Centre for Economic Policy Research discussion papers

10532. Heterogeneity in Wage Setting Behavior in a New-Keynesian Model
Authors: Sylvester C. W. Eijffinger, Anderson Grajales Olarte and Burak R. Uras
In this paper we estimate a New‐Keynesian DSGE model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko (2011) develop a DSGE model, in which firms follow four different types of price setting schemes: sticky prices, sticky information, rule of thumb, or flexible prices. We enrich Coibion and Gorodnichenko (2011) framework by incorporating heterogeneity in nominal wage setting behavior among households.

10459. Sovereign debt, bail‐outs and contagion in a monetary union
Authors: Sylvester C. W. Eijffinger, Michal L. Kobielarz and Burak R. Uras
The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail‐out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble.

9418. Central Banks: Inferring Hawks and Doves from voting records
Authors: Sylvester C. W. Eijffinger, Ronald J. Mahieu and Louis Raes
In this paper we estimate spatial voting models for the analysis of the voting record of the monetary policy committee of the Bank of England. We use a flexible Bayesian approach for estimating such models. A simple modification to the standard spatial model as well as a variety of model checks are proposed to deal with the specifics of the data available. We provide evidence that extreme policy preferences are to be found among the external members. We also consider the variation in policy preferences according to career backgrounds. The median voter preference is similar for different backgrounds, except for those with a background in the industry where the median voter is more hawkish. The heterogeneity in policy preferences is the largest among academics and those with a background in the industry. The range of policy preferences is much smaller among other groups, in particular among monetary policy committee members with central bank experience who exhibit the lowest heterogeneity in policy preferences.

9369. Three Sisters: The Interlinkage between Sovereign Debt, Currency and Banking Crises
Authors: Sylvester C. W. Eijffinger and Bilge Karataş
The study contributes to the existing literature with the application of high-frequency data in estimations having monthly starting dates of sovereign debt rises and introducing non-linear effects of the currency and banking crises on sovereign defaults. The role of political disunity is clearly present in the analysis increasing the uncertainty of the sovereign actions and leading to a rise in the probability of default.

8063. The bond yield conundrum: alternative hypotheses and the state of the economy
Authors: Sylvester C. W. Eijffinger, Ronald J. Mahieu and Louis Raes
We study the bond yield conundrum in a macro-finance framework. Building upon a flexible and non-structural macro-finance model, we test the hypothesis that the bond yield conundrum is connected to various sources of uncertainty in the financial markets. Moreover we explicitly test for the role of the state of the economy. Our findings give a richer description of the drivers of the term premium yet the conundrum remains. The results in this paper indicate that the underlying observable drivers of the term premium are not yet fully understood.

7798. Currency Crises and Monetary Policy: A Study on Advanced and Emerging Economies
Authors: Sylvester C. W. Eijffinger and Bilge Karatas
Currency crisis literature offers a broad area of research regarding the causes and impacts of the phenomenon. The literature recently focuses on the appropriate policy measures in the aftermath of a currency crisis; however the studies do not gather around a robust answer regarding the appropriate monetary policy response in defending the domestic currency. This study tries to emphasize the notion that there is no single policy applicable for all currency crises happened and happening in the global world.

7718. Globalization and the Output-inflation Tradeoff: New Time Series Evidence
Authors: Sylvester C. W. Eijffinger and Zongxin Qian
Recent cross-country studies on the globalization and output-inflation tradeoff correlation find openness has no significant effect on OECD countries. Those studies assume parameter constancy across countries. In this paper, we argue that this assumption does not hold for major industrialized countries. Using individual time series analysis, we find the effect of openness on the output-inflation trade off differ in sign and size across countries. In contrast to previous cross-country studies, we find globalization has significantly changed some major industrialized countries’ output inflation tradeoff. This has important implications for future theoretical and empirical research.

7674. The lender of last resort: liquidity provision versus the possibility of bail-out
Authors: Sylvester C. W. Eijffinger and Rob Nijskens
Banking regulation has proven to be inadequate to guard systemic stability in the recent financial crisis. Central banks have provided liquidity and ministries of finance have set up rescue programmes to restore confidence and stability. Using a model of a systemic bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity and takes excessive risk compared to the social optimum. A Lender of Last Resort can alleviate the liquidity problem, but induces moral hazard. Therefore, we introduce a fiscal authority that is able to bail out the bank by injecting capital.

7585. The role of central bank transparency for guiding private sector forecasts
Authors: Michael Ehrmann, Sylvester C. W. Eijffinger and Marcel Fratzscher
There is a broad consensus in the literature that costs of information processing and acquisition may generate costly disagreements in expectations among economic agents, and that central banks may play a central role in reducing such dispersion in expectations. This paper analyses empirically whether enhanced central bank transparency lowers dispersion among professional forecasters of key economic variables, using a large set of proxies for central bank transparency in 12 advanced economies. It finds evidence for a significant and sizeable effect of central bank transparency on forecast dispersion, be it by means of announcing a quantified inflation objective, other forms of communication, or by publishing central banks’ inflation and output forecasts.

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