Regime-dependent impulse response functions in a Markov-switching vector autoregression model

In this paper we introduce identifying restrictions into a Markov-switching vector autoregression model. We define a separate set of impulse responses for each Markov regime to show how fundamental disturbances affect the variables in the model dependent on the regime. We go to illustrate the use of these regime-dependent impulse response functions in a model of the U.S. economy. The regimes we identify come close to the “old” and “new economy” regimes found in recent research. We provide evidence that oil price shocks are much less contractionary and inflationary than they used to be. We show furthermore that the decoupling of the US economic performance from oil price shocks cannot be explained by “good luck” alone, but that structural changes within the US economy have taken place.vector autoregression; regime switching; shocks; new economy

Equilibrium and inefficiency in fixed rate tenders

The fixed rate tender is one of the main procedural formats relied upon by central banks in their implementation of monetary policy. This fact stands in a somewhat puzzling contrast to the prevalent view in the theoretical literature that the procedure, by fixing interest rate and quantity at the same time, does not allow a strategic equilibrium. We show that an equilibrium exists under general conditions even if bidders expect true demand to exceed supply on average. The outcome is typically inefficient. It is argued that the fixed rate tender, in comparison to other tender formats, may be an appropriate instrument for central bank liquidity management when market conditions are sufficiently calm. JEL Classification: D44, E52equilibrium, Fixed rate tenders, inefficiency, rationing

Declining valuations and equilibrium bidding in central bank refinancing operations

It is argued that bidders in liquidity-providing central bank operations should typically possess declining marginal valuations. Based on this hypothesis, we construct an equilibrium in central bank refinancing operations organised as variable rate tenders. In the case of the discriminatory pricing rule, bid shading does not disappear in large populations. The predictions of the model are shown to be consistent with the data for the euro area. JEL Classification: D44, E52discriminatory auction, Eurosystem, Open market operations, uniform price auction

Term structure and the sluggishness of retail bank interest rates in euro area countries

This paper analyses the pricing of bank loans and deposits in euro area countries. We show that retail bank interest rates adjust not only to changes in short term interest rates but also to long-term interest rates. This result, which is arguably intuitive for long-term retail bank rates, is also confirmed for bank interest rates on short-term instruments. The transmission of changes in short-term market interest rates along the yield curve is found to be a key factor explaining the sluggishness of retail bank interest rates. We also show that in the cases where we cannot reject that the adjustment of retail rates has changed since the introduction of the euro, this adjustment has become faster. JEL Classification: E43, G21Euro area countries, market interest rates, retail bank interest rates

Optimal allotment policy in the Eurosystem's main refinancing operations

On several occasions during the period 2001-2003, the European Central Bank (ECB) decided to deviate from its “neutral” benchmark allotment rule, with the effect of not alleviating a temporary liquidity shortage in the banking system. This is remarkable because it implied the possibility of short-term interest rates raising significantly above the main policy rate. In the present paper, we show that when the monetary authority cares for both liquidity and interest rate conditions, the optimal allotment policy may entail a discontinuous reaction to initial conditions. More precisely, we prove that there is a threshold level for the accumulated aggregate liquidity position in the banking system prior to the last operation in a given maintenance period, so that the benchmark allotment is optimal whenever liquidity conditions are above the threshold, and a tight allotment is optimal whenever liquidity conditions are below the threshold. JEL Classification: E43, E52euro, monetary policy instruments, operational framework, refinancing operations-

Sporadic manipulation in money markets with central bank standing facilities

In certain market environments, a large investor may benefit from building up a futures position first and trading subsequently in the spot market (Kumar and Seppi, 1992). The present paper identifies a variation of this type of manipulation that might occur in money markets with an interest rate corridor. We show that manipulation involving the use of central bank facilities would be observable only sporadically. The probability of manipulation decreases when the central bank uses an active liquidity management. Manipulation can also be reduced by widening the interest rate corridor. JEL Classification: D84, E52corridor system, manipulation, money market

The natural real rate of interest in the euro area

In this paper, we discuss the consequences of taking inot account the variations of the natural real interest rate (rt*) in simple monetary policy rules. We also provide one possible model-based analysis of the level of rt* that has prevailed in the euro area since the early 1970s, and present the implied 'real rate rate gap' as a possible additional indicator to assess the stance of monetary policy. JEL Classification: E4, E5euro area, monetary policy, Natural rate of interest

Conventional direction to unconventional measures: using quantitative easing to shape Eurozone fiscal capacity

Eight years after the outbreak of the crisis, the Eurozone (EZ) fiscal policy remains fragmented at the national level. This paper fills the structural gap between the monetary and fiscal dimensions of EZ economic policy by suggesting a ‘conventional’ direction to the unconventional Quantitative Easing (QE) policy of the European Central Bank (ECB). We propose an evolution for QE to tackle the shortcomings of the current ‘decentralized’ fiscal policy in the EZ. In a nutshell, we suggest a change in the composition of QE asset purchases, focusing on buying European Investment Bank (EIB) bonds that, in turn, would be used to finance real investments through the Juncker Plan programme. The rationale of our proposal is legitimised by an overview of the gloomy macroeconomic conditions of the EZ, and the situation in ongoing policies. The mechanism is described in detail, with a discussion of both its strengths and possible limitations

Learning and distribution in monetary economics

Defence date: 14 March 2003Examining board: Giuseppe Bertola, EUI, Supervisor ; Prof. Roberto Perotti, EUI ; Franck Portier, Toulouse ; Volker Wieland, FrankfurtPDF of thesis uploaded from the Library digitised archive of EUI PhD theses completed between 2013 and 201