WWW.DISSERTATION.XLIBX.INFO FREE ELECTRONIC LIBRARY - Dissertations, online materials

<< HOME
CONTACTS

Pages:     | 1 |   ...   | 3 | 4 ||

# «MICHAEL W. MADSEN THESIS FOR THE DEGREE MASTER OF ECONOMIC THEORY AND ECONOMETRICS DEPARTMENT OF ECONOMICS UNIVERSITY OF OSLO MAY 2012 © Michael W. ...»

-- [ Page 5 ] --

Below are the graphs showing the recursive graphics. They present estimated time-path results when running the regression with different lead lengths for the financial stress index.

34 Figure 6: Recursive graphics, panels a- c. The plots show the time paths of the coefficients in the Taylor-type rule. In each panel, the top left graph is inflation, top right graph is the output gap, the bottom left graph is the exchange rate and the bottom right graph is the financial stress index.

35 Figure 7: Recursive graphics, panels d- f. The plots show the time paths of the coefficients in the Taylor-type rule. In each panel, the top left graph is inflation, top right graph is the output gap, the bottom left graph is the exchange rate and the bottom right graph is the financial stress index.

36 Once more, all the coefficients are somewhat unstable in the early parts of the sample, for all different leads and lags for the financial stress index. However, the plots suggest that the time-paths of the coefficients become more stable after the initial unstable phase, with the exception of a sudden drop in the coefficient measuring financial instability’s impact on the interest setting decisions of the monetary authority.

Time- varying coefficients estimation

In estimating the model using the varying coefficients method, I will assume that most of the coefficients are time-invariant. As the plots above suggest convergence toward a steady-state for all parameters but the one measuring the impact of financial stress on the interest rate, I assume that all coefficients but the latter are time-invariant. Furthermore, I will utilize the

specification given by eqs. (18) – (19), namely:

(18) (19) The time-varying results for the financial stress index coefficient are presented below, for different leads and lags imposed on the financial stress index.

–  –  –

In the time-varying plots in Figure 8 above, it is evident that the occurrence of financial distress in late 2008 led the central bank to decrease the interest rate. Specifically, for all specifications of leads and lags on the financial stress index, in late 2008, the monetary authority responded by cutting its interest rate by at least 0.25 basis points per unit increase in the stress index. The largest cut is seen when the model is estimated under the assumption that the central bank was rather sluggish in its response, which can be seen looking at the plots for δ_-1, δ_-2, and δ_-3 in Table 8 above. In particular, the plot named δ_-3 in the figure above show that three months after the initial shock, the interest rate was reduced by more than 0.7 basis points by the monetary authority, either by lowering its policy rates, through open market operations, or both, ultimately resulting in a drop in the interbank rate. As the stress index increased by more than three units at its peak, this result means that the reduction in the interest rates were roughly 2.1 basis points three months after the increase in the stress index.

It can also be seen from the figure above that the expansionary effect on monetary policy decreases as the time elapsed since the financial stress occurred tends to zero. Additionally, 38 the evidence from the figures suggests that there is a double-dip in the central bank’s response to the financial distress in 2008, except for in the specifications where the central bank responds three periods after the initial shock and two periods prior to an expected shock. This suggests that the initial slashing of the interest rates was not enough, and that a second cut in the interest rates was needed.

Moreover, it can also be seen, by conferring the plots dubbed δ_2 and δ_1, that the interest rate was increased in response to an increase in financial stress in 2003. These results are especially evident when assuming that the central bank adjusts its interest rate when there is an expected increase in financial instability. That is, plot δ_2 shows that there is a monetary contraction when financial stress is expected to increase two periods ahead. The increase in the interest rate as a result of an increase in the financial stress index is, however, at its peak in the case where it is assumed that the central bank adjusts the interest rate to an expected increase in the financial stress index one period ahead. As an increase in the stress index might lead to a contraction in the real economy, through higher unemployment and lower inflation, an increase in the interest rate may act so as to propagate a possible economic downturn.

39 6 Conclusion In this thesis, I have looked at the impact of increased financial stress on monetary policy in Norway. Periods of financial instability affect the real economy through their negative impact on the supply of credit. A situation with credit rationing tends to slow down the economy.

Hence, shocks to the economy originated in the financial sector might spread to the real economy and thereby cause deflationary pressure and setbacks in production. For that reason, I found it interesting to investigate the Norwegian Central bank’s response to such shocks.

The thesis sought to find an answer to the size and timing of the central bank’s response, i.e., by how much it reduced its interest rates and if it responded before or after the shock had occurred.

