121 research outputs found
The Dynamic (In)efficiency of Monetary Policy by Committee
This paper develops a model where the value of the monetary policy instrument is selected by a heterogenous committee engaged in a dynamic voting game. Committee members differ in their institutional power and, in certain states of nature, they also differ in their preferred instrument value. Preference heterogeneity and concern for the future interact to generate decisions that are dynamically inefficient and inertial around the previously-agreed instrument value. This model endogenously generates autocorrelation in the policy variable and provides an explanation for the empirical observation that the nominal interest rate under the central bank's control is infrequently adjustedCommittees, status-quo bias, interest-rate smoothing, dynamic voting
Uncovering Financial Markets Beliefs About Inflation Targets
This paper exploits the term structure of interest rates to develop testable economic restrictions on the joint process of long-term interest rates and inflation when the latter is subject to a targeting policy by the Central Bank. Two competing models that econometrically describe agentsâ inferences about inflation targets are developed and shown to generate distinct predictions on the behavior of interest rates. In an empirical application to the Canadian inflation target zone, results indicate that agents perceive the band to be substantially narrower than officially announced and asymmetric around the stated mid-point. The latter result (i) suggests that the monetary authority attaches different weights to positive and negative deviations from the central target, and (ii) challenges on empirical grounds the assumption, frequently made in the literature, that the policy makerâs loss function is symmetric (usually a quadratic function) around a desired inflation value.Ce papier exploite la structure Ă terme des taux dâintĂ©rĂȘt afin de dĂ©velopper des restrictions Ă©conomiques testables sur le processus conjoint des taux dâintĂ©rĂȘt Ă long terme et de lâinflation quand cette derniĂšre est soumise Ă une politique de contrĂŽle Ă lâintĂ©rieur dâune fourchette cible de la part de la Banque centrale. Deux modĂšles concurrents qui dĂ©crivent, en termes Ă©conomĂ©triques, les infĂ©rences des agents sur lâinflation cible sont dĂ©veloppĂ©s et gĂ©nĂšrent des prĂ©dictions distinctes sur lâĂ©volution des taux dâintĂ©rĂȘt. Lâapplication empirique du modĂšle au Canada, qui pratique une politique monĂ©taire avec intervalle-cible dâinflation, indique, dâune part, que la fourchette perçue par les agents Ă©conomiques est significativement plus Ă©troite que celle qui est officiellement annoncĂ©e et, dâautre part, que celle-ci est asymĂ©trique par rapport au point mĂ©dian visĂ©. Ce dernier rĂ©sultat (i) suggĂšre que les autoritĂ©s monĂ©taires attribuent des poids diffĂ©rents aux dĂ©viations positives et nĂ©gatives par rapport au point mĂ©dian, et (ii) remet en question, sur le plan empirique, lâhypothĂšse frĂ©quemment faite dans la littĂ©rature que la fonction de perte du dĂ©cideur de la politique monĂ©taire est symĂ©trique (habituellement une fonction quadratique) autour du niveau dâinflation dĂ©sirĂ©
Skewness risk and bond prices
Statistical evidence is reported that even outside disaster periods, agents face negative consumption skewness, as well as positive inflation skewness. Quantitative implications of skewness risk for nominal loan contracts in a pure exchange economy are
derived. Key modeling assumptions are Epstein-Zin preferences for traders and asymmetric distributions for consumption and inflation innovations. The model is solved
using a third-order perturbation and estimated by the simulated method of moments.
