This paper focuses on controversial issues of inflation targeting. The study is based on Svensson... more This paper focuses on controversial issues of inflation targeting. The study is based on Svensson?s and Bernanke?s theory which is applied in case studies of Czech Republic, Poland and Hungary. Understanding of actual performing of inflation targeting allows us to interpret correctly econometric and statistics analysis. The object of the thesis is to decide if the central European countries should rather follow Bernanke?s or Svensson?s theoretical conclusions. Brief summary of historical development explains reasons for implementing of inflation targeting. Next, Bernanke?s and Svensson?s definition of inflation targeting is mentioned and the differences are further analyzed. In particular, the choice of price index, understanding of price stability, lags of monetary transmission mechanism, the choice between band and point target. The last part of the thesis deals with intermediate target examining the performance of central bank and market forecast.
Univerzita Karlova, Fakulta sociálních věd, May 27, 2020
Asset prices and macroeconomics: towards a unified macro-finance framework Aleš Maršál March 30, ... more Asset prices and macroeconomics: towards a unified macro-finance framework Aleš Maršál March 30, 2020 Abstract The dissertation consists of three papers focused on fiscal policy and explaining what determines the dynamics of cross-sectional distribution of bond prices. The connecting factor of the thesis is however not just its main theme but also the used methodology. The valuation of bonds and effects of studied policies are endogenous outcome of the full-fledged macro-finance dynamic stochastic general equilibrium model. The first chapter provides broader context and non-technical summary of the three papers in following chapters. The first paper studies the role of trend inflation in bond pricing. Motivated by recent empirical findings that emphasize low-frequency movements in inflation as a key determinant of term structure, we introduce trend inflation into the workhorse macro-finance model. We show that this compromises the earlier model success and delivers implausible busi- ness cycle and bond price dynamics. We document that this result applies more generally to non-linearly solved models with Calvo pricing and trend inflation and is driven by the behavior of price dispersion, which is i) counterfactually high and ii) highly inaccurately approximated. We highlight the channels be- hind the undesired performance..
Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwe... more Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This working paper is produced for discussion purpose only. These working papers are expected to be publishedin due course, in revised form, and should not be quoted or cited without the author's written permission. Cardiff Economics Working Papers are available online from: econpapers.repec.org/paper/cdfwpaper/ and business.cardiff.ac.uk/research/academic-sections/economics/working-papers Enquiries: EconWP@cardiff.ac...
We introduce costly …rm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein-... more We introduce costly …rm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein-Zin preferences and show that it can jointly account for a high mean value of bond and equity premium without compromising the …t of the model to …rst and second moments of key macroeconomic variables. In the standard New Keynesian model without entry it is easy to generate in‡ation risks on long-term nominal bonds when placing high coe¢ cient on the output gap in the Taylor rule. Our model is able to generate in‡ation risks when the coe¢ cient on the output gap is small. In the entry model real risks are lower than in the standard New Keynesian model without entry due to the appearance of new varieties that help households smooth their consumption better.
Motivated by recent empirical findings that emphasize low-frequency movements in inflation as a k... more Motivated by recent empirical findings that emphasize low-frequency movements in inflation as a key determinant of term structure, we introduce trend inflation into the workhorse macro-finance model. We show that this compromises the earlier model success and delivers implausible business cycle and bond price dynamics. We document that this result applies more generally to non-linearly solved models with Calvo pricing and trend inflation and is driven by the behavior of price dispersion, which is i) counterfactually high and ii) highly inaccurately approximated. We highlight the channels behind the undesired performance under trend inflation and propose several remedies.
We explore asset pricing implications of productive, wasteful and utility enhancing government ex... more We explore asset pricing implications of productive, wasteful and utility enhancing government expenditures in a New Keynesian macro-finance model with Epstein-Zin preferences. We decompose the pricing kernel into four underlying macroeconomic factors (consumption growth, inflation, time preference shocks, long run risks for consumption and leisure) and design novel method to quantify the contribution of each factor to bond prices. Our methodology extends the performance attribution analysis typically used in finance literature on portfolio analysis. Using this framework, we show that bonds can serve as an insurance vehicle against the fluctuations in investors wealth induced by government spending. Increase in uncertainty surrounding government spending rises the demand for bonds leading to decrease in yields over the whole maturity profile. Bonds insure investors by i) providing buffer against bad times, ii) hedging inflation risk and iii) hedging real risks by putting current con...
