Nominal and Real Convergence in Spain, Portugal and Greece During Their Accession to the EMU

This paper reports the progress of nominal and real convergence of Spain, Portugal and Greece during their accession to the Economic and Monetary Union (EMU). When the EMU was designed, it was hoped that it would induce nominal convergence (convergence of interest rates and inflation rates) and stimulate investments and economic growth through its positive microeconomic effects. As had been expected, nominal interest rates have converged quite early during the accession, output has been growing fast, and the countries experienced an inflow of foreign direct investments (FDI) and an increase of domestic investment rates. However, once within the EMU, all three countries experienced persistently higher inflation rates, which may be consistent with the convergence of price levels, instead of inflation. While all the above phenomena can be related to the EMU accession, in an econometric estimation for Spain in which we control for macroeconomic policies, we are unable to detect significant microeconomic effects of the EMU. Therefore, we conclude that it is the policies induced by the necessity to satisfy the Maastricht criteria that matter primarily for the macroeconomic performance soon after accession. In any case, the experience of the SPG is encouraging for the new member states facing accession to the EMU in the future.euro, EMU, currency union, Maastricht criteria, nominal convergence, real convergence, Southern Europe

Responses to Monetary Policy Shocks in the East and the West of Europe: A Comparison

This paper estimates responses to monetary shocks for several of the current members of the EMU (in the pre-EMU sample) and for the Central and East European (CEE) countries, along with the mean response in each of the groups. The problem of the short sample, especially acute in the case of the CEE, is mitigated by using a Bayesian estimation which combines information across countries. The estimated responses are similar across regions, but there is some evidence of more lagged and deeper price responses in the CEE economies. If this results from structural differences, premature entering the EMU would cause problems, but if from credibility issues, entering the EMU would be desirable. Also, with longer response lags, conducting a stabilizing monetary policy should be difficult in the CEE currently, and giving it up might not be a big loss after all.monetary policy transmission, Structural VAR, Bayesian estimation, exchangeable prior

Determinants of economic growth: Will data tell?

Many factors inhibiting and facilitating economic growth have been suggested. Can agnostics rely on international income data to tell them which matter? We find that agnostic priors lead to conclusions that are sensitive to differences across available income estimates. For example, the PWT 6.2 revision of the 1960-96 income estimates in the PWT 6.1 leads to substantial changes regarding the role of government, international trade, demography, and geography. We conclude that margins of error in international income estimates appear too large for agnostic growth empirics.Growth regressions, robust growth determinants, agnostic Bayesian econometrics

Monetary Policy and Inflation in Georgia (1996-1998)

Monetary policy and inflation in Georgia in the years 1996-1998 are the subject of this paper. As it is written in the middle of 1997, the discussed period is in a natural way divided into two parts: past and future. Correspondingly, first sections of the paper deal with facts which have already occurred and with their interpretation, while the remaining sections contain some projections that the authors tried to make for the future. The paper is organized as follows. Section 2 describes the framework in which the monetary policy of Georgia is conducted. The first part of this section names the monetary authority, shortly sketches the legal and political framework in which it operates and lists the instruments which it can use. The second part concentrates on the IMF’s ESAF program which is implemented in Georgia since 1996 and will be continued until 1998, and which tightly constraints the acceptable monetary policy range. The discussion of this program revolves around its two core (and sometimes inconsistent) macroeconomic elements: the quantitative performance criteria and the exchange rate policy. Section 3 discusses two characteristic features of the Georgian economy that were inherited from the hyperinflation period 1993-1994: low money multiplier and low monetization. Low money multiplier is directly related to the situation in the banking sector, which is thus also sketched. Low monetization is an indirect indicator of a whole set of factors. While discussing it we resort to recent literature on this problem and to international comparisons contained in it. Section 4 is of a more descriptive nature: it presents the past behavior of money supply and of the exchange rate in a chronological fashion, but attempts to interpret the observed phenomena are also made. Section 5 opens the forward looking part of the paper: it characterizes prospects for the future for M2 and real output. Section 6 sketches the econometric modeling strategy which the authors applied for Georgia. The constructed model has been used to obtain forecasts of inflation and nominal GDP, on the basis of assumed scenarios of money supply and the real output. The forecasts for 1997 H2 - 1998 (the remaining part of the discussed period) are presented in section 7. Finally, some conclusions are drawn in section 8. Technical details of the estimations can be found in the Appendix.monetary policy, inflation, Georgia, 1996, 1997, 1998

House prices and the stance of monetary policy

This paper estimates a Bayesian vector autoregression for the U.S. economy that includes a housing sector and addresses the following questions: Can developments in the housing sector be explained on the basis of developments in real and nominal gross domestic product and interest rates? What are the effects of housing demand shocks on the economy? How does monetary policy affect the housing market? What are the implications of house price developments for the stance of monetary policy? Regarding the latter question, we implement a Céspedes et al. (2006) version of a monetary conditions index.Monetary policy ; Housing - Prices

