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- Geldpolitik (5)
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2007, 30
We review savings trends in Italy, summarizing available empirical evidence on Italians’ motives to save, relying on macroeconomic indicators as well as on data drawn from the Bank of Italy’s Survey of Household Income and Wealth from 1984 to 2004. The macroeconomic data indicate that households’ saving has dropped significantly, although Italy continues to rank above most other countries in terms of saving. We then examine with microeconomic data four indicators of household financial conditions: the propensity to save, the proportion of households with negative savings, the proportion of households with debt, and the proportion of households that lack access to formal credit markets. By international comparison, the level of debt of Italian households and default risk are relatively low. But in light of the deep changes undergone by the Italian pension system, the fall in saving is a concern, particularly for individuals who entered the labor market after the 1995 reform and who have experienced the largest decline in pension wealth. JEL Classification: D91
2007, 21
Retirees confront the difficult problem of how to manage their money in retirement so as to not outlive their funds while continuing to invest in capital markets. We posit a dynamic utility maximizer who makes both asset location and allocation decisions when managing her retirement financial wealth and annuities, and we prove that she can benefit from both the equity premium and longevity insurance in her retirement portfolio. Even without bequests, she will not fully annuitize; rather, her optimal stock allocation amounts initially to more than half of her financial wealth and declines with age. Welfare gains from this strategy can amount to 40 percent of financial wealth (depending on risk parameters and other resources). In practice, it turns out that many retirees will do almost as well by purchasing a variable annuity invested 60/40 in stocks/bonds. JEL Classification: G11, G23, G22, D14, J26, H55
2007, 25
We introduce a multivariate multiplicative error model which is driven by componentspecific observation driven dynamics as well as a common latent autoregressive factor. The model is designed to explicitly account for (information driven) common factor dynamics as well as idiosyncratic effects in the processes of high-frequency return volatilities, trade sizes and trading intensities. The model is estimated by simulated maximum likelihood using efficient importance sampling. Analyzing five minutes data from four liquid stocks traded at the New York Stock Exchange, we find that volatilities, volumes and intensities are driven by idiosyncratic dynamics as well as a highly persistent common factor capturing most causal relations and cross-dependencies between the individual variables. This confirms economic theory and suggests more parsimonious specifications of high-dimensional trading processes. It turns out that common shocks affect the return volatility and the trading volume rather than the trading intensity. JEL Classification: C15, C32, C52
2007, 06
This paper studies a dynamic general equilibrium model with sticky prices and rational expectations in an environment of low interest rates and deflationary pressures. We show that small changes in the public’s beliefs about the future inflation target of the government can lead to large swings in both inflation and output. This effect is much larger at low interest rates than under regular circumstances. This highlights the importance of effective communication policy at zero interest rates. We argue that confusing communications by the US Federal Reserve, the President of the United States, and key administration officials about future price objectives were responsible for the sharp recession in the US in 1937-38, one of the sharpest recessions in US economic history. Poor communication policy is the mistake of 1937. Before committing the mistake of 1937 the US policy makers faced economic conditions that are similar in some respect to those confronted by Japanese policy makers in the first half of 2006. JEL Classification: E32, E52, E61
2007, 02
We provide a simple and intuitive measure of interdependence of asset returns and/or volatilities. In particular, we formulate and examine precise and separate measures of return spillovers and volatility spillovers. Our framework facilitates study of both non-crisis and crisis episodes, including trends and bursts in spillovers, and both turn out to be empirically important. In particular, in an analysis of sixteen global equity markets from the early 1990s to the present, we find striking evidence of divergent behavior in the dynamics of return spillovers vs. volatility spillovers: Return spillovers display a gently increasing trend but no bursts, whereas volatility spillovers display no trend but clear bursts. JEL Classification: F30, G15, F36
2007, 16
This paper proposes a possible way of assessing the effect of interest rate dynamics on changes in the decision-making approach, communication strategy and operational framework of a Central bank. Through a GARCH specification we show that the USA and Euro area displayed a limited but significant spillover of volatility from money market to longer-term rates. We then checked the stability of this phenomenon in the most recent period of improved policymaking and found empirical evidence that the transmission of overnight volatility along the yield curve vanished soon after specific policy changes of the FED and ECB.
2007, 07
We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy. JEL Classification: E32, E52, J64, C11
2007, 20
This paper focuses on dynamic interactions of equity prices among theoretically related assets. We explore the existence of intraday non-linearities in the FTSE 100 cash and futures indices. We test whether the introduction of the electronic trading systems in the London Stock Exchange in 1997 and in the London International Financial Futures and Options Exchange (LIFFE) in 1999 has eliminated the non-linear dynamic relationship in the FTSE 100 markets. We show that the introduction of the electronic trading systems in the FTSE 100 markets has increased the efficiency of the markets by enhancing the price discovery process, namely by facilitating the increase of the speed of adjustment of the futures and cash prices to departures of the mispricing error from its non-arbitrage band. Nevertheless, we conclude that the automation of the markets has not completely eliminated the non-linear properties of the FTSE 100 cash and futures return series. JEL Classification: G12, G14, G15
2007, 05
In this paper, we examine three famous episodes of deliberate deflation (or disinflation) in U.S. history, including episodes following the Civil War, World War I, and the Volcker disinflation of the early 1980s. These episodes were associated with widely divergent effects on the real economy, which we attribute both to differences in the policy actions undertaken, and to the transparency and credibility of the monetary authorities. We attempt to account for the salient features of each episode within the context of a stylized DSGE model. Our model simulations indicate how a more predictable policy of gradual deflation could have helped avoid the sharp post-WWI depression. But our analysis also suggests that the strong argument for gradualism under a transparent monetary regime becomes less persuasive if the monetary authority lacks credibility; in this case, an aggressive policy stance (as under Volcker) can play a useful signalling role by making a policy shift more apparent to private agents. JEL Classification: E31, E32, E52
2007, 14
This paper uses factor-augmented vector autoregressions (FAVAR) estimated using a large data set to disentangle fluctuations in disaggregated consumer and producer prices which are due to macroeconomic factors from those due to sectorial conditions. This allows us to provide consistent estimates of the effects of US monetary policy on disaggregated prices. While sectorial prices respond quickly to sector-specific shocks, we find that for a large number of price series, there is a significant delay in the response of prices to monetary policy shocks. In addition, price responses display little evidence of a “price puzzle,” contrary to existing studies based on traditional VARs. The observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power, as predicted by models with monopolistic competition. JEL Classification: E32, E52