Manuel Mota Freitas Martins

Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker

This article tests for asymmetries in the preferences of the euro-area monetary policymaker with 1995:1–2005:2 data from the latest update of the European Central Banks (ECBs) Area-wide database. Following the relevant literature, we distinguish between three types of asymmetry: precautionary demand for expansions, precautionary demand for price stability and interest rate smoothing asymmetry. Based on the joint generalized method of moments (GMM) estimation of the Euler equation of optimal policy and the aggregate supply-aggregate demand (AS-AD) structure of the macroeconomy, we find evidence of precautionary demand for price stability in the preferences revealed by the monetary policymaker. This type of asymmetry is consistent with the ECBs definition of price stability and with the priority of credibility-building by a recently created monetary authority. 1CEMPRE–Centro de Estudos Macroeconómicos e Previsão - is a research centre supported by the Fundação para a Ciência e a Tecnologia, Portugal, which is financed by European Union and Portuguese funds.

Macroeconomic Volatility Trade-off and Monetary Policy Regime in the Euro Area

This research uncovers a well-defined monetary policy regime starting in 1986 in the aggregate Euro Area. Both alternative solution-estimation methods employed - optimal control cum GMM, and dynamic programming cum FIML - identify a regime of strict inflation targeting with interest rate smoothing. The unemployment gap, properly estimated as quasi real-time information, is a relevant element in the information set of the monetary authority, despite not being included in its preferences. The emergence of the regime relates to the improvement of the volatility trade-off between inflation and unemployment gap since the mid-80s. Additional improving factors have been milder supply shocks and better ability of policymakers to set the interest rate closer to optimum.

Trend, cycle, and non-linear trade-off in the Euro Area 1970-2001

This paper presents new tests and estimates of the Phillips trade-off in the Euro Area, carried out in a unobserved components model with possibly non-linear Phillips and Okun relations, using quarterly aggregate data for the period 1970:I-2001:II. A concept of forward-looking near-rational expectations is introduced in the model, improving on the contradiction between rational expectations and evidence of inflation inertia. The Phillips curve turns out to be linear and its trade-off statistically significant, while non-linearity shows up in the Okun relation. The trend-cycle decompositions capture the main features of the Euro Area recent macroeconomic record.

Un)anticipated monetary policy in a DSGE model with a shadow banking system

Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) interest rates that were too low for too long, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favourable conditions.

Convergence of the Economic Sentiment Cycles in the Eurozone: A Time‐Frequency Analysis

In this article, wavelet tools and economic sentiment indicators are used to study the similarity and synchronization of economic cycles in the eurozone. The time‐varying and frequency‐varying patterns of business cycles synchronization are assessed and the impact of the creation of the European monetary union (EMU) in 1999 is tested. Among several results, it is found that: the EMU is associated with a significant increase in the similarity and synchronization of the economic sentiment in the eurozone; and the hard‐peg of its currency to the euro led to a comparable effect on Denmarks economic sentiment after 1999, different from what happened in the United Kingdom.

Financial Shocks and Optimal Monetary Policy Rules

We assess the performance of optimal Taylor-type interest rate rules, with and without reaction to financial variables, in stabilizing the macroeconomy following financial shocks. We use a DSGE model that comprises both a loan and a bond market, which best suits the contemporary structure of the U.S. financial system and allows for a wide set of financial shocks and transmission mechanisms. Overall, we find that targeting financial stability – in particular credit growth, but in some cases also financial spreads and asset prices – improves macroeconomic stabilization. The specific policy implications depend on the policy regime, and on the origin and the persistence of the financial shock.