Thomas J. Jordan

Disinflation costs, accelerating inflation gains, and central bank independence

Disinflation Costs, Accelerating Inflation Gains, and Central Bank Independence. - This paper considers the impact of central bank independence on both the costs of disinflation and the gains of accelerating inflation. For this purpose, sacrifice ratios for disinflation episodes and benefice ratios for accelerating inflation episodes are constructed by using a new method. The ratios are calculated for 19 industrial countries over the period 1960–1992. The results indicate that central bank independence only matters during disinflation episodes: Sacrifice ratio and output loss are higher, the more independent the central bank is; whereas during accelerating inflation episodes, central bank independence has no influence on either the benefice ratio or the output gain.ZusammenfassungKosten abnehmender Inflation, Gewinne einer Inflationsbeschleunigung und Unabhängigkeit der Zentralbank. - Der Verfasser betrachtet die Auswirkungen der Unabhängigkeit der Zentralbank auf die Kosten einer abnehmenden Inflation und die Gewinne aus einer sich beschleunigenden Inflation. Zu diesem Zweck konstruiert er Verlustrelationen für Zeiten abnehmender Inflation und Gewinnrelationen für Zeiten zunehmender Inflation, wobei er eine neue Methode anwendet. Die Relationen werden für 19 Industrieländer für die Periode 1960–1992 berechnet. Die Ergebnisse deuten darauf hin, daß die Unabhängigkeit der Zentralbank nur in Zeiten abnehmender Inflation von Bedeutung ist: Verlustrelation und Produktionseinbußen sind um so höher, je unabhängiger die Zentralbank ist. Demgegenüber ist die Unabhängigkeit der Zentralbank in Zeiten einer sich beschleunigenden Inflation ohne Einfluß auf die Gewinnrate oder die Produktionsgewinne.

Seigniorage, banking, and the optimal quantity of money

Abstract This paper discusses seigniorage in an economy with imperfect competition in the banking sector. The amount of total seigniorage and its division between the central bank and the banking sector are derived by using the opportunity cost concept of seigniorage. The paper analyzes the impact of changes in inflation, reserve requirements, competition and technology on the division of seigniorage and on the welfare loss and relates the analysis to the concept of the optimal quantity of money.

The Demand for M3 and Inflation Forecasts: An Empirical Analysis for Switzerland

The Demand for M3 and Inflation Forecasts: An Empirical Analysis for Switzerland. — This paper argues that money should continue to play an important role in monetary policy even if a central bank pursues a strategy based on inflation forecasts. Within the context of an error correction model, the paper delivers empirical evidence that both the growth rate of the monetary aggregate M3 and the size of excess M3 incorporate useful information with regard to future inflation in Switzerland. This evidence strongly suggests that money should remain an important indicator for monetary policy.

Central bank independence and the sacrifice ratio

Abstract This paper analyzes the impact of central bank independence on the sacrifice ratio. A monetary game model is constructed where the output depends on past inflation due to some indexation in the economy and where the slope of the short-run Phillips curve depends on the average inflation rate. The model predicts the following main results: A higher degree of central bank independence leads to a higher sacrifice ratio. There is no general positive correlation between the degree of central bank independence and output variance. Stabilization policy in each period is linked to past inflation. The higher past inflation, the less the policymaker stabilizes an output shock. From a welfare point of view, the model shows that the sacrifice ratio is not an appropriate measure to assess the costs of central bank independence.

Ten Years' Experience with the Swiss National Bank's Monetary Policy Strategy

SummaryIn December 1999 the Swiss National Bank (SNB) abandoned monetary targeting and introduced a new monetary policy strategy. The cornerstones of the new framework are an explicit definition of what the SNB considers to be price stability, a forecast of inflation over a three-year horizon, and a target range for the three-month Swiss franc Libor. The strategy lived up to expectations in every respect and contributed to strengthening the SNB’s credibility. In particular, the new framework’s flexibility proved successful in times of financial stress. The term reference interest rate contains an automatic monetary stabilizer that has insulated the nonfinancial sector from much of the turbulence. The major challenge lying ahead is sustained accuracy in the assessment of future inflation.

Monetary control uncertainty and inflation bias

This paper offers an alternative explanation for the occurrence of an inflation bias with and without an output goal exceeding natural output. A monetary game model is developed from which an inflation bias emerges because the policymaker increases money growth in order to avoid a recession due to a possible negative control error. Whereas higher additive instrument uncertainty increases the inflation bias, higher multiplicative uncertainty decreases it. Delegating monetary policy to an independent and conservative central banker decreases the inflation bias for all types of control errors.

