106 research outputs found
Coronabonds are a pragmatic response to a crisis – and are not about cross-EU transfers or solidarity
No full textCommon debt instruments created by the European Union, of which coronabonds are currently the most urgent and salient example, evoke in some countries the fear that the Eurozone may be heading towards a ‘transfer union’. Some advocates also misleadingly justify these innovations by an appeal to European ‘solidarity’. Yet, in practice, Michael Paetz and Patrick Kaczmarczyk argue that such instruments require only a dose of pragmatism. We need to fundamentally reframe the debate around ‘debt mutualisation’ in Europe on more evidence-based and realistic lines if the Eurozone is to survive
Adjustment in EMU: Is Convergence Assured?
No full textUsing a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades. Keywords: EMU, convergence, stability.EMU, convergence, stability, inflation
What Can an Open-Economy DSGE Model Tell Us about Hong Kong’s Housing Market?
No full textThis paper develops an open-economy DSGE model with a housing-market sector and a borrowing constraint. Contrary to standard conventions, domestic households are allowed to invest in foreign housing and vice versa. Using Bayesian methods, the model is applied to data for Hong Kong. The results show that Hong Kong’s housing market is quite open to foreign investment, and perhaps more significantly, that variations in the loan-to-value ratio and housing preference shocks largely explain business cycle volatility.DSGE models; housing; open economy; Hong Kong
Robuste Kontrolle und Persistenz in neukeynesianischer geldpolitischer Analyse
No full textThis thesis investigates the consequences of model uncertainty and persistence in consumption habits and price-setting behaviour in a New Keynesian model.
As the decision of a central bank is made in an uncertain environment, the analysis of uncertainty is essential in monetary policy models. In opposition to Bayesian methods, which always require an a-priori density function this thesis uses a robust control approach. Uncertainty is represented by a vector-shock-process, distorting the transition equations. Given this process, optimal interest rates under uncertainty are derived by minimizing the loss function of the distorted model, and compared to optimal policy in the approximating model. Unlike a Bayesian planner, who would only be concerned about calculated risk, a robust planner faces unorganised uncertainty and cannot express his beliefs in probabilistic statements. A robust control theorist builds a set of possible models around the reference model and chooses the optimal policy in the worst case scenario.
In the New Keynesian literature the Keynesian assumption of rigid prices is combined with modern macroeconomic methods. Models are based on detailed microfoundations, which are log-linearized around an equilibrium to achieve a simple, linear model, that only depends on inflation, the output gap, and the interest rate, in the case of a single closed economy. For deriving the optimal monetary policy, an investigation of the persistence in output and inflation dynamics is crucial. Because of the controversial debate on the importance of expectations, the consequences of persistence and the interaction with uncertainty is analysed. Therefore, the persistence in macro-variables is justified by the model’s microfoundations of private sector behaviour. This allows to study the influence of private sector behaviour.
Thus, chapter 2 starts with explaining the relationship of monetary policy and different types of uncertainty, before chapter 3 discusses the New Keynesian perspective on monetary policy. Subsequently, the fourth chapter illustrates the robust control methodology. The fifth chapter summarizes and categorizes the existing literature regarding the investigation of model uncertainty in a closed economy, before chapter 6 studies a closed hybrid New Keynesian economy under different preferences of the central bank, and for different assumptions on private sector behaviour. Model dynamics are shown for the benchmark model, for the case of uncertainty, and for the case of an unfounded fear against model misspecification. All results are derived for a discretionary policymaker, and a policymaker, who acts under commitment to the optimal interest rate response. Furthermore, different types of simple rules are analysed. Since New Keynesian models have been extended to two-country economies during the last years, due to increased international interdependencies, chapter 7 gives a summary of this evolution, before chapter 8 studies a two-country New Keynesian framework. The conclusions are given in chapter 9.
