Revised draft Ensuring Financial Stability: Financial Structure and the Impact of Monetary Policy on Asset Prices Katrin Assenmacher-Wesche∗ Research Department Swiss National Bank Stefan Gerlach Institute for Monetary and Financial Stability Johann Wolfgang Goethe University, Frankfurt March 26, 2008 Abstract This paper studies the responses of residential property and equity prices, inflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006. We estimate VARs for individual economies and panel VARs in which we distinguish between groups of countries on the basis of the characteristics of their financial systems. The results suggest that using monetary policy to offset asset price movements in order to guard against financial instability may have large effects on economic activity. Furthermore, while financial structure influences the impact of policy on asset prices, its importance appears limited. Keywords: asset prices, monetary policy, panel VAR. JEL Number: C23, E52 ∗ The views expressed are solely our own and are not necessarily shared by the SNB. We are grateful to seminar participants at the SNB and Petra Gerlach for helpful comments. Contact information: Katrin Assenmacher-Wesche (corresponding author): SNB, Börsenstrasse 15, Postfach 2800, CH-8022 Zürich, Switzerland, Tel +41 44 631 3824, email: Katrin.Assenmacher-Wesche@snb.ch; Stefan Gerlach: IMFS, Room 101D, Mertonstrasse 17, D-60325 Frankfurt/Main, Germany, email: Stefan.Gerlach@wiwi.uni-frankfurt.de. 11. Introduction There is much agreement that asset prices, in particular residential property prices, provide a crucial link through which adverse macroeconomic developments can cause financial instability.1 Episodes of asset price “booms” are seen as raising the risk of a sharp correction of prices, which could have immediate repercussions on the stability of financial institutions. Indeed, many observers have argued that property-price collapses have historically played an important role in episodes of financial instability at the level of individual financial institutions and the macro economy (e.g. Ahearne et al. 2005, Goodhart and Hofmann 2007a). Not surprisingly, this view has led to calls for central banks to react to movements in asset prices “over and beyond” what such changes imply for the path of aggregate demand and inflation (Borio and Lowe 2002, Cecchetti et al. 2000). Proponents of this policy emphasise that episodes of financial instability could depress inflation and economic activity below their desired levels. Consequently, they argue, central banks that seek to stabilise the economy over a sufficiently long time horizon may need to react to current asset price movements (Bean 2004, Ahearne et al. 2005). Importantly, they do not argue that asset prices should be targeted, only that central banks should be willing to tighten policy at the margin in order to slow down increases in asset prices that are viewed as being excessively rapid in order to reduce the likelihood of a future crash that could trigger financial instability and adverse macroeconomic outcomes. While seemingly attractive, this proposed policy has implications for central banks' understanding of The Tradeoffs of Trade Policy The Tradeoffs of Trade Policy By: OpenStaxCollege Economists readily acknowledge that international trade is not all sunshine, roses, and happy endings Over time, the average person gains from international trade, both as a worker who has greater productivity and higher wages because of the benefits of specialization and comparative advantage, and as a consumer who can benefit from shopping all over the world for a greater variety of quality products at attractive prices The “average person,” however, is hypothetical, not real—representing a mix of those who have done very well, those who have done all right, and those who have done poorly It is a legitimate concern of public policy to focus not just on the average or on the success stories, but also on those have not been so fortunate Workers in other countries, the environment, and prospects for new industries and materials that might be of key importance to the national economy are also all legitimate issues The common belief among economists is that it is better to embrace the gains from trade, and then deal with the costs and tradeoffs with other policy tools, than it is to cut off trade to avoid the costs and tradeoffs To gain a better intuitive understanding for this argument, consider a hypothetical American company called Technotron Technotron invents a new scientific technology that allows the firm to increase the output and quality of its goods with a smaller number of workers at a lower cost As a result of this technology, other U.S firms in this industry will lose money and will also have to lay off workers—and some of the competing firms will even go bankrupt Should the United States government protect the existing firms and their employees by making it illegal for Technotron to use its new technology? Most people who live in market-oriented economies would oppose trying to block better products that lower the cost of services Certainly, there is a case for society providing temporary support and assistance for those who find themselves without work Many would argue for government support of programs that encourage retraining and acquiring additional skills Government might also