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Papers and Comments
  • Balance sheet policies in the euro area (2013), (with Andreas Schabert).

    This paper develops and estimates a macroeconomic model which explicitly accounts for central banks asset purchases and for the implications of price changes of government bonds. The latter are held by banks who require liquidity for loan supply and for managing deposits. Shifts in the market price of government bonds can thereby affect costs of financial intermediation. The aim of the paper is to provide a framework that allows to quantitatively assess recent policies conducted by central banks, like the US Fed or the ECB. Specifically, the model is calibrated/estimated for the euro area, to examine the effectiveness of central bank bond purchase programs.

  • Predictive Likelihood Comparisons with DSGE and DSGE-VAR models (2013), (with Guenter Coenen and Anders Warne).

    This paper shows how to compute the h-step-ahead predictive likelihood for any subset of the observed variables in parametric discrete time series models estimated with Bayesian methods. The subset of variables may vary across forecast horizons and the problem thereby covers marginal and joint predictive likelihoods for a fixed subset as special cases. The basic idea is to utilize well-known techniques for handling missing data when computing the likelihood function, such as a missing observations consistent Kalman filter for linear Gaussian models, but it also extends to nonlinear, nonnormal state-space models. The predictive likelihood can thereafter be calculated via Monte Carlo integration using draws from the posterior distribution. As an empirical illustration, we use euro area data and compare the forecasting performance of the New Area-Wide Model, a small-open-economy DSGE model, to DSGEVARs, and to reduced-form linear Gaussian models.

    ECB Working Paper 1536 WCC.pdf

  • The Bond Risk Premium, Fiscal Rules and Monetary Policy: An estimated DSGE approach (2011), (with Ivan Jaccard and Juha Kilponen).

    The interaction between monetary and fiscal policy gives rise to general equilibrium effects that have sizeable implications for bond pricing in an estimated dynamic general equilibrium model. Procyclical fiscal policy leads to a deterioration in the policy trade-off faced by the monetary authority and increases the bond risk premium. While the effects of procyclical fiscal policy on inflation and output can be partially offset by adopting a more aggressive monetary stance, the spillover effects on the bond premium are clearly more difficult to contain. Adopting countercyclical fiscal rules stabilizes business cycle fluctuations and helps to reduce the risk premium.

    Preliminary version BondsPolicy.pdf

  • Forecasting with DSGE Models (2010), (with Guenter Coenen and Anders Warne).

    In this paper we review the methodology of forecasting with log-linearised DSGE models using Bayesian methods. We focus on the estimation of their predictive distributions, with special attention being paid to the mean and the covariance matrix of h-steps ahead forecasts. In the empirical analysis, we examine the forecasting performance of the New Area-Wide Model (NAWM) that has been designed for use in the macroeconomic projections at the European Central Bank. The forecast sample covers the period following the introduction of the euro and the out-of-sample performance of the NAWM is compared to nonstructural benchmarks, such as Bayesian vector autoregressions (BVARs). Overall, the empirical evidence indicates that the NAWM compares quite well with the reduced-form models and the results are therefore in line with previous studies. Yet there is scope for improving the NAWM’s forecasting performance. For example, the model is not able to explain the moderation in wage growth over the forecast evaluation period and, therefore, it tends to overestimate nominal wages. As a consequence, both the multivariate point and density forecasts using the log determinant and the log predictive score, respectively, suggest that a large BVAR can outperform the NAWM.

    The paper has appeared as chapter 4 in an ‘Oxford Handbook’ on Economic Forecasting, edited by Michael P. Clements and David F. Hendry.

    ECB Working Paper 1185 ForecastingDSGE.pdf

  • DSGE Models and their use at the ECB (2010), (with Frank Smets, Guenter Coenen, Roberto Motto and Massimo Rostagno).

    Bayesian dynamic stochastic general equilibrium (DSGE) models combine micro-economic behavioural foundations with a full-system Bayesian likelihood estimation approach using key macro-economic variables. Because of the usefulness of this class of models for addressing questions regarding the impact and consequences of alternative monetary policies they are nowadays widely used for forecasting and policy analysis at central banks and other institutions. In this paper we provide a brief description of the two main aggregate euro area models at the ECB. Both models share a common core but their detailed specification differs reflecting their specific focus and use. The New Area Wide Model (NAWM) has a more elaborate international block, which is useful for conditioning the euro area projections on assumptions about foreign economic activity, prices and interest rates and to widen the scope for scenario analysis. The Christiano, Motto and Rostagno (CMR) model instead has a more developed financial sector, which allows it to be used for monetary and financial scenarios and for cross checking. Based on the comparison of two models we find a broad agreement on the qualitative predictions they make, although, in quantitative terms, there are some differences. However, the perspectives provided by the two models are often complementary, rather than conflicting.
    SERIEs (Spanish Economic Society), 1(1), 51-65, 2010. DSGEatECB.pdf

  • Inflation Dynamics with Labour Market Matching: Assessing Alternative Specifications (2009), (with James Costain, Gregory de Walque, Keith Kuester, Tobias Linzert, Stephen Millard and Olivier Pierrard).

    This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behavior. In a search and matching environment, we consider the following modeling setups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates.

    ECB Working Paper 1053 G7.pdf

    Revised Version 'Wage, inflation and employment dynamics with labour market matching' as Banco de Espana Working Paper 0981 G7revised.pdf

  • The Role of Labor Markets for Euro Area Monetary Policy (2009), (with Keith Kuester and Tobias Linzert).

