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Abstract:
This paper presents a survey of the so-called "New Economic Geography" (NEG) approach to International Trade, giving particular emphasis to the impact of labour mobility on the spatial distribution of economic activities across integrated countries. The liberalisation of international trade boosts industrial concentration according to a core-periphery pattern. However, when some factors of production, especially labour, are internationally immobile, a further reduction in trade costs scales up the importance of price and wage spatial differentials in the cost function of a typical firm compared to the importance of backward and forward linkages. This deters producers from setting up economic activities in the core and might in the end lead firms to a new dispersion towards less developed and more peripheral regions. In surveying the most recent contributions in this area, the paper sheds light on several shortcomings of the NEG literature in order to point out new directions for further research, with particular reference to studies concerning the European Union (EU).

Agglomeration, economic integration, new economic geography, backward and forward linkages, labour mobility, wage differentials

Abstract:
The design of monetary policy depends upon the targeting strategy adopted by the central bank. This strategy describes a set of policy preferences, which are actually the structural parameters to analyse monetary policy making. Accordingly, we develop a novel calibration method to identify central bank's preferences from the estimates of an optimal Taylor-type rule. The empirical analysis on US data shows that output stabilization has not been an independent argument in the Fed's objective function during the Greenspan era. This suggests that the output gap has entered the policy rule only as leading indicator for future inflation, therefore being only instrumental (to stabilize inflation) rather than important per se.

Central bank's preferences, calibration, inflation targeting, optimal monetary policy

Abstract:
The announced primary objective of the European Central Bank is price stability. While no restrictive reference is given to how the goal should be reached, such a mandate can be thought as a concern to stabilize some relevant macroeconomic aggregates. Accordingly, we frame ECB monetary policy in a general set up that allows policy makers to weight differently positive and negative deviations of inflation and output gaps. The empirical analysis on aggregated Euro area data indicates that ECB monetary policy can be characterized by a nonlinear policy rule. While the objective of price stability is symmetric, the one on real activity is not in that output contractions require larger policy responses. Moreover, the actual Euro interest rate highly commoves with the counterfactual rate that the Bundesbank would have followed if charged to set policy rates for the Euro area.

ECB monetary policy rule, (asymmetric) central bank policy preferences, Bundesbank counterfactual interest rate target

Abstract:
Monetary policy in the US is characterized by a substantial degree of inertia. While in principle this may well be the outcome of an optimizing central bank behavior, the ability of any derived policy rule to match the data relies on so large weights for interest rate smoothing into policy makers' preferences as to be theoretically flawed. In this paper we investigate whether such a puzzle can be interpreted as resulting from the concern of monetary authorities for potential misspecifications of the macroeconomic dynamics. Accordingly, we propose a novel thick modeling approach that incorporates model uncertainty into the identification of central bank's preferences. The thick robust policy rule shows the kind of smoothness observed in the data without resorting to 'incredible' values for the preference parameters.

Model uncertainty, interest rate smoothing, Fed policy preferences, optimal monetary policy

Abstract:
Economic activities are highly clustered. Why is geographic concentration becoming a predominant feature of modern economies? On the basis of the empirical models developed by the 'new' theories of international trade, our answer is that increasing returns are the driving force of economic geography in the US as well as in Europe. In so doing, we review econometric methods proposed in the literature to separate and to test alternative theoretical paradigms.

Increasing returns, market access, demand and cost linkages, large-scale agglomeration

Abstract:
This paper investigates the empirical relevance of a new framework for monetary policy analysis in which decision makers are allowed to weight differently positive and negative deviations of inflation and output from the target values. The specification of the central bank objective is general enough to nest the symmetric quadratic form as a special case, thereby making the derived policy rule potentially nonlinear. This forms the basis of our identification strategy which is used to develop a formal hypothesis testing for the presence of asymmetric preferences. Reduced-form estimates of postwar US policy rules indicate that the preferences of the Fed have been highly asymmetric in both inflation and output gaps, with the asymmetries on the latter becoming relatively more pronounced during the post-79 tenures.