By estimating a Taylor-type rule in a model framework where the parameter measuring the effect of financial stress on interest rates was time-varying, the effect of an increase in the financial stress index was found. The augmented Taylor rule was also estimated using the two-stage least squares method. The interest rate estimated was the three month interbank rate, which also captures open market operations executed by the central bank, thus covering more of the set of instruments the monetary authority can utilize.

The results showed that there was a negative impact of a shock to the financial sector on the interest rates. That is, the estimation results implied that an increase in the financial stress index caused the central bank to decrease its interest rates. Moreover, by applying the timevarying coefficients method to the model, it was clear that the past financial crisis caused the central bank to be more expansionary in its policy than usual towards financial stress. The findings also suggested that the monetary authority reacted more on the increase in financial instability ex post than ex ante. That is, there seemed to be a more aggressive reaction towards financial stress after the impact rather than a reaction towards an expected increase in the stress index.

40 References Akram, Q. F., & Eitrheim, Ø. (2008). Flexible Inflation Targeting and Financial Stability: Is it Enough to Stabilize Inflation and Output? Journal of Banking & Finance, 32, 1242Akram, Q. F., Bårdsen, G., & Lindquist, K.-G. (2007). Persuing Financial Stability Under an Inflation-Targeting Regime. Annals of Finance, 3, 131-153.

Baxa, J., Horváth, R., & Vašíček, B. (2011). Time-Varying Monetary-Policy Rules and Financial Stress: Does Financial Instability Matter for Monetary Policy? Journal of Financial Stability.

Bernanke, B., & Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9(4), 27-48.

Bernanke, B., & Gertler, M. (1999). Monetary Policy and Asset Price Volatility. Federal Reserve Bank of Kansas City Economic Review, 17-52.

Bernanke, B., & Gertler, M. (2001). Should Central Banks Respond to Movements in Asset Prices. American Economic Review, 91(2), 253-257.

Bernanke, B., Gertler, M., & Gilchrist, S. (1999). The Financial Accelerator in a Quantitative Business Cycle Framework. In J. B. Taylor, & M. Woodford (Eds.), Handbook of Macroeconomics. Amsterdam, North- Holland.

Borio, C., & Lowe, P. (2004). Securing Sustainable Price Stability: Should Credit Growth Come Back From the Wilderness? BIS Working Paper no. 157.

Bulíř, A., & Čihák, M. (2008). Central Bankers’ Dilemma When Banks Are Vulnerable: To Tighten or not to Tighten? IMF Mimeo.

Cardarelli, R., Elekdag, S., & Lall, S. (2011). Financial Stress, Downturns, and Recoveries.

Journal of Financial Stability, 7, 78-97.

Cecchetti, G., S., & Li, L. (2008). Do Capital Adequacy Requirements Matter for Monetary Policy? Economic Inquiry, Western Economic Association International, 46(4).

Chadha, J. S., Sarno, L., & Valente, G. (2004). Monetary Policy Rules, Asset Prices and Exchange Rates. IMF Staff Papers, 51(3).

Christiano, L., Ilut, C., Motto, R., & Rostagno, M. (2008). Monetary Policy and Stock Market Boom-Bust Cycles. ECB Working Paper no. 955.

Clarida, R., Galí, J., & Gertler, M. (1998). Monetary policy rules in practice: Some international evidence. European Economic Review, 42, 1033-1067.

–  –  –

de Andrade, J. P., & Divino, J. A. (2005). Monetary Policy of the Bank of Japan- Inflation Target versus Exchange Rate Target. Japan and the World Economy, 17, 189-208.

Goodfriend, M. (1991). Interest Rates and the Conduct of Monetary Policy. CarnegieRochester Conference Series on Public Policy, 32, 7- 30.

Kim, C.-J. (2006). Time-Varying Parameter Models with Endogenous Regressors. Economics Letters, 91, 21-26.

Kim, C.-J., & Nelson, C. R. (2006). Estimation of a Forward-Looking Monetary Policy Rule:

A Time-Varying Parameter Model Using ex-post Data. Journal of Monetary Economics, 53, 1949-1966.

Mishkin, F. (2009). Is Monetary Policy Effective During Financial Crises? American Economic Review, 99(2), 573-577.

Norges Bank (2006). http://www.norges-bank.no/en/about/mandate-and-coreresponsibilities/. Retrieved January 19, 2012 Norges Bank (2008). http://www.norges-bank.no/en/about/financial-turbulence-and-norgesbank/steps-taken-by-norges-bank/. Retrieved January 19, 2012 Norges Bank (2011). http://www.norges-bank.no/en/about/published/press-releases/2011/keyrate-14-december/. Retrieved January 19, 2012 Norges Bank (2012). Monetary Policy Report 1/12.