support research and development efforts, so that other firms may find ways of outdoing Technotron Blocking the new technology altogether, however, seems like a mistake After all, few people would advocate giving up electricity because it caused so much disruption to 1/5 The Tradeoffs of Trade Policy the kerosene and candle business Few would suggest holding back on improvements in medical technology because they might cause companies selling leeches and snake oil to lose money In short, most people view disruptions due to technological change as a necessary cost that is worth bearing Now, imagine that Technotron’s new “technology” is as simple as this: the company imports what it sells from another country In other words, think of foreign trade as a type of innovative technology The objective situation is now exactly the same as before Because of Technotron’s new technology—which in this case is importing goods from another county—other firms in this industry will lose money and lay off workers Just as it would have been inappropriate and ultimately foolish to respond to the disruptions of new scientific technology by trying to shut it down, it would be inappropriate and ultimately foolish to respond to the disruptions of international trade by trying to restrict trade Some workers and firms will suffer because of international trade In a living, breathing market-oriented economy, some workers and firms will always be experiencing disruptions, for a wide variety of reasons Corporate management can be better or worse Workers for a certain firm can be more productive or less Tough domestic competitors can create just as much disruption as tough foreign competitors Sometimes a new product is a hit with consumers; sometimes it is a flop Sometimes a company is blessed by a run of good luck or stricken with a run of bad luck For some firms, international trade will offer great opportunities for expanding productivity and jobs; for other firms, trade will impose stress and pain The disruption caused by international trade is not fundamentally different from all the other disruptions caused by the other workings of a market economy In other words, the economic analysis of free trade does not rely on a belief that foreign trade is not disruptive or does not pose tradeoffs; indeed, the story of Technotron begins with a particular disruptive market change—a new technology—that causes real tradeoffs In thinking about the disruptions of foreign trade, or any of the other possible costs and tradeoffs of foreign trade discussed in this chapter, the best public policy solutions typically not involve protectionism, but instead involve finding ways for public policy to address the particular issues, while still allowing the benefits of international trade ... Chapter 16 The Conduct of Monetary Policy: Strategy and Tactics © 2013 Pearson Education, Inc. All rights reserved. 16-2 The Price Stability Goal and the Nominal Anchor • Over the past few decades, policy makers throughout the world have become increasingly aware of the social and economic costs of inflation and more concerned with maintaining a stable price level as a goal of economic policy. • The role of a nominal anchor: a nominal variable such as the inflation rate or the money supply, which ties down the price level to achieve price stability © 2013 Pearson Education, Inc. All rights reserved. 16-3 Other Goals of Monetary Policy • Five other goals are continually mentioned by central bank officials when they discuss the objectives of monetary policy: – (1) high employment and output stability – (2) economic growth – (3) stability of financial markets – (4) interest-rate stability – (5) stability in foreign exchange markets © 2013 Pearson Education, Inc. All rights reserved. 16-4 Should Price Stability Be the Primary Goal of Monetary Policy? • Hierarchical Versus Dual Mandates: – hierarchical mandates put the goal of price stability first, and then say that as long as it is achieved other goals can be pursued – dual mandates are aimed to achieve two coequal objectives: price stability and maximum employment (output stability • Price Stability as the Primary, Long-Run Goal of Monetary Policy - Either type of mandate is acceptable as long as it operates to make price stability the primary goal in the long run, but not the short run © 2013 Pearson Education, Inc. All rights reserved. 16-5 Inflation Targeting • Public announcement of medium-term numerical target for inflation • Institutional commitment to price stability as the primary, long-run goal of monetary policy and a commitment to achieve the inflation goal • Information-inclusive approach in which many variables are used in making decisions • Increased transparency of the strategy • Increased accountability of the central bank © 2013 Pearson Education, Inc. All rights reserved. 16-6 Inflation Targeting (cont’d) • New Zealand (effective in 1990) – Inflation was brought down and remained within the target most of the time. – Growth has generally been high and unemployment has come down significantly • Canada (1991) – Inflation decreased since then, some costs in term of unemployment • United Kingdom (1992) – Inflation has been close to its target. – Growth has been strong and unemployment has been decreasing. © 2013 Pearson Education, Inc. All rights reserved. 