The analysis shows that central banks should react stronger to changes in inflation and output under uncertainty. Furthermore, it is shown that private sector behaviour is of much more importance for the conduct of optimal monetary policy than a general model uncertainty for a given persistence level. Additionally, the study illustrates that monetary policy under commitment is a policy on the razor’s edge with respect to uncertainty, since commitment can be destabilizing, when the fear against model misspecification is unfounded (commitment to the wrong model). This questions the advantage of a commitment solution and shows that protection against the worst case can only be achieved at costs of average performance.In dieser Arbeit werden der Einfluss von Modellunsicherheit und persistentem Konsum- und Preissetzungsverhalten in einem neukeynesianischem Modell untersucht. Da die Entscheidung einer Zentralbank über die optimale Zinssetzung unter Unsicherheit über die Zusammenhänge der Ökonomie gefällt wird, ist die Analyse von Unsicherheit in geldpolitischen Modellen essentiell. Im Gegensatz zu Bayesianischen Methoden zur Untersuchung von Unsicherheit, welche stets voraussetzen, dass eine A-priori-Wahrscheinlichkeitsverteilung über unbekannte Modellteile gebildet werden kann, analysiert die vorliegende Arbeit allgemeine Unsicherheit unter Verwendung einer robusten Kontrollmethode. Modellunsicherheit wird implementiert durch einen Schockprozess, welcher die Übergangsgleichungen des Modells stört. Gegeben diesen Prozess wird die optimale Zinspolitik unter Unsicherheit durch Minimierung der Verlustfunktion des gestörten Modells erreicht und mit der optimalen Lösung ohne diesen Prozess verglichen. Während eine bayesianische Analyse nur kalkulierbare Risiken untersucht, bietet die robuste Kontrolltheorie die Möglichkeit Unsicherheit zu analysieren, ohne im Vorfeld bestimmte Wahrscheinlichkeitsannahmen tref-fen zu müssen. Der robuste Kontrolltheoretiker bildet eine Menge von gestörten Modellen um das Referenzmodell und wählt die optimale Geldpolitik so, dass diese im ungünstigsten Modellfall die besten Lösungen hervorbringt. In der neukeynesianischen Literatur wird die keynesianische Annahme rigider Preise mit modernen makroökonomischen Methoden verbunden. Neukeynesianische Modelle basieren auf einer detaillierten Mikrofundierung, welche durch Log-linearisierung der Übergangsgleichungen um das Gleichgewicht zu einem einfachen linearen Modell führen, das im Falle einer geschlossenen Volkswirtschaft lediglich Inflation, die Produktionslücke und den Zinssatz als geldpolitisches Instrument beinhaltet. Wesentlich für die Herleitung der optimalen Geldpolitik ist die Persistenz in der Inflations- und Outputdynamik. Aufgrund der kontroversen Diskussion bezüglich der Bedeutung von Erwartungen wird in dieser Arbeit daher der Einfluss von Persistenz und die Interaktion mit Modellunsicherheit analysiert. Das persistente Verhalten auf Makroebene wird in der Mikrofundierung des Modells durch persistentes Verhalten von Haushalten und Firmen gerechtfertigt. Dies ermöglicht es, den Einfluss des Privatsektorverhaltens zu untersuchen. In Kapitel 2 der Arbeit wird daher der Zusammenhang zwischen Geldpolitik und verschiedenen Arten von Unsicherheit verdeutlicht, bevor in Kapitel 3 die derzeitige state-of-the-art Modellklasse der geldpolitischen Analyse, d.h. die neukeynesianischen Modelle, dargestellt wird. Nachfolgend erklärt Kapitel 4 die angewendete robuste Kontrollmethode. In dem fünften Kapitel werden bisherige Ansätze der Untersuchung von Modellunsicherheit in geschlossenen Volkswirtschaften zusammengefasst und kategorisiert, bevor in Kapitel 6 eine geschlossene neukeynesianische Ökonomie unter verschiedenen Präferenzen der Zentralbank und Annahmen über das Haushaltsverhalten analysiert wird. Die Dynamik des Modells wird für den Standardfall sowie unter Unsicherheit durch Berechnung von Verlusten und Impuls-Antwort Funktionen für eine diskretionäre und eine regelgebundene Geldpolitik (Commitment) verdeutlicht. Zudem werden diverse einfache geldpolitische Regeln des Taylor-Typus untersucht. Da die akademische Forschung, als Reaktion auf die zunehmende internationale Verflechtung, die neukeynesianischen Volkswirtschaften in den letzten Jahren zu Zwei-Länder Ökonomien erweitert hat, gibt das siebte Kapitel einen Überblick über diese Entwicklung, bevor in Kapitel 8 ein neukeynesianisches Zwei-Länder Modell untersucht wird. In Kapitel 9 werden die Ergebnisse zusammengefasst. Diese Arbeit zeigt, dass Zentralbanken unter Unsicherheit stärker auf Veränderungen von Inflation und Produktion reagieren sollten. Des weiteren weisen die Ergebnisse darauf hin, dass kleine Veränderungen bezüglich der Annahme über das Verhalten des