Lukas Vogel

Oil Price Shocks, Rigidities and the Conduct of Monetary Policy: Some Lessons from a New Keynesian Perspective

The strong and sustained rise in oil prices observed in recent years poses a challenge to monetary policy and its ability to simultaneously achieve low inflation and stable output. Against this background, the paper studies monetary policy in a small open economy New Keynesian DSGE model including oil as a production input and a component of final demand. It investigates the performance of alternative price level definitions, notably headline and core CPI, in standard interest rate rules with respect to output and inflation stabilisation. The analysis puts special emphasis on the impact of price and real wage rigidity and their interaction on the policy trade-off induced by the oil price shock. While the degree of price rigidity alone is found to have little impact on the shock transmission and generates only small differences between alternative monetary strategies, the simulations suggest a more important role for real wage stickiness. Real wage stickiness triggers second round effects and complicates stabilisation whatever the policy rule. A focus on core inflation tends to limit the contraction of output in this context. The results also point to some interaction between nominal price and real wage rigidities. In the presence of real wage rigidity, greater price flexibility is found to be destabilising, as it amplifies the initial inflation effect of shocks, thereby triggering a stronger monetary policy response and a larger output effect.

Regional Convergence in Central and Eastern Europe: Evidence from a Decade of Transition

The paper analyses regional growth and convergence in a sample of 31 Central and Eastern European regions over the period 1990-2002. We find that the regional disparity has decreased in the first half of the 1990s. Thereafter it has remained stable. Almost all of the reduced disparity seems to be attributable to income convergence between countries. At the country level, on the other hand, we find no evidence for sigma-convergence. Our econometric analysis finds evidence for conditional beta convergence. The estimates indicate that structural variables like the labour participation rate and the economys sectoral structure matter for regional growth. Additionally, they point to the role of national specific differences in the growth performance. The sources of regional disparities do not seem to differ much between the accession countries and the current EU members. From this, we conclude that the present priorities and instruments of EU regional policy equally apply to an enlarged European Union.

What Drives the German Current Account? And How Does It Affect Other EU Member States?

We estimate a three-country model using 1995 2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyse the determinants of Germany s current account (CA) surplus after the launch of the euro. Our results suggest that the German surplus reflects a succession of distinct shocks. Mono-causal explanations of the surplus are thus insufficient. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The key shocks that drove the rise in the German CA tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German CA surplus. An expansion in German government consumption and investment would raise German GDP and reduce the CA surplus, but the effects on the surplus would be weak.

Optimal Simple Rules for Fiscal Policy in a Monetary Union

The paper discusses the stabilizing potential of fiscal policy in a dynamic general-equilibrium model of monetary union. We consider a small open economy inside the currency area. We analyze the demand and supply effects of direct taxation, indirect taxation and government spending and derive optimal simple rules for fiscal stabilization of a technology shock. Fiscal policy achieves substantial macroeconomic stabilization. Simple public-expenditure rules show the highest degree of both output and inflation stabilization. The implementation lag substantially weakens output stabilization, but hardly affects the stabilization of prices. Out-put-oriented rules imply less instrument inertia than inflation-dominated rules. The implemen-tation lag leads to higher coefficients for inflation relative to output in the optimal rule. Com-pared to the single-instrument approach the simultaneous optimization of two instrument rules implies only little additional stabilization gains.

The Portfolio Balance Mechanism and QE in the Euro Area

The paper analyses quantitative easing (QE) in a dynamic general�?equilibrium model which includes assets of different types and maturity. We explicitly model asset purchases by the central bank and their impact on the central banks balance sheet. In particular, QE is captured by central bank purchases of long�?term government bonds financed by enhanced liquidity provision to the private sector. With imperfect substitutability between asset classes, QE affects the term premium, stock prices, the exchange rate and the private sectors saving decision. We use the model to simulate the European Central Banks (ECBs) QE path as announced in early 2015. With six basis points term�?premium reduction the model generates 0.9 per cent effective euro depreciation and raises real GDP in the euro area by 0.3 per cent and prices by 0.5 per cent by 2016. Enduring periods of low interest rates strengthen the expansionary effect of QE in the short and medium term. Frontloading of asset purchases has little impact on output and inflation effects as long as the duration of the balance sheet expansion remains unchanged. Expansionary effects of QE are reduced if the central bank purchases eligible assets from foreign rather than domestic counterparties.

Structural Reforms and European Monetary Union: What Can a Panel Analysis for the World versus OECD Countries Tell Us?

Recently, the economics of structural reforms has attracted increasing attention in the academic literature (Abiad and Mody, 2005; Helbling et al., 2004; for a survey see Heinemann, 2004, 2005). A more practical question is whether being part of European Monetary Union tends to help or hinder structural reform. This ongoing research is driven by the fact that, for a number of EU countries, the speed of structural changes lags behind what is necessary, given high structural unemployment and imminent demographic change. Policy fields where a striking contrast between needs and deeds of institutional change has been identified are, for instance, government size, labour market, product market, credit and business regulation.

Monetary commitment and structural reforms: a dynamic panel analysis for transition economies

This paper examines the contemporaneous relationship between the exchange rate regime and structural economic reforms for a sample of CEEC/CIS transition countries. We investigate empirically whether structural reforms are complements or substitutes for monetary commitment in the attempt to improve macroeconomic performance. Both EBRD and EFW data suggest a negative relationship between flexible exchange rate arrangements and external liberalization. Another finding from the EFW sample is that economic liberalisation has tended to be stronger under better macroeconomic fundamentals, suggesting that the impact of good macroeconomic conditions as facilitating structural reforms outweighs countervailing effects in the sense of lower reform pressure.

Are Monetary Rules and Reforms Complements or Substitutes? A Panel Analysis for the World Versus OECD Countries

This paper investigates the relationship between the exchange rate regime and the degree of structural reforms using panel data techniques. We look at a broad sample of countries (the “world sample”) and also an OECD sample. Our main findings suggest that adopting a fixed exchange rate rule is positively correlated with the degree of overall structural reforms and the trade component. The paper also highlights the fact that considering a heterogeneous panel of countries as opposed to a limited does not matter for this results.

Should Commodity Exporters Peg to the Export Price

To account for the specific situation of commodity exporters, pegging to export prices (PEP) has been proposed elsewhere as an alternative to other conventional monetary regimes such as an exchange rate peg or inflation targeting. PEP is supposed to deliver automatic accommodation to terms-of-trade shocks, while retaining the credibility gain from a nominal anchor. This paper analyzes the PEP proposal in a dynamic general-equilibrium model and compares it with a standard Taylor rule, consumer price index (CPI)-level targeting and a nominal exchange rate peg. Judged by the degree of output stabilization, PEP performs very similar to CPI targeting for export demand as well as domestic demand shocks and underperforms in the case of shocks to the export price. The results suggest that PEP is not superior to conventional CPI targeting from a macroeconomic stabilization perspective.