    In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.

    Published in: European Economic Review, 53 (2009), 908-936

    ECB Working Paper 1035 CKL.pdf

  • The Elasticity of the Unemployment Rate with Respect to Benefits (2008), (with Keith Kuester).

    If the Mortensen and Pissarides model with efficient bargaining is calibrated to replicate the fluctuations of unemployment over the business cycle, it implies a far too strong rise of the unemployment rate when unemployment benefits rise. This paper explores an alternative, right-to-manage bargaining scheme. This also generates the right degree of fluctuations of unemployment but at the same time implies a reasonable elasticity of unemployment with respect to benefits.

    Published in: Economic Letters, 102(2), 102-105, 2009.

    Philadelphia Fed Working Paper 2008-15 Elasticity.pdf

  • The New Area-Wide Model of the Euro Area: a micro-founded Open-Economy Model for Forecasting and Policy Analysis” (2008), (with Guenter Conen and Anders Warne)

    In this paper, we outline a version of the New Area-Wide Model (NAWM) of the euro area designed for use in the (Broad) Macroeconomic Projection Exercises regularly undertaken by ECB/Eurosystem staff. We present estimation results for the NAWM that are obtained by employing Bayesian inference methods and document the properties of the estimated model by reporting its impulse-response functions and forecast-error-variance decompositions, by inspecting the model-based sample moments, and by examining the model’s forecasting performance relative to a number of benchmarks, including a Bayesian VAR. We finally consider several applications to illustrate the potential contributions the NAWM can make to forecasting and policy analysis.

    ECB Working Paper 944 NAWM.pdf

    YADA: A Matlab based GUI for DSGE model estimation by Anders Warne YADA

  • Resuscitating the Wage Channel in Models with Unemployment Fluctuations (2007), (with Keith Kuester).

    Higher wages all else equal translate into higher inflation. More rigid wages imply a weaker response of inflation to shocks. This view of the wage channel is deeply entrenched in central banks' views and models of their economy. In this paper, we present a model with equilibrium unemployment which (a) features such a proper wage channel, which (b) reproduces the fluctuations of unemployment over the business cycle and which (c) implies a reasonably low elasticity of steady state unemployment with respect to changes in benefits. Search and matching models with right-to-manage wage bargaining imply (a). Accounting for fixed costs associated with maintaining an existing job greatly magnifies profit fluctuations for any given degree of wage fluctuations, which gives (b). While the calibration still relies on low profits, it does not necessarily demand a small gap between the value of working and the value of unemployment for the worker, which yields (c).

    Published in: Journal of Monetary Economics, 54(8), 2439-2466, 2007.

    ECB Working Paper 635 WageChannel.pdf

  • Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior” (2007), (with Guenter Coenen and Andrew Levin)

    We formulate a generalized price-setting framework that incorporates staggered contracts of multiple durations and that enables us to directly identify the influences of nominal vs. real rigidities. We estimate this framework using macroeconomic data for Germany (1975–1998) and for the U.S. (1983–2003). In each case, we find that the data are well-characterized by nominal contracts with an average duration of about two to three quarters. We also find that new contracts exhibit very low sensitivity to marginal cost, corresponding to a relatively high degree of real rigidity. Finally, our results indicate that backward-looking price-setting behavior (such as indexation to lagged inflation) is not needed in explaining the aggregate data, at least in an environment with a stable monetary policy regime and a transparent and credible inflation objective.

    Published in: Journal of Monetary Economics, 54(8), 2439-2466, 2007.

  • Conditional versus Unconditional Forecasting with the New Area-Wide Model of the Euro Area” (2007), (with Guenter Conen and Anders Warne)

    In this paper we examine conditional versus unconditional forecasting with a version of the New Area-Wide Model (NAWM) of the euro area designed for use in the context of the macroeconomic projection exercises at the European Central Bank (ECB). We first analyse the out-of-sample forecasting properties of the estimated model from 1999 to 2005 by comparing its unconditional forecasts with those obtained from a Bayesian VAR with a steady-state prior as well as na¨ýve forecasts. Model-based forecasts that are conditioned on differing information sets are then studied and evaluated through, for instance, modesty statistics to assess the relevance of the Lucas critique. In contrast to other studies in the literature, we condition on a fairly large set of policy-relevant variables. Furthermore, we consider conditioning information that partially, albeit not fully determine the future path of the observed variables, but which restrict the channels through which they can be affected.


  • Identifying the Role of Labor Markets for Monetary Policy in an Estimated DSGE Model (2006), (with Keith Kuester and Tobias Linzert).

    We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy.

    ECB Working Paper 635 ChristoffelKuesterLinzert06.pdf

  • The Role of Real Wage Rigidity and Labor Market Flows for Inflation Dynamics (2005), (with Tobias Linzert).

    This paper analyzes the role of wage rigidities and labor market frictions in a New Keynesian business cycle model. We analyze the effect of a monetary policy shock and investigate how labor market frictions and real wage rigidities affect the transmission process of monetary policy on inflation. We find that the specification of the wage bargaining process plays a crucial role for the transmission of real wage rigidities on inflation. Under the standard efficient Nash bargaining there is no feedback of wage rigidities on inflation. However, under the alternative right-to-manage bargaining we find that more rigid wages translate into more persistent movements of aggregate inflation.

    ECB Working Paper 556 ChristoffelLinzert05.pdf

    Revised Version forthcoming in Journal of Money, Credit, and Banking ChristoffelLinzert10.pdf

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