16-7 Inflation Targeting (cont’d) • Advantages – Does not rely on one variable to achieve target – Easily understood – Reduces potential of falling in time-inconsistency trap – Stresses transparency and accountability • Disadvantages – Delayed signaling – Too much rigidity – Potential for increased output fluctuations – Low economic growth during disinflation © 2013 Pearson Education, Inc. All rights reserved. 16-8 Figure 1 Inflation Rates and Inflation Targets for New Zealand, Canada, and the United Kingdom, 1980–2011 © 2013 Pearson Education, Inc. All rights reserved. 16-9 The Federal Reserve’s Monetary Policy Strategy • The United States has achieved excellent macroeconomic performance (including low and stable inflation) until the onset of the global financial crisis without using an explicit nominal anchor econstor www.econstor.eu Der Open-Access-Publikationsserver der ZBW – Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW – Leibniz Information Centre for Economics Nutzungsbedingungen: Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen der unter → http://www.econstor.eu/dspace/Nutzungsbedingungen nachzulesenden vollständigen Nutzungsbedingungen zu vervielfältigen, mit denen die Nutzerin/der Nutzer sich durch die erste Nutzung einverstanden erklärt. 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The combination of wage policy and monetary policy, Kieler Diskussionsbeiträge, No. 399, ISBN 3894562463 This Version is available at: http://hdl.handle.net/10419/2924 KIELER DISKUSSIONSBEITRÄGE 399 KIEL DISCUSSION PAPERS Higher Economic Growth through Macroeconomic Policy Coordination? The Combination of Wage Policy and Monetary Policy by Klaus-Jürgen Gern, Carsten-Patrick Meier and Joachim Scheide CONTENTS  Strengthening potential output is high on the agenda for economic policy in the European Union. While there is widespread agreement that structural policies have a positive impact on long-term growth, there is a controversial discussion whether coordination of mac- roeconomic policies can contribute to this goal. Against the background of the new economic condi- tions in the euro area, we analyze what could be gained from a combination of wage policy and mone- tary policy.  Using a small theoretical macroeconomic model, we show that coordination between wage policy and monetary policy can be beneficial under certain as- sumptions. A policy of sustained wage moderation re- sults in an increase in employment and potential out- put. Assuming that expectations are not completely forward-looking and prices are sticky, the upward shift in potential output will not be matched by a similar in- crease in aggregate demand. To prevent an output gap from emerging, the optimal monetary policy is to lower interest rates. However, a central bank aiming at price stability will only do so when the announce- ment of a policy of sustained wage moderation is credible.  Simulations with a large macroeconometric multi- country model confirm that a coordination of German wage policy and ECB monetary policy would help to realize the beneficial effects of NOTE THE AESTHETIC FUNCTIONALITY DOCTRINE AND THE LAW OF TRADE-DRESS PROTECTION Mitchell M Wongt INTRODUCTION 1117 I. THE LAW OF TRADE-DRESS PROTECTION 1121 A. Purposes of Trade-Dress Law 1121 1. Protection of Firms from Misassociation 1124 2. Prevention of Goodwill Misappropriation 1125 3. Facilitation of Meaningful Consumer Participation in the M arket 1126 4. Encouragement of Production of High-Quality Products 1127 B. The Lanham Act and Related State Remedies 1128 II. THE "IDENTIFICATION" THEORY OF FUNCTIONALrIY AND ITS TESTS 1132 A. The "Identification" Theory 1132 B. Four Tests Under the Identification Theory 1134 1. The "Indicia of Source" Test 1134 2. The 'Actual Benefit" Test 1136 3. The "Consumer Motivation" Test 1138 4. The "Commercial Success" Test 1140 C. Why These Tests Belong Under the Identification Theory 1141 Ill. THE "COMPETION" THEORY OF FuNCrIONALITY AND ITS TESTS 1142 A. The "Competition" Theory 1142 t This Note received the 1998 Gerald Rose Memorial Award for Best Paper in Intel- lectual Property from the Center for Intellectual Property at the John Marshall School of Law, and was Winner of the New York Intellectual Property Law Association's 1998 Honor- able William C. Conner Writing Competition. I am indebted to the staff of the Cornel Law Reiew for its invaluable assistance in bringing this piece to publication. Particular thanks are owed to Leo R. Tsao for indispen- sable advice and encouragement during the initial drafts; to Nathan C. Thomas, StevenJ. Scott, and Samson M. Frankel for editorial oversight; and to Christine M. O'Reilly and Susan G. Pado for tireless administrative and clerical support on this Note. Finally, I would also like very much to acknowledge the diligent efforts of the Law Review Associates who worked on portions of this piece: Paul M. Buono, Adam M. Chud, David M. Fine, Steven D. Greenblatt, Darian M. Ibrahim, Jason E. Murtagh, Christopher A. Ogiba, Kamran Pasha, and John M. Tolpa. 