This paper tests for non-linearity in a standard vector autoregression including output, prices, ... more This paper tests for non-linearity in a standard vector autoregression including output, prices, money supply, interest rates and exchange rates. We find evidence of non-linearity and as such we analysed the response of the economy to various shocks using a logistic smooth transition VAR (LSTVAR). Shocks to the money supply, interest rates, exchange rates and oil prices were found to have differing effects depending on whether they are positive or negative and on the state of the economy. In particular, negative monetary and interest rate shocks are found to have stronger output and price effects when the economy is in a low inflation environment.
Intermittent exchange rate instability and attendant high interest rates have led some observers ... more Intermittent exchange rate instability and attendant high interest rates have led some observers to argue that there is need for an alternate monetary regime such as a currency board or official dollarization. Against this background, this paper compares the welfare costs of various stabilization policies for the Jamaican economy. The analytic framework used is a stochastic model of a small open economy based on micro-foundations. When calibrated to Jamaican data, the results suggest that policy regimes that allow for some flexibility in monetary policy are superior, in terms of welfare, to a currency board or the extreme of dollarization. Further, at low levels of inflation policy could shift towards a full fledge inflation-targeting regime. The results however rely on the critical assumption that the policy regime is credible. Thus whilst dollarization may be inferior, policy makers are still confronted with the issue of the credibility of their stabilization policies.
Intermittent exchange rate instability and attendant inflation have led some observers to argue t... more Intermittent exchange rate instability and attendant inflation have led some observers to argue that Jamaica needs an alternate monetary regime such as a currency board or official dollarization in order to ensure low inflation. Against this background, this paper compares the welfare costs of various stabilization policies for the Jamaican economy. The analytic framework used is a stochastic model of a small open economy based on micro-foundations. When calibrated to Jamaican data, the results suggest that policy regimes that allow for some flexibility in monetary policy are superior, in terms of welfare, to a currency board or the extreme of dollarization. Further, at low levels of inflation a full fledge inflation-targeting regime is just as good as monetary based stabilization. The results however rely on the critical assumption that the policy regime is credible. Thus whilst dollarization may be inferior, policy makers are still confronted with the issue of the credibility of t...
The New Keynesian Phillips curve (NKPC) driven byunit labor costshas been criticized for failing ... more The New Keynesian Phillips curve (NKPC) driven byunit labor costshas been criticized for failing to match inflation dynamics and for failing to explain the duration of price contracts. This paper extends recent attempts in the literature to improve the fit of the NKPC, by introducing a fuller marginal cost proxy,unit total costs, that is derived from bothlaborandnonlabor unit costs; the latter include capital-related costs and production taxes. Borrowing costs are examined separately, as in the cost channel literature.Unit total costsare shown to improve the fit of the short-run variation in inflation and strengthen the empirical support for the role of expectations-based inflation persistence. They also imply a duration of fixed nominal contracts that is closer to those suggested by firm-level surveys. Thecost channelbecomes relatively less important whenunit total costs, rather thanunit labor costs, are used as a marginal cost proxy.
This paper provides comprehensive empirical evidence that supports the predictions of Sargent and... more This paper provides comprehensive empirical evidence that supports the predictions of Sargent and Wallace's (1981) “unpleasant monetarist arithmetic” that an increase in public debt is typically inflationary in countries with large public debt. Drawing on an extensive panel dataset, we find that the relationship holds strongly in indebted developing countries, weakly in other developing countries, but generally not in developed
This paper compares the performance of linear GARCH models in forecasting the volatility of retur... more This paper compares the performance of linear GARCH models in forecasting the volatility of returns in the Jamaican foreign exchange market with that of asymmetric models. The foreign exchange market in Jamaica is a developing market that is still relatively thin and is ...
This paper uses an aggregated small-scale macroeconomic model to study the monetary transmission ... more This paper uses an aggregated small-scale macroeconomic model to study the monetary transmission mechanism in Jamaica. It also simulates the behaviour of the economy under different monetary policy rules. There is a direct transmission from interest rates to exchange rates through ...
Given certain limitations of structural modelling, this paper explores the use of an alternate Ve... more Given certain limitations of structural modelling, this paper explores the use of an alternate Vector Autoregressive Regressive (VAR) model, augmented by an error correction term to forecast inflation. The model used monthly observations on the consumer price index, monetary base, exchange rate, interest rate on Government of Jamaica treasury bills, imported inflation and a proxy for gross domestic product. The model exhibited greater predictive accuracy when compared to other models. The impulse response functions showed that expansionary monetary policy has an unambiguous expansionary effect on prices. The lag effect of monetary policy was found to be at least two months. Exchange rate stabilization was found to be the most effective means of short term stabilization.
This paper analyses the behaviour of the interest rate differential in the 1997 Korean crisis. It... more This paper analyses the behaviour of the interest rate differential in the 1997 Korean crisis. Its decline prior to the crisis suggests that investors did not anticipate the crisis. Using a simple portfolio balance model, we show the currency risk premium to be positively related to the relative ...
