Fiscal policy effectiveness and neutrality results in a non-Ricardian world

The paper introduces monetary and fiscal regimes into a Blanchard-Weil overlapping generations model. Contrary to intuition, it is shown that fiscal policy becomes more effective, the less the central bank monetises government debt. Furthermore, there is a degree of debt monetisation at which Ricardian equivalence seems to hold in this 'non-Ricardian' model, as fiscal policy is neutral with respect to agent's net wealth. At the origin of these results are the opposite intergenerational wealth effects of money and debt financing. Since, on average, central bank independence increased through EMU, the analysis suggests that fiscal policy might have become a more powerful instrument for euro-area countries. It is further argued that given the Stability and Growth Pact, governments will find it wise to run budget positions 'close to balance or in surplus' in order to maintain the increased fiscal policy effectiveness. JEL Classification: E63fiscal policy effectiveness

Maintaining price stability under free-floating: a fearless way out of the corner?

The behaviour of the exchange rate under a floating exchange rate regime for a small open economy with perfect capital mobility may appear like a managed float or even a firmer peg. We present a canonical new neo-classical synthesis open economy model where the central bank follows a strategy directed at maintaining price stability. It is shown that the behaviour of the exchange rate depends on the structure of the economy and on the nature of the relevant shocks. In the case of very open economies the exchange rate will look quasi-fixed in response to shocks stemming from the international capital markets. It is also shown that the joined endogeneity of the interest rate and the exchange rate has important implications for the empirical testing of uncovered interest rate parity. JEL Classification: E58, E63, F41flexible exchange rates, managed floating, price stability, small open economy, uncovered interest rate parity

Liquidity shocks and asset price boom/bust cycles

We provide systematic evidence for the association of liquidity shocks and aggregate asset prices during mechanically identified asset price boom/bust episodes for 18 OECD countries since the 1970s, while taking care of the endogeneity of money and credit. Our derivation of liquidity shocks allows for frequent shifts in velocity as they are derived as structural shocks from VARs in growth rates. Residential property price developments and money growth shocks accumulated over the boom periods are able to well explain the depth of post-boom recessions. We further suggest that liquidity shocks are a driving factor for real estate prices during boom episodes. During normal times however, the relative predictive power of liquidity shocks seems to shift from asset price inflation to consumer price inflation. The results only hold for broad money growth based liquidity shocks and not for private credit growth shocks. JEL Classification: C33, E41, E51, E58asset price booms, Liquidity shocks, monetary policy, money and credit aggregates, real estate prices, role of money

The Euro and International Capital Markets

currency; economic integration; EMU; Euro; European Central Bank; political economy

Asset price booms and monetary policy

The paper aims at deriving some stylised facts for financial, real, and monetary policy developments during asset price booms by means of aggregating information contained in 38 boom periods since the 1970s for 18 OECD countries. We observe 26 macroeconomic variables in a pre-boom, boom and post-boom phase. Not all booms lead to large output losses. We divide our sample in high-cost and low-cost booms and analyse the differences. High-cost booms are clearly those in which real estate prices and investment crash in the post-boom periods. In general it is difficult to distinguish a highcost from a low-cost boom at an early stage. However, high-cost booms seem to follow very rapid growth in the real money and real credit stocks just before the boom and at the early stages of a boom. During high-cost booms, rates of change of real estate prices and consumption growth are significantly higher and the investment (especially housing) GDP ratio deviation from trend rises faster over the whole boom period. There is also evidence that high-cost booms are associated with significantly looser monetary policy conditions over the boom period, especially towards the late stage of a boom. We finally discuss the results with regard to the theoretical literature. The looser monetary policy at the later stage of high-cost booms could be interpreted in different ways. It could be that excessively loose monetary policy contributes to extending the boom and exacerbating the real and financial imbalances. Alternatively, observed monetary policy could reflect a desirable, pre-emptive loosening in anticipation of an asset price crash to come. JEL Classification: E44, E52, E58and monetary policy developments, real, The paper aims at deriving some stylised facts for financial