We lay out a small open economy dynamic stochastic general equilibrium (DSGE) model with Markov s... more We lay out a small open economy dynamic stochastic general equilibrium (DSGE) model with Markov switching to study the term structure of interest rates. We extend the previous models by opening up the economy and adding a foreign demand channel. As a result, we explain the term structure of Czech interest rates and that the open economy version of the model fits reasonably well the period after the adoption of inflation targeting, which was characterized by two regimes: 1) a disinflation regime and 2) a price stability regime.
We use an affine term structure model with time-varying macro trends and a vector autoregression ... more We use an affine term structure model with time-varying macro trends and a vector autoregression model to investigate the response of the US Treasury yield curve to changes in fiscal policy. By accounting for the timing of the fiscal policy in the shock identification we can separate the effect of news about future increases in government spending from the effect of innovations in changes of current government expenditures. Further, we use the Baker, Bloom, and Davis (2016) uncertainty index dataset to explain the flight to quality type of events. By controlling for the low frequency movement in yields and the decomposition of yield to risk neutral rates and term premia we show that the news channel is driven by a cautious response of agents to an increase in projected future government spending and leads to a drop in yields. This result contrasts with shock into contemporaneous spending which has no significant impact on bond yields.
The paper evaluates costs and benefits related to the transformation of the Czech economy. As an ... more The paper evaluates costs and benefits related to the transformation of the Czech economy. As an alternative approach to the frequently used accounting-based view, a macroeconomic method is utilized which identifies costs and benefits of the transformation in its impact on the domestic product growth rate. The analysis itself follows econometric estimates of relationships between the growth rate of an economy and an occurrence of a transition reform. These estimates, which are gathered from the relevant literature, are then applied to the Czech case, which allows obtaining explicit values of costs and benefits related to the transformation process. Results show that, in the short run, the transformation brought costs of hundreds billion Czech Koruna (CZK), measured in the 2005 price level. The total costs are estimated in the range 3300-3400 billion CZK. Nevertheless, the total result of the economic transformation is found to be positive – especially a quick external liberalization...
We introduce costly firm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein... more We introduce costly firm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein-Zin preferences and show that it can jointly account for a high mean value of bond and equity premium without compromising the fit of the model to first and second moments of key macroeconomic variables. In the standard New Keynesian model without entry it is easy to generate inflation risks on long-term nominal bonds when placing high coefficient on the output gap in the Taylor rule. Our model is able to generate inflation risks when the coefficient on the output gap is small. In the entry model real risks are lower and inflation risks are ceteris paribus higher than in the standard New Keynesian model without entry due to the appearance of new varieties that help households smooth their consumption better.
We show that the ability of the Rudebusch and Swanson (2012) model to match a large and variable ... more We show that the ability of the Rudebusch and Swanson (2012) model to match a large and variable term premium without compromising the model’s ability to fit key macroeconomic variables relies on zero trend inflation – an assumption that contradicts recent empirical findings which emphasize low-frequency movements in inflation as a key determinant of term structure. We show that a model version that corrects for the presence of trend inflation delivers implausible business cycle and bond price dynamics. This result is driven by the behavior of price dispersion, which is i) counterfactually high and ii) highly inaccurately approximated. We document several model extensions which can to some degree restore the earlier success of the Rudebusch and Swanson model.
This collective volume is published with the support of the Visegrad International Fund, as part ... more This collective volume is published with the support of the Visegrad International Fund, as part of the project "International Student Conference of the V4 and Romania: 25 years since the fall of communism," no. 21420361.The project was carried out by the National University of Political Studies and Public Administration, the Department of International Relations and European Integration with the financial support of the Visegrad International Fund.The articles from this volume have been presented by participants in the conference of the project – International Student Conference of the V4 and Romania: 25 years since the fall of communism, which took place on 26-27 March 2015, Bucharest, Romania.The fall of the Iron Curtain is a symbol of freedom that must be remembered by the younger generation. The uniqueness of the International Student Conference of the V4 and Romania: 25 years since the fall of communism consisted in the fact that for the first time, universities from...
We examine the role of government spending in the dynamics of the term structure of interest rate... more We examine the role of government spending in the dynamics of the term structure of interest rates. Is the quantity of risk related government spending important for the price of risk? How does it depend on monetary policy conduct? Can fiscal policy immunize its impact on the term structure of interest rates? To answer this questions, we explore asset pricing implications of fiscal policy in what become paradigm in dynamic general equilibrium macro-finance literature. We break down the transmission of the government spending to macroeconomic attributes driving the dynamic response of the yield curve, both analytically and numerically. The novelty of our approach lies in the way we quantify the decomposition of pricing kernel. We find that rise in fiscal uncertainty amplifies the hedging property of bonds against real and nominal risks. Depending on the size of uncertainty monetary policy drives up the price of nominal risk. Spending reversals break the link between quantity and pric...
