nep-cba New Economics Papers
on Central Banking
Issue of 2004‒12‒12
twelve papers chosen by
Roberto Santillan

  1. Monetary transmission and equity markets in the EU By Elbourne, A.; Salomons, R.
  2. Look Who's Talking: ECB communication during the first years of EMU By David-Jan Jansen; Jakob de Haan
  3. EMU enlargement, inflation and adjustment of tradable goods prices: What to expect? By Philipp Maier
  4. Has the ECB been wrong ? A lesson from counterfactual simulations By Jérôme Héricourt
  5. Financial integration, exchange rate regimes in CEECs, and joining the EMU : Just do it... By Maurel Mathilde
  6. Independent Monetary Policies and Social Equality By Andrew Hughes Hallett; Diana N. Weymark
  7. Monetary policy rules and their application in Russia By Anna Vdovichenko; Victoria Voronina
  9. A Simple Monetary Growth Model with Variable Rates of Time Preference By Tom Kompas; Omar Abdel-Razeq
  10. How Should Large and Small Countries Be Represented in a Currency Union? By Helge Berger; Till Mueller
  11. Inflation, Income Redistribution, and Optimal Central Bank Independence By Diana N. Weymark
  12. Central Banks as Lenders of Last Resort - Trendy or Passe? By David Laidler