1116 HeinOnline 83 Cornell L. Rev. 1116 1997-1998 AESTHETIC FUNCTIONALiTY B. Six Tests Under the Competition Theory 1144 1. The "Comparable Alternatives" Test 1144 2. The "Essential to Usage" Test 1146 3. The "Relation to Usage" Test 1147 4. The "Ease of Manufacture" Test 1148 5. The Effective Competition" Test 1149 6. The "De Facto/Dejure" Test 1149 C. Why These Tests Belong Under the Competition Theory 1152 IV. THE Two THEORmsS OF FuNcrIoNALrrY AND r=m AFsT-ETIC FUNCTIONALrY PROBLEM 1152 A. Redefining the "Aesthetic Functionality" Problem 1152 B. Purposes of the Functionality Doctrine 1154 1. Prevention of Perpetual Monopolies 1154 2. Partitioning of Intellectual-Property Law 1156 C. Resolving the "Aesthetic Functionality" Problem 1162 1. The Interest in Preventing Perpetual Monopolies 1162 2. The Interest in Partitioning Intellectual-Property Law. 1163 CONCLUSION 1165 INTRODUCTION As a general rule, under trade-dress law,' product features can be protected from imitation in the market. This protection allows manu- facturers to advertise their "brand names" through their products' de- signs without fear of competitors passing off imitation goods as originals. However, the courts have held that the "functional" fea- tures on a product can never be protected under trade-dress law. 2 1 The Supreme Court defines "trade 1 Company Proprietary and Confidential Company Proprietary and Confidential FINAL REPORT  WHOSE INTERESTS SHOULD BE THE PRIMARY CONCERN OF GOVERNMENT TRADE POLICY, THE INTERESTS OF PRODUCERS (FIRMS AND THEIR EMPLOYEES) OR CONSUMERS?  ALSO, WHAT KIND OF TRADE POLICY DO YOU THINK SHOULD THE GOVERNMENT ADOPT FOR THE BENEFIT OF THE COUNTRY AS WHOLE? 2 Company Proprietary and Confidential Company Proprietary and Confidential Members of group • Trần Bảo Kiều ID: 71106118 • Nguyễn Thị Thủy Tiên ID: 71106074 • Đỗ Thị Cẩm Thu ID: 71106146 • Nguyễn Hoàng Hoài Thương ID: 711060 73 • Nguyễn Phúc Như Thúy ID: 71106072 • Huỳnh Châu Phương Thảo ID: 71106062 • Trần Huệ Quân ID: 71106137 3 Company Proprietary and Confidential Company Proprietary and Confidential PART I • The frameworks: Definition & Fundamentals PART II • Primary concern of government trade policy PART III • Conclusion STRUCTURE OF PRESENTATION 4 Company Proprietary and Confidential Company Proprietary and Confidential Part I: THE FRAMEWORK Government trade policy • Trade is the form that the ownership of goods and services is transferred from a person or entity to another by getting something in exchange from the buyer, then this will build the network known as the market. 5 Company Proprietary and Confidential Company Proprietary and Confidential Part I: THE FRAMEWORK What is producer ? PRODUCER In Social studies In Science 6 Company Proprietary and Confidential Company Proprietary and Confidential • The consumer is the one who pays to consume the goods and services produced. Part I: THE FRAMEWORK What is consumer ? 7 Company Proprietary and Confidential Company Proprietary and Confidential • Mercantilism makes a crude case for government involvement in promoting exports and limiting imports. • The theory of Smith, Ricardo, Heckscher – Ohlin from part of the case for unrestricted free trade Part I: THE FRAMEWORK Trade theory 8 Company Proprietary and Confidential Company Proprietary and Confidential New trade theory Porter’s theory of national competitive advantage can be interpreted Part I: THE FRAMEWORK Trade theory 9 Company Proprietary and Confidential Company Proprietary and Confidential • The theories of international trade also matter to international businesses because firms are major players on the international trade scene. Part I: THE FRAMEWORK Trade theory 10 Company Proprietary and Confidential Company Proprietary and Confidential Subsidies Tariffs Impor t quota s Voluntary export restraints Antidumping policies Local content requirements Administrative policies 7 instruments of trade policy Part II: PRIMARY CONCERN OF GOVERNMENT TRADE POLICY [...]... quota on trade imposed by the exporting country, typically at the request of the importing country s government consumers of the product in the exporting country experience Consumers of the product in the importing country suffer a an increase in well-being as a result of the VER reduction in well-being as a result of the VER producers in the importing country experience an increase in Producers in the. .. TO WHOLE COUNTRY Free trade of country will be restricted Company Proprietary and Confidential Company Proprietary and Confidential 18 Part III: CONCLUSION • The foreign trade policy can’t protect the producers’ and the consumers’ benefits at the same time • • The consumer’s income determines their benefit wanting The producer’s capability of productive and the consumer’s income are relative to the country s... exports They must pay a higher price for imported product TO CONSUMERS The tariff affords producers some protection against foreign competitors by increasing the cost of imported foreign goods TO PRODUCERS TO WHOLE COUNTRY The tariff increases the government revenues Company Proprietary and Confidential Company Proprietary and Confidential 12 Subsidies Subsidies are the ... causes real tradeoffs In thinking about the disruptions of foreign trade, or any of the other possible costs and tradeoffs of foreign trade discussed in this chapter, the best public policy solutions... substantially increase the cost, and thus the price, of U.S.-manufactured laptops As a result of the ITC’s decision, Apple moved its domestic manufacturing 2/5 The Tradeoffs of Trade Policy plant for... from trade? 3/5 The Tradeoffs of Trade Policy Critical Thinking Questions What are some examples of innovative products that have disrupted their industries for the better? In principle, the benefits