The flattening of the yield curve : causes and economic policy implications

The article examines the flattening of the yield curve in the euro area since mid 2004, and that in the United States where a slight inversion has actually been apparent since mid 2006. Analysis has shown that, apart from the tightening of monetary policy, this phenomenon is due to a substantial reduction in the risk premium, and especially its real component. It also indicates that this contraction was caused mainly by strong demand for government bonds on the part of atypical investors, in particular, the Asian central banks and pension funds. In addition, the study revealed that the reliability of break-even inflation as an indicator of inflation expectations is not really affected by this flattening, since the reduction in the inflation risk premium made only a small contribution to the contraction of the overall risk premium. Conversely, the analysis indicates that the quality of the yield curve as an advanced indicator of the business cycle is affected by the contraction of the risk premium. Since the flattening of the yield curve is due to adjustment of the risk premium rather than revised interest rate expectations, the current behaviour of the yield curve does not signal a marked slowdown in economic activity. Since, the contraction of the risk premium corresponds to an easing of financial conditions, the monetary authorities need to exercise great vigilance in order to ensure price stability in the medium term. Vigilance is all the more necessary if the reduction in the risk premium is not due to changes in the macroeconomic fundamentals. In that case, there is also the risk of a possible upward adjustment to long-term interest rates. However, it should also be noted that the demand currently exhibited by atypical investors seems to be more structural than that generated by the “flight to quality” which lay at the root of the decline in the risk premium during the period 1997-1998. The risk premium reduction which occurred between June 2004 and June 2005 therefore appears to be more persistent than that seen between mid 1997 and the end of 1998.yield curve, risk premia

Inflation persistence in Belgium

The article deals with inflation dynamics in Belgium, and in particular the degree of inflation persistence. It also presents a historical perspective in order to determine whether the statistical properties of the inflation process have changed over time. The analysis revealed significant changes in inflation dynamics over the past thirty years. First, inflation fell sharply in the mid 1980s, and this downward movement was common to all components of the national consumer price index, except services, where the decline in inflation was much more gradual. Next, the analysis showed that, under the current monetary policy regime, the degree of aggregate inflation persistence is relatively modest. The results also showed that the degree of persistence has diminished somewhat over time, presumably because of changes in the wage formation process. Finally, the study showed that the present findings are broadly similar to those recorded in the euro area, which suggests that the Eurosystem’s monetary policy is appropriate to the Belgian economy.inflation, inflation persistence, monetary policy

Toward Precision Measurement of Central Black Hole Masses

We review briefly direct and indirect methods of measuring the masses of black holes in galactic nuclei, and then focus attention on supermassive black holes in active nuclei, with special attention to results from reverberation mapping and their limitations. We find that the intrinsic scatter in the relationship between the AGN luminosity and the broad-line region size is very small, ~0.11 dex, comparable to the uncertainties in the better reverberation measurements. We also find that the relationship between reverberation-based black hole masses and host-galaxy bulge luminosities also seems to have surprisingly little intrinsic scatter, ~0.17 dex. We note, however, that there are still potential systematics that could affect the overall mass calibration at the level of a factor of a few.Comment: 10 pages, 2 figures. To be published in the Proceedings of IAU Symposium 267 "Co-Evolution of Central Black Holes and Galaxies

Inflation differentials in the euro area : size, causes, economic policy implications and relative position of Belgium

Both the size and the persistence of inflation differentials in the euro area have been the subject of a large number of studies in recent years. These studies have tried to determine the causes of these differentials as well as their implications not only for the implementation of the common monetary policy but also in terms of the macroeconomic policies needed at the country level. Indeed, since the start of Stage Three of the EMU, countries can no longer correct country-specific imbalances or idiosyncratic shocks through changing their national monetary policy stance. As a consequence, it may be deemed fit, in some cases, to take appropriate policy measures aimed at reducing inflation differentials. The article tackles the case of Belgium, in which country the inflation differentials vis-à-vis the euro area appear to be relatively small and do not seem to show any persistence or any systematic upward or downward bias. However, empirical studies based on the “Balassa-Samuelson” theory have concluded that Belgium should be prone to a relatively high inflation rate. This theory holds that, on restrictive assumptions, a real appreciation (or positive inflation differential) is generated in countries showing the most rapid growth of the productivity differential between the traded and non-traded goods sectors. The article goes into those rather surprising results. The authors observed a pronounced increase of relative productivity in Belgium and a strong positive correlation between relative productivity and relative prices, measured by the value added deflator, which proves to be consistent with the theory and the results of previous studies. These studies have typically assumed that the tradable sector showed purchasing power parity. In that case, the pronounced increase in relative prices has strong implications for the real exchange rate (or inflation differentials). However, the authors found empirical evidence against this hypothesis in the Belgian case. Indeed, the real exchange rate in the tradable sector depreciated strongly in the seventies and the early eighties. This depreciation in the tradable sector offset the impact of the positive relative price differential, causing the real exchange rate for the economy as a whole to be relatively stable. Belgium should therefore not be an economy prone to high inflation. As the HICP is the main indicator monitored by the European monetary authorities, it was important to examine whether such conclusions could also be drawn for the consumer price index. The authors found similar results, namely a stable real exchange rate for the Belgian economy as a whole during the period under review and, therefore, the absence of any structural reason for inflation to be systematically higher in Belgium. It may thus be concluded that significant and persistent inflation differentials between Belgium and the euro area or a systematic bias in any particular direction are unlikely and, therefore, that the European monetary policy is appropriate for the Belgian economy in the current environment.Real exchange rates, Inflation differentials, Balassa-Samuelson effect, European Monetary Union

On the size of the Fe II emitting region in the AGN Akn 120

We present a reverberation analysis of the strong, variable optical Fe II emission bands in the spectrum of Akn 120, a low-redshift AGN which is one of the best candidates for such a study. On time scales of several years the Fe II line strengths follow the variations in the continuum strength. However, we are unable to measure a clear reverberation lag time for these Fe II lines on any time scale. This is due to the very broad and flat-topped nature of the Fe II cross correlation functions, as compared to the H-beta response which is much more sharply localized in time. Although there is some suggestion in the light curve of a 300-day response time, our statistical analysis does not pick up such a feature. We conclude that the optical Fe II emission does not come from a photoionization-powered region similar in size to the H-beta emitting region, but we cannot say for sure where it does come from. Our results are generally consistent either with emission from a photoionized region several times larger than the H-beta zone, or with emission from gas heated by some other means, perhaps responding only indirectly to the continuum variations.Comment: Accepted for publication in the Ap

Comparison of Gaussian process modeling software

Gaussian process fitting, or kriging, is often used to create a model from a set of data. Many available software packages do this, but we show that very different results can be obtained from different packages even when using the same data and model. We describe the parameterization, features, and optimization used by eight different fitting packages that run on four different platforms. We then compare these eight packages using various data functions and data sets, revealing that there are stark differences between the packages. In addition to comparing the prediction accuracy, the predictive variance--which is important for evaluating precision of predictions and is often used in stopping criteria--is also evaluated