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on Central Banking |
| By: | Radim Bohacek; Hugo Rodriguez Mendizabal |
| Abstract: | This paper analyzes the propagation of monetary policy shocks through the creation of credit in an economy. Models of the monetary transmission mechanism typically feature responses which last for a few quarters contrary to what the empirical evidence suggests. To propagate the impact of monetary shocks over time, these models introduce adjustment costs by which agents find it optimal to change their decisions slowly. This paper presents another explanation that does not rely on any sort of adjustment costs or stickiness. In our economy, agents own assets and make occupational choices. Banks intermediate between agents demanding and supplying assets. Our interpretation is based on the way banks create credit and how the monetary authority affects the process of financial intermediation through its monetary policy. As the central bank lowers the interest rate by buying government bonds in exchange for reserves, high productive entrepreneurs are able to borrow more resources from low productivity agents. We show that this movement of capital among agents sets in motion a response of the economy that resembles an expansionary phase of the cycle. |
| Keywords: | Credit, Monetary policy shock, Heterogeneous agents |
| JEL: | E50 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp244&r=cba |
| By: | Nelson C. Mark; |
| Abstract: | When central banks set nominal interest rates according to an interest rate reaction function, such as the Taylor rule, and the exchange rate is priced by uncovered interest parity, the real exchange rate is determined by expected inflation differentials and output gap differentials. In this paper I examine the implications of these Taylor-rule fundamentals for real exchange rate determination in an environment where market participants are ignorant of the numerical values of the model's coefficients but attempt to acquire that information using least-squares learning rules. I find evidence that this simple learning environment provides a plausible framework for understanding real dollar--DM exchange rate dynamics from 1976 to 2003. The least-squares learning path for the real exchange rate implied by inflation and output gap data exhibits the real depreciation of the 70s, the great appreciation (1979.4-1985.1) and the subsequent great depreciation (1985.2-1991.1) observed in the data. An emphasis on Taylor-rule fundamentals may provide a resolution to the exchange rate disconnect puzzle. |
| JEL: | F4 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11061&r=cba |
| By: | Mats Persson; Torsten Persson; Lars E.O. Svensson |
| Abstract: | This paper demonstrates how time consistency of the Ramsey policy - the optimal fiscal and monetary policy under commitment - can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite a general Ramsey policy, including timevarying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004). |
| JEL: | E31 E52 H21 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11088&r=cba |
| 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 show that the optimal institutional design always requires some degree of central bank independence and that there is substitutability between central bank independence and conservatism. The results also show that partial central bank independence can be optimal and that there are circumstances under which it is optimal for the government to appoint a liberal central banker. |
| Keywords: | Central bank conservatism, central bank independence, inflation bias, liberal central banker |
| JEL: | E52 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0502&r=cba |
| By: | Alexandre MINDA (LEREPS-GRES) |
| Abstract: | This paper will analyse the debate about official dollarization in Latin America. Because of the opportunity cost of dollarization, replacing a national currency by a foreign currency is a solution of last resort to the financial instability of emerging economies. To clarify the discussion, a taxonomy of dollarization regimes is drawn up in order to make an inventory of officially dollarized countries, territories and dependencies. The foundations for adopting complete dollarization are analysed through three elements : an account of the limits to corner solutions, the identification of the economic contexts which are favourable to the adoption of foreign currencies and the reasons behind the legitimacy crisis of national currencies. To determine what is at stake in such decisions, cost advantage analysis mentions, first of all, the expected benefits highlighted by the advocates of complete dollarization. A detailed study of its potential impact will then allow us to evaluate the induced costs of the disappearance of national currencies. Finally, by looking at emerging countries that have adopted this exchange regime, the limits of adopting such a solution are underlined, particularly by the fact that the disappearance of national currencies implies an abandonment of monetary sovereignty and a loss of a powerful symbol of national assertion and identity. |
| Keywords: | Dollarization, Latin America, exchange rate regime, monetary sovereignty |
| JEL: | E E F F |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:grs:wpegrs:2005-02&r=cba |