scholarly journals One Money, Many Markets

2020 ◽  
Vol 20 (108) ◽  
Author(s):  
Giancarlo Corsetti ◽  
Joao Duarte ◽  
Samuel Mann
Keyword(s):  
Open Economy ◽  
Factor Model ◽  
Small Open Economy ◽  
Dynamic Factor ◽  
Monetary Shocks ◽  
Financial Variables ◽  
Consumer Prices ◽  
Frequency Identification ◽  
Cross Country ◽  
Adjustable Rate

We study the transmission of monetary shocks across euro-area countries using a dynamic factor model and high-frequency identification. We develop a methodology to assess the degree of heterogeneity, which we find to be low in financial variables and output, but significant in consumption, consumer prices, and variables related to local housing and labor markets. Building a small open economy model featuring a housing sector and calibrating it to Spain, we show that varying the share of adjustable-rate mortgages and loan-to-value ratios explains up to one-third of the cross-country heterogeneity in the responses of output and private consumption.

One Money, Many Markets

2021 ◽  
Author(s):  
Giancarlo Corsetti ◽  
Joao B Duarte ◽  
Samuel Mann
Keyword(s):  
High Frequency ◽  
Factor Model ◽  
Wage Rigidity ◽  
Dynamic Factor ◽  
Dynamic Factor Model ◽  
Monetary Shocks ◽  
Financial Variables ◽  
Consumer Prices ◽  
Study Heterogeneity ◽  
Frequency Identification

Abstract We study heterogeneity in the transmission of monetary shocks across euro-area countries using a dynamic factor model and high-frequency identification. Deploying a novel methodology to assess the degree of heterogeneity, we find it to be low in financial variables and output but significant in consumption, consumer prices, and variables related to local housing and labour markets. We show that a large proportion of the variation in the responses to monetary shocks can be accounted for by differences in some characteristics of these markets across EA member countries: the share of adjustable mortgage contracts, homeownership rates, shares of hand-to-mouth and wealthy hand-to-mouth consumers, as well as wage rigidity.

Trade Tax Reform in a Small Open Economy with Distributional Objectives and Distortionary Taxation

2002 ◽  
Vol 1 (1) ◽  
Author(s):  
Jeremy Edwards
Keyword(s):  
Open Economy ◽  
Small Open Economy ◽  
Small Open Economies ◽  
Tax Reforms ◽  
Distortionary Taxation ◽  
Nontraded Goods ◽  
Traded Goods ◽  
Consumer Prices ◽  
Distortionary Taxes ◽  
The One

Abstract The paper shows that, if two conditions are satisfied, both radial contraction and concertina trade tax reforms continue to be desirable in a small open economy that differs from the one usually considered by having distributional objectives and using distortionary taxes to raise revenue. The first condition is that some optimisation in the choice of commodity taxes takes place - at a minimum, taxes on nontraded goods must be optimally chosen while taxes on traded goods keep the consumer prices of such goods constant. The second is that pure profits are absent from every household's budget constraint. These conditions mean that some care is required in arguing the case for simple trade tax reforms in small open economies.

scholarly journals Adjustment Costs and Nominal Rigidities in a Small Open Economy / Anpassungskosten und nominelle Rigiditäten in einer kleinen offenen Volkswirtschaft

2002 ◽  
Vol 222 (4) ◽  
Author(s):  
Alfred Maußner
Keyword(s):  
Time Series ◽  
Utility Function ◽  
Open Economy ◽  
Small Open Economy ◽  
Adjustment Costs ◽  
Monetary Shocks ◽  
Firm Level ◽  
Current Period ◽  
The Business Cycle ◽  
Simulated Time

SummaryWhat does account for the persistence of monetary shocks in dynamic general equilibrium models of the business cycle? A number of papers have dealt with that question and point at labor market frictions besides those introduced by overlapping wage contracts.In this paper I investigate an obvious source of persistence, namely small adjustment costs of labor at the firm level. These introduce indeed hump shaped impulse responses of hours worked in simulated time series. Compared with a benchmark model without nominal and real frictions my model outperforms the former in most respects.However, its account of the time series properties of monetary variables is not satisfactory. This holds true for closely related models that change the current period utility function, that introduce money into the utility function, or that posit a cash in advance constraint. I take this as suggestive to think about more sophisticated models of money demand.

