Jan Marc Berk

The Lucas Critique in Practice: An Empirical Investigation of the Impact of European Monetary Integration on the Term Structure

An empirical investigation of the term structure (the relation of the long interest rate to the short interest rate) showed structural change as the deadline for the euro became closer. Our empirical analysis of the term structures (yield curves) in 12 OECD countries uncovers that econometrically estimated behavioural equations for most EMU countries were stable even in the light of the creation of the euro. This finding would seem to defy the Lucas Critique. However, the significant structural instability found for the euro areas core country Germany suggests that the Lucas Critique is relevant in the analysis of the impact of the creation (and future extensions) of EMU.

The Information Content of the Yield Curve for Monetary Policy: A Survey

The information content of the yield curve with respect to future inflation as well as future real economic activity is discussed. Both theoretical arguments and the empirical validity of these arguments are reviewed. The empirics favouring the yield curve as leading indicator for inflation is not found to be entirely convincing. The curve possesses information content, but it is difficult to empirically discriminate between the effects on real interest rates and future inflation. The yield spread is a stable leading indicator for future real economic activity, but there are several theoretical interpretations of this (positive) relationship, depending on the nature of shocks hitting the economy and the behaviour of prices in the economy. The proper reaction of monetary policy could differ among these interpretations. All in all, care should be taken in using the yield curve as information variable for monetary policy.

Testing for long horizon UIP using PPP-based exchange rate expectations

Abstract This paper revisits the uncovered interest parity relation. It supplements existing work in two ways: It focuses on long instead of short-term interest rates, and, related to that, employs exchange rate expectations derived from purchasing power parity (PPP) instead of actual outcomes. Among the major floating currencies over the period 1975–1997, the paper cannot support the notion of further increases in UIP-validation beyond that associated with the wave of financial market liberalization and deregulation in the early 1980s.

CONSUMERS' INFLATION EXPECTATIONS AND MONETARY POLICY IN EUROPE

This paper analyses the effects of monetary policy decisions on inflation expectations of European consumers. Using a novel approach that does not assume unbiasedness of expectations, which makes use of survey data on expected future as well as perceived past price developments and allows for non-normal peakedness and asymmetry, we convert qualitative survey responses of consumers in various European countries into quantitative time series of inflation expectations. After checking the rationality of the constructed expectations measures, we investigate the effects of unanticipated movements in interest rates and inflation on inflation expectations across European countries. We inter alia seek to explore whether the reaction of consumers in countries with more credible central banks differs from the reaction of consumers in less credible countries.

The Dynamic Voting Patterns of the Bank of England's MPC

The literature on the behavior of the Bank of Englands Monetary Policy Committee (MPC) has focused on static voting patterns. We find statistical support for a dynamic pattern using a panel reaction function to analyze MPC votes over the 1997-2008 period. We find that internal and external members do not behave differently in their first year on the MPC. In their third year of tenure, internal members prefer higher policy rates, placing a higher weight on price stability and a lower weight on the output gap than external members.

Monetary Policy Committees: meetings and outcomes

Monetary Policy Committees differ in the way the interest rate proposal is prepared and presented in the policy meeting. In this paper we show analytically how different arrangements could affect the voting behaviour of individual MPC members and therefore policy outcomes. We then apply our results to the Bank of England and the Federal Reserve. A general finding is that when MPC members are not too diverse in terms of expertise and experience, policy discussions should not be based on pre-prepared policy options. Instead, interest rate proposals should arise endogenously as a majority of views expressed by the members, as is the case at the Bank of England and appears to be the case in the FOMC under Chairman Bernanke. (

Committee Structure and its Implications for Monetary Policy Decision-making

We investigate the implications for the setting of interest rates when monetary policy decisions are taken by a committee, in which a subset of members may meet prior to the voting in the committee and therefore has the possibility to reach consensus ex ante to vote unanimously ex post. We allow for different committee sizes, various voting rules and differences in skills among committee members. We find that the size of the committee is much less important in determining the degree of interest rate inertia than the skills of committee members. Moreover, prior interaction of a subgroup only has a minor effect on the setting of interest rates by the committee, provided that members on average are equally skilled and voting takes place using a simple majority rule. If either of these assumptions are relaxed, prior interaction has substantial effects on the setting of interest rates.

Price movements in The Netherlands and Germany and the guilder-Dmark peg

Dutch monetary policy was until the start of stage three of EMU in January 1999 aimed at maintaining a stable exchange rate of the guilder vis-a-vis the German mark. The ultimate objective was an inflation rate which is in line with the relatively low inflation rate in Germany. A credible exchange rate policy, moreover, lead to a low interest rate differential with Germany through mitigation of uncertainties and consequently a lower risk premium in Dutch interest rates. In this way monetary policy contributed to noninflationary, steady economic growth. Naturally, a well-balanced fiscal policy and modest wage increases were also crucial to achive price stability. In addition to a direct effect, the guilder — Dmark peg also had an indirect influence by means of its disciplinating effect on the government’s behaviour and that of the employers’ organizations and trade unions.

The term structure of UIP: evidence from survey data

This note focuses on uncovered interest parity (UIP) in the short and medium run using survey-based exchange rate expectations. Analysing the major world currencies over the period 1985–1998 the paper finds that the validity of the UIP relation increases with the term of the investment, thereby supporting the theoretical notions developed by literature.

The Effects of Learning in Interactive Monetary Policy Committees

We develop a theoretical framework for studying the effects of interaction on the quaJity of decision-making by monetary policy committees. We show that interaction, i.e. increasing ones expertise through an exchange of views, is most likely not to result in interdependent voting behaviour.Therefore, and in contrast to earlier literature, we find that interaction is beneficial for the collective outcome.