, Pakistan, Bangladesh, Sri Lanka and Nepal, using modern time series procedures. Our results show savings in South Asia are mainly determined by income, access to banking institutions, foreign savings rate and dependency rate. The impact of the real interest rate on savings is minor and inconclusive. [Copyright &y& Elsevier]

Up until now, European fiscal discipline has been essentially assessed on the basis of the deficit rather than on the debt situations of EU countries. However, the sustainability of the public debt depends on the discrepancy between the interest rate and the growth rate of any given country. As these future economic variables are difficult to anticipate, however, the present paper proposes a more applicable rule for the deficits. Unlike what is stated in the Stability and Growth Pact, the budgetary deficits in the European Union may therefore be kept at higher levels as a country maintains a high inflation or real growth rate, and a low level of public indebtedness. [Copyright &y& Elsevier]

Abstract: In this paper we aim at identifying the natural real rate of interest, defined here as the (unobservable) component of the real interest rate which has no contemporaneous and lagged correlation with the output gap. We first discuss the theoretical underpinnings and the possible empirical advantages of this measure. Based on this definition and taking a measure of the output gap as given, we then derive an estimate of the natural interest rate for the euro area over a sample period from 1960 to 2003. The corresponding estimate of the natural interest rate measure is found to fluctuate significantly, a finding which appears to be well explained by economic and institutional developments in the euro area over the past 4 decades. Moreover, the resulting estimate of the real rate gap is found to have some forward-looking information content on inflationary pressure in the euro area. [Copyright &y& Elsevier]

Abstract: This paper empirically reassesses the seemingly opposite interpretations of the causality running between the US interest rate and the dollar exchange rate, focusing especially on the 1980s. We conclude that the Reagan administration''s strong dollar actually lowered the US interest rate, at least in the short-run during the first half of the 1980s. However, we find that the causal relationship was time-varying, mainly triggered by changes in the investor''s exchange rate expectations. Estimation results also support Frankel and Froot''s [Frankel, J., and Froot, K. (1987). Using survey data to test standard propositions regarding exchange rate expectations. The American Economic Review 77, 133–153] argument that the extrapolative expectations prevailed in the early 1980s. These findings help to understand the so-called “erratic movement” of the US dollar in the 1980s. In particular, they give potentially very useful policy implications to the recent US economic tribulation and associated policy. [Copyright &y& Elsevier]

Abstract: This paper reports simulations of the effect of fertility on optimal saving and consumption under three assumptions about capital mobility: zero, perfect and imperfect. The case of imperfect capital mobility is modeled by expressing the interest rate as a function of the level of foreign liabilities. Simulations show that even a small degree of responsiveness of the interest rate to the level of foreign liabilities is sufficient to generate optimal paths of consumption and saving that are very close to the paths for a closed economy. The results of the simulations suggest that, with an exogenous rate of technical progress, the effect of a lower fertility rate on social welfare is not likely to be significantly welfare-reducing. [Copyright &y& Elsevier]

Abstract: This paper examines the existence of common movements in production, prices and interest rates in three countries: France, Germany and the United Kingdom. To analyse this issue, the usual approach of studying cross-correlations is extended by considering moving correlations and correlation matrices. The results indicate strong simultaneous comovements. However, though these European countries are closely linked to each other, the results obtained vary substantially over time, with the economic variables and in the countries under consideration. [Copyright &y& Elsevier]

Domestic economic inefficiencies and imported panic have been alternatively argued to have caused the 1997-1998 Korean economic crisis. The aim of this paper is to determine which of the two hypotheses is the more likely to explain the fall in output that occurred during the crisis. A dynamic model of a small open economy is built and parameterized to fit the main characteristics of the Korean economy. Then, we perform some accounting, simulating it with the actual shocks to the domestic productive efficiency and to the foreign real interest rate. Both factors appear to have played an important role in the fall of output meaning that both theories are required for the model to be able to explain the amplitude of the fall in the output during the 1997-1998 Korean crisis. [ABSTRACT FROM AUTHOR]