scholarly journals Constructing a Financial Condition Index for a Small-Open Economy: The Case of Malta

2018 ◽  
Vol 10 (3) ◽  
pp. 89
Author(s):  
Borg Ian ◽  
Micallef Brian
Keyword(s):  
Interest Rates ◽  
Open Economy ◽  
Small Open Economy ◽  
Balance Sheet ◽  
Principal Component ◽  
Condition Index ◽  
Predictive Capacity ◽  
Financial Variables ◽  
Financial Condition ◽  
Financial Conditions

This paper develops a Financial Conditions Index (FCI) for Malta for the period 1996-2017. This index provides a summary measure of financial conditions by combining several financial variables, both domestic and foreign, that influence economic activity. The indicators in the FCI are grouped in four categories: interest rates, bank balance sheet, asset prices and external variables. The weights are derived using Principal Component Analysis (PCA) and cross-checked using simulations from STREAM, the Central Bank of Malta’s macro-econometric model. Financial conditions in Malta were relatively benign in the mid-to-late 90s, followed by a period of tightening in the early 2000s. Financial conditions improved again during the pre-crisis period but deteriorated during the financial crisis and remained tight until 2013. In recent years these have recovered and became broadly neutral by 2017. The proposed FCIs correlate the most with one to three quarters ahead real GDP growth, suggesting potential predictive capacity for short-term forecasting.

scholarly journals A Welfare Based Approach for choosing the Inflation Targeting and the Exchange Regime in Tunisia

2014 ◽  
Vol 6 (12) ◽  
pp. 919-932
Author(s):  
Abdelli Soulaima
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Inflation Targeting ◽  
Exchange Rate Regime ◽  
Small Open Economy ◽  
Flexible Exchange Rate ◽  
Stochastic Dynamic ◽  
Consumer Prices ◽  
The Social ◽  
The Impact

The inflation targeting is considered as an attractive monetary policy strategy in order to handle the inflation rate and improves the credibility of the central bank. The paper provides a stochastic dynamic general equilibrium model with the specificity of employing a small open economy. This model analyzes the impact of different regimes of inflation targeting and exchange rate in Tunisia in terms of the welfare loss and describes some aspects of the Tunisian’s economy. The results displays that the social loss is higher under the managed exchange rate than the flexible exchange rate regime for all the shocks. Then in terms of the inflation targeting index, it demonstrates that the consumer prices index outperforms the domestic inflation except for the productivity shock, in contrast to the result of (Parrado, 2004). Finally the strict is superior to the flexible inflation targeting except with the foreign inflation and the domestic interest rate shock.

NOWCASTING GDP GROWTH IN A SMALL OPEN ECONOMY

2021 ◽  
Vol 256 ◽  
pp. 127-161
Author(s):  
Massimiliano Marcellino ◽  
Vasja Sivec
Keyword(s):  
Open Economy ◽  
Small Open Economy ◽  
Factor Models ◽  
Economic Conditions ◽  
Dynamic Factor ◽  
Gdp Growth ◽  
Learning Models ◽  
Dynamic Factor Models ◽  
Mixed Frequency ◽  
Machine Learning Models

Nowcasting, that is, forecasting the current economic conditions, is a key ingredient for decision making, but it is complex, even more so for a small open economy, due to the higher volatility of its GDP. In this paper, we review the required steps, taking Luxembourg as an example. We consider both standard and alternative indicators, used as inputs in several nowcasting methods, including various factor and machine learning models. Overall, mixed frequency dynamic factor models and neural networks perform well, both in absolute terms and in relative terms with respect to a benchmark autoregressive model. The gains are larger during problematic times, such as the financial crisis and the recent Covid period.