Rigobon, R., & Sack, B. (2003). Measuring the Reaction of Monetary Policy to the Stock Market. The Quarterly Journal of Economics, 118(2), 639- 669.

Schlicht, E. (1981). A Seasonal Adjustment Principle and a Seasonal Adjustment Method Derived from this Principle. Journal of the American Statistical Association, 76(374), 374-378.

Schlicht, E. (2005). Estimating the Smoothing Parameter in the so-called Hodrick-Prescott Filter. Journal of the Japan Statistical Society, 35(1), 99-119.

Schlicht, E., & Ludsteck, J. (2006). Variance Estimation in a Random Coefficients Model.

IZA Discussion Paper No. 2031.

Siklos, P. L., & Bohl, M. T. (2008). Asset Prices as Indicators of Euro Area Monetary Policy:

An Empirical Assessment of Their Role in a Taylor Rule. Open Economics Review, 20(1), 39- 59.

42 Trecroci, C., & Vassalli, M. (2010). Monetary Policy Regime Shifts: New Evidence from Time-Varying Interest Rate Rules. Economic Inquiry, 48(4), 933-950.

Valente, G. (2003). Monetary Policy Rules and Regime Shifts. Applied Financial Economics, 13, 525-535.

–  –  –

A.1 Tables Table A 1: Results from two-stage least squares estimation, with a lead of 2 periods on the financial stress index, estimating using the output gap constructed from production data.

44 Table A 2: Results from two-stage least squares estimation, with a lead of 0 periods on the financial stress index, estimating using the output gap constructed from production data.

–  –  –

46 Table A 4: Results from two-stage least squares estimation, with a lag of 3 periods on the financial stress index, estimating using the output gap constructed from production data

–  –  –

48 Table A 6: Results from two-stage least squares estimation, with a lead of 0 periods on the financial stress index, estimating using the output gap proxied by the deviation of the unemployment rate from the natural rate of unemployment.

–  –  –

50 Table A 8: Results from two-stage least squares estimation, with a lead of 2 periods on the financial stress index, estimating using the output gap proxied by the deviation of the unemployment rate from the natural rate of unemployment.

–  –  –

Figure A 1: Time-paths for all lags and leads on the financial stress index, where δ_x is the time-path of the financial stress coefficient when the financial stress index is led x periods, and δ_-x when the stress index is lagged x periods. The effect is estimated using the output gap constructed from production data.

52 Figure A 2: Time-paths for all lags and leads on the financial stress index, where δ_x is the time-path of the financial stress coefficient when the financial stress index is led x periods, and δ_-x when the stress index is lagged x periods. The effect is estimated using the output gap constructed from production data.

53 Figure A 3: Time-paths for all lags and leads on the financial stress index, where δ_x is the time-path of the financial stress coefficient when the financial stress index is led x periods, and δ_-x when the stress index is lagged x periods. The effect is estimated using the output gap constructed from production data.

54 Figure A 4: Time-paths for all lags and leads on the financial stress index, where δ_x is the time-path of the financial stress coefficient when the financial stress index is led x periods, and δ_-x when the stress index is lagged x periods. The effect is estimated using the output gap proxied by the deviation of the unemployment rate from the natural rate of unemployment.

–  –  –

56 Figure A 6: Time-paths for all lags and leads on the financial stress index, where δ_x is the time-path of the financial stress coefficient when the financial stress index is led x periods, and δ_-x when the stress index is lagged x periods. The effect is estimated using the output gap proxied by the deviation of the unemployment rate from the natural rate of unemployment.

57

Pages:     | 1 |   ...   | 3 | 4 ||

Similar works:

«PAPER EA021 A series of background briefings on the policy issues in the May 2015 UK General Election #ElectionEconomics Productivity and Business Policies Anna Valero and Isabelle Roland CEP ELECTION ANALYSIS Productivity and Business Policies  UK productivity (GDP per hour) and income grew faster than in France, Germany and the United States between 1979 and 2008, reversing a century of relative decline. Increases in higher education, tougher product and labour market competition, the...»

«Nir Halevy Graduate School of Business Stanford University 655 Knight Way, Stanford, CA 94305 nhalevy@stanford.edu Positions 2015— Associate Professor of Organizational Behavior (untenured) Graduate School of Business Stanford University 2013—2015 Assistant Professor of Organizational Behavior Fletcher Jones Faculty Scholar for 2014-2015 Graduate School of Business Stanford University 2010—2013 Acting Assistant Professor of Organizational Behavior Graduate School of Business Stanford...»

