The Federal Funds Rate and the Conduction of the International Orchestra

In the first ten years of EMU, monetary policy choices of the European Central Bank (ECB) in setting the short-term interest rate have followed, systematically, monetary policy decisions made by the Federal Reserve System (Fed). For, despite the presence of variable lags with respect to Fed decisions, turning points of European short-term interest rates have been largely anticipated by movements in the federal funds rate. In this paper we show that, in the context of a bivariate cointegrated system, a clear long-run US dominance emerges. Moreover, the structural analysis reveals that a permanent increase in the federal funds rate causes a permanent one-for-one movement in the eonia rate.Monetary policy; Identification; Structural Cointegrated VARs

Sources of Unemployment Fluctuations in the USA and in the Euro Area in the Last Decade

The aim of this paper is to investigate the role played by macroeconomic shocks in shaping unemployment fluctuations, both in the USA and in the Euro area, in the recent, European Monetary Union, period. The task is accomplished by estimating a VAR model which jointly considers US and European variables. We identify the structural disturbances through sign restrictions on the dynamic response of variables. Our results show that there are real effects of monetary policy shocks and of non-monetary policy, financial shocks in both economic areas. Moreover, a significant role is also exerted by business cycle, adverse aggregate demand shocks. We provide an estimation of the relative importance of the identified structural shocks in explaining the variability of inflation and unemployment. Not surprisingly, in the last decade an important role has been played by financial shocks.Structural VARs; Euro Area; Monetary Policy; Unemployment

On Some Neglected Implications of the Fisher Effect

Following the lead of Fama [American Economic Review 65 (1975) 269-282] and of other influential papers, such as Mishkin [Journal of Monetary Economics 30 (1992) 195-215], it has become standard to interpret the Fisher effect as the ability of short-term interest rate to predict future inflation. However, in this paper we demonstrate that by restricting to zero the instantaneous response of expected inflation to an interest rate shock, one can identify a disturbance that economic agents, according to the Fisherian framework, should evaluate as transitory. An important implication of this result is that short-term nominal interest rates cannot be interpreted as predictors, at least not long-run predictors, of inflation. We illustrate this result with an empirical application to US postwar data.Fisher Effect; Identification; Structural Cointegrated VARs

The Recent Performance of the Traditional Measure of Core Inflation in G7 Countries

In this paper we undertake an empirical investigation concerning the performance of the traditional measure of core inflation in recent years. We consider the group of G7 countries and explore both the high-frequency and the low-frequency relations between overall inflation and core inflation. We find that the traditional core measure, obtained by subtracting from the overall index those components which exhibit high volatility and which are responsible for the short-run variability of inflation, is a reliable indicator of trend inflation for a group of countries including the USA, Canada and Japan. The innovation accounting shows that for the three countries the transitory shock, i.e. the total inflation shock, has limited persistence and hence there is a relatively quick convergence of overall inflation to its trend component.Core Inflation Indicator; Structural Cointegrated VARs; Permanent-transitory Decompositions

What Drives US Inflation and Unemployment in the Long Run?

There is a growing consensus on the existence of a positive, long-run relation between inflation and unemployment in the US economy. However, the conclusion that the two variables move in the same direction at low frequencies leaves open the question of the identification of the factors - real or, alternatively, monetary - underlying this co-movement. In this paper we try to shed light on this question by adopting a structural VAR agnostic approach. The main conclusion is that in the postwar US economy an important role has been played by supply shocks in shaping the long-run evolution of unemployment. Thus, it seems that this evidence is at odds with purely monetary explanation of the co-movement between inflation and unemployment