Modelling the Second-Round Effects of Supply-Side Shocks on Inflation

Since the introduction of inflation targeting in the Czech Republic in 1998, supply-side factors have had a strong direct influence on CPI inflation on several occasions. This paper uses a small-scale dynamic rational expectations model based on an open-economy version of Fuhrer- Moore-type staggered wage setting to quantify the second-round effects of selected supply-side shocks and of shocks to the nominal exchange rate on wages and subsequently on inflation. In order to analyse the desired reaction of the central bank to these shocks, optimal time-consistent policy rules are derived within the presented New-Keynesian framework. Impulse response analyses are then carried out to demonstrate the model's dynamics under various policy rules corresponding to different loss functions of the central bank. The conclusions presented in the paper suggest that the second-round effects of shocks to import prices and the nominal exchange rate on inflation should not be ignored in practical policy-making.monetary policy, optimal policy rules, inflation targeting.

Visualizing spacetimes via embedding diagrams

It is hard to imagine curved spacetimes of General Relativity. A simple but powerful way how to achieve this is visualizing them via embedding diagrams of both ordinary geometry and optical reference geometry. They facilitate to gain an intuitive insight into the gravitational field rendered into a curved spacetime, and to assess the influence of parameters like electric charge and spin of a black hole, magnetic field or cosmological constant. Optical reference geometry and related inertial forces and their relationship to embedding diagrams are particularly useful for investigation of test particles motion. Embedding diagrams of static and spherically symmetric, or stationary and axially symmetric black-hole and naked-singularity spacetimes thus present a useful concept for intuitive understanding of these spacetimes' nature. We concentrate on general way of embedding into 3-dimensional Euclidean space, and give a set of illustrative examples.Comment: 8 pages, 5 figure

Dynamical stability of fluid spheres in spacetimes with a nonzero cosmological constant

The Sturm-Liouville eigenvalue equation for eigenmodes of the radial oscillations is determined for spherically symmetric perfect fluid configurations in spacetimes with a nonzero cosmological constant and applied in the cases of configurations with uniform distribution of energy density and polytropic spheres. It is shown that a repulsive cosmological constant rises the critical adiabatic index and decreases the critical radius under which the dynamical instability occurs.Comment: 3 pages, 1 figure, to appear in "Proceedings of the 11th Marcel Grossmann Meeting on General Relativity", eds H. Kleinert, R. T. Jantzen, R. Ruffin

Implementing the New Structural Model of the Czech National Bank

The purpose of the paper is to introduce the new “g3†structural model of the Czech National Bank and illustrate how it is used for forecasting and policy analysis. As from January 2007 the model was regularly used for shadowing official forecasts, and in July 2008 it became the core model of the CNB. In the paper we highlight the most important and unusual features of the model and discuss tools and procedures that help us in forecasting and assessing the economy with the model. The paper is not meant to provide a full derivation of the model or the complete characteristics of its behavior and should not be regarded as model documentation. Rather, the paper demonstrates how the model is used and how it contributes to policy analysis.DSGE, filtering, forecasting, general equilibrium, monetary policy.

An Economy in Transition and DSGE: What the Czech National Bank’s New Projection Model Needs

Since the introduction of the inflation targeting regime in 1998 the Czech National Bank has made considerable progress in developing formal tools for supporting its Forecasting and Policy Analysis System. This paper documents the advances in the ongoing research aimed at developing a DSGE small open economy model designed to capture some of the most important features of the Czech economy - both the business-cycle regularities and the recent developments associated with the economy's transition and its convergence towards the industrialized European countries. The model in its current form is able to capture trends in relative prices, allow for medium-convergence in expenditure shares, and deal with the undercapitalization and investment inflow issues. Besides the model exhibits real and nominal rigidities that are in line with the recent New Open Economy Macroeconomics literature built fully on first principles. The innovative features of our model include the international currency pricing scheme permitting flexible calibration of import and export price elasticities along with the disconnect of the nominal exchange rate, the policy reaction function with a parameterized forecast horizon, and a generalized capital accumulation equation with imperfect intertemporal substitution of investment..

Diversification and Systemic Risk: A Financial Network Perspective

In this paper, we study the implications of diversification in the asset portfolios of banks for financial stability and systemic risk. Adding to the existing literature, we analyse this issue in a network model of the interbank market. We carry out a simulation study that determines the probability of a systemic crisis in the banking network as a function of both the level of diversification, and the connectivity and structure of the financial network. In contrast to earlier studies we find that diversification at the level of individual banks may be beneficial for financial stability even if it does lead to a higher asset return correlation across banks

A systems view of risk factors for knee osteoarthritis reveals insights into the pathogenesis of the disease.

Early detection of osteoarthritis (OA) remains a critical yet unsolved multifaceted problem. To address the multifaceted nature of OA a systems model was developed to consolidate a number of observations on the biological, mechanical and structural components of OA and identify features common to the primary risk factors for OA (aging, obesity and joint trauma) that are present prior to the development of clinical OA. This analysis supports a unified view of the pathogenesis of OA such that the risk for developing OA emerges when one of the components of the disease (e.g., mechanical) becomes abnormal, and it is the interaction with the other components (e.g., biological and/or structural) that influences the ultimate convergence to cartilage breakdown and progression to clinical OA. The model, applied in a stimulus-response format, demonstrated that a mechanical stimulus at baseline can enhance the sensitivity of a biomarker to predict cartilage thinning in a 5 year follow-up in patients with knee OA. The systems approach provides new insight into the pathogenesis of the disease and offers the basis for developing multidisciplinary studies to address early detection and treatment at a stage in the disease where disease modification has the greatest potential for a successful outcome

The Implementation of Scenarios using DSGE Models

The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the design of a broad range of scenarios and can tackle a large range of issues, while at the same time offering an appealing structural interpretation of the scenario specification and simulation results. This paper provides illustrations of some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, as well as treatment of monetary and fiscal policy rules.Business fluctuations, monetary policy, fiscal policy, forecasting and simulation

PREPARED FOR The Texas Clean Energy Coalition PREPARED BY

and George Mitchell Foundation. All results and any errors are the responsibility of the authors and do not represent the opinion of the project’s sponsors, The Brattle Group, Inc. or its clients. Acknowledgement: We would like to thank the following individuals for their assistance. Comverge: Colin Meeha