«Idolatry and Redemption: Economics in Biblical Perspective By Prof Tim Gorringe, March 2013 Since we are all beholden to him let’s begin with Adam Smith and understand economics as the study of the way in which human communities obtain ‘the necessities and conveniences of life’. In the course of human history many different forms of economy have been pursued and they can be measured both by their effectiveness in producing the means of life, by their sustainability, and according to the...»

«Daniel Department of Economics Ladley University of Leicester Leicester, UK +44 (116) 252 5285 D.Ladley@leicester.ac.uk CV http://www2.le.ac.uk/departments/economics/people/dladley Education 2004–2008 PhD. Finance, Leeds University Business School and School of Computing, University of Leeds. 2001–2004 BSc. Computer Science, School of Computing, University of Leeds, 1st. PhD thesis title Essays on Computational Finance supervisors K. R. Schenk-Hoppé and Netta Cohen Experience 4/2014–...»

«13 Vijay K. Bhatia* & Christopher N. Candlin* Analysing Arbitration Laws across Legal Systems Abstract In this paper, the national Indian and Chinese statutes on arbitration are compared with the UNCITRAL Model Law. After a presentation of the GILD-MMC project, focus is especially on textual aspects indicating attitudes towards the relation between the administrative powers and the parties in commercial arbitration. Thus, looking at the features all-inclusiveness, information load, information...»

«By the Light of the Silvery Moon, by Katy Evans-Bush By the Light of the Silvery Moon: Dowson, Schoenberg and the birth of Modernism by Katy Evans-Bush photograph: David Secombe ‘The death of Ernest Dowson will mean very little to the world at large, but it will mean a great deal to the few people who care passionately for poetry’, wrote Arthur Symonds in 1900. ‘A little book of verses, the manuscript of another, a one-act play in verse. some translations from the French, done for...»

«CULTURE ALES Innovation, vision and performance are the basis of large companies. ALES is an integrated business Group committed during more than 45 years who is present in all stages of the value chain of the industry doing project implementation activities oriented to corporate image, industrial design and accessories for architecture, always generating innovative solutions created through the symbiosis between imagination and material application. We focus to increase the profitability of...»

«16th International Conference on Conceptual Modeling (ER'97), Los Angeles, California, USA, pp. 263-271, November 3-6, 1997 Transaction-Based Specification of Database Evolution Lars Bækgaard Department of Information Science, the Aarhus School of Business Fuglesangs Allè 4, DK-8210 Aarhus V, Denmark Email: lb@hha.dk Abstract: We present a two-layer language for the specification of database evolution in terms of transaction-based, dynamic integrity constraints. The first language layer is...»

«APPENDIX A REPORT TO THE PRESIDENT ON THE ACTIVITIES OF THE COUNCIL OF ECONOMIC ADVISERS DURING 2013 letter of transmittal Council of Economic Advisers Washington, D.C., December 31, 2013 Mr. President: The Council of Economic Advisers submits this report on its activities during calendar year 2013 in accordance with the requirements of the Congress, as set forth in section 10(d) of the Employment Act of 1946 as amended by the Full Employment and Balanced Growth Act of 1978. Sincerely yours,...»

«Accounts Receivable Securitization By Adrian Katz akatz@finacity.com Chief Executive Officer Finacity Corporation 281 Tresser Blvd., 11th Floor Stamford, CT 06901 By various estimates, a tally of accounts receivable as reflected in the financial statements of U.S. companies would total approximately \$10 trillion, with a comparable amount outstanding in Europe and more in the rest of the world. In order to bridge the typical timing gap of cash inflows and outflows, companies frequently seek...»

«ACCESS TO HOUSING FINANCE IN AFRICA: EXPLORING THE ISSUES No. 9 ETHIOPIA ACCESS to housing finance in Africa Overview of the housing finance sector in Ethiopia, commissioned by the FinMark Trust with support from Meheret Ayenew Edited, and with additional material by Richard Martin July 2009 Access to housing finance in Africa: Exploring the issues (No. 9) Ethiopia BACKGROUND TO THE SERIES Since 2002, the FinMark Trust has been pursuing its mission, “Making Financial Markets Work for the...»

«Praise for Using Thematic Thinking to Achieve Business Success, Growth, and Innovation “This is THE case book for unconventional, yet proven business ideas on anything from brand extension, new product development, to intelligent homes. The authors provide a straight-forward approach to solving well-known problems using a new perspective. Thematic Thinking will be an eye-opener to many strategist and innovation leaders.” —Prof. Dr. Mueller-Kirschbaum, Henkel, Corporate Senior Vice...»

<<  HOME   |    CONTACTS
2016 www.dissertation.xlibx.info - Dissertations, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.