Privatsektors einen sehr viel stärkeren Einfluss auf die optimale Geldpolitik und die Dynamik der Ökonomie haben als eine allgemeine Modellunsicherheit unter gegebener Persistenz im Konsum- und Preissetzungsverhalten. Ferner wird gezeigt, dass die Verwendung einer regelgebundenen Geldpolitik (Commitment solution), welche sich auf die Beeinflussung der Erwartungen der Wirtschaftssubjekte verlässt, unter Unsicherheit zu einer Destabilisierung der Volkswirtschaft führen kann, wenn die Unsicherheit unbegründet und das Referenzmodell zutreffend ist. Dies stellt die Vorteilhaftigkeit einer geldpolitischen Commitment Strategie in Frage und zeigt zudem, dass eine Absicherung gegen Unsicherheit nur auf Kosten der durchschnittlichen Güte der Geldpolitik erreicht werden kann
Robust Control and Persistence in the New Keynesian Economy
No full textSince Keynes no economist would deny that expectations under uncer- tain conditions matter for the conduct of monetary policy, but still opin- ions about their formation are diverse. We build a hybrid New Keynesian Framework to analyze the influence of model uncertainty on optimal in- terest rates under di¤erent degrees of rational forward-looking behavior, using recently developed robust control techniques. Impulse response functions illustrate that uncertainty seems to be a rationale for more aggressive interest rate reactions, but also suggest that the degree of forward-looking behavior seems to be more important than an appro- priate fear about the misspecification of a given model. Furthermore, we argue that assuming to control inflation through expectations is a policy on the razor's edge, since robust expectations overestimate shock impacts. This questions the gains from commitment under uncertainty.Robust Control, Knightian Uncertainty, Monetary Policy, Forward-Looking Expectations, Model Uncertainty.
A DSGE-based assessment of nonlinear loan-to-Value policies: Evidence from Hong Kong
No full textIn the wake of the 2008-2009 global financial crisis, the macroeconomic discussion has returned to the topic of proactive macroprudential policies. One proactive approach, the use of loan-to-value (LTV) policies to curb booming property markets, has long been used by Hong Kong's monetary authorities to actively manage and mitigate the potential fallout from housing price bubbles. Here, we analyse the merits of this countercyclical macroprudential policy in a New Keynesian DSGE model. We conclude that nonlinear LTV policy rules implemented in reaction to episodes of high property price inflation can limit transmission of housing price cycle effects to the real economy
Dynamic Stochastic General EQUILIBRIUM ‐ BASED Assessment of Nonlinear Macroprudential Policies: Evidence from Hong Kong
No full textFinancial system reforms and China's monetary policy framework: A DSGE-based assessment of initiatives and proposals
No full textThis paper evaluates various financial system reform initiatives and proposals in China in a DSGE modelling setting. The key reform steps analysed include phasing out benchmark interest rates, deepening the direct finance market, reducing government's quantity-based intervention on financial institutions. Our counterfactual model simulation results suggest that the reforms will be beneficial only, if Chinese monetary policy continues to rely on quantity-based interventions on financial institutions or tightens the interest rate rule
Environmental Policy Under Model Uncertainty: A Robust Optimal Control Approach
No full textThe design of optimal environmental policy inherits model uncertainty. We investigate the consequences in a simple linear model, where the aim of the policymaker is to stabilize the atmospheric content of carbon. We study how decision-makers' concerns about robustness alters policy using the Hansen and Sargent (2000, 2003, 2007) approach. The analysis shows that a policymaker, who fears about model misspecification should react more aggressively to changes in the stock of atmospheric carbon and reduce emissions stronger.robust control, model uncertainty, environmental policy
What can an open-economy DSGE model tell us about Hong Kong's housing market?
No full textThis paper develops an open-economy DSGE model with a housing-market sector and a borrowing constraint. Contrary to standard conventions, domestic households are allowed to invest in foreign housing and vice versa. Using Bayesian methods, the model is applied to data for Hong Kong. The results show that Hong Kong s housing market is quite open to foreign investment, and perhaps more significantly, that variations in the loan-to-value ratio and housing preference shocks largely explain business cycle volatility
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