Nonlinear Optimal Monetary Policy Rules, Asymmetric Loss Function, Linearized Central Bank Euler Equation

Abstract:
Most analyses of the U.S. Great Moderation have been based on structural VAR methods, and have consistently pointed towards good luck as the main explanation for the greater macroeconomic stability of recent years. Based on an estimated New-Keynesian model in which the only source of change is the move from passive to active monetary policy, we show that VARs may misinterpret good policy for good luck. First, the policy shift is sufficient to generate decreases in the theoretical innovation variances for all series, and decreases in the variances of inflation and the output gap, without any need of sunspot shocks. With sunspots, the estimated model exhibits decreases in both variances and innovation variances for all series. Second, policy counterfactuals based on the theoretical structural VAR representations of the model under the two regimes fail to capture the truth, whereas impulse-response functions to a monetary policy shock exhibit little change across regimes. Since these results are in line with those found in the structural VARbased literature on the Great Moderation, our analysis suggests that existing VAR evidence is compatible with the 'good policy' explanation of the Great Moderation.

Great Moderation, DSGE models, indeterminacy, vector autoregressions

Abstract:
This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs and two different identification strategies based on zero restrictions and sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the subsamples associated with a weak central bank response to inflation. These subsamples correspond to the pre-Volcker period for the United States and the period prior to the introduction of the inflation targeting framework for the United Kingdom. Using a micro-founded NewKeynesian monetary policy model for the US economy, we then show that the structural VARs are capable of reproducing the price puzzle from artificial data only when monetary policy is passive and hence multiple equilibria arise. In contrast, this model never generates on impact a positive inflation response to a policy shock. The omission in the VARs of a variable capturing the high persistence of expected inflation under indeterminacy is found to account for the price puzzle observed in actual data.

Price Puzzle, DSGE model, Taylor principle, indeterminacy, SVARs

Abstract:
Economic activities are highly clustered. Why is geographic concentration becoming a predominant feature of modern economies? On the basis of the empirical models developed by the 'new' theories of international trade, our answer is that increasing returns are the driving force of economic geography in the US as well as in Europe. in so doing, we review econometric methods proposed in the literature to separate and to test alternative theoretical paradigms.

Increasing returns, market access, demand and cost linkages, large-scale agglomeration

Abstract:
This paper investigates the empirical relevance of a new framework for monetary policy analysis in which the decision-makers are allowed to weight differently positive and negative deviations of inflation and output from the target values. Reduced-form and structural estimates of the central bank first order condition indicate that the preferences of the Fed have been highly asymmetric only before 1979, with the response to output contractions being larger than the response to output expansions of the same magnitude. This asymmetry is shown to induce an average inflation bias of 1.11% that appears to have substantially contributed to the great inflation of the 1960s and 1970s.

asymmetric objective, nonlinear monetary policy rules, average inflation bias

Abstract:
This paper offers an alternative explanation for the behavior of postwar US inflation by measuring a novel source of monetary policy time-inconsistency due to Cukierman (2002). In the presence of asymmetric preferences, the monetary authorities end up generating a systematic inflation bias through the private sector expectations of a larger policy response in recessions than in booms. Reduced-form estimates of US monetary policy rules indicate that while the inflation target declines from the pre- to the post-Volcker regime, the average inflation bias, which is about one percent before 1979, tends to disappear over the last two decades. This result can be rationalized in terms of the preference on output stabilization, which is found to be large and asymmetric in the former but not in the latter period.

Asymmetric preferences, time-inconsistency, average inflation bias, US inflation

Abstract:
This paper documents a new stylized fact of the greater macroeconomic stability of the U.S. economy over the last two decades. Using 131 monthly time series, three popular statistical methods and the forecasts of the Federal Reserve's Greenbook and the Survey of Professional Forecasters, we show that the ability to predict several measures of inflation and real activity declined remarkably, relative to naive forecasts, since the mid-1980s. This break down in forecast ability appears to be an inherent feature of the most recent period and thus represents a new challenge for competing explanations of the 'Great Moderation'.

predictive accuracy, macroeconomic stability, forecasting models, sub-sample analysis, Fed Greenbook

Abstract:
Using a structural VAR with time-varying parameters and stochastic volatility on post-WWII U.S. data, we document a striking negative correlation between the evolution of the long-run coefficient on inflation in the monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component. Using a standard sticky-price model, we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability, providing a possible interpretation for the findings of the structural VAR.