'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity

We test the performance of a host of real and financial variables as early warning indicators for costly aggregate asset price boom/bust cycles, using data for 18 OECD countries between 1970 and 2007. A signalling approach is used to predict asset price booms that have relatively serious real economy consequences. We use a loss function to rank the tested indicators given policy makers' relative preferences with respect to missed crises and false alarms. The paper analyzes the suitability of various indicators as well as the relative performance of financial versus real, global versus domestic and money versus credit based liquidity indicators. We find that global measures of liquidity are among the best performing indicators and display forecasting records, which provide useful information for policy makers interested in timely reactions to growing financial imbalances, as long as aversion against type I and type II errors is not too unbalanced. Furthermore, we explore out-of-sample whether the most recent wave of asset price booms (2005-2007) would be predicted to be followed by a serious economic downturn. JEL Classification: E37, E44, E51Early Warning Indicators, Leaning Against the Wind, Signalling Approach

On prosperity and posterity: the need for fiscal discipline in a monetary union

We show how in a Blanchard-Yaari, overlapping generations framework, perfect substitutability of government bonds in Monetary Union tempts governments to exploit the enlarged common pool of savings. In Nash equilibrium all governments increase their bond financed transfers to current generations (prosperity effect) at the expense of future generations (posterity effect). The resulting deficit bias occurs even if one assumes that before Monetary Union countries had eliminated their deficit bias by designing appropriate domestic institutions. The paper provides a rationale for an increased focus on fiscal discipline in Monetary Union, without the need to assume imperfect credibility of existing Treaty provisions or to refer to extreme situations involving sovereign default. We draw on existing empirical evidence to argue that the degree of government bond substitutability within the European Monetary Union is an order of magnitude larger than in the global economy. JEL Classification: D62, E61, E63bond market integration, common pool, European Monetary Union, fiscal discipline, fiscal rules, fiscal spillover effects, overlapping generations

A SIEM Architecture for Advanced Anomaly Detection

Dramatic increases in the number of cyber security attacks and breaches toward businesses and organizations have been experienced in recent years. The negative impacts of these breaches not only cause the stealing and compromising of sensitive information, malfunctioning of network devices, disruption of everyday operations, financial damage to the attacked business or organization itself, but also may navigate to peer businesses/organizations in the same industry. Therefore, prevention and early detection of these attacks play a significant role in the continuity of operations in IT-dependent organizations. At the same time detection of various types of attacks has become extremely difficult as attacks get more sophisticated, distributed and enabled by Artificial Intelligence (AI). Detection and handling of these attacks require sophisticated intrusion detection systems which run on powerful hardware and are administered by highly experienced security staff. Yet, these resources are costly to employ, especially for small and medium-sized enterprises (SMEs). To address these issues, we developed an architecture -within the GLACIER project- that can be realized as an in-house operated Security Information Event Management (SIEM) system for SMEs. It is affordable for SMEs as it is solely based on free and open-source components and thus does not require any licensing fees. Moreover, it is a Self-Contained System (SCS) and does not require too much management effort. It requires short configuration and learning phases after which it can be self-contained as long as the monitored infrastructure is stable (apart from a reaction to the generated alerts which may be outsourced to a service provider in SMEs, if necessary). Another main benefit of this system is to supply data to advanced detection algorithms, such as multidimensional analysis algorithms, in addition to traditional SIEMspecific tasks like data collection, normalization, enrichment, and storage. It supports the application of novel methods to detect security-related anomalies. The most distinct feature of this system that differentiates it from similar solutions in the market is its user feedback capability. Detected anomalies are displayed in a Graphical User Interface (GUI) to the security staff who are allowed to give feedback for anomalies. Subsequently, this feedback is utilized to fine-tune the anomaly detection algorithm. In addition, this GUI also provides access to network actors for quick incident responses. The system in general is suitable for both Information Technology (IT) and Operational Technology (OT) environments, while the detection algorithm must be specifically trained for each of these environments individually