This paper examines how far the restructuring process toward a market economy has proceeded in Accession Countries (AC) during the past decade in order to determine how ready they are, and how useful it would be for them, to unilaterally adopt the Euro before they are officially admitted into the European Economic and Monetary System (EMU) or Euro Area. By unilaterally adopting the Euro now, the Accession Countries gain stability in their exchange rates and can benefit both from lower interest rates and from reduced exposure to speculative attacks, but they would also lose most of their policy flexibility in economic and financial matters, which is of great importance in the process of completing their process of restructuring toward full-fledged market economies. [Copyright &y& Elsevier]

The level of real interest rates actually observed does not necessarily coincide with its “natural” level. This paper contrasts a number of approaches that have served to elaborate alternative concepts referred to as the “natural”, “equilibrium” or “neutral” real rate of interest. It highlights the relevance of those various concepts and angles for monetary policy decision making. [Copyright &y& Elsevier]

This paper examines the information content of COPOM decisions by estimating the responses of the term structure to changes in target short-term interest rates on COPOM meeting days. Within an event-study approach empirical evidence suggests that the introduction of the floating exchange rate and the inflation targeting (IT) regime have had a dampening effect on interest rate surprises along the term structure. [Copyright &y& Elsevier]

This paper develops a Vector Error Correction (VEC) model and uses the recently developed technique of ‘generalized’ impulse response analysis to test the empirical relationships in the Colombian economy between coffee revenues and a set of macro variables. We find that coffee price (revenue) shocks have exerted an important influence on money growth, inflation, and real exchange rates, and the direction of these effects are in line with some of the predictions of traditional Dutch Disease type models. The major difference between our results and the results of Dutch Disease type models arise in the effects of coffee booms on real output. We find that in the time horizon of 5 years after the boom, real output has increased in response to the effects of the coffee boom. The finding that coffee booms can result in positive long-run output effects is an important finding since it contradicts the traditional conclusion of Dutch Disease type models which envision an adverse long-run effect on output. We also find that the long-run effect of coffee booms is to reduce both current account and government deficits. These results illustrate strikingly that the term “Dutch Disease” is an unfortunately pejorative term that obscures the fact that coffee booms need not be viewed as a “disease” but as an extraordinary opportunity to strengthen internal and external balances. [Copyright &y& Elsevier]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jpolmod.2007.05.002 Byline: Hamid Baghestani Keywords: Greenbook and SPF forecasts; Forecasting bias; Asymmetric information hypothesis; Sign forecast accuracy; Central bank's credibility, accountability, and transparency; Monetary policy Abstract: This paper shows that the Federal Reserve and private forecasts of the unemployment rate for 1983-2000 have much in common: they produce very similar mean errors and mean squared errors, and, while biased, they are efficient and accurately predict the direction of change in the actual series. However, the private forecasts encompass those of the Federal Reserve and are thus more informative. In light of these findings, we first address several questions related to the unemployment forecasts and then discuss such policy issues as the Federal Reserve's credibility, accountability, and transparency. Author Affiliation: Department of Economics, School of Business and Management, American University of Sharjah, P.O. Box 2666, Sharjah, United Arab Emirates Article History: Received 13 February 2006; Revised 22 October 2006; Accepted 1 May 2007

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jpolmod.2005.01.003 Byline: Keith Pilbeam Abstract: This paper examines the impact of non sterilized and sterilized foreign exchange market operations on both the exchange rate and domestic interest rate within the context of a rational expectations portfolio balance model. The results show that non sterilized intervention will be more effective than sterilized intervention in affecting both the exchange rate and domestic interest rate. Both types of operations affect a market risk premium that is shown to be a function of relative asset supplies in the hands of the private sector. When domestic and foreign bonds are perfect substitutes, the risk premium vanishes and so to does the effectiveness of sterilized foreign exchange market interventions. Author Affiliation: Department of Economics, City University, Northampton Square, London EC1V 0HB, UK