Moldova in 1995 - 1999: Macroeconomic and Monetary Consequences of Fiscal Imbalances

After stabilization in 1993 Moldova maintained an unsustainable macroeconomic policy mix. The key problem was a lack of a fiscal adjustment, which resulted in large budget deficits. At the same time, the National Bank of Moldova (NBM) attempted to conduct a tight monetary policy. As a result, the exchange rate was appreciating, domestic absorption increasingly exceeded income and the country has been running large Current Account deficits. Moldova had an access to international financial markets and its indebtedness vs. the rest of the world was growing year by year at an alarming rate. Finally, in late 1998 Moldova suffered a balance of payments crisis, directly triggered by developments in Russia. Moldovan leu was devalued by about 70% and the current account improved. The paper concentrates on the empirical dimension of the Moldovan financial crisis. It provides a case study of a) detecting and interpreting macroeconomic anomalies and b) identification of early warning signals of policy unsustainability and imminent change of financial market sentiment. The first part of the paper discusses domestic macroeconomic developments, which correspond with the current account evolution. It examines determinants of a steady growth of the share of consumption in GDP, and of developments in government and non-government disposable incomes. The turnaround of foreign balance had its counterpart in a significant reduction of the share of consumption and investments in GDP, although, given the economic outlook of Moldova, investments still remained surprisingly high. Macroeconomic anomalies in Moldova have their roots in both the fiscal disequilibrium and a too slow progress in enterprise restructuring. The second part of the paper identifies monetary phenomena generated by macroeconomic imbalances. Initially, the tight monetary policy of the NBM, the resulting stable exchange rate and low inflation contributed to a gradual growth of demand for money and remonetization. However, growing imbalances in the Moldovan economy put sustainability of the exchange rate and price level under question. As a result, demand for lei started to shrink and remonetization reversed itself. Interest rates increased and the NBM foreign reserves started to fall. Because of the uncertainty about the future stability of the leu, people converted much of their deposits into dollars and the dollarization of deposits reached more than 50%. The case of Moldova illustrates dangers faced by a country, which conducts a loose fiscal policy and relies on foreign capital inflows. Prior to the crisis, many macroeconomic indicators, especially in the monetary sphere, had been judged as appropriate. However, a hard monetary stance only postponed manifestation of problems caused by the fiscal imbalance and lack of structural reforms.Moldova, fiscal imbalance

Approaches to monetary policy revisited - lessons from the crisis, 6th ECB Central Banking Conference, 18-19 November 2010

This volume contains a collection of papers, commentaries and speeches that review the strategic and operational decisions taken by the central banks to combat the crisis and that reflect on the lessons for the future. The contributions are grouped around five broad topics: monetary policy strategy, lessons from historical experiences, challenges for macroeconomic and finance theory, the international dimension of the crisis, and operational frameworks for monetary policy.monetary policy strategy, monetary policy operational framework

Credibility of the Exchange Rate Policy in Transition Countries

Credibility of an exchange rate policy is one of the most important factors contributing to success or failure of any stabilization program. Authorities usually hope that the public will trust official exchange rate commitments and take decisions regarding domestic currency holdings accordingly. However, as the experience of several countries analyzed in this study shows, this is not always the case. Economic agents behave in line with their own expectations which need not directly reflect central bank's commitments but are most often a combination of official policy and public's own notions regarding its actual future course. There are clear advantages of high credibility of exchange rate policy to the country's disinflation efforts. It can help bring inflation down quicker and reduce inevitable output losses. Naturally, this prompts the question of whether one can quantify credibility and find factors that are affecting it. Various studies found in the literature have attempted to find an answer to this problem. In line with these efforts, our paper tries to shed new light on the issue. It makes use of the new theoretical model specially designed to approximate credibility of exchange rate policy and provides its empirical application for a number of transition economies that have actively used exchange rate policy in their stabilization programs during the 1990s. For each country we present the modelderived coefficient of credibility, draw conclusions from the model's predictions and confront it with the behavior of other macroeconomic indicators. The resulting analysis and discussion enable us to identify a set of possible "independent" factors explaining the developments of credibility. Our paper is composed as follows. Chapter 2 presents the theoretical model and its dynamics. Subsequent chapters are devoted to individual countries and contain empirical estimation of the model and the discussion of results. Chapters 3-10 contain studies of Poland, Bulgaria, Estonia, Lithuania, Latvia, Moldova and Georgia. Finally, chapter 11 concludes with summary of results and findings.transition country, credibility, exchange rate

A note on implementing the Durbin and Koopman simulation smoother

The correct implementation of the Durbin and Koopman simulation smoother is explained. A possible misunderstanding is pointed out and clarified for both the basic state space model and for its extension that allows time-varying intercepts (mean adjustments)