Intra-industry trade — An in-depth study of Swedish liquid pump trade

Intra-Industry Trade — An In-Depth Study of Swedish Liquid Pump Trade. - The issue of intra-industry trade is here investigated through an in-depth case study of Swedish trade in pumps. A questionnaire was made in order to give detailed information about the trade flows. The survey indicates that the share of “true” IIT in Swedens centrifugal pump trade in 1990 was about 10 percent. This part of the apparent IIT could not be attributed to “categorical aggregation”. The survey revealed twelve different causes of IIT. A large share of IIT was due to re-exports (= vertical IIT). Behavioural and institutional factors were the main explanations of the non-re-exports IIT (= horizontal IIT).ZusammenfassungDer intraindustrielle Handel. Eine Studie des schwedi-schen Handels mit Flüssigkeitspumpen. - Das Thema des intraindustriellen Handels (IIH) wird hier durch eine detaillierte Fallstudie des schwedischen Handels mit Pumpen untersucht. Ein Fragebogen sollte ausführliche Informationen über die Handelsströme geben. Es hat sich gezeigt, daß der Anteil des “wirklichen” IIH am schwedischen Handel mit Kreiselpumpen 1990 ungefähr 10 vH betrug. Dieser Teil des IIH konnte nicht auf die “Kategorienbildung durch Aggregation” zurückgeführt werden. Die Um-frage ergab zwölf verschiedene Gründe für IIH. Ein großer Teil des IIH ist auf Reex-porte zurückzuführen (= vertikaler IIH). Verhaltensmäßige und institutionelle Fakto-ren waren die hauptsächlichen Erklärungsgründe für den Teil des IIH, der nicht aus Reexporten bestand (= horizontaler IIH).

An Empirical Observation on Central Bank Independence and Real Output

This note reviews the relation between central bank independence and real output for the 1970s and 1980s. A new statistic, based on the total amount of real output available in a decade, is proposed in order to broaden the analysis of the impact of central bank independence on real output. The results show that, although there is no correlation between central bank independence and average growth, central bank independence had a significantly negative impact on the sum of real output during the 1980s. For the 1970s, central bank independence had no influence on the total quantity of real output.

Demand and Supply Shocks in the IS-LM Model: Empirical Findings for Five Countries / Nachfrage- und Angebotsschocks im IS-LM Modell: Empirische Ergebnisse für fünf Länder

Summary This paper analyzes whether the short-run behavior of output, the interest rate, and the price level in the U.S., Germany, France, the U.K., and Italy follows the qualitative predictions of the IS-LM model augmented by a long-run aggregate supply schedule. The use of the structural vector auto-regression methodology allows to identify three different shocks under the long-run neutrality assumptions implied by the vertical aggregate supply curve. An impulse response analysis shows that, for all countries considered, the dynamic adjustment of the variables in response to supply, monetary, and fiscal shocks is consistent with the considered version of the IS-LM model. In addition, the variance decompositions show that demand shocks explain a substantial part of output fluctuations at short horizons. This result stands in contrast to simple Real Business Cycle models which explain business cycles exclusively in terms of productivity shocks. Zusammenfassung Diese Studie untersucht die Dynamik des Outputs, des Zinssatzes und des Preisniveaus in den USA, Deutschland, Frankreich, dem Vereinigten Königreich sowie Italien und überprüft, ob die qualitativen Aussagen des IS-IM Modells, ergänzt um eine langfristige aggregierte Angebotskurve, erfüllt werden. Die Studie bedient sich dabei der Methode der strukturellen Vektorautoregression. Drei verschiedene Impulse, die als Angebots-, Fiskal- und Geldmarktschocks zu interpretieren sind, werden durch die langfristigen Neutralitätsannahmen, welche die vertikale aggregierte Angebotskurve impliziert, identifiziert. Die Resultate der Impulse-Response Analyse weisen darauf hin, daß das IS-LM Modell die kurzfristige Dynamik der Variablen in den betrachteten Ländern richtig beschreibt: Die beobachteten Anpassungsprozesse der Variablen auf die drei Arten von Schocks sind mit dem Modell im Einklang. Die Varianzdekomposition zeigt außerdem, daß ein beträchtlicher Anteil der kurz- und mittelfristigen Schwankungen des Outputs durch Nachfrageschocks erklärt werden kann. Dieses Resultat steht im Gegensatz zu einfachen Modellen realer Konjunkturzyklen, welche die Outputschwankungen nur durch Produktivitätsschocks erklären.

Monetary and Real Shocks in a Monetary Union: The Swiss Case

We analyze to what extent real and monetary shocks affect price levels and real exchange rates in seven Swiss regions. A structural time series model is set up and estimated using the Kalman filter under two assumptions on the persistence of monetary shocks. We find that the variability of changes in price levels is mainly due to real shocks. The variance of monetary shocks is small but the monetary component of inflation differences across regions differs from zero with some persistence. As the Swiss case shows this does not seem to be a major obstacle to forming a monetary union.