Bayesian time-varying VARs, sign restrictions, frequency domain, Great Inflation, predictability

Abstract:
We develop a method of quantifying the uncertainty surrounding the estimates of the fundamental inflation implied by the New Keynesian Phillips Curve (NKPC). The uncertainty is represented as a band around the fundamental inflation, and encompasses the sampling uncertainty of both the estimates of the structural parameters and the estimates of the VAR used to form a projection of real marginal costs. An empirical application on UK and US data confirms that fundamental inflation tracks actual inflation reasonably well in both countries. For the United Kingdom the confidence band is sufficiently narrow, relative to the sample variance of inflation, to identify a number of periods where the predictions of the NKPC do not fully capture movements in actual inflation. In contrast, considerable uncertainty surrounds the estimates of fundamental inflation for the United States.

Sampling uncertainty, New Keynesian Phillips Curve, fundamental inflation, two-step minimum distance

Abstract:
We construct a measure of global liquidity using the growth rates of broad money for the G7 economies. Global liquidity produces forecasts of US inflation that are significantly more accurate than the forecasts based on US money growth, Phillips curve, autoregressive and moving average models. The marginal predictive power of global liquidity is strong at three years horizons. Results are robust to alternative measures of inflation.

Abstract:
Several industrialised countries have had a similar inflation experience in the past 30 years, with inflation high and volatile in the 1970s and the 1980s but low and stable in the most recent period. We explore the dynamics of inflation in these countries via a time-varying factor model. This statistical model is used to describe movements in inflation that are idiosyncratic or country specific and those that are common across countries. In addition, we investigate how comovement has varied across the sample period.

Our results indicate that there has been a decline in the level, persistence and volatility of inflation across our sample of industrialised countries. In addition, there has been a change in the degree of comovement, with the level and persistence of national inflation rates moving more closely together since the mid-1980s.

factor model, Low inflation, monetary policy, time variation

Abstract:
Several industrialised countries have had a similar inflation experience in the past 30 years, with inflation high and volatile in the 1970s and the 1980s but low and stable in the most recent period. We explore the dynamics of inflation in these countries via a time-varying factor model. This statistical model is used to describe movements in inflation that are idiosyncratic or country specific and those that are common across countries. In addition, we investigate how comovement has varied across the sample period. Our results indicate that there has been a decline in the level, persistence and volatility of inflation across our sample of industrialised countries. In addition, there has been a change in the degree of comovement, with the level and persistence of national inflation rates moving more closely together since the mid-1980s.

low inflation, factor model, time variation, monetary policy

Abstract:
This paper models the evolution of monetary policy, the term structure of interest rates and the UK economy across policy regimes. We model the interaction between the macroeconomy and the term structure using a time-varying VAR model augmented with the factors from the yield curve. Our results suggest that the level, slope and curvature factors display substantial time variation, with the level factor moving closely with measures of inflation expectations. Our estimates indicate a large decline in the volatility of both yield curve and macroeconomic variables around 1992, when the United Kingdom first adopted an inflation-targeting regime. During the inflation-targeting regime, monetary policy shocks have been more muted and inflation expectations have been lower than in the pre-1992 era. The link between the macroeconomy and the yield curve has also changed over time, with fluctuations in the level factor becoming less important for inflation after the Bank of England independence in 1997. Policy rates appear to have responded more systematically to inflation and unemployment in the current regime. We use our time-varying macro-finance model to revisit the evidence on the expectations hypothesis.

Term structure, time-varying VAR, Bayesian estimation

Abstract:
Economic activities are highly clustered. Why is geographic concentration becoming a predominant feature of industrialized economies? On the basis of the empirical models developed by the theories of international trade, our answer is that increasing returns are the driving force of economic geography in the US as well as in Europe. In so doing, we review several econometric methods proposed in the literature to separate and to test alternative theoretical paradigms.

