Andre Fourcans

Money and monetary policy in the Eurozone: an empirical analysis during crises

This paper analyzes the role of money and monetary policy as well as the forecasting performance of New Keynesian dynamic stochastic general equilibrium models with and without separability between consumption and money. The study is conducted over three crisis periods in the Eurozone, namely, the ERM crisis, the dot-com crisis, and the global financial crisis (GFC). The results of successive Bayesian estimations demonstrate that during these crises, the non-separable model generally provides better out-of-sample output forecasts than the baseline model. We also demonstrate that money shocks have some impact on output variations during crises, especially in the case of the GFC. Furthermore, the response of output to a money shock is more persistent during the GFC than during the other crises. The impact of monetary policy also changes during crises. Insofar as the GFC is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter.

Stability and Growth Pact II: Incentives and Moral Hazard

Abstract Adopted in 1997 and implemented in 1999 with the euro, the Stability and Growth Pact (SGP) addresses concerns of budgetary discipline in the Economic and Monetary Union (EMU). After many breaches and the failure of the implementation of fines, Europe amended the SGP on 20 March 2005. In the new institutional design, the preventive element is now tighter, but the dissuasive element is laxer. Using a game theoretical approach emphasizing the notion of moral hazard, we find that the new design does not prevent countries from engaging in moral hazard behaviors and countries will thus be less inclined to abide by the SGP.

Working capital management for the multinational firm: A simulation model

The rapid growth of multinational corporations has hastened the need for the development of powerful models to reflect the new complexities imposed by the international interface. Working capital management is complex in the uninational setting where the firm must weigh the trade-offs between the liquidity and profitability of its current assets in the face of uncertainty. Significant additional dimensionality is added to the problem when foreign exchange rates, foreign tax methodologies, new sources of funds from foreign money markets, and new multi-faceted social, economic, and political factors are superimposed on the framework. This paper develops a simulation model to assist the multinational firm in the management of working capital for all of its subsidiaries considering their needs, world-wide short-term opportunities, and global sources of short-term funds. The simulation methodology is used in conjunction with a linear programming model which determines the optimal sources and uses of short-term funds for each subsidiary given the values that have been generated for each exogenous variable in the system. The overall model capitalizes on the strengths of both simulation and the linear programming optimization model and thus, yields a flexible but robust approach to this difficult problem setting.The rapid growth of multinational corporations has hastened the need for the development of powerful models to reflect the new complexities imposed by the international interface. Working capital management is complex in the uninational setting where the firm must weigh the trade-offs between the liquidity and profitability of its current assets in the face of uncertainty. Significant additional dimensionality is added to the problem when foreign exchange rates, foreign tax methodologies, new sources of funds from foreign money markets, and new multi-faceted social, economic, and political factors are superimposed on the framework. This paper develops a simulation model to assist the multinational firm in the management of working capital for all of its subsidiaries considering their needs, world-wide short-term opportunities, and global sources of short-term funds. The simulation methodology is used in conjunction with a linear programming model which determines the optimal sources and uses of short-term funds for each subsidiary given the values that have been generated for each exogenous variable in the system. The overall model capitalizes on the strengths of both simulation and the linear programming optimization model and thus, yields a flexible but robust approach to this difficult problem setting.

The Role of Money and Monetary Policy in Crisis Periods: The Euro Area Case

In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three different crises: 1992, 2001 and 2007. We find that money has a rather significant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases significantly. Moreover, we find that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.

Multinational capital budgeting: A simulation model

The rapid growth of multinational corporations has hastened the need for the development of robust models to handle the increased risk and complexity. Particularly in capital budgeting, careful analysis and adequate reflection of the critical variables are essential. The great number of relevant variables, their significant interrelationships, and the high degree of uncertainty render mathematical models highly complex or infeasible to solve. To overcome these shortcomings, a “Hertz-type” simulation model is formulated for the multinational firm. The important international variables—foreign exchange rates, foreign tax methodology, host government controls, and other social, economic, and political factors—are reflected in the model. A two stage approach is utilized: first, investment projects are analyzed by the subsidiary and if they pass this first screening they are proposed for the parents consideration; second, the parent evaluates the attractiveness of projects from its point of view and ranks proposals for acceptance considering all global opportunities. The model is designed so that sensitivity analysis can be easily performed.

Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation

Which monetary policy rule best fits the historical data? Which rule is most effective to reach the central bank?s objectives? Is minimizing a central bank loss equivalent to maximizing households? welfare? Are NGDP growth or level targeting good options, and if so, when? Do they perform better than Taylor-type rules? In order to answer these questions, we use Bayesian estimations to evaluate the Smets and Wouters (2007) model under nine monetary policy rules with US data ranging from 1955 to 2017 and over three different sub-periods (among them the zero lower bound period where a shadow rate is introduced). We find that when considering the minimization of the central bank?s loss function, the estimates generally indicate the superiority of NGDP level targeting rules. If the behavior of the Fed is expressed in terms of households-welfare, the implications are not necessarily the same.

The End of the “French Paradox”?

Abstract The purpose of this article is to provide a short- to medium-term analysis of the overall performance of the French economy. Unfortunately, this subject is all too frequently discussed in a manner that is perhaps not as clear as it could be. As a French economist trained in the United States, I hope to briefly outline what I feel are the major issues concerning the French economy in a way that I hope carries a few less biases than usual. First, we need to be clear that the performance of the French economy relative to most OECD countries has been less than what the underlying strengths of the country would lead one to expect. This problem is producing ongoing difficulties with the public finances. Without faster growth, paying for the social benefits the population prefers is becoming increasingly difficult. Third, slower growth coupled with structural impediments in the labor market are combining to produce shockingly high levels of unemployment among the young. As in much of Europe such reforms will be difficult but the need for change is pressing. Fourth, French banks are fortunately in rather good shape and problems in the financial system are not a major concern. Putting these factors together illustrates the “paradox” that is the French economy. This is a highly developed country whose economic performance in many ways is disappointing. However, France is, after all, a democracy. Navigating the country out of this paradox can be done, but only in a way that is French. Thinking that France will somehow transform itself into Germany is delusional. On the other hand, France needs to avoid becoming a larger version of Italy.

A Game Theoretical Approach to Monetary Policy

Game theory has been used as a tool to analyze monetary policy since the beginning of the 1980s, especially to study the “rules versus discretion” question. After the founding article by Kydland and Prescott (1977), Barro and Gordon (1983) introduced game theory in their model. This approach was improved by Canzoneri (1985), Backus and Driffill (1985) and Rogoff (1985). The debate “rules versus discretion” turned into the debate “credibility versus flexibility” (Minford 1993). New concepts appeared, such as the conservative central banker and performance contracts. These models, built in a closed economy, led to the famous time inconsistency result with its inflationary bias. The question is whether this result also holds in an open economy.

Financial models (General)

This session reports upon several uses of simulation methodology in finance and accounting. Two papers consider the effect of variability, variability assumptions (e.g. normality), and uncertainty on measurement of investment returns. In addition two applications of simulation in financial planning and control will be discussed.