This paper tests for non-linearity in a standard vector autoregression including output, prices, ... more This paper tests for non-linearity in a standard vector autoregression including output, prices, money supply, interest rates and exchange rates. We find evidence of non-linearity and as such we analysed the response of the economy to various shocks using a logistic smooth transition VAR (LSTVAR). Shocks to the money supply, interest rates, exchange rates and oil prices were found to have differing effects depending on whether they are positive or negative and on the state of the economy. In particular, negative monetary and interest rate shocks are found to have stronger output and price effects when the economy is in a low inflation environment.
Intermittent exchange rate instability and attendant high interest rates have led some observers ... more Intermittent exchange rate instability and attendant high interest rates have led some observers to argue that there is need for an alternate monetary regime such as a currency board or official dollarization. Against this background, this paper compares the welfare costs of various stabilization policies for the Jamaican economy. The analytic framework used is a stochastic model of a small open economy based on micro-foundations. When calibrated to Jamaican data, the results suggest that policy regimes that allow for some flexibility in monetary policy are superior, in terms of welfare, to a currency board or the extreme of dollarization. Further, at low levels of inflation policy could shift towards a full fledge inflation-targeting regime. The results however rely on the critical assumption that the policy regime is credible. Thus whilst dollarization may be inferior, policy makers are still confronted with the issue of the credibility of their stabilization policies.
Intermittent exchange rate instability and attendant inflation have led some observers to argue t... more Intermittent exchange rate instability and attendant inflation have led some observers to argue that Jamaica needs an alternate monetary regime such as a currency board or official dollarization in order to ensure low inflation. Against this background, this paper compares the welfare costs of various stabilization policies for the Jamaican economy. The analytic framework used is a stochastic model of a small open economy based on micro-foundations. When calibrated to Jamaican data, the results suggest that policy regimes that allow for some flexibility in monetary policy are superior, in terms of welfare, to a currency board or the extreme of dollarization. Further, at low levels of inflation a full fledge inflation-targeting regime is just as good as monetary based stabilization. The results however rely on the critical assumption that the policy regime is credible. Thus whilst dollarization may be inferior, policy makers are still confronted with the issue of the credibility of t...
The New Keynesian Phillips curve (NKPC) driven byunit labor costshas been criticized for failing ... more The New Keynesian Phillips curve (NKPC) driven byunit labor costshas been criticized for failing to match inflation dynamics and for failing to explain the duration of price contracts. This paper extends recent attempts in the literature to improve the fit of the NKPC, by introducing a fuller marginal cost proxy,unit total costs, that is derived from bothlaborandnonlabor unit costs; the latter include capital-related costs and production taxes. Borrowing costs are examined separately, as in the cost channel literature.Unit total costsare shown to improve the fit of the short-run variation in inflation and strengthen the empirical support for the role of expectations-based inflation persistence. They also imply a duration of fixed nominal contracts that is closer to those suggested by firm-level surveys. Thecost channelbecomes relatively less important whenunit total costs, rather thanunit labor costs, are used as a marginal cost proxy.
This paper provides comprehensive empirical evidence that supports the predictions of Sargent and... more This paper provides comprehensive empirical evidence that supports the predictions of Sargent and Wallace's (1981) “unpleasant monetarist arithmetic” that an increase in public debt is typically inflationary in countries with large public debt. Drawing on an extensive panel dataset, we find that the relationship holds strongly in indebted developing countries, weakly in other developing countries, but generally not in developed
This paper compares the performance of linear GARCH models in forecasting the volatility of retur... more This paper compares the performance of linear GARCH models in forecasting the volatility of returns in the Jamaican foreign exchange market with that of asymmetric models. The foreign exchange market in Jamaica is a developing market that is still relatively thin and is ...
This paper uses an aggregated small-scale macroeconomic model to study the monetary transmission ... more This paper uses an aggregated small-scale macroeconomic model to study the monetary transmission mechanism in Jamaica. It also simulates the behaviour of the economy under different monetary policy rules. There is a direct transmission from interest rates to exchange rates through ...
Given certain limitations of structural modelling, this paper explores the use of an alternate Ve... more Given certain limitations of structural modelling, this paper explores the use of an alternate Vector Autoregressive Regressive (VAR) model, augmented by an error correction term to forecast inflation. The model used monthly observations on the consumer price index, monetary base, exchange rate, interest rate on Government of Jamaica treasury bills, imported inflation and a proxy for gross domestic product. The model exhibited greater predictive accuracy when compared to other models. The impulse response functions showed that expansionary monetary policy has an unambiguous expansionary effect on prices. The lag effect of monetary policy was found to be at least two months. Exchange rate stabilization was found to be the most effective means of short term stabilization.
This paper analyses the behaviour of the interest rate differential in the 1997 Korean crisis. It... more This paper analyses the behaviour of the interest rate differential in the 1997 Korean crisis. Its decline prior to the crisis suggests that investors did not anticipate the crisis. Using a simple portfolio balance model, we show the currency risk premium to be positively related to the relative ...
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