Abstract:
The New Keynesian Phillips Curve plays a central role in modern macroeconomic theory. A vast empirical literature has estimated this structural relationship over various post-war full samples. While it is well known that in a standard sticky price model a 'weak' central bank response to inflation generates sunspot fluctuations, the consequences of pooling observations from different monetary policy regimes for (i) the estimates of the structural Phillips curve and (ii) the estimates of inflation persistence had not been investigated. Using Monte Carlo simulations from a purely forward-looking model, this paper shows that indeterminacy can introduce a sizable persistence in the process of inflation. On the reduced form, our results show that inflation persistence can be endogenous to the policy regime rather than intrinsic to the structure of the economy. On the structural form, we find that by neglecting equilibrium indeterminacy the estimates of the forward-looking term of the New Keynesian Phillips Curve are biased downward. The implications are in line with the empirical evidence for the United Kingdom and United States.

Indeterminacy, New Keynesian Phillips Curve, Monte Carlo, bias, persistence

Abstract:
The design of monetary policy depends on the targeting strategy adopted by the central bank. This strategy describes a set of policy preferences, which are actually the structural parameters to analyse monetary policy making. Accordingly, we develop a calibration method to estimate a central bank's preferences from the estimates of an optimal Taylor-type rule. The empirical analysis on US data shows that output stabilization has not been an independent argument in the Fed's objective function during the Greenspan's era. This suggests that the output gap has entered the policy rule only as leading indicator for future inflation, therefore being only instrumental (to stabilize inflation) rather than important per se.

Abstract:
This paper offers an alternative explanation for the great inflation of the 1970s by measuring a novel source of monetary policy time inconsistency. In the presence of asymmetric preferences, the monetary authorities generate a systematic inflation bias through the private-sector expectations of a larger policy response in recessions than in booms. The estimated Fed's implicit target for inflation has declined from the pre to the post-Volcker regime. The average inflation bias was about 1% before 1979, but this has disappeared over the last two decades, because the preferences on output stabilization were large and asymmetric only in the former period.

Abstract:
Monetary policy in the US is characterized by a substantial degree of inertia. While in principle this may well be the outcome of an optimizing central bank behaviour, the ability of any derived policy rule to match the data relies on so large weights for interest rate smoothing into policy makers' preferences as to be theoretically flawed. In this paper we investigate whether such a puzzle can be interpreted as resulting from the concern of monetary authorities for potential misspecifications of the macroeconomic dynamics. Accordingly, we propose a novel thick modelling approach that incorporates model uncertainty into the identification of central bank's preferences. The thick robust policy rule shows the kind of smoothness observed in the data without resorting to implausible values for the preference parameters.

Abstract:
The first six years of ECB monetary policy are examined using a general framework that allows central bankers to weight differently positive and negative deviations of inflation, output and the interest rate from their reference values. The empirical analysis on synthetic euro-area data suggests that the objective of price stability is symmetric, whereas the objectives of real activity and interest-rate stabilizations are not. Output contractions imply larger policy responses than output expansions of the same size, while movements in the interest rate are larger when the level of the interest rate is relatively high. The hypothesis of M3 growth-rate targeting is rejected.

Abstract:
This paper uses mortgage data to construct a measure of terms on which households access to external finance, and relates it to consumption at both the aggregate and cohort levels. The Household External Finance (HEF) index is based on the spread paid by risky borrowers in the mortgage market. There is evidence that the terms of access to external finance matter more for the consumption of young cohorts in U.K. data. Results are robust to a wide variety of specifications.

birth cohorts, external finance, household consumption, pseudo panels, terms of access

Abstract:
The ability of popular statistical methods, the Federal Reserve Greenbook and the Survey of Professional Forecasters to improve upon the forecasts of inflation and real activity from naive models has declined significantly during the most recent period of greater macroeconomic stability. The decline in the predictability of inflation is associated with a break down in the predictive power of real activity, especially in the housing sector. The decline in the predictability of real activity is associated with a break down in the predictive power of the term spread.

Fed Greenbook, forecasting models, predictability, Survey of Professional Forecasts