  1. By: Elbourne, A.; Salomons, R. (Groningen University)
    Abstract: We assess the role of equity markets in the transmission of monetary policy in the EU. We use a structural VAR model based upon the models of Kim and Roubini [2000] and Brischetto and Voss [1999] and we find that there are differences in monetary policy transmission across our sample of countries. The largest output losses following a monetary shock are seen in a core of euro area countries: Austria, Belgium, Finland, France, and Germany. Germany also displays the largest response of prices and is followed by Austria and Finland. Variance decompositions also suggest that the bank based core euro area countries are different from market based countries. As regards the channels of transmission we find no evidence to suggest an equity wealth effect channel in the euro area and only circumstantial evidence for the UK. We do, however, find that those countries that use equity finance (the UK and the Netherlands) suffer smaller output losses following a monetary shock indicating that a bank lending channel is less likely to be present in these countries.
    Keywords: monetary policy, equity markets, VAR modelling. JEL Classifications: E44, E52, G15
    Date: 2004
  2. By: David-Jan Jansen; Jakob de Haan
    Abstract: This paper studies ECB and Bundesbank communication on monetary policyduring the first years of the European Economic and Monetary Union. We study whether statements by different (groups of) central bankers have been contradictory and whether differences have diminished over time. We find that statements on the interest rate, inflation and economic growth have indeed been contradictory. Fur- thermore, national central banks continue to dominate communication on monetary policy. Finally, only the ECB Executive Board has observed radio silence before ECB Governing Council meetings. A positive conclusion is that, over time, interest rate statements have become less contradictory.
    JEL: E32 G21 G28 G31
    Date: 2004–08
  3. By: Philipp Maier
    Abstract: Inflation differentials resulting from EMU enlargement have so far mostly been discussed within the Balassa-Samuelson framework, i.e. resulting from inflation in nontradable goods. We analyse the inflationary consequences of convergenceof tradable goods' prices. Using disaggregated price level data, simulations show that inflation in the new EU member states might on average be 1.5-3.5 percentage points higher than in the current euro area (with considerable variation between the new EU members). These inflationary effects even exceed most simulations of the Balassa-Samuelson effect. The `burden of adjustment' rests mainly on the shoulders of the new EU members if the European Central Bank sets monetary policy in response to inflation developments in the entire currency area. In contrast the impact of EMU enlargement on the current euro area is limited, due to the small economic weight of the new EU member states.
    Keywords: Price level differences; convergence; EMU enlargement
    JEL: E30 E31 E50 F40
    Date: 2004–09
  4. By: Jérôme Héricourt (TEAM)
    Abstract: How did European Central Bank (ECB) fit the disparate macroeconomic needs of euro zone members ? The purpose of this paper consists in providing quantitative answers to this question using an original methodology. Using simple specifications of monetary transmission mechanisms, we simulate the national evolutions of GDP growth and inflation since 1999, in a fictitious context where the euro was never launched. Our major result is that the ECB did a far better stabilisation job for euro zone countries than national central banks would have done.
    Keywords: Taylor rules, monetary policy transmission, alternative world, simulations, stabilisation
    JEL: E52 E58 F47
    Date: 2004–01
  5. By: Maurel Mathilde (ROSES)
    Abstract: Candidate countries of central and eastern Europe (CEECs) are suppose to join the EU in 2004, June, which imply that they will face important challenges in the conduct of macroeconomic policy, in order to be able to enter the ERM-II system and eventually enter the EMU (European Monetary Union). Abandoning an independent monetary policy might entail significant costs for countries, which have succeeded in recovering and are in a process of catching-up. However those costs have probably been exaggerated, and their estimation biased by the traditional optimal currency area criteria. The main criticism against a too strong emphasis on the latter rest on two arguments. The first one is that assessing the trade-off for joining the EMU does not deliver the same conclusion ex ante and ex post. Meanwhile, the degree of financial integration will likely increase dramatically, which in turns will decrease the opportunity cost of loosing the monetary policy for absorbing country specific shocks. In a world of capital mobility, the room left for an independent monetary policy is very narrow, maybe close to zero in small, emerging countries, more vulnerable to speculative attacks than countries in the core. The second argument is more empirical. While the link between the exchange rate regime and the fundamentals is rather weak, the political agenda of joining the EU and subsequently the EMU seems to explain the choice of the exchange rate regime.
    Keywords: Exchange rate arrangements, accession to the EMU, EU enlargement, international capital flows
    JEL: F15 F41
    Date: 2004–03
  6. By: Andrew Hughes Hallett (Department of Economics, Vanderbilt University); Diana N. Weymark (Department of Economics, Vanderbilt University)
    Abstract: The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy has a social equality component, there is a natural conflict between optimally configured monetary policies and equality. As a result, governments interested in social redistribution, when faced with an independent central bank, will have an incentive to limit their use of fiscal policy.
    Keywords: Monetary independence, central bank conservatism, income redistribution
    JEL: E52
    Date: 2003–04
  7. By: Anna Vdovichenko; Victoria Voronina
    Abstract: This paper examines the Bank of Russia behaviour in post crisis period. Special attention is devoted to econometric modelling of monetary policy rules of various types. Standard model is modified in a number of ways and estimated with the use of alternative econometric techniques (GMM, OLS and TSLS methodology). One of the modifications is set in the form of a system of two simultaneous equations, describing dynamics of intervention on foreign currency market and sterilisation of excess liquidity by the Bank of Russia. Empirical results support preliminary assumptions made on the basis of qualitative analysis of terms and principles of monetary and exchange rate policy in 1999-2003. Thus, interest rate policy of the Central Bank has had rather adaptive format, while management of base money dynamics possessed pronounced stabilising pattern. Another major finding lie in the fact that despite officially declared priority of anti-inflation policy major efforts of the Bank of Russia were turned to the regulation of the exchange rate. There are some reasons to suggest that the Central Bank intervened in the exchange market with the aim to affect not only the smoothness of the exchange rate but also its level.
    Keywords: Russia, monetary and exchange rate policy, monetary policy rule, intervention, sterilisation
    JEL: E52
    Date: 2004–07–13
  8. By: Carlos Fernando Lagrota R. Lopes
    Abstract: This paper analyses monetary policy in Brazil, investigating why interest rates were so high and volatile from 1995 to 1998. We identify in monetary policy an overreaction to external shocks, where exogenous changes in international liquidity triggered sharp movements on domestic interest rates. We also show that the Brazilian policy response to these shocks was far more intense than in Argentina and Mexico. We argue that Brazil was caught in a high interest rates trap, which culminated in a currency crisis in January 1999.
    JEL: F41 C52 E52
    Date: 2004
  9. By: Tom Kompas; Omar Abdel-Razeq
    Abstract: This paper constructs a simple optimal monetary growth model in which an endogenous and variable rate of time preference provides a rational foundation for a Tobin-effect in a system where otherwise strong neoclassical assumptions (e.g., perfect foresight, an infinite planning horizon, and continuous marketclearing) are maintained. Changes in the proportional rate of growth of the nominal money supply affect both the rate of time preference (ñ) and the equilibrium capital—labour ratio. The impact effect of a fall in ñ (less impatience), and the induced capital accumulation that goes with it, drives the result. Proper transformation rules for two-state variable control problems and curvature and simulation results for the rate of time preference function are also established. The latter in particular provides a reasonable and easily understood foundation for simple systems in which the rate of time preference depends on an index of future consumption, and provides a counter-argument to well-known criticisms (e.g., Blanchard and Fischer (1989) and Barro and Sali-i-Martin (1995)) of Epstein—Uzawa rate of time preference functions. All results are obtained in an analytically simple way, using standard techniques.
    JEL: C61 D91 E1 E4 O42
    Date: 2001
  10. By: Helge Berger; Till Mueller
    Abstract: The likely extension of the euro area has triggered a debate on the organization of the ECB, in particular on the apparent mismatch between relative economic size and voting rights in the Council. We present a simple model of optimal representation in a federal central bank addressing this question. Optimal voting weights reflect two opposing forces: the wish to insulate common monetary policy from changing preferences at the national level, and the attempt to avoid an overly active or passive reaction to idiosyncratic national economic shocks. A perfect match between economic size and voting rights is rarely optimal, and neither is the “one country, one vote principle”. Empirically, there are indications that the pattern of over- and under-representation of member countries in the ECB Council might be extreme by the standards of the US Fed and German Bundesbank and not always optimal.
    Keywords: Central Bank, Federal Central Bank, Currency Union, optimal representation, voting, ECB
    JEL: D72 E52 E58 F33
    Date: 2004
  11. By: Diana N. Weymark (Department of Economics, Vanderbilt University)
    Abstract: The problem of monetary policy delegation is formulated as a two-stage non-cooperative game between the government and the central bank. The solution to this policy game determines the optimal combination of central bank conservatism and independence. The results obtained show that the optimal combination of central bank conservatism and independence that minimizes government losses is not unique and that there is substitutability between these institutional characteristics. Consequently, partial central bank independence can be optimal. The framework I employ provides a theoretical basis for interpreting the results obtained in empirical studies of the relationship between inflation and central bank independence.
    Keywords: Central bank independence, inflation bias
    JEL: E52
    Date: 2000–12
  12. By: David Laidler (University of Western Ontario)
    Abstract: From Henry Thornton (1802), through Walter Bagehot (1873) until Ralph Hawtrey (1932), the lender of last resort function was central to the theory of central bank behaviour. In that role, the bank was urged to aid individual banks in times of crisis, but also and crucially to provide liquidity to the market. In modern circumstances, banking systems are subject to a degree of regulation and oversight that did not exist before the Great Depression, and the first element in the lender of last resort's role has become rather unimportant. The latter element remains crucial in dealing with financial crises, however, even in a world in which, in normal times, monetary policy is executed through interest rates rather than the reserve base.
    Keywords: monetary policy; central bank; financial crisis; liquidity
    JEL: B12 B22 E5 E58
    Date: 2004

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