Results show that skewness risk accounts for 6 to 7 percent of the risk premia depending
on the bond maturity
The Inflation Bias When the Central Bank Targets, the Natural Rate of Unemployment
This paper studies the proposition that an inflation bias can arise in a setup where a central banker with asymmetric preferences targets the natural unemployment rate. Preferences are asymmetric in the sense that positive unemployment deviations from the natural rate are weighted more (or less) severely than negative deviations in the central banker's loss function. The bias is proportional to the conditional variance of unemployment. The time-series predictions of the model are evaluated using data from G7 countries. Econometric estimates support the prediction that the conditional variance of unemployment and the rate of inflation are positively related.Cet article Ă©tudie la proposition qu'un biais inflationniste puisse survenir dans une situation oĂč un banquier central ayant des prĂ©fĂ©rences asymĂ©triques cible le taux de chĂŽmage naturel. Les prĂ©fĂ©rences sont asymĂ©triques dans le sens que les Ă©carts positifs du chĂŽmage par rapport au taux naturel sont pondĂ©rĂ©s plus (ou moins) sĂ©vĂšrement que les Ă©carts nĂ©gatifs dans la fonction de perte du banquier central. Le biais est proportionnel Ă la variance conditionnelle du chĂŽmage. Les prĂ©dictions du modĂšle sont Ă©valuĂ©es en utilisant des donnĂ©es des pays du G7. Les estimations Ă©conomĂ©triques soutiennent la prĂ©diction que la variance conditionnelle du chĂŽmage et le taux d'inflation sont reliĂ©s positivement
Does the Barro-Gordon Model Explain the Behavior of US Inflation? a Reexamination of the Empirical Evidence
This paper tests the predictions of the Barro-Gordon model using US data on
inflation and unemployment. To that end, it constructs a general game-theoretical model
with asymmetric preferences that nests the Barro-Gordon model and a version of
Cukiermanâs model as special cases. Likelihood Ratio tests indicate that the restriction imposed by the Barro-Gordon model is rejected by the data but the one imposed by the version of Cukiermanâs model is not. Reduced-form estimates are consistent with the view that the Federal Reserve weights more heavily positive than negative
unemployment deviations from the expected natural rate.Ce papier teste les prĂ©dictions du modĂšle de Barro-Gordon en utilisant les donnĂ©es amĂ©ricaines sur lâinflation et le chĂŽmage. Pour ce faire, il construit un modĂšle de jeu thĂ©orique gĂ©nĂ©ral avec des prĂ©fĂ©rences asymĂ©triques qui englobe le modĂšle de Barro-Gordon et une version du modĂšle de Cukierman qui sont des cas spĂ©ciaux. Les tests du rapports de vraisemblance indiquent que la restriction imposĂ©e par le modĂšle de Barro-Gordon est rejetĂ©e par les donnĂ©es, mais celle imposĂ©e par la version du modĂšle de Cukierman ne lâest pas. Les estimations sous la forme rĂ©duite sont cohĂ©rentes avec lâidĂ©e selon laquelle la RĂ©serve fĂ©dĂ©rale accorde une plus grande importance aux dĂ©viations positives quâaux dĂ©viations nĂ©gatives du chĂŽmage par rapport au taux naturel espĂ©rĂ©
Dissent in Monetary Policy Decisions
Voting records indicate that dissents in monetary policy committees are frequent and predictability regressions show that they help forecast future policy decisions. In order to study whether the latter relation is causal, we construct a model of committee decision making and dissent where members' decisions are not a function of past dissents. The model is estimated using voting data from the Bank of England and the Riksbank. Stochastic simulations show that the decision-making frictions in our model help account for the predictive power of current dissents. The eect of institutional characteristics and structural parameters on dissent rates is examined using simulations as well.Committees, voting models, political economy of central banking
Factor Analysis of a Large DSGE Model
We study the workings of the factor analysis of high-dimensional data using artiÂ
cial series generated from a large, multi-sector dynamic stochastic general equilibrium (DSGE) model. The objective is to use the DSGE model as a laboratory that allow us to shed some light on the practical beneÂ
ts and limitations of using factor analysis techniques on economic data. We explain in what sense the artiÂ
cial data can be thought of having a factor structure, study the theoretical and fiÂ
nite sample properties of the principal components estimates of the factor space, investigate the substantive reason(s) for the good performance of diffusion index forecasts, and assess the quality of the factor analysis of highly dissagregated data. In all our exercises, we explain the precise relationship between the factors and the basic macroeconomic shocks postulated by the model.Multisector economies, principal components, forecasting, pervasiveness, FAVAR
Inflation targeting under asymmetric preferences
El autor desarrolla y estima un modelo de teoria de juegos sobre objetivos de inflacion en el que las preferencias de los bancos centrales son asimetricas en torno a la tasa que se ha establecido como objetivo. En concreto, en la funcion de perdida de los bancos centrales, las desviaciones positivas del objetivo pueden ponderarse con mayor o menor severidad que las desviaciones negativas. Se muestra que algunos de los resultados anteriores derivados del supuesto de simetria no varian con la generalizacion de las preferencias. Las estimaciones de los parametros de preferencia de los bancos centrales para Canada, Suecia y el Reino Unido son estadisticamente diferentes de las implicitas en la funcion de perdida cuadratica utilizada habitualment. Los resultados econometricos no varian cuando se consideran distintos modelos de prediccion de la tasa de desempleo, pero si para la utilizacion de medidas de inflacion mas amplias que la establecida como objetivo. (fjrm) (ad
Estimating Nonlinear DSGE Models by the Simulated Method of Moments
This paper studies the application of the simulated method of moments (SMM) for the estimation of nonlinear dynamic stochastic general equilibrium (DSGE) models. Monte Carlo analysis is employed to examine the small-sample properties of SMM in specifications with different curvature. Results show that SMM is computationally efficient and delivers accurate estimates, even when the simulated series are relatively short. However, asymptotic standard errors tend to overstate the actual variability of the estimates and, consequently, statistical inference is conservative. A simple strategy to incorporate priors in a method of moments context is proposed. An empirical application to the macroeconomic effects of rare events indicates that negatively skewed productivity shocks induce agents to accumulate additional capital and can endogenously generate asymmetric business cycles.Monte-Carlo analysis; priors; perturbation methods, rare events, skewness
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