EMPIRICAL PSYCHOLOGY BETWEEN WHOLESALE PRICE AND CONSUMER PRICE INDICES: THE CASE OF PAKISTAN

2010 ◽  
Vol 55 (03) ◽  
pp. 537-551 ◽  
Author(s):  
MUHAMMAD SHAHBAZ ◽  
ABU N. M. WAHID ◽  
ADNAN HAIDER
Keyword(s):  
Interest Rates ◽  
Open Economy ◽  
Price Index ◽  
Wholesale Price ◽  
Small Open Economy ◽  
Nominal Exchange Rate ◽  
Retail Sector ◽  
Inference Procedure ◽  
Long Run ◽  
Consumer Prices

In a small open economy, the retail sector adds value with a lag to existing production and uses existing domestic production as an input. Therefore, demand side dynamics depend on the wholesale prices of the domestic goods, the prices of the imported goods, the nominal exchange rate, the level of indirect taxes, the marginal cost of retail production and interest rates. Hence, this mechanism provides a theoretical basis for causality from wholesale prices to consumer prices. Being motivated by this causal transmission mechanism, this paper tries to examine the causal relationship between wholesale prices and consumer prices in a small developing economy like Pakistan. Empirical methodology uses recently developed tests for the existence of a long-run relationship between wholesale prices and consumer prices. Typically, in applied analysis, testing for the existence of cointegration and causality can only be carried out once the time series properties of the data have been established. For example, tests for cointegration require the variables to be integrated to the same order, typically I(1), prior to estimation. By eliminating the need for unit root pre-testing, the tests applied here considerably simplify the inference procedure. They also reduce the potential for distortions in the inference due to the unknown properties of the testing sequence. Our findings include robust evidence that, for Pakistan, there is a bidirectional causality between wholesale prices and consumer prices. Feedback impact shows that influences from the wholesale price index (WPI) to the consumers' price index (CPI) is stronger or dominating as compared to feedback from CPI to WPI supporting the Cushing-McGarvey (1990) hypothesis.

scholarly journals How Important Are Foreign Shocks in a Small Open Economy? The Case of Slovakia

2009 ◽  
Vol 9 (1) ◽  
pp. 1850155 ◽  
Author(s):  
Roman Horvath ◽  
Marek Rusnak
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Open Economy ◽  
Small Open Economy ◽  
Monetary Shocks ◽  
Positive Role ◽  
Interest Rate Policy ◽  
Monetary Policy Shock ◽  
Foreign Shocks

In this article, we provide evidence on the nature and the relative importance of domestic and foreign shocks – with a focus on monetary shocks – in the Slovak economy based on the block-restriction vector autoregression model during the years 1999–2007. We document a well-functioning monetary transmission mechanism in Slovakia. Subject to various sensitivity checks, we find that contractionary monetary policy shock has a temporary negative effect on the degree of economic activity and price level. We find that using output gap instead of GDP alleviates the price puzzle. In general, prices are driven mainly by foreign factors and the European Central Bank monetary policy shock on Slovak prices is more powerful than that of the National Bank of Slovakia. The Slovak Central Bank interest rate policy seems to follow the ECB's interest rates. On the other hand, spectacular Slovak economic growth is primarily driven by domestic factors suggesting the positive role of recently undertaken Slovak economic reforms.

scholarly journals On business cycle forecasting

2020 ◽  
Vol 14 (1) ◽  
Author(s):  
Huiwen Lai ◽  
Eric C. Y. Ng
Keyword(s):  
Business Cycles ◽  
Factor Model ◽  
Mixed Data ◽  
Dynamic Factor ◽  
Dynamic Factor Model ◽  
Forecast Errors ◽  
Data Sampling ◽  
Target Variable ◽  
Financial Variables ◽  
Mixed Data Sampling

Abstract We develop a recession forecasting framework using a less restrictive target variable and more flexible and inclusive specification than those used in the literature. The target variable captures the occurrence of a recession within a given future period rather than at a specific future point in time (widely used in the literature). The modeling specification combines an autoregressive Logit model capturing the autocorrelation of business cycles, a dynamic factor model encompassing many economic and financial variables, and a mixed data sampling regression incorporating common factors with mixed sampling frequencies. The model generates significantly more accurate forecasts for U.S. recessions with smaller forecast errors and stronger early signals for the turning points of business cycles than those generated by existing models.

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