This paper focuses on controversial issues of inflation targeting. The study is based on Svensson... more This paper focuses on controversial issues of inflation targeting. The study is based on Svensson?s and Bernanke?s theory which is applied in case studies of Czech Republic, Poland and Hungary. Understanding of actual performing of inflation targeting allows us to interpret correctly econometric and statistics analysis. The object of the thesis is to decide if the central European countries should rather follow Bernanke?s or Svensson?s theoretical conclusions. Brief summary of historical development explains reasons for implementing of inflation targeting. Next, Bernanke?s and Svensson?s definition of inflation targeting is mentioned and the differences are further analyzed. In particular, the choice of price index, understanding of price stability, lags of monetary transmission mechanism, the choice between band and point target. The last part of the thesis deals with intermediate target examining the performance of central bank and market forecast.
Univerzita Karlova, Fakulta sociálních věd, May 27, 2020
Asset prices and macroeconomics: towards a unified macro-finance framework Aleš Maršál March 30, ... more Asset prices and macroeconomics: towards a unified macro-finance framework Aleš Maršál March 30, 2020 Abstract The dissertation consists of three papers focused on fiscal policy and explaining what determines the dynamics of cross-sectional distribution of bond prices. The connecting factor of the thesis is however not just its main theme but also the used methodology. The valuation of bonds and effects of studied policies are endogenous outcome of the full-fledged macro-finance dynamic stochastic general equilibrium model. The first chapter provides broader context and non-technical summary of the three papers in following chapters. The first paper studies the role of trend inflation in bond pricing. Motivated by recent empirical findings that emphasize low-frequency movements in inflation as a key determinant of term structure, we introduce trend inflation into the workhorse macro-finance model. We show that this compromises the earlier model success and delivers implausible busi- ness cycle and bond price dynamics. We document that this result applies more generally to non-linearly solved models with Calvo pricing and trend inflation and is driven by the behavior of price dispersion, which is i) counterfactually high and ii) highly inaccurately approximated. We highlight the channels be- hind the undesired performance..
Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwe... more Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This working paper is produced for discussion purpose only. These working papers are expected to be publishedin due course, in revised form, and should not be quoted or cited without the author's written permission. Cardiff Economics Working Papers are available online from: econpapers.repec.org/paper/cdfwpaper/ and business.cardiff.ac.uk/research/academic-sections/economics/working-papers Enquiries: EconWP@cardiff.ac...
We introduce costly …rm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein-... more We introduce costly …rm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein-Zin preferences and show that it can jointly account for a high mean value of bond and equity premium without compromising the …t of the model to …rst and second moments of key macroeconomic variables. In the standard New Keynesian model without entry it is easy to generate in‡ation risks on long-term nominal bonds when placing high coe¢ cient on the output gap in the Taylor rule. Our model is able to generate in‡ation risks when the coe¢ cient on the output gap is small. In the entry model real risks are lower than in the standard New Keynesian model without entry due to the appearance of new varieties that help households smooth their consumption better.
Motivated by recent empirical findings that emphasize low-frequency movements in inflation as a k... more Motivated by recent empirical findings that emphasize low-frequency movements in inflation as a key determinant of term structure, we introduce trend inflation into the workhorse macro-finance model. We show that this compromises the earlier model success and delivers implausible business cycle and bond price dynamics. We document that this result applies more generally to non-linearly solved models with Calvo pricing and trend inflation and is driven by the behavior of price dispersion, which is i) counterfactually high and ii) highly inaccurately approximated. We highlight the channels behind the undesired performance under trend inflation and propose several remedies.
We explore asset pricing implications of productive, wasteful and utility enhancing government ex... more We explore asset pricing implications of productive, wasteful and utility enhancing government expenditures in a New Keynesian macro-finance model with Epstein-Zin preferences. We decompose the pricing kernel into four underlying macroeconomic factors (consumption growth, inflation, time preference shocks, long run risks for consumption and leisure) and design novel method to quantify the contribution of each factor to bond prices. Our methodology extends the performance attribution analysis typically used in finance literature on portfolio analysis. Using this framework, we show that bonds can serve as an insurance vehicle against the fluctuations in investors wealth induced by government spending. Increase in uncertainty surrounding government spending rises the demand for bonds leading to decrease in yields over the whole maturity profile. Bonds insure investors by i) providing buffer against bad times, ii) hedging inflation risk and iii) hedging real risks by putting current con...
We lay out a small open economy dynamic stochastic general equilibrium (DSGE) model with Markov s... more We lay out a small open economy dynamic stochastic general equilibrium (DSGE) model with Markov switching to study the term structure of interest rates. We extend the previous models by opening up the economy and adding a foreign demand channel. As a result, we explain the term structure of Czech interest rates and that the open economy version of the model fits reasonably well the period after the adoption of inflation targeting, which was characterized by two regimes: 1) a disinflation regime and 2) a price stability regime.
We use an affine term structure model with time-varying macro trends and a vector autoregression ... more We use an affine term structure model with time-varying macro trends and a vector autoregression model to investigate the response of the US Treasury yield curve to changes in fiscal policy. By accounting for the timing of the fiscal policy in the shock identification we can separate the effect of news about future increases in government spending from the effect of innovations in changes of current government expenditures. Further, we use the Baker, Bloom, and Davis (2016) uncertainty index dataset to explain the flight to quality type of events. By controlling for the low frequency movement in yields and the decomposition of yield to risk neutral rates and term premia we show that the news channel is driven by a cautious response of agents to an increase in projected future government spending and leads to a drop in yields. This result contrasts with shock into contemporaneous spending which has no significant impact on bond yields.
The paper evaluates costs and benefits related to the transformation of the Czech economy. As an ... more The paper evaluates costs and benefits related to the transformation of the Czech economy. As an alternative approach to the frequently used accounting-based view, a macroeconomic method is utilized which identifies costs and benefits of the transformation in its impact on the domestic product growth rate. The analysis itself follows econometric estimates of relationships between the growth rate of an economy and an occurrence of a transition reform. These estimates, which are gathered from the relevant literature, are then applied to the Czech case, which allows obtaining explicit values of costs and benefits related to the transformation process. Results show that, in the short run, the transformation brought costs of hundreds billion Czech Koruna (CZK), measured in the 2005 price level. The total costs are estimated in the range 3300-3400 billion CZK. Nevertheless, the total result of the economic transformation is found to be positive – especially a quick external liberalization...
We introduce costly firm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein... more We introduce costly firm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein-Zin preferences and show that it can jointly account for a high mean value of bond and equity premium without compromising the fit of the model to first and second moments of key macroeconomic variables. In the standard New Keynesian model without entry it is easy to generate inflation risks on long-term nominal bonds when placing high coefficient on the output gap in the Taylor rule. Our model is able to generate inflation risks when the coefficient on the output gap is small. In the entry model real risks are lower and inflation risks are ceteris paribus higher than in the standard New Keynesian model without entry due to the appearance of new varieties that help households smooth their consumption better.
We show that the ability of the Rudebusch and Swanson (2012) model to match a large and variable ... more We show that the ability of the Rudebusch and Swanson (2012) model to match a large and variable term premium without compromising the model’s ability to fit key macroeconomic variables relies on zero trend inflation – an assumption that contradicts recent empirical findings which emphasize low-frequency movements in inflation as a key determinant of term structure. We show that a model version that corrects for the presence of trend inflation delivers implausible business cycle and bond price dynamics. This result is driven by the behavior of price dispersion, which is i) counterfactually high and ii) highly inaccurately approximated. We document several model extensions which can to some degree restore the earlier success of the Rudebusch and Swanson model.
This collective volume is published with the support of the Visegrad International Fund, as part ... more This collective volume is published with the support of the Visegrad International Fund, as part of the project "International Student Conference of the V4 and Romania: 25 years since the fall of communism," no. 21420361.The project was carried out by the National University of Political Studies and Public Administration, the Department of International Relations and European Integration with the financial support of the Visegrad International Fund.The articles from this volume have been presented by participants in the conference of the project – International Student Conference of the V4 and Romania: 25 years since the fall of communism, which took place on 26-27 March 2015, Bucharest, Romania.The fall of the Iron Curtain is a symbol of freedom that must be remembered by the younger generation. The uniqueness of the International Student Conference of the V4 and Romania: 25 years since the fall of communism consisted in the fact that for the first time, universities from...
We examine the role of government spending in the dynamics of the term structure of interest rate... more We examine the role of government spending in the dynamics of the term structure of interest rates. Is the quantity of risk related government spending important for the price of risk? How does it depend on monetary policy conduct? Can fiscal policy immunize its impact on the term structure of interest rates? To answer this questions, we explore asset pricing implications of fiscal policy in what become paradigm in dynamic general equilibrium macro-finance literature. We break down the transmission of the government spending to macroeconomic attributes driving the dynamic response of the yield curve, both analytically and numerically. The novelty of our approach lies in the way we quantify the decomposition of pricing kernel. We find that rise in fiscal uncertainty amplifies the hedging property of bonds against real and nominal risks. Depending on the size of uncertainty monetary policy drives up the price of nominal risk. Spending